Guadalupe flirting with bankruptcy

June 17, 2014

GuadalupeBy JOSH FRIEDMAN

Guadalupe City Administrator Andrew Carter, who often describes himself as a numbers person, has discovered some financial mismanagement and accounting practices that could leave him without a city to administer.

Guadalupe, which has the smallest tax base of all cities in both Santa Barbara and San Luis Obispo counties, has long grappled with budget problems. When Carter left his seat on the San Luis Obispo City Council in Feb. 2013, he took over a city that was nearly bankrupt.

The Northern Santa Barbara County town of about 7,000 residents has a general fund budget of $3.6 million and an ongoing deficit of about $725,000, Carter said. But, the extent of Guadalupe’s fiscal woes did not become public knowledge until last month when Carter reported that previous city officials had been using illegal accounting tactics to cover up a structural deficit in the city’s general fund.

Andrew Carter

Andrew Carter

In his first year on the job, Carter delegated budgeting duties to an experienced city official, he said. When he took over the reigns this year, Carter noticed that the city had been transferring money from special tax of fee based funds and enterprise funds such as water and sewer to back fill general fund expenses.

State regulations require agencies to spend money they collect from rate and fee payers on the services for which they are billed. For example, a city cannot take money residents pays for their water bills and use it to fund salaries for police and fire departments; the funds must go toward water department expenses.

Another type of restricted use revenue is money derived from specific purpose taxes. Santa Barbara County, for instance, has a specific purpose half-cent sales tax which Guadalupe can only use for street maintenance and transportation improvements.

For years, though, Guadalupe has used enterprise and special fund revenues to pay for general maintenance. Some expenditures charged to the wrong funds include money spent on park irrigation, workers’ compensation and electricity for the senior center, legion hall and city hall, according to a recent staff report.

Recently, annual transfers into the general fund have totaled about $200,000 more than the city can legally justify.

If voters do not pass three new taxes in November, Guadalupe is expected to disband its police and fire departments, enter bankruptcy or disincorporate, meaning it would cease to exist as a city.

“The community has an either or choice,” Carter said. “If we don’t get support for the three tax measures, we will have to disband our police and fire departments and contract to the county.”

If Guadalupe disbands its police and fire departments, emergency response times would likely increase by 15 minutes, Carter said. If the city were to disincorporate, it would be the first city to do so in California since Hornitos did so in 1973.

Some interfund transfers are allowable in Guadalupe because the city is so short-staffed. Employees, like Carter, have to perform both general fund and special fund sponsored services. Carter, for instance, acts as his own utilities director.

But, Carter said that over the years, the interfund transfers have equated to 99 percent to 193 percent of the combined budgets for the departments that dip into multiple funds. These unjustifiable transfers have occurred for at least 17 years, audits show.

In 2013, then finance manager Carolyn GallowayCooper handled budgeting duties, Carter said. Galloway-Cooper, now the finance manager in Buelton, became Guadalupe’s finance director in January 1998. From January 2003 to September 2009, she served as city administrator. Galloway-Cooper then left the city but returned as finance director in August 2010, remaining in the position until November 2013.

Galloway-Cooper did not respond to multiple requests for comment.

Each year, the city of Guadalupe is audited by accountants. The Central Coast accounting firm Glenn Burdette is the current auditor and has audited Guadalupe’s budgets since 2002-2003, Carter said.

In the most recently published financial report, Glenn Burdette stated that budget shortfalls raise doubt as to whether the city can remain a going concern. The firm’s audit report also criticized some of Guadalupe’s accounting practices, such as its delays in reporting liabilities and asset depreciation.

But, Glenn Burdette auditors made no mention of excess interfund transfers or allocation of general fund expenses to special or enterprise funds. They stated that Guadalupe’s financial statements complied with American accounting standards.

Auditors with Glenn Burdette did not respond, either, to multiple requests for comment.

Carter said he spoke with auditors at the firm after uncovering the issues with the intefund transfers.

“They confirmed that the amount of the interfund transfers have been confirmed by council,” Carter said. “Apparently, they never made the connection that they were way beyond what was reasonable to expect.”

Faced with the $725,000 structural deficit, Carter has proposed a combination of tax increases and cost-cutting measures to balance the budget.

He plans to shave general fund expenditures by about $350,000. The primary savings would come from a proposed 5 percent pay cut for city employees and departmental reorganizations that would eliminate unnecessary positions.

Carter also plans to raise $350,000 through three tax initiatives that the city council is currently in the process of placing on the November ballot.

A business tax costing firms 50 cents for every $1,000 in gross receipts would raise $100,000, Carter said. An initiative eliminating the city’s cap on its utility user tax would also raise $100,000. The third measure, a half-cent city sales tax, would bring in $150,000 to the general fund.

Each measure needs a simple majority vote to pass, and the utility tax initiative would likely affect only one entity — vegetable seller Apio, the city’s largest business.

But, the results of recent initiatives indicate an unfavorable sentiment toward new taxes in Guadalupe. The last two tax measure failed, one of which more than 72 percent of voters rejected in 2010.

Due to Santa Barbara County’s roads tax, sales tax is already 8 percent in Guadalupe. The proposed half-cent sales tax would raise the rate to 8.5 percent, which is a full percent above the state requirement.

Guadalupe’s police and fire departments consume about 80 percent of its budget. When asked if the city could continue to fund its public safety services if only one or two of the taxes pass, Carter said the city would need all three to pass.

If the city were to disband its police and fire departments, emergency responses would likely come from Santa Maria and/or Orcutt. Santa Maria is approximately eight miles away from Guadalupe, and Orcutt is approximately 12 miles away.

Deputy fire chief of the Santa Barbara County Fire Department, Eric Peterson, said his agency would not open a station in Guadalupe.

“We can’t afford to put a fire station in there,” Peterson said. “We don’t have the funding for that.”

The nearest county fire station is located in Orcutt. Peterson said responses to Guadalupe would come from either Orcutt or Santa Maria, if the county could arrange a deal with the city.

Likewise, the nearest Santa Barbara County Sheriff’s substation is located just outside of Orcutt.

“The sheriff’s office would be open to discussion regarding providing police services at whatever level was needed and agreed upon,” sheriff’s spokeswoman Kelly Hoover wrote in an email.

Even if the taxes pass, Gaudalupe could go bankrupt due to lag time in collecting the new revenue. Sales and utility user tax revenues are not expected to reach city coffers until April 2015.

Likewise, the reductions in staffing costs from employee pay cuts and position eliminations may not kick in until this September.

Carter projects the city to have a $579,000 general fund deficit when the current fiscal year concludes at the end of June. The deficit would leave the general fund with a negative balance of about $275,000.

In addition, the city will have a $350,000 deficit budgeted for 2014-2015 due to its inability to implement the deficit-cutting measures in time.

Unlike many cities flirting with bankruptcy, Guadalupe does not offer lavish salaries and benefits to its employees.

Carter’s approximate $80,000 salary is the highest among city employees. Guadalupe police officers have a 2 percent at 55 pension formula, which is below the industry standard in California, and several of the firefighters essentially work as volunteers. Guadalupe also contracts out several services, including janitorial, planning and legal work.

But, it is questionable whether the size of the city’s tax base justifies its incorporated status. Guadalupe has a per capita sales tax revenue of $44, Carter said. Countywide, the average is $155, and cities generate an average of $225 per person in sales tax.

A new housing development called DJ Farms could draw 3,000 new residents to Guadalupe and subsequently grow the tax base. With construction started on the project, the city has begun to collect revenue from development fees.

Unsurprisingly, Carter discovered that the city has already improperly allocated the $180,000 from the fees. The money belonged to a special fund that collects development fees, but Carter found it in the general fund.

Now, the new revenue represents a large chunk of the ongoing deficit.

Carter is expected to bring a draft budget for 2014-2015 to the city council next week. The upcoming fiscal year begins July 1.


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achillesheal

In order for government entities to balance their budgets, they need to come to the realization that they cannot afford to keep people on the payroll via pension and health benefits for the rest of their lives.


Police and Fire consume 80% of the budget. Really?


MrM

An interesting, well written and informative article!


Kudos to the city manager, Mr. Carter, for ferreting out the truth; and for his courage in to proposed the only reasonable (but not popular) course of action to resolve the shortfall by raising rates and taxes.


Sadly, there is another local community that is facing the same problem.

In Los Osos on June 5 the new GM had the difficult task to report to the community that the LOCSD has similar structural problems.


It appears that in the past taxpayer funds of over $650,000 was loaned from one LOCSD fund to another LOCSD fund; and that the loans have not been paid back; nor is there a source of revenue to repay them.


The GM also reported that in 2006 the LOCSD paid the Bond Payment by borrowing the payment from the bonds own reserves, so that money needs to be repaid too. Again, there is no source of revenue to repay that loan either.


In all, the Los Osos CSD may not survive unless the community and the LOCSD board makes the hard decisions as to how to raise the revenue to repay these loans.


I would like to know more about what is going on in Los Osos as would many others; so it would be great if Mr. Friedman investigated what exactly is going on in Los Osos too.


NoCoSkeptic

Many licensed Marriage and Family Counselors are either divorced or on a second or even third marriage. Should be cause for concern when seeking advice.


Likewise, something as simple as running a credit report on those that handle the public coffers could provide some great foresight before improprieties even have a chance to be facilitated. Anything questionable on the credit report would require a deeper look into their personal finances. Why should I put my trust into someone that cannot handle their own finances?


slo Fact Finder

This unfortunate situation could never occur in the City of San Luis Obispo where Andrew Carter served on the city council and constantly reviewed the city fiances, or could it ??


Kevin Rice

Suggestive questions without evidence are low blows. By the way, do you still beat your wife?


hijinks

The similarities to SLO are striking. In fact, the city is transferring sewer and water funds, paid by customers for those services, to other funds. Next week’s council agenda, for example, (at slocity.org, city council agenda) has a detailed financial plan report whose fine print shows millions of dollars of water and sewer funds being transferred to run city hall’s general operations. According to Mr. Carter, this is illegal, those funds must go for the service for which they are collected, yet this was going on when he was on the SLO Council. Geez. What’s one to think of Carter’s “oversight?”


Robert1

The true charactar of a man is doing the right thing when nobody is looking.

My hat off to Mr Carter for putting the cities interest before his own.

That is what a honest person does.


MaryMalone

This is a great article.


Clearly, a large chunk of the problem lies in the audits performed. Often, the auditing personnel rely far too much on what the city financial officer presents to them and conveniently assumes it is correct without analyzing it.


Sometimes the auditors will only review what the city financial officer chooses to present to them, which completely guts any chance at true city financial accountability.


Then there is the built-in conflict of interest of allowing the same auditing firm to perform audits for a city year after year after year. This promotes corruption by benefiting the negligent auditing firms with client retention for many years, allowing the city’s corruption to become firmly established and to flourish.


Clearly, a city with corrupt administrators benefit from (and the taxpayer residents pay the price for) keeping the same look-the-other-way auditing firm for their yearly audits for multiple years.


So the fact that Guadalupe is now paying the price for negligent audits is a shame, but not surprising. The way the system is set up, and the lack of sufficient controls on the city and its auditors, have guaranteed corruption can flourish.


SLO_Johnny

There are several types of audits. You must read the fine print. The auditors aren’t lawyers. They merely check to see if the revenues that were claimed were actually received and the money spent was spent was actually spent and not embezzled. They don’t deal with these types of legal issues unless they are specifically task to do so. In this situation, it is the City Manager and City Council that are responsible.


MaryMalone

When the auditing firm allows the city or CSD to decide which records are to be reviewed it sets the stage for corruption. The agency accountant with whom I worked was very uncomfortable with the practice and did not contract with that auditing firm after the initial year.


achillesheal

We mismanage the money that we currently have, so we need to take more.


Sounds like a kid with daddy’s credit card to me.


pasodowny

This is an important regional story. Once again, CCN leads the way. The Tribune will follow, several days later, after it has finished a follow-up on Spreckles the Bear. Thank you CCN and Josh Friedman. Without this kind of coverage, local corruption would remain to thrive in the dark.


pigsrule

A relatively small out of the way town like Guadalupe, probably thought they could get away with this deceit, but it just underlines the bubbling problem underneath the surface with most cities, especially here in California.


The city is to blame, as no one wants to do the right thing and truly cut spending. However, the problem is much more complexing when you consider how many tax dollars go to the federal and state governments, but never are released back to the cities – such as for road repairs.


The state takes monies that should be funneled back to the municipalities so they can repair roads, but that money is kept at the state level to supposedly ‘balance the budget’, which is a farce.


Mr. Carter is doing the right thing but as this story starts out … “could leave him without a city to administer.” – that’s probably the sad truth. I agree and am afraid bankruptcies like this are a much bigger problem brewing that won’t end well for many of us.


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