Lindsay utility funds suffer withdrawals
Lindsay realizes $791,000 streets fund mistake, reconciles $882,000 advance from water, sewer, refuse funds and passed sewer fund rate increase that may have been avoided
By Paul Myers @PaulM_SGN
LINDSAY – Last week the Sun-Gazette reported that the City of Lindsay was forced to come to the realization that funds which had advanced money into the general fund, and monies advanced from the general fund, were unlikely to ever be repaid.
While the City doesn’t specify a time period when they moved around $7.9 million, they did note they had over charged utility funds for their street improvement fund between 2013 and 2017. And in 2015 the City successfully passed a rate increase to cover deficits in their sewer and refuse funds.
Council members at the time believed they did their “due diligence” on the rate increase, but it remains unknown whether they were aware of money moving out of the streets, sewer and refuse funds and into the general fund.
Per resolution 19-02 passed on Feb. 12, the City’s general fund had to reconcile with the loss of $1,541,139.78 that had been advanced to McDermont and the Wellness Center, by converting those advances into transfers.
According to a City staff report on the resolution, “the City had borrowed significantly from various funds to cover the losses in the general fund, McDermont Field House and the Wellness Center.”
Meanwhile, several other funds that had advanced a total of $6,332,305.01 into the general fund will also have to reconcile their loss of capital after those advances were converted into transfers as well.
Within the $6.3 million: $1,557,120.01 came from the street improvement fund; $1,906,796.12 came from the water fund; $2,108,162.74 came from the sewer fund; and $401,921.13 came from the refuse fund. The remaining $358,303 came from a combination of the parks improvement fund, waste water cap reserve fund, curb and gutter fund, and storm drain system fund.
The report goes on to say the borrowing was done by a series of “due to/due from” transactions. Due to/due from transactions are an internal accounting process to bring accounts to balance. Different from advances, due to/due from transactions are intended to be repaid over a short period of time (less than a fiscal year), and do not have to be repaid with interest. Even more precarious, due to/due from transactions do not require city council approval.
However, according to the Feb. 12 staff report, since the Council, city staff and finance professionals evaluated the situation, “Council directed staff to record the borrowing as advances.”
According to the City staff report that explains Resolution 19-02, the Lindsay streets improvement fund advanced $882,880 between fiscal years 2013-2014 through 2016-2017. However, the streets improvement fund is funded in part through three utility funds: water, sewer and refuse. The staff report notes the streets improvement fund gathers 23.6% of the total utilities billed per month. But due to an error in calculation based on the City’s accounting software, the City would multiply 23.6% by the total billed amount, which had already accounted for the base utility rate plus 23.6%, instead of subtracting 23.6% from the total billed amount.
City finance director Bret Harmon, and auditors did not realize the error until January of this year. They noted that they have made the proper adjustments. As a result, the City had to reverse four years and $791,059 worth of allocations back to the water, sewer and refuse funds. And the City had to reclassify $882,880 worth of advances from the street improvement fund to the general fund as advances from the three utility funds to the general fund. The report notes that the reclassification was done because after correcting the streets fund allocation error, the fund would not have been able to advance money into the general fund. And in order to correctly account for advances, the City had to account from where the money would have actually come from.
In essence then, between fiscal years 2013-2014 through 2016-2017 the water fund lent the general fund $324,796, the sewer fund lent $296,163 and the refuse fund lent $261,921 using due to/due from transactions, that were later classified as advances, and were not repaid. Nor did they have City Council approve until long after the money had been transferred. The amount lent by each utility fund over the four year period is reflected in the total advances that were converted into transfers from each utility fund.
Utilities on the rise
Within the four year period when the City was using due to/due from statement to move money from utility funds and the street improvement fund into the general fund, and certainly while the City was racking up a $6.3 million debt to those funds, the City noticed a $37,691 deficit in their refuse fund and a $114,711 deficit in their sewer fund in the summer of 2015.
Because of the deficit in the refuse fund, it was not able to contribute their share of the 23.6% into the street improvement fund. Which as the City has admitted in their staff report over Resolution 19-02, was being overcharged. In 2015, the City said they needed to restore sewer and refuse rates to their 2011 levels, leaving residents to pay $36.88 per month for sewer, when they were paying $30.
The City had consciously lowered the sewer and refuse rates in the wake of a dramatic water increase that sent the public into an outcry. City services director Mike Camarena said at the time that the budget could handle the decrease in revenue by delaying some capital improvement projects. But by 2015, then finance director Tamara Laken said decreasing the rates was a knee jerk reaction.
However, before they could raise sewer rates in 2015 the City was forced to go through a Proposition 218 process that gives property owners the opportunity to halt the increase. It takes 50 percent plus one of all the City’s property owners to keep the rate increase proposal from going to the City Council for a vote. On Aug. 25, 2015, only 393 protests were submitted and it is unlikely most of those were individual property owners.
Before the vote though, then councilman Danny Salinas explained that during budget discussions the council was made aware of the sewer fund deficit.
“At that point four council members unanimously voted to go through with this [increase]. It was not something we did lightly. We are all residents and we all have to pay the same bills,” Salinas said during the 2015 meeting.
Then councilwoman, and current mayor, Pam Kimball echoed Salinas’ point that evening.
“We did our due diligence. We considered reducing street funds instead of raising rates in our [budget] workshop. There were opinions expressed that having our roads worked on was a valuable thing and worth paying a few more dollars,” Kimball sad.
Whether the council members realized they were on their way to transferring $1.6 million into the general fund, instead of allocating it to streets is anyone’s guess. But according to a source who worked intimately with the City’s finances between fiscal years 2013-2014 through 2016-2017, Lindsay administration was well aware that money supposed for streets, from the utility funds was being given to the general fund.
The source added that city manager Bill Zigler gave strict instructions to keep the amount transferred out of the street improvement fund under wraps.
Zigler did not respond to the Sun-Gazette for comment before press time.
In June 2015, before the Prop 218 vote that raised sewer and refuse rates, Laken said with confidence the street improvement fund was created to account for every dollar allocated to streets, exactly because they were coming from the utility funds.
“With enterprise funds you know exactly what was spent based on what was collected. It allows us to know an exact number for streets and ensures that there are no gray areas,” Laken said at the time.
She added that rates will inevitably go up because the cost to provide services goes up, and the people at the City feel for those who are having to take the hit of cost increases.
“While staff and council empathize with the economically disadvantaged at the low end of the spectrum, we have a responsibility to maintain the property values and maintain a quality community that will attract new business,” Laken added in 2015.
The City Council went on to pass the rate increase, 3-2. Rosaena Sanchez, who stepped off the council in 2016 – but was reelected in 2018 – and councilman Steve Mecum who also stepped off the Council in 2016, voted no.
Advances left undone
Last week The Sun-Gazette reported that the Lindsay general fund was able to reduce its debt owed to other funds within the City by converting advances into transfers. In essence the transfers relieve the general fund of the burden to repay the advancing funds. As well, the conversions of advances to transfers draws a more accurate picture of the City’s overall financial status.
However, the City still must repay money loaned to them from the California Department of Housing and Community Development (HCD). Those monies were also spent on McDermont and the Wellness Center. And according to their staff report explaining Resolution 19-02, only HCD can authorize the conversion of funds they loaned the City into transfers. For now the outcome of those loans, and the impact on the City are far from certain.
“The City will need to continue negotiations with HCD. The outcome of those negotiations is unclear, yet it needs to happen if the City is to have a reasonable hope of a sustainable recovery,” stated the Council’s Feb. 12 staff report.