Municipal Elections: Will They Provide a Platform for Fiscal Sustainability?

November 6, 2015. Share on Twitter

Voting for a City’s Post-Bankruptcy Future. In an election, where a majority, or four of the seven San Bernardino City Council seats were on the ballot, to determine half of the leaders who will shape whether and how San Bernardino might emerge from the longest municipal bankruptcy in U.S. history, only one-third of the city’s residents are even registered to vote. The greatest number of votes—in an election with an abysmal turnout of about 10 percent—came in the race for city Treasurer, where the incumbent, David Kennedy easily won reelection by a 2-1 margin. Or, as City Clerk Gigi Hanna, who was re-elected in an uncontested election, describes it: “It’s abysmal,” referring to the low turnout: “It’s a perennial problem in this area.” Councilman John Valdivia, who ran unopposed, was re-elected with 641 votes. In the 6th Ward, four candidates split a total of 983, while there were just over 1,500 votes cast in the 5th and 7th wards—where in the latter, 7th Ward Councilman Jim Mulvihill will face a runoff — albeit it remains uncertain who his opponent will be. Final, unofficial results appear to indicate that Bessine Littlefield Richard will face Roxanne Williams in a runoff for the 6th Ward. In the 5th Ward race, incumbent Henry Nickel won re-election with 66 percent of the vote, while incumbent San Bernardino Treasurer was easily reelected with 71 percent of the vote. In the city races where none of the candidates reach 50 percent, the top two vote-getters will advance to a February run-off. The runoff in the 7th – in the north end of the city, where the abysmal voter turnout was about 5% — centered on incumbent Councilmember Mulvihill, who had been elected two years ago in the wake of a recall election of Wendy McCammack. In the 6th Ward race to replace retiring Councilman Rikke Van Johnson, Littlefield Richard of San Bernardino County’s Workforce Development Department has been narrowly leading Roxanne Williams, a program specialist for the San Bernardino City Unified School District — 370 votes to 356 votes — reversing their order from the first round of results. However, both are assured placement on the runoff ballot, beating out Anthony Jones (156 votes) and Rafael Rawls (101 votes). Challenger Karmel Roe failed to dislodge the long-term hold of incumbent City Treasurer David Kennedy, who has served for some 24 years. A mortgage broker who ran for Mayor two years ago and the 5th Ward City Council in 2014, Mr. Roe attacked Treasurer Kennedy for not having done more to help a bankrupt city. The specific commitments Ms. Roe campaigned on that said she would do to change the office — demanding audits, taking control of the Finance Department, encouraging economic development in the city — are, however, not issues in the city which the treasurer is authorized to handle under the current city charter. Incumbent City Attorney Gary Saenz, City Clerk Gigi Hanna and 3rd Ward Councilman John Valdivia all, successfully—and unopposed, were re-elected.

Waiting for Godot. S&P yesterday reported it was keeping Atlantic City on credit watch negative as the credit rating agency awaits both an updated report by Emergency Manager Kevin Lavin and an expected decision by New Jersey Governor and aspiring GOP Presidential candidate Chris Christie whether and when he might sign into law a financial assistance package approved by the New Jersey State Legislature. Atlantic City Revenue Director Michael Stinson said he expects resolution on the fate of the legislature-approved rescue package by next week before the state Assembly and Senate return to session. If Gov. Christie takes no action before the new session, the five bills automatically become law, according to Mr. Stinson: “If the bills are passed than we are going to get revenue…The uncertainty of the bills should be resolved by next week.” Atlantic City, which is in a fiscal and governance Twilight Zone, with its municipal finances overseen by a state-appointed overseer and Mayor Don Guardian, is closing a $101 million budget deficit this year by firing employees, and crossing its fingers for a state assistance package approval. The city’s proposed budget, approved by the state’s Local Finance Board at the end of last month, depends on Governor and Presidential candidate Chris Christie’s approval of bills that would allow the city to spend $33.5 million of revenue from casinos that now goes to redevelopment projects and marketing. The Atlantic City budget was adopted nine months late, but came in time to mail fourth quarter tax bills and also fully funds its annual requirements for settled tax appeals. Emergency Manager Lavin, testifying before the legislature in Trenton, told state lawmakers the budget was an initial step to ease a fiscal crisis in the city, while Mayor Guardian testified: “We understand that we can’t get out of this by ourselves.” The unique partnership between Mayor Guardian and state-appointed emergency manager Lavin has led to the dismissal of more than 100 employees, reducing the city’s workforce by nearly a third, and deferring payments for employee pensions and health-care benefits, while continuing to meet Atlantic City’s obligations to its municipal bondholders. Nevertheless, S&P last month cut the city’s credit rating deeper into junk, because it had yet to lay out detailed plans for dealing with its fiscal distress. S&P ranks the debt B, five levels below investment grade. Moody’s Investors Service grades it two steps lower at Caa1.

S&P analysts Timothy Little and Lisa Schroeer noted in a report yesterday that while the state’s Local Finance Board approved a balanced Atlantic City 2015 budget in late September, that budget relies on anticipated revenues of $33.5 million in redirected casino taxes and $38.9 million in deferred pension and health care expenses. The pending assistance package adopted by the legislature last June of five bills would allow the redirection of casino taxes to pay debt service. S&P said the city reported it will be able to make an $11 million December 2015 debt service payment even the anticipated redirected casino tax revenue is not received. S&P dropped Atlantic City’s credit rating three notches by S&P in August due to uncertainty over whether it could meet its 2015 fiscal obligations. Now the city awaits both the decision of the peripatetic Gov. Christie as well as a second report from Emergency Manager Lavin which is expected anon. The city is rated Caa1 by Moody’s Investors Service.

Unaccountability? The road to municipal bankruptcy can be paved by inattention and unaccountability. Thus, a California audit of the City of Beaumont, an LA suburb, found that the city failed to properly account for nearly three quarters of a billion dollars’ worth of municipal bond transactions and that the municipality was unable to provide the State Controller’s office with any accounting records for the bond transactions—and that neither the current city management nor its employees were able to provide any information or records of bond transactions, according to the audit. Beaumont officials say they are already taking steps to address what the report called pervasive shortcomings resulting in non-existent accounting controls for the city: the state report found that 95% of the city’s internal control elements reviewed in an audit of fiscal years 2012-13 and 2012-14 were inadequate—or, as California Controller Betty Yee stated: “These kinds of deficiencies are of great concern,” adding: “However, I am encouraged that city leaders recognize the need to implement major improvements.” The audit uncovered widespread deficiencies that rendered them effectively non-existent, with 75 of 79 internal control elements determined to be inadequate, or, as Ms. Yee explained: “These kinds of deficiencies are of great concern, especially to the citizens of Beaumont, who rightly expect their city government to safeguard their tax dollars.” The state fiscal investigation came in the wake of an FBI and Riverside County District Attorney’s Office search conducted at Beaumont City Hall. Controller Yee launched her audit last May, a month after the Riverside County District Attorney’s office and the FBI executed warrants at City Hall, former City Manager Alan Kapanicas’ house, and the Beaumont offices of Urban Logic Consultants, a firm which had provided many of the city’s top managers on a contract basis. No charges have been filed, but the investigation is ongoing; the audit found improper accounting by three city agencies for bonds issued between 1993 and 2014.

Among the state findings:

  • The city failed to properly account for bond transactions by three of its units, including financing and utility authorities and a community facilities district that together issued $626 million in bonds. As a result, the Controller’s team could not determine whether the bond proceeds were used for the intended purposes.
  • The former city manager and former public works director, both principals of outside consultants that provided city staff, received fees from bond proceeds for their services. In the absence of any written agreements, it was unclear whether these services were separate from their responsibilities as city officials. These two officials approved payments to the consulting companies where they were principals, creating conflicts of interests.
  • In 2008, Beaumont obtained a reseller’s permit from the state Board of Equalization, allowing it to purchase items outside the city without paying sales tax, even though the city did not appear to be in the business of selling goods. Beaumont also allowed one of its vendors to use the permit. The arrangement allowed the city to shift sales tax revenues from other jurisdictions by moving the supposed point of sale within its boundaries.
  • The city did not consistently follow its competitive bidding laws. City staff bought equipment or let contracts for public works without competitive bidding, arguing that the vendor was the only source, yet failed to provide documents supporting this claim. In 2013, the city entered into a no-bid contract with Urban Logic Consultants that allowed engineering projects to be approved through “job cards” rather than open, competitive bidding.
  • The city lacked receipts and descriptions for credit card purchases, supporting documentation for loans made to employees, and sufficient records for a loan to a private business. Invoices were missing, including purchases from a construction company totaling more than $1 million.
  • For five years in a row, the city ended the fiscal year with material deficits of as much as $10 million in its General Fund. It did not have sufficient revenue to fund existing levels of service. The city said it would cover these deficits with $21.5 million owed by its redevelopment agency. However, the redevelopment agency has been dissolved and it is highly uncertain that amount can be collected.
  • Beaumont failed to do timely bank reconciliations and did not segregate staff duties.

According to acting City Manager Elizabeth Gibbs-Urtiaga, the findings of the Controller’s office confirm what the City Council and the new city management team uncovered last summer, in the wake of which, last month, the former city manager signed a separation agreement valued at $213,702.75 to terminate his contract, according to city documents—or, as Beaumont Mayor Brenda Knight said in a statement: “We have been very busy correcting the business practices going forward.”

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