Northern California news
Years of financial mismanagement in Lincoln ‘threaten the city’s stability,’ state audit reports
The California State Auditor’s office slammed the city of Lincoln for years of financial mismanagement of public funds, lax accountability and inadequate oversight from officials that “threaten the city’s stability,” in an audit report released Thursday.
Lincoln overcharged developers and residents, made “questionable” loan transfers, and shuffled money from restricted funds to offset deficit-ridden accounts to falsely present the funds as solvent, according to the state auditor’s report. These actions “did not always follow state law,” Chief Deputy State Auditor John Billington wrote in a letter to legislators.
Lincoln City Council acknowledged “mistakes were made” that have eroded the public’s trust, in a letter signed by all members of the city council published Thursday on the city’s website.
“We apologize,” reads the letter. “We regret not requiring more detailed operational reporting, not directing an overhaul of business practices sooner, and not demanding prior management make needed changes.”
Aware of the state audit’s findings, city staff has been identifying gaps in current city policies since December as part of a business process improvement initiative to remedy the findings of the audit, interim City Manager Jennifer Hanson said.
“One of the challenges is the city grew too fast,” Hanson said. Lincoln, with a population of more than 46,000, almost quadrupled in size between 2000 and 2010, making it at the time one of the fastest growing small cities in the country.
“I don’t think the financial structure was built to process that much business in that time, and what happens in that process is that the i’s are not dotted and the t’s are not crossed,” she said.
The audit began in May 2018, Hanson said, after a group of residents concerned that the city was illegally charging ratepayers to cover the cost of the city’s municipal utility rates reached out to then-state Sen. Ted Gaines, R-El Dorado Hills, requesting an audit.
The audit found Lincoln overcharged resident ratepayers $1.6 million for municipal utilities from January 2014 through February 2018, violating a state constitution provision. Voters approved Proposition 218 in 1996, which forces local government to only charge ratepayers the cost to service the ratepayer’s property.
The city has already begun paying back overcharges starting from July 2017, Hanson said, adding that the statute of limitations for repaying utility rate overcharges is one year.
Lincoln also overcharged developers and builders for the cost of water infrastructure, with the city collecting nearly $41 million in excess for its water connections fund as of June 2017, according to the report.
The city would then loan money from the water connections fund, in addition to other funds, to separate accounts that “clearly did not have the capacity to repay those loans,” according to the report, breaking the city’s interfund loan policy. The city has five outstanding interfund loans it is obligated to pay back, totaling $9.6 million, according to Hanson.
The city would also temporarily transfer money from the water connections fund each year to several other funds with deficits, such as the Fire Department, Parks Department and the airport, from 2013 to 2017, misrepresenting its financial position in its annual financial statements, the audit reported.
Between fiscal 2013-14 and 2016-17, transfers from the water connection fund ranged from more than $7 million in 2016-17, to nearly $19 million the previous year.
The mismanagement stems from years of city officials failing to follow their own policies, the report states. Several past financial investigations by the city’s external financial auditor reported “recurring deficiencies, including the city’s inability to accurately prepare its financial statements at the end of each fiscal year,” but little changed, the report said.
Staff would sometimes make expenditures and city contracts were sometimes amended without obtaining appropriate approval, the report found. The City Council approved a $3.9 million loan in 2010 from the water connections fund to its redevelopment agency, despite staff stating that the redevelopment agency would not be able to pay back the loan.
City managers in Lincoln are allowed to enter into contracts of up to $25,000 without prior approval of the City Council, but city ordinances require they promptly report these contracts to a City Council meeting. “However, Lincoln could not demonstrate that its former city managers ever made such reports,” the report stated.
“It would be very difficult to pinpoint a particular person” as the root of the city’s financial disarray, Hanson said. The issues “transcend a number of councils and a number of city managers.”
The city’s first priority is addressing bad accounting practices to ensure future annual financial statements are accurate, and creating repayment plans for the loans the city owes to various accounts. Lincoln is also required to study fees and rates, which could lead to ratepayer bills increasing or decreasing, according to a city FAQ.
“I don’t view the audit as a bad thing. It’s like buying a house,” Hanson said. “I’ve had the house inspected, I know what’s wrong and it’s time to fix it.”