Hercules' books are so shoddy and riddled with omissions that some of them are "inauditable," says the state's chief financial officer.

In a cover letter addressed to Hercules' elected and top administrative officials that was made public Thursday, state Controller John Chiang also complains that city staff members were not forthcoming with information during his office's audit of Hercules' fiscal year 2009-10 books. The shortcomings potentially could result in the city owing the state and federal governments about $2 million -- just for that one fiscal year, Chiang warns.

Thursday morning, Chiang's office published an audit of Hercules' more than $2 million in expenditures of federal and state funds during 2009-10 as well as one that examines Gas Tax Fund spending, earmarked for transportation. A review of Hercules' financial internal controls and an audit of the now-defunct Hercules Redevelopment Agency are pending.

Chiang's Hercules audit follows similar audits of Bell and Montebello, other cities that have been engulfed in political turmoil over claims of financial mismanagement. In April, Chiang's office announced it would next investigate Stockton.

Financial shambles

Mayor Dan Romero said Thursday the state's audit comes at the worst possible time for a city reorganizing after a former city manager left its finances in shambles. The state began its audit less than a year after Hercules City Hall imploded in December 2010 in the wake of increasingly damaging revelations, including shortages in various funds and a practice of backfilling them from more-solvent funds, and public discontent over $1 million a year in city contracts with the family firm of then-City Manager Nelson Oliva, currently the target of a lawsuit by the city.

Between October 2010 and October 2011, Hercules had three interim city managers, sandwiched around a brief reappearance by Oliva in December 2010 before he stepped down for good the following month, and replaced its entire City Council, two through a recall.

During data-gathering, conducted mostly from September to December, Chiang said his office made "repeated requests to city staff members who either could not, or would not, produce accounting records and supporting documents to show how much, if any, federal and state grant funds have been spent." Officials often were unavailable; requests for information were ignored; requests for meetings were denied, or city staff failed to attend meetings that were scheduled, Chiang reported.

The city provided only 15 items of 107 the state office requested, Chiang said.

"As accounting records and supporting documentation were unavailable to show how much had actually been spent and that federal and state grant funds were used for authorized activities, we determined that the entire $2,034,746 was questionable," Chiang wrote.

Moreover, because conditions described in the report for 2009-2010 could have existed in prior years, "the city's potential fiscal liability to the federal government and the state could be much greater than $2,034,746, unless the city can produce sufficient accounting records and supporting documentation to account for the funds," Chiang added.

Hardship compounded

Romero on Thursday took exception to the state's accusation of city foot-dragging, likening Chiang's action to ordering the captain of a submarine to conduct a fire drill while the vessel is under attack.

"Our staff was scrambling to put together documents for two or three investigations while also trying to run the city," Romero said. "We had an interim city manager trying to hold down the fort."

The current city manager, Steve Duran, arrived in October, when the state audit was in progress.

"The state controller comes in with their herd of people," Romero continued. "We gave them access."

He noted that the city put up the controller's staff in a portable office next to City Hall that once housed the city's affordable housing program.

Romero characterized the audit as a "power play" by the state.

"Chiang does this right after (Gov.) Jerry Brown back stabs the city," Romero said, in a reference to Brown's spearheading the elimination of redevelopment agencies statewide effective Feb. 1.

The Controller's Office sent Hercules a draft of the Chiang report April 20. The city's joint Finance Subcommittee/Citizens Finance Ad Hoc Committee discussed it April 26.

In an April 30 response to Chiang's findings that is attached to his report, Duran said the city experienced an unprecedented rate of layoffs, resignations and retirements in the current and past fiscal year and had to contend with simultaneous requests for information from the Controller's Office, the FBI and a new outside auditor.

Those hardships were compounded, he said, by a severe staffing shortage, especially in the Finance Department, which moreover was headed by an interim finance director during the bulk of the state's work.

Duran said the problem is not a lack of accounting records but that the city could not produce them when requested. He said the city will try to accede to all of the requests and promised to retain backup documentation in the future.

'Incomplete or incorrect'

Chiang found lesser irregularities in the Gas Tax Fund, though he chastised the city for commingling gas tax money in an investment pool with other city funds, and speculated that gas tax funds may have been diverted to activities unrelated to public streets and roads.

Chiang's Hercules audit was triggered by several factors, including the filing of the 2009-10 transaction reports of the city and Redevelopment Agency four months after deadline by the city's former independent auditor, Moss, Levy & Hartzheim LLP.

That tardiness obligated Chiang to notify state agencies that funnel federal money to the city. Chiang also noted apparent shortcomings in financial reports for a previous year's report.

In addition, Chiang singled out a 2010 report by the Contra Costa County Civil Grand Jury describing an appearance of impropriety and lack of transparency in the city's housing and business loan programs; a Dec. 3, 2010, report by then-interim City Manager Charlie Long that sounded the alarm over the city's deteriorating finances, including insufficient Redevelopment Agency revenue to make bond payments and insufficient general fund revenues to maintain municipal services; a Hercules Police Department investigation into the deletion of some city computer files discovered in January 2011; and another grand jury report in 2011 that urged Hercules to address the city's deteriorating finances.

Based on all those factors, Chiang said, "there is reason to believe that the Annual Report of Financial Transactions submitted by the city and the RDA is false, incomplete, or incorrect."

Earlier this week, Duran and Finance Director Nickie Mastay presented to the City Council a first draft of a 2012-13 budget that shows a $2 million deficit in the general fund.

Contact Tom Lochner at 510-262-2760.

ONLINE extra
Read the complete audit at
www.contracostatimes.com.

Funds in question
  • $720,000 in state housing funds under the Building Equity and Growth in Neighborhoods program
  • $577,000 in federal transportation funds for San Pablo Ave. pavement work
  • $469,000 in federal transportation funds for the rail segment of a planned intermodal transit center
  • $146,000 in federal watershed restoration funds
  • $100,000 in state Department of Justice Citizens Option for Public Safety funds