By Michael Reiter, Attorney at Law
We do not yet know the full story about what went wrong as far as misstatements or miscalculations (incompetence) or concealment (fraud) of numbers in the City of San Bernardino that led to the situation wherein the City of San Bernardino had or has, at some point, less than $150,000 in its bank account. Some political campaigns in San Bernardino County have more than that in their accounts right now.
The Finance Department of the City of San Bernardino created a report, dated July 9, 2012, that blames, on page 1 in the Executive Summary:
. . . the City is still facing insolvency due to a variety of issues including accounting errors, deficit spending, lack of revenue growth, and increases in pension and debt costs.
Something went wrong with the way government is supposed to work, with checks and balances regarding these unspecified accounting errors.
The Charter of the City of San Bernardino has a variety of checks and balances, and there are also external checks and balances in the municipal system of government from California law and to some extent in Federal law.
Within today’s Charter, there are eleven elected officials in the City of San Bernardino: Council members from seven geographical wards, an elected Mayor, an elected City Clerk, an elected City Treasurer, and an elected City Attorney. However, the structure if the City lacks an appropriate check and balance to find either a well-concealed fraud, or even a miscalculation of numbers that appeared on financial reports but did not reflect actual amounts.
Here is the problem, from the same July 9, 2012 report, Page 7:
Starting General Fund balance has been erroneously stated for the past 2 fiscal
years
Fiscal Year July 1st Audited Fund Balance Staff Reported Fund Balance
FY 2009-2010 $2,708,319 $2,557,9oo
FY 2010-11 $410,293 $1,770,400
FY 2011 -12 $(1 ,181,603) $2,044,100*
*Mid-Year report presented April 3, 2012.
Shouldn’t an audit have found the problem? Maybe, but if there was actual fraud, it can be difficult to find because some skilled in financial deceit can falsify document to make the numbers match up. Even if a skilled City Council member with a background in accounting exists, they probably won’t find the discrepancy. However, from these numbers, it seems that an audit did catch these numbers, though it doesn’t say when and who it was reported to.
What about the City Treasurer? The Treasurer’s Duties are:
The Treasurer shall receive and pay out all moneys belonging to the City, and shall keep an account of all receipts and expenditures, under such rules and regulations as may be prescribed. He/She shall make a
monthly statement to the Mayor and Common Council of the receipts and expenditures of the preceding month, and shall perform all duties required of him/her by law and the Mayor and the Common Council. He/She shall not pay out any monies belonging to the City except on claims presented, allowed and submitted in the manner provided by this Charter. Charter section 70.
However, if numbers are falsified by members of the Finance Department (which the Charter gives day-to-day supervision to the City Manager), the City Treasurer’s Office may not catch the problem.
What then, is the answer? Part 1, Create a City Auditor, like the City of Los Angeles Controller, that is elected and has the power to audit, investigate, and request prosecution or discipline according to the needs of the situation.
The Controller in Los Angeles, per the Los Angeles City Charter, has these duties:
Sec. 260. Auditor and General Accountant.
The Controller shall be the auditor and general accountant of the City and shall exercise a general supervision over the accounts of all offices, departments, boards and employees of the City charged in any manner with the receipt, collection or disbursement of the money of the City. The Controller shall be elected as provided in Section 202.
Sec. 261. Powers and Duties.
The Controller shall:
(a) appoint assistants, deputies, clerks and other persons as the Council shall prescribe by ordinance;
(b) prescribe the method of keeping all accounts of the offices, departments, boards or employees of the City in accordance with generally accepted accounting principles, except that any change of the system of accounting shall first be authorized by the Council;
(c) regularly review the accounting practices of offices and departments and upon finding serious failings in accounting practices, be empowered to take charge of the accounting function, and thereafter assist the office or department in implementing appropriate accounting standards and practices;
(d) maintain a complete set of accounts which shall be deemed the official books and accounts of the City, which shall show at all times the financial condition of the City, the state of each fund, including funds of departments responsible for managing their own funds, the source from which all money was derived and for what purposes all money has been expended;
(e) in compliance with generally accepted government auditing standards, audit all departments and offices of the City, including proprietary departments, where any City funds are either received or expended; be entitled to obtain access to all department records and personnel in order to carry out this function; establish an auditing cycle to ensure that the performance, programs and activities of every department are audited on a regular basis, and promptly provide completed audit reports to the Mayor, Council, and City Attorney and make those reports available to the public;
(f) maintain a reconciliation between the accounts in all offices and departments with the accounts in the Controller’s office, and from time to time, verify the condition of all City funds in the City Treasury, and report to the Mayor and Council thereon;
(g) allocate among the several respective funds all public money at any time in the City Treasury not otherwise specifically allocated and appropriated by law or ordinance, and promptly notify the Treasurer of the allocation or appropriation;
(h) report to the Mayor and Council, at times established by law, the condition of each fund, and make other reports as the Mayor or Council requests;
(i) maintain each fund on a parity with its obligations at all times by transferring from the Reserve Fund as a loan to any fund which may become depleted through tardy receipt of revenues, and upon receipt of revenues sufficient to make an allocation as will restore each fund to parity, retransfer the amount of the loan to the Reserve Fund;
(j) monitor the level of debt incurred by the City and report periodically to the Mayor and Council on City debt; and
(k) conduct performance audits of all departments and may conduct performance audits of City programs, including suggesting plans for the improvement and management of the revenues and expenditures of the City. Nothing in this subsection shall preclude the Mayor or Council from conducting management studies or other review of departmental operations.
Sec. 262. Approval of Demands on Treasury.
(a) The Controller shall, prior to approval of any demand, make inspection as to the quality, quantity and condition of services, labor, materials, supplies or equipment received by any office or department of the City, and approve before payment all demands drawn upon the Treasury if the Controller has adequate evidence that:
(1) the demand has been approved by every board, officer or employee whose approval is required by the Charter or ordinance;
(2) the goods or services have been provided, except that advance payment may be authorized by ordinance for specified categories of goods and services;
(3) the payment is lawful;
(4) the appropriation for the goods or services has been made;
(5) the prices charged are reasonable;
(6) the quantity, quality and prices correspond with the original specifications, orders or contracts; and
(7) any additional criteria established by ordinance have been satisfied.
(b) Notwithstanding subsection (a), the Controller shall delegate to the various offices and departments the duties of inspection of goods and services and approval of demands, in accordance with methods for inspection and approval established by the Controller, but the Controller may suspend the authority delegated pursuant to this subsection upon a finding of abuse of that authority or on a determination that the office or department lacks adequate controls to exercise that authority properly. In the event of suspension of the authority delegated pursuant to this subsection, the Controller shall assist the office or department to achieve adequate controls and standards prior to reinstatement of that authority to the office or department.
(c) The Controller shall withhold approval of any demand, in whole or in part, if there is a question as to whether it is improper, illegal, or unauthorized, and immediately file a report with the Mayor and Council stating the objections to the demand. The Council shall promptly consider the report and may overrule or sustain the objections of the Controller.
(d) The Controller shall keep a record of all demands on the Treasury approved by the Controller and of all demands to which objections have been made and overruled.
Sec. 263. Approval of Expenses of Controller.
All demands for the expenses of the office of the Controller shall, before payment, be presented to the Mayor, who shall have the same powers as to approval or disapproval as are exercised by the Controller in the case of other demands. The action of the Mayor shall be subject to review by the Council.
Sec. 264. Reduction of Demand on Treasury.
No demand upon the Treasury shall be allowed by the Controller in favor of any person or entity indebted to the City without first deducting the amount of the indebtedness, to the extent permitted by law.
Sec. 265. Payment of Bonds.
Nothing in this Article shall be construed as interfering with or preventing the payment by the Treasurer of principal and interest on bonds payable by the City in accordance with the California Constitution, laws and ordinances authorizing the issuance and payment of those bonds.
Sec. 266. Periodic Surveys of Proprietary Departments.
(a) The Controller, Council and Mayor shall jointly cause, at least once in every five years, an industrial, economic and administrative survey to be made of the business and property of each of the Harbor, Water and Power and Airports Departments and shall select an independent qualified industrial engineer or organization specializing in such surveys to conduct the survey. The cost of each survey shall be paid for from the funds of the surveyed department.
(b) Each survey shall be made in consultation with the Mayor and City Council to ascertain if the surveyed department is operating in the most efficient and economical manner.
(c) A copy of the report of each survey shall be transmitted to the Mayor, Council, and board of the surveyed department and shall be made available to the public.
Solution Part 2: Create an Elected City Prosecutor. The City Attorney in San Bernardino is already the City prosecutor. However, by splitting the functions, the City will have the best of both worlds. An elected City Attorney will give advice to the City as an entity without the fear of being fired for not giving advice to the other elected officials in power, and a City prosecutor can prosecute violations of the Municipal Code and the areas of State law given by Charter or state law with the independence necessary, with the independently elected City Auditor, to root out these kinds of corruption.
If an elected City Attorney is an elected watchdog, a City Prosecutor would be doubly so. The City Attorney’s client is the City of San Bernardino, the entity, and the City Attorney must protect the entity’s pocket book. The role of exposing corruption sometimes is at odds with that goal. Adding a separate elected City Prosecutor can rectify that situation and protect, in the long run, the People’s interest without regard to the City’s financial interest.
Of course, the bad numbers shown above do not add up to the alleged deficit, but if Council members were going on the correct numbers to start with, perhaps they would not have made the political choices that led to the fiscal emergency.
The information you obtain at this blog is not, nor is it intended to be, legal advice. No attorney-client relationship is established by reading or commenting on this blog. You should consult an attorney for advice regarding your individual situation.
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Michael Reiter, Municipal Attorney. Partner with Cole Huber, LLP in Ontario, Roseville California 