S&P Reinstates Oregon Town's Rating After New Audit in Wake of Scandal

SAN FRANCISCO - Standard & Poor's last week reinstated its AA-minus general obligation bond rating for West Linn, Ore., after new city management released audited financial statements that had been delayed after a former finance director was caught embezzling money from the Portland suburb.

"The city has made changes both in operational and policy terms that we believe represent a substantial turnaround," said Standard & Poor's analyst Chris Morgan in a report. "The most prominent development has been a near full turnover of its leadership since January 2005, including its mayor, City Council, city manager, and finance director."

Former West Linn finance director Elma Sandoval Magkamit pled guilty to more than 50 counts of felony theft and was sentenced to eight and a half years in prison in November 2006. She stole more than $1.4 million to feed a gambling addiction over four and a half years, beginning in 2001, by writing checks to a fake company called Magkamit Consulting.

It took years for the city to discover the fraud because West Linn was constantly behind on its audits during Magkamit's tenure, said city spokeswoman Kirsten Wyatt. Magkamit covered her tracks by forging bank statements and check registers.

The former finance director kept the city's books in such disarray that auditors had trouble piecing together complete records even after she was caught by an accountant who noticed suspicious entries in the city's check register.

The city's post-scandal auditors, Talbot, Korvola and Warwick LLP, have refused to issue an opinion on the 2004 audit, but the firm has issued qualified opinions on the city's 2005 and 2006 audits, pending improvements in tracking of the value of developer contributions to capital.

"There was a lack of oversight," Wyatt said, adding that the former city manager's contract was not renewed after the scandal and voters replaced most of the city's elected officials.

Since the fraud, the city has created a new audit committee, replaced its outside auditors, increased the frequency of financial reports to the city manager and the city council, and split responsibility for management of the city's checking accounts between the finance director and the accounting manager.

Standard & Poor's said West Linn's financial management is now "good," citing its five-year financial forecasting and capital planning models and more frequent financial reporting. The agency's one critique was the lack of a formal debt-management policy.

Standard & Poor's said the well-to-do suburb of 24,000 people has underlying credit strengths, including "very strong economic characteristics," low debt burden, and "good-to-very strong" fund balances in recent years. The main credit weakness is the difficulty of raising revenues under Oregon property tax limits and a populace that has thrice rejected revenue measures in the aftermath of the financial scandal.

West Linn has $8.6 million of GO bonds outstanding and is considering a $5 million referendum for a replacement of its police station.

Moody's Investors Service also revoked the city's rating after the fraud, but the city has not requested reinstatement, said Wyatt.

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