SAN FRANCISCO — California Controller John Chiang has ordered an investigation into Stockton’s finances following the city’s admission of accounting mistakes.
“I have concluded that there is reason to believe that the city’s ability to provide reliable and accurate financial information related to the required financial reports is questionable,” Chiang said in the letter.
Specifically, he said Stockton reported a net deficit of $37 million, and its redevelopment agency a net gain of $90 million, in its fiscal 2010 unaudited statement, while the follow-on audited report the same year found deficits of nearly $130 million in related funds.
Chiang also noted that the audited report for fiscal 2009 did not disclose any deficits. “The state controller’s audit is not unexpected,” Connie Cochran, a spokeswoman for Stockton, said in a statement. “If it helps everyone to understand the seriousness of our fiscal condition, we welcome them and will cooperate fully.”
Cochran said the city believes the controller’s audit will confirm the errors it and a consultant, Management Partners, have already found.
The controller’s investigation is also partly due to a “massive” number of requests that range from past politicians to Stockton’s taxpayer association, said Chiang’s spokesman, Jacob Roper.
Stockton, a city of 300,000 residents east of San Francisco, is trying to avoid becoming the largest city in the country to file for bankruptcy by mediating with more than a dozen creditors under terms set by a new state law.
Last week, Stockton said it had started the confidential 60-day mediation process.
Chiang said it is unlikely that his audit would be completed in time to have any impact on the negotiations.
Deis has said the city’s finances have taken a drubbing from the accounting errors, the housing bust and rising employee retirement costs. Stockton has suffered in the past from one of the highest foreclosure and unemployment rates in the country .
The City Council voted on Feb. 28 to suspend payments toward $110 million of general-fund-supported bonds through June 30, the end of the fiscal year, causing defaults.
In a disclosure statement in February announcing the city’s decisions, Deis said it would also be restating past financial reports.
The city manager said Stockton officials found a “material overstatement” in the report for fiscal 2010, including $500,000 in double-counted parking ticket revenues and an overstatement in the general fund of $2.8 million.
Management Partners, a local government consultant hired by Stockton to review its finances, said in its report that “restatements and corrections of accounting errors in prior periods reduced the available general fund balance at July 1, 2010, from $11.4 million to a $3.5 million deficit.”
A spokeswoman for Macias Gini & O’Connell LLP, the auditor for the city’s last filed report for fiscal 2010, said her firm does not comment on “client engagements” and that it will respond as quickly as possible to any requests from the controller.
Ironically, Stockton had received an award for excellence in financial reporting from the Government Finance Officers Association for its fiscal 2009 audit financial report.
Roper said it is hard to say how long the investigation will take until the books are open.
If the controller finds any wrongdoing, he can shift any misused state funds, fine the city $5,000 or refer any criminal wrongdoing.
“In other audits, we have referred them to the district attorney or Department of Justice,” Roper said.
Last year, legislation sponsored by Chiang that would have raised fines and expanded the controller’s ability to conduct local government audits stalled.
