LOS ANGELES -- Stockton, Calif. residents can thank the city’s civic leaders, who failed to see the warning signs of an imminent bankruptcy, for much of its financial problems, according to an audit released Monday by State Controller John Chiang.

City management should have revisited their spending and borrowing decisions by taking information about revenue and expenditure trends, the housing contraction, and other data into account earlier than they did, the report found.

“Stockton is not Bell – we found no evidence that corruption and self-dealing drove this city into insolvency,” Chiang said. “Instead, many of Stockton’s problems can be tracked to poor decision-making that was not only ill-informed by weak accounting and fiscal management systems, but failed to heed downward-trending data that should have curbed spending and borrowing decisions.”

In an 85-page report, the controller found significant weaknesses in the city’s fiscal management practices and internal controls, many of which are still unaddressed today, more than a year after the city filed for Chapter 9 bankruptcy. 

Of the 79 general accounting controls that were reviewed, 48, or 60.8%, were found inadequate. The inadequate controls resulted in a number of decisions that negatively affected the city’s financial situation, the audit found.

Most of the city auditor office’s planned audit activities were not carried out and few audit reports were issued. Of the reports that were released, few addressed issues of substance, the controller found in the first of three audits released Monday.

The first audit also found that the city did not produce required financial statements and reports in a timely manner.

Chiang said if these problems remain unaddressed, wasteful spending and abuse of public resources will continue. He suggested that the city develop a comprehensive remedial plan in order to reduce further threat to the city’s financial situation.

Prior to the release of the audits, the city was given the opportunity to respond to the controller’s findings. Stockton management said it agrees with the finding that there are problems in the audit process as well as the finding on the city’s inability to produce financial statements in a timely manner. However, they noted that this is not new information to the city and, in both cases, they have already taken steps to address the issues.

In a second audit of the Stockton’s asset transfers, the controller found that the city is unlawfully holding $1.4 million in redevelopment agency assets that should have been transferred to a successor agency following the dissolution of all redevelopment agencies in California.

When Stockton’s RDA was dissolved, the city instead transferred assets from the RDA to the city.

Stockton management disagreed with part of this finding, saying that it received $1.3 billion from the RDA and used the funds to repay loans from the California Housing Finance Agency. Stockton said auditors from the state controller’s office were onsite and held an exit conference for the RDA transfer review in Dec. 2012.

The controller’s office, however, said the city did not prove that the CalHFA loans were an RDA obligation, and even if they did, the city paid off the loans prior to the maturity dates, which is a violation of California state law.

The controller is requiring the city to reverse the transfer of the redevelopment assets by sending them to the RDA’s successor agency, which will use the money to retire debt absorbed by the dissolved RDA.

In a third audit, the controller found that the city’s “co-mingling of taxpayer dollars resulted in the cash impairment of some funds.”

For example, the city’s general fund reported negative cash balances during the year, which impaired the city’s gas tax fund. The gas tax fund had negative cash balances which caused the city to charge interest expense through negative interest allocation to the fund.

Stockton management disagrees with these findings.

Still, the controller is requiring the city to immediately separate its gas tax dollars from other accounts and to establish a separate bank account of the gas tax fund.

City officials did not immediately respond to a request for further comment.

In total, the audit on the city’s accounting controls makes eight findings and recommendations. The audit on the city’s asset transfer review made two findings, and the audit on city’s funds made three findings.

“I recognize the all too clear challenges facing the City of Stockton,” Chiang said in a statement. “The purpose of these audits is to shine a light on serious, but solvable, problems that must be addressed by City leadership in order for Stockton to restore its financial integrity.”

The audits were initiated after the controller’s office received multiple requests from officials and residents in the city seeking an independent review of Stockton’s accounting practices.

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