SAN FRANCISCO — California Controller John Chiang has ordered an investigation of the troubled city of Hercules after uncovering what he calls major discrepancies in its financial reports.

"We have serious concerns about the reliability and accuracy of the information in the annual financial transaction reports for the city and the" Hercules Redevelopment Agency, Chiang said in an Aug. 18 letter to the city's interim city manager Liz Warmerdam notifying her of the audit.

The damaging discoveries by the controller come in the wake of recent financial messes discovered in other California cities, including Bell, Montebello and Vernon.

In one example, the controller said Hercules represented a negative amount of $14.2 million in its debt service fund as a positive in its fiscal 2010 financial statement. Chiang's review also found that the same problems occurred with its general, special revenue and enterprise funds.

Similar inconsistencies with debt service and other funds occurred in its fiscal 2009 statement, according to the controller.

Hercules, which has a population of around 26,000, sits on the northeast shore of San Francisco Bay, just a few miles south of the city of Vallejo, which itself exited bankruptcy earlier this month.

Chiang also noted that the city's independent fiscal 2010 audit due March 31 was not submitted in full until Aug. 15. The auditor found 23 "significant deficiencies" in both financial reporting and compliance. The fiscal 2008 audit had also found similar problems.

For fiscal 2009, the city claimed an exemption from the audit requirement.

Chiang also said his concerns have been heightened because of related issues, including an investigation by the Hercules police into city operations related to deleting computer files.

In June, the Contra Costa County grand jury said in a report that they city has used bond funding to make up a $6.6 million deficit.

In 2010, the same grand jury described the appearance of impropriety and or lack of transparency in the city housing and business loan program.

Mayor Myrna de Vera said in a statement that the city has formed several committees to deal with the problems she said are tied to the former administration. She said in the next few weeks Hercules would hire a new auditor, city attorney and city manager.

"Council has been taking steps with our skeletal staff to right the mistakes of the past administration," de Vera said. "The Council has been responsive to the grand jury's recommendations and findings and made many positive changes these past few months."

The state controller's audit will begin on Sept. 6.

Hercules is also trying to reduce a $5.3 million projected deficit, of which $1.5 million is Hercules Redevelopment Agency debt service that the city must pay.

In April, the city hired the Municipal Resource Group to review its finances.

The consultant found that the HRA was basically insolvent and unable to make $1.4 million in debt service payments without help from the city's general fund.

The HRA and the Hercules Public Financing Authority have more than $162 million of outstanding debt. That does not include debt associated with assessment districts, the report said.

The report said the Redevelopment Agency's assessed valuations and tax increment revenues have fallen by 25% over the past three years.

Last year, Standard & Poor's downgraded the HRA's 2005 and 2007 tax allocation bonds to BB from A because of a decline in tax increment revenues.

In June, city residents voted to fire Mayor Joanne Ward and councilman Donald Kuehne following a recall drive by residents related to a political mess over the budget and their dealings with the former city manager.

One of the council members resigned before the recall election.

While the former city manager Nelson Oliva was out on sick leave, former interim city manager Charlie Long uncovered the city's dire financials, made structural changes, and hired a new finance director.

Then the City Council fired Long and put Oliva back in his position until he retired at the end of the year.

The city's police chief, Fred Deltorchio, took over the job of city manager until the council hired Warmerdam.

Hercules paid its city manager $268,305 in 2009, according a salary database maintained by the state controller's office.

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