ATWATER -- A severe lack of financial oversight as well as unwillingness to act by the City Council has led this Merced County town to the brink of bankruptcy.
The situation can partially be blamed on the poor economy, but city officials have been made aware in recent weeks that depleted funds have eaten away at restricted monies and drained the city's cash reserves.
An August treasurer's report shows the general fund has a deficit of $5.2 million, a water enterprise fund has a deficit of $9.3 million and a sanitation enterprise fund a deficit of $1.3 million.
The public pays fees into enterprise funds, which ideally would allow the services the funds provide to be self-sufficient. But water rates haven't been raised in 20 years and sanitation rates have not been raised in a decade.
As noted in a report by Fitch Ratings, which recently downgraded Atwater's financial status, the City Council's lack of leadership in addressing budgetary issues has resulted in a near financial catastrophe, including the possibility of dozens of layoffs and bankruptcy.
In a worst-case scenario, Atwater would join Stockton, San Bernardino and Mammoth Lakes as California cities to declare bankruptcy this year.
Council members have tried to address the water and sanitation deficits in recent years.
In 2009, Mayor Joan Faul made a motion for a vote on rate hikes in both funds, but no other council members supported her, despite staff having warned the council that the rate increases were "a necessity."
In April, Faul made a similar motion to begin laying the groundwork for rate increases. "We're headed for bankruptcy if we don't do something," she said.
That time, she got a second from Councilman Craig Mooneyham, but the move was struck down with "no" votes from Councilmen Joe Rivero, Jeff Rivero and Gary Frago.
City officials have conceded that they knew something had to be done to correct deficits in two of the utility funds, but that they didn't realize just how toxic the situation was. As blocs of council members shot down opportunities such as the rate increases, funds were bleeding out faster than they may have realized.
It wasn't until the fiscal crisis started coming into clearer view that the council got enough votes to begin studies on possible rate increases.
Council members have confirmed that they were being told by the staff that there was a $7 million budget surplus. Then six weeks ago, they were informed that instead of having a $7 million surplus, all that money was for restricted uses and not available for general purposes.
Mooneyham said staff failed to highlight the dire situation the city was facing. The result was a council that didn't see an immediate need to make changes and raise utility rates.
"I think they (the council) didn't do it, honestly, because we had a huge budget surplus and they didn't want to hit the citizens with a higher bill if they could get away with it," he said.
During an all-hands, closed-door meeting with city employees in early September, interim City Manager and Police Chief Frank Pietro joined then-City Attorney Jose Sanchez and Finance Director Glen Carrington to explain how bad the crisis had become.
"Last month, basically, has been a hurricane," Sanchez said in the meeting. "At the end of the month, which was actually July 31, I got a call and I was told basically the way our finances work, it seems as though restricted funds that should not be used for paying general fund obligations are being used."
Where has money gone?
City officials and staffers haven't been able to pinpoint where the money has gone.
The city's fiscal mess has been exacerbated by the Great Recession and the housing market collapse, which began in 2006 and continues to linger. The economic fallout was a major hit to Central Valley cities' pocketbooks.
With property taxes falling to $3.8 million in fiscal year 2011-12 from $5.2 million in fiscal year 2007-08, Atwater is no different. A dropoff in building permits and a spike in pension costs added to the city's predicament.
Though declining revenues have played a major role in the crisis, some of the city's trouble has been self-inflicted.
The city has failed to collect various fees in recent years, and documents show a $700,000 decline in administrative fees from 2009-10 to 2011-12.
Pietro confirmed that in 2007, finance officials changed computer software and entered only about half of the city's businesses in the new system. Since then, only about half of businesses have been charged for updated business licenses. The issue is being corrected, he said.
Furthermore, a project heralded as the largest and most expensive endeavor the city has undertaken has contributed to Atwater's financial crisis.
The new waste-water treatment plant, which officials say was needed to comply with stricter environmental regulations from the state, was financed with bond money.
City records show that when the bond money ran out, $5 million was used from general fund reserves to complete the work. The city is paying off three bonds from the project for $20 million, $54.1 million and $10 million.
Faul said there is money set aside to pay off those amounts.
Despite deficits in the water and sanitation funds, Atwater residents have seen significant spikes in their utility bills from waste-water rate increases. The waste-water enterprise fund has a positive cash flow.
14 with pink slips
Wednesday, management said 14 city employees have gotten pink slips and 24 got letters telling them they may be laid off.
The City Council will meet Oct. 22 to consider declaring a fiscal emergency under Assembly Bill 506, which would be a precursor to bankruptcy. The council declared a common-law fiscal emergency, giving the city more flexibility to negotiate with contracted employees.
Land area: 6.1 square miles
Year incorporated: 1922
Median household income: $42,226
Per capita income: $17,768
Projected revenue 2012-13: $9.2 million
Projected expenses 2012-13: $12 million
General fund deficit: $5.2 million
Water enterprise fund deficit: $9.3 million
Sanitation enterprise fund deficit: $1.3 million