Sacramento's Department of Utilities is in such disarray that thousands of city-owned water meters valued at $1.3 million are unaccounted for, according to a scathing audit released Friday.
The missing meters – purchased as part of a citywide water meter retrofit program for homes and businesses – are believed to be part of a black-market salvage scheme that came to light in a joint police-FBI investigation launched in 2006.
As a result of the probe, city Auditor Martin Kolkin began a detailed look at the department more than a year ago.
In his audit, Kolkin estimates that some 4,500 meters have disappeared. He said he wasn't able to find inventory tracking records and called the lax record-keeping "a significant deficiency" in the department's management.
"Department of Utilities staff members were unable to determine the type and number of water meters placed in service," Kolkin wrote.
So troubled was the department that Kolkin ended up writing two reports: one looking at contracting issues, the second focusing on inventory controls and employee spending.
Problems included missing meters; failure to follow competitive bidding procedures; unaccounted-for camcorders and cameras; and questionable employee debit card charges. One employee who managed a storeroom racked up $141,586 in charges in 2006.
The findings come as the city considers increasing commercial and residential water rates by 3.75 percent. The City Council is slated to vote Tuesday on the increase, with most of the new revenue going to the department's water meter retrofit program.
The city has begun a 20-year, $350 million program to install water meters in homes and businesses. Under a 2005 state law, Sacramento was ordered to install water meters by 2025 – about 120,000 in various phases.
Although homes built after 1992 have water meters, all city residents are still charged a flat rate. Beginning Jan. 1, 2010, bills for homes with meters will be based on a volume rate. For residences with meters installed after 2010, the flat rates will be lifted after a one-year grace period.
Neither City Manager Ray Kerridge nor Assistant City Manager Marty Hanneman was available Friday. Instead, a statement was released through Jessica Hess, a city spokeswoman.
"While the department cannot change what was done in the past, we are looking to address the issues raised in the audit and continuing to move forward by continuing to provide high-quality, reliable and environmentally safe water, sewer, drainage and solid waste services," the statement said.
Hess noted that many of the concerns raised in the audit have been addressed, including changing policies and procedures, improving employee training and having workers pay for "items inappropriately purchased."
Gary Reents, the city's director of utilities since January 2003, moved up his planned July retirement date and exited this month. He was never implicated in any wrongdoing.
The utilities department has been beset by controversy in recent years. The police-FBI investigation that began in 2006 continues, and has expanded to other jurisdictions in the country.
In Sacramento, investigators focused on the possibility that city employees accepted bribes and sold salvage illegally to the owner of a Bay Area company.
In January, the city's former water superintendent, Barry C. Holland, pleaded guilty in federal court to taking bribes as a reward for the water meter sales. Holland pledged to provide testimony and information about the scheme in return for a reduced sentence.
After Holland retired, two other utility workers were placed on administrative leave. One of those employees, a supervisor, retired in January as part of an agreement with the city, but was not implicated, city officials have said. The employment status of the other worker was not provided Friday.
Because the department lacked clear accountability, there are problems with determining who is responsible for past problems, the audit found. Kolkin urged the city to call in the police if criminal activity was suspected with any of the unaccounted-for water meters.
In March, alarmed city officials brought in a consultant for $100,000 to verify the location of the 32,183 meters the city has purchased since 1998. It could take a month more to get a final tally, Hess said. Some meters were buried, obstructed or difficult to find, she said.
As the consultant's count continued, Kolkin was well into his separate audit, combing through documents to assess the department's inventory, contracting and oversight procedures.
He found that little attention was paid to the department's operations. For instance, staff took an unexplained $400,000 inventory write-off in 2007, an action that went unchallenged.
"Sufficient internal controls would have routinely red-flagged such a large and unusual transaction," Kolkin found.
Also overlooked were employees' use of debit cards, which had monthly spending limits of as much as $15,000.
A sample of purchases found several examples where employees didn't provide adequate receipts for purchases, sometimes claiming they were lost.
In two instances, the department told the City Council that competitive bidding for purchases should be suspended because no other vendor made the item, when that was not true, Kolkin found.
In 2001, the department spent more than $1 million more than City Council approved contracts for water meters.
Kolkin found no existing policy for change orders for projects under $100,000. And, he discovered "inadequate separation of duties" where a project manager is allowed to receive, open and evaluate bids.
Although the department is making changes, taxpayers still have concerns.
"A couple of customers have asked if the increase has anything to do with the meters and the audit and I've told them no," Hess said. "We haven't considered the potential of missing (meters) in our calculations."
Call The Bee's Terri Hardy, (916) 321-1073.
