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City of Lincoln’s stability ‘threatened’ by years of financial mismanagement, state audit says

The California State Auditor’s office slammed the city of Lincoln for years of financial mismanagement of public funds, lax accountability and inadequate oversight from officials that “threaten the city’s stability,” in an audit report released Thursday.

Lincoln overcharged developers and residents millions of dollars, made “questionable” loan transfers, and shuffled money from restricted funds to offset deficit-ridden accounts to falsely present the funds as solvent, according to the state auditor’s report which reviewed city practices between 2013 and 2018. These actions “did not always follow state law,” Chief Deputy State Auditor John Billington wrote in a letter to legislators.

For many in Lincoln, the state audit validates a long-held belief that city officials repeatedly failed to heed concerns raised by residents, contributing to bad accounting practices and government oversight, said Tony Manning, a co-founder of a neighborhood watchdog group called Lincolnites for Integrity and Fiscal Transparency, or LIFT.

“All along we were told we were wrong, we were ignored,” Manning said. “The only regret I have is we didn’t figure this out sooner.”

The Lincoln City Council acknowledged “mistakes were made” that have eroded the public’s trust, in a letter signed by all members published Thursday on the city’s website.

“We apologize,” reads the letter. “We regret not requiring more detailed operational reporting, not directing an overhaul of business practices sooner, and not demanding prior management make needed changes.”

Aware of the state audit’s findings, city staff has been identifying gaps in current city policies since December as part of a business process improvement initiative to remedy the findings of the audit, interim City Manager Jennifer Hanson said.

“One of the challenges is the city grew too fast,” Hanson said. Lincoln, with a population of more than 46,000, almost quadrupled in size between 2000 and 2010, making it at the time one of the fastest growing small cities in the country.

“I don’t think the financial structure was built to process that much business in that time, and what happens in that process is that the i’s are not dotted and the t’s are not crossed,” she said.

The audit began in May 2018 at the request of then-state Sen. Ted Gaines, R-El Dorado Hills, after members of LIFT raised concerns that the city was mismanaging its budget. The previous year, a group of residents won a class-action lawsuit against the city for illegally overcharging ratepayers for water rates, and the city has since agreed to refund residents $7 million related to overcharges, Hanson said.

The audit found Lincoln made resident ratepayers cover $1.6 million in the city’s municipal utilities costs from January 2014 through February 2018, violating a state constitution provision. Voters in 1996 approved Proposition 218, which allows local government to charge ratepayers only for the cost of servicing the ratepayer’s property.

Though Lincoln is not legally required to issue refunds, Hanson said City Council is set to consider whether the city should repay residents for additional refunds at a meeting next month.

“It’s so hard when you’re a citizen, and your government officials aren’t doing the right thing and you don’t know where to go,” Manning said.

Lincoln also overcharged developers and builders for the cost of water infrastructure, with the city collecting nearly $41 million in excess for its water connections fund as of June 2017, according to the report.

The city would then loan money from the water connections fund, in addition to other funds, to separate accounts that “clearly did not have the capacity to repay those loans,” according to the report, breaking the city’s interfund loan policy. The city has five outstanding interfund loans it is obligated to pay back, totaling $9.6 million, according to Hanson.

The city would also temporarily transfer money from the water connections fund each year to several other funds with deficits, such as the Fire Department, Parks Department and the airport, from 2013 to 2017, misrepresenting its financial position in its annual financial statements, the audit reported.

Between fiscal 2013-14 and 2016-17, transfers from the water connection fund ranged from more than $7 million in 2016-17, to nearly $19 million the previous year.

The mismanagement stems from years of city officials failing to follow their own policies, the report states. Several past financial investigations by the city’s external financial auditor reported “recurring deficiencies, including the city’s inability to accurately prepare its financial statements at the end of each fiscal year,” but little changed, the report said.

Staff would sometimes make expenditures and city contracts were sometimes amended without obtaining appropriate approval, the report found. The City Council approved a $3.9 million loan in 2010 from the water connections fund to its redevelopment agency, despite staff stating that the redevelopment agency would not be able to pay back the loan.

City managers in Lincoln are allowed to enter into contracts of up to $25,000 without prior approval of the City Council, but city ordinances require they promptly report these contracts to a City Council meeting. “However, Lincoln could not demonstrate that its former city managers ever made such reports,” the report stated.

“It would be very difficult to pinpoint a particular person” as the root of the city’s financial disarray, Hanson said. The issues “transcend a number of councils and a number of city managers.”

Lincoln’s last permanent city manager, Matt Brower, resigned in June 2018. Lincoln’s current mayor, Paul Joiner, has served on the City Council since 2008.

The city’s first priority is addressing faulty accounting practices to ensure future annual financial statements are accurate, and creating repayment plans for the loans the city owes to various accounts. Lincoln is also required to study fees and rates, which could lead to ratepayer bills increasing or decreasing, according to a city FAQ.

“I don’t view the audit as a bad thing. It’s like buying a house,” Hanson said. “I’ve had the house inspected, I know what’s wrong and it’s time to fix it.”

The Lincoln City Council will discuss the audit during its Tuesday meeting at 6 p.m. at City Hall, 600 Sixth St. In addition, the city will host two community meetings on the audit on March 28 10 a.m. at City Hall, and 6 p.m. at the City of Lincoln Library, 485 Twelve Bridges Drive.

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Alexandra Yoon-Hendricks covers Sacramento County and the cities and suburbs beyond the capital. She’s previously worked at The New York Times and NPR, and is a former Bee intern. She graduated from UC Berkeley, where she was the managing editor of The Daily Californian.
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