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Audit finds Hughson in bad shape

POSTED January 25, 2011 8:49 p.m.

An expected, $64,789 General Fund budget surplus for the City of Hughson is now projected as a $70,923 – or more – deficit, members of the Hughson Finance Committee learned Tuesday.

The sudden budget swing has Hughson racing to cut costs, meeting with labor groups to renegotiate contracts, considering consolidating services with other cities and counties, and possibly cutting whole programs.

“On a positive note, the revenues are coming in fairly close to what we thought,” Hughson City Manager Bryan Whitemyer said.

While tax revenues are roughly on par with expectations, unanticipated costs have materialized for the City of Hughson. An approximately $30,000 hit in employee retirements, unexpected purchases, and other minor budget modifications dropped the projected surplus to $34,327.

“I wish that was the end of the story,” Whitemyer said.

During a recent visit, auditors noticed Hughson was improperly calculating or using fund balances in four areas:

·         For the past two years, Hughson has spent $37,250 from the low-moderate housing account to pay for code enforcement activities; the auditor recommended that housing funds only be used for housing, and that the city backfill the account from the General Fund.

·         Funds from the Euclid North and South Benefit Assessment Districts and Landscape and Lighting Districts were used to fund some city salaries, despite the fact that related developments were never built due to the economic downturn. As there is nothing to maintain, the city should not have collected assessments, and should not have charged the accounts; approximately $28,000 will be refunded to developers from the General Fund.

·         The City of Hughson collects impact fees on behalf of Stanislaus County when new projects are developed.  In 2009/2010, the City of Hughson mistakenly marked those fees as city revenues. Hughson will need to refund approximately $40,000 to the county.

·         When developers begin projects, they are required to deposit a certain amount of money into a liability account. Those accounts are charged as Hughson performs work for the developer, such as environmental assessments. Developers are supposed to add money to the accounts as funds run low, but many liability accounts are now running a negative balance. If Hughson cannot collect, it will be forced to swallow the costs.

Those adjustments tally a further $105,000 cost to Hughson, plus whatever costs remain in negative-balance liability accounts.  According to Whitemyer, some developers may have gone bankrupt, and other debts may have exceeded the statute of limitations to collect.

“If you can't collect it, you've got to write it off,” said Hughson Finance Director Margaret Souza. “The cash is already gone. You've already paid the bills. But the books show we're supposed to be getting money to reimburse that. We never should have gone in the hole.”

Hughson could dip into its modest reserves to balance the budget deficit, but such a move may jeopardize the city’s financial stability should catastrophe strike. Instead, to correct the structural deficit, the city will look to reduce costs.

“If we don't address these things now, we will really pay the piper later,” Whitemyer said. “With these budget adjustments, we're anticipating a deficit of at least $70,923.”

That’s a sizable deficit for a city with a general fund budget of just $1.8 million. Should city labor groups agree to an effective 5 percent pay cut, either through furloughs or an increased employee contribution to benefits, the city would save only $28,000.

Whitemyer will meet with labor groups later this week to discuss possible long-term solutions to the budget gap. Other possibilities include reducing city departments by partnering with neighboring communities – as some county cities have outsourced building departments to the county – or cutting department budgets.

The city will be looking for solutions from any perspective, and hopes to involve staff of all levels in the brainstorming process.

“If an employee of Hughson comes up with a really good idea, I want to make sure they get credit for it too,” Hughson Councilman Matt Beekman said. “No idea's too hacky at this point. Now's the time to think out of the box.”

Beekman emphasized a need to pursue economic development initiatives in the down economy. Such a move could increase the city’s property tax collections.

Hughson’s been hard hit by the downturn, with assessed property tax values dropping 10, 8, and 5 percent since the 2007-2008 fiscal year.

"Normally this would be awful, but after working in the City of Patterson, this doesn’t look all that bad,” Souza said. “Trust me."

Due to Prop 13, property tax valuations will increase very slowly, leaving the city with down revenues for years to come. According to Souza, it could be until 2043 before property tax revenues return to their 2007-2008 highs.

The only way that recovery could come sooner is if property changes hands, or if new developments break ground in Hughson.

“Unless something comes to the community, it's going to be flat for years to come,” Souza said.

To contact Alex Cantatore, e-mail acantatore@turlockjournal.com or call 634-9141 ext. 2005.

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