Opinion: South Lake Tahoe justifies reallocation of $7 million

To the community,

The following is a response to recent allegations of misappropriation of city/Redevelopment Agency funds in regards to actions that occurred approximately 10 years ago. The information presented comes from the public record, auditor’s reports, evaluations conducted and discussions with staff that are currently or formerly employed by the city/Redevelopment Agency. The information is supplied to the best of our ability as most of the staff are no longer employed at the city or Redevelopment Agency.

sltAt issue is the question of how the South Tahoe Redevelopment Agency developed a deficit of $7,007,000 between the years 1999 and 2003. There is no evidence to suggest anyone “stole” the funds as recently alleged by Mr. Steve Kubby who has not presented any evidence to support such accusations.

Where did the deficit come from?

The accumulative deficit that occurred between the years of 1999-2003 were determined and found to be in the following line items:

Revenue reductions:

• $500,000 late start at Park Avenue (less revenue than budgeted)

• $371,076 in reduced property values of the Embassy Suites

• $1,200,000 administrative costs advanced by the City

Excess expenditures:

• $1,184,053 overhead charges the city “charged” the agency as described below (charging the agency was not anticipated at the time the budget was prepared and

resulted in the budgets showing a deficit).

• $1,800,000 excess expenses to acquire the Transit Center which were not known at the time the grant funds were received

• $1,100,000 legal expenses related to acquiring property

• $476,000 road construction costs higher than budgeted

• $333,000 relocation costs higher than budgeted

• $42,871 miscellaneous costs higher than budgeted

What caused the deficit?

As has been said in the past in the public record, the amount and causes of the deficit are not uncommon when projects are in the midst of getting built, when revenues come in less than anticipated and when project expenses are higher than budgeted. In this case, the developer was also going through bankruptcy, which contributed to the outcome. How the deficit occurred has been reviewed by a multitude of professionals and citizens, from the grand jury to lawyers, CPAs, auditors and councilmembers. No evidence of criminal or illegal conduct has been determined by appropriate authorities who reviewed the situation. The oversights or errors that were made can be debated and judged in retrospect, but the most important action is to reflect on them and make the necessary corrections to avoid similar situations in the future. Under new procedures in place today, the City Council would have been presented with a decision whether or not to continue to support and fund the projects before the actions taken to do so were implemented, which did not occur in every instance between 1999 and 2003.

The grand jury looked into the financial matter of the deficit for two years, independent auditors have reviewed the records, contracts and expenditures and the $7,007,000 deficit is accounted for as described above. The issue was discussed with the City Council at a public meeting in 2003 and a detailed accounting was presented to the City Council in a staff report for the March 16, 2004, meeting. At that same meeting a loan agreement between the city and agency was approved to create the process for repaying the city from Redevelopment Agency proceeds. To date, the agency has repaid $4,000,000 to the city’s general fund. The deficit issue, discussion of the oversights that occurred, along with proposed corrective actions have come before the City Council and the public many times in the years since the deficit was realized.

Most, if not all the errors or oversights that led to the deficit, were identified by the El Dorado Grand Jury in its review of the actions and which have been previously reported. Those of most significance include the following:

• Inadequate financial policies. In 2005, the City Council adopted a comprehensive set of financial policies to prevent the kind of errors that led to the deficit. Prior to 2005, the city did not have sufficient financial policies. While the use of the funds may not have been improper or outside the scope of the city manager’s position and decision-making authority, the City Council upon learning of the deficit realized part of the problem was a lack of strict financial controls that would keep City Council more informed and provide them the opportunity to make the financial and policy decisions on matters of importance to the community and on significant projects. The adoption of the financial policies has led to significantly improved public and City Council involvement with respect to all levels of financial management and reporting.

• Lack of transparency with City Council. Some of the deficit was first reported in the 2001 and 2002 auditor’s evaluation reports. Those auditor’s reports were provided to the City Council, but not appropriately highlighted. The growing deficit should have been more directly brought to City Council’s attention as soon as it was reported.

• Charging the Redevelopment Agency for “admin costs” when the agency didn’t have funds. The City had a practice and cost allocation recovery policy to charge the Redevelopment Agency for the city’s expenses it incurred to develop projects on behalf of the agency. This practice itself is appropriate to recover costs. However, it was known at the time that the agency didn’t have any additional funds outside of the funds it was going to need to build the project(s) yet, the city billed the agency for those costs, which contributed over a million dollars to the deficit, the portion of which is literally “on paper.” While it is proper for the city to recover costs it incurred, the process of billing the agency contributed (somewhat falsely) to the eventual total deficit.

• Poor communication. Inadequate communication between several city managers between 1999–2003, redevelopment project managers and Redevelopment Agency board of directors (City Council) appears to have contributed to the overall situation.

In retrospect, the errors or oversights that led to the deficit were not caused by a single person or single instance. The procedural issues that caused the deficit were understood upon reflection and examination after the projects were done, which provided the opportunity to improve. Looking back one can conclude, as the grand jury did when presented with all of the facts and information that the lack of financial management and policies, inadequate financial staffing at the senior management level, organizational culture and lack of transparency all contributed to the $7,007,000 deficit.

New procedures in place

What is most important is to learn from our mistakes. To date the city has completely retooled its financial practices and continues to do so. These changes include:

• Comprehensive financial policies adopted by City Council in 2005 – these policies strengthened financial and management controls. A deficit of any amount is no longer possible without prior City Council authorization. New purchasing and grant management

policies have also been put in place since 2005. All of these policies place financial management controls over the city’s finances, require multiple reviews of expenditures and provide for better accounting and public reporting.

• New budgeting and financial reporting – each year the budget process and documents have been improved resulting in recognition from the Government Finance Officers’ Association for meeting the national standards for budgeting and financial reporting.

• Re-established the position of finance director to oversee and review expenditures. The position has authority to inquire of staff regarding budget expenses and ensure appropriate tracking procedures are in place to notify senior staff and City Council if and when budget concerns are realized.

• The hiring of new auditors through a competitive process in accordance with the recommended best practices of the GFOA.

• Updated purchasing polices limiting the authority of the city manager to sign contracts over $30,000.

• Established a general fund reserve policy requirement to set aside 25 percent of the general fund operating expenses, which is currently fully funded. This is a remarkable turnaround from 2003 when the city’s reserve fund was zero! This outcome is commendable as recently reported in the Sacramento Bee, “Dry Times for Many Rainy Day funds” (May 29, 2011) the city of South Lake Tahoe has been identified as the second best among local governments in the region for the amount of reserve funds as a percentage of its general funds.

In 2010-11, the city’s trend toward improved policies continued with:

• Hiring a new city manager tasked with improving the organizational culture, developing strategic plans and developing a five-year financial plan.

• Changing the process of preparing staff reports for City Council to include a review by the Finance and Legal departments to ensure appropriate funds have been budgeted and legal requirements are met.

• Appointing of a Fiscal Sustainability Committee comprised of members of the public at-large with business and financial backgrounds and expertise to review the city’s finances and provide opportunity for unique perspectives.

• Adopting the Five-Year Financial Plan in March 2011 to reduce expenses and focus on financial priorities.

• Adopting a Strategic Plan to keep fiscal s sustainability as a top priority of the city. Letter to community.

• Establishing new communication practices and improved responsiveness to concerns and questions raised by the public or employees.

• Creating accountability between city manager and City Council through a truly open door policy at the highest level of the organization to receive information, ideas and complaints.

City employees are encouraged to directly communicate with any member of senior staff, the public or city councilmembers.

Looking toward the future

The city continues to focus on improving its efforts to provide information to the public, senior management and to City Council. Errors or oversights will still happen, they always will in any organization. An ongoing review of financial policies, input from staff, City Council and citizenry along with improved accountability to the public for the city’s performance will help to minimize errors. We appreciate the opportunity to respond about the events that occurred between 1999 and 2003 and hope this review helps to fill in any gaps that may have been missing.

We are now moving forward toward an improved, better prepared and focused city government.

We have committed to the citizenry and City Council to focus on the strategic priorities, which include improving the infrastructure and built environment, responding to public inquiries, involving the citizenry, focusing on our fiscal sustainability, bringing much needed jobs to the community and addressing issues of concern efficiently.

The citizenry can and should expect what the city has promised to deliver including:

• Performance measures for each strategic priority to allow rapid responses to changing conditions.

• Quarterly progress reports on our efforts to achieve stated goals.

• A new, improved user-friendly budget document and process involving a wide variety of input from citizens, City Council and city staff at all levels.

• Improved customer service and community relations providing opportunity for public input. debate and dialogue on the issues and routine feedback.

• A focus on improving the built environment so it will correspond to the beauty of the natural environment.

• Better partnerships and responsiveness to local agencies and special interest groups to bring more projects to completion.

• And many others.

We welcome any suggestions or comments on any item of interest and at any time.

Nancy Kerry, South Lake Tahoe public affairs and communications manager

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Comments (16)
  1. Steve Kubby says - Posted: June 2, 2011

    Missing from this official “explanation” are answers to the following questions:

    (1) How did $7 million get stolen from the general fund without the knowledge or approval of the city council and who is responsible?
    (2) Under what legal authority did the council believe it could back date an illegal transfer as a “loan”?
    (3) How the city council hid the failures of redevelopment and misled the public into believing redevelopment is working.
    (4) How the city justifies using money already allocated to the city to repay a “loan”.
    (5) No explanation about the pattern and practice of stealing funds to fix our roads to pay for redevelopment instead.
    (6) No discussion of the hundreds of millions of dollars of unfunded liabilities, created by the practice of stealing funds from road maintenance to cover redevelopment.
    (7) No mention of the conclusion by the Grand Jury that the city council was over its head trying to undertake big city projects it can’t manage or afford.
    (8) No mention that the Grand Jury concluded the city council may be guilty of malfeasance and the illegal activities of the council, that were uncovered by the Jury are, “just the tip of the iceberg.”

    The people of South Lake Tahoe are not stupid and this latest coverup only demonstrates the level of corruption that has come to infect our city council.

    Given that the city has chosen to circle the wagons and perpetuate what appears to be massive fraud, I see no choice but to file a complaint with the California Attorney General.

    Anyone who would like to sign a complaint with me or who has further information to contribute, please contact me at [email protected].

  2. Steve Kubby says - Posted: June 2, 2011

    Here’s a note someone sent me that is the best reality check I’ve seen. Please read this to see why this issue is so critical to all of us:

    ” Where else in the world would you buy a house for a million plus dollars on a street with crumbling curbs and huge potholes at the end of your driveway? The new City council is too busy with lawsuits and redevelopment area issues to come up with a reasonable, sustainable, funding plan for the repairs of our roads. Until they tackle that issue, our city will continue to sustain a further decline of property values and degradation as owners become less likely to invest in remodels and redevelopment of commercial properties. No commercial investor in their right mind is going to want to invest in our City until our City addresses our roads and general disrepair of infrastructure. I said that to Tom Davis during the election and he said, in his little stocky voice, “well you know hwy 50 is Caltrans responsibility”. Obviously, Tom must only drive hwy 50 and never drives into the Tahoe Keys subdivisions or down Glenwood in the Bijou neighborhood. We have some seriously huge cracks and potholes, some of the cracks are more than 12” wide and 3 or 4” deep. They are a real safety issue and they prohibit people from riding around on bikes which is one activity that nearly every summer visitor to Tahoe likes to do. Not to mention that we have collapsed storm water drain pipes that cause more sediment to go directly in our lake. We have one that runs under Ala Wai Blvd. that has been collapsed for two years. Every time it rains or we have high snowmelt the City is out there with 2-4 public works employees and a couple of work trucks pumping the water from one side of the road to the other. For the amount of time they have spent pumping the water they could have probably fixed it twice by now but they complain that they don’t have the money to do the job. Meanwhile the pavement there has completely crumbled and it appears that sink holes may be developing.”

  3. Bob says - Posted: June 2, 2011

    Thanks for the update Nancy. I’m sure Mr. O’Rourke is looking into these road matters. His no nonsense attitude is helping to make much needed changes around town. Rome wasn’t built overnight.

  4. john barleycorn says - Posted: June 2, 2011

    The council hid the transfers, as they are also the board members for the RDA and knew esactly what was going on or should have.
    The question is were they committing malfeasance, nonfeasance, or misfeasance. Probably not, but they probably were were close to the line.
    What do you think Vern?
    For the Von Kluge’s that is another story
    that may be slightly sordid.

  5. Steve says - Posted: June 2, 2011

    It is disturbing to learn the large accumulating deficits, errors, oversights, and financial irregularities were first reported in the city audits of 2001 and 2002, yet neither city staff nor city council were able to comprehend such.

    Same pattern as the financial collapse and bankruptcy of the South Tahoe Area Transit Authority.

    By the time the bureaucrats figure out what is happening, the horses have escaped.

  6. Steve Kubby says - Posted: June 2, 2011

    Former Councilman Bill Crawford, who was elected in November 1998 and served until December 2002, has asked me to post his comment about this situation. Mr. Crawford suggests, as he has in the past, that the city attorney should formally request the superior court appoint a “Master” to investigate this situation.

  7. lou pierini says - Posted: June 2, 2011

    The staff you say is no longer at the city are still in the area. Maybe you should talk to them. Most of your response or reaction to Kubby is boiler plate BS that you can find on the web. Your answer leaves out many issues and your reforms are more style than substance.

  8. dryclean says - Posted: June 2, 2011

    If Nancy Kerry is a city employee, why is her response to Kubby an opinion piece? Its either factual or not. It should not be an opinion.
    If her thoughts represent the city’s point of view, these comments should be signed off by the city manager and city attorney at the least and probably the city council. Is Ms. Kerry the official on the record voice of the city manager, city attorney and the city council?

    Additionally, if this represents what the city manager wanted Nancy to write, where does this back and forth stop and why isn’t the “city” or Nancy addressing every comment about mismanagement and improper practices. Why just Kubby’s thoughts/comments?

    Nancy, please clarify so we know where the “city” stands on this and who you are actually speaking for. Is the city to be held liable for your comments and can your comments be used in a court of law in case a lawsuit is filed? If this is only your opinion, This is akin to Greggo using city stationary for personal a agenda as you signed your piece, Nancy Kerry, South Lake Tahoe public affairs and communications manager.

  9. Steve Kubby says - Posted: June 2, 2011

    Nancy Kerry sent me this email this morning:

    “Hello Mr. Kubby, Please find the attached Letter to the Community regarding the deficit that occurred in the Redevelopment Agency between the years 1999-2003 (attachment “Rdvl.Deficit Answers.June1.2001.pdf”). This letter is a response to the community regarding your recent allegations published on Lake Tahoe News.net that the deficit amounted to criminal conduct. While we are responding to the community, I am providing you a copy of the letter and those you cc’d in your email directed to the City Attorney (email dated May 28, 2011). The City Attorney has authorized this letter to the community to satisfy as a response to your email directed to him and acknowledges as much through my copy of this email to him.”

    Unfortunately, this response by the Ms. Kerry and the city attorney does not satisfy me or others in this community. One can only speculate as to why city employees would not simply disavow past errors and choose instead to engage in what has all the appearances of a coverup. One thing is clear and that is that the city is not being honest about its sordid past, its debt-ridden present or its painful future.

  10. Parker says - Posted: June 2, 2011

    Ms. Kerry, I appreciate your taking the time to respond in length and in detail to Mr. Kubby’s opinion piece! And I’ll disagree (a bit) with dryclean, in that your response certainly is less of opinion piece than something you previously posted.

    But bottom line, someone, or multiple people, screwed up at the expense of the taxpayer! That no one is held accountable, and instead we’re fed lines of, “In retrospect, the errors or oversights that led to the deficit were not caused by a single person or single instance….” shows that our City bureaucrats (maybe not all that differently than other cities?) feel more of a need to cover each other’s backside than a feel a sense they’re working FOR SLT’s citizens!!

  11. clear water says - Posted: June 2, 2011


  12. tahoeadvocate says - Posted: June 2, 2011

    • $1,100,000 legal expenses related to acquiring property

    Anyone know to whom these legal expenses were paid? I’m assuming a law firm which the city hired. Who was it and why didn’t they use city attorneys?

  13. satori says - Posted: June 2, 2011

    Although generally satisfied with some of the “bean-counting” issues, in answer to my question when Mr. Kubby brought up this issue: Will the City respond ? – they did.

    So as to be clear for others who may not fully understand what (Nancy ?) presented, including Mr. Kubby, allow these comments:

    Funding in total is sometimes subject to what used to be called commingling, which has generally not been a problem in practice for decades, due to the overall fiduciary responsibility assumed in handling, and accounting for, accrued funds. Accrued sales have become more important than cash sales, as they result in more growth than is otherwise possible – the opposite side is “accounts receivable”.

    (As a society, we have obviously altered white collar procedures to our liking, to our national detriment, but that’s for another day).

    Commingling, to use the simplest legal definition is “combining things into one body”, such as general City coffers.

    The response, such as it is, takes into account the vagaries of cash flow and construction contracts (even though this town is still too reliant on a “change order” style, which can, and has, caused chaos to costing procedures).

    This is more prevalent to “good enough for government”(which quite often isn’t good enough for the rest of us) due to various factors, including, for example,”prevailing wage” issues.

    What is implied in the response is consistent with the balance/imbalance of a project, although there may still be some specific cost categories that may need to be dealt with, and seems to account for the expenditures – so be it.

    The current societal call for accountability & transparency needs to have better understanding of what they’re looking at, to be effective, but it is certainly more obvious to this case.

    What may be implied but is not actually said is that funds are relied upon, but sometimes are not there, as we’re discovering with all government operations across the board now.

    The reason entities can run in either the “red” or the “black” at all is due to the revenue stream issue – is there enough at any given time to take care of payables ? This also is what nullifies the old idea of commingling being “illegal”, as it once was, as we’ve all been living beyond our means due to distorted realities about having enough.

    Ordinarily, funds are sometimes shifted to cover daily contingencies in anticipation of what’s known to be coming soon – in order to keep things going. These days, that’s not always sufficient.

    CA’s Director of Finance, Ana Matosantos, does it all the time,which is phenomenal, given the condition of CA’s finances. Shift money from one account to another to make sure contracts are fulfilled on time – she’s a whiz, given the political pressure.

    The problem in South Lake Tahoe is more cultural than criminal, ignorance than competent.

    When you can have one of the City Council say in open session not to worry about a $ 450,000 lower difference in two bids, as there is a “$ 440,000” contingency fund in the budget, you are simply inviting the winning contractor to soak it up during the project to get even.

    That kind of thing has happened all too often here, with no notice or comment at the time.

    When you can have a City Manager quoted as saying that there is no such thing as a performance bond on a $ 400 million project that ends belly-up without it, you are asking for the trouble you get.

    When you can sign off 30 + years of income from a significant tax base like Heavenly, you are upsetting your own apple-cart in terms of being able to afford what needs to be done “down the road”.

    Well, “down the road” is here now. . . when it should become apparent that doing it right the first time is way more important than doing it at all, if there are not things to be dealt with later. . . it’s later than any of us thinks.

    Are we learning anything from any of this ?

  14. Jason says - Posted: June 2, 2011

    Thanks satori! It’s refreshing to know there are still educated, rationale people in this town.

    Kubby – please stop your ranting diatribe. The only people that care about what you say are the apathetic “locals” who contribute just as much to our demise as the public officials that you cry foul about.

    On a sidenote Kubby–would you really even care about SLT if the MJ Collectives weren’t here? My guess is you’ll be long gone if medicinal marijuana is actually regulated as medicine.

  15. Tahoe Tomas says - Posted: June 3, 2011

    Jason… Put down the whisky bottle… This was educational, informative and needed… What do you have to contribute? Thanks kubby, don’t listen to these idiots who probably have contributed to the towns demise. You seem to care, are focusing on the right issues and bringing corruption to light. keep it up!

  16. satori says - Posted: June 3, 2011

    Thanks to Jason for the acknowledgement. . .as someone who has never smoked tobacco, barely drank alcohol, but have smoked pot unmedicinally for 45 years, I can attest to Jason’s use of ‘apathy’, in the almost 200 year old French saying “The people get the government they deserve”. . .

    Tomas is also right when gives credit to Mr. Kubby, although I hope his seeming MJ bias doesn’t dilute his message, which is my primary reason for adding. even more perspective.

    This town will remain in serious trouble, given what else is happening “out there” that is not showing improvement, and will not, due to the same issue that causes it here, the over-politicized, inappropriate choice of sensible priorities. . .