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Restricted City $$? - Enterprise Funds Use Questioned

POSTED July 17, 2012 9:01 p.m.

As city residents await word on a sewer and water rate hike, questions are being raised on the City of Oakdale’s use of its sewer sanitation and water enterprise funds to finance non-related areas of the operation of the city government. A review of the 2012-2013 Oakdale city budget raises uncertainties regarding billings being in compliance with Proposition 218.

Prop 218 To Protect Taxpayers
In November, 1996, California voters passed Proposition 218 to establish rules for raising fees and taxes in the state. The initiative ensured municipalities could not shift the cost of providing services under its general fund to utility ratepayers.

When these costs are shifted, taxpayers may be deprived of their rights to vote on which services they are willing to pay for and utility ratepayers get charged more than the cost of providing utility services.

In essence, the City of Oakdale cannot charge ratepayers more than the cost of providing actual utility services, nor can they use revenue from ratepayers for non-utility purposes. The intent of these requirements is to prevent cities from overcharging ratepayers for utility services, and using the surplus funds for other city purposes that would fall under its general fund.

2012-2013 City Budget
The recently approved Oakdale city budget shows a plethora of outside positions fully or partially financed through these enterprise funds, particularly the sewer (622) and water (625) accounts.

Enterprise Funds account for billable services that the city operates like private business enterprises. In these situations, the city may act to recover the costs of providing certain types of services primarily through user charges. These costs include operating expenses and the capital cost of maintaining, replacing, upgrading, and managing the service – including administrative salaries.

In addition to positions within the public works department, where the operational costs for these services are expected to be financed, these special funds also subsidize all three clerks in the finance department despite their other departmental duties related to other department billings and city administrative duties. The accounts also cover 55 percent of the finance director’s salary and 50 percent of the finance department account supervisor.

The city manager salary and benefits are allocated at 30 percent and the Oakdale human resources officer’s salary and benefits are covered through 50 percent of the restricted enterprise funds despite only 21 line level public works employees within sewer and water related operations. The city has a total of over 100 city employees and just as many volunteers.

Finance Department Responds
When asked about these allocations, Oakdale Finance Director Albert Avila stated the system the city used was based on department head estimates.

“Are they the exact allocations? No,” said Avila. “But it’s the best we can do given our circumstances.”

Avila admitted that the three finance clerks do an array of other duties and even that one that was financed at 100 percent of sewer-water enterprise funds only did about 50 percent of actual work for that division.

“It’s not really a significant amount of difference,” stated Avila, noting the $3,000 a month clerk salary. “How much really is that on the yearly salary?”

Avila said his time allocation varied on the time of year and historically had been charged at 55 percent of his salary.

When asked about the disparity in the HR department, Avila said that the public works department generates over half of personnel-related issues within the city due to complaints, worker’s compensation claims, and other related issues.

Fifty percent of the five administrative salaries of the public works department are also slotted under these enterprise funds.

“Seventy-seven percent of city hall salaries are coming out of the sewer and water enterprise funds,” said Public Works electrician Chris Robinette in a recent interview on privatization. “Public works as a whole only makes up 30 percent of the total number of (city) employees.”

“The allocation for electrician is 100 percent between sewer and water and he’s (Robinette) not doing strictly sewer activities either,” said Avila in a return phone message about the disproportion. “If they start questioning allocations of the financial staff and start pointing fingers, they need to realize the allocations for any of the employees are not perfect. It’s not limited to the financial staff or administration, but everywhere.”

No Cost Study
To Verify Allocations
The percentages used by Oakdale are questionable and may not be supported. On July 10, The Leader filed a public information request for a mandated cost of services and cost allocation plan for those accounts.
In a response from the city, The Leader learned that the last study was done in 2009 and did not include calculations on time allocations.
“They (The study consultants) are only relying on the information provided by the city to be the operating costs,” said Avila. “The department directors determine the splits.”
“You can’t just pick them (the percentages) out of a hat,” said former Petaluma City Councilman Bryant Moynihan. “They need to back up those numbers.”
Earlier this year Moynihan filed a class-action lawsuit against the City of Petaluma for the misappropriation of millions of dollars in sewage treatment fees. In response to the suit, Petaluma removed $872,000 of funding transfers from its wastewater fund. Another $3.5 million of repayment is still at stake and pending judicial decisions.
Moynihan reviewed the City of Oakdale budget and made notations of questionable charges in addition to the salary transfers.
“A lot of this is what Petaluma was doing,” said Moynihan.
Moynihan questioned not only the allocations of general fund positions’ time, but also some of the expenditures and other fees that were billed to the sewer fund totaling over $100,000.
“These figures have been this way for years,” said Avila about the billings.
Interim City Manager Stan Feathers said he has worked in both larger cities (Modesto) and smaller ones comparable to Oakdale (Atwater), and pointed out that larger cities will have a cost allocation model that allows them to charge out services to enterprise funds. Smaller cities, however, are based on where they think the workload is and will be in the future.
“Should a city do a cost allocation every two to three years? Yes,” said Feathers. “But you have to balance the cost of that study with other uses for that money – especially in times like now.”
Feathers said Oakdale’s allocations are based on judgment and evaluated every few months.

Possible Impacts
Several California grand juries in recent years have addressed city misuse of enterprise funds being diverted for general fund expenditures. (Sacramento 2009, Modesto 2010, Sanger 2009, San Diego 2007.)
Though both Feathers and Avila stand by their numbers, it still is not clear in Oakdale that it would be permissible to charge some of the expenses as an indirect cost permissible given that the means to provide those direct cost allocations are not readily available and is solely based on estimates from department heads that, as an end result, benefit their budgets from the estimates.
The shrinking general fund already has forced Oakdale to slash services, lay off employees, and possibly seek privatization. If, like Petaluma, the city cannot use these allocations as intended, the 2012-2013 budget may have more of a shortfall than it does currently.

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