Saturday, January 9, 2010

Grand jury questions Sacramento’s use of utility funds

By Robert Lewis and Loretta Kalb
rlewis@sacbee.com
Published: Thursday, Jan. 7, 2010 - 12:00 am | Page 2B
Last Modified: Thursday, Jan. 7, 2010 - 2:14 pm

Sacramento city officials ignored information showing the city may have improperly diverted more than $21 million between 1996 and 2008 in water, sewer and other utility funds to cover general government expenses, the Sacramento County grand jury has found.

On Wednesday, the grand jury released the findings of its investigation into the city's compliance with Proposition 218, a 1996 voter-approved initiative that barred local governments from shifting the cost of general government operations to utility ratepayers.

"The grand jury found that, at best, the city has not done enough to determine whether the city is violating the law and, at worst, has shifted millions of dollars in costs from the general fund to utility enterprise funds," according to the report.

Marty Hanneman, Department of Utilities director, said officials have been working with the city attorney since 2007 to determine if the city has been violating Proposition 218.

"There's a lot of things that aren't black and white and clear here," Hanneman said, adding that the city has discontinued several practices noted in the grand jury's report.

City Attorney Eileen Teichert said she could not discuss legal advice given staff members. But she said Proposition 218 issues arise often.

"We've had a lot of Prop. 218 issues brought to our attention, particularly with utility issues," she said.

Utilities are supposed to be self-supporting funds to pay for water and solid waste removal. If officials divert money, bills for ratepayers might go up to offset the loss of funds and utilities' aging infrastructure might go unrepaired.

The report did not say whether either of those happened in the city.

In 2008, the Utilities Department brought in an outside consultant to review the city's compliance with Proposition 218. The consultant's draft report, completed in May of that year, found the city may have inappropriately diverted more than $21 million from the utilities fund to pay for other city expenses.

Those expenses included:

• $2 million annually in subsidized water rates for city departments.

• $2 million to buy property for the proposed Natomas Auto Mall.

• A $1 million annual allocation to help developers with utility upgrades on downtown projects.

The consultant didn't say these costs definitely violated Proposition 218 but that they should prompt legal review.

City officials tried to suppress the consultant's report, the grand jury alleged.

"Sworn testimony from multiple sources reveals that the city manager and his subordinates have suppressed a 44-page report that analyzed the potential costs of Proposition 218 noncompliance," the grand jury said.

While the report doesn't name the officials, Ray Kerridge was city manager at the time and Hanneman the assistant city manager in charge of utilities.

Kerridge did not return calls for comment Wednesday afternoon. Hanneman said officials didn't try to suppress the consultant's report.

"Before we bring anything forward to the City Council, we want to make sure it's accurate," he said.

The consultant who wrote the draft as part of a $25,000 contract was terminated before producing a final report. Hanneman said the city ended the contract because "we were running out of money."

"We felt that we didn't need to go further," he said.

The City Council got copies of the draft report in July 2008 but never discussed the issues publicly, according to the grand jury. The grand jury did not say how the report came to the council's attention.

The city did end a number of the practices the consultant found might be violations of Proposition 218, Hanneman added. For example, the city has stopped allocating money from utility funds for developers and is increasing water rates paid by the parks department to the full amount over 15 years, he said.

Councilwoman Sandy Sheedy said she did not remember seeing the consultant's 2008 report.

"We are really going to have some discussion on this, some briefings. And we're going to have it all done in public," Sheedy said.

Mayor Kevin Johnson, in a prepared statement, said he "will be following up with staff to see how we can not only resolve these issues but prevent them."

Other cities have been sued for violating Proposition 218, and the Sacramento County Taxpayers' League will be looking at the allegations, said Bob Blymyer, the group's executive director.

The grand jury, among its recommendations, urged the city to release the consultant's report, hire outside counsel and explain why it failed to act.

The city is to respond in writing by April 6.

http://www.sacbee.com/city/story/2443837.html

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