Update: Grand Jury Criticizes Imperial Beach Finances

Original story published May 28, 2013 at 10:41 a.m.

A report released Tuesday by the County of San Diego Civil Grand Jury urged Imperial Beach and its redevelopment successor agency to make several changes in the way it keeps its books.

Though no evidence of fraud was found, an audit by the San Diego County Office of Audits and Advisory Service found that millions of dollars were improperly used.

"The Grand Jury found that the demise of redevelopment has hit Imperial Beach hard economically and we recommend and encourage the city take strong action to get their financial house in order," the report stated. 

See the attached PDF for the full report. 

In an attempt to block the Grand Jury from using specific information related to city and redevelopment agency legal fees, the city filed a restraining order last month.  

Last week a Superior Court judge ruled the Grand Jury could use documents willingly turned over by the city in an audit of city financial activities.  

The purpose of the audit was to examine potential financial irregularities in the specific areas of outsourced attorney charges and employee time allocations related to RDA activities.

An investigation started after complaints were made by a citizen last fall. The complaints were "too numerous and haphazard to efficiently address," the report said.

Instead of exploring every complaint made by the citizen, the Grand Jury examined city and redevelopment agency attorney fees and "alleged misallocation of redevelopment expenses."

Dissolution of redevelopment agencies statewide was approved in February 2012. A successor agency was established to fulfill the final business of the redevelopment agency.

The audit found that the city had become too dependent upon redevelopment agency money. Redevelopment funds were paying approximately 10 percent of city salary and the agency's budget was more than 50 percent the size of the general fund. 

A remaining $4.1 million in redevelopment debt may be absorbed by the city's General Fund. 

Shared payroll between the city and other city agencies have led to inaccurate bookkeeping, the report said. 

Employees who receive part of their salary from redevelopment agency funds have been paid based on estimates, not time sheets. City employee time sheets can currently be altered after being approved by a supervisor and before payroll processing, the audit found.

Enforceable obligation payments to phase out redevelopment was also inaccurate by more than $600,000. Some of these payments were approved by the California Department of Finance but were later denied. 

"In the opinion of the Grand Jury, the City should implement a stronger accounting system," the report said. 

After dissolution of redevelopment began, the city hired a second law firm. Legal cost accounting needs to be clearly labeled as city or redevelopment agency successor agency services, the report found. From July 2010 to December 2012 the city spent more than $446,000 on legal fees, according to the report. 

A $1.7 million loan in fiscal year 2010-11 was transferred from the redevelopment agency to the city's general fund. A California Department of Finance audit called the loan invalid but that decision was later overturned.

In part due to the loan, the Grand Jury recommended city fiscal year 2010-11 finances be restated. 

Several recommendations were made to the Mayor of Imperial Beach as well as its City Council and City Manager:

• Update and segregate payroll time keeping for city employees 
• Immediately separate General Fund and Successor Agency funds
• Accurately label legal service fees

Less than an hour after the report and audit were released, the city released a statement Tuesday morning that disagreed with the notion that Imperial Beach is under stress from redevelopment agency debt.

The city called attention to annual independent audits to inspect the integrity of the city and its redevelopment successor agency. 

Like hundreds of other cities, the California Department of Finance (DOF) has conducted multiple audits for redevelopment agency dissolution.

Following the audits, in April the DOF awarded the city a Finding of Completion letter, marking a milestone of redevelopment agency dissolution. 

As a result the city is allowed to complete some remaining redevelopment projects to wind down redevelopment activity.

"More importantly, unlike many other cities, the City of Imperial Beach has not had to deplete its reserves to pay any obligations of its former redevelopment agency. The city’s success has been due in no small part to its checks and balances, including its accounting standards," the statement said.

A formal response to recommendations listed in the report will be released in the future, the statement said. The city is required to respond within 90 days.

In 2010 a Grand Jury recommended Imperial Beach and other small cities enact a code of ethics and establish a fraud hotline to combat waste and abuse.  

The City Council responded with a letter stating that city and state law provide enough oversight. An annual independent audit, public review and generally accepted accounting principles are appropriate safeguards, the letter said.