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Stockton's woes came from mistakes, not corruption, state says

Controller's office audit says bankrupt Stockton suffered from poor accounting and financial management systems that cost the city millions.

August 05, 2013|By Diana Marcum
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FRESNO — A long-awaited state audit released Monday sheds new light on the forces that drove Stockton into bankruptcy, citing poor accounting practices that cost the city millions of dollars but finding no evidence of outright corruption.

"Stockton is not Bell — we found no evidence that corruption and self-dealing drove this city into insolvency," state Controller John Chiang said in a statement. "Instead, many of Stockton's problems can be tracked to poor decision-making" related to weak accounting and financial management systems.

There may still be problems that "invite wasteful spending," the audit said, as the Central Valley city of 300,000 struggles to emerge from bankruptcy while it battles a host of problems, including one of the state's highest violent-crime rates.

Stockton, an epicenter of the housing foreclosure crisis, filed for bankruptcy in June 2012, becoming the largest U.S. city to seek protection from creditors until Detroit's filing last month. Stockton's case is being watched as a test of who will take the biggest hit when a city fails — bondholders and insurers or city employees and retirees. 

The audit was launched in April 2012 as bankruptcy loomed. Some Stockton city leaders and residents besieged the state controller with requests to pore over the city's accounts. Some hoped an audit would uncover missing funds.

Instead, it found the unlawful holding of $1.3 million in redevelopment funds, and the loss of $8.6 million in state and federal grants because of inadequate paperwork. Auditors also found that funds from the state gasoline tax had been improperly pooled with other money. The controller's office has ordered Stockton to immediately open a separate bank account for the gasoline tax funds.

Stockton officials said the report merely rehashed old findings and came a decade or two late to help the beleaguered city.

"This audit is a disappointment. It produces very little new information. Instead it just inflames the situation and slows down Stockton's recovery," City Manager Bob Deis said in a statement.

In colorful correspondence released with Monday's report, the city manager accused the controller's office of  being a "political operative that 'bayonets the wounded' after the battle has been fought to repair a distressed city."

Deis described a City Council and staff that had inherited "a mess," struggling to provide services while avoiding a free-fall financial default in the final days before filing for protection from creditors.

"In our spare time we responded to an unprecedented crime wave," he wrote.

The audit provides a snapshot of 2010 and 2011, when Stockton's homicide rate broke records during a time when the Police Department was cut by one-third.

In response, George Lolas, acting chief operating officer for the controller's office, urges the city manager to heed the audit's recommendations and lists each time Stockton failed to give auditors requested information.

"While our findings of fiscal mismanagement are unflattering at times and our reform recommendations are tough medicine, they are not intended to 'bayonet the wounded' but to provide a proud and resilient community with the tools it needs to recover from the fiscal and reputational distress from which it currently suffers," he wrote.

David Renison, president of the San Joaquin Taxpayers Assn. and third-generation Stocktonian, said he was grateful for the state's audit and disappointed that Stockton was "pushing back."

"It's not like we were hoping they'd find bad things — God knows this city has seen enough of that — but these findings are valuable to us and to other cities as a blueprint going forward," he said. "If only Stockton's leaders would listen and consider that someone else might have something worth saying."

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