Lindsay claims ‘functional bankruptcy’

By Paul Myers @PaulM_SGN

LINDSAY – The City of Lindsay is “functionally bankrupt.”

“[The City] receives enough revenue each year to pay its annual expenses but not enough to build reserves or repay advances,” states an agenda item from the Lindsay City Council’s Feb. 12 meeting.

In order to begin making progress toward fiscal stability the City Council voted in favor of a resolution that converts millions of dollars in advances to transfers. The agenda item ultimately spells out that what was once a loan from one fund to another must be converted to a transfer now that the City has come to the realization that the accounts that lent money to other funds will not be paid back.

“Converting the advances to transfers clears the obligation and makes the City’s financial situation more transparent to the public and other agencies,” the Feb. 12 staff report states.

While converting advances to transfers absolves the indebted funds of their debt, the funds that lent to other funds will have to account for a substantial loss of revenue.

This is not a new problem for Lindsay, albeit the urgency to reach fiscal stability is growing much direr as the City faces growing challenges such as increases to CalPERS and increasing costs of providing services. Councilman Brian Watson says even though the City is operating at functional bankruptcy, they are not the only government agency doing so.

“There are a lot of agencies that are functionally bankrupt…you could argue that at $22 trillion in debt, our country is one of them,” Watson stated.

He added that the Council’s decision to pass the resolution has just been the latest in a long line of decisions to “right the ship.”

“Had we not made some difficult decisions [with the old council] we would have had to hand over the key of the City to the County or the State and say, we don’t have the revenue,” Watson said.

Creating advances

For almost 10 years the City of Lindsay has been teetering on the edge of financial collapse. And as an impetus by the City’s financial auditor to finalize their 2017-2018 fiscal year audit, the City has turned $7.8 million worth of advances over four fiscal years into transfers.

Two of the largest advances converted were McDermont and the Wellness Center. As of last week’s meeting the City realized that $741,000 advanced to McDermont and $800,504.78 advanced to the Wellness Center from the City’s floundering General Fund is not likely to be repaid. McDermont started $160,000 down at the beginning of fiscal year 2017-2018 and lost a whopping $581,000 in the following six months to create the $741,000 advance before the City handed over operations to McDermont X on Dec. 31, 2017.

Things between McDermont and the City have not gotten much more profitable. While the City is now playing the role of landlord, they only gathered approximately $16,000 worth of revenue from, McDermont X, at the end of 2018.

At the Wellness Center things got better before they got worse. By the end of fiscal year 2016-2017, the Wellness Center broke even for the year, but by the end of fiscal year 2017-2018 the general fund had to cover their $189,000 loss through an advance. That’s in addition to the $800,000 in losses from July 2013 through June 2017.

As a part of the audit, the City had to account for the $930,000 total worth of advances for the 2017-2018 fiscal year. Of which $786,307 came from 13 different funds, among them was the sewer fund, curb and gutter fund, storm drain fund, and a litany of California Department of Housing and Community Development (HCD) funding sources. The general fund provided the additional $143,000 to cover the combined losses of both entities.

And according to the city staff report, auditors are highly skeptical of the general fund recouping their advances.

“The City’s auditors have expressed concern about the likelihood the City will ever repay the advances, particularly over a 50-year time horizon,” the report states.

Newly elected councilwoman Yolanda Flores had been a longtime advocate for fiscal accountability since the City grossly misappropriated millions of dollars under the Scot Townsend administration. But now she says that she sees how the City is making an effort to correct their finances.

“It seems that we’re finally trying to fix it. I don’t like the messing around with funding and moving this and that, but right now it’s necessary,” Flores said.

Watson says the operations of McDermont stuck around too long and ultimately became a large financial detriment to the City.

“For too many years the way the City was operating McDermont and the Wellness Center…created a bigger mess to clean up. Had we privatized McDermont years ago, we would be in better financial shape,” Watson says.

Transferring internal debt

Ultimately the resolution, passed unanimously by the City Council, converted the $1,541,139.78 total advance from the general fund to McDermont and the Wellness Center between fiscal years 2014 through 2017 into transfers. The City also converted $6,332,305.01 advanced to the general fund from the, streets fund, park improvements fund, water fund, sewer fund, refuse fund, waste water cap reserve fund, curb and gutter fund, and storm drain system fund, into transfers.

The City staff report notes that the general fund will be relieved of the $6,332,305.01 worth of debt owed to the other funds. But while the City was able to convert the advances to transfers from funds under their purview, they were not able to do the same for the HCD funds. HCD must authorize that conversion.

“The consequences of these conversions will be continued debt to the HCD Funds on one hand and a significant reduction in the general fund debt on the other. It will not pull the City out of its general fund deficit because of the funds owed to HCD Funds; however, it will be a major move forward,” the City staff report stated.

The report went on to say that the City will need to continue negotiations with HCD.

“The outcome of those negotiations is unclear, yet it needs to happen if the City is to have a reasonable hope of a sustainable recovery,” the staff report stated.

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