Tuesday, Aug. 8, 2006 | Mayor Jerry Sanders asked that more than $1 million of the city’s already depleted reserves be deposited back into the city of San Diego’s water and sewer budgets after a study released Monday showed that the city had been cherry-picking those budgets to bolster other areas of the government.

The study, conducted by the Irvine accountancy firm Mayer Hoffman McCann, showed that there were “no material departures from generally accepted accounting principles” in the city’s shifting of funds between departments. But it identified flaws in the city’s accounting that allowed the Water Department and Metropolitan Wastewater Department to be excessively billed by other city departments.

Sanders sought the outside review of the city’s water and sewer finances to gain public confidence before asking the City Council to raise water and sewer fees in order to fund infrastructure projects that would bring the city in line with state and federal environmental laws.

The study was conducted to address concerns raised in the media and by the county grand jury that the city had propped up its general fund – which relies largely relies on tax revenue to pay for services such as libraries, police and recreation programs – by charging the enterprise funds for certain services. Critics claim the practice amounts to a backdoor tax, as water and wastewater funds can be bolstered by a simple City Council vote, and any tax increase must be approved by voters.

Sanders commissioned the study in January after his State of the City address in order to make sure that funds in those enterprise departments were being spent properly before weighing whether the city should raise its water and sewer rates. The report cost the city $85,000.

“The mayor wanted to ensure first that there was not waste, fraud or abuse occurring in these areas, and the answer, to a material nature, is clearly ‘no,’” said Sanders spokesman Fred Sainz.

The report did not provide a formal opinion of the enterprise funds’ financial dealings, but rather laid out the results of their probe “so that readers can draw their own conclusions,” the accountants said in a letter prefacing the report. The firm, which bills itself as a company of certified public accountants, explicitly said in one letter to Sanders that the work it performed for the city did not amount to an “audit.”

Despite its reluctance to issue a formal opinion, the accountants issued a seemingly pristine assessment of how the city managed funds generated by increases in water and wastewater rates over the past four years. Also, the review asked that nominal changes be made to how the departments administer bond proceeds.

But the accountants did have more questions about transfers between the enterprise funds and the general fund, saying that the water and wastewater budgets didn’t benefit proportionally from certain services for which they were charged.

The Mayer Hoffman McCann study found that the enterprise funds helped pay for the construction of a day care facility for the children of city workers, contracts for lobbyists who advocate on behalf of the city, and portions of the city’s Equal Employment Opportunity Program.

The study recommended that the city remedy the inappropriate charges by transferring about $644,000 and $429,000, respectively. The money will come from the city’s already-thin cash reserves, which dropped to dangerously low levels last year due to unforeseen lawsuit and consultant costs.

Sanders said “sloppy bookkeeping” contributed to the errors. He said he will ask the City Council to make the $1 million in transfers at an upcoming council meeting.

About $2 million in general fund monies have already been returned to the water and sewer funds after the county grand jury scathed the city for drawing up contracts that disproportionately billed the enterprise funds.

The report also criticized the City Attorney’s Office past practices of billing for an estimated amount of legal assistance performed for the enterprise funds instead of the actual amount of time that deputy city attorneys spent working for the water and sewer departments. The practice was out of the ordinary, the accountants said.

“This practice is not in conformity with generally accepted accounting principles,” the report stated.

The firm noted that the City Attorney’s Office’s practice of estimating billable hours ended in “late calendar year 2004” – about the same time Mike Aguirre was elected to the post. The office’s past billing practices are now the subject of a probe by the state attorney general.

“There’s no way ratepayers feel confident going forward … unless they know the city is prudently managing their funds,” Aguirre said.

The city’s water and wastewater systems have been thrust into the public eye recently as two public health risks became public. Last month, a sewage spill in East Mission Bay forced the county to shut down stretches of the bay for weeks (one portion is still considered hazardous and remains closed).

On Saturday, the city issued a boil-water order in the northeastern suburbs after levels of E. coli were present in the water there. Officials attributed the contamination to a water main burst in Rancho Penasquitos, and the boil-water order ceased Sunday.

The city has been criticized by local consumer watchdogs, environmentalists, the state Department of Health and the U.S. Environmental Protection Agency for falling behind in its construction and maintenance of water and sewer pipes, mains, storm drains and reservoirs.

Making these improvements, which regulators say will prevent health dilemmas such as the spread of cryptosporidium and E. coli bacteria, is expected to costly for the city. An estimated $300 million is needed to make improvements to the three municipal reservoirs that dispense tap water to 1.2 million people. Another $150 million is required on an annual basis to rebuild dilapidated sewer pipes to EPA standards.

In order to raise money for those improvements, the city will have to calculate the cost of the projects and estimate the amount rates will have to increase in order to pay for them. Sainz said he expected the prospective projects to be cataloged by September. The mayor will make a decision whether to ask the council to hike rates shortly thereafter, he said.

Concurrently, the city is hoping to reenter the public credit markets early next year in order to borrow money for projects such as the water and wastewater infrastructure. Those bonds would be financed by rate increases.

City officials are keeping their fingers crossed that the presentation by private consultants for their 18-month-long probe into the city’s finances Tuesday will mark the beginning of its journey back to Wall Street.

Kroll Inc. was charged with investigating allegations of mismanagement at City Hall after KPMG, the auditor of the city’s financial statements for 2003, said it had concerns about the veracity of the city’s disclosures. Credit rating agencies have indicated that the city will not regain its financial standing on Wall Street without the blessing of auditor.

Kroll will present its report Tuesday at 8 a.m. on the 12th floor of the City Administration Building, located at 202 C St. in downtown San Diego.

Please contact Evan McLaughlin directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.

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