More than two weeks after city officials in San Bernardino resolved to file for bankruptcy protection amid charges of widespread fraud and financial document falsification, the city council has declared a state of fiscal emergency exists at the county seat but no criminal charges against any city employees, current or past, have been filed.
Information that has surfaced in the intensive glare of scrutiny following the announcement that the city would play the bankruptcy card indicates some possible corruption of city procedures and cronyism at City Hall, but on a scale that does not  account for the city’s fiscal collapse, one that is unprecedented in San Bernardino County history.
Rather, the city’s dire economic condition appears to be one that has been building for years as businesses in the once-booming municipality have been steadily leaving, unemployment and poverty among the citizenry has been increasing, and short term fixes with ultimately negative and counterproductive long term implications have been applied.
In recent months, city officials have been particularly stingy with municipal financial information. As San Bernardino County’s other 23 municipalities were finalizing and presenting to the public their 2012-13 budgets, San Bernardino, the county’s largest city in terms of population and oldest municipality, had no budget to offer and would not even release a version of the tentative budget city officials were working on. Likewise, city officials were unwilling to release financial reports, audited or unaudited, despite the public nature of nearly all of those documents. Within several days of the council’s vote to seek bankruptcy protection, the firestorm of controversy and criticism forced the release of the most recently compiled audited financial report, a very unflattering snapshot of the city’s fiscal management.
Whereas into the 1990s, the city of San Bernardino had been sitting on comfortable reserves consisting of surplus revenue that municipal operations had been generating for decades, year after year of deficit spending, much of it hidden from public scrutiny, began to deplete that cushion. As early as the latter years of former city manager Shauna Clark’s tenure in the 1990s, expenditures were sometimes outrunning revenues. Under the subsequent 12-year duration management of Fred Wilson, efforts at fiscal discipline were made, including scaling down the size of city government to  bring operations into line with available income, although inevitably, the city was forced to draw on its reserves. Under Wilson, the city avoided taking money out of restricted funds to shore up operations funded by the city’s general fund, but did tap into reserves.
Upon Wilson’s departure for the city of Huntington Beach in 2008, he was succeeded by interim city manager Mark Weinberg and then Charles McNeely. Weinberg and McNeely made  borrowings from the city’s workers compensation and liability insurance funds to balance the budget.
In 2009, the city council supported a staff proposal to borrow $1.3 million from the city’s economic development agency to balance its books.
In 2007-08, the last full year Wilson was in place, the city’s general fund balance stood at $16.1 million at the end of the fiscal year in June 2008. By June 2009, the end of fiscal 2008-09, the general fund, including reserves, had been depleted to $2.7 million. By June 2010, the close of fiscal 2009-10, the general fund’s balance had dropped to $410,000.
Over the decade-long haul from 2002 to 2012, deficit spending continued apace through all of the city’s accounts – including the general fund, enterprise funds, reserve funds, special funds and redevelopment agency, with unrestricted net assets drawing down yearly to the point that the city had $181 million in unserviced debt by 2010.
With the downturn in the economy and the closure of shops, stores and restaurants throughout San Bernardino, sales tax revenues have declined by $10 million to $16 million per year every year for the last four years. .
Since 2008, the city has shed 20 percent of its workforce, either through layoffs or attrition. Within one week of the July 10 declaration of the intent to file for bankruptcy, fourteen more city workers made their exodus, perhaps to ensure that they would be able to receive full pensions rather than be constrained to future pension reductions if they remained employed by the city.
Though the city did not put its figures in concrete, officials were projecting a $45 million deficit in 2012, a consideration that led to the decision to file for bankruptcy protection.
There were suggestions that the city’s financial officers or those in other positions of responsibility had not acted forthrightly in monitoring the city’s financial condition or informing other officials or the public in a timely manner.
But the San Bernardino-based auditing firm Rogers, Anderson, Malody & Scott LLP, which was hired to carry out regular annual audits of the city’s books and operations, said its employees saw a deteriorating financial circumstance and some cause for alarm but no indication of criminal activity.  Rogers, Anderson, Malody & Scott noted the city’s tendency to log in and process information related to its income and expenditures slowly, but attributed that to the shortage of finance department workers. The most recent audit turned in by the company was for fiscal year 2009-10. The audit for fiscal year 2010-2011 has not been completed. The 2009-10 audit found that the city was operating in accordance with generally accepted accounting principles and that it was projected to remain a going concern at least through 2010-11, which indeed it did.
In the atmosphere of fingerpointing that ensued the council’s declaration on July 10, former city manager McNeely, city treasurer David Kennedy and the firm of Rogers, Anderson, Malody & Scott all maintained they had exercised due care in monitoring and reporting up and down the chain of command with regard to the city’s deteriorating financials. In this regard, an August 23, 2010 city council meeting was referenced.
At that meeting, Kennedy and one of the Rogers, Anderson, Malody & Scott auditors, Terry Shea, were in attendance in response to McNeely’s request. Kennedy and Shea briefed the council on the city’s worsening financial condition, including its mushrooming deficits.
“That pool (of available money) has shrunk by $40 million over the last three years,” Kennedy told the council. “We have been getting by with borrowing money from other funds and other magic accounting tricks.”
That evening, McNeely pointed out that that 13 of the 15 previous years, the council undertook each yearly budget discussion with a projected deficit.
Despite the claims by these high ranking city officials and the auditing firm that the city had made full and adequate disclosure of the city’s financial position all along, on July 10, city attorney James Penman alleged individuals affiliated with the city falsified the city’s financial documents in 13 out of the last 16 years. Those documents were doctored or otherwise altered to indicate the city was functioning in the black when it was actually running deficits, Penman said.
Without being specific, Penman seemed to indicate that he had brought the matter to the attention of the San Bernardino Police Department, the San Bernardino County Sheriff’s Department, the San Bernardino County District Attorney’s office and the California Attorney General. But Rogers, Anderson, Malody & Scott said there was no data to confirm Penman’s charge. The state attorney general’s office would not confirm or deny that any such investigation was ongoing. Nor did the district attorney’s office. Indications from the sheriff’s and police departments were that there were investigations on issues relating to San Bernardino City Hall but that they pertained to matters separate from and predating the bankruptcy filing.
Since January, the San Bernardino police department’s economic crimes task force has been looking into allegations of bid-rigging favoring contractors and kickbacks to city employees in connection with city-sponsored construction projects. The names of two former city employees, Robert Lennox and Chris Evans, surfaced during that investigation. Neither Lennox, the city’s former parks and recreation division’s deputy director, nor Evans, the owner of Evans Construction Management and an independent contractor hired by Lennox to serve as the city’s recreation division’s construction manager, have been arrested or charged in the case. Both have denied any wrongdoing.
An affidavit in furtherance of the investigation signed by San Bernardino police  detective Frank Alvarez alleges “bid fixing… on projects which involved Lennox and Evans.”
The sheriff’s department, likewise, was involved in the inquiry into that matter and others that have come under investigation, with two investigators from the division’s white collar crime detail focusing on several allegations that have been made. Among those issues are preparation for and work done at the Hernandez Community Center and the Verdemont Recreation Facility, as well as business and banking accounts maintained by Lennox and Evans.
The amount of money involved in that portion of the investigation, which is yet ongoing, would not approach even one percent of the money at issue with regard to the bankruptcy.
Ironically, Penman’s reference to financial malfeasance at City Hall has resulted in an examination of a matter by the multi-agency task force in which Penman’s action is a consideration.  The task force has again taken up an inquiry into that circumstance, which was previously examined by the police department without a recommendation for prosecution.
At issue in that investigation were alleged improprieties in public works projects, the contracts for which ran into the millions of dollars.
Last October 11, San Bernardino Public Works Director Nadeem Majaj authored a memo to Penman that was widely distributed in which he said he was confronted and threatened by Penman after Majaj cancelled a $2.5 million city contract with the Matich Corporation.
The Matich Corporation and its owners have contributed thousands of dollars to Penman’s various campaigns for city attorney and San Bernardino mayor.
Majaj said in the memo he feared Penman would use his authority as city attorney to have armed investigators search his home and car to obtain a copy of the police report relating to the investigation of the city contract with Matich.
In the memo, Majaj stated that he was questioned in “an intimidating tone” by Penman during an October 5 meeting “as to why I terminated the Matich contract.” Majaj said Penman called the meeting in an effort to bring about “restoring the contract” and that he believed “it is inappropriate for you or any other elected official to be involved with ‘steering’ city staff toward contracting with one of your major contributors.”
Penman, who last fall was involved in an unsuccessful election campaign for mayor against incumbent Patrick Morris, characterized both the investigation targeting Matich Majaj had called for and the October 11 memo as politically motivated. In a memo to then-city manager McNeely, Penman defended the investigation of Majaj for delaying his provision of the police report to the city attorney’s office.
Majaj was reluctant to turn the report over to Penman because of Matich’s political support of Penman, the pressure he felt Penman was putting him under to restore the Matich contract, and his desire to protect the identity of witnesses.
The police report documented public works employees’ allegations that the public works director who preceded Majaj, Randy Kuettle, accepted gifts in the form of a leather jacket, a truck load of Christmas presents, 200 rib eye steaks and travel accommodations to Hawaii and fishing camps from the Matich Corporation. The report further related accusations that Kuettle then removed an inspector who questioned the quality of road paving done by Matich for the city, and inspected the work himself.
According to his memo, Majaj became suspicious after requests to increase the amount being paid to Matich on a 2009 contract came to his office.
Matich corporate officers maintain the company did not provide steaks, gifts or travel accommodations to Kuettle.
Kuettle, who had served in the position of interim public works director for two years, was replaced by Majaj in November 2010 when he was hired as public works director. Kuettle was then reduced in rank to deputy director, but on Feb.10, 2011, Kuettle was informed by Majaj that he was being terminated as of April 30. Kuettle took leave of that post, but remained employed by the city, working in the city attorney’s office until April 30.
The police department in 2011 determined that there was not enough information to proceed with a case against either Kuettle or Matich, but Penman’s accusation has now revived the matter, putting it under the eyes of the multi-agency task force.