Squeezed By Deficit Nearing $3M, Colton To Declare Fiscal Emergency

By Mark Gutglueck
Plagued by a budget deficit that is now well in excess of $2 million and continuing to grow, the City of Colton is preparing to declare a fiscal emergency that will allow it to hold a special municipal election as early as April, the Sentinel has learned.
An effort to prepare an item that would have been brought before the city council this week at its December 1 meeting was underway last month but was abandoned. It remains unclear as to whether the council will revisit the issue at its December 15 meeting, as a competing proposal that calls for the city leasing out its waste water treatment system to generate money is now under discussion. Nevertheless, there is still some degree of urgency pertaining to the declaration of a fiscal emergency, as doing so would clear the way for an election at which the city’s voters would be asked to approve a measure that would give the city the authorization to impose either an add-on sales tax or a utility tax or alternatively, the authority to transfer money out of the city electrical division’s reserve accounts for use in the city’s general fund.
Blue collar Colton, with its population of 54,000, ranks 15th population-wise among San Bernardino County’s 24 cities. But the city was the second of San Bernardino County’s communities to incorporate – having done so in 1887 – and it is one of the most mature of the county’s municipalities in terms of service provision, boasting its own police and fire departments, its own cemetery district, its own water division, its own sewer division and its own electrical utility division. Almost two decades ago, in 1997, Colton divested itself of its in-house sanitation division and contracted its municipal trash hauling service out to a private sector company. More recently it divested itself of its animal control division as well. That notwithstanding, Colton remains as one of the most comprehensive municipal entities in the region, and the City of Loma Linda, which abuts Colton to the southeast, contracts with it for the provision of fire protection service, and the City of Grand Terrace, which adjoins Colton directly to the south, contracts with Colton for waste water treatment and sewer service. The city’s electrical utility division owns power plants located both in California and in Arizona and it has an absolute monopoly on the provision of electricity to homes, industrial operations and retailers within its city limits.
Despite Colton’s vaunted status as a service provider, however, its municipal operations are among the most tenuous ones in the county financially, with the exceptions of the county seat to its east – San Bernardino, which filed for Chapter 9 bankruptcy protection in 2012 and is only now emerging from that status – and the severely financially ravaged cities of Needles, Adelanto and Grand Terrace.
Colton is plagued by a “structural deficit,” such that the city for two years running has passed annual budgets that initiate on July 1 of each year and run through until June 30 of the next year in which the city brings in less in revenue than it expends, and sustains operations by digging into dwindling reserve accounts banked up in years past from budget surpluses. The city is on schedule to again tap into its reserves in upcoming 2016-17, beyond which point those reserves will be on the brink of being depleted. The prospect that lies beyond is a dire one for the city, consisting of substantial cutbacks in service levels accompanied by a further winnowing of city staff, including layoffs and furloughs.
In response, some city officials are contemplating asking city residents to approve a sales tax add-on of one-half or one cent on top of the state sales tax and the half cent sales tax imposed across the entirety of San Bernardino County to cover the cost of street and road improvements. Some other city officials want to instead institute a utility tax on the city’s residents and business owners. Under California law, such taxes must first be approved by those upon whom the tax is to be imposed. Thus, the city must put such a measure on the ballot. The next general municipal election in Colton will come in eleven months. City officials want to move faster than that, however, and have the citywide referendum on such taxing proposals held as early as April or have it otherwise coincide with the June primary election. In order to qualify for such early balloting the city must demonstrate an extraordinary need to the San Bernardino County Registrar of Voters Office. Declaring a fiscal emergency exists in Colton would meet that criterion.
A third option for shoring the city up financially exists in the proposed ploy of using the special election to obtain voter approval for a so-called general fund transfer. Under that proposal, the city would seek permission from the city’s voters to take somewhere in the neighborhood of $12 million out of the electrical utility division’s reserves and place them into the city’s general fund, from which disbursements to cover the cost of the city’s day-to-day operations are made.
Councilman David Toro this week told the Sentinel, “It is true we are having difficulty with our finances. We are looking at some options, which we hope to put on the ballot.”
Toro opined that there should be “no utility tax. I would not support that.” He looked more favorably, he said, upon a “general fund transfer from the electrical utility.”
Toro said he believed voter approval for the transfer could be had “if we did it right,” which he said would require disabusing the city’s residents of some persistent misconceptions. One of those misperceptions is that the city’s electrical utility charges its customers – the city’s residents – higher rates than residents in the surrounding area pay for their electricity. While three years ago that was true, in an eighteen month period since then the city twice lowered its rates and a previous utility tax the city levied upon its residents and businesses lapsed so that now the city’s residents pay less per unit of electricity than do Inland Empire customers outside Colton, who purchase their energy from Southern California Edison. “People complain about our rates and say they are higher than Edison, when in fact they are lower,” Toro said. “We need to tell them, ‘We have just lowered your electrical utility rates. We have over the years generated some revenue to our electrical reserves. We have extra money in our utility reserve fund and can now transfer this money without affecting our electrical bills.’ We need to show them this is a good alternative to raising rates through taxes. We need to demonstrate to them that our rates are lower. They need to understand that we can provide with this transfer a level of service that would be greater without having to support a tax increase. This could be a seamless transition, if we can make our residents see the bigger picture.”
Toro said the city cannot just decree a special election.
“I think in order to get it on the next ballot we have to declare a fiscal emergency,” he said.
Councilman Luis Gonzalez told the Sentinel, “Our financial situation is not healthy at this moment” in explaining how the city has come to the crossroads of declaring a fiscal emergency.
In explicating the city’s dilemma, Gonzalez enunciated his belief the city could have averted its fiscal crisis by prudent action taken earlier. “In June we passed a budget which set a $2.5 million structural deficit,” he said. “I voted against it, but lost 6-1. My reasoning is we should have balanced the budget then and that if we didn’t do it then, it would only get worse.”
Gonzalez pointed out that he is a relative newcomer to the council, elected in 2014, and that the city’s downward spiral into its current fiscal abyss predated his ascendancy to the council. “Last year, when I was a civilian, if you will, the council passed a budget with a $1.8 million structural deficit,” Gonzalez said. “I mentioned to the council at that time I didn’t think this was the best decision. I don’t understand why you would want a structural deficit. It will just get worse. You have to make cuts or get around to making revenue. We are now looking at 2016-17 and without some kind of stop gap we are scheduled to have a $3.7 million structural deficit. Right now we are without anything to stop it. That is our financial situation. My feeling is it is already worse. In June I voted against the budget as it was proposed because I represent the residents and I said that we needed to work at that time to balance the budget permanently. We were able to make cuts, do a hiring freeze and recover fees for various services but those were just small items. There were not any big ticket items included that would make up for this kind of deficit. I’m a little bit on the sad side because we had several opportunities to correct this problem. One big contract dealt with this year was our trash contract. The revenues we could have made would run into the several millions of dollars and we could have done that by going out to bid with other trash companies. The cities of Chino Hills, San Bernardino and Loma Linda looked at their trash contracts and went out to bid. We were in a position to do the same. We could have made up several million dollars. We had this right at our fingertips. I wanted to go out and get those bids but I came up on the short end of a 5-2 vote. Instead the council voted to stay with the same trash firm we’ve had for more than 17 years, Republic Industries, who are very nice people, but I felt we should have gone out for a bid or negotiated and gotten the best deal for our residents and for the city. How do we know what kind of a deal we could have had without going out to bid?”
The city council missed another opportunity within the last two months to reduce its costs significantly, Gonzalez said.
“After the trash situation, we just signed a five year contract with our city attorney,” he said. “This is a multimillion dollar contract, as well. Although we legally went out to bid and received seven responses, we did not really analyze those bids and instead chose to focus on our current attorney company without the benefit of knowing what the other law firms were offering. We missed out on that. So, we had the opportunity to balance the budget in June, we could have gotten bids or negotiated a better trash contract and saved the city millions of dollars and we could have gotten a better deal with our attorney services. If we had done those three things, I believe we would be in a much better situation now moving forward.”
Those missed opportunities are regrettable, Gonzalez said, but the question now has become, he said, “How are we going to correct this? The only big ticket items available are to raise the sales tax, create a utility users tax or do what they call a general fund transfer. In order to get a sales tax increase we need a vote of the people. The bad part is the people may not go for that because they are already pinched. The one good thing about the sales tax option is we would be able to spread it out around the city and not impose it on just one group or on one district. We would spread it out among everyone in the city as well as everyone who chooses to come to Colton and shop. The other option, the utility tax, would also require a vote of the people. It would be a tax on all of the city’s utilities, water, waste water and electrical. This would certainly help financially, but once again, the residents are pinched and their rates would go up and the vote might not pass. The last big ticket item is the GTF, the general fund transfer, which would allow us to pull money out of our electric department’s reserves.”
Gonzalez said he did not have an exact figure, but said there was somewhere “between $40 million and $50 million” in the electrical utility’s reserve account.
Gonzalez said there are strong arguments both ways for and against tapping into the electrical utility’s reserves to redress the city’s general fund shortcoming.
“Generally speaking, I am not an expert, but money in our utility reserves created through utility operations, should go to improving the utilities, their infrastructure and facilities,” Gonzalez said. “It is not entirely the best practice to be taking money from the utility reserves to be using it in the general fund. But the advantage to this is if we go out to a vote, the general fund transfer option would have the best chance of passing. The people have the right to do that because the people of Colton own the electrical utility. The reserve funds are generated by the rates the residents and businesses in town pay. This is potentially a good thing. As I said, it is not entirely the best practice to go in and use our electrical division reserves for the general fund. I was not in favor of any of these three options because I would have rather have balanced the budget or gone out to bid on the trash and city attorney contracts. But, because we did not do those things, we are in a bad financial situation and we need to correct that. After all of the discussion with regard to raising the sales tax and creating the utility user tax, I just don’t think the voters will accept more taxes, so I have to accept the GFT – the general fund transfer – as our best bet because it will not affect the residents’ rates. At this point I think it is the best way to go. If I had to go before the public today and support one of the three options, it would be the GFT.”
The city will need to act quickly if that is the route it is going to take, Gonzalez said.
“In order to have a special vote in the March or April election, then we have to declare a fiscal emergency,” Gonzalez said. “It is my understanding to have a vote that is outside of our normal schedule of every other November, we have to declare a fiscal emergency. So we are going to have to make that declaration soon.”
This week, a fourth option to plug the budget gap emerged, with a proposal put forth by councilman Isaac Suchil to enter into an arrangement to farm out the city’s sewer/water treatment function to a private sector entity, a semi-franchise through which the private company would pay a franchise fee to the city to operate the sewer system. The company would then be free to raise sewer rates to recoup its expenses and justify the investment. The city would realize revenue from the franchise fee and reduce its expenditures in running the sewer division. The concept immediately generated controversy, as the city’s sewer division is currently operating in the black, representing a steady and reliable revenue stream for the city.
Prior to its incorporation in 1978, Grand Terrace contracted sewage service treatment from Colton, which maintained and operated the sewage treatment plants owned by Grand Terrace in addition to its own. That arrangement continued after Grand Terrace incorporated. While Grand Terrace owned one of its treatment facilities, it was managed and operated by City of Colton employees. By 2013, a dispute between the two cities had developed because the fees charged by Colton to Grand Terrace for sewage treatment had not been increased for more than a decade and Grand Terrace residents and businesses were being charged far less than Colton’s ratepayers. In March 2014, the Colton and Grand Terrace city councils approved a 50-year agreement by which Colton is to continue to provide contract sewage services to Grand Terrace. In July 2014, the City of Grand Terrace agreed to raise the rates its citizens and businesses pay for sewer service and signed a corresponding settlement agreement requiring Grand Terrace to pay Colton $1.2 million from Grand Terrace’s sewer reserve fund to cover the cost of back fees that had not been paid by Grand Terrace for providing previous sewage treatment services. That comprehensive deal contained a provision by which Colton paid Grand Terrace an initial one-time lease payment of $400,000 and agreed to subsequent annual lease payments of approximately $300,000 on Grand Terrace’s sewer treatment facilities. In exchange, Colton is guaranteed revenue from sewer treatment fees paid by Grand Terrace of roughly $1.4 million per year at the beginning of the fifty-year contract, with built-in increases to the sewer rates Grand Terrace residents and businesses are to pay annually.
In this way, the workability of Suchil’s proposal appears questionable. Nevertheless, the council this week called for placing an item on the December 15 council agenda for considering the sewer treatment outsourcing. Curiously, Suchil’s plan came less than a month following the abrupt departure of Colton Public Works Director Amer Jakher. No reason was given for Jakher’s sudden resignation and city officials are tight-lipped about why he left and what, exactly, precipitated his leaving, and whether it was truly voluntary on his part or whether he was in some fashion forced to quit. Jakher was territorial with regard to the public works division and its funding. Recent developments, including the proposals to outsource sewer treatment or tap into electrical division reserves are issues that may have triggered his exodus.
Gonzalez told the Sentinel he had no penetrating insight on why Jakher left.
“It happened in a flash,” Gonzalez said. “On a Tuesday he gave us notification he resigned and he was gone. That being said, I don’t believe there was a specific reason. I frankly don’t know what drove him to leave. All I know is there have been a lot of questions that have been floated around the council meetings and out on the streets, questions about the direction of public works. There has been a lot of talk about the use of funds, the management of people and funds. I don’t know what happened in the background.”
Frank Gonzales, who was a council member and mayor in Colton for more than twenty years in the 1970s, 1980s and 1990s and then returned as a council member from 2010 until 2014, said the fiscal crisis and Jakher’s sudden jump betray a city with a leadership and directional crisis.
“The city, with its electrical and water and waste water departments is a non-profit entity,” Frank Gonzales said. “All of its residents and businesses are mandatory customers. And now they are telling us it can’t break even? Something is wrong if they can’t balance the books. They have multimillions coming in and now they are coming back to scare us with bankruptcy? After 2010 we overcame our structural deficit and cleared 1.3 million in debt. We were in the black three years ago. The cash flow doesn’t stop. We pushed to have Grand Terrace pay sewer charges, which we are getting direct from them now. That money is drawing interest. Where is that money going to?”
Gonzales said that Jakher’s departure is a signal something is amiss at Colton City Hall.
“Something had to have happened for him to leave all of a sudden,” Gonzales said. “He was protective of his department. I don’t think he would let them [the city council and city management] take money from his budget.”
Frank Gonzales reiterated the same concern Luis Gonzalez [no relation] expressed over the failure to seek a competitive bid on the trash contract.
“That borders on the criminal, in my opinion,” Gonzalez said. “I don’t understand why the DA’s office doesn’t come in here to see what is going on. They should be looking at this. The trash company, Republic Industries, really took advantage of the city. I don’t blame them. They got the best deal they could for themselves. But the council is supposed to be looking out for us. They didn’t. The DA, Mike Ramos, has roots in Colton. His father was born and raised in Colton. He grew up on K Street. I knew his father when I was a kid. Has Mike Ramos forgotten us and where he came from? The DA should be looking into this trash business.”

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