A confusing and sometimes contradictory series of financial statements has stirred concern at Hawthorne City Hall that the city’s finances might be distressed, despite assurances from city leadership that there is no cause for alarm.

Finance reports show a fast-declining reserve savings balance since July. But city leaders haven’t fully explained what happened to $8.6 million in savings that should be in the 2014-15 fiscal year budget but isn’t delineated there. Instead, they say the city is doing better financially than it has in years.

Some city officials believe the opposite is true. They worry some or all of the unaccounted-for $8.6 million has been secretly spent to balance a structural deficit or to fund new City Hall expenses.

“We have now learned (regrettably) that our city’s budget may not be as balanced as we had been led to believe,” Councilman Alex Vargas said in a written statement. “Our cash reserves may have been used to make up the deficit. In spite of the mayor’s claims that we were ‘in the black,’ we may actually have significant red ink.”

Public services may need to be cut to balance next year’s budget if the structural deficit has been exacerbated by increased spending and diminished reserve savings, he said.

During City Council meetings, Mayor Chris Brown and City Hall officials said nothing is amiss and declined to discuss specifics with this news organization.

The focus of contention is the city’s reserve fund, an account separate from the operating budget that holds cash, near-liquid funds and interest payments and debt owed to the city that can be used in case of a fiscal emergency.

Like an individual’s savings account, the size of the reserve account reflects on a city’s financial health. Hawthorne has a policy of maintaining a savings balance that equals at least 25 percent of its operating budget, which for next fiscal year would be $16.1 million.

Diminishing statements

The account contained $17.8 million on June 30, 2014, according to financial records audited by an outside accounting firm. Of that, $10.7 million was in cash. Since then, Finance Director Rickey Manbahal has reported varying reserve fund balances while simultaneously maintaining that none of the funds was spent. In May, Manbahal said the fund had only $9.2 million in cash.

Since the end of last fiscal year, Manbahal has reported the following reserve fund balances:

“The $7.9 million is purely liquid cash that we have,” Manbahal told the council in March. “The remainder (of the reserve fund balance) is in capital assets that the city owns.”

Manbahal declined to discuss why he reported such large fluctuations in the fund balance or where the remaining reserve funds were moved. By definition, capital assets cannot be included in reserve funds, according to officials at the state Controller’s Office.

In May, he presented a proposed $64.7 million spending plan for the coming 2015-16 fiscal year, which begins July 1. That includes about $2 million more in expenditures than this fiscal year, ending June 30. The budget proposes no additional savings for the coming year.

While he and Brown have assured other council members that neither the current budget nor last year’s budget were balanced with reserve funds, Brown has advocated spending reserves to pay down debt and, thus, reduce interest payments. However, his suggestions were not supported by his council colleagues.

“In terms of real estate assets, we’re very healthy — extremely healthy,” Brown said during a March budget presentation. “I debate with the city manager on this all the time. The way we were operating before was costing us hundreds of thousands of dollars in interest. We stopped the bleeding. We hired a competent finance director — in my opinion, one of the best in the South Bay.

“With the help of the city treasurer, (we’ve been) coming up with different ideas to bring additional interest-bearing monies to the reserve.”

Budget gaps

Some city officials believe that some or all of the $8.6 million in cash and near-cash assets may have gone to pay for added city costs and to close this year’s $6 million budget deficit.

Asked by this news organization to review city finance documents, former City Manager Jag Pathirana said there is no reason why those funds would be subtracted from financial statements unless they were spent.

“The audited financial statements in June 2014 show $10.7 million cash and now, with a supposed balanced budget for 2014-15, the cash amount is $9.2 million,” Pathirana said. “On the face of it there is $1.5 million cash missing. Clearly, this is due to overspending.”

Hawthorne has struggled to close a multimillion-dollar structural budget deficit for about a decade, often relying on salary and department cutbacks, the sale of city property, and other one-time fixes to close the gap.

Manbahal said he managed to balance the current $62.6 million 2014-15 budget earlier than it had been in years even though the city spent more than it earned. He said he did so with one-time funds he found “left over” from the previous fiscal year, and other tweaks, such as reducing the on-the-books balance of employee sick and vacation time.

The city’s finances were so secure this year, he argued, that he supported departmental cost increases, promotions, raises and hiring seven new positions, including a public information officer, a public information clerk, two payroll assistants, a Planning Department intern and an assistant, and an account clerk.

Vargas and Councilman Nilo Michelin balked at the added spending and voted against adopting the 2014-15 budget in July because of expense increases. But Brown and Councilwomen Angie English and Olivia Valentine passed the plan, praising it for being balanced quicker than any city budget in the past decade.

Last week, Vargas, Michelin and Valentine fired City Manager Mike Goodson without offering a public explanation. But Vargas later said that his vote hinged on budget concerns.

“Our city needs to get back on track and refocus on balancing our budget, unleashing our economic engine, building reserves, completing downtown redevelopment, and, ultimately, creating a (larger) job base,” Vargas said. “Unfortunately, Mr. Goodson has been unable to achieve those objectives. In fact, just the opposite has occurred.”