Sebastopol’s city budget adjusted for $1.2 million wire transfer fraud

By Camille Escovedo, Staff Writer, SoCoNews, July 27, 2021

seb budget pie

Where does the money go? A pie chart of how the city of Sebastopol spends its money. (From the Sebastopol City Budget)

The Sebastopol City Council adopted the city’s budget for the 2021-22 fiscal year and deferred funding for some departmental expenses at its July 20 meeting, days after the city announced a $1.2 million cyber theft dented its reserves.

As projected in the document that night, the city predicted total revenues of $10,114,250 and total expenditures of $11,166,683, with a $1,052,433 deficit.

The city council concluded its meeting after midnight, agreeing to meet Wednesday morning, July 28 to address the most time-sensitive items and as many remaining items as possible before postponing the rest for later.

The deferred funding will be on hold until the council expects to revisit those proposed expenses in October, depending on what the city learns about getting reimbursed for the loss.

Without the $1.2 million, the estimated actual for the ending unassigned fund balance — or unassigned reserve — for the 2020-21 fiscal year is $1,634,422, which becomes the beginning balance to start the new year in the proposed 2021-22 budget, Administrative Services Director Ana Kwong explained.

At that point, the city sustains a $1,052,433 deficit that leaves just $582,009 as the total unassigned reserve projected for the end of the fiscal year on June 30, 2022.

That reserve is 5.2% in relation to the city’s anticipated expenditures. The city’s policy is to maintain an unassigned reserve of at least 15%, which would be $1,675,002. If the $1.2 million gets restored, the unassigned reserve level should be 16% for the 2021-22 fiscal year, Kwong said.

Down to the dishwasher — council reviews what to defer until updates on payback

The council chose to go through a list of 20 departmental needs line by line to find what they could all agree to defer funding.

“I’m going to take the bold and unpopular position here, folks,” Councilmember Diana Rich said. “I went through this list, and I was able to come up with about $200,000 max in this list of about $700,000 that I was comfortable delaying.”

The bump in the reserves wouldn’t improve much significantly, by her calculations. “This is a list primarily of investments in our community, the potential, the future. I look at it and I go, ‘Really?’ I don’t see how you’re going to persuade me to cut more than $200,000,” she said.

And after more than an hour and a half of discussion, the council settled on holding back funds for four listed needs and paying for another from a separate fund for $208,250 in savings.

The council deferred $30,000 for the SB-1383 program to increase food recovery that requires obtaining procuring compost and $28,250 in funding for a pickup truck for the public works department.

Next, Mayor Una Glass pointed out that the $80,000 marked for fire engine replacement could be covered by the city’s vehicle reserve instead of the general reserve that the other departmental needs items were proposed for.

One of the last deferrals was for the public works department, $20,000 for “zero waste building upgrades,” described by Public Works Superintendent Dante Del Prete as a kitchenette with a dishwasher and stackable washer and dryer for the public works department.

Glass said she viewed the kitchenette as something that could be best paid from a fund for facilities. Last on the list, the council agreed to defer $50,000 in funding for the sewer lateral revolving fund until the October review.

Earlier, City Manager Larry McLaughlin said adopting a budget that funded everything as earlier directed wouldn’t impact the city’s operations, but it would drag the reserve below the minimum 15% per policy with the $1.2 million loss.

About the wire transfer fraud

Glass said the $1.2 million wire transfer fraud was a reason why the council pushed the budget approval back, wanting to be transparent with the community before its passage.

“And I just wanted to express that the city is not in a dangerous situation,” she said, in response to receiving emails sounding off fears of “dire straits.” Glass said the city retains significant funding in different accounts.

McLaughlin said city staff first discovered the late April $1.2 million wire transfer fraud on June 9 or so and the city has since started the process to claim reimbursement through insurance policies.

He said insurance claim processing should take six months or less to complete and he hopes the city would have word on reimbursement before the mid-year review in January.

The first time staff had any idea something was abnormal was when the finance department came across the unfamiliar wire transfer during a monthly bank reconciliation, and the city council was informed soon after, he said.

According to McLaughlin, different law enforcement agencies began investigations, “and we were told early on that in order to facilitate those investigations and not thwart them in any way, it would be their advice that we keep the amount of the wire transfer and its happenstance confidential for as long as we could.”

The city manager said that the stolen reserve money on deposit with the county treasurer wasn’t for operational expenses and doesn’t “directly affect city operations at all.” The stolen funds were property tax proceeds, Kwong said.

McLaughlin said the City of Sebastopol is still receiving direction from law enforcement, but moving forward with the budget meetings, the council sought to disclose the missing money for transparency.

“Even at the time the city council prepared the statement that was released, certain facts still were not able to be disclosed in that statement,” he said, referring to an announcement sent out by the city on July 16. He said the city staff will share more information to the public when they get the sense it wouldn’t risk the investigations.

The missing $1.2 million must be presented as a subtraction from the reserve because the city cannot guarantee that it’ll get the money back. “I would say, as city manager, that I am confident that the city will eventually, by one source or another, receive back its money,” said McLaughlin, however.

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