As a newly completed audit of the City of Hercules demonstrates, the evolution in the Bay Area city that included recalling the city council, establishing new policies, and hiring a new, professional staff was entirely necessary. According to the audit report released by the State Controller’s office, millions were misspent, under-reported, or inappropriately funneled to allies of former city officials.

“Weak oversight and poor management practices invited self-dealing, nepotism, and other public trust abuses that crippled Hercules’ fiscal health,” said Controller John Chiang. “But part of any recovery process is to understand what went wrong, and my audits not only break down those transgressions but offer a path forward.”

The financial unwinding of Hercules was complete. The city once appeared to be vibrant and healthy city. However, that image was a façade maintained a rubber-stamp city council that approved budgets that grossly misstated revenues and expenses, as well as a variety of other actions recommended by former City Manager Nelson Oliva.

According to the audit, the 2010/11 General Fund revenues were overstated by $12 million – or about 46 percent of the $25.6 million budget.

That budget was approved unanimously by the city council with no discussion.

Such rubber-stamping was normal in the years under Oliva. Only one of the 1,079 votes taken by the city council between 2007 and 2010 was not approved unanimously. All such decisions included no comment or discussion.

According to a press release issued by the State Controller’s office, the audit department, “found the City had little or no internal controls.”

The lack of such controls led to situations where Oliva was able to channel millions of dollars to his family businesses, hire people who appeared to be political allies for vague services, and even pay local school principals hundreds of thousands of dollars to perform duties that may have coincided with their normal, salaried positions.

The audit found just 9 percent of the city’s internal controls met standards adopted by the American Institute of Certified Public Accountants.

When those controls did recognize a mistake or discrepancy, local officials were slow to act. In 2009, two payrolls experienced discrepancies totaling more than $50,802. The source and reason for the apparent overspending still has not be resolved. The city has said it will be addressed at the end of the fiscal year – nearly four years after the overpayments were made.

The city’s response to the audit challenged none of the findings. Instead, it listed actions already taken to adopt recommendations made by the Controller’s office, and policies already put in place beyond the scope of the audit to prevent future abuses from taking place.

The scandal in Hercules cost Oliva his job and he is now subject to numerous lawsuits. Two city council members were also recalled, while a third resigned. City Manager Steve Duran alluded to other significant structural reforms that have taken place. In his response to the Controller, Duran cited seven personnel changes in Hercules – including the recalls – that have helped reshape the City’s leadership.

Those changes have resulted in “improved financial oversight.”