The city of Dos Palos in Merced County is planning to sell off city land and will consider raising water, trash and sewer rates to repay millions in misspent transportation tax money.
The problem confronting Dos Palos officials was revealed after a citizens advisory committee agenda posted Friday brought it to light. The misspent money was also confirmed by Mayor Katy Reed, who was contacted by The FOCUS after the issue was made public Friday afternoon.
Due to outdated accounting practices and “interfund borrowing,” Reed said, the city spent about $2.2 million of transportation tax money from Measure V to cover costs to provide city services.
Rather than going into a separate account, Measure V money was mixed with the city’s enterprise funds and ended up covering deficits for water, trash and sewer services.
Even though Dos Palos raised water rates a few years ago, the increase wasn’t enough, Reed said. Measure V money was inadvertently used to make up for shortages, which went unnoticed by city officials until they started planning road projects, Reed said.
By the time city officials realized what was happening, “It was like a freight train that’s out of control,” Reed said.
Measure V was passed in 2016 as a 30-year, half-cent sales tax, estimated to generate over $450 million in funding for countywide transportation maintenance and improvements. Each of Merced County’s six incorporated cities, along with Merced County, receive Measure V tax money.
Merced County Association of Governments (MCAG) manages the tax money. A mandated audit of 2024-25 revenues and expenditures, conducted by Clovis-based Price Paige & Company, revealed Dos Palos was out of compliance with Measure V.
Since then, Dos Palos officials have retraced accounting steps to figure out how they got here.
That error was detailed on the agenda for the Measure V Citizen’s Oversight Committee. Later Friday afternoon, the Dos Palos City Council agenda was also posted online.
This week, the financial blunder will be addressed at three separate public meetings: the Measure V Citizen’s Oversight Committee meeting on Monday, the Dos Palos City Council meeting on Tuesday, and the MCAG Governing Board meeting on Thursday.
Moving forward, Dos Palos must recover the $2.2 million it borrowed from its Measure V funding and save or use that money for road projects. Additionally, MCAG will withhold Dos Palos’ future Measure V funding until the city’s Measure V account is made whole, according to a staff report included in the Dos Palos City Council agenda for Tuesday.
“As a resident, I’m angry,” Reed said. “As the mayor, I’m sad. I’m embarrassed. Nobody wants to be sitting at the helm and find out that it’s shattered glass.”
Dos Palos finances
According to city documents, the Dos Palos water treatment plant became inoperable in June 2020 – at the height of the COVID-19 pandemic.
In 2023, Dos Palos raised water rates to cover the costs to build a new water treatment plant. Reed believes it was the first time the city ever raised water rates, she said.
At that time, the city’s enterprise funds were already facing a deficit of $3.4 million, city documents show. When the city conducted its rate study in 2023, the study did not address the $1.5 million of “interfund loans” to cover the deficit, city reports say.
While such “interfund borrowing” is legal by state law, Dos Palos officials at the time weren’t aware that Measure V prohibited the practice and required Measure V money to be held in a separate, interest-bearing account.
“Obviously, the current situation is untenable and the city must take immediate steps to improve the fiscal outlook,” Acting Interim City Manager Gordon Bonds wrote in the staff report for Tuesday’s city council agenda.
At Tuesday’s meeting, the Dos Palos City Council will consider three options to rectify the situation:
- Increase rates and charges for enterprise services (water, sewer, trash) to ensure that the funds generated cover the costs of those services moving forward
- Increase rates and charges for enterprise services to cover the costs of interfund loan obligations
- Explore the option of getting outside financing so the city can immediately begin road repair work funded by loan repayments mentioned above. The completed work would act as repayment of Measure V loans. This option would allow the city to spread the deficit recovery over a long period of time and would make rate increases smaller while also allowing the city to move forward to repair roads.
To date, Dos Palos has used about $300,000 of Measure V funding for sidewalk projects that were in compliance with Measure V, Reed said. Additionally, the city created a separate, interest-bearing account for Measure V funding last August. That account now has around $150,000, Reed said.
“As the mayor, I’m sad. I’m embarrassed. Nobody wants to be sitting at the helm and find out that it’s shattered glass.”
Dos Palos Mayor Katy Reed
The mayor worries how further rate increases will affect Dos Palos residents.
The city’s population is under 6,000, with a median household income of $42,000 and over 17% of residents living in poverty, according to U.S. Census estimates.
“This is not going to be an easy time for anybody,” Reed said. “I know that this is going to be a shock to everyone, because it was definitely a shock to me.
“It’s OK to be upset about it. It’s okay to be angry about it. But pointing fingers and trying to lay blame personally, there’s no traction there. That simply just isn’t it.”
Reed said she hopes the council can work together calmly during Tuesday’s meeting toward a solution.
MCAG audit
An audit of Measure V funding for the 2024-25 fiscal year found that the cash-strapped city of Dos Palos may have used the tax money to make up for other general fund deficits.
While the audit did not explicitly say Dos Palos misspent Measure V money, auditors warned there was high risk of that happening due to the way Dos Palos staff have managed the money.
The audit noted that Measure V money should be held by jurisdictions separately, and that by mixing Measure V funding with other, general city accounts, there’s a higher risk that Measure V may be misspent for purposes other than its intended transportation programs.
The audit noted that MCAG officials know that Dos Palos has financial struggles, such as mismanagement and overspending of other money outside of Measure V.
“Although Measure V activity may be separately reported, the city’s overall cash position indicates that restricted Measure V cash may be supporting the city’s general cash flow needs or other fund deficits,” the audit states.
Moving forward, the auditors recommended MCAG officials improve monitoring practices of the jurisdictions that receive the transportation funding.
Since Measure V went into effect in 2017, Dos Palos has received nearly $2.5 million.
Other audit findings
The audit revealed two other findings and recommendations.
First, the audit found that some jurisdictions aren’t properly tracking or reporting the interest earned on Measure V money, which has been an ongoing issue. The auditors recommended MCAG create a formal process to track and report interest earnings.
Second, the audit found issues with quarterly reporting, such as late submissions and missing documents. Auditors recommended training so that the quarterly reports were better managed.
The FOCUS on Friday afternoon left messages for MCAG Executive Director Stacie Guzman and Board Chair Scott Silveira, who also represents Dos Palos on the Merced County Board of Supervisors.
Neither Guzman nor Silveira responded by the time of publication. In the event they return phone calls or provide statements, this story will be updated.