Officials in Dos Palos say they are taking steps to put the city on a path to fiscal stability following revelations that $2.2 million in Measure V funds were misspent over the past seven years.
The issue, which was first reported by The Merced FOCUS, dominated the Dos Palos City Council on Tuesday, drawing a massive crowd demanding answers from leaders.
At a follow-up meeting Friday evening, Dos Palos Mayor Katy Reed gave a preview of the path city leaders may take moving forward.
Reed shared she will propose a resolution for the June 16 agenda to formally declare a state of fiscal emergency for the city due to structural deficits and “municipality insolvency.”
“We can’t pretend this is just going to get better overnight,” Reed told the audience gathered inside council chambers Friday.
Reed said she will also ask the council next month to consider a multi-phase action plan to start getting the city’s finances back on track. Reed said the plan prioritizes preserving public safety and public works while moving toward financial solvency.
Although the city council will review Reed’s proposed plan next month, they aren’t waiting to curb spending and put financial controls in place.
The council voted 4-1 Friday to require council approval for all money transfers. Mayor Pro Tem Thomas Pigg cast the dissenting vote. That item was questioned by Assistant City Manager Manuela Sousa, who said she already emails the council when financial transfers are made.
“Notification is very different than approval,” Reed responded. “The financial situation we are in right now, we need approval. When we are financially solvent, maybe we can ease up on that…I want the council to approve all transfers, end of story.”
The city also enacted a hiring freeze for all positions, with the exception of those that are grant funded. Officials are cutting expenses and reducing budgets to the minimum in every department.
Plus, Reed said the city has already identified and approved several properties for sale.
Since the revelations of misspent Measure V funds and financial deficits came to light, many residents have expressed concerns they could be left on the hook.
Reed said she’s hopeful the strategy proposed Friday will ensure that won’t happen.
“It is clear that the citizens of Dos Palos should not be responsible to repay money they didn’t even know they were loaning out,” Reed said.
Still, Reed does want to pursue a water rate study.
“Since the last couple of days, I don’t think anybody has yet apologized to you. And I am here to say, ‘I am sorry.’ I am sorry for what’s going on. I apologize on behalf of the city for how hard it has gotten.”
Dos Palos Councilmember Armando Bravo, speaking at Friday’s city council meeting
By August, Reed said she would like the council to initiate the Proposition 218 process, which requires the city to gather input from property owners before fees or rate increases can be proposed for services.
That process can take eight to 12 months, Reed said.
The current water, refuse and wastewater rates were incorrectly determined, Reed said, and those costs need to be reevaluated.
“The idea that we need to adjust the rates is true. We need to find out, what does it really cost the city to provide those services?” Reed explained. “That is a separate issue from the (Measure V) money that needs to be repaid.”
A crisis years in the making
Ten years ago, Merced County voters passed Measure V as a half-cent sales tax specifically for transportation maintenance and improvements. Dos Palos and all cities within the county receive regular disbursements of that money from MCAG.
The funding agreement with Merced County Association of Governments (MCAG) has with Dos Palos clearly spells out that Measure V dollars can only be used for transportation purposes – and must be kept in a separate, interest-bearing account.
“Any jurisdiction that violates this provision, as determined by the MCAG board, must fully reimburse all misspent funds, including interest which would have been earned thereon,” the agreement says.
A mandated 2024-25 audit revealed Dos Palos was out of compliance with the measure. Rather than going into a separate account, Dos Palos’ Measure V money was mixed with the city’s enterprise funds and ended up covering deficits for water, trash and sewer services.
City officials themselves confirmed $2.2 million in Measure V money was spent through interfund borrowing. The height of that interfund borrowing happened during the COVID pandemic in 2020-21.
The issue was barely a blip at Thursday’s governing board meeting for MCAG, the agency that oversees Measure V money, but it’s certainly on the organization’s radar.
MCAG Executive Director Stacie Guzman read a disclosure about the compliance issue, but no board members or people from the public made any other comments about the improper spending.
“MCAG is committed to addressing the matter publicly and responsibly in order to protect the integrity of Measure V and maintain public trust in the program and its long-term administration,” Guzman said.
MCAG will withhold future Measure V money from Dos Palos until the city raises the amount of money that was improperly spent. Upon learning of the spending mistake, Guzman said, the agency immediately put up safeguards to prevent future errors and created a corrective plan for the misspent money.
In an interview with The FOCUS, Guzman credited Dos Palos leaders, particularly Mayor Reed and Councilmember Marcus Porter, for disclosing the issue to MCAG officials in March and vowing to make it right.
Still, the news felt like a gut punch, she said.
“As the administrator of the measure, it’s frustrating, it’s a little scary, and it’s disappointing to learn that something like this happened,” Guzman said. “Measures are only possible because the voters trust you with their dollars, and our primary job is to preserve that trust by preserving the integrity of the measure.
“We do that by ensuring promises made are kept,” Guzman said.
She affirmed that the representatives who make up MCAG intend to fulfill their promise to the voters who approved Measure V.
After learning about the misspending from Dos Palos officials, Guzman described a process MCAG went through: triage, investigation, determining current standing, and building preventative guard rails so the mistake isn’t repeated. That process took months before officials felt they knew enough details to disclose the error publicly.
Guzman said MCAG officials are confident that what happened in Dos Palos isn’t a widespread issue with jurisdictions that receive Measure V money.
“Trust, but verify,” Guzman said.
With that in mind, jurisdictions receiving Measure V money are aware that MCAG staff may do “a deeper dive” of cities’ finances to ensure the jurisdictions aren’t facing similar conditions as Dos Palos. Plus, they will explore creating safeguards to further protect taxpayer money, such as creating accrual thresholds, Guzman said.
“As the administrator of the measure, it’s frustrating, it’s a little scary, and it’s disappointing to learn that something like this happened.”
Stacie Guzman, MCAG executive director
The Measure V funding Dos Palos misspent was the city’s monthly allocation of local project funding. Some cities save up that money so they can use it for larger projects, and MCAG audits reflected that’s what Dos Palos was doing, Guzman said.
Despite the misspent money, Dos Palos has benefitted from regional project funding from Measure V that went toward rehabilitating Blossom and Center streets, in addition to the Lorraine Street bridge replacement project that was completed in partnership with Central California Irrigation District.
Reed, who sits on MCAG’s board, said Friday that the city will work cooperatively with MCAG to re-establish compliance with Measure V and determine the amount needed to completely replenish the misallocated funds.
“Addressing the deficit will require the development and implementation of a multi-year budget strategy and a restructured payment plan,” Reed said.
For their part, MCAG board members have consistently expressed concern for the people of Dos Palos, Guzman said.
Tense city council meetings
By many accounts, the crowd of people who attended Tuesday’s Dos Palos City Council meeting was the largest seen in quite some time.
Every seat inside council chambers was filled, and dozens of people had to stand. There was also a crowd of people outside the building because there simply wasn’t enough space for everyone who wanted to attend.
The audience at Friday’s city council meeting was much smaller but included a gathering of at least 50 engaged residents.
City Attorney Phillip Hall, who’s been on the job for four months, speculated Tuesday it’s likely that Dos Palos’ prior management was unaware of Measure V’s specific requirements.
The Measure V funds are just part of a larger fiscal crisis facing the city of Dos Palos.
In 2023, the city raised its water rates by 72% over a five year period to help cover the costs of a new water treatment plant. Back in 2020, the city’s aging plant was clogged with algae, leaving residents without potable water.
Some members of the city council, such as Claudia Bautista, who was appointed to her seat a year ago, said they understand why residents feel frustrated and angry.
“I feel the same way. I don’t feel like it’s fair,” Bautista said.
“However, it happened. The money was used within the city. There’s no fraud that I’m aware of, but it’s not the residents’ fault that this all happened, and it took seven years to get here.”
Pigg, who has served on the council for more than a decade, said he’s optimistic the city will find its way through the crisis.
“If we work together, nobody get(s) excited, we can pull this thing off and get Dos Palos back on the black again,” Pigg said.
Porter, who was first elected in 2020 and re-elected four years later, said he had asked previous city managers about increasing sales tax to increase enterprise funds.
Those ideas were not pursued. “And here we are,” he said.
Many residents at Tuesday’s meeting had questions about why it took so long for the city to address the issue, considering it’s been seven years in the making.
“(The Measure V money) was allocated somewhere else, why wasn’t the money put back?” asked resident Gracie Gonzales. “Now you guys want to raise our rates to make up (for the) differences? I don’t think that’s right.”
“Where’s the checks and balances? What have you guys been doing?” Somebody has to be held accountable for what that money went to,” Gonzales added.
Dos Palos resident Maria Bretado, who is retired, said she’s already paying too much for Medicare insurance and other costs, and can’t deal with another rate increase.
“There’s a lot of people here that are on a fixed income, so I would like for you guys to make sure you take that into consideration,” Bretado said. “If we’re going to pay that bill for the water, then the city should pay the half of it also.”
Others, such as Cecelia Perez, say the city must ensure controls are in place to prevent the same situation from happening again.
“So we found the problem, we got audited, it’s there,” Perez said. “My thing is going forward, we’re going to have to communicate, we’re going to have to make sure we have adequate people looking at these papers, running the budgets and accountability.”
What’s next?
Aspects of Reed’s proposed response plan would include:
1). Creation of a citizen oversight committee.
2). Partnering with agencies in Merced County and outside services to reconcile budgets, establish internal financial controls and replenish Measure V funds.
3). Dissolution of unnecessary expenses and consolidation of excess funds into the Measure V account.
4) Securing a pro bono management team to help save on salaries.
5). Spending freezes for unnecessary expenses outside of payroll, until all city financial documents are appropriately reconciled.
At the end of Friday’s city council meeting, one of the council members even issued an apology for Dos Palos’ current struggles.
Councilmember Armando Bravo encouraged residents to put forward their ideas, as the city moves forward to address the situation.
“We’re up here working for you guys,” Bravo said. “Since the last couple of days, I don’t think anybody has yet apologized to you. And I am here to say, ‘I am sorry.’ I am sorry for what’s going on. I apologize on behalf of the city for how hard it has gotten. But hopefully, you know, we can work together here.”
