Forensic Audit Finds Banning Electric Utility Was ‘Financially Mismanaged’

The Banning City Council last month received a draft report from accounting and advisory firm Green Hasson Janks (GHJ) that found the Banning Electric Utility’s (BEU) roughly $9 million negative cash balance was due to mismanagement.

“Our overall conclusion is that the electric utility was financially mismanaged, and the negative cash balance that it had really was a result of really not keeping an eye on the ball with respect to what was happening with the cash balance,” Peter Brown, GHJ’s forensic services practice leader, said at the Feb. 28 meeting.

GHJ was initially brought on by the city last August to assist the city with an internal investigation of the electrical department after former BEU Director Tom Miller was placed on administrative leave when it became apparent that the department was facing a multi-million dollar deficit.

“The reason that the investigators were hired in the first place is because of the pushback that the city provided and saying that we needed an internal evaluation of what was found by the internal staff,” Lincoln Bogard, finance director, said. “That evaluation was done and paid for and supported the conclusions of the meeting that was initially provided.”

Brown said the forensic audit focused on the “back office operations” of the utility, which included the fiscal management including rates, capital projects and other expenditures. The investigation included interviews with the city council, city manager, finance department staff, BEU staff and Miller.

“I would have to say that Mr. Miller was very, very responsive, very forthcoming,” Brown said. “In his meetings with us, any question we asked, he responded, very forthcoming and was very responsive.”

The investigation also included what Brown characterized as “a lot of testing and a lot of analytical procedures,” when it came to the utility’s finances to figure out how the utility went from a balance of more than $20 million in 2018, when Miller was hired, to roughly negative $9 million in 2023.

“What has happened is there has been a tremendous amount of activity in the area of capital projects, so there have been a number of substations built, a number of upgrades and expansion of existing services, and those things all cost substantial amounts of money,” Brown said. “And there really was no plan as to how that amount was going to be financed.” 

However, utility staff pushed back on this assessment at the meeting, noting that the department did have a plan in place for all of the projects it took on.

“When we made our official and formal 2004 Electric Master Plan, it kind of couldn’t have been done at a worse time,” Brandon Robinson, an electrical engineering supervisor, said. “Four years later, as you guys know, we kind of went into a really big economic recession that hit major parts of the United States and hit us pretty big as well.”

Because of the Great Recession, Robinson said the department shrunk the number of capital projects it was looking to accomplish with a $45 million bond and instead refunded some of that money to cut the debt service to more manageable levels.

“Fast forward to 2024, we’re actually just now finishing basically all of the projects that we had left,” he said. “That capital improvement plan turned into more of a 20-year plan instead of a 10-year plan because of the aforementioned reasons and, of course, Covid.”

Brown also said that the investigation found that neither the utility’s declining cash balance nor the size of the deficit were immediately known due to a lack of adequate oversight by management. 

“The electric utility has had a negative cash balance since 2022, and this deterioration in financial condition was not properly reported to the city council in our view,” Brown said. “In addition, the budgets for the utility for the years 2021 through 2023 indicated that the utility would actually operate at a loss, but there was no plan in place to show how that loss would be covered.”

Acting Director Jim Steffens said that while he was not disputing Brown’s overall findings when it came to the department’s finances, he felt that there was some additional context that the council should have been provided with, including the impact Covid had on the utility. 

According to Steffens, the utility stopped disconnecting customers for nonpayment from the start of the pandemic through the middle of 2023, which meant the utility was not charging reconnection fees, and also stopped charging late payment fees to help residents struggling to pay their bills.

“These numbers are what they are, our margins did decline in 2020, ’21 and ’22,” he said. “We should have done something — COVID probably changed some of our decisions on whether to do those — but anyway, I just wanted to offer that for your consideration.”

And while Brown was very clear that the investigation did not uncover any evidence of fraud or misconduct by Miller, who is no longer employed by the city, or any other utility staff, the report noted that Miller, though knowledgeable and competent, could be difficult to work with, though BEU staff who spoke at the meeting had nothing but praise for him.

“Over the course of my employment, I have not met nor been under the leadership of a more dedicated driven individual than Tom Miller,” Jason Smith, an operations manager, said. “Although not perfect, he provided belief in his employees coupled with opportunity and an environment in which promoted not only departmental but personal growth as well. The intangible value that is lost due to his departure should have at least made it onto this report.” 

As for recommendations moving forward, Brown said BEU should consider available financing options to ensure sufficient funds going forward, present a clear and concise plan to the city council to address any future deficit spending or budget shortfalls, consider a rate increase for both residential and commercial customers, conduct a new cost of service study that incorporates a capital needs assessment to ensure that the cost of those upcoming improvements are factored into a potential rate increase and prepare a formal strategic plan.

Additionally, Brown said the city might also want to identify future opportunities to charge developers for line extensions and developer fees when increased service is needed, consider developing a formal understanding between the utility and the city finance team to clearly identify roles and responsibilities, consider entering into a formal understanding with the Southern California Public Power Authority and take steps to improve the relationship between the utility and other city departments.

“It appears that the working relationship between the utility and city departments appears strained and somewhat dysfunctional,” Brown said.

City Manager Doug Schulze said “significant progress” has already been made with regards to GHJ’s recommendations, including addressing the animosity that exists between the utility and other city departments as well as shoring up the utility’s finances by addressing things like delinquent accounts and clearing up inconsistencies between the department’s procedures and policies manual and municipal code.

“Now that we have the report complete, we can bring back a more detailed plan of action for council discussion and review,” he said.

GHJ’s draft report as provided in the Feb. 28 agenda can be found here, though City Attorney Serita Young said the more detailed report provided to council in closed session would not be released to the public despite objections by Councilmember Sheri Flynn.

“I think that that report should be given to the public when it is finalized,” Flynn said. “It’s not finalized yet, but when it’s actually finalized, I think that it should be made public and given to the public. The public paid for it, and I don’t see why there’s a problem with giving that.”