Hollister’s Financial Emergency: How a City Ran Out of Money It Could Spend

Three resolutions on a Friday evening

Hollister, the San Benito County seat, had about 41,700 residents in 2020 (Census Bureau). Its council met in special session on Friday, Oct. 2, with three items on an agenda posted the day before: a declaration of financial emergency; an $18 million loan from two impact-fee funds to the general and water funds; and authority to seek special state legislation allowing an extra sales tax of up to 1 percent, subject to a later council vote and voter approval (agenda). Hollister’s combined rate is already 9.25 percent (CDTFA), the most a city can reach without such an exception.

All three passed. BenitoLink reported a 3-0 vote on the emergency by Mayor Roxanne Stephens and council members Rudy Picha and Priscilla de Anda, with one member dropped from a remote connection and another absent (BenitoLink). As of Oct. 16 the city had not posted minutes, and the resolutions in the agenda packet carry no numbers.

The declaration does less than its name suggests. The staff report describes it as “a formal legislative record” and a list of priorities: preserve cash, restore reserves by fiscal 2028–29, cut recurring costs, collect money owed, sell or lease surplus property, study a utility concession and a stormwater fee, and finish overdue audits (staff report). The resolution cites no statute and says it does not override existing law (draft resolution). Neither document cites Government Code §53760.5, under which a city can declare a fiscal emergency as a step toward bankruptcy, and the resolution does not make that section’s findings, such as an inability to pay obligations within 60 days (§53760.5).

The actions around it moved faster. On Oct. 5 the city manager proposed a 30-year private concession for the water, wastewater and sewer systems, with three “illustrative” scenarios of $105 million to $190 million, including potential payments to the city of $10 million to $30 million (presentation). She warned that without an infusion of funds the city faced Chapter 9; the council asked for a study session instead (BenitoLink). On Oct. 14 the city issued layoff notices, saying first-quarter spending still exceeded revenue and voluntary incentives had not saved enough (city release). BenitoLink counted at least 37 employees, nearly half in the police department; the city has not confirmed a number (BenitoLink).

A fund balance is not a bank balance

How does a city with tens of millions of dollars miss a payroll? California cities divide money into funds. The general fund pays for police, fire, parks and administration and can be spent on any lawful purpose. Enterprise funds, such as water and sewer, are meant to live on their own rates. Impact-fee funds hold what developers pay for the roads, parks and other facilities that growth requires, and state law confines them to those purposes (Gov. Code §66006). Like most cities, Hollister pools these funds’ cash and tracks each fund’s share in its ledger.

Pooling is efficient, but it lets a deficit hide. When a fund overspends, the pool covers the difference and the ledger shows a negative balance. The 2022 audit found “various funds with negative cash balances” and reclassified $6.3 million of the general fund’s recorded cash as money owed to it by other funds, $2.3 million of it by street sweeping (audit adjustments). The assets behind the general fund’s $15.95 million audited balance included $5.9 million due from other funds (2022 audit).

That is the mechanism the city now describes. Staff say the water fund has been insolvent since 2018 and “heavily subsidized by the General Fund” (staff report). The city’s own ten-year summary, prepared for an Oct. 16 town hall, still shows the general fund with a positive balance of $7.3 million at the end of 2025–26, while the water fund, net of its capital assets, is $18.6 million in deficit (town hall presentation). A fund balance can consist of claims on a fund that has no cash. On paper the general fund still had a positive balance. In the bank, by the city manager’s account, it held $178.

The last audited year was not a normal one

The 2021–22 audit was issued Dec. 10, 2025 (2022 audit), about 32 months after the federal single-audit deadline; the 2020–21 audit had been transmitted in May 2024 (2021 audit). On paper 2021–22 was a strong year: the general fund balance rose from $9.0 million to $15.95 million. Revenue exceeded spending by $4.0 million. Another $2.4 million came from a financed purchase, which is borrowing, and transfers added $0.5 million. Federal pandemic aid paid $4.87 million of police and fire salaries through a separate fund, and the city credited higher charges for services to permits, inspections and impact fees from increased construction activity (2022 audit).

The city’s last firm benchmark, in other words, was buoyed by one-time federal money, borrowing and a building cycle. It was not a clean year either. The auditors reported five material weaknesses, including in cash and bank reconciliations, which had run seven to ten months late and were finished only in October 2023; most of the prior year’s findings had not been fixed (audit findings). The opinion was unmodified, meaning the statements were judged fair after about 50 correcting entries. That is a finding about the corrected numbers, not the controls that produced them.

Four years of numbers no one has audited

The State Controller lists Hollister among agencies whose single-audit packages for fiscal 2023 and 2025 are missing (FY2023 list; FY2025 list). The finance director told the council that a newly hired firm expects to finish the 2023 audit in October 2026, 2024 in June 2027 and 2025 in March 2028 (loan staff report). Until then, every figure about Hollister’s recent finances is the city’s own.

The unaudited years are hard to compare with the audited ones. General fund revenue in the city’s summary jumps from $41.2 million in 2021–22 to $60.1 million in 2022–23 (town hall presentation). Nothing in the public record explains a 46 percent rise in one year, or says whether it reflects a change in what is counted. The series shows three straight deficits and a fund balance that never reaches zero on paper.

Some contradictions have ordinary explanations; property tax arrives in December and April, so cash runs lowest in early fall. Others do not.

One gap is structural. The treasury report covers the city’s investments, $56.8 million on June 30, 2026, but not its bank deposits (treasury report). At the last audit, deposits were the largest part of the city’s cash: $68.6 million of $115.0 million (Note 2). No public document since shows the city’s total cash or how it divides among funds, which is what bank reconciliations establish.

The water fund

The largest claim on the general fund runs to water. Its revenue has stayed between $7.2 million and $9.3 million a year since 2018 while expenses passed $11.0 million in 2023–24 (town hall presentation). Rates were not raised from 2019 until a 30 percent increase in April 2026 (BenitoLink). In 2025–26 the water enterprise collected $8.1 million and spent $10.9 million (water budget report; staff report).

On June 22 the council adopted a further schedule of increases, with revenue adjustments through 2030, under the Proposition 218 notice mailed in December 2025 (June 22 water-rate resolution). The city projects water revenue rising from $10.0 million in 2026–27 to $19.0 million in 2027–28 and $25.9 million by 2030–31 (town hall presentation); the slide labels its growth assumptions 20, 20, 10 and 10 percent, but the first step in the table is about 90 percent. The general fund’s projection counts on water repaying it $11.8 million over four years. Under Proposition 218, rates may not exceed the cost of the service, and the city’s rate study forecast that cost at $13.5 million in fiscal 2030 (BenitoLink). The presentation does not explain how revenue of nearly twice that figure would be reached.

Borrowing from growth

When the general fund ran dry, the sewer fund was the first choice. The budget resolution prepared for June 22 called for borrowing $20 million from it (draft budget resolution), and a 2025 resolution had approved about $2 million from the sewer expansion fund. Neither loan was made. The 2025 loan was never executed and was rescinded on Sept. 9 after counsel advised it could not be repaid within the fiscal year (staff report; minutes). By October finance had concluded that sewer revenue could not be lent at all because it is pledged to the wastewater bonds (loan staff report); the September strategy deck said it “is not available as a near-term solution” (stabilization strategy).

That left development fees. The traffic impact fee fund reported $33.0 million in available cash and the park dedication fund $13.4 million (loan staff report). The traffic fund held $28.5 million at the last audit and collected $6.6 million that year alone (2022 audit); the sewer expansion fund took in $3.6 million in 2025–26 on what the city called “heightened development activity” (sewer budget report). The building continues: 34 new-residential permits from April through June 2026 and 29 in July, with active subdivisions by KB Home, Tri Pointe, Richmond American and Stonebridge, among others (building report; July report).

The Oct. 2 loan moves $11 million from the traffic fund to the general fund and $7 million from the park fund to the water fund, at 4 percent (the resolution allows 3 to 4 percent), due by June 30, 2027 (loan staff report; draft resolution). The draft agreement calls for two payments, in February and June, and makes the loan junior to every other obligation of the borrowing funds (draft agreement). The finance department describes it as bridge funding until quarterly revenue arrives and higher water rates and shut-offs of delinquent accounts take effect (loan staff report).

Is it lawful? The Mitigation Fee Act requires fees to be held in separate accounts and spent “solely for the purpose for which the fee was collected” (Gov. Code §66006). The city says its attorney confirmed that a loan repaid with interest within the fiscal year, delaying no planned project, is not an improper use (loan staff report). The statute does contemplate loans: a city must report each one annually, with its repayment date, interest rate and “the public improvement on which the transferred or loaned fees will be expended.” That language assumes loaned fee money ends up in a public improvement; this loan pays payroll and utility bills. We know of no ruling on the question and reach no legal conclusion. The loan must be disclosed in the city’s 2026–27 fee report.

Repayment is the harder question. The city’s Oct. 16 plan has the general fund repaying all $11.26 million within 2026–27 from ordinary revenue and still ending the year about $279,000 short after layoffs (town hall presentation). The loan bridges the months before tax revenue arrives; it does not close the gap. If repayment slips, the fee funds, and the road and park projects they were collected to build, carry the risk.

The forecast behind the reserve decision

One earlier decision deserves a second look. Hollister’s policy called for a general fund reserve of 20 percent of spending. On April 20 the council directed a budget that kept it; on June 8 it let the reserve fall to zero (June 22 staff report). The forecast presented on June 8 showed two paths (forecast). With no reserve, the fund ends the first year at $1.3 million, dips below zero, and recovers to $16.2 million by year ten. With a 20 percent reserve, the table shows a shortfall of $9.9 million in year one deepening to −$92.6 million by year ten.

The second path equals the first minus 20 percent of each year’s spending, summed over all prior years, as though the reserve were spent annually rather than held; the slide does not explain the calculation. Recomputed from the same assumptions, the shortfall against a 20 percent reserve peaks at $11.2 million in year two and closes in year nine, fiscal 2034–35. The council had other reasons, including avoiding layoffs (June 22 staff report). But the table’s deepest shortfall is about eight times the recomputed one, which shows the reserve fully funded by year ten.

Competing explanations

Inherited administrative failure. City Manager Ana Cortez and Finance Director Jessica O’Connell, who arrived in February and March 2026, attribute the crisis to years of missing audits and reconciliations, frozen rates and general-fund subsidies of other funds (staff report). The 2022 audit corroborates the control failures. The draft resolution says some past transfers lacked “demonstrated legal and accounting authority” (draft resolution), and O’Connell told the council that earlier administrations used restricted revenue for general expenses, which she called a crime (BenitoLink); we found no audit finding, investigation or legal determination that any transfer was unlawful.

Structural limits. The sales tax rate is at the state cap, and the 1-cent Measure W tax, extended for 20 years in 2016, remains a pillar of the general fund (2022 audit, MD&A). The city’s miscellaneous CalPERS plan was 72.8 percent funded at June 30, 2024, with a $22.2 million unfunded liability and a $2.13 million payment toward it due in 2026–27 (CalPERS). Personnel cost $30.5 million of $52.5 million in general fund spending in 2025–26 (budget to actual).

Policy choices. Water rates stayed flat for nearly seven years, one-time federal aid paid recurring salaries, and in June the council adopted a budget with a known gap while it awaited attrition and retirement incentives (town hall presentation).

Accounting changes. A new cost-allocation plan shifts overhead between the general fund and the utilities (June 8 staff report); the 2022 auditors had found no basis for the old charges (management letter). That moves deficits between funds without changing total cash.

Employees and a former mayor also faulted the council for voting without a presentation of the numbers (BenitoLink); the packet held no cash-flow forecast (agenda).

What it means for land and property

For owners, developers and buyers, Hollister’s condition shows up less in zoning than in costs and capacity. Water rates rose 30 percent in April, and further increases through 2030 were adopted in June (BenitoLink; water-rate resolution). A stormwater fee is being developed, which would need its own Proposition 218 process (draft resolution). New subdivisions are still annexed into community facilities districts that levy special taxes for public facilities and for police and fire services (minutes). And fees developers paid for traffic and park improvements are now partly a loan to operating funds.

None of this has stopped building. But the fee balances exist because improvements have been paid for and not yet built, and the loan ties them to the city’s ability to close its gap by next June. Anyone underwriting a project that depends on a fee-funded road, park or sewer capacity should ask where those funds stand.

What can be established

Four findings are well supported by the city’s own records. The general fund ran out of cash in September 2026 while restricted funds held tens of millions of dollars. The last audited year was boosted by one-time money and already showed serious control failures. The council approved borrowing development-fee money to make payroll, on terms that require full repayment by June 2027. And the city’s published figures conflict on how big the deficit is and how much cash exists.

Much remains unknown: total cash and its division among funds; the size of the structural deficit; whether any past transfer was unlawful; and whether the loan can be repaid on schedule. The audits now under way are the only route to most of those answers.

This investigation was possible because Hollister publishes its agendas, staff reports and audits online, and slow because those records sit in a meeting portal, a file server and state compliance lists that rarely refer to one another. LedgeX Research’s approach is to tie each figure to its source and label it audited, unaudited, projected or reported. That cannot audit a city or settle its legal questions. LedgeX’s product, an early-access ADU screening tool for San José lots, applies the same rule to parcel facts; it does not cover Hollister or municipal finance.

The next tests are on the calendar: the 2022–23 audit, promised for this month; the monthly reports the emergency resolution requires; the impact-fee report for 2025–26, due in late December, which should show the fee funds before the loan; the first loan payment, in February; the mid-year water-rate review the June resolution anticipates; and the study session on the utility concession.

About the data and graphics

• Audited versus unaudited. Only the financial statements through June 30, 2022 have been audited. Every later figure is the city’s own and is labeled unaudited.
• Primary records. City staff reports, resolutions, minutes, budget reports and presentations were read in full from the city’s meeting portal and file server. Several are drafts from agenda packets; adopted versions had not been posted as of Oct. 16, 2026.
• Fund balance and cash. A fund balance is an accounting measure and is not a bank balance. Figures labeled “cash available” are the city’s labels; the city has not reconciled its bank accounts since FY2021–22, by its own account.
• Calculations. Every derived figure (the 2021–22 bridge, loan interest, the forecast recomputation, the share of fee cash lent) can be reproduced from the data tables in the figures.
• Legal questions. This article describes statutes and the city’s stated legal positions. It does not offer a legal opinion on the loan or on past transfers.
• City positions. The city’s positions are taken from its own staff reports, resolutions, presentations and press releases.
• Currency. Records as published through Oct. 16, 2026. The Oct. 16 town hall and later meetings may change the picture.
• Ownership. Cited records and reports belong to their publishers. LedgeX Research’s contribution is the synthesis, the calculations and the graphic design.

Sources

1. S1 City Council special meeting agenda, Oct. 2, 2026 (items 5.1–5.3) — City of Hollister, 2026-10-01. Primary (city).
2. S2 Staff report City Manager-2026-46: Declaration of financial emergency — City of Hollister, 2026-10-02. Primary (city).
3. S3 Draft resolution declaring a state of financial emergency (agenda packet) — City of Hollister, 2026-10-02. Primary (city; draft).
4. S4 Q2 Fiscal Stabilization Strategy (City Manager presentation) — City of Hollister, 2026-09. Primary (city).
5. S5 Staff report Finance-2026-48: $18 million interfund loan from impact fee funds — City of Hollister, 2026-10-02. Primary (city; unaudited figures).
6. S6 Draft resolution authorizing the $18 million interfund loan — City of Hollister, 2026-10-02. Primary (city; draft).
7. S7 Draft interfund loan agreement, impact fee funds to General and Water funds — City of Hollister, 2026-10-02. Primary (city; draft).
8. S8 Staff report Finance-2026-37: Rescind Resolution 2025-127 (sewer expansion fund loan) — City of Hollister, 2026-09-08. Primary (city).
9. S9 General Fund budget to actual, FY2025-26, period ending June 30, 2026 — City of Hollister Finance Department, 2026-08-24. Primary (city; unaudited).
10. S11 Monthly Treasury Report, period ending June 30, 2026 — City of Hollister, 2026-09-08. Primary (city; unaudited).
11. S12 Water Funds budget to actual, FY2025-26, period ending June 30, 2026 — City of Hollister Finance Department, 2026-08-24. Primary (city; unaudited).
12. S13 Staff report Finance-2026-34: June 30, 2026 budget to actual, Water Fund — City of Hollister, 2026-09-08. Primary (city; unaudited).
13. S14 Staff report Finance-2026-35 and Sewer Funds budget to actual, FY2025-26 — City of Hollister, 2026-09-08. Primary (city; unaudited).
14. S15 Sewer Funds budget to actual detail, period ending June 30, 2026 — City of Hollister Finance Department, 2026-08-24. Primary (city; unaudited).
15. S16 Building Activity Report, April–June 2026 — City of Hollister Building Division, 2026-09-08. Primary (city).
16. S17 Building Activity Report, July 2026 — City of Hollister Building Division, 2026-09-08. Primary (city).
17. S18 Staff report City Manager-2026-23: FY2026-27 budget, ten-year forecast and reserves — City of Hollister, 2026-06-08. Primary (city; unaudited).
18. S19 General Fund ten-year forecast (attachment to June 8, 2026 staff report) — City of Hollister, 2026-06-08. Primary (city; projection).
19. S20 Staff report City Manager-2026-31: Adoption of the FY2026-27 budget (Options R and S) — City of Hollister, 2026-06-22. Primary (city).
20. S21 Draft FY2026-27 budget resolution, “Scenario (R)” — City of Hollister, 2026-06-22. Primary (city; draft).
21. S22 Minutes of the special meeting of June 22, 2026 — City of Hollister, 2026-08-03 (approved). Primary (city).
22. S23 Minutes of the special meeting of Sept. 9, 2026 — City of Hollister, 2026-09-21 (approved). Primary (city).
23. S24 Minutes of the regular meeting of Sept. 8, 2026 — City of Hollister, 2026-09-21 (approved). Primary (city).
24. S26 Public Utility Concession: council presentation — City of Hollister, 2026-10-05. Primary (city; illustrative scenarios).
25. S27 Financial Update, October 2026 (town hall presentation) — City of Hollister, 2026-10-16. Primary (city; FY2023–26 unaudited).
26. S28 Annual Financial Report for the year ended June 30, 2022 (audited; MUN CPAs, report dated Dec. 10, 2025) — City of Hollister, 2025-12-10. Audited.
27. S29 FY2021-22 management letter, audit adjustments and single audit report (MUN CPAs) — City of Hollister, 2025-12-10. Audited.
28. S30 Annual Comprehensive Financial Report FY2020-21 (letter of transmittal dated May 9, 2024) — City of Hollister, 2024-05-09. Audited.
29. S31 Division of Audits status report, fiscal year 2023 (missing single audit packages) — California State Controller, 2026-08-25. Primary (state).
30. S32 Division of Audits status report, fiscal year 2025 — California State Controller, 2026-07-15. Primary (state).
31. S33 Government Code §66006 (Mitigation Fee Act: fee accounts and annual reporting) — California Legislature, current. Statute.
32. S34 Government Code §53760.5 (fiscal emergency declaration preceding Chapter 9) — California Legislature, current. Statute.
33. S35 California city and county sales and use tax rates (Hollister: 9.250%) — California Department of Tax and Fee Administration, current. Primary (state).
34. S36 Hollister council agrees to declare fiscal emergency (Noe Magaña) — BenitoLink, 2026-10-06. Reported.
35. S37 City of Hollister lays off dozens of employees amid fiscal crisis (Noe Magaña) — BenitoLink, 2026-10-15. Reported.
36. S38 Press release #2: City clarifies misinformation regarding workforce reductions and financial emergency — City of Hollister, 2026-10-14. Primary (city).
37. S39 Hollister council OKs 30% water bill increase—for now (Noe Magaña) — BenitoLink, 2026-02-19. Reported.
38. S40 Actuarial valuation as of June 30, 2024: City of Hollister Miscellaneous plan — CalPERS, 2025. Actuarial (not audited).
39. S41 Staff report, Central Coast Water Board, Dec. 2008 item 36 (rescission of Order R3-2002-0105) — Central Coast Regional Water Quality Control Board, 2008. Primary (state).
40. S42 FY2023-24 Budget Book (debt section and Appendix C, S&P letter of Aug. 31, 2022) — City of Hollister, 2023-11-01. Primary (city).
41. S43 City water privatization proposal draws criticism, council seeks study (Noe Magaña) — BenitoLink, 2026-10-08. Reported.
42. S44 QuickFacts: Hollister city, California (2020 census population) — U.S. Census Bureau, 2020. Primary (federal).
43. S45 Staff report City Manager-2026-30 and draft resolution: water rate adjustments (adopted 5-0 June 22, 2026) — City of Hollister, 2026-06-22. Primary (city).
44. S46 Cease and Desist Order R3-2002-0105, adopted Sept. 19, 2002 (attachment to Dec. 2008 item 36) — Central Coast Regional Water Quality Control Board, 2002. Primary (state).