By Johnny Kampis | Missouri Watchdog

JEFFERSON CITY — A state auditor’s report of Lanagan reveals a municipal catastrophe, with one examiner saying the city is in the worst financial shape of any in Missouri.

City leaders raided refundable water customer deposits to partially pay off a debt to its trash vendor.

A former city clerk quit after at least $16,000 in property tax and utility receipts went missing.

And Lanagan’s two-member police force was indicted on forgery charges for falsifying reports to prevent the city from paying money it owed to the state.

But the starkest numbers of all: Lanagan shows a cash balance of $333 and liabilities of more than $171,000.

State Auditor Thomas Schweich

State Auditor Thomas Schweich’s office released a follow-up audit of Lanagan last week, showing that the problems uncovered in a November 2011 audit have gotten worse.

Of the 30 recommendations in the initial report, the city had not implemented 18 and has indicated it will not do so. Only five auditor recommendations have been put into place.

Schweich’s staff found that most of the deficient policies and procedures that allowed money to go missing and the city to fall into such a financial hole haven’t changed.

Auditor Darrell Moore, who started Schweich’s follow-up team two years ago, called Lanagan’s situation “tragic and sad.”

“Of all the ones we’ve done, it’s clearly the worst,” he told Missouri Watchdog. “It doesn’t appear anyone of authority was stepping up to seriously address the problems.

“A lot of cities and counties are struggling, but Lanagan is the worst of the lot.”

Tight lipped

Lanagan’s leaders aren’t saying much.

City Clerk Monica Blue told Missouri Watchdog that calls regarding the audit are being referred to the city’s attorney, William Weber. He did not return a call Friday.

The listed home phone number for Lanagan Mayor Mary Beaver has been disconnected.

Lanagan has a population of around 450 and is three hours south of Kansas City.

While examining Lanagan finances for 2009 and 2010, auditors found $13,520 in receipts for water and garbage bill collections were missing, and efforts had been made to conceal discrepancies in the ledger. For example, some customers made multiple payments that were not posted to their accounts, which led both to the money disappearing and customers being overcharged.

Nearly $3,000 in property tax revenue also went missing.The first audit said city tax books and tax receipt information disappeared from Lanagan City Hall after the study began, and former City Clerk Peggy Gilliam resigned around the same time.

This promoted an audit comment that “it is likely additional monies are missing.”

Schweich recommended Lanagan work with local law enforcement regarding criminal prosecution for the missing cash and try to recover restitution.

That hasn’t happened.

The follow-up audit says Lanagan has neither contacted its bonding company to determine if funds can be recovered nor implemented sufficient controls to safeguard against future losses.

The July report shows a town practicing sloppy record keeping. Some receipts were not deposited into accounts for two months. Budgets do not include beginning and ending estimated cash balances or a listing of the town’s debt. Lanagan is rarely independently audited.

The root of the problems

Moore said more than fraud or mismanagement, Lanagan’s root financial problem is a lack of cash flow due to declining revenue and increasing expenditures.

“They just don’t have the revenue to support what they’re doing,” he said. “They only have enough revenue to support the few city employees they have.”

Auditors found that Lanagan was supplementing its meager income with a traffic ticket scheme, Moore said.

A McDonald County grand jury indicted Police Chief Larry Marsh, 52, and officer Michael Gallahue, 38, in May on felony charges of forging traffic tickets and filing false Missouri Vehicle Stops Annual Reports with the Attorney General’s Office to hide wrongly collected money.

Schweich’s initial audit found that Lanagan police were improperly reporting traffic stops on Missouri Highway 59 as taking place on a city street. This allowed the city to avoid paying thousands of dollars to the Missouri Department of Revenue under a state law that limits a town’s revenue from tickets issued on federal and state highways.

Of 555 tickets issued between January and June of 2010 for violations on city streets, only four actually occurred off state highways.

The first audit uncovered $36,281 that should have been paid to the state in 2009 and 2010. The follow-up found another $48,617 owed to the DOR for the years 2007, 2008 and 2011.

DOR officials told the auditor it sent a payment request to Lanagan in March, but had not received any money as of May 23.

DOR spokesman Ted Farnen told Watchdog Friday that the city has yet to make that payment.

“This would not be the first time a local municipality has owed money to the state for this reason,” he said.

The McDonald County Sherriff’s Office took over patrol duties, after Lanagan’s police force was indicted, and the city’s Board of Alderman said it planned to find replacements.

Sheriff Robert Evenson could not be reached for comment Friday.

More complications

Now Lanagan is dealing with water shortage and contamination issues it must find funding to solve.

The system’s main water pump failed in March, cutting off residents’ water supply for about a week. An April 2012 water system report said that 81 percent of the water was lost through leaky pipes and tanks.

Attorney General Chris Koster

Attorney General Chris Koster sued the city in June for violating the Missouri Safe Drinking Water Law, after high levels of the radioactive radionuclide were found in Lanagan’s water supply.

McDonald County Circuit Judge Timothy Perigo signed a consent agreement between the city and the Attorney General’s Office that requires Lanagan to tie into nearby Anderson’s water supply within 500 days.

Weber told the McDonald County Press that city leaders plan to work with the Midwest Assistance Program to help with financing the project. He did not give an estimated cost.

“The problem is as it’s always been — it’s the money,” he said. “If they had the money, they’d get things done. There’s a good bunch there. There are some really good people in Lanagan that would like to see this city survive.”

The state audits note that Lanagan has experienced problems getting funding for improvements to its deteriorating water system because of its incomplete and inaccurate financial statements.

Schweich’s team also found that the city was shuffling money from one account to another to pay off some debts. About $3,000 was paid from the water deposit fund to a trash collection vendor on March 2. This left only $433 in an account of refundable water customer money that should have about $14,000 in it.

And the city still owes $8,450 to the vendor.

A separate audit of Lanagan’s court system showed that at least $521 has disappeared, and the number could be higher, because records documenting receipts and case dispositions are missing.

Account examiners aren’t through with this area. Moore said auditors plan to investigate the finances of Pineville, the McDonald County seat, after allegations of fund mismanagement there.