In February 2002, when Angels Camp Administrator Tim Shearer learned that the company handling the city's payroll services had not paid California Employment Development Department taxes for January, he felt sick.

Actually, the Fresno firm Khadin & Co. doing business as Admiral Business Services had sent EDD a $6,552.01 check for city payroll taxes for Jan. 9 and 23 of that year.

But the check bounced.

"And it just got worse and worse," Shearer said.

Officials learned Admiral Business Services, which had handled the city's payroll services since September 1996, had also failed to file quarterly federal taxes for June 2001 and December 2001, leaving the city owing $143,396.91 in back-taxes.

Then, Angels Camp Finance Director Blaine Oborn discovered an unauthorized deduction of $12,342.08 from the city's account made by the payroll service.

There were interest charges on the unpaid taxes: $169.46 for EDD and $5,535.88 for the IRS.

The IRS waived $14,337 in penalties because of the circumstances, but the administrative time spent trying to take care of the problem added another $4,364 to the mounting tab.

The losses and expenses total $172,360.

Contracting for payroll services is common for government agencies, school districts and companies. Admiral was responsible for disbursements to Angels Camp employees, the IRS and EDD. The taxes were deducted from the city's checking account.

Angels Camp is not the only one of Admiral's clients to lose.

Police Chief Tony Tacheira said FBI officials told him multiple groups have been victimized, and an investigation is ongoing.

Cathy Batsch, director of operations for the Better Business Bureau of San Joaquin Valley, said the BBB had the business listed as Admiral Payroll, with Gill Shafer as general manager.

She said mail sent to the firm by the BBB was returned, and the phone was disconnected in June 2002. There was no forwarding address.

Shearer said Admiral Business Services had hundreds of clients or more.

"They were reputable, we checked references," he said.

At the Feb. 18 city council meeting, Angels Camp Auditor Wendy Prather presented her financial report for years ending June 30, 2002, and 2001.

The report says the city expects to recover $160,466 from its former payroll service provider.

That's the amount the city recognized on its books as of June 30, 2002, Oborn said.

"There were changes after the fiscal year that changed the numbers slightly. This is an ongoing process," he said.

Prather's report said the city's attorney, Richard Matranga, made a demand for restitution to Agri-Center Insurance Agency, Inc., Admiral's insurance carrier.

Prather, a certified public accountant with Clendenin Bird and Co., in Modesto, said the city lost almost a year's worth of payroll taxes because those funds were not passed on to the government agencies that were supposed to receive them.

"It's not really a big loss to the city," she said. "As of June 30, 2002, the city had total assets of almost $24,651,000, so it's a pretty small number in relation to that."

Since March 2002, the city has used Payroll People, Inc., in Fresno, for its payroll services. Shearer said this is an interim measure. The city hired Melisa Ralston in January to be the assistant finance director.

She'll handle payroll and other functions. The city anticipates payroll services will be handled in-house as of next month.

When the missing tax payments came to light, Shearer said the city auditor looked at all the city's controls and internal procedures and found no defects.

Angels Camp has paid all the back-taxes and interest.

"The city is 100 percent on time for everything," Prather said, "so (now) it's just trying to get the money back from the payroll service provider."

For that, the city has to wait until the investigation is complete.

The loss doesn't mean city services will suffer, though.

Angels Camp thought it had a surplus last year of about $350,000, Shearer said.

If the city can't get restitution, "then we're looking at a budget surplus for that year of only $190,000," Shearer said. "What it means in that case is that less money will be rolled over into the reserve.

"But we're pursuing every avenue to get restitution. We're one among many."

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