A total of 24 employees will be laid off, Saturday bus service is being cancelled and five routes will be eliminated or changed due to financial problems uncovered at Island Transit.

Martha Rose, director of Island Transit, said she fired Financial Manager Barbara Savary in May after she disclosed that the agency didn’t have the money to pay $135,000 in bills.

Rose said she was dumbfounded to discover that Savary hadn’t been running the monthly cash flow analysis for years. She said the simple, internal report is not only a vital part of the job, but would have alerted the agency to cash flow concerns years ago.

Island Transit is an independent agency overseen by a board of directors. It offers fare-free transit and is funded by a nine-tenths of 1 percent sales tax and grants. The operating budget for this year is $12.2 million.

Unbeknownst to her, Rose said, Savary was dipping into investments as expenses outpaced revenues for years on end. Rose said she found unpaid bills in Savary’s desk after she was gone.

“We are implementing swift, decisive changes in service to fix the problem,” Rose said. “We expect to come out of the clouds in about a year.”

Members of the agency’s board of directors said they were shocked by the revelation.

Bob Clay, transit board member and Coupeville councilman, announced the developments at the recent Town Council meeting. He claimed the reports the finance manager was providing to the director and board were “erroneous.”

Clay said the board didn’t see regular financial statements, but that will change. He said taxpayers trusted Island Transit with providing specific services.

“We’re going to fail those people for a short time,” he said.

Island County Commissioner Helen Price-Johnson, a member of the transit board, said she was extremely disappointed and that her heart goes out to riders and employees affected by the cuts.

“Every aspect of this must be investigated, by internal audit and state audit,” she said. Also, I want assurance that there was no illegal activity.”

Rose said she hopes to bring back employees and restore routes by the end of 2015.

As a result of the shortfall, the transit board approved an $800,000 note — basically a bank loan — to pay bills. On top of that, the board OK’d issuance of a $1.5-million bond to pay the balance of the agency’s matching funds for the new transit facility near Coupeville.

Both are supposed to be paid back by next summer.

Still, people are upset.

The layoff affects 22 percent of Island Transit employees, both office staff and bus operators.

Riders who rely on routes 5, 6, 7, 8 and 9, or Saturday service, will also be affected; the routes being changed are in North, Central and South Whidbey. Island Transit is holding a series of community meetings in August to discuss the modifications and suspensions.

After Savary was fired, Rose brought back the former finance manager, Sandra Kuykendall, whom Savary had succeeded, to get things back in order. Rose also asked the state Auditor’s Office to come earlier than usual for the audit.

During an interview this week, Kuykendall explained that she’s audited the records and developed a picture of what went wrong.

She said Island Transit had $6.2 million in investments when she retired in January of 2010. Of that, $4 million was earmarked for the construction of a new facility. The rest essentially served as a reserve for the operating budget.

“We have always been very healthy and very frugal,” she said.

From looking through the books, Kuykendall said she discovered that Savary had stopped doing the analyses after the first few months without telling Rose; as a result, she wasn’t able to warn the director or the board when the operations started running in the red.

To cover the shortfall in operating expenses, Savary spent large portions of the investments as they matured, instead of reinvesting everything.

By the end of 2010, about $500,000 of the investments were gone; another $700,000 was spent on operations in 2011, Kuykendall said.

U.S. Rep. Rick Larsen helped Island Transit obtain an $18 million federal grant for the new facility in 2011. Island Transit needed to come up with $4.4 million in matching funds necessary.

Rose said she thought the money was already in the bank. According to Kuykendall, however, investment funds continued to be raided to cover operating expenses until only about half of the original $6.2 million remained.

Kuykendall said Rose had every reason to believe the money earmarked for the facility was still there and was understandably “blindsided” when the bills came due and Island Transit came up short.

As a result, Island Transit obtained the $1.5 million bond to raise the necessary match and a $800,000 note for operating expenses.

Kuykendall said investments are now at zero.

Kuykendall said she was surprised that state auditors didn’t identify the problems in their yearly audits.

“It would have been nice if they had said,  ‘Whoa, horsey, where’s all your cash?’ ” she said.

Through it all, Rose claims that Savary never warned her about the cash flow problems.

She said she didn’t think she had to micromanage the finance manager, but it’s something she will definitely do in the future.

A reporter contacted Rose and a couple of IT’s board members about budget problems a month ago, but none of them mentioned the impending layoffs, widespread route cuts or that the finance director was terminated because of the cash flow problems.

Rose told the reporter that the “county connector” in Skagit County was being modified and Everett connector canceled due to cuts in state transportation funding. She now says she didn’t realize at that time that deep cuts would be necessary to right the ship.

In fact, Rose said she flew home from a family vacation just weeks ago after being notified of the seriousness of the problem.

Rose said layoffs are being done in stages. Some were laid off as of July 1 and others have until July 31. The 13 operators will be laid off on Sept. 1.

“As the executive director of Island Transit, I take full responsibility for this situation,” she said.

“Island Transit truly regrets the disruption in service to our community members, and we deeply regret having to lay off some of our wonderful employees.”