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California State Auditor Report Number : 2015-806

City of Hemet
Its Ongoing Budget Deficit and Organizational Inefficiency Threaten Its Financial Stability and Delivery of Public Services

Appendix A

Scope and Methodology

In January 2016, the Joint Legislative Audit Committee approved a proposal by the California State Auditor (State Auditor) to perform an audit of the city of Hemet (Hemet) under the State Auditor’s high‑risk local government agency audit program. We conducted an initial assessment of Hemet in July and August 2015, in which we reviewed Hemet’s financial and operating condition to determine whether it demonstrated characteristics of high risk pertaining to the following six risk factors specified in state regulations:

Based on our review, we identified concerns about Hemet’s financial condition and financial stability as well as aspects of its operations that were ineffective or inefficient. Table A.1 lists the audit objectives and related procedures that address those three specific risk factors. We did not identify concerns during our initial assessment pertaining to the remaining three risk factors.

Table A.1
Audit Objectives and the Methods Used to Address Them
1 Review and evaluate the laws, rules, and regulations significant to the audit objectives. Reviewed relevant laws, regulations, and other background materials applicable to the city of Hemet (Hemet).
2 Evaluate Hemet's financial position and options to address its structural deficit, including its ability to meet short-term and long-term financial and legal obligations.
a. Review and assess the city's five-year revenue and expenditure projection.
  • Reviewed Hemet's five-year revenue and expenditure projection and verified the reasonableness of the assumptions and numbers presented.
  • For errors and out-of-date information, we revised the projection to correct the information and determined how these changes affected the projection.
b. Assess the city's use of grant funding and options in using grants to address the citys deficit.
  • Reviewed Hemet's methods for obtaining grant funding.
  • Compared grant funding obtained by Hemet to the grant funding received by other cities in the surrounding area. Due to limitations in available information to compare Hemet's success in obtaining grant funding, we were unable to determine how well Hemet performed. However, Hemet has not had a centralized process for obtaining grant funding. The deputy city manager indicated that each department assigns staff to seek and manage grants in addition to their daily tasks. However, it is not evident that a different approach would yield additional funding.

c. Review and assess options for Hemet to reduce its costs, including, but not limited to:

  1. The use of personal services contracts
  2. Streamlining city operations, and
  3. Outsourcing city departments or functions.



  • To ensure that Hemet did not waste limited resources on contractors, we reviewed eight personal services contracts from fiscal year 2010-11 to March 1, 2016—the date the contract list was provided—to determine if they were properly bid and approved and if any contracts appeared excessive. We selected various contracts to obtain a range in the levels of approval authority. We discuss this issue in Appendix B.
  • Interviewed department directors and reviewed mission statements to identify areas where reorganization of city functions could result in greater efficiency.
  • Identified the fire, police, library, and parks departments as candidates for outsourcing.
  • Based on our interviews with city staff and research conducted, we identified areas where city departments could increase revenue or decrease costs.
  • Identified charging for the costs of emergency medical services as a method to increase revenue. To determine the cost of one emergency medical service call, we used the fire department's fiscal year 2015-16 fully burdened hourly rate—a measure reflecting all of the costs of operating a fire engine, and used by Hemet for other cost recovery efforts—and multiplied it by the average length of a call, which was just under 20 minutes. For the projected number of emergency medical service calls, we calculated the average annual increase in emergency medical service calls from 2012 to 2015, which was 10.8 percent. Using 2015 as a base year, we increased the number of calls each year by 10.8 percent.
d. Review the potential impact of Hemet annexing unincorporated communities or merging with a neighboring city to address its deficit.
  • Reviewed Hemet's process for identifying possible areas for annexation.
  • Reviewed recent staff analyses of potential areas for annexation.
  • Determined that a merger with a neighboring city would not be feasible due to the neighboring city contracting for public safety services. We discuss this issue in Appendix B.
e. Model the revenue and cost-saving options identified in steps (a) through (d) and project how they will affect the budget deficit. Identified and quantified revenue-generating and cost-saving options where possible.
3 Compare economic and other indicators such as unemployment and crime rates for Hemet to neighboring communities and determine the extent to which these factors may impact the efficiency or effectiveness of Hemet's delivery of public health and safety services.
  • Documented the crime and unemployment rates for Hemet, neighboring communities, and California as a whole from 2003 to 2014 (crime rates) and from 2003 to 2015 (unemployment rates) based on federal data.
  • Determined that Hemet's 2014 violent and property crime rates are higher than crime rates in surrounding communities and California as a whole. Hemet has a higher unemployment rate than California as a whole and many of the surrounding communities. Only the cities of Perris and San Jacinto had higher unemployment rates in October 2015.
  • Concluded that high crime rates and high unemployment rates may affect Hemet's ability to deliver services, as both can result in decreases to its revenues. This, in turn, hinders Hemet's ability to maintain or increase staffing levels, thus limiting the services it can provide.
4 Determine the extent to which turnover of city staff affected efficiency and effectiveness of city operations.
  • Reviewed turnover of key officials and the impact on city operations.
  • Reviewed strategic and succession planning efforts by city departments and Hemet in general.
5 Determine the extent to which the city has sought to engage with the community, including, but not limited to, public information efforts, and how those efforts have affected the efficiency and effectiveness of city operations.
  • Reviewed community engagement efforts by Hemet in general and by each department.
  • Identified community engagement plans, if any.
  • Identified areas where community engagement affected the provision of city services.
6 Review and assess any other issues that are significant to the audit. During the course of the audit, we identified other options for revenue generation and cost savings that we investigated, including designating an area for redevelopment, modifying the assignment of police department vehicles, and tracking business licenses. These options are summarized in Appendix B as activities we determined were not beneficial for the city to pursue at this time.

Sources: California State Auditor’s analysis of Joint Legislative Audit Committee audit proposal number 2015-806, and information and documentation identified in the table column titled Method.

In performing this audit, we relied upon reports generated from the information systems. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that is used to support our findings, conclusions, or recommendations. Table A.2 describes the analyses we conducted using data from these information systems, our methodology for testing them, and the conclusions we reached as to the reliability of the data. Although these determinations may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Table A.2
Methods Used to Assess Data Reliability
Information System Purpose Methods and Results Conclusion
City of Hemet's (Hemet) five-year projection database To conclude on Hemet's budget deficit going forward.
  • To verify the completeness of the data, we compared amounts for initial fiscal years in the projection to comprehensive annual financial reports and found no errors.
  • To verify the accuracy of the data, we compared the projection data to supporting documentation and found errors, as described here.
Not sufficiently reliable for this audit purpose. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.
Eden Accounting Software Purchasing Module To select contracts by dollar value and type for testing.
  • To verify the completeness of the data, we selected contracts and compared them to the database. No errors were identified.
  • To verify the accuracy of the data, we randomly selected items and compared the data to contract files. We found five errors. Four of the five errors were information unsupported by the contract files, such as lack of support for the original contract date listed in the database.
Not sufficiently reliable for these audit purposes. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.
SirsiDynix Horizon (Hemet's library database) To determine the residential location of users of the Hemet Public Library. Because the data are entirely electronic, it is not possible to conduct accuracy and completeness testing. Alternatively, we could have reviewed the adequacy of selected information system controls that include general and application controls, but we determined that this level of review was cost-prohibitive. Undetermined reliability for the purposes of this audit. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.
Hemet's human resources database To determine the likelihood of employees retiring and the impact of the retirements on succession. Because the information in the database is confidential and individuals can be easily identified due to their small number, we cannot state with specificity the extent of turnover Hemet is likely to experience without potentially revealing protected personal information. Therefore, we chose not to conduct accuracy or completeness testing. Undetermined reliability for the purposes of this audit. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Sources: California State Auditor’s analyses of documents, interviews, and data obtained from Hemet.

Appendix B

Other Issues Reviewed

As part of our audit, we reviewed several areas in which we saw potential for the city of Hemet (Hemet) to increase efficiencies or adopt policies to reduce its risk. However, for those areas listed in this appendix, we determined that changes are unlikely to significantly benefit the city at this time.

Outsourcing of the Hemet Police Department

We reviewed the potential for outsourcing the Hemet police department to determine if it would be a cost‑effective option for the city. The fiscal year 2013–14 per capita cost of operating the police department is only 2 percent higher than the combined average of five nearby cities’ per capita costs to outsource this function to the Riverside County sheriff (sheriff). Further, Hemet’s per capita cost is 15 percent lower than the combined average of three nearby cities’ per capita costs to operate their own police departments. Additionally, eight cities in Riverside County that currently contract with the sheriff for police services are working with a consultant to determine if there are more cost‑effective ways of delivering police services due to increases in the amounts charged by the sheriff for its services. Therefore, maintaining the police department appears to be a more practical option at this time than outsourcing this function.

Use of Police Department Vehicles

The police department’s policy for police vehicles allows officers to take their assigned patrol cars home at the end of work shifts. The policy does have restrictions in place requiring the commute to be no more than 15 miles beyond the city limits and the vehicle to be stored securely. Although this policy requires the police department to maintain a larger number of vehicles than would be needed in a pooled vehicle system, the take‑home policy is necessary for Hemet under its current staffing levels. The police chief explained that if the city switched to a pooled vehicle policy to reduce the number of vehicles, it would take an officer off the street for roughly half an hour at the beginning and end of each shift due to the time associated with switching vehicles. This transition time equates to two fewer hours of police coverage over a 24‑hour period due to the fact that all Hemet patrol officers work one of two 12‑hour shifts. In comparison, a police officer with an assigned vehicle does not require paid time to transfer gear into or out of a vehicle. Therefore, until such time that Hemet has sufficient staffing to create more than the two shifts and cover vehicle changes, it would not be beneficial to switch to a pooled vehicle system, as such a system would reduce the level of police service and challenge the police department’s ability to provide public safety services.

Annexing Territory

In the past five years, Hemet has considered annexing two areas within geographical proximity. In 2010 it completed a fiscal impact analysis for the residential area east of the city’s boundary and found that annexing that land would result in a fiscal deficit. However, in March 2016, Hemet completed annexation of about 995 acres west of the city in an uninhabited area, which it believes will generate nearly $1.8 million annually after the land is developed for business and other uses.

As part of our audit objectives, we reviewed a suggestion by a city official of merging Hemet with a neighboring city, San Jacinto, to leverage economies of scale. Upon further review, we found that San Jacinto contracts for public safety services, whereas 72 percent of Hemet’s budget is dedicated to its city‑operated public safety services. For the merger to achieve meaningful cost savings due to economies of scale, the two entities would need to have the same structure for public safety services, with the services being either administered in their entirety by the combined city or administered through a contractor. Given the benefits realized by each city through its current method of providing public safety services, a merger of the two cities would be impractical at this time.

Use of Personal Service Contracts

Our review of personal service contracts found no inappropriate contracts and that Hemet followed its tiered approval process. To ensure that it makes appropriate use of contracts, Hemet has a multilevel process for contracts, in which different individuals have the ability to approve contracts within certain dollar thresholds. For example, city policy requires all contracts over $50,000 to be approved by the city council. We reviewed contracts from each tier of approval authority and found that city staff and the city council, when appropriate, properly approved the contract. Our review also focused on personal service contracts—contracts with individuals to provide services such as consulting, planning, and advisory functions—because they present a greater risk of wasteful spending, since there is typically less accountability over the quality and quantity of work provided. None of the personal service contracts we reviewed appeared inappropriate or wasteful.

Business Licenses

We reviewed Hemet’s management of business licenses to ensure that it received all of the revenue due for regulating businesses. To ensure that all licenses are paid, Hemet contracts with a company that searches for businesses that do not have valid licenses. Hemet’s contract requires it to pay the company only for those businesses the company identifies as having delinquent licenses, and the amount to be paid is a percentage of the additional revenue generated from the license fees. Additionally, Hemet has other ways of identifying businesses that have not obtained licenses. For example, before a business can begin water service, it must have an active business license. Therefore, because Hemet has active controls through its contractor as well as passive controls through its utility billing, we determined that Hemet has sufficient controls to ensure that it obtains business license revenue.

Community Revitalization and Investment Authority

In 2015 the Governor approved Assembly Bill 2 (Chapter 319, Statutes of 2015), which enabled cities to establish a community revitalization and investment authority (CRIA) that would adopt and carry out a community revitalization and investment plan. A CRIA may receive tax increment money with the affected governmental entities’ permission. Tax increment money is the incremental increase in property tax revenue resulting from the development of a parcel of land. We investigated the use of this state law to aid development in Hemet and determined that it is too early to conclude whether the option is feasible for the city. To establish a CRIA, Hemet would need to verify that the area it intends to designate as a plan area meets the necessary criteria. The criteria include an annual median household income that is less than 80 percent of the statewide annual median income and at least three other conditions, which may include a deteriorated or inadequate infrastructure, crime rates, and nonseasonal unemployment rates that exceed defined thresholds. The state law also requires 25 percent of the tax increment funds the CRIA received to be allocated to affordable housing. To revitalize its downtown area, Hemet is currently developing a “downtown specific plan” with a consultant, who has identified a CRIA as one of several potential funding mechanisms for the plan. The community development director indicated that although the city council had discussed potentially implementing a CRIA, it would not formally explore the option until after the plan is finalized. At that time, Hemet will be able to determine if a CRIA is a viable funding mechanism for its plan. Hemet expects to receive the final draft of the plan from its consultant by the fall of 2016.

Appendix C

The California State Auditor’s High‑Risk Local Government Agency Audit Program

California Government Code section 8546.10 authorizes the California State Auditor (State Auditor) to establish a high‑risk local government agency audit program (local high risk program) to identify local government agencies that are at high risk for potential waste, fraud, abuse, or mismanagement, or that have major challenges associated with their economy, efficiency, or effectiveness. Regulations that define high risk and describe the workings of the local high risk program became effective July 1, 2015. Both statute and regulations indicate that the State Auditor must seek approval from the Joint Legislative Audit Committee (Audit Committee) to conduct high risk audits of local entities.

California Cities

To identify local entities that may be high risk, we analyzed publicly available information, such as financial reports and prior audit reports or analyses, for more than 450 California cities. Using this analysis, we identified various cities for which we performed a more detailed financial analysis. This detailed analysis included using the financial data to calculate fiscal indicators that may be indicative of a city’s fiscal stress. We also reviewed publicly available information to assess the city’s fiscal outlook over the next five years, using financial and budgetary reports and other information that could affect the city’s operations. We then analyzed the results to determine whether each city is at risk for potential waste, fraud, abuse, and mismanagement, or has major challenges associated with its economy, efficiency, or effectiveness.

Based on our initial analyses, we identified six cities, including the city of Hemet (Hemet), which appeared to meet the criteria for being at high risk. To better understand the factors that led us to this determination, we visited each of the six cities and conducted an initial assessment to determine the city’s awareness of and responses to those issues and to identify any other ongoing issues that could affect our determination of whether the city is high risk. After conducting our initial assessment, we concluded that Hemet warranted an audit. In January 2016, we sought and obtained approval from the Audit Committee to conduct an audit of Hemet.

If the local agency is designated as high risk as a result of the audit, it must submit a corrective action plan. If it is unable to provide its corrective action plan in time for inclusion in the audit report, it must provide the plan no later than 60 days after the report is published. It must then provide written updates every six months after the audit report is issued regarding its progress in implementing the corrective action plan. This corrective action plan must outline the specific actions the local agency will perform to address the conditions causing us to designate it as high risk, and the proposed timing for undertaking those actions. We will remove the high risk designation when the agency has taken satisfactory corrective action.

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