California State Auditor Report Number : 2016-111

City of Irwindale
It Must Exercise More Fiscal Responsibility Over Its Spending So That It Can Continue to Provide Core Services to Residents

Introduction

Background

The city of Irwindale, incorporated in 1957, is located 20 miles east of downtown Los Angeles and covers 9.6 square miles. According to the Department of Finance, the city has a population of 1,415 residents. Nearly 2.9 square miles, or one‑third of the geographical area of the city, consists of 16 gravel and sand pit mines, as Figure 1 shows. Currently, there are in the city six active pit mines that produce more than $6.3 million in mining tax revenue, and six pit mines in reclamation that the mine owners are backfilling and that no longer produce tax revenue; these mines may eventually be redeveloped. Of the four remaining mines, one was an idle pit mine that the city has begun activating and that will resume mining operations, and the other three are and will remain inactive with no plans for future development. The city estimates that it is also home to roughly 700 businesses that employ approximately 25,000 people. These businesses include the Irwindale Speedway, located on a former quarry, as well as companies in the utility, communications, beverage, food service, and agricultural industries.

 

Figure 1
City of Irwindale and the 16 Pit Mines Within Its Boundaries

Status as a Charter City

Irwindale currently operates under a city charter initially adopted in 1976 by the city’s electorate. The California Constitution gives a city the right, based on the approval of a majority of the city’s electorate, to operate as a charter city. Unlike general law cities, which are subject to the State’s general law that regulates municipal affairs, a charter city has the authority, through the adoption of a charter, to define its own system of governance and to establish specific rules for conducting municipal affairs. The California Constitution expressly defines regulation of the city’s police force; election, removal, and compensation of municipal officers and employees; conduct of city elections; and regulation of subgovernmental units of the city as four primary areas of municipal concern over which charter cities have control, subject only to the California and U.S. constitutions. These so‑called home‑rule provisions of the California Constitution are based on the principle that a city, rather than the State, is in the best position to govern matters of local concern. In addition, the courts have recognized specific issues that are considered matters of municipal concern and over which a charter city has control, such as the power to tax for local purposes.

Despite the fact that a charter city has considerable discretion over its municipal affairs, it remains subject to the various state laws that do not pertain to municipal affairs and that are considered to be of statewide concern. For example, courts that have considered these issues have found that conducting city business at open public meetings, rather than in closed meetings, is a matter of statewide concern. The city must therefore comply  with the Ralph M. Brown Act, a law that governs open meetings for local government bodies when they conduct business, and it must also comply with the general laws relating to conflicts of interest, such as the Political Reform Act of 1974 and Government Code section 1090.

The National Civic League—an organization intent on making local government open, accountable, and effective—publishes a model charter that delineates best practices for charter cities. The model charter describes key provisions for charter cities to include in their charters, which the text box lists. Irwindale includes most of these provisions in its charter, and the remainder are included in state law or city ordinances, except those that call for a separate multiyear capital program and an independent annual audit. The National Civic League recommends that cities submit to the city council a multiyear capital program that includes long‑term goals of the city, a list of all capital improvements and other capital expenditures that are proposed during the fiscal years the program covers, cost estimates and time schedules, and the method for financing the program. Additionally, the National Civic League recommends that the charter contain a provision for the city council to provide for an independent annual audit of its accounts. Although the model charter recommends these provisions, Irwindale’s city manager stated that inclusion of the current and ongoing capital projects as part of the annual budget process, as well as the voluntary submission to an annual independent audit, fulfill the recommendations.

City Structure

Under its charter, Irwindale is governed by a five‑member city council, which is the legislative body of the city and is expected to hold council meetings twice a month. The city council members serve four‑year terms, with elections staggered every two years. Each year the city council selects one of its members as mayor—the presiding officer of the city council—and selects another of its members as the mayor pro tempore—the officer responsible for performing the duties of the mayor if the mayor is absent or disabled. Two new members were elected to the city council somewhat recently—one member joined the city council in November 2013 and one joined in November 2015. The remaining three members of the city council have served on the council for nearly nine, 11, and 17 consecutive years, respectively.

The city council appoints a city manager—the city’s top executive—who is responsible to the city council as the administrative head of the city government. The city council may also appoint a city clerk, city attorney, and city treasurer. Currently, the city has six executive management positions, with three individuals who each fill multiple positions within the city. Specifically, the city manager is also the city clerk and personnel director, the finance director is also the city treasurer, and the director of public works also serves as the city engineer.

As shown in Figure 2, the city has various staff and commissions that perform typical city functions, as well as some specialized services of the city. For example, the city provides various programs to promote the physical and social well‑being of Irwindale residents, including a recreation department that provides a range of youth programs, such as after‑school and summer programs, and a senior center that offers daily food services, classes, and transportation. As of September 2016, the city had 76 full‑time employees, nearly one‑half of whom are in the police department. The city has entered into collective bargaining agreements with its employees, except for the city manager, the finance director, the police chief, the public works director, and the community development director. The city contracts with the California Public Employees’ Retirement System and Public Agency Retirement Services to provide retirement benefits to its employees.

Figure 2
City of Irwindale’s Organizational Chart

Financial Position

The city’s general fund is its primary operating fund, used to account for all revenue and expenditures necessary to carry out the basic governmental activities of the city that are not accounted for through other funds. As Figure 3 shows, the general fund receives most of its ongoing revenue through different taxes, with sales tax as its largest single source, followed by a utility users tax.¹ The city’s largest general fund expenditures, shown in Figure 4, generally consist of expenditures for its police department, followed by expenditures for its public works and construction department. In fiscal year 2015–16, the city’s estimated general fund revenue was $22.9 million, and its expenditures were $21.1 million. We discuss the city’s historic deficits further in the Audit Results.

 

Figure 3
City of Irwindale’s Budgeted General Fund Revenue
Fiscal Years 2011–12 Through 2015–16
(In Millions)

Figure 4
City of Irwindale’s Budgeted General Fund Expenditures
Fiscal Years 2011–12 Through 2015–16
(In Millions)

 

The city also has special revenue funds, which are separate from the general fund and account for activities funded by specific revenue sources that are legally restricted for specified purposes. Therefore, the city may not use amounts in these funds to pay for general governmental purposes. As the text box indicates, the Special Mining Tax Fund finances specific activities to address the negative effects the city experiences because of the various mining operations in the city. Additionally, the Irwindale Housing Authority (Housing Authority) Fund is dedicated to providing housing opportunities to households with extremely low, very low, low, or moderate incomes (which this report refers to collectively as low‑income), as defined by the Department of Housing and Community Development.

Until 2011 the city’s redevelopment agency received a portion of property tax for purposes of preparing and carrying out plans for the improvement, rehabilitation, and development of blighted areas within the city. However, legislation in June 2011 subsequently dissolved the State’s redevelopment program and did away with this revenue source. As a result of this dissolution, the city council elected to become the successor agency to the city’s redevelopment agency. Thus, all assets and all responsibilities for closing out the activities of the redevelopment agency transferred to the city as the successor agency. These responsibilities include fulfilling obligations of the former redevelopment agency, such as making payments for outstanding bonds and loans.

Housing Authority

One of the city’s goals includes providing affordable housing opportunities for all segments of its residential community, an effort that the Housing Authority carries out. The Housing Authority is a city entity managed by city employees whose goal is to provide safe, affordable housing for the city’s low‑income residents. The five individuals who sit on the city council also serve as the Housing Authority’s five‑member board of directors.

As the successor agency to the former redevelopment agency, the Housing Authority assumed the responsibility ofproviding loans through the city’s low‑income housing purchase program (Olson program) and its low‑income housing rehabilitation program (rehabilitation program). However, the Housing Authority does not have the same financing that the former redevelopment agency had. Specifically, the former redevelopment agency funded its housing projects primarily through tax increment financing, which generally relies on incremental property taxes and which is a technique used for redevelopment and for attracting economic development projects. The dissolution of the State’s redevelopment program abolished this financing mechanism.

As of June 30, 2016, the Housing Authority had provided to Irwindale residents a total of $19.3 million in loans under its Olson program, Mayans housing purchase program (Mayans program), and rehabilitation program. The former redevelopment agency created the Olson program in 2004 to provide additional single‑family housing inventory and to create opportunities for first‑time homeownership. Specifically, using tax increment financing, the former redevelopment agency entered into an agreement with a developer for the construction and development of 132 single‑family homes to be built over four phases. The former redevelopment agency also provided $11.9 million in home purchase loans to low‑income participants in the Olson program. Moreover, as part of its redevelopment efforts, the former redevelopment agency provided $6.4 million in rehabilitation program loans to low‑income households within the city to address severe cases of deterioration or overcrowding of existing buildings. The Housing Authority has provided an additional $1 million in loans for its current housing purchase program.

The Housing Authority is currently in the process of administering another housing program, and it also subsidizes the rent for residents of its senior apartment complex using remaining redevelopment funds. In 2013 the Housing Authority created the Mayans program, which like the Olson program, will provide additional single‑family housing inventory and create first‑time homeownership opportunities for low‑income individuals. The Housing Authority entered into an agreement with another developer for the construction of 17 new homes and the rehabilitation of four existing homes, for a total of 21 homes that are all reserved for low‑income households. As of August 2016, the developer had completed the rehabilitation of the four existing homes, and it is currently constructing the new homes. Furthermore, the Housing Authority is in the process of adding additional properties to the Mayans program. The Housing Authority also owns the Las Casitas senior apartments (senior apartments) with the goal of providing safe and sanitary rental opportunities for its low‑income seniors. The senior apartment complex consists of 25 units restricted to low‑income senior households and one unit for the apartment manager.

Scope and Methodology

The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to conduct an audit of the management and finances of the city of Irwindale. Specifically, the Audit Committee directed us to address the objectives listed in Table 1.

Table 1
Audit Objectives and the Methods Used to Address Them

		Audit Objective	Method
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.		Reviewed relevant laws, regulations, and other background materials applicable to charter law cities.
2	Review the current charter and any proposed changes to determine whether they comply with applicable laws and promote sound operational business practices. Determine how the charter compares to those of similar cities.		Reviewed the existing city of Irwindale charter; Irwindale has not proposed any changes to it. Identified other charter law cities in California similar to Irwindale based on geographic size, location, population, and the amount of expenditures the cities made, which we used as an approximation for the overall size of the cities’ operations. We compared Irwindale’s charter to the charters of three other cities selected—Arcadia, Los Alamitos, and Temple City—and found Irwindale’s charter includes similar provisions. Compared Irwindale’s charter to the National Civic League’s model city charter.
3	Describe the current governance structure in the city, including the roles, responsibilities, and authority of various officials including elected officials, the city manager, and others with key roles in governing the city’s operations.		Reviewed the organizational chart, job specifications for key management employees, and other relevant documentation. Reviewed the roles, responsibilities, and authority of the city council, Planning Commission, Parks and Recreation Commission, and Housing Authority. In particular, we reviewed meeting minutes and evaluated whether meetings were held appropriately and decisions were adequately documented. Interviewed city staff to determine their roles, responsibilities, and authority.
4	Describe the operational structure of the city and evaluate the effectiveness of management’s controls over financial and administrative functions, particularly the city’s contracting practices and how it spends funds and manages its decisions regarding the city’s Planning Commission.		Examined the city’s operational and organizational structure, as further detailed in Objective 3. Reviewed the city’s controls over financial functions, including bank reconciliations and controls to minimize the risk of fraud, and controls over changes in wage rates. Reviewed the city’s controls over administrative functions, including timesheets, conflicts of interest, and harassment training. Determined that city employees and city council members received biannual ethics training. Verified the appropriateness of a selection of city council members’ travel reimbursements to verify that they only include reimbursement for allowable expenses and were approved. Examined the city’s contracting practices, as further detailed in Objective 8. Reviewed the city’s expenditures, as explained in Objectives 5 and 6. Evaluated the city’s management of the Planning Commission decisions, as described in Objective 3.
5	For the most recent five‑year period, review the city’s expenditures and revenue to identify any unusual trends or fluctuations. If any such trends or fluctuations exist, determine why.		Reviewed Irwindale’s annual budgets and midyear budget adjustments for fiscal years 2011–12 through 2016–17. Also obtained and reviewed the city’s audited financial statements for fiscal years 2009–10 through 2014–15. Identified trends in major revenue sources and expenditure categories for fiscal years 2011–12 through 2015–16. Interviewed staff to determine the reasons for any significant or unusual fluctuations or trends in the major revenue sources and expenditure categories.
6	Review the appropriateness of a selection of revenues and expenditures occurring over the last five years.		Reviewed a judgmental selection of 50 expenditure transactions: 10 from each of the five fiscal years from 2011–12 through 2015–16. Reviewed city council and employee travel expenditures. Specifically, we reviewed hotel, meal, parking, and mileage expenditures to ensure they were reimbursed at allowable rates. Reviewed Irwindale’s general fund revenue structure and existing tax rates and determined when they were last updated.
7	Examine the salaries, benefits, and pension packages of high‑level staff and elected officials. Determine how the compensation was determined and approved, and how it compares to that of other cities of comparable size. Determine whether any public funds are supporting the college educations of any children of city officials.		Interviewed city employees and reviewed relevant policies, procedures, and employment agreements with various represented employee groups. Reviewed Irwindale’s contracts for employment that describe compensation for the city manager, finance director, public works director, and police chief. Reviewed whether any executives held multiple office positions and determined how their compensation was established. Reviewed wage rate adjustments to ensure salary increases were appropriate and actual pay fell within the allowable range. Identified 14 comparable cities based on the amount of expenditures, population, geographic location, geographic size, and the types of services the cities provide, such as police and fire services. Compared the salary ranges of Irwindale’s key management positions to similar positions held in 14 comparable cities. Also compared Irwindale’s pension and health benefits provided to employees with the benefits provided by comparable cities. Finally, compared the salaries, pension and health benefits of Irwindale’s city council to those of two other cities. Examined Irwindale’s practices related to providing performance evaluations, pay raises, cost‑of‑living increases, overtime, and leave cash‑outs. Reviewed a Fair Political Practices Commission report related to a donation made by a vendor to the child of a city council member, as we discuss in the Audit Results. Also, reviewed Irwindale’s expenditures and did not identify any expenditures of public funds for college tuition.
8	Examine contracting practices over the last five years. Review the contract bidding and approval process, the process for identifying and mitigating conflicts of interest, and the process for ensuring adequate performance under the contract.		For fiscal years 2011–12 through 2015–16, judgmentally selected 25 contracts for review. Determined whether Irwindale complied adequately with relevant city codes; state law; and contracting best practices related to contract bidding and approval, identifying and mitigating conflicts of interest, and ensuring adequate performance under the contract. Reviewed Irwindale’s conflict‑of‑interest code and verified that all required staff and council members filed appropriately a Form 700 disclosure of financial interests.
9	Evaluate how Irwindale manages bonds and the impact of the city’s bonded indebtedness on its long‑term fiscal health. Identify all bonds issued over the past seven years and, for a selection of those bonds, determine the following		Interviewed city management to determine why the city does not have a debt management policy. Obtained a list of all bonds issued by the city from fiscal years 2009–10 through 2015–16.
	a.	The purpose of the bond issue.	Reviewed the terms of bond indentures to identify the purpose of the bonds.
	b.	Whether it was well-defined, properly approved, and used appropriately.	Reviewed meeting minutes at which bond issuances were approved by the city council. Reviewed bond approval documents. Interviewed city employees to determine how bond‑related proceeds and expenditures are tracked. Determined whether the city complied with applicable laws and regulations for its bonds.
	c.	The status of the debt service.	Reviewed audited financial statements to identify the status of the debt service on outstanding bonds. Analyzed the impact of debt service on the city’s financial status through audited financial statements, the city budget, and other documents.
10	Examine Irwindale’s ownership of residential property within the city limits, including a review of leasing practices, rental practices, and property sale practices.		Obtained Irwindale’s list of residential properties within the city and current low‑income housing programs. Examined Irwindale’s policies and procedures for administering its low‑income housing purchase programs. Examined Irwindale’s policies and procedures for administering its low‑income senior housing apartment rental program. Determined whether Irwindale complied with applicable federal and state laws for its low‑income housing programs.
11	Review and assess any other issues that are significant to the audit.		Reviewed Irwindale’s resident prescription and vision benefit programs, including payment data, and their financial impact on the city.

Assessment of Data Reliability

In performing this audit, we obtained electronic data files extracted from the information systems listed in Table 2. 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 we use to support findings, conclusions, and recommendations. Table 2 describes the analyses we conducted using data from these information systems, our methods for testing, and the results of our assessment. 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 2
Methods Used to Assess Data Reliability

INFORMATION SYSTEM	PURPOSE	METHOD AND RESULT	CONCLUSION
LAUSD Systems Applications and Products (SAP) accounting system	To choose for review a selection of expenditures made by Irwindale from fiscal years 2011–12 through 2015–16.	We performed data‑set verification procedures and testing of key data fields and found no errors. We also performed completeness testing of 29 items and found no errors.	Complete for this audit purpose.
Payroll data	To calculate the amount and cost of overtime charged by Irwindale’s police department from fiscal years 2011–12 through 2015–16.	We performed data‑set verification procedures and testing of key data fields and found no errors. We also performed limited accuracy testing and found no errors. However, because the data were aggregated by fiscal year we were unable to perform completeness testing.	Undetermined reliability. 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. Further, we present these data because they represent the best available data source of this information.
SIRE document management system	To choose for review a selection of contracts Irwindale entered into from fiscal years 2011–12 through 2015–16.	We performed data‑set verification procedures and testing of key data fields and found one error. We also performed completeness testing of 29 items and found errors.	Not complete for this audit purpose.
Prescription program billing data	To calculate the city’s and residents’ costs for the prescription program from fiscal years 2011–12 through 2015–16.	We performed data‑set verification procedures and testing of key data fields and found no errors. We also compared the billing data to expenditure data in the city’s accounting system and found a variance of less than 1 percent.	Sufficiently reliable.
State Controller’s Office Government Compensation in California website (compensation website)	To determine the salary ranges of selected positions at Irwindale and comparable cities.	We reviewed information provided on the compensation website that indicates the data are unaudited. We performed limited analysis of the data to ensure they appeared reasonable. We did not perform accuracy or completeness testing on these data because the source documentation is located at various cities throughout the State, making such testing cost‑prohibitive.	Undetermined reliability. 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. Further, we present these data because they represent the best available data source of this information.

Sources: California State Auditor’s analysis of various documents, interviews, and data from Irwindale.

 

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Footnote

¹ Irwindale imposes a utility users tax on customers of electricity, gas, telephone services, cable television, and sewer services.
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