APPENDIX A

Scope and Methodology

In May 2018, the Joint Legislative Audit Committee (Audit Committee) approved a proposal by the State Auditor to perform an audit of Montebello under the State Auditor's high‑risk local government agency audit program. We completed an initial assessment of Montebello in January 2018, during which we reviewed Montebello'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:

The local government agency's financial condition has the potential to impair its ability to efficiently deliver services or to meet its financial or legal obligations.
The local government agency's ability to maintain or restore its financial stability is impaired.
The local government agency's financial reporting does not follow generally accepted government accounting principles.
Prior audits reported findings related to financial or performance issues, and the local government agency has not taken adequate corrective action.
The local government agency uses an ineffective system to monitor and track state and local funds it receives and spends.
An aspect of the local government agency's operation or management is ineffective or inefficient; presents the risk for waste, fraud, or abuse; or does not provide the intended level of public service.

Based on our review, we identified concerns about Montebello's financial condition, financial stability, and the effectiveness of aspects of its operations. Table A lists the objectives that the Audit Committee approved and the methods we used to address them.

Table A.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.	Identified and reviewed relevant laws, regulations, and other background materials applicable to the city of Montebello.

2	Review and evaluate the operations of Montebello's business activities, including but not limited to, the following: a. Montebello's plans for addressing deficits in its transit system, water utility, and golf course, including whether it will be able to avoid using general fund dollars to support these programs in the future.	Interviewed relevant Montebello staff and reviewed documentation they provided. Reviewed audited financial statements for fiscal years 2009–10 through 2016–17, as well as unaudited financial documents and budgets through fiscal year 2018–19. Evaluated Montebello's plans for paying off debts and reducing deficits in its enterprise funds. Reviewed financial information for Montebello's transit system and determined that its deficit in fiscal year 2015–16 was caused by an error in requesting grant funds; Montebello corrected this error in fiscal year 2016–17.
	b. Montebello's plans for addressing infrastructure needs related to its water utility.	Interviewed city officials, including the city manager and public works director. Reviewed studies on water rates and repairs to Montebello's water system. Reviewed city ordinances and presentations to the city council related to the water utility.
	c. The revenue projections for Montebello's hotels to determine whether they are reasonable estimates of future revenue and assess Montebello's plans for using those projections when developing future budgets.	Interviewed Montebello finance and administrative department staff. Reviewed council meeting minutes and other city documentation. Reviewed Montebello's projections for the hotels to assess their reasonableness. We determined that projections for the second hotel are premature because the second hotel opened in September 2018, nine months later than planned. However, Montebello is not using the projections to develop its budget.

3	To the extent possible, assess Montebello's financial condition and ability to pay its obligations.	Interviewed Montebello finance and administrative department staff. Reviewed Montebello's financial documents, including audited financial statements, Montebello's budgets, and unaudited general fund account reports from Montebello's finance department staff. Developed historical trends for Montebello's revenues and expenditures from fiscal year 2009–10 to present. Reviewed Montebello's projections for revenue, expenditures, and debt service in its fiscal year 2018–19 budget. Reviewed the 2018 CalPERS actuarial valuation reports for Montebello and Montebello's projections for retirement expenses. Reviewed and assessed Montebello's plans to increase revenue and reduce expenditures. Identified similar cities to Montebello based on revenues from the cities' fiscal year 2016–17 financial reports, land area data from the United States Census, and population data from the California Department of Finance. Compared Montebello's current debt payments to that of similar cities based on the framework used by the Government Finance Officers Association. We found that Montebello's level of debt payments is comparable to that of Monterey Park and Pico Rivera, which are similar neighboring cities.

4	Assess Montebello's actions taken in response to the recommendations the State Controller included in its 2011 report.	Reviewed Montebello's Administrative Policy Manual and assessed if Montebello has made updates and if it has addressed the State Controller's identified deficiencies. Reviewed the finance department's policies and procedures. For a selection of 15 payments, reviewed a selection of payment-related internal controls to determine their effectiveness. Reviewed and assessed Montebello's policies and practices related to the use of city credit cards and petty cash.

5	Evaluate Montebello's compliance with procurement policies and best practices for ensuring that it receives the best value for the goods and services it purchases.	Evaluated if Montebello's procurement policies and practices are aligned with relevant laws, regulations, and procurement best practices related to competitive bidding and other areas. Reviewed Montebello's contract log, payment records, and meeting minutes to identify agreements for review. For fiscal years 2015–16 through 2017–18, judgmentally selected 16 agreements based on contract size, whether the contract was sole source, and the nature of the work. Assessed the selected agreements for compliance with Montebello's procurement policies and best practices.

6	Review and assess any other issues significant to the audit.	Using data from the State Controller and Montebello's budgets, determined whether a selection of current administrative positions have salary ranges below comparable positions in the region. Assessed the extent to which the salary ranges have changed over time. Reviewed statement of economic interest disclosures and did not identify any issues. Reviewed city documentation and city council meetings and interviewed city officials regarding the multiple business relationships between the hotel operator and the city.

Source: Analysis of the Audit Committee's audit proposal number 2018‑802, as well as information and documentation identified in the column titled Method.

Assessment of Data Reliability

In performing this audit, we relied on electronic reports that we obtained from the city of Montebello's accounting system for the purposes of identifying agreements that Montebello entered into from fiscal years 2015–16 through 2017–18, and for reviewing authorizations for payments. The U.S. Government Accountability Office, whose standards we are statutorily obligated to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information we use to support our findings, conclusions, or recommendations. We performed dataset verification and testing of key data elements in these reports and did not identify any issues. To assess completeness, we randomly selected purchase order numbers in the ranges that the reports represented, and we noted that some were missing. Therefore, we determined that the reports were not complete for the purposes of this audit. Further, authorizations for payments were electronic and therefore we could not test these for accuracy because there were no paper records for comparison. Although we recognize that these limitations may affect the precision of numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

APPENDIX B

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

California Government Code section 8546.10 authorizes the State Auditor to establish a 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 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 several 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 recently identified five cities, including Montebello, 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 five 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 Montebello warranted an audit. In May 2018, we sought and obtained approval from the Audit Committee to conduct an audit of Montebello.

If we designate a local agency 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 city has taken satisfactory corrective action.