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Poor Management Has Contributed to Its Financial Instability and Led to Its Failure to Comply With State Law

Report Number: 2018-803


In October 2017, the California State Auditor (State Auditor) informed the city of Lynwood (Lynwood) that it had been selected for review under the high‑risk local government agency audit program (local high‑risk program). The program authorizes the State Auditor 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. We initially identified Lynwood, a city located in south central Los Angeles County with a population of more than 70,000, as an entity that might be classified as a high‑risk local government entity based on publicly available information. The State Auditor conducted an initial assessment of Lynwood in October and November 2017 and identified concerns regarding Lynwood’s persistent budget deficits, high turnover among its key leadership positions, and its lack of policies to ensure sound financial management.

In January 2018, Lynwood provided the State Auditor with an update on its progress in addressing the risk factors we identified. In particular, Lynwood cited several actions including the approval of a temporary sales tax and the hiring of a progressive, permanent finance team as steps being taken to strengthen the financial stability of the city. Further, Lynwood reported that it had hired the necessary staff citywide to address its service provision needs—specifically in its finance department—and to institute policies and procedures to ensure sound financial management. However, based on our continuing concerns regarding its financial and operational challenges, we recommended an audit of Lynwood, which the Joint Legislative Audit Committee (Audit Committee) approved in May 2018.

Between the end of fiscal years 2012–13 and 2016–17, Lynwood’s general fund balance declined from approximately $6.5 million to $2.6 million. The city’s largest expenditure has been the cost for contracting with Los Angeles County for fire and sheriff services. This expenditure—$16 million in fiscal year 2016–17—consumed approximately 60 percent of the city’s general fund revenue during that year, but it appears there is little the city can do to reduce this amount other than to reduce the services provided by the county. In July 2016, the city declared a fiscal emergency; the following November, Lynwood voters passed a measure instituting a temporary sales tax of 1 cent effective April 2017 through March 2027 to generate additional revenue for the city’s general fund. According to Lynwood’s fiscal year 2017–18 adopted budget, this additional revenue will allow the city to balance its fiscal year 2017–18 budget without tapping into its general fund reserves.

Lynwood, however, had significant difficulty determining the actual ending balance of its general fund for fiscal year 2016–17, which was the basis for the fund balance at the beginning of fiscal year 2017–18. Although Lynwood’s fiscal year 2017–18 budget stated the city would operate with a beginning‑of‑year fund balance of approximately $3.8 million, the city significantly revised this projection in March 2018—nine months into the fiscal year. By then, city staff reported to the city council that the general fund starting balance for fiscal year 2017–18 was actually closer to $1 million. Following the revision to the beginning‑of‑year fund balance, Lynwood imposed a hiring freeze on nonrevenue generating positions for the remainder of fiscal year 2017–18, which was intended to reduce the drain on the city’s general fund balance.

Lynwood estimates that its general fund will end fiscal year 2018–19 with a balance of $6 million. However, we question the accuracy of the city’s beginning‑of‑year fund balance and the use of one‑time revenue to balance its budget. Accordingly, we are concerned that Lynwood is at high risk of operating at a deficit in fiscal year 2018–19.

The city has experienced frequent turnover among its key leadership positions since fiscal year 2014–15. During this period, the city transitioned through multiple directors in four departments and changed city managers three times. Although as of October 2018 the city had no vacancies in its key leadership positions, Lynwood has not established a succession plan that would assist it in limiting the loss of institutional knowledge resulting from future leadership turnover. Without such a plan in place, we believe the city is at high risk that future turnover among the city’s key leadership positions would result in further loss of institutional knowledge and disruption of core operations, hampering its ability to provide services.

We also determined that the city is at high risk of waste, fraud, and noncompliance with state law. The city council’s discretion to frequently forego competitive bidding and its discretion to amend current contracts without any limitations places the city at risk of wasting resources by not procuring goods and services at the best value. Because it lacks adequate policies and procedures for functions such as procurement and financial reporting, the city is also at risk of being susceptible to fraud and waste in its operations and of inaccurately presenting its financial condition. Finally, the city has not complied with state law regarding its use of restricted funds because it lacks the necessary policies and procedures to guide use of these funds. Lynwood has used these funds to pay for personnel expenditures unrelated to the purpose of the funds.

To help Lynwood address the identified risk factors, we have developed numerous recommendations the city could implement, including the following:

Agency’s Proposed Corrective Action

Lynwood provided its initial response to our audit report in which it disagreed with several of our conclusions, including that it is at risk of not meeting its future financial obligations. Because Lynwood did not submit a corrective action plan as part of this response, we will await delivery of the plan by February 2019 to understand the specific actions it has undertaken to address the conditions that caused us to designate it as high risk.

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