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Appendix A

Scope and Methodology

The Joint Legislative Audit Committee (Audit Committee) approved a proposal by the California State Auditor's Office (State Auditor) to perform an audit of El Cerrito under the local high risk program. We conducted an initial assessment of El Cerrito in December 2019 in which we reviewed the city's financial and operating conditions 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 initial assessment, we identified concerns about El Cerrito's financial condition and financial stability as well as aspects of its operations that appeared to be ineffective or inefficient. As such, we requested authority from the Audit Committee to perform an audit of El Cerrito under the local government high risk program. The Audit Committee approved the request, and the following table lists the audit objectives and related procedures that address these risk factors. We did not identify concerns during our initial assessment pertaining to the remaining three risk factors.

Table
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, rules, regulations, guidelines, and policies related to the financial and operational administration of the city. In particular, reviewed federal and state laws relating to overtime and the operation of public safety departments.

2	Evaluate El Cerrito's current financial condition and ability to meet its short-term and long‑term financial obligations while continuing to provide services to its residents.	Reviewed financial information, including budgets and audited financial statements, and assessed the impact of the financial condition on the city's ability to provide services to its residents. Interviewed key staff members in El Cerrito's finance department to inquire about the city's efforts to meet its obligations.

3	Identify the causes of El Cerrito's financial challenges, and determine whether the city has developed an adequate plan for addressing those challenges, including the following:	Reviewed El Cerrito's financial reports and the reports by its fiscal consultant to identify the causes of its financial challenges. Reviewed the plans El Cerrito has developed to address its financial challenges and compared those plans to best practices issued by the GFOA.
	a. Assess the city's efforts to improve its financial condition by increasing revenue and reducing costs.	Assessed whether the city's plans are likely to result in actions that will address its challenges.
	b. Evaluate the city's use of short-term and long-term loans to fund its operations, and identify viable options for improving its cash flow.	Identified the city's history of using short-term loans to meet its financial needs and the costs of using such loans. Reviewed city financial documents to determine that El Cerrito does not have long‑term loans. As of June 2020, the city had about $19 million in various long‑term debt obligations and unamortized bond premiums among its governmental and proprietary funds. Most of these obligations are refunding bonds, including $7.2 million in lease revenue refunding bonds, $8.8 million in sales tax revenue refunding bonds, and $1.6 million in recycling facility revenue refunding bonds.

4	Determine whether El Cerrito's budgeting processes comply with best practices. Evaluate the city's procedures and underlying assumptions for projecting future revenue and expenditures, and determine whether they result in balanced budgets and accurate financial forecasts.	Reviewed El Cerrito's budget reports, budget policies, and informal guidance to assess challenges resulting from the city's budgeting practices. Interviewed key staff members responsible for the city's budget development to obtain an understanding of the city's budgeting process, including the development of projections, and identified any inefficiencies or areas of concern with those practices.

5	Review the costs of El Cerrito's existing programs and services. Identify which programs are self-sustaining, evaluate options for potential revenue from new or increased fees, and evaluate potential cost savings from reduced spending on programs that rely on the general fund to operate.	Identified programs that have the capacity to be self-sustaining but are not operating in such a manner. Focused on the swim center and senior services, two programs in the city's recreation department that consistently required subsidies from the city's general fund. Reviewed financial reports and interviewed city officials to identify opportunities for El Cerrito to recover more of its costs.

6	Evaluate the financial viability of El Cerrito's fire department, including the following:
	a. Evaluate the city's demand for emergency fire services and assess the appropriateness of its fire department's staffing and size.	Assessed the fire department's staffing levels. According to best practices, fire departments should identify minimum staffing levels as necessary to perform firefighting operations. Based on its determination of staffing levels, El Cerrito's fire department maintains the minimum staff required at each of its fire stations.
	b. Evaluate the cost and benefit of El Cerrito's use of staff overtime rather than filling vacancies in its fire department.	During our initial assessment, the city indicated that it preferred to incur overtime costs in its fire department instead of filling vacant positions. That assessment concluded that this practice resulted in increasing the city's overall costs. The city subsequently decided to hire three new firefighters in an effort to reduce fire department overtime costs.
	c. Determine whether El Cerrito can charge fees to offset the costs of its fire department providing primary response to emergency medical calls, and estimate the potential revenue it could receive from doing so.	Identified an existing agreement that allows El Cerrito to obtain revenue for providing emergency medical services and assessed the sufficiency of that agreement.

7	Evaluate the impact of deferred maintenance and delayed equipment and capital replacement, including the city's need for a new public safety building, on El Cerrito's long-term costs and ability to provide services.	Reviewed lists of pending maintenance and capital replacement projects throughout the city to identify the potential financial impact resulting from the deferral of those projects. Interviewed key staff members responsible for tracking El Cerrito's deferred maintenance to inquire about the city's efforts to address projects requiring particular attention.

8	Review and assess any other issues that are significant to the audit.	Compared salaries for key positions to salaries of comparable positions at five nearby cities. Because El Cerrito's police and fire departments have the largest departmental budgets in the city and the largest number of employees among city departments, we reviewed their operations to identify areas where the city could potentially reduce costs.

Source: Analysis of documents and data obtained from El Cerrito, and interviews with El Cerrito officials and staff members.

Assessment of Data Reliability

In performing this audit, we relied on data from El Cerrito's financial accounting system to review its revenue and expenditures for fiscal years 2015–16 through the first half of fiscal year 2020–21. 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, and recommendations. We verified the accuracy of these data by selecting revenue and expenditure categories from the data and tracing the amounts reported to the city's audited financial statements. We verified the completeness of these data by comparing total revenue and expenditures for fiscal years 2015–16 through 2019–20 to the totals reported in the audited financial statements and other supporting documentation. Accordingly, we found the city's financial accounting system to be sufficiently reliable for the purpose of reviewing its financial condition.

In addition, we relied on two data sets developed by El Cerrito for specific purposes. To obtain salary information for city employees, we relied on personnel budgets developed by the city. To ensure that the conclusions we reached aligned with the city's projections of personnel costs, we reconciled data from the personnel budgets to the information included in the annual budget documents presented to the city council and the public. Accordingly, we found the personnel budgets to be sufficiently reliable for the purpose of identifying salaries.

To obtain information about the types of calls that El Cerrito's fire department responds to and the locations of those calls, we relied on a call log maintained by the fire department. Because the call log is entirely electronic, we were not able to conduct accuracy and completeness testing. However, we ensured that the information in the call log was recorded in a logical format. Consequently, we found the call log data to be of undetermined reliability for the purpose of establishing the type and location of calls responded to by the fire department. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our findings, conclusions, and recommendations.

Appendix B

The State Auditor’s Local High Risk Program

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 on July 1, 2015. Both statute and regulations require that the State Auditor seek approval from the Audit Committee to conduct high-risk audits of local entities.

To identify local entities that may be high risk, we analyzed audited financial statements and pension‑related information for more than 470 California cities. This detailed review included using financial data to calculate indicators that may be indicative of a city's fiscal stress. These indicators enabled us to assess each city's ability to pay its bills in both the short and long term. Specifically, the indicators measure each city's financial reserves, debt burden, cash position or liquidity, revenue trends, and ability to pay for employee retirement benefits. In most instances, the financial indicators relied on information for fiscal year 2016–17.⁷As we describe in Appendix A, we conducted our initial assessment of El Cerrito in December 2019. In November 2020, we updated our financial indicators to include information through fiscal year 2018–19.

Based on our analysis from 2019, we identified several cities, including El Cerrito, that appeared to meet the criteria for being at high risk. We visited each of these cities and conducted an initial assessment to determine the city's awareness of and responses to these issues as well as to identify any other ongoing issues that could affect our determination of whether the city was at high risk. After conducting our initial assessment, we concluded that El Cerrito's circumstances warranted an audit. In February 2020, we sought and obtained approval from the Audit Committee to conduct an audit of El Cerrito.

If a local agency is designated as high risk as a result of an 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's publication. It must then provide written updates every six months after the audit report is issued regarding its progress in implementing its 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 and the deficiencies identified in the audit have been satisfactorily addressed.