April 27, 2021
2020-805

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814

Dear Governor and Legislative Leaders:

As directed by the Joint Legislative Audit Committee, my office conducted an audit of the city of San Gabriel (San Gabriel) as part of our high-risk local government agency audit program. Our assessment focused on San Gabriel’s financial and operational risks, and after auditing San Gabriel, we found that the city is at high risk of financial instability because of its depleted general fund reserves, lack of available cash, and large unfunded retirement obligations, all of which threaten the city’s financial recovery.

Since San Gabriel depleted its general fund reserves, it has relied on borrowing from other city funds to cover its short-term expenses. This situation began when San Gabriel entered into a loan in 2014 to build a public works facility that set aside $7.8 million of its general fund cash as collateral for 10 years—essentially limiting the city’s ability to pay for city services from the general fund. Despite this condition, the city continued to spend more than the revenues it received between fiscal years 2015–16 and 2017–18, which further deteriorated its financial health. As of June 2020, the city’s general fund reserves had a deficit of $8.1 million. With the prolonged and uncertain economic impact of the COVID-19 pandemic exacerbating the situation, San Gabriel’s lack of financial reserves will continue to threaten the city’s financial health. Although the current city management has taken steps to strengthen its financial policies and practices, the city does not have a comprehensive plan to adequately address the city’s poor financial condition, including how to pay for its large retirement obligations, such as its rising retiree health care costs.

Among the recommendations to address our concerns, we recommend that San Gabriel develop a comprehensive financial recovery plan that includes strategies for building its reserves, renegotiating or refinancing the loan that restricts its available cash, and identifying opportunities to increase revenues and reduce expenditures.

Respectfully submitted,

ELAINE M. HOWLE, CPA
California State Auditor