City of San Gabriel
April 7, 2021
Elaine Howle, CPA
California State Auditor
621 Capitol Mall, STE 1200
Sacramento, CA 95814
Dear Ms. Howle:
The City Council and City Management is fully committed to the responsible and wise financial stewardship of the City of San Gabriel. We have demonstrated this clearly through the actions that the City has taken in response to its precarious fiscal position. We welcome your report as another tool that the City can use in its ongoing mission of self-improvement.
In late 2018, it became clear that the City of San Gabriel had a negative general fund balance. When the current City Council was made aware of the situation, they felt misled by former management and that former management failed to live up to their professional and fiduciary responsibilities to the City as a whole and the City Council. The City Council felt that the former City Management failed in at least three critical ways during that period of time: (1) former City Management failed to disclose to and advise the City Council that projected revenues were not being realized and budgeted expenditures were being exceeded; (2) former City Management failed to disclose to and advise the City Council that the $7.8 million being pledged as collateral for the public works loan would result in a direct dollar-for-dollar decrease in the City's unreserved general fund balance; and (3) former City Management failed to deploy the proceeds of the I-Bank loan in a timely manner and failed to disclose to and advise the City Council of the years-long delays in the deployment of such funding. As a result of these failures, the City Council was not apprised of the true financial condition of the City and was therefore denied the opportunity to take corrective action.
However, once these failures were discovered and the City Council was properly informed about the financial condition of the City, they immediately directed staff to carefully review the City’s finances to provide short and long term solutions to restore its financial health. Because of that direction, staff discovered many of the issues later presented in the audit and presented them to the City Council.
The City Council responded to these challenges without hesitation, and took multiple actions to improve the oversight of City resources as well as to ensure the continued quality service provided to the people of San Gabriel. Throughout the process, the City engaged the public and made them aware of the problem through increased transparency and frequent fiscal reporting. Additional information was also made available through the City’s public information channels and staff has continued to regularly update this information.
Specifically, the City Council adopted a fiscal sustainability policy in May 2019that implemented a comprehensive framework for budget, economic development, risk management, financial reporting, cash management, and debt management. We improved transparency with a new policy that requires regular presentations of our comprehensive annual financial reports to the City Council with an independent auditor present. We improved accountability by having each director take direct responsibility for their department’s operational revenue and expenditures. We improved our budget tracking by presenting actual real-time revenue and expenditures as a critical part of our ongoing budget process. Though adopted prior to our initial contact with the State Auditor’s office, much of what is contained in the new policies addresses concerns brought up in the Audit by providing a financial recovery plan. These policies will be combined into a single document to become the framework of a comprehensive financial recovery plan as recommended by the audit.
Through our revised budgeting process and consistent financial updates to the City Council, in late 2018 through June 30, 2019, the City generated a positive change in fund balance of $756,719. These actions produced a near-30% improvement to the City’s fund balance, illustrating that with keen oversight, the process improvements were working.
In the following fiscal year, beginning July 1, 2019, the City Council and current City Management continued the diligent practices by adopting a general fund budget with a projected surplus. However, in March 2020, our regional economy began experiencing the devastating impacts of the COVID-19 pandemic as a result of the safer-at-home orders issued by the State and the County. Despite these ongoing difficult financial conditions, the City was able to generate a positive change of $84,611 in our fund balance through constant communication between the City Council and City Management. This further improved the overall financial health of the City’s general fund.
Lastly, for the current fiscal year ending June 30, 2021, the City is projecting a positive change in fund balance of over $400,000. The results provided by the City over the last three fiscal years -- despite difficult economic circumstances -- demonstrates the City Council’s and current City Management’s commitment to the wise and diligent stewardship of City resources.
Although the City’s financial health has improved, there is much more work left to accomplish and the City continues to strive to be better. An important part of this process is critically analyzing actions taken in the past and correcting them where appropriate. The City's initial discovery of the problems and the public outreach that followed, coupled with the State's Audit, are important steps in this process. The process of self-evaluation and correction will continue even after all the recommendations made in the Audit have been implemented.
The City welcomes the recommendations provided in the Audit report as validation that the City is on the right track. Attached is the City’s detailed response to each of the recommendations noted in the Audit. You will see that the City is very much in alignment with the recommendations and even began the process of implementing similar improvements prior to the report.
If you have any questions related to this response, please do not hesitate to contact me at your convenience.
Respectfully,
Mark Lazzaretto
City Manager
City of San Gabriel, California
Response to Recommendations of the California State Auditor
April 7, 2021
| No. | Risk Area | State Recommendations | City Responses |
| I |
Financial Management |
To ensure efficacy and accountability in its financial recovery process, city management should develop and city council should adopt a comprehensive financial recovery plan by October 30, 2021. |
The City has been implementing a financial recovery plan to revive the City's financial condition since 2018. The plan has included passing a local sales tax measure, generating operating general fund surpluses, adopting annual budgets with general fund surpluses, adjusting budgets as external environments change, providing monthly, quarterly and semi-annually financial updates to the City Council, exploring options and offers to refinance the public works loan, adjusting fees charged to residents, contemplating options to address the City's pension and OPEB liabilities, and tightening the operations at the Mission Playhouse. The City will continue the implementation process of the financial recovery plans mentioned above, along with constantly updating the plans as circumstances change. In response to the State Auditor's recommendation, the City will bring a formal financial recovery plan by October 30,2021 to the City Council that will identify the specific area for improvement along with the potential courses of action to take, and measureable goals. |
To ensure San Gabriel has relevant information for making decisions, it should update its financial projections to include in- depth analysis of key revenue sources and future costs, including factors such as the pandemic and the effect of the loan collateral on its general fund reserves, among other factors. |
The City has developed a five-year forecast for revenues and expenditures. The forecast is developed by making projections on what will happen in future years and they offer the opportunity to run operating scenarios. The five-year forecast is frequently revised to incorporate new information, changes in the City's operating environment and updates to our future. As the Audit suggests, the City will incorporate the loan collateral into the forecasts, as well as into the formal financial plan. |
||
To eliminate the general fund's need to borrow from other funds, San Gabriel should develop a plan by October 30, 2021 to renegotiate or refinance the public works loan to free up its general fund cash. In making its decision, it should consider the short and long-term impact of its financing choice on its general fund and on the operations of the city. |
The City has reached out to potential lenders to refinance the public works loan. The City has had discussions with the bank holding the loan, but the bank was unwilling to modify the terms of the loan. |
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San Gabriel should adopt a policy by October 30, 2021, that describes options and considerations it will evaluate and present to its city council when entering into any future debt, including: an analysis of alternative methods of financing; impact on city finances, both short term and long term. |
A standard practice for professional staff in the preparation of City Council agenda reports is to fully analyze the agenda item that is up for consideration by the City Council. The City recognizes that the agenda report presented by former management to the City Council lacked key analysis such as the impact to the general fund's fund balance. In line with the Auditor's recommendations, the City's debt policy can be updated to instruct staff to include key information in regards to debt financing and will be done so by October 30, 2021. |
| No. | Risk Area | State Recommendations | City Responses |
| II |
Expenditure Reductions and Revenue Increases |
To ensure that its rising pension costs do not create a burden on the general fund, San Gabriel should identify and develop an analysis of the benefits and risks of alternative methods of paying for these rising costs, such as increasing the retirement tax or issuing pension obligations bonds. |
The City is addressing its pension liability. Like nearly every city in California, pension liability is a burden that San Gabriel faces. The City has engaged a fiscal advisor and is analyzing the merits of using Pension Obligation Bonds to reduce its future pension outlays. The fiscal advisor will be presenting potential solutions to the City Council on April 20, 2021. Other potential solutions to improve the financial condition of the pension liability, such as raising the City's retirement tax, are also being vetted. |
To limit costs related to employee retirement benefits, San Gabriel should negotiate with its unions for employees to contribute a reasonable portion of their salaries to fund their OPEB benefits. |
In regards to the OPEB liability, there are many options to consider, one of which could include the possibility of requiring employees to contribute a portion of their salary to offset the benefit. The City will contemplate its options to improve the OPEB liability, taking into account short-term and long-term impacts on the organization's finances and the ability to provide services to the community. Any changes to the employee benefit formula would need to be negotiated with the employee bargaining units. |
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San Gabriel should develop a long-term funding plan to address its OPEB liability. The plan should include actions necessary to ensure that the city will be able to meet its obligations to its employees and retirees. |
A prudent financial plan will include, at the minimum, the acknowledgement of future liabilities. The City recognizes the need to fund the OPEB liability trust to some level. As each financial challenge is overcome by the City, the City's ability to fund the OPEB trust will become more clear. |
||
To reduce the negative impact of the Mission Playhouse on the city's financial condition, San Gabriel should implement recommendations from its consultant reports including developing a strategic plan that maximizes the use of volunteers and pursuing other measures that reduce expenditures and increase revenue. |
The Mission Playhouse has been part of the City since 1927 and provides many cultural experiences to the residents of San Gabriel and to the region. The City has reduced the level of funding the Mission Playhouse receives from the general fund by over $550,000 per year. Further illustrating the City's commitment to reducing costs and raising revenues, during the COVID pandemic where businesses and entertainment venues have been shuttered, the Mission Playhouse has remained open for alternative programming and has required an allocation from the general fund of only $250,000. The City is contemplating all options to reduce the financial impact on the City's general fund including an increased reliance on volunteers and exploring methods to raise revenue and lower expenses, as recommended in the Audit. |
||
To ensure that the fees it charges for services align with cost, San Gabriel should develop and implement policies and procedures to require it to: a)develop methodologies for determining the full cost of those services to ensure that it is not overcharging or undercharging for services; b)Reevaluate the costs of its fee-funded services at least every three years. It should develop a plan to adjust its fees to fully recover costs, including a phased-in approach for large increases. |
The City has already completed a study to update City fees with the results of the study presented to the City Council on April 1, 2021. The fees will be updated for the fiscal year beginning July 1, 2021, and regular updates will be performed. |
| No. | Risk Area | State Recommendations | City Responses |
| III |
Contract Management |
To ensure that it consistently receives the best terms and value for services, the city should strengthen its purchasing policies to require: 1)departments to competitively bid services at least every three years, or to document a justification for services that require a longer contract duration; 2) departments to justify in writing reasons for amending contracts that extend the term or alter the services of the original contract instead of using a competitive bidding process. City council should approve these justifications. |
The City has long recognized the need to get the best overall value for goods and services received. A competitive process helps ensure the City receives the best value, and outside a competitive a process, a satisfactory explanation on why the City is receiving the best value provides assurance. The City's current purchasing policy requires all contract $15,000 or more receive City Council approval along with requirements to competitively bid contracts. Though already part of our current requirements, the City will identify ways to improve oversight as it revisits and revises the purchasing policy. |
To ensure that it is able to track its costs related to its contracts citywide the city should: develop a centralized depository, develop and implement procedures to monitor and update the centralized depository, and develop and implement a process to ensure the enforcement of the city's policy to submit all executed contracts to the city clerk. |
The City agrees with the importance of a central repository for documentation and monitoring of all City contracts. The City will further refine and finish implementing a solution to accurately track and monitor contracts. The City expects a robust contract management system to be in place by the end of the year. |
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San Gabriel should negotiate with its waste collection company to revise key terms of its contract, including the contract's duration and the city's right to terminate the agreement. San Gabriel should also annually survey comparable cities waste collection franchise fees to ensure it is receiving a competitive fee from its contractor. Finally, San Gabriel should also solicit information on rates that residents and business in other cities are paying for waste collection services to ensure it negotiates fair rates for its residents. |
The industry standard for waste hauling contracts is to have a long- term agreement with a waste hauler. The cost to acquire several expensive waste hauling vehicles, to set up a database for tracking and billing several thousand customers, and to design efficient collection routes is extremely expensive. Amortizing these costs over a long term contract ensures that the lowest fees are secured for the City's residents and businesses. On the contrary, should these contracts be rebid or renegotiated on a short term basis, these costs would need to be spread over a short payback period, thus resulting in high costs to the end customer. The contract with the solid waste collection provider was thoroughly contemplated and negotiated. An ad hoc solid waste committee was established and |
Comments
California State Auditor's Comments on the Response From the City of San Gabriel
To provide clarity and perspective, we are commenting on San Gabriel’s response to our audit. The numbers below correspond to the numbers we have placed in the margin of San Gabriel’s response.
Although we acknowledge that the city has improved its financial policies and practices, the city continues to have a significant financial reserves deficit, and the current measures in place may not be sufficient to fully address its financial problems, as we state here. Thus, the city needs to take further steps to address its poor financial condition, such as developing a comprehensive financial recovery plan that includes strategies for building its reserves, renegotiating or refinancing a loan that restricts its available cash, and identifying opportunities to increase revenues and reduce expenditures.
Although we agree that former management did not clearly disclose to the city council revenue shortfalls, expenditure overruns, and other key financial information, the city was unable to demonstrate that the city council ever asked for budget updates, formal presentations of the city’s audited financial statements, or additional information on the city’s financial condition as we discuss here. Such information would have shown that the city’s financial condition was in significant decline. By failing to exercise the necessary oversight to ensure that city management had fully apprised it of the true financial condition of the city, the city council failed to fulfill its fiduciary responsibility over the city and in overseeing the city’s financial health.
We disagree with the city’s claim that much of what is contained in its new policies addresses the concerns of our audit. As we state here, although the city has adopted and implemented several stand-alone financial policies, these policies lack specific actions for how the city will achieve its financial goals. In addition, as we show in Table 2, San Gabriel’s policies lack key elements of a comprehensive financial recovery plan. As we recommended, the city should develop a more robust plan that specifies, both in the short term and long term, how it will rebuild its general fund reserves, and it should address the city’s lack of general fund cash, its unfunded pension and OPEB obligations, and how it will refinance its public works loan.
While we recognize that the city has stopped its overspending in recent years, it will need to do more to eliminate its substantial general fund reserves deficit, which was $8.1 million as of June 30, 2020. Therefore, it is critical that the city implement our recommendations to improve its financial health, including renegotiating or refinancing its public works loan that restricts its access to its general fund cash.
We look forward to receiving San Gabriel’s complete plan for addressing the risks described in our report and each of our recommendations. As we describe here, San Gabriel is required to submit a corrective action plan within 60 days of this report’s publication. The corrective action plan must outline the specific actions the city will perform to address the conditions causing us to designate it as high risk and the proposed timing for undertaking those actions. The city must then provide written updates every six months after the audit report is issued regarding its progress in implementing its corrective action plan. We will remove the high risk designation when the city has taken satisfactory corrective action.
The financial recovery plan that the city asserts it has been implementing since 2018 is San Gabriel’s fiscal sustainability policy, fund balance reserves policy, and five-year forecast, as we discuss here. Although these policies are an improvement over previous city practices, they do not outline specific recovery strategies or actions for how the city will rebuild its general fund reserves or address other significant financial challenges, such as its large unfunded pension and OPEB obligations. Without a comprehensive financial recovery plan, the city lacks an adequate blueprint for improving its financial condition. We look forward to receiving the city’s comprehensive financial recovery plan when it provides an update on its progress toward implementing our recommendations.
In addition to incorporating the effect of the loan collateral into its financial forecast, we also recommend that the city include an in-depth analysis of key revenue sources and future costs, such as the ongoing effects of the pandemic and other factors we discuss here.
The city did not present the results of its new fee study to the city council until after we provided it with a draft copy of our report. We look forward to receiving this study when the city provides its 60‑day update on its progress in implementing this recommendation, including documentation of its plan to adjust its fees to fully recover costs.
Although the city has a policy requiring that it competitively bid contracts, it has not always done so. As we discuss here, we identified one instance in which the city council approved contract amendments that extended the terms of the original contract over several decades, and another instance in which the city council approved new contracts for different services with the same vendor without seeking competitive bids. Therefore, the city must strengthen its current polices and practices to ensure that it receives the best value when procuring goods and services, including requiring departments to competitively bid services at least every three years.
Although the city states that it conducted thorough negotiations with the solid waste collection provider and surveyed other cities, it conducted those negotiations with just its current vendor. Specifically, it amended the contract in 2020 to extend the contract term to an ongoing service period of 25 years—more than double the duration of the previous term without competitively bidding this contract. By substantially extending the contract’s term, the city committed its residents to paying the contractor’s rates for at least 25 years without verifying that the contract is providing the best value to them. The city also points out that it was able to procure an annual payment from the solid waste provider of $350,000. However, as we state here, if it had done so sooner, the city could have collected a total of $3.4 million in additional revenue from fiscal years 2009–10 through 2019–20.
Although the city noted that it performed a regional survey to aid in its negotiations for the most recent amendment, as we discuss here, the city did not seek proposals from multiple waste collection companies in previous years. Therefore, to ensure that its waste collection contract represents the best value for the city and its residents and given the city’s long history of renewing contracts with its waste collection provider without competitively bidding, before the next automatic extension in October 2021, San Gabriel should renegotiate with its waste collection company to revise key terms of its contract, including the contract’s duration and the city’s right to terminate the agreement. We also recommend that the city annually conduct such a survey of comparable cities to identify their waste collection franchise fees to ensure that it is receiving a competitive fee from its contractor. In addition, it should solicit information on rates that residents and businesses in other cities are paying for waste collection services to ensure that it negotiates fair rates for its residents and businesses.