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City of West Covina
Its Deteriorating Financial Situation Threatens Its Fiscal Stability and Its Ability to Provide City Services

Report Number: 2020-806

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Appendix A

Scope and Methodology

In February 2020, the Audit Committee approved a proposal by the State Auditor to perform an audit of West Covina under the local high risk program. We conducted an initial assessment of West Covina in January 2020, 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:

Based on our initial assessment, we identified concerns about West Covina’s financial condition and financial stability as well as aspects of its operations that were ineffective or inefficient. Further, West Covina could not demonstrate having taken adequate corrective action to address certain prior audit findings, including those addressing weaknesses that could expose it to increased risk of fraud or financial mismanagement. The Table lists the resulting audit objectives and related procedures that address these risk factors. We did not identify concerns during our initial assessment pertaining to the remaining two risk factors.

Audit Objectives and the Methods Used to Address Them
1 Review and evaluate the laws, rules, and regulations significant to the audit objectives. Reviewed relevant state laws, regulations, municipal code, and other background materials applicable to the city.
2 Evaluate West Covina’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 the city’s fiscal policies, including those concerning fiscal sustainability and debt policies.
  • Reviewed the city’s audited and unaudited financial statements to determine its current financial condition.
  • Reviewed and evaluated the city’s plans and ability to pay for pension, OPEB, and other long‑term debt obligations.
  • Reviewed and evaluated the city’s plans to address deficit spending and revenue shortfalls.
3 Identify the causes of West Covina’s financial challenges and determine whether the city has developed an adequate plan for addressing those challenges. This will include assessing the city’s efforts to improve its financial condition by increasing revenue and reducing expenditures.
  • Reviewed the city’s audited and unaudited financial statements and its adopted budgets to determine the financial challenges the city had identified and assessed its plans to address those challenges.
  • Evaluated the city’s financial records and internal documentation to identify additional causes of the city’s fiscal challenges.
  • Developed strategies to improve the city’s financial condition based on identified causes.
4 Determine whether West Covina’s budgeting processes comply with best practices. In addition, 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.
  • Identified GFOA budgeting best practices and evaluated the city’s budget policies for adherence to those best practices.
  • Reviewed budget documents and city council meeting minutes and related documentation to determine the extent to which the city adhered to its policies when developing its budgets.
  • Evaluated the city’s past and current processes for establishing financial forecasts.
5 Assess West Covina’s process for setting, increasing, or decreasing fees or rates to ensure that it complies with applicable laws, rules, regulations, and best practices. For a selection of these fees and rates, determine whether they cover the city’s costs of providing services.
  • Reviewed the city’s fee schedules and related documentation to determine when the city last updated each of its fees, the process it used to determine the amounts of its fees, and the fees it did not set at full cost recovery.
  • Evaluated a selection of fees to estimate the amount of revenue the city did not receive by not setting its fees at full cost recovery.
6 Examine West Covina’s efforts to fill key management and staff positions and maintain organizational and leadership continuity within city operations.
  • Evaluated employment documentation related to West Covina’s city managers and finance directors from fiscal years 2012–13 through 2019–20. Those positions and other key management positions are currently filled as of October 2020.
  • Evaluated budget documentation to determine the city’s historical staffing trends.
7 Evaluate West Covina’s efforts to address the deficiencies the SCO identified in its 2015 report.
  • Reviewed the SCO’s 2015 report and identified eight recommendations that are pertinent to the city’s financial condition.
  • Evaluated the extent to which the city had addressed those recommendations.
  • Interviewed key staff at West Covina to gather evidence and perspective pertaining to the contracts into which the city entered and the documentation of those contracts.
  • Reviewed a selection of four contracts to determine whether West Covina adhered to its contracting policies.
  • Reviewed statements of economic interests for individuals involved in procuring and approving selected contracts and did not identify any apparent conflicts of interest.
  • Reviewed a selection of eight purchase card transactions to determine whether West Covina adhered to its credit card purchasing policies.
8 Review and assess any other issues that are significant to the audit. Analyzed quarterly revenue and expenditure data from fiscal years 2015–16 through 2019–20 to identify trends and to evaluate the possible impact of the pandemic on West Covina’s financial condition.

Assessment of Data Reliability

In performing this audit, we relied on data from West Covina’s financial accounting system to review its revenue and expenditures for fiscal years 2015–16 through 2019–20. 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 and other supporting documentation. We verified the completeness of these data by comparing total revenue and expenditures for fiscal years 2015–16 through 2018–19 to the totals reported in the audited financial statements. Accordingly, we found the city’s financial accounting system to be sufficiently reliable for the purpose of reviewing its financial condition.

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 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 rely on information for fiscal year 2016–17.As we describe earlier in this report, we conducted our initial assessment of West Covina in January 2020 based on this detailed review. 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 West Covina, which 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 West Covina’s circumstances warranted an audit. In February 2020, we sought and obtained approval from the Audit Committee to conduct an audit of West Covina.

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.

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