Report 2021-807
October 14, 2021

City of Montebello
Although It Is Making Positive Changes, It Remains at High Risk Because of Recent Declines in Its Financial Condition

Appendix A

Scope, Methodology, and the Status of 2018 Risk Areas

In May 2018, the Joint Legislative Audit Committee (Audit Committee) approved a proposal by the California State Auditor (State Auditor) to perform an audit of Montebello under the local high-risk program. We published the results of our 2018 audit in a report titled City of Montebello: Its Structural Deficit and Poor Operational Processes Threaten the City's Financial Stability and Delivery of Public Services, Report 2018-802. For this follow‑up audit report required by state law, we assessed the progress Montebello has made in addressing the 12 risk areas we identified in the 2018 audit.

The following table shows the 12 risk areas and the methods we used to follow up on Montebello's progress. When we identify a risk area's recommendations as addressed, the city implemented the recommendations we made in 2018-802; however, the area may still present some risk and require monitoring, as we describe in this report. Partially addressed recommendations are those where we noted that the city implemented some of our recommendations in the risk area, but not all; we provide updated recommendations in this report. Pending risk areas are those where the city has not taken action or the city has taken action but the results are not yet known. Resolved refers to those areas where we no longer consider the risk area relevant; we describe the specific reason for these decisions in the middle column of the table. We will base subsequent assessments of Montebello on the revised risk areas presented in this report.

Montebello's Risk Areas From Report 2018-802 and the Methods Used to Evaluate Its Progress in Addressing Them

Risk Area Status of the 2018-802 Risk Area and Related Recommendations Method to Evaluate Progress

Montebello relied heavily on one-time revenue to balance its budget.

— Partially addressed —

We made no specific recommendations in this area in Report 2018-802 or in this report. While the city has a new revenue source and is less reliant on one-time revenue, the city's position on the local high-risk dashboard, which we describe in the report, indicates the city's financial condition remains an area of concern.

Evaluated Montebello's audited financial statements and budgets to determine its financial condition, including how key financial indicators for the city changed on our local high-risk dashboard.


Montebello had not addressed its municipal golf course's increasing debt to the city's general fund.

— Pending —

Montebello addressed our recommendations in Report 2018-802, and we do not make additional recommendations; however, because the city has not finalized its plans for the golf course, it should continue to monitor and report on this risk area.

  • Assessed whether Montebello considered recommendations from a consultant it hired in 2018.
  • Reviewed the city's plan to remodel the golf course and add a driving range facility to assess whether it would be sufficient to eliminate the golf course's recurring deficits.
  • Discussed the possibility that the plans for the remodel and driving range will have to change because of changes in state law.

Montebello needed to sell its water system or secure alternative financing because necessary improvements risked burdening the city's general fund.

— Pending —

As of September 2021, a decision on the sale of the water district was still pending at the California Public Utilities Commission.

Reviewed whether the city had taken action to sell its water system. We determined that the city has taken steps to initiate a sale, though the transaction must be approved by the State.


Montebello's retirement costs risked becoming a financial burden.

— Addressed —

Although we consider this area addressed, the city will continue to experience costs related to its bonds and retirement plans and should continue to monitor those costs carefully.

Assessed risks related to the city's issuance of retirement bonds based on guidance from the GFOA, other financial experts, and the city's financial adviser.


Montebello's hotel bonds risked impairing the city's general fund.

— Addressed —

In response to our original concern, the city indicated that it did not intend to issue new lease revenue bonds and that it would have its adviser explore ways to reduce costs related to bonds. The city refinanced some of its lease revenue bonds in 2019 in consultation with its adviser, which we conclude is in line with our recommendation to avoid new lease revenue bonds.

Reviewed the city's financial adviser's report on risks related to hotel bonds and assessed whether the city took action on any of the considerations in the report.


Montebello's mismanagement of hotel revenue cost the city at least $1.6 million.

— Partially addressed —

We make a recommendation related to the payment of management fees with hotel revenue.

Obtained documentation on the city's outstanding unpaid management fees and interest to determine their balance.


Montebello did not ensure that it received the best value from its agreements with the hotel operator.

— Partially addressed —

We make a recommendation related to annual reports on the hotels' performance.

Interviewed pertinent city staff and reviewed city council meeting agendas and minutes, hotel budget documents, and one hotel financial report the city prepared in response to our 2018 recommendations.


Montebello needed to do more to monitor the city manager's contracting activities.

— Partially addressed —

We make a recommendation related to appropriate contract approvals.

Reviewed four contracts approved by the city manager from January 2019 through May 2021 and determined whether each contract amount was within the limits established by Montebello's municipal code, whether the contract contained a maximum value, and whether the city conducted the appropriate approval process for a contract of that value.


Montebello did not always follow competitive bidding processes and did not adequately ensure that it received the best value for services.

— Partially addressed —

We make recommendations related to competitive bidding and procurement training.

  • Reviewed four contracts from January 2019 through May 2021 and determined whether the contracts were competitively bid in compliance with the city's municipal code and if city staff documented their rationale for any sole‑source procurements or procurements that deviated from the municipal code.
  • Reviewed two architectural and engineering contracts from January 2019 through May 2021 and assessed whether the city followed relevant municipal codes in procuring the contracts.
  • Reviewed two agreements from January 2019 through May 2021 that did not have maximum values attached and determined whether the city council approved each agreement and whether staff reported a maximum annual amount to the city council.
  • Reviewed procurement training materials and history.

Montebello did not address some of the deficiencies identified by the State Controller in 2011.

— Resolved —

Because the State Controller report is 10 years old and because we evaluated similar internal control issues in other areas of this report, we consider this issue area resolved and will instead follow up on Montebello's progress based on the findings highlighted in this report.

Interviewed city staff about Montebello's progress in addressing the State Controller's findings. Staff informed us that the city has not worked to specifically address some of the outstanding findings.


Montebello's poor control over its petty cash and its lack of credit card policies and procedures created risks for fraud.

— Partially addressed —

We make recommendations related to implementing petty cash and credit card policies.

Interviewed pertinent city staff and reviewed city council meeting agendas and minutes, petty cash and credit card policies and procedures, petty cash logs and requests, credit card statements, and supporting documentation and receipts. We judgmentally selected 10 petty cash and five credit card transactions for additional testing for compliance with city policies.


Montebello's lack of consistent leadership and competitive salaries reduced the effectiveness of its departments.

— Addressed —

Although we consider this area addressed, Montebello will need to monitor how salary increases may affect its financial situation.

Interviewed pertinent city staff and reviewed city council meeting agendas and minutes, a staffing survey presentation and preliminary data, and city agreements with bargaining units to support city activities in response to our 2018 recommendations.

Source: Audit records.

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, audit, and issue reports on local government entities 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 the statute and regulations require that the State Auditor seek approval from the Audit Committee to conduct high-risk audits of local entities.

As we describe in our 2018 report, following an initial assessment and analysis, we sought and obtained approval from the Audit Committee to conduct an audit of Montebello in May 2018. In December 2018, we published the results of our audit, which concluded that Montebello was a high-risk entity because of the financial risks associated with its enterprise funds and long-term obligations, problematic hotel operations, contracting practices, and staffing deficiencies.

If we designate a local entity 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's issuance regarding its progress in implementing the corrective action plan. This corrective action plan must outline the specific actions the entity will perform to address the conditions causing us to designate it as high risk and its proposed timing for undertaking those actions. We will remove the high-risk designation when we conclude that the entity has taken satisfactory corrective action. State law additionally requires that if the State Auditor determines that a local government entity is high risk, then the State Auditor shall issue an audit report at least once every three years with recommendations for improvement in the local government agency.