Report 2011-131 Recommendation 27 Responses

Report 2011-131: City of Vernon: Although Reform Is Ongoing, Past Poor Decision Making Threatens Its Financial Stability (Release Date: June 2012)

Recommendation #27 To: Vernon, City of

To address the structural deficit in its general fund, the city should seek long-term solutions to balance the general fund's expenditures and revenues and lessen its reliance on transfers from other city funds. These solutions could include revenue increases, such as the proposed increased and new parcel tax, as well as looking for ways to reduce expenditures.

Annual Follow-Up Agency Response From October 2016

In addition to the passage of new or increased taxes, the reduction of consultant related expenditures, and the 28% increase in its General Fee Schedule in July 2014, the City continues its conscientious long-term financial planning efforts.

As previously reported, the City was exploring debt restructuring options and, as of June 2015, it successfully refinanced its bonds to alleviate economic stress that previous financing had placed on the City's long-term financial outlook. The debt restructuring will serve to evenly balance the City's debt over the next several years, thereby positively affecting the stability and security of the City.

The City continues to pay down its interfund loan, thereby reducing its deficit. Additionally, the City is exploring the concept of an increase in its Utility User Tax (UUT) and is in the process of evaluating the advantages and disadvantages of such. Steps are being taken to address the structural deficit by implementing the following: Increased transparency with potential long-term effects of expenditures; careful evaluation of OPEB liabilities; controlled spending in the present and future; increased proactive methodology in budget policies and procedures which includes comprehensive financial planning to identify goals, initiatives, expenditures, revenues, debt service, fund structure, etc.; the creation of quantifiable tools to measure performance of operation; and improving communication with the conveyance of timely, accurate, concise information to the public and City Council.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

Annual Follow-Up Agency Response From October 2015

In addition to the passage of new or increased taxes and the reduction of employee and consultant related expenditures, the City increased its General Fee Schedule by approximately 28%, effective July 1, 2014. The structural deficit in the General Fund is being addressed taking into consideration Post GASB 68 matters. City Council will be briefed on various options available to fund the deficit. Some options may include issuing pension bonds, increase general taxes and reduce operating expenses.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

Annual Follow-Up Agency Response From July 2014

In addition to the passage of new or increased taxes and the reduction of employee and consultant related expenditures, the City increased its General Fee Schedule by approximately 28%, effective July 1, 2014. The structural deficit in the General Fund is further being addressed by the City Administrator and Finance Director in conjunction with the long-term financial planning efforts currently underway. The Citys Financial Advisor, PFM, is currently assisting and advising the City with regard to potential debt restructuring options that would further address the structural deficit. The City continues to seek additional solutions consistent with the provisions and requirements of its Budget Policies and Procedures Manual.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

1-Year Agency Response

Since early 2011, the City has worked diligently and extensively with the Vernon Chamber of Commerce and other members of the business and residential communities to develop a long-term, stable solution consisting of equal parts expenditure reductions and increased revenues to address the structural deficit in the City's General Fund. Included in the most efforts to reduce expenditures were: (1) an Early Retirement Incentive Program expected to save the City approximately $1.8 million annually - resulted in 35 retirements as of June 30, 2013; (2) reduction of all City Council member salaries by 64% as recommended by the City's Reform Monitor; and (3) further reductions to outside legal, consultant, and lobbying costs. These reductions were in addition to those made to employee retirement and health benefits in 2010 (saving $3 million dollars annually), and previous workforce reductions and consultant contract terminations. The efforts to develop long-term revenue solutions began with the tax consulting services of NBS, who specializes in assisting local governments, to analyze, evaluate, and make recommendations regarding funding options and tax formulas for Vernon. Among the most viable of those explored were parcel and utility user taxes. Ultimately, in April 2013, Vernon voters overwhelmingly approved the following three-pronged tax proposal expected to generate approximately $8 million annually: (1) increase and recalculation of the existing business license tax (Measure K); (2) a new special parcel tax of $0.03 per square foot for Police, Fire, and Health services and projects (Measure L - sunsets in 10 years); and (3) a new utility user tax of 1% (Measure M - sunsets in 10 years).

California State Auditor's Assessment of 1-Year Status: Partially Implemented

In April 2013, city voters approved three ballot measures that the city proposed to increase its revenue. The city estimates revenue increases of $8 million for ten years. Additionally, the city reported 35 employee retirements as of June 2013 and estimates a savings in 2013-14 of $1.8 million and a cumulative savings of $8.1 million over 5 years. Although the city has taken these actions to increase revenues and reduce expenditures, the city has not clearly shown the amount of the general fund structural deficit that it is attempting to address with these actions.

6-Month Agency Response

In June 2012, the city council approved a resolution increasing its warehouse special parcel tax for fiscal year 2012-13. The city reported that it has proposed three tax measures to the voters for its April 2013 election. The proposed tax measures—a business license tax increase, special parcel tax, and utility users' tax—would increase revenues to the city and represent what the city believes to be an appropriate distribution of the revenue burden among the city's various industries and taxpayers. The city estimates the business license tax increase to generate an additional $4.5 million in revenues. The city estimates the special parcel tax and utility users' tax to generate $3.5 million annually and these taxes will sunset after 10 years.

Also, as previously stated in recommendation 10, the city reported that 22 employees retired as of the end of January 2013 and 12 will retire by the end of June 2013. The city estimates a savings of $1.9 million in 2013-14 and a cumulative savings of $8.1 million over 5 years from these retirements.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

60-Day Agency Response

The city states that in addition to the 20 percent reduction in its general fund expenditures reflected in the 2012–13 fiscal year budget, a subsequent budget amendment further reduced general fund spending by 6 percent. Additionally, the city indicates considering other actions, including working with key stakeholders in the business community to develop a comprehensive long-term revenue plan for the city's general fund and expects to present a proposal to city council by December 2012. (See 2013-406, p. 195)

California State Auditor's Assessment of 60-Day Status: Partially Implemented

All Recommendations in 2011-131

Agency responses received after June 2013 are posted verbatim.