Report 2011-131 Recommendation 4 Responses

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

Recommendation #4 To: Vernon, City of

To increase accountability and transparency in its governance, the city should develop a formal policy that describes the circumstances under which revenues can be transferred from its power department, and the limits and permissible uses of transferred revenue.

Annual Follow-Up Agency Response From October 2016

On September, 2015, the City Council adopted a revised Budget Policies and Procedures Manual. The Manual was developed utilizing the methodology used by the Government Finance Officer Association (GFOA), as was its preceding version. Within the manual, there is language that specifically addresses the City of Vernon's policy regarding Interfund transfers, describes the circumstances under which transfers occur, and indicates the City's position on limits and permissible uses of transferred revenue.

As referenced in page 8 of the Budget Policies and Procedures Manual, the determination of Interfund transfers and the purpose for the use of such transfers will be detailed for the public and City Council to evaluate appropriately. The limits and permissible uses of transfers shall be deliberated by City Council upon review of the planned allocation of resources during budget planning each fiscal year. Adoption of the proposed budget, inclusive of the Interfund transfer allocation, is at the City Council's discretion. The City Charter or Code does not place a limitation on transfer of resources among itself since its net impact upon the overall City is zero. However, in the effort to maintain a sustainable operation and mitigate volatility, the City has established a policy where fifteen (15%) is the maximum allowable transfer amount of fund revenues for any given fiscal year. Additionally, the City recognizes that its transfer amounts may be further restricted by its existing bond covenants and will exercise conformance as necessary.

In order to elaborate on the specifics related to Interfund transfers, the Director of Finance has elected to add "Exhibit 1" to the Budget Policies and Procedures Manual which details applicability of Interfund transfers at the City and provides an example calculation of such a transfer.

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

Annual Follow-Up Agency Response From October 2015

The City has examined the CSA's comments and will incorporate additional specificity regarding transfers from the power department including circumstances, limits, and permissible uses of the transferred revenue. This will be incorporated as part of the annual update of the Budget Policies and Procedures manual and will be presented to the City Council for approval. The clerical error in the Budget Policies and Procedures manual has been corrected. The appropriate maximum transfer rate is 15%.

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

Annual Follow-Up Agency Response From July 2014

On February 4, 2014, the City Council adopted a formal Budget Policies and Procedures Manual prepared by the Finance Director. The Manual was developed utilizing the methodology used by the Government Finance Officer Association (GFOA), approaches by other local cities, and the Citys existing practices. The Manual includes a section specifically addressing interfund transfers. (See page 8 of Budget Policies and Procedures Manual.)

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

Although the city's budget includes an interfund transfers policy, the policy lacks specific detail related to transfers from the power department: the circumstances under which transfers can occur and the limits and permissible uses of transferred revenue. The policy is also unclear whether the limitation on total transfers is 15 or 20 percent of fund revenues.

1-Year Agency Response

On November 15, 2011, the City Council adopted Resolution No. 2011-185, authorizing the issuance of the City of Vernon Electric System Revenue Bonds, 2011 Series A and B. The January 1, 2012 Bond Indenture limits transfers from the City's Light & Power Department to the City's General Fund to 11.5% of retail sales each fiscal year, and specifies how transfers are to be determined. The City's bond counsel and financial advisors review the City's compliance with said provisions annually as required by the Indenture, and more frequently as requested by City staff. As part of the budget management process, the Finance Director, Light & Power Director, and City staff meet monthly to review the City's compliance with the Indenture requirements and limitations respecting transfers. Further, by December 2013, separate from, but consistent with the 2012 Bond Indenture, the Finance Director, in coordination with the City's new financial advisors, the City Administrator, the Director of Light & Power, and outside bond counsel, will develop and present for City Council adoption, a formal policy respecting the transfer of revenues from the Light & Power Department in accordance with City policy and applicable law.

California State Auditor's Assessment of 1-Year Status: No Action Taken

The city asserts it will develop a policy by December 2013. As noted in our audit report on pages 77 and 78, relying on bond convenants as a debt policy is insufficient because the bond convenants are intented to protect bondholders.

6-Month Agency Response

The city indicates it plans to develop and present to the city council a formal policy respecting the transfer of revenues from the Light & Power department in accordance with city policy and applicable law by July 2013.

California State Auditor's Assessment of 6-Month Status: No Action Taken

60-Day Agency Response

The city did not address this recommendation in its August 2012 response. (See 2013-406, p. 190)

California State Auditor's Assessment of 60-Day Status: No Action Taken

All Recommendations in 2011-131

Agency responses received after June 2013 are posted verbatim.