01-19-2021 - AGENDA ITEM 29 CONSIDERATION OF CORRECTIVE ACTION PLAN IN RESPONSE TO THE DECEMBER 2020 STATE AUDITOR'S REPORTAGENDA ITEM NO.29
AGENDA STAFF REPORT
City of West Covina I Office of the City Manager
DATE: January 19, 2021
TO: Mayor and City Council
FROM: David Carmany
City Manager
SUBJECT: CONSIDERATION OF CORRECTIVE ACTION PLAN IN RESPONSE TO THE
DECEMBER 2020 STATE AUDITOR'S REPORT
RECOMMENDATION:
That the City Council approve the Corrective Action Plan prepared in response to the State Auditor Report
Dated December 2020.
BACKGROUND:
On December 19, 2019, the California State Auditor notified the City that they had identified certain factors
through recently published fiscal health analysis of the State's cities that caused concern that the City of West
Covina may be a high -risk local government agency. Upon identification as a high -risk agency the State
Auditor referred the matter to the Joint Legislative Audit Committee for recommendation on performing an
audit.
The Joint Legislative Audit Committee (JLAC) is 14-member committee consisting of seven Assembly
Members and Senators that is established through the Legislature's rulemaking authority under the California
Constitution, Government Code Section 10501 and the Joint Rules of the Senate and Assembly, Rule 37.3.
Duties and responsibilities in the Joint Rules of the Senate and Assembly apply to the JLAC as well as all
powers conferred upon committees by Article IV, Section 11 of the California Constitution.
Audits considered by the JLAC include performance audits, which examine whether state agencies and
programs are efficiently and effectively accomplishing specified goals and objectives, complying with laws,
regulations and policies and using state resources properly. Performance audits are on a variety of topics, which
range from broad to very specific in scope. The JLAC also considers financial and financial -related audits of
government and publicly created entities.
JLAC recommended the City for an audit and the State audit team commenced work on February 26, 2019.
The team spent several months analyzing historic data going back to Fiscal Year 2016-2017 (July 1, 2016 -
June 30, 2017). In December 2020, the California State Auditor issued findings (Attachment No. 1).
DISCUSSION:
The December 2020 State audit contains multiple issues that need to be addressed (Attachment No. 2). The
focus of the corrective action plan is preparation of a financial recovery plan, which will be submitted to the
State in July 2021. The recovery plan will address the city's rising costs of providing services and the actions
that must be taken to improve the City's financial condition - it will be a plan for crisis prevention and crisis
response. The plan will include long-term financial projections, prioritize the resources that the city will use to
improve the city's financial condition, identify individuals responsible for monitoring the City's progress in
implementing each action, and outline when the City anticipates it will complete key milestones related to each
action. In order to ensure success, the recovery plan goals will be specific, measurable, achievable, relevant and
time -based.
Key elements of the recovery plan include:
• Ensure that the fees/assessments charged for services align with costs
• Review, evaluate, and monitor all city contracts
• Set aside land sale revenue to replenish the city's general fund reserves
• Proactively mitigate risk and exposure to litigation through use of best risk management practices
• Address the costs currently incurred providing fire and emergency medical services
• Prepare financial analyses that evaluate the short-term and long-term financial implications of spending
decisions
• Implement a formal process for development of reasonable budget projections
• Limit costs related to employee retirement and health care benefits
• Improve internal purchasing processes
Prepared by: David Carmany, City Manager
Fiscal Impact
FISCAL IMPACT:
There are no direct fiscal impacts through adoption of the Corrective Action Plan. There will be significant
cost savings through adoption of the financial recovery plan, scheduled for spring 2021.
Attachments
Attachment No. 1 - Audit Report December 2020
Attachment No. 2 - Corrective Action Plan
CITY COUNCIL GOALS & OBJECTIVES: Achieve Fiscal Sustainability and Financial Stability
Enhance the City Image and Effectiveness
ATTACHMENT NO. 1
City of West Covina
Its Deteriorating Financial Situation Threatens Its
Fiscal Stability and Its Ability to Provide City Services
December zozo
NI — REPORT 2020-806
O CALIFORNIA STATE AUDITOR
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Elaine M. Howie State Auditor
December 1, 2020
zozo-8o6
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
¢STATEo��
a i
vd a
As directed by the Joint Legislative Audit Committee, my office presents this audit report
regarding the city of West Covina (West Covina), which we conducted as part of our high -risk
local government agency audit program.
This report concludes that West Covina is a high risk city because of the significant risks it faces
related to its financial and operational management. West Covina reduced its year-end general
fund reserve balance by $io.6 million —more than half —during the past several fiscal years,
primarily due to its inability to address substantial increases in citywide expenditures and its
significant pension liability. The city has also likely underestimated the financial impact of the
COVID-i9 pandemic during this current fiscal year.
West Covina made certain financial decisions that appear questionable or were based on
insufficient analyses. Moreover, the city has not developed a formal financial recovery plan with
specific timelines, monitoring, and reporting to improve its long-term financial health. We also
identified instances of inadequate management that limit West Covinds ability to ensure that
public funds are used appropriately and that its procurement efforts provide the best value.
To address these concerns, we present several recommendations, such as pursuing opportunities
to better manage or reduce spending, preparing multiyear financial forecasts to quantify the
impact of its decisions, and establishing and following procurement policies. We also recommend
that West Covina develop a formal financial recovery plan to prioritize resources and assign
responsibility for monitoring progress in implementing the plan.
Respectfully submitted,
ELAINE M. HOWLE, CPA
California State Auditor
621 Capitol Mall, Suite 1200 1 Sacramento, CA 95814 1 916.445.0255 1 916.327.0019 fax I www.auditor.ca.gov
Blank page inserted for reproduction purposes only.
CALIFORNIA STATE AUDITOR
v
Report 2o2o-806 1 December 2020
LOCAL HIGH RISK
HIGH RISK ISSUES
City of West Covina, Los Angeles County Risk Designation: High Risk
West Covina's Ineffective Fiscal Management Threatens Its Ability to Meet Its Financial Obligations and to
Provide City Services
Continual diminishing ofreserves
• Reliedonitsgeneralfundreservestosupportitsoperationsforyears,therebysignificantlyreducingits
reserve balance.
• Encounteredsubstantial increases in citywide expenditures, including its unfundedpension liability and 3
associated annual payments.
• Allowed the fire department to routinely exceed its budget by more than $1million each year primarily because
ofexcessive overtime costs.
• Will be further threatened by revenue decreases resulting from the COVID-19 pandemic.
Questionable use of city resources
• Paid a greaterproportion ofits employees'health benefits than the averageproportion paid by state andlocal
governments on the West Coast. 14
• Used general fund revenue to subsidize city services rather than increasing the fees it charged to the users of
thoseservices.
Financial decisions based on insufficient analyses
• Did not adequately quantify the financial consequences ofbudget adjustments for the city council. 16
• Did not begin to develop projections ofits long-term outlook based on financial trends until after our initial
assessment and has not included keyassumptions in its forecast.
Lackof a formal financial recoveryplan
• Has not developed a comprehensiveplan with clear timelines, monitoring, and reporting to improve its 18
long-term financial health.
West Covina's Weak Enforcement of Its Procurement Policy Increases the Risk of Waste and Fraud
Inadequate management of purchase cards
• Lacks documentation demonstrating that managers appropriately approved increases to the dollar limits for
purchase cards. 21
• Allowed requests for limitincreases on purchase cards to be granted indefinitely despite its own policy restricting
such increases to specific time frames.
Lack of oversight to ensure thatcontracts provide best value
• Violated its own competitive bidding requirements when contracting for human resources and claims
administration services. 22
• Approved amendments to its contract for waste collection services that contain overly -restrictive terms,
including lengthy time extensions and a nontermination clause.
Appendices '
Appendix A —Scope and Methodology 27
Appendix B—The State Auditor's Local High Risk Program
Agency esp '
City ofWestCovina 33
CALIFORNIA STATE AUDITOR
December202O I Report 2020-806
LOCAL HIGH RISK
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CALIFORNIA STATE AUDITOR
Report202O-806 I December202O
LOCAL HIGH RISK
Risks Facing the City of West Covina
In December 2019, the California State
Auditor's Office (State Auditor) informed
the city of West Covina (West Covina) that
it had been selected for review under the
high -risk local government agency audit
program. This program authorizes the
State Auditor to identify local government
agencies that are at high risk for potential
waste, fraud, abuse, or mismanagement or
that face major challenges associated with
their economy, efficiency, or effectiveness.
We first identified that West Covina might
be classified as a high -risk local government
entity based on publicly available information.
We conducted an initial assessment of the
city in January 202o and identified concerns
regarding its financial stability. Its general
fund reserves had steadily declined over the
past several years, potentially straining its
ability to continue providing essential services
to its community and to meet its obligations
in the event of a fiscal emergency. In addition,
we identified operational risks related to
West Covina's governance and management
controls. The city had experienced significant
turnover of key management positions, and
the State Controller's Office reported in 2015
that it had serious and pervasive weaknesses
in its administrative and internal accounting
controls, concluding that such controls were
in effect nonexistent.
West Covina agreed with the risks that we
identified in our initial assessment, but it
asserted that it was taking actions to address
our concerns. For example, the West Covina
city council (city council) had authorized a
special election so that residents could vote
on a local tax measure that the city estimated
would increase its revenue by $9.7 million
annually; however, the city's residents did not
ultimately approve the measure. The city's
leadership also planned to issue municipal
bonds to raise more than $200 million to
pay down its California Public Employees'
Retirement System (CAPERS) unfunded
pension liability. Despite these efforts, based
on our continued concerns regarding its
financial and operational management,
we recommended an audit of West
Covina, which the Joint Legislative Audit
Committee (Audit Committee) approved in
February 2020.
Our audit found that West Covina faces
several significant risks related to its financial
and operational management. In particular,
its financial condition is rapidly deteriorating,
as demonstrated by the city's continued
reliance on its general fund reserves to
support its operations, its questionable uses
of city resources, and its lack of sufficient
analyses to support its financial decisions.
West Covina's year-end general fund
reserves dwindled from $20.5 million in
fiscal year 2014-15 to $9.9 million at the end
of fiscal year 2018-19, placing the city on a
path to further deplete its reserves. The city
also faces rising employee salary and benefit
costs. Finally, its purchasing and contracting
processes have deficiencies that its leadership
has allowed to persist over several years,
exposing the city to the risk of fraud and
perpetuating its susceptibility to wasted
public funds.
West Covina's leadership has identified
several actions that the city has taken or
plans to take that the city manager believes
will improve its financial condition. For
example, the city is in the process of selling
a large parcel of land; if completed, this
sale will result in a one-time revenue gain
Of $13.5 million that will be used to repay
bond debt and replenish its reserve balance.
Additionally, the city became a member
of the California Joint Powers Insurance
Authority (CJPIA), which the city manager
believes will reduce the city's exposure to
significant litigation expenditures. Further,
CALIFORNIA STATE AUDITOR
December202O I Report 2020-806
LOCAL HIGH RISK
as it had planned, the city sold $zoo million
in municipal bonds to pay down the
amount it owes to CaIPERS for pension
costs; as a result, although the city will pay
significantly smaller unfunded pension
liability payments to CaIPERS, it will need
to make bond debt payments through fiscal
year 2044-45• However, the city's leadership
has not performed the analysis necessary
to determine the combined results of these
actions, nor has it created a comprehensive
plan to ensure its success in implementing
them. As a result, West Covina continues
to be at risk of depleting its general fund
reserves and of not being able to adequately
provide public services in the near future.
To help West Covina address the risk factors
we identified, we have developed numerous
recommendations the city could implement,
including the following:
Increase city fees and seek opportunities
for cost sharing to eliminate its reliance
on its general fund reserves to support
its operations.
Prepare financial analyses that evaluate
both the short-term and long-term
financial implications of significant
spending decisions.
Develop a financial recovery plan that
accounts for the city's rising costs and
the actions that it will take to improve
its financial condition. The plan should
include a long-term financial projection,
prioritize the resources that the city will
use to improve its financial condition,
identify individuals responsible for
monitoring the city's progress in
implementing each action, and outline
when the city anticipates it will complete
key milestones related to each action.
Improve its internal processes to reduce its
susceptibility to waste and fraud.
CALIFORNIA STATE AUDITOR
Report202O-806 I December202O
LOCAL HIGH RISK
West Covina's Ineffective Fiscal Management
Threatens Its Ability to Meet Its Financial
Obligations and to Provide City Services
West Covina's Leadership Has Continually Made
Decisions That Have Diminished the City's
Financial Reserves
West Covina is at high risk of being unable to
meet its future financial obligations and provide
effective city services. Since fiscal year 2014-15,
its past and present leadership has relied on
the city's general fund reserves to support
its operations rather than pursuing solutions
involving generating additional revenue or
reducing expenditures, such as increasing fees
for city services or negotiating with its employee
unions to have its employees pay a greater
share of their benefits. In particular, the city has
relied on its general fund reserves for salary and
benefit costs for its public safety employees, its
litigation costs, and its pension fund payments.
Because of these factors and the city's financial
condition at the end of fiscal year 2018-19,
we determined that West Covina was at high
risk. The effects of the COVID-19 pandemic
(pandemic) have now further threatened the
city's financial stability. If West Covina does not
implement immediate and long-term strategies
to control its expenditures and maximize its
revenue, it may be forced to reduce the services
it provides to its residents.
General Fund Reserves
As we reported in our November 2020 update
of our local government high risk dashboard, we
continue to designate West Covina at high risk
in several indicators of financial health. Based
on financial information from fiscal year 2016-
17, we initially reported that West Covina was
at high risk in five of the Io established risk
indicators. As Table i shows, the risk indicator
for its general fund reserves has since worsened
from moderate risk for fiscal year 2o16-17 to
high risk for fiscal years 2017-18 and 2018-19, a
consequence of city leadership relying on these
reserves to support the city's operations. Nearly
all of the city's other financial risk indicators
continue to be high risk or moderate risk.
By operating with a structural deficit —a
condition in which operating revenue is
insufficient to cover operating expenditures —
West Covina has diminished its general fund
reserves by more than half during the past
several fiscal years. Figure i shows that the city
reduced its year-end reserve balance
from $20.5 million at its recent peak in
fiscal year 2014-15 to $9.9 million in fiscal
year 2018-19. Although the city council adopted
balanced budgets for fiscal years 2ois—i6,
2016-17, and 2o18—i9, in each of these years,
city management subsequently requested —and
the city council approved —budget amendments
to increase expenditures significantly,
contributing to general fund deficits averaging
$3 million annually during each of those three
fiscal years. And although West Covina's general
fund revenue exceeded expenditures in
fiscal year 2017-18, city management
nevertheless reduced the city's general fund
reserve balance by $2.1 million primarily to
reclassify revenue that would not be available to
the city for discretionary purposes. By
continually choosing to reduce the city's
reserves, city leadership has left West Covina
vulnerable to unexpected expenditures or
reductions in anticipated revenue, thus
jeopardizing its ability to meet its financial
obligations without reducing services to
the community.
CALIFORNIA STATE AUDITOR
December202O I Report 2020-806
LOCAL HIGH RISK
Table 1
West Covina's Financial Risk Indicators Have Remained the Same or Worsened
Since Fiscal Year 2016-17
r 1
INDICATOR INDICATOR
EVALUATION EVALUATION
HIGH RISK
�-. MODERATE RISK M
LOW RISK LOW RISK
•. .. HIGH RISK HIGH RISK
HIGH RISK HIGH RISK
HIGH RISK LOW RISK
HIGH RISK HIGH RISK
OPEB Obligations*
OPEB Funding*
Source: State Auditor's local high risk dashboard at https://www.auditor.ca.gov/local-high-risk-dashboard.
* OPEB =Other Post -Employment Benefits
As of the end of October 2020, the city had not
completed its year-end closing procedures to
record all financial activity for fiscal
year 2019-2o.' Based on its financial records at
that time, the city projected a general fund
deficit for fiscal year 2019-2o resulting from its
general fund expenditures exceeding its
revenue by $904,000. During this time,
however, city management determined that the
city would be able to reclassify other revenue
that had previously not been available for
discretionary purposes and concluded that its
general fund reserve balance would increase to
$11.2 million. After the city completes its
' Because West Covina had not completed its year-end closing
procedures, its financial statements for fiscal year 2019-2o had not
been audited as of October 2020.
FISCAL YEAR
2018-19
year-end closing
procedures and
undergoes its annual
financial audit, it will
be able to confirm the
actual impact of its
financial activity on its
general fund reserves.
To the extent that the
financial activity
reported in its audited
financial statements is
consistent with its
projections, the city's
general fund reserve
balance for fiscal
year 2019-20 will have
increased slightly from
the prior year, although
the city will have
continued to maintain
a structural deficit.
City management has
described a number of
® strategies to improve
its financial condition,
such as finalizing a
$13.5 million land
sale to a development
firm, and it intends
to dedicate $8.6 million of the proceeds
from the sale to repay bond debt, leaving
$4.9 million available to replenish the reserve
balance. However, the structural nature of the
city's general fund deficits suggests that large
one-time revenue sources will be insufficient
on their own to reverse the city's negative
financial trend and rebuild its reserves.
If West Covina is unable to resolve its
structural deficit, it risks becoming embroiled
in the lengthy and complex process of declaring
municipal bankruptcy. Figure 2 summarizes
the process a city must follow and the
conditions it must satisfy to declare bankruptcy
and to obtain the assistance needed to continue
its operations. According to federal bankruptcy
law, a city's declaration of bankruptcy provides
CALIFORNIA STATE AUDITOR
Report202O-806 I December2020
LOCAL HIGH RISK
Figure 1
West Covina Reduced Its General Fund Reserve Balance by More Than Half From the End of Fiscal Year 2014-15 to the
End of Fiscal Year 2018-19
$20
c
0
w
c
A
A
rL
W
C
2014-15 2015-16 2016-17 2017-18 2018-19
Fiscal Year End
Source: West Owina's audited comprehensive annual financial reports for fiscal years 2014-15 through 2018-19.
protection from the city's creditors, then
allows it to adjust its debt while continuing its
day-to-day operations. However, bankruptcy
also results in significant ongoing legal costs
to a city, occupies a significant amount of staff
attention, and has a negative effect on a city's
credit rating. Municipal bankruptcy may also
result in lower levels of service to residents and
may impede a city's economic development
and maintenance of its infrastructure, such as
buildings and streets.
Substantial Citywide Financial Obligations
West Covina's largest financial burden is
its public safety costs, which include fire
department and police department expenditures.
Those costs totaled $58.1 million during fiscal
year 2ot8-19—including $53.1 million paid
from the general fund —and made up nearly
6o percent of the city's total expenditures.
From fiscal years 2014-15 through 2o18-19,
the amount of annual public safety costs the
city paid from its general fund increased by
$10.9 million, or 26 percent, primarily because
of rising salary and benefits costs. Moreover,
effective January 2o2o, the city council
approved new 12 percent salary raises for the
city's firefighters and police officers, which will
result in an estimated additional $2 million
per year of salary expenditures beginning
in fiscal year 2020-21, the first full year of
the raises.
Another of the city's significant financial burdens
is the cost of litigation. Until recently, the city
was a member of an insurance pool that covered
general liability losses greater than $i million,
while West Covina was responsible for paying
claim losses of up to $> million. Nevertheless, the
city budgeted for only $200,000 in self-insurance
CALIFORNIA STATE AUDITOR
December2020I Report 2020-806
LOCAL HIGH RISK
Figure 2
A City's Declaration of Bankruptcy Requires Negotiation With Stakeholders and Approval From the
Bankruptcy Court
To be eligible to decl,
Engage a NEUTRAL EVALUATOR to:
• Act as a mediator in negotiations between
the city and its stakeholders.
• Review documentation to assist in addressing
the city's obligations.
• Assistparties to reach asatistactoryresolution
of disputes resulting from the bankmptcy.
5 The city has become
r insolvent because it is
unable to pay its obligations
for the current fiscal year.
Declare a FISCAL EMERGENCY if it is unable
to pay its obligations within 60 days.
The city has negotiated with
its creditors in good faith but
has exhausted all possible
alternatives to achieve
The city has demonstrated
solvency. Such efforts could
a willingness to commit to
include the following:
a recovery plan to adjust
• atingor_
its debts.
outs
outsourcing se
• Renegotiating employee
salaries and benefits.
• Increasing faxes and tees.
• Restructuring its debt.
Source: Analysis of federal and state law, and Legislative Analyst's Offices and League of California Cities reports.
claim expenditures in fiscal year 2ot8—i9,
despite paying nine individual general liability
claims from fiscal years 2014-15 through
2017-18, each ranging between $221,000 and
$796,000. During fiscal year 2oi8—i9, West
Covina exceeded its budget for self-insurance
claims by $2.2 million, primarily because it
incurred greater litigation expenditures than
the city anticipated. The human resources
CALIFORNIA STATE AUDITOR
Report202O-806 I December202O
LOCAL HIGH RISK
fee of $1.6 million, membership in CJPIA
allows West Covina to pool its insurance
payments with the payments from other
members to cover general liability and
workers' compensation losses. In addition,
the city delegates its handling of liability
claims and settlement of claims to CJPIA. The
city manager anticipates that West Covinas
participation in CJPIAs risk management
director during that time described the claims program will reduce the amount and
that resulted in these higher expenditures as frequency of losses and decrease the city's
unexpected anomalies. The city subsequently cost of handling claims.
increased its budget for self-insurance claims
for fiscal years 2019-2o and 2020-21 to
$9o8,000 each year. Although the current
finance director stated that the previous city
management based this adjustment on an
analysis of claims in previous years, the city
still exceeded its budget for self-insurance
claims in fiscal year 2019-20 by $573,000,
or 63 percent. West Covina's current
human resources and risk management
director (human resources director) again
characterized the claims that caused these
expenditures as unanticipated anomalies.
West Covina exceeded
its budget for
self-insurance claims by
$2.2 million, primarily
because it incurred
greater litigation
expenditures than the
city anticipated.
After its former insurance pool stopped
offering services, West Covina became
a member of CJPIA in May 2020, which
the city manager asserts will help improve
the city's risk management practices and
control its litigation costs. For an annual
Nevertheless, under this agreement, the city
continues to be responsible for paying for
any of its losses up to $i million per claim.
Further, CJPIA has the right to cancel a
member's participation in its programs if it
determines that the frequency or severity of
that member's claims has an adverse impact
on other members. Thus, West Covinas
membership in CJPIA is not a substitute for
its city management's responsibility to budget
appropriately for litigation expenditures and
to minimize its general liability losses. To
ensure its continued ability to participate in
CJPIA, the city is collaborating with CJPIA
staff to prioritize and develop a plan to
resolve specific risk areas identified by CJPIA.
An additional significant expenditure
West Covina faces is its annual payment
to CalPERS. Each year, the city must make
payments to CAPERS for the cost of pension
benefits earned by its employees that year —
referred to as annual normal payments.
However, a city may also have to make
annual unfunded pension liability payments
(unfunded liability payments) to CaIPERS to
decrease the unfunded portion of its pension
liability. An entity's pension liability is the
total amount of benefits that its employees
and retirees have earned that the entity is
obligated to pay. The unfunded portion of this
liability is the difference between the entity's
total pension liability and the assets that the
entity has invested in its pension fund, which
CaIPERS maintains. West Covina incurred
an unfunded pension liability in part because,
CALIFORNIA STATE AUDITOR
December202O I Report 2020-806
LOCAL HIGH RISK
like many other California cities, it offered
pensions with favorable retirement benefits
to its employees, which increased its total
pension liability. Another contributing factor
was that the market value of its pension fund
assets decreased as a result of the financial
crisis of 2008 (financial crisis).
West Covina offered generous pension plans
to hundreds of employees that it hired before
2011, creating a significant, ongoing financial
obligation. Figure 3 shows that the city offered
pensions following retirement benefit formulas
that allow its public safety employees and
miscellaneous employees hired before 2011
to receive retirement payments amounting to
significant percentages of their highest -earned
salaries. West Covina's total pension liability
thus grew significantly in the years before
2o11 as the city continued to hire new
employees who were eligible to participate
in these pension plans. Further, its liability
has continued to increase since that time as
these employees have accumulated years of
service. In addition, because of the financial
crisis, CAPERS experienced large decreases in
the market value of the investments it held to
cover the cost of these retirement obligations.
The impact of these factors contributed to
West Covinas inability to maintain sufficient
funds invested with CAPERS, thereby resulting
in an unfunded pension liability.
Total pension liability
thus grew significantly
in the years before 2011
as the city continued
to hire new employees
who were eligible to
participate in these
pension plans.
In the aftermath of the financial crisis,
West Covina adjusted its retirement benefit
formulas for miscellaneous employees and
public safety employees hired in 2011 and
2012. These formulas were further revised
for both categories of employees when the
State Legislature passed the Public Employees'
Pension Reform Act of 2013 (PEPRA) in part
to establish specific retirement formulas for
new public employees. The overall effect of
the changes in the formulas was to decrease
the percentage of employees' salaries used in
determining their retirement benefits and to
increase the minimum age for employees to
be eligible to receive benefits. Under these
new formulas, West Covina's future pension
obligations for more recently hired employees
will be lower than its obligations for employees
hired before 2o11. Nevertheless, as Figure 3
shows, the city remains obligated to pay the
larger retirement benefits it offered employees
hired before the city revised its retirement
formulas and PEPRA was enacted, including at
least 156 active employees who had not retired
as of June 2019.
Specifically, West Covinas unfunded pension
liability grew from $128 million in June 2015 to
$187 million in June 2o19, an increase of
45 percent in four years. The city's unfunded
liability has continued to increase over time
for additional reasons:
Ca1PERS has decreased its expected rate of
return on its investments.
West Covina has given its employees raises,
which increase their salary base for benefits.
The population of retirees has tended to
live longer and draw upon pension assets
for longer than initially anticipated. As of
June 2019, the city had 278 active employees
contributing to CalPERS and 792 retirees
receiving pension benefits, including
78 individuals who have been retired for
more than 20 years.
CALIFORNIA STATE AUDITOR 9
Report202O-806 I December2020
LOCAL HIGH RISK
Figure 3
Before 2011 West Covina Offered Generous Pension Plans That Increased Its Pension Liability
Example
PUBLIC SAFETY EMPLOYEE
Hired before 2011
• Started working for city at age 25.
• Retired from city at age 50.
• Received retirement benefits based on
highest -earned salary of $100,000.
• Retirement formula: 3 percent at age 50.
25 years of service
x 3 percent of salary per year
— 75 percent of $100,000
_ $75,000 retirement
benefit per year for life
V
Example
MISCELLANEOUS EMPLOYEE
Hired before 2011
• Started working for city at age 25.
• Retired from city at age 55.
• Received retirement benefits based on
highest -earned salary of $100,000.
• Retirement formula: 2.5 percent at age 55.
30 years of service
x 2.5 percent of salary per year
— 75 percent of $lOQ,000
$75,000 retirement
benefit per year for life
Number of Pre-2011 Pension Plan Participants as of June 2019 *
At least 96 of 151 active employees At least 60 of 126 active employees
- Up to 211 retired employees I - Up to 359 retired employees
Source: Analysis of CalPERS annual valuation reports as of June 2019 and city benefits schedule.
" Data from CalPERS valuation reports do not provide specific detail to determine the exact number ofemployees and retirees who enrolled in
pension plans before 2011.
As a consequence of its growing unfunded
pension liability, the city's annual payments
to CalPERS increased from $8.8 million
in fiscal year 2017-18 to $13.5 million in
fiscal year 2020-21. Ca1PERS projected in its
annual valuation report as of June 2oi9 that
the amount of the city's unfunded liability
payments would grow to a high of $21 million
in fiscal year 2029-3o, an increase of
138 percent from fiscal year 2017-18.
In an attempt to address its large unfunded
pension liability, the city issued $204 million
in municipal bonds in July 202o and
concurrently transferred $186 million of
the bond proceeds to Ca1PERS, thereby
increasing the amount of funds CalPERS
invests on the city's behalf to about 97 percent
of the city's total pension liability. As a result,
the city will begin making significantly
lower annual unfunded liability payments
10 CALIFORNIA STATE AUDITOR
December2020I Report 2020-806
LOCAL HIGH RISK
although it will continue to make its annual
normal payments to CalPERS. However,
the city must now pay back the bond debt
it acquired, at an average annual interest
rate of 3.7 percent. Under the terms of the
bond agreement, the city is required to make
annual bond debt payments for 25 years.
Those payments will gradually increase
from $10.9 million in fiscal year 2021-22
to $16.4 million in fiscal year 2044-45• The
lower cost of the bond payments compared
to its planned CalPERS payments will initially
reduce the city's total annual expenditures
by about $6 million annually, and the city
estimates that its total savings during the
25-year period of the bond will be about
$53 million. Nevertheless, this reduction still
may not entirely resolve the city's structural
deficit if city management cannot control its
increasing expenditures.
Although the city's payment of its bond
revenue to CalPERS reduced its unfunded
pension liability to only 3 percent of its total
pension liability, its approach carries risks.
For example, if CalPERS achieves lower
than expected or negative returns on its
overall investment portfolio, the value of the
investments that CalPERS holds on West
Covinas behalf will decrease, creating more
unfunded liability. Such poor performance
is not unprecedented: CalPERS returned
3.7 percent or less in eight of 21 years from
fiscal years 1998-99 through 2018-19,
most recently in fiscal year 2oi5—i6. Most
significantly, in the aftermath of the financial
crisis, CAPERS experienced a 24.8 percent
decline in the value of its investment portfolio
in fiscal year 2008—o9• Aside from the
potential for increased unfunded liability
payments each year, West Covina could
experience a loss on its overall investments
if CAPERS' rate of return ultimately ends up
being less than the interest rate the city pays
on the bonds.
Additionally, the city had an unfunded
liability of $59 million as of June 2019
pertaining to its retirement health care
benefits —known as other post -employment
benefits (OPEB). The city's unfunded OPEB
liability grew AS percent in four years, from
$2o.6 million in June 2015 to the $59 million
most recently reported by CalPERS. However,
city management has not developed a plan
to reduce this obligation. The city manager
informed us that his first priority was to
address the city's unfunded pension liability
before considering strategies to address the
OPEB liability.
Significant Fire Department Expenditures and
Budget Overages
The consistently excessive costs incurred
by West Covinas fire department represent
another substantial cost burden to the city.
Table 2 shows that in the four years from
fiscal years 2015-16 through 2018-19, the
fire department exceeded its total budgeted
expenditures by an average of $1.6 million
annually. The primary cause of the fire
department exceeding its budget was its
excessive overtime costs —a component of
its total expenditures. For example, the fire
department exceeded its budgeted overtime
costs for fiscal year 2o18—i9 by $1.4 million,
which accounted for nearly all of the
department's total budget overage in that
fiscal year.
The fire chief told the city council that once
the department became fully staffed, it would
no longer need to incur excessive overtime
costs to ensure that it had the required
number of firefighters available on a given
day. As we discuss later in this report, the
city attempted to address its fire department
costs by approving raises in November 2019
that became effective in January 2020, which
the fire chief believed would allow him to
hire and retain a sufficient number of staff.
After approving the raises, the department
became fully staffed in the first half of
fiscal year 2019-2o. Nevertheless, even after
the fire department became fully staffed, it
still exceeded its fiscal year 2019-2o budget
CALIFORNIA STATE AUDITOR
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LOCAL HIGH RISK
Table 2
The Fire Department Has Routinely Exceeded Its Budget, Primarily Because of Excessive Overtime Costs
(dollars in millions)
FIRE DEPARTMENT'S TOTAL COSTS
FIRE DEPARTMENT'S OVERTIME COSTS
2015-16 $17.5 $18.3 $0.8(5%)
$1.3 $2.7
$1.4(108%)
2016-17 17.6 19.9 2.303%)
1.2 2.9
1.7(142%)
2017-18 17.9 19S 1.6 (9%)
1.8 3.6
1.8 (100%)
2018-19 19.3 20.8 1.5 (8%)
1.8 3.2
1.4 (78%)
2019-20 20.4 22.5 2.1(10%)
2.1 2.6
0.5(24%)
Average over budget (fiscal years $1 6 (9%)
Average over budget (fiscal years
$1.6 (107%)
2015-16 through 2018-19)
2015-16 through 2018-19)
Source: West Covina's budgets and financial reports
for overtime costs by $490,000. Further, in
that same year, it exceeded its overall budget
by $2.1 million. Although the high overtime
costs may have partially been attributable to
the department's not being fully staffed for
the entire year, the fact that it exceeded its
overall budget by such a significant amount
suggests that other factors have contributed
to its overspending.
Even after the fire
department became
fully staffed, it still
exceeded its fiscal
year 2019 20 budget
for overtime costs
by $490, 000.
When preparing its budget for fiscal
year 2020-21, the fire department reduced
its projected overtime costs to only $S68,000.
However, we question whether this estimate
is realistic, particularly given that it incurred
$2.6 million of overtime expenditures during
fiscal year 2019-20, when it was fully staffed
for the latter half of that year. Further, the fire
department has consistently demonstrated its
inability to adhere to its budgets for overtime.
To address the excessive costs of its fire
department, West Covina is pursuing
alternatives to its current method of fire
service delivery. Specifically, it is considering
either contracting for its fire services with the
Los Angeles County Fire Department (county
fire department) or reducing its number of
firefighter paramedics and contracting with a
less costly private ambulance service. Under
the first option, the city could potentially
reduce costs by no longer having to pay
salary, benefits, maintenance, or equipment
costs. Instead, it would pay the county fire
department an annual fee that the fire chief
estimates would be lower than the city's
current costs and remain lower than the
city's projected future costs, though the city's
forecast did not account for the county's
annual fee increasing more substantially after
the first five years of the contract. Under the
second option, the contracted ambulance
service would provide patient transport that
the city's fire department currently handles,
allowing the city to reduce the number of
firefighter paramedics it pays. However,
1E
CALIFORNIA STATE AUDITOR
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the city did not develop a forecast of the
ambulance service's expected costs or the
city's potential cost savings or revenue loss.
In response to our request for a cost analysis
of potential fire service delivery options, city
management provided draft agreements
with the county and the ambulance service.
However, city management could not
demonstrate that it has performed a specific
analysis comparing the long-term costs of
the two alternatives. If the city does not
find a more cost-effective option to provide
services, it will likely need to continue to draw
upon its general fund reserves to meet its fire
department's high costs. Alternatively, if the
city directs the fire department to restrict
off -duty firefighters from working overtime
to cover for absences or temporary vacancies,
the city may be forced to temporarily close
fire stations that do not meet minimum
required staffing levels on certain days when
backup is unavailable. Consequently, West
Covinas residents and businesses could
receive reduced levels of fire and emergency
medical services.
The Financiallmpact of the Pandemic
Although West Covina appears to have
withstood the financial impact of the pandemic
on its fiscal year 2019-20 revenue, it has
likely underestimated the effect the pandemic
will have on its fiscal year 2020-21 budget.
In May zozo, the city manager submitted a
staff report to West Covina's mayor and city
council proposing that the city declare a fiscal
emergency. The accompanying resolution
included an estimate of potential budget
impacts associated with the pandemic that the
finance director had developed in April. The
estimate concluded that the city would not
receive $2.8 million of general fund revenue
that it had anticipated in its fiscal year 2019-20
budget. However, it appears that the initial
financial impact to the city was not as severe
as this estimate projected. As of the end of
October 2020, the city had recorded actual
revenue of $69.2 million for fiscal year 2019-20,
which was $782,000 more than the budget it
adopted before the start of the pandemic.
West Covina was in the process of developing
its annual budget for fiscal year 2020-21
during the initial months of the pandemic.
The final budget that the city council adopted
included a projection of $66.7 million of
general fund revenue for that year. However,
this projection was only $2.5 million less than
the total general fund revenue the city had
recorded for fiscal year 2019-20. We find this
problematic given that the city experienced
the negative effects of the pandemic in only
a single quarter of fiscal year 2019-2o—after
the State and Los Angeles County issued
stay-at-home orders in March zozo—and
numerous health research organizations
predict that governments will continue
to address the pandemic through all of
fiscal year 2020-21.
The finance director explained that to develop
her revenue projection for fiscal year 2020-21,
she considered her April zozo estimate of
the impact of the pandemic on the city's
fiscal year 2019-2o revenue, tax revenue
forecasts that one of the city's consultants
created, and the annual revenue that the city
had received historically. Specifically, the
finance director estimated the revenue that
the city would have received if the pandemic
had not occurred and then reduced it by
an amount comparable to the effect that
she estimated the pandemic would have on
fiscal year 2019-2o revenue. However, she
could not provide specific documentation
supporting her analysis and could not
demonstrate the reasonableness of her
estimates. Further, the finance director did not
factor in the likelihood that a greater portion
of fiscal year 2020-21 would be affected
by the pandemic than fiscal year 2019-20.
As a result, we believe that the city's
projection is overly optimistic and does not
adequately account for the uncertainty of the
pandemic's duration.
We believe that the
city's projection is
overly optimistic and
does not adequately
account for the
uncertainty of the
pandemic's duration.
Moreover, West Covina did not appear to
take into consideration the impact of the
pandemic on specific sources of revenue when
developing its overall revenue projection
for fiscal year 2020-21. Many of the city's
sources of revenue are dependent on the city's
level of economic activity. For example, in
fiscal year 2019-20, West Covina received
$6 million from charges for city services such
as recreation programs and facility rentals.
For fiscal year 2020-21, the city budgeted
$7.1 million for this revenue category —
an increase of $1.1 million —despite the
effects of the pandemic likely resulting in
decreased use of these city services because
of social -distancing orders. Similarly, West
Covinds transient occupancy tax —a surcharge
on hotel stays and other forms of lodging —
directly relates to tourism and business travel.
As expected, the city experienced a reduction
in this revenue from its budget of $1.9 million
to actual revenue of $1.s million in fiscal
year 2019-2o because of the lower volume of
travel. Nevertheless, West Covina once again
budgeted $1.9 million in revenue from its
transient occupancy tax in fiscal year 2020-21.
If these and other revenue sources decline
as the pandemic persists, West Covinas
revenue for fiscal year 2020-21 may be
significantly lower than it projected in its
budget. The city already projected in its
fiscal year 2020-21 budget that its total
general fund expenditures would equal its
total general fund revenue. If the city's actual
CALIFORNIA STATE AUDITOR
Report202O-806 I December202O
LOCAL HIGH RISK
revenue falls short of its expectations because
of the pandemic, city leadership will be forced
to reduce the city's expenditures or further
deplete its general fund reserves.
Recommendations to Address This Risk
After it completes its land sale, West
Covina should set aside the resulting
revenue to compensate for any shortfalls
in revenue that it experiences as a result
of its underestimates of the effects of
the pandemic on its fiscal year 2o2o-21
budget. It should use any remaining
revenue from the land sale not already
committed to repay bond debt to
replenish its general fund reserves.
To ensure that it manages those
litigation costs for which it will continue
to be responsible, West Covina should
use historical data and other reasonable
assumptions to develop budgets for the
costs of claim payments.
To ensure that it can continue to
maintain its membership in CJPIA,
West Covina should develop a plan
to manage its risks and exposure
to litigation.
To address the excessive costs it
currently incurs providing fire and
emergency medical services, West
Covina should perform cost -benefit
analyses of the other options that it has
identifiedfor procuring these services.
• To better ensure its ongoing
financial stability, West Covina
should implement a process for
better developing reasonable budget
projections that adequately account for
the impact that significant events may
have on revenue.
CALIFORNIA STATE AUDITOR
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LOCAL HIGH RISK
Despite West Covina's Continual Budget
Shortfalls, City Leadership Has Made
Questionable Decisions Regarding Its Use
of Resources
The questionable decisions of West Covina's
leadership regarding the city's use of resources
have resulted in significant reductions to its
financial reserves. For example, the city pays
a greater share of its employees' health care
benefit premiums than the average share
paid by other government organizations.
According to a 2020 U.S. Bureau of Labor
Statistics survey, state and local governments
in the West Coast region pay on average
about 86 percent of benefit premiums
for employees with employee -only plans
and 75 percent for employees with family
plans. In fiscal year 2019-20, West Covina
contributed 95 percent of its employees'
total health care premiums. If the city had
instead contributed 86 percent, it would
have saved about $329,000 in general fund
expenditures in fiscal year 2019-2o, and if
it had contributed 75 percent, it would have
saved about $726,000.'
City management recently negotiated with the
various employee unions to reduce the city's
expenditures for employee benefits; however,
most of these are temporary reductions and
will not significantly affect West Covinas
long-term financial health. After declaring a
fiscal emergency in May 202o because of the
pandemic, city management negotiated with
its employee unions to temporarily suspend
or reduce certain employment benefits. From
July 2020 to October zozo, the city council
approved agreements with various employee
unions that suspended certain benefits for
six-month periods. For example, the unions
agreed to have their represented employees
increase their contributions to their CaIPERS
1 West Covina's human resources records do not provide
specific detail on the number of city employees enrolled in
employee -only plans and the number of employees enrolled in
family plans. Consequently, we did not have the information that
would allow us to calculate the actual savings.
retirement plans by 3 percent to io percent.
The unions also agreed to allow the city to
suspend its contributions to the retiree health
savings plan and to suspend cash payments for
unused sick leave balances? City management
estimates it will achieve savings of $i million
from these reductions.
The city also took actions to temporarily
reduce its costs related to its management's
benefits. Specifically, department directors
throughout the city agreed to a io percent
reduction in the city's payment of their
health insurance premiums and other benefit
contributions from July 2020 through
December 2020. The city manager similarly
agreed to an n.s percent reduction in the
city's contributions to his benefits, including
his health savings plan, health insurance, and
vehicle allowance. These temporary benefit
reductions are reasonable actions to address
the short-term impact of the pandemic, but
they are not a long-term solution to improve
the city's financial condition. Once the effects
of the pandemic subside, the city would
benefit from negotiating similar reductions
with its employees for a longer period as part
of its effort to eliminate its structural deficit.
In addition, city management has not
adjusted the fees it charges for services so
that they align with the full cost to the city
of those services. When its fees do not cover
its costs, West Covina has been relying on
the city's general fund revenue to subsidize
those services. Under state law, the city may
establish its fees at levels that would allow it to
recoup the full cost of the services it provides
without exceeding those costs —
a concept referred to as full cost recovery.
However, until recently, the city's leadership
did not calculate the full costs of its services
so that it could adjust its 741 distinct fees
3 A retiree health savings plan is a savings account that the
employee and the city contribute to regularly to cover future
medical costs upon the employee's retirement. Upon retirement,
the employee is eligible to receive annual payments based on
years of service that may be used for medical care.
accordingly. As communicated in a staff
report to the city council, the city hired a
consultant in 1993 to determine the costs of
its services, and city management relied on
that analysis for more than 20 years when
updating the city's fees. Consequently, the
city established hundreds of its fees at levels
significantly lower than full cost recovery and
did not charge fees for some services.
Although West Covina increased some of its
fees in fiscal year 2017-18, it is still charging
less than full cost recovery for a significant
number of services. In September 2015,
the city contracted with a consultant to
identify the full cost of providing its various
categories of services. The text box describes
examples of city departments that charge
fees for services and the types of services
they provide. The consultant found that the
city had set more than 400 fees lower than
full cost recovery. City staff then compared
the full cost for each service with the fee
charged and recommended a suggested fee
level. The consultant presented both the full
cost recovery amount and the city's suggested
fee for each service in a report it issued in
April 2017. The city council subsequently
adopted all of the suggested fees to take effect
in fiscal year 2017-18.
Though most of the suggested fee levels were
at full cost recovery, the city chose not to
increase some fees to the full cost recovery
amounts that the fee study identified. In
particular, we identified 55 building fees for
which the city council adopted fee amounts
that were an average of 6o percent less
than full cost recovery. When adopting
the fiscal year 2017-18 fee schedule, the
city did not explicitly provide a rationale
for establishing these fees below full cost
recovery. The consultant stated in its report
that the city's primary intention was to
create a comprehensive and up-to-date fee
schedule and that city staff made the ultimate
determination of the suggested fees.
CALIFORNIA STATE AUDITOR
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LOCAL HIGH RISK
Examples of City Fees
The 2017 fee study evaluated fees at the following six
city departments:
Planning Fire
Public Works Community Services
Police Finance and Administrative Services
These departments provide services that are grouped
among 30 categories, including the following:
Engineering permits
Building permit and construction plan review
Fire suppression inspection
Source: West Covina 2017 Fee Study.
In fiscal year 2019-20, city management
increased some of its engineering and
building fees above their fiscal year 2017-18
amounts but continued its approach of
not raising all building fees to levels that
would achieve full cost recovery. When
increasing the fees, city management
reported that it based the amounts on Los
Angeles County's fees for similar services,
which city management noted is a common
practice among cities. City management
informed the city council that it adjusted
the city's engineering fees to amounts
equaling the county's fees and adjusted the
city's building fees to amounts reflective of
the county's fees marked up by 65 percent,
which city management justified based on
the city's unique topography and quality of
construction. However, the city adjusted 39 of
the 55 building fees that it had set below full
cost recovery in 2017 to levels that continue
to be 6 percent to 97 percent lower than the
amounts that the consultant had identified in
2017 as necessary to fully cover the city's cost
of providing the services.
Our review of a selection of building permits
indicates that the city has been missing an
opportunity to maximize its revenue each
year because it charges less than full cost
CALIFORNIA STATE AUDITOR
December2020I Report 2020-806
LOCAL HIGH RISK
recovery. The city does not maintain sufficient
detail in its records to allow us to determine
the total revenue it has forgone by charging
less than full cost recovery for its engineering
and building services because a single permit
contains multiple fees, not all of which are
set below full cost recovery. However, to
provide some context, we reviewed individual
building services fees that the city charged for
the plumbing and electrical permits of four
construction projects. Based on that review,
we estimate that the city's decision not to
adjust fees for its plumbing and electrical
permit services for full cost recovery likely
cost it about sigi,000 in forgone revenue from
these four projects alone. West Covina issued
803 electrical permits and 466 plumbing
permits in 2019, which underscores the
magnitude of the missed opportunity.
Moreover, those two services accounted for
less than 20 percent of the city's budgeted
revenue pertaining to the building division in
fiscal year 2019-20, meaning that the impact
of undercharging for other services may also
be substantial. Although city management may
prefer not to burden residents and businesses
by increasing all of its fees at once, increasing
the fees in phases over several years would
allow it to align the fees with its actual costs,
while recognizing some amount of additional
revenue during the interim.
Recommendations to Address This Risk
To limit its costs related to employee
health care benefits, West Covina
should renegotiate employee union
agreements once the effects of the
pandemic subside so that its employees
contribute a reasonable percentage
of their premiums. To determine that
percentage, West Covina should consider
options such as using survey data from
comparably sized cities in its region.
To ensure that the fees it charges for
services align with its costs, West Covina
should use a phased approach that
steadily increases its fees each fiscal
year until they fully cover the costs of
the services it provides. It should also
reassess the full costs of its services at
least every three years.
The City's Management Failed to Perform
Sufficient Analyses When Making Important
Financial Decisions
City management did not always provide
complete information to the city council
when requesting approval for budgetary
or organizational changes. For example, in
November 2019, the fire chief requested that
the city council approve 12 percent salary
raises for firefighters following contract
negotiations between city representatives and
the firefighters union. The fire chief defended
the proposal by asserting that the raises
would save money in the long term because
competitive salaries would attract and retain
firefighters, thus allowing him to fully staff the
fire department and reduce overtime costs.
However, he did not present a documented
analysis to support this assertion. Although
city council members questioned the lack
of analysis and expressed concern that the
chief was unable to demonstrate how the
raises would decrease overtime costs, the city
council approved the raises without requiring
the fire chief to provide a cost -benefit analysis.
As we discuss previously, the fire department
continued to exceed its budget for overtime
expenditures despite becoming fully staffed
in fiscal year 2019-20. The recurrence of such
overspending underscores the importance
of performing thorough analyses to justify
significant financial decisions.
In another instance, city management
requested that the city council approve a
plan to reduce costs by reorganizing the
city's community services, planning, and
public works departments. City management
estimated that the reorganization would save
about $275,000 per year, including $125,000
from the general fund, primarily by eliminating
two management positions, including the
public works director who also served as the
city engineer. However, city management
noted that those estimated savings excluded
the cost of contracting for a city engineer,
which staff had not quantified because they
had not yet sought proposals. The city council
approved the plan in October 2oi8 without
questioning the lack of information about the
costs of contracting for replacement services.
In November 2018, the city contracted with
a firm to provide city engineering services
at a cost of $95,000 for fiscal year 2018-19.
In April 2019, city management requested a
budget amendment, increasing that contract to
$145,000. Ultimately, the city council's decision
to approve the reorganization resulted in cost
savings for the city in fiscal year 2oi8—i9 of less
than half of the amount that city management
originally claimed.
In addition to its insufficient analyses of the
effects of its firefighter raises and department
reorganization, city management did not
thoroughly address West Covina's long-term
financial outlook until after our initial
assessment in January 2020. Given the city's
ongoing deteriorating financial condition,
we expected that it would have a process
for developing projections of its planned
expenditures and anticipated revenue for the
next several years. In fact, the Government
Finance Officers Association (GFOA)
recommends that cities prepare multiyear
revenue and expenditure forecasts as part
of their annual budget process to determine
the likelihood that they can sustain services
and to highlight future financial issues they
will need to address. However, the current
city management had not performed fiscal
forecasting of this nature before we conducted
our assessment. At that time, we requested
that West Covina's management provide
us with any financial forecasts the city had
CALIFORNIA STATE AUDITOR
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LOCAL HIGH RISK
developed. Although the finance director
found a document labeled as a five-year
forecast, she was unfamiliar with its source or
the context of its creation, and she informed
us that the city was not using the information
from the document for any current budgeting
or forecasting efforts.
Had city management routinely developed
multiyear forecasts, city leadership would
have likely had greater insight when making
long-term decisions, such as approving
budget amendments and salary increases.
Such forecasting would also have informed
the city council of the city's financial outlook
beyond the next fiscal year. In April 2020,
the city contracted with a consultant to
prepare a forecast for the period from fiscal
years 2020-21 through 2026-27. In June 2020,
the consultant provided the city with a
spreadsheet showing a general fund financial
forecast based on data from April 2020.
The forecasting model included anticipated
revenue and expenditures, the resulting
projected trend of its general fund reserves,
and placeholders to input assumptions
such as tax rates and salary increases. In his
delivery of the forecasting model to the city,
the consultant noted that maintaining the
multiyear forecast should be an ongoing effort
and that the city should update it frequently
with current projections and new assumptions
so that it can better anticipate its fiscal needs.
City management included in the forecasting
model the potential cost savings of issuing
the bonds to reduce its unfunded pension
liability we previously discussed, and
concluded that the city could quickly rebuild
its financial reserves by replacing its unfunded
liability payments with lower annual debt
payments. However, as of October 2020,
city management had not yet added
several key assumptions into the forecast.
These assumptions include rising salary
costs, anticipated litigation expenditures,
planned but unfunded capital improvement
projects, long-term OPEB obligations,
and the full anticipated amount of lost tax
17
CALIFORNIA STATE AUDITOR
December2020I Report 2020-806
LOCAL HIGH RISK
revenue resulting from the pandemic. City
management has also not included in its
forecast all of the additional revenue and
reduced expenditures that it anticipates the
city will receive or incur from the actions
it intends to implement to improve the
city's financial condition. Until the city
updates its financial forecast with accurate,
comprehensive financial information, city
leadership will continue to make decisions
based on incomplete information. As a result,
these decisions are unlikely to fully address
current or upcoming challenges.
Recommendations to Address This Risk
To ensure the effectiveness of the cost
savings proposals it adopts, West
Covina should require such proposals
to clearly identify and support how they
will deliver cost savings and the extent
of those savings.
To ensure that city management
and the city council are able to make
informed, rational decisions, West
Covina should update its multiyear
financial forecast at least annually
to include all projected revenue and
expenditures and to add information
on new assumptions, unanticipated
costs, and cost -saving actions. It should
then use the forecast to quantify the
long-term impact of its decisions on the
city's financial condition.
West Covina's Management Has Not Adopted
a Comprehensive Financial Recovery Plan to
Improve the City's Fiscal Condition
Despite operating with yearly structural
deficits and significantly declining reserves,
city leadership has not developed a
comprehensive financial recovery plan to
improve its long-term financial health or to
address the specific issues we discuss in this
report. The city's general fund reserve balance
policy requires city management to maintain
a reserve balance of 17 percent of the city's
annual general fund operating expenditures.
This threshold represents the equivalent
of two months of reserves —the minimum
amount that the GFOA recommends. The
policy further requires city management
to develop an approach for rebuilding the
reserves within three years if the balance
falls below 17 percent. Because the reserve
balance dropped to 14.4 percent at the end
of fiscal year 2018-19, we elevated West
Covinas risk indicator for its general fund
reserves to high risk in our updated local high
risk dashboard. Although city management
described a number of strategies it intends
to implement to improve the city's financial
condition, it has not developed a formal
approach to rebuilding its reserve. According
to the finance director, city management's
current approach is to rebuild the reserves
through savings generated when the city's
bond debt payments are lower than the
unfunded liability payments it would
have paid.
In addition to following the requirements
of the city's financial reserve policy, city
leadership would benefit from creating
a formalized financial recovery plan to
ensure that it identifies the most effective
combination of strategies to address its
financial condition and that it remains
committed to implementing its strategies.
The GFOA notes that a written financial
recovery plan is a useful tool that can identify
key strategies, help city leadership focus its
direction, and give its stakeholders greater
confidence in the recovery process. The
GFOA further explains that key elements of
an effective financial recovery plan include
financial forecasts and an operational action
plan. Presently, city leadership lacks a formal
approach for committing resources to
perform the actions it has described to us or
for analyzing the intended financial results of
those efforts. Further, city leadership has not
implemented timelines, progress monitoring,
or reporting to ensure that it follows through
on its commitments.
By creating a comprehensive financial
recovery plan with the characteristics we
describe above, city leadership can introduce
multiple levels of accountability into its
fiscal recovery process. This accountability is
particularly critical for providing consistency
in goals and actions when the city experiences
turnover among its managers, which has
occurred repeatedly in recent years. From
fiscal years 2012-13 through 2019-20, the
city had five different city managers and
eight finance directors, including individuals
serving in interim or acting positions.
Without a written financial recovery plan
that is sustainable over time and across all
levels of leadership, the city will be unlikely
to follow through on the actions its current
management has described.
Such a plan would also provide the
city council with a means to hold city
management accountable because it would
provide the council with benchmarks for
determining whether the city is making
adequate progress over time. Such a plan
could withstand any turnover among city
council members and provide future council
members with a basis for evaluating the city's
performance. Finally, a formalized plan would
give stakeholders, including city residents,
greater assurance that the city is taking steps
to improve its financial condition, as well as
a means to evaluate the city's performance.
With access to a documented plan, residents
could be informed and prepared to ask
specific questions about the city's progress at
city council meetings.
CALIFORNIA STATE AUDITOR
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Recommendation to Address This Risk
To ensure accountability in its fiscal
recovery process, West Covina should
develop a financial recovery plan by
June 2o2i that describes its intended
corrective actions, prioritizes its resources,
identifies individuals responsible for
monitoring its progress in implementing
each action, and outlines when it
anticipates completing key milestones
related to each action. City management
should also inform the city council
quarterly of the city's progress in
implementing the plan.
20 CALIFORNIA STATE AUDITOR
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West Covina's Weak Enforcement of Its
Procurement Policy Increases the Risk of
Waste and Fraud
The City Has Inadequately Managed
Components of Its Purchasing Card Processes
West Covina has not consistently followed
its administrative processes for purchasing
goods and services. Although the city has
developed policies and procedures for its
procurement activities, our review of selected
transactions identified a number of instances
when staff did not comply with these policies
and procedures. For example, the city
established a formal purchase card program
to provide an efficient, cost-effective method
of paying for purchases of $2,500 or less. The
$2,500 limit is significant because purchase
card transactions do not require preapproval,
unlike purchases using contracts or purchase
orders. When city employees need to use a
purchase card to purchase items above this
threshold, they may request an exemption —
referred to as a temporary increase —by
completing a request form for a specific,
defined purchase that includes a clear
justification and the time frame during which
the purchase will be made. However, for the
three purchase card transactions that we
reviewed for purchases greater than $2,500,
the city had insufficient documentation
demonstrating that managers had authorized
temporary increases.
In the first instance, the finance department
did not prepare a request form to seek a
temporary increase for its purchase of several
laptop computers in March 2020, for a total
cost of $6,185• According to the finance
director, the department needed the laptops
so that some of its staff members could work
from home at the onset of the pandemic. The
finance department used its purchase card
because it wanted to acquire laptops that were
immediately available from a store. When we
asked the city manager about the purchases,
he explained that he verbally approved
the purchase of the laptops for the finance
department. However, the city's policy
requires such approvals to be documented on
a request form.
In the second instance, the finance director
approved a request form for the public
services department to purchase two
computers in December 2019, at a total cost
Of $4,853• However, that request form is
undated, raising concerns about whether the
temporary increase was actually authorized
before the purchase was made. The finance
director acknowledged that the undated
approval of the increase for these computers
was an oversight.
Finally, in the third instance, multiple city
officials approved two temporary increases
in July and August 2019 for automotive
repairs totaling $7,455• Although both
request forms included the required approval
signatures, the staff member who requested
the increases did not provide a description
of the transaction on one of the forms or
the time frame on either form. When we
asked about the missing time frame, the city
manager and finance director informed us
that the increases were permanent, despite
city policy stating that transaction limit
increases should exist for only a limited
period. The lack of specific restrictions for
the temporary increase could have resulted
in the staff member purchasing an item or
service of more than $2,500 that did not
meet the intent of those who authorized the
22 CALIFORNIA STATE AUDITOR
December2020I Report 2020-806
LOCAL HIGH RISK
transaction. Moreover, the city manager did not
provide an explanation for why he authorized
the temporary increase for the request form
that did not describe the transaction.
The weaknesses in documentation of
purchase approvals may be indicative of
systemic issues that, if left unaddressed,
could result in increased risk of excessive
expenditures or potential fraud. In total, the
three purchase card transactions we reviewed
involved nearly $u,000 of costs beyond
the standard limit that did not follow the
city's procurement requirements for proper
preapproval. A July 201S audit of West Covinds
administrative and accounting controls by
the State Controller's Office (SCO) identified
similar deficiencies in the city's use of purchase
cards from July 2011 through June 2013. That
review questioned the appropriateness of
$32,219, or 22 percent, of the city's purchase
card activity during that period, including
many expenditures incurred or directed by
former city managers. The SCO recommended
that the city implement management processes
to ensure proper review and approval of
charges relating to the expenditure categories
about which it had concerns: meals, lodging,
and incidental expenditures. Our review
determined that city management is not
ensuring that staff follow policies and
procedures for using purchase cards for other
types of purchases.
Recommendation to Address This Risk
To ensure that its purchases align with its
needs, West Covina should adhere to its
purchase card program policies, including
effectively documenting its management's
approval of temporary increases in
purchase card limits.
West Covina Has Failed to Ensure That Its
Contracting Practices Result in Contracts
That Provide the Best Value to the City
and Community
West Covina violated its competitive bidding
requirements when it contracted with a
consulting firm to provide human resources
and claims administration services from
November 2019 through October 2020.
Under the provisions of this contract, West
Covina agreed to pay the consulting firm a
maximum of $29,000 to provide a variety of
personnel -related services, including work
related to general liability claims, workers'
compensation, and some of the city's insurance
policies. According to the city manager, the
city experienced significant turnover among
its risk management staff soon after it hired
its current human resources director in
September 2019, which prompted the city to
seek an external resource to provide those
services. The human resources director
recommended the consulting firm to the city
based on her knowledge of the firm through
her previous employer. However, under West
Covina's contracting policy for professional
and consulting services, the city should have
used a competitive bidding process that would
have enabled it to compare firms to ensure
that it received the best value. The policy states
that for professional and consultant services
valued from $20,001 through $30,000, the city
is required to obtain price quotations from a
minimum of three vendors. Although West
Covina's accounting records show that the
consulting firm did not invoice for services
beyond March zozo, the city nevertheless paid
$12,550 for the firms services without assurance
that the contract represented the best value.
Further, West Covina approved multiple
amendments to its contract with a waste
collection company that include terms that
may not be in the best interest of the city and
its residents. West Covina's waste collection
contract is a franchise agreement that
establishes the waste collection company's
exclusive right to engage in the business of
collecting solid waste, recyclables, and other
waste within the boundaries of the city. In
exchange for this right, the waste collection
company pays the city a franchise fee of
10 percent of its gross receipts resulting from
the agreement. The contract also specifies
the rates that the waste collection company
can charge to residents and businesses for
its services and authorizes the company to
request an annual rate increase in accordance
with the consumer price index. This type of
arrangement appears to be common among
similar cities in Los Angeles County.
West Covina approved
multiple amendments
to its contract with
a waste collection
company that include
terms that may not
be in the best interest
of the city and
its residents.
As Figure 4 shows, West Covina initially
contracted with the waste collection company
in 1992. However, the contract contained a
clause that annually extended the contract's
duration by one year, thereby ensuring it
maintained an ongoing service period of
eight years (known as an evergreen period.
In other words, in 1997 the expiration date
for the contract was 2005, while by 1999
the expiration had extended to 2007. In
March 2001, the city council adopted the first
of a amendments to that contract, which
extended its evergreen period from eight
to 12 years, while in October 2012, the city
council approved another amendment that
extended the evergreen period to 25 years.
That amendment also stipulated that either
CALIFORNIA STATE AUDITOR
Report202O-806 I December202O
LOCAL HIGH RISK
party 's notification to terminate the contract
would result in the contract terminating
25 years from the date of that notification. In
addition, the waste collection company agreed
to make a one-time payment of $2 million
to the city and annual recurring payments of
$100,000 in addition to the franchise fee.
In November 2016, the city council approved
an amendment to the same contract for a
series of rate increases to customers for waste
collection services. That amendment also
increased the annual recurring payments from
the waste collection company to $300,000
but stipulated that the city's notification of
contract termination would void that payment
clause. Finally, West Covina approved another
amendment in October 2o18 that included a
clause preventing the city from exercising its
annual option to terminate the contract until
October 2023.
Neither West Covina's municipal code nor
its purchasing policies require any limits on
a contract's duration. Further, West Covinas
contract policies do not address the extent
to which the city may use amendments to
modify its existing contracts. Nevertheless,
we question the city's decisions to increase the
duration of the evergreen period to 25 years
and to establish a nontermination clause until
2023. These decisions are not in the city's best
interest because they restrict the city's ability
to seek more favorable terms from other
vendors offering similar services. In reviewing
the waste collection providers that other cities
near West Covina use, we identified that at
least two other companies could potentially
serve West Covina. However, as a result of
its amendments, the soonest the city could
contract with another vendor would be
October 2048.
The current city manager could not identify
any information from the city's records
to ascertain why the city initiated the
October 2012 amendment to extend the
evergreen period to 25 years even though
the contract still had 12 years remaining
23
24 CALIFORNIA STATE AUDITOR
December202O I Report 2020-806
LOCAL HIGH RISK
Figure4
West Covina's City Council Approved Amendments That Significantly Extended the Length of Its Waste
Collection Contract
Exclusive service provider AM
$Years / wwww
99/1A S I //
Original Contract
March 1992
Exclusive service provider
12Yea i /S\\
r 1 t //
Amendment 11
March 2001
Exclusive service provider
25 M AF■—IRIL
----
I a lid t i
Amendment *9
October 2012
Exclusive service provider
3
=11=�
P
Amendment "11
October2018
As of October 2020, the soonest
(s-yearnont—nination clause)
that West Covina can cease its
contractual obligations with its
waste collection company is
October 2048.
Source: Analysis of WestCovina's waste collection contract and amendments.
Note: West Covina approved other amendments to its waste collection contract
that pertained to rate adjustments but did not modify the
length of the contract.
on it at that time. Further, the city's current
necessary or desirable from the standpoint of
management could not explain why the
the city. Nevertheless, the city manager believes
2oi8 amendment included the nontermination
that West Covina does not have any recourse in
clause: the primary purpose of this amendment
addressing the terms of either amendment.
was to update the rates that residents and
businesses pay to cover the cost of new
Despite the restrictive provisions of its
state -mandated recycling of organic waste, so
contract, West Covina may be able to
it is unclear why a nontermination clause was
renegotiate certain terms if the waste collection
company continues to seek amendments to
adjust the rates it charges for its services.
Our review of municipal contracts for waste
collection services identified three cities
in Los Angeles County that have contracts
with durations that are more favorable than
West CovindS 25-year evergreen clause. In
fact, two of these cities —Los Angeles and
Whittier —each contract with the same waste
collection company as West Covina, yet their
contract terms are only to years and eight
years, respectively. Neither contract has an
evergreen clause or a nontermination clause.
Accordingly, it seems reasonable for West
Covina to pursue alternatives to seek the best
value for its residents and community.
Recommendations to Address This Risk
• To ensure that it procures services
that represent the best value, West
Covina should follow its competitive
bidding requirements. To avoid
the circumvention of competitive
CALIFORNIA STATE AUDITOR 25
Report202O-806 I December202O
LOCAL HIGH RISK
bidding, it should establish policies
clarifying the appropriate use of
contract amendments.
To ensure that the contracts it enters
are effective and represent the best
value, West Covina should amend
its contracting policies to include a
requirement that city management
document its reason for entering into
any contract or contract extension with
a duration in excess of five years.
To ensure that its waste collection
contract represents the best value
for the city, its residents, and its
other community members, West
Covina should negotiate with its
waste collection company at the next
available opportunity to revise key
terms of its contract, including the
contract's duration and the city's right
to terminate the agreement.
We conducted this audit under the authority vested in the California State Auditor by
Government Code 8543 et seq. and according to generally accepted government auditing
standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our
audit objectives specified in the Scope and Methodology section of the report. We believe that
the evidence obtained provides a reasonable basis for our findings and conclusions based on our
audit objectives.
Respectfully submitted,
ELAINE M. HOWLE, CPA
California State Auditor
December 1, 2020
26 CALIFORNIA STATE AUDITOR
December202O I Report 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:
The local government agency's financial
condition has the potential to impair its
ability to efficiently deliver services or to
meet its financial or legal obligations.
• The local government agency's ability to
maintain or restore its financial stability
is impaired.
The local government agency's
financial reporting does not follow
generally accepted government
accounting principles.
• Prior audits reported findings related to
financial or performance issues, and the
local government agency has not taken
adequate corrective action.
CALIFORNIA STATE AUDITOR
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The local government agency uses an
ineffective system to monitor and track
state and local funds it receives and spends.
An aspect of the local government agency's
operation or management is ineffective
or inefficient; presents the risk for waste,
fraud, or abuse; or does not provide the
intended level of public service.
Based on our initial assessment, we identified
concerns about West Covinas 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.
27
28 CALIFORNIA STATE AUDITOR
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Table
Audit Objectives and the Methods Used to Address Them
1 Review and evaluate the laws, rules, and
Reviewed relevant state laws,regulations, municipal code, and other background
regulations significant to the audit objectives.
materials applicable to the city.
2 Evaluate West Covina's current financial condition
Reviewed the city's fiscal policies, including those concerning fiscal sustainability
and ability to meet its short-term and long-term
and debt policies.
financial obligations while continuing to provide
Reviewed the city's audited and unaudited financial statements to determine its
services to its residents.
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
• Reviewed the city's audited and unaudited financial statements and its adopted
challenges and determine whether the city has
budgets to determine the financial challenges the city had identified and
developed an adequate plan for addressing
assessed its plans to address those challenges.
those challenges. This will include assessing the
Evaluated the city's financial records and internal documentation to identify
city's efforts to improve its financial condition by
additional causes of the city's fiscal challenges.
increasing revenue and reducing expenditures.
• Developed strategies to improve the city's financial condition based on
identified causes.
4 Determine whether West Covina's budgeting
Identified GFOA budgeting best practices and evaluated the city's budget
processes comply with best practices. In addition,
policies for adherence to those best practices.
evaluate the city's procedures and underlying
Reviewed budget documents and city council meeting minutes and related
assumptions for projecting future revenue
documentation to determine the extent to which the city adhered to its policies
and expenditures and determine whether
when developing its budgets.
they result in balanced budgets and accurate
financial forecasts.
Evaluated the city's past and current processes for establishing financial forecasts.
5 Assess West Covina's process for setting,
• Reviewed the city's fee schedules and related documentation to determine
increasing, or decreasing fees or rates to ensure
when the city last updated each of its fees, the process it used to determine the
that it complies with applicable laws, rules,
amounts of its fees, and the fees it did not set at full cost recovery.
regulations, and best practices. For a selection
Evaluated a selection of fees to estimate the amount of revenue the city did not
of these fees and rates, determine whether they
cover the city's costs of providinq services.
receive by not setting its fees at full cost recovery.
6 Examine West Covina's efforts to fill key • Evaluated employment documentation related to West Covina's city managers
management and staff positions and maintain and finance directors from fiscal years 2012-13 through 2019-20. Those positions
organizational and leadership continuity within and other key management positions are currently filled as of October 2020.
city operations. Evaluated budget documentation to determine the city's historical staffing trends.
7 Evaluate West Covina's efforts to address the Reviewed the SCO's 2015 report and identified eight recommendations that are
deficiencies the SCO identified in its 2015 report. 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 offour 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.
CALIFORNIA STATE AUDITOR
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LOCAL HIGH RISK
8 Review and assess any other issues that are Analyzed quarterly revenue and expenditure data from fiscal years 2015-16 through
significant to the audit. 2019-20 to identify trends and to evaluate the possible impact of the pandemic on
West Covina's financial condition.
Source: Analysis of documents and data obtained from West Covina, and interviews with West Covina officials.
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 2oi5—i6 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 2o18-19 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.
29
30 CALIFORNIA STATE AUDITOR
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LOCAL HIGH RISK
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Appendix B
The State Auditor's Local High Risk Program
Government Code section 8546.io 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 2oi6-17.4
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
4 As we describe earlier in this report, we conducted our initial
assessment of West Covina in January 2o2o based on this
detailed review. In November 2020, we updated our financial
indicators to include information through fiscal year 2018-19.
CALIFORNIA STATE AUDITOR
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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 6o 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.
32 CALIFORNIA STATE AUDITOR
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Mi it
�V�SI COVINEI
City Manager's
Office
November 2, 2020
Elaine M. Howle, CPA
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento CA 95814-4761
Dear Ms. Howle:
CALIFORNIA STATE AUDITOR 33
Report202O-806 I December2020
LOCAL HIGH RISK
This is a difficult time for California local governments. Without question, the COVID-19
pandemic will cause more California cities to consider bankruptcy. Most California municipalities
predominantly depend on sales tax, property tax, and transient occupancy taxes to pay the bills.
The pandemic has exacerbated the situation. California local governments must plan, without
delay, for post -pandemic fiscal realities. With the possibility of a recession and what the State
Director of Finance calls a "significant negative effect on state revenues", and considerable
uncertainty about recovery, California municipalities must plan now.
With the goal of improving government performance, the Joint Legislative Audit Committee
(JLAC) was established by the State Legislature. Audits considered by the JLAC include financial
and financial -related audits of government and publicly created entities. In December 2019, the
California State Auditor's Office informed the City of West Covina that it had been selected for
review under the high -risk Local Government Agency Audit Program.
The City received the draft report prepared by your office titled "City of West Covina: Its
Deteriorating Financial Situation Threatens Its Fiscal Stability and Its Ability to Provide City
Services". The report details the audit conducted by your office, as the result of the audit proposal,
which was approved by the California State Assembly Joint Legislative Audit Committee. I have
reviewed the report and intend to prepare a corrective action plan to address the risks identified.
Sincerely,
David N. Carmany
City Manager
1444 West Garvey Avenue • P.O. Box 1440 • West Covina • CA 91793 • Phone (626) 939-8401 • Fax (626) 939-8406
Attachment No. 2
High risk fiscal management issues affecting the City's ability to meet city financial obligations to
provide city services and increasingthe risk of waste and fraud.
Diminishing reserves:
• Relied on city general fund reserves to support city operations for years, thereby significantly
reducing city reserve balance.
• Encountered substantial increases in citywide expenditures, including city unfunded pension
liabilityand associated annual payments.
• Allowed the fire departmentto routinely exceed city budget by more than $1 million each year,
primarily because of excessive overtime costs.
• Will be further th reate ned by revenue decreases resulting from the COVID-19 pandernic.
Use of city resources:
• Paid a greater proportion of city employees' health benefitsthan the average proportion paid by
state and local governments on the West Coast.
• Used General fund revenue to subsidize city services ratherthan increasingthe fees it charged to
the users of those services.
Financial decision analysis:
• Did not adequately quantify the financial consequences of budget adjustments for the city
council.
• Did not begin todevelop projections of city long-term outlookbasecon financial trends until after
our initial assessment and has not included key assumptions in city forecast.
Formal financial recovery plan:
• Has not developed a comprehensive plan with clear timelines, monitoring, and reporting to
improve city long-term financial health.
Procurement policy enforcement:
• Lacks documentation demonstrating that managers appropriately approved increases to the
dollar limits for purchase cards.
• Allowed requests for I imit increases on purchase cardsto be granted indefinitely despite city own
policy restricting such increases to specific ti me frames.
• Violated city own competitive bidding requirements when contracting for human resources and
claims administration services
• Approved amendmentsto city contract forwaste collection servicesthat contain over -restrictive
terms, including lengthytime extensions and a nontermination clause.
Corrective actions required to address risks:
The City will submit by July 1, 2021 a financial recovery plan that accounts forth city's rising costs and
the actions that it will take to improve cityfinancial condition. The plan will include long-term financial
projection, prioritize the resources that the city will use to improve city financial condition, identify
individuals responsible for monitoring the city's progress in implementing each action, and outline when
the city anticipates itwill complete key milestones related to each action. The recovery plan goals will be
specific, measurable, achievable, relevant and time -based. Key elements ofthe financial recoveryplan:
• Ensure that the fees/assessments charged forservices align with costs and increase fees to reflect
costs reasonably borne in the provision of city services. The City will consider using a phased
approach that steadily increases city fees each fiscal year until the costs of the services it provides
are fullycovered. Reassess the ful I costs of city services at least every three years.
• Thefinancial recoveryplan willdescribethe i nte nded corrective actions, ti mi ng, prioritize resources,
and identify individuals responsible for monitoring progress toward implementing each action.
• Review, evaluate, and monitor all city contracts. Seek opportunities for collaboration,
reorganization, grants and cost sharing to eliminate reliance on general fund reserves to support
operations.
• Setaside landsale revenue to compensate forany shortfallsin revenuethatthe city experiencesas
a resultofthe effectsofthe pandemicon the city's fiscal year 2020-21 budget. Use any remaining
revenuefromthe land sale not already committed to repaybonddebttoreplenishthecity'sgeneral
fund reserves. This does not supersede existing commitments to repay bonds or other debt
associated landthatis presently city owned, but subjecttosale.
• Proactively mitigate risk and exposureto litigation through trai ni ng and implementation ofbest risk
management practices. Maintain membership in the California Joint Powers Insurance Authority
(CJPIA). Work with the CJPIA-assigned Risk Managerto assess, understand, manage and minimize
the cost of municipal risk. Implement all Actions Items (1-63) identified in the CJPIA's Initial Risk
Management Evaluation report(July 15, 2019). The citywill use historical data and otherreasonable
assumptionsto develop budgets forthe costs of claims payments.
• Address the excessive costs currently incurred providing fire and emergency medical services.
Reviewthe current service delivery model ofthe WestCovina Fire Department. Identifyand consider
other options for service delivery. The city will perform cost -benefit analyses ofthe identified options
for procurement and delivery ofthese services.
• Prepare financial analyses that evaluate both the short-term and long-term financialimplicationsof
significant spending decisions.
• To betterensure city ongoing financial stability, implement a formal process for development of
reasonable budget projections that adequately account for the impact that significant events, such
as the global COVID-19 pandemic, may have on revenue.
• Oncetheeffectsofthepandemicsubside, meetandconfer regarding negotiation ofemployeeunion
agreements. Limitcosts related to employee retirementand healthcare benefits so that employees
contribute a reasonable percentage of their premiums. To determine that percentage, the city will
consider options such as using survey data from comparablysized cities in city region.
• Improve internal purchasing processes/enforcementto reduce suscepti bi lityto waste and fraud by
effectively documenting management approval. To ensure that purchasing and contracts secure the
bestvalue, procurements will follow the city's competitive bidding policy.
City of West Covina Corrective Action Plan February 1, 2021 Page 2 of 2