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California State Auditor Report Number : 2015-806

City of Hemet
Its Ongoing Budget Deficit and Organizational Inefficiency Threaten Its Financial Stability and Delivery of Public Services

Response to the Audit


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City of Hemet

July 11, 2016

Elaine M. Howle, CPA
State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: Response to State Auditor

Dear Ms. Howle,

It is with pleasure that we prepare this response to your correspondence dated July 5, 2016 regarding the draft report to the Joint Legislative Audit Committee entitled "Local High Risk -City of Hemet: Its Ongoing Budget and Organizational Inefficiency Threaten Its Financial Stability and Delivery of Services."
Pursuant to California Government Code Section 8545(b) and 8545.1,

"The California State Auditor may establish a high-risk local government agency audit program for the purpose of identifying, auditing, and issuing reports on any local government agency, including, but not limited to, any city, county, special district, or any publicly created entity, whether created by the California Constitution or otherwise, that the California State Auditor identifies as being at high risk for the potential of waste, fraud, abuse, or mismanagement or that has major challenges associated with its economy, efficiency, or effectiveness."

1

The City of Hemet is pleased to learn that, through the high risk local government agency audit program, the State Auditor has found no evidence of waste, fraud, abuse, mismanagement or other malfeasance. This is an important finding which the City of Hemet would like to highlight in the report to the Joint Legislative Advisory Committee.

2

Furthermore, the City strongly disagrees with the State Auditor's Designation of the City as High Risk. Since 2008, the City has undertaken numerous cost saving measures to improve its financial position. The actions include a series of concerted and coordinated efforts to place the City on a sustainable path to end the City's historic practice of deficit spending. These steps include:

 

1. Reduction in Staffing Levels

Between FY 08-09 and FY 16-17, city staffing was reduced by 38% from 442 to 293, including a loss of 25 police officers and 10 firefighters.

2. Balancing Services with Revenues

Over the same period, the Hemet Public Library reduced operating hours by 50%. Operation of the City of Hemet Simpson Senior Center was contracted to Valley Wide Parks and Recreation and the YMCA of Riverside.

3. Employee Compensation and Benefit Reductions

Beginning in 2008, city employees agreed to a number of significant pay and benefit reductions. These included layoffs, salary cuts, furloughs and increased employee contributions to medical and retirement benefits. Reforms also included a reduction in benefits for new employees.

4. Retiree Medical Benefit Reductions

Due to decisive action taken by the City Council, the city is projected to save over $30 million in retiree medical expenses over the next 10 years.

5. Public Private Partnerships

In 2011, the Hemet City Council voted unanimously to approve a "Franchise Agreement for Comprehensive Refuse Services" with CR&R, Inc. This action resulted in the elimination of 28 city jobs and shifted the entire city-run refuse operation to CR&R, Inc. The city received a lump sum payment of $12.5 million, an annual franchis􀀺 fee totaling $12.5 million {$657,895 per year) and monthly payments totaling $63 million over 19 years. This agreement resulted in an infusion of cash in the city's general fund as well as an on-going revenue stream to help off-set the city's structural deficit.

6. Contracts for Service

The city currently contracts with the private sector or non-profits for over 40 functions city­wide including, but not limited to: animal control services, forensic crime-lab analysis, fire plan check, background investigations, vehicle towing service, custodial services, landscape maintenance, and refuse and solid waste collection and disposal.

7. Grant Funding

The City continues to aggressively pursue grants resources, having applied for over $30 million in grant funding to offset general fund expenditures since 2008. Public safety grant awards during this 7 year period total over $20.5 million for public safety expenses including police and fire safety equipment, police and fire personnel in support of innovative public safety enhancement programs such as the Hemet Restoring Our Community Strategy (ROCS) and traffic safety and gun violence reduction programs. Grant funding has also been used extensively to offset general fund expenditures for the purchase of police, fire and public works vehicles and apparatus. Last year alone, the city was awarded $4,489,674 in Federal grant dollars.

8. External Funding Sources

General fund operations funded by sources other than the general fund or grants totaled $757,737 in 2014. The city continues to aggressively pursue outside funding sources to offset general fund expenditures.

9. Flnancial Sustainability

3

In 2015, the City Council adopted the Five-Year Financial Plan which ends the City's historic practice of deficit spending by FY 19-20 while maintaining at least a 20% General Fund Reserve (Fund Balance) as required by city ordinance.

Key elements of the 5-year plan Include:

10. Responsible Financial Practices

4

In 2016, the City Council adopted the FY 16-17 Annual Budget, which includes a nearly balanced budget, with a deficit of $350,000, which is less than 1% of the General Fund.

Staff has the opportunity of five business days to review the report recommendations. On a go forward basis, it is the City of Hemet's intent to submit a Corrective Action Plan to the State Auditor on August 4, 2016, in which the City will outline its plan to address the State Auditor's recommendations. In the meantime, the City will review the recommendations to address each risk area.

The City of Hemet has worked closely with the State Auditor over the last several months. This has been an arduous process in which the City provided detailed financial, organizational and historical data to the State Auditor. This information is critical to both understanding the history of the City, and developing a complete and accurate picture of the current financial and organizational state of the City.

5

As the City of Hemet moves forward in the drafting of a Corrective Action Plan, it is the intent to clarify items contained in the State Auditor's report, including mischaracterizations, inaccuracies, and unsubstantiated items. Additionally, the City will address each topic within the report to provide a timeline for the ongoing tasks to be undertaken in furtherance of the goal to achieve financial stability and address service delivery expansion.

As the City of Hemet moves forward in the drafting of a Corrective Action Plan, it is the intent to clarify items contained in the State Auditor's report, including mischaracterizations, inaccuracies, and unsubstantiated items. Additionally, the City will address each topic within the report to provide a timeline for the ongoing tasks to be undertaken in furtherance of the goal to achieve financial stability and address service delivery expansion.

The State Auditor's efforts to understand the unique challenges of the City of Hemet are appreciated and each risk area will be thoroughly reviewed and addressed by the City Council and staff with the goal of eliminating the "high risk" designation.

As the City of Hemet moves forward in the drafting of a Corrective Action Plan, it is the intent to clarify items contained in the State Auditor's report, including mischaracterizations, inaccuracies, and unsubstantiated items. Additionally, the City will address each topic within the report to provide a timeline for the ongoing tasks to be undertaken in furtherance of the goal to achieve financial stability and address service delivery expansion.

If you wish to discuss the report and the City's response, please contact Jessica Hurst, Deputy City Manager at {951) 765-2330.

Sincerely,

Alexander P. Meyerhoff
City Manager






Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE CITY OF HEMET

To provide clarity and perspective, we are commenting on the city of Hemet’s (Hemet) response to the audit. The numbers below correspond to the numbers we have placed in the margin of Hemet’s response.

1

Although we state here that we did not observe any conditions related to fraud or abuse, our report clearly does identify instances of ineffective and inefficient management. For example, here, we state that Hemet has historically underfunded its fire department, resulting in insufficient staffing levels and substandard infrastructure, creating a risk to public safety. Further, we note here that Hemet has not reduced costs by outsourcing the remaining maintenance of its parks, despite outsourcing other park and streetscape maintenance.

2

We stand by our designation of Hemet as high risk. Although throughout the report we acknowledge that Hemet has undertaken various actions focused on achieving cost savings, the city’s expenditures continue to outpace revenue, impeding its ability to meet its financial obligations as we highlight here. In addition, despite the city’s actions, we note here that ineffective and inefficient organizational management negatively affect its provision of public services.

3

Hemet’s statement that its five-year plan will end its historic practice of deficit spending by fiscal year 2019–20 is misleading. As noted on here, we refer to the extent to which Hemet’s general fund expenditures exceed its revenue as its budget deficit. Here, we state that Hemet’s projected budget deficit for fiscal year 2019–20 is closer to $268,000 rather than the nearly $17,000 deficit included in its projection.

4

In June 2016, the city council approved Hemet’s operating budget for fiscal year 2016–17. This adopted budget projects a general fund deficit of approximately $350,000, consistent with the deficit portrayed in Hemet’s five-year projection for that year developed in October 2015. However, Hemet’s budget deficit for fiscal year 2016–17 will likely be greater than the $350,000 it projects due to overly optimistic expenditure and revenue projections, as we note here. Specifically, we question Hemet’s projection of a more than 15 percent increase in property tax revenue and a 12 percent increase in motor vehicle license fees. Further, we question a total of nearly $1.7 million in reduced expenditures including reductions in engineering and overtime costs.

5

We strongly disagree with Hemet’s contention that the report contains mischaracterizations, inaccuracies, and unsubstantiated items. The audit was conducted according to generally accepted government auditing standards and the California State Auditor’s thorough quality control process. We gave Hemet ample opportunities to review the items contained in the draft report and correct any items it believed to be inaccurate. Throughout the audit, we communicated our concerns to Hemet. Further, we shared the body of the draft report, which detailed our findings and conclusions, with city staff at our exit conference before we sent the draft report for Hemet’s formal review. We considered all the comments and suggestions Hemet made regarding the draft report’s accuracy and clarity and made those changes we believed were warranted based on the evidence. We reviewed all documentation provided, and all our conclusions are fully supported and factually correct.

We expected Hemet to address any concerns regarding the draft report either in its formal response or through discussions with us during the formal review period. However, Hemet states that it will instead clarify these concerns in its corrective action plan that it intends to submit in early August 2016. We will review the plan and provide any further perspective and clarity, as needed, at that time.






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