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California State Auditor Report Number : 2016-111

City of Irwindale
It Must Exercise More Fiscal Responsibility Over Its Spending So That It Can Continue to Provide Core Services to Residents

Summary

HIGHLIGHTS

Our audit of the city of Irwindale highlighted the following:


Results in Brief

The city of Irwindale, located in eastern Los Angeles County, has experienced substantial deficits that if continued could limit its ability to deliver to residents such core services as police services and street repairs. From fiscal years 2011–12 through 2015–16, the city experienced deficits as high as $5.3 million. For example, in fiscal year 2013–14, the city had a $5.3 million deficit, which equaled approximately one‑third of its budgeted general fund revenues for that year. The city had a one‑time gain of $2.6 million in fiscal year 2015–16 that helped it overcome its budget deficit; however, the city’s budgeted expenditures continue to outpace revenue, so it expects to face a $735,000 deficit in fiscal year 2016–17. Consequently, Irwindale has been depleting its general fund reserves, which includes an emergency fund for economic downturns.

Although the city has made limited efforts to control costs, it continues to overspend because it has not developed a long‑term financial plan, adjusted some of the benefits it provides to its residents, or adequately evaluated its use of police overtime. The city also has not made certain that it receives the best value for the money it spends on contracts or revised its purchasing policy so that staff document that costs for all types of city contracts are reasonable. Additionally, the city’s housing programs require revision so that they remain viable; the Irwindale Housing Authority (Housing Authority), consisting of five city council members, has forgiven completely $9.1 million in loans to low‑income residents, and it plans to forgive another $10.2 million. Because this practice may leave limited funding available to sustain future housing programs, the Housing Authority should consider other funding mechanisms to continue providing low‑income housing.

Known for gravel and sand pit mines—which have brought the city millions of dollars in mining tax revenue—Irwindale has failed to develop a long‑term financial plan to align its financial resources with its long-term objectives and help it to weather future financial crises. Instead, Irwindale's city council has looked in recent years to one‑time gains and revenue from the sale or redevelopment of pit mines and other properties to help the city fund normal municipal operations. Nonetheless, the city's reliance on income from development projects or mine sales is risky because these revenue sources are limited.

The city’s financial situation has not prevented it from providing generous benefits to the city’s employees. Irwindale has a population of just 1,415 residents, according to the Department of Finance; however, the city’s businesses employ about 25,000 workers each day, and the city has the departments, commissions, and employees typical of most cities. Indeed, the city provides key management employees with salaries that are competitive with those at 14 other California cities to which we compared Irwindale, as well as comparatively more generous health and retirement benefits that consume nearly 51 percent of the city’s general fund budget. Not only will the city’s retirees at the management level receive a generous pension because of the city’s contributions to the Public Agency Retirement Services, which will augment these retiree’s pensions from the California Public Employees’ Retirement System, but these individuals can also cash out some of their vacation and sick leave hours while they are employed and all of their accumulated sick leave when they retire. Despite the city’s financial situation, it spent almost $336,000 on cashed‑out sick leave during the five years we reviewed. Moreover, according to data the city provided to the State Controller’s Office, the city spent $1.4 million on health benefits in 2015, or $18,400 for each of its 76 full‑time employees. Partly because it pays 100 percent of all medical, dental, and vision premiums for its full‑time employees and their dependents, Irwindale spent $6,000 more in health benefits per employee in 2015 than was paid by the city that had the next most generous benefits among the 12 other cities we reviewed.

Although the city has not demonstrated whether a relationship exists between the pit mining activities in the city and any health problems experienced by the city’s residents, Irwindale has also chosen to provide its residents with generous vision and prescription drug benefits. Because the city requires only a $3 or $10 copay, depending on the resident’s age, for all generic prescription medicines—and because it generally does not limit the number or cost of medications for each participant—these prescription benefits have cost the city over $900,000 in fiscal year 2015–16. A relatively small number of participating residents—25 of 251 total participants—have received a disproportionate amount of the city’s expenditures for prescriptions; these 25 each received more than $10,000 in prescription benefits from the city in fiscal year 2015–16. Despite its efforts to reduce the costs of administering this benefit, the city needs to take further steps to contain the costs for the residents’ prescription program and prevent them from rising even higher.

In addition, the city has not evaluated adequately its use of police overtime to ensure that its spending for overtime is cost‑effective and sustainable and that the level of overtime work is safe for its police force. The city spent more than $500,000 in fiscal year 2014–15 for roughly 9,000 hours of overtime, and five police officers worked most of those hours, raising concerns about the officers becoming fatigued and less attentive while on duty and creating the appearance of favoritism.

In contracting with vendors for services, the city has exempted, by its municipal code or policy, many types of contracts from competitive bidding requirements. Along with these exemptions, it has not made certain that it always obtains fair and reasonable prices for these contracts. Of the 25 contracts we reviewed, 16 were exempt from competitive bidding and for only five of the exempt contracts did we find evidence that the city had obtained a reasonable price. Additionally, the city has not adequately overseen spending on some of its contracts, which led to the city spending more than $63,000 above contracted amounts for three contracts.

Composed of five city council members, the Housing Authority has likewise made questionable decisions in the way it administers Irwindale’s housing programs, including its practice of forgiving both the principal and interest on many borrowers’ loans and its ranking of housing program applicants according to the number of years they have lived in Irwindale. The Housing Authority is now in the process of administering a housing purchase program that will further diminish the Housing Authority’s funds. Between 1995 and 2016, it forgave a total of $9.1 million in loans to low‑income residents who wanted to purchase homes or to rehabilitate existing homes. The Housing Authority has also given its residents, who have lived in the city for 15 years or more, an unfair advantage in its housing programs. Because of this residency priority, the majority of the successful participants of its current housing purchase program are longtime residents.

Although the city has been prudent in refinancing its long‑term debt, it needs to develop and implement a formal debt management policy. Irwindale has refinanced three issuances of long‑term debt that are projected to result in savings on interest costs of approximately $1.6 million over the life of the debt, which ranges from approximately eight to 11 years. However, the city does not have a debt management policy that would guide decisions involving the debt issuance process, management of a debt portfolio, and adherence to applicable laws.


Summary of Recommendations

To address the structural deficit in its general fund, the city should seek long‑term solutions to balance its budget so that its expenditures do not exceed its revenues. The city should document its approach in a long‑term financial plan.

Considering that the city’s retirement benefits are more generous than those of most comparable cities, and in light of its financial situation, the city should reduce its employee benefits cost by negotiating with employee bargaining groups and key management employees.

To minimize the use of its reserves to reduce long‑term liabilities, the city should annually determine whether it has sufficient funding to cash out employee leave balances. Additionally, in future labor negotiations, the city should explore the possibility of eliminating or reducing voluntary leave balance cash‑outs by employees, and eliminate sick leave cash‑outs altogether.

To reduce the cost of its prescription drug benefit program, the city should enact limits on the number or dollar amount of prescriptions an individual can receive each year.

To promote public safety and equity among police officers, the city should implement a rotational order for scheduled overtime to prevent some officers from working excessive shifts.

To help ensure that it receives the best value for contracts it exempts from competitive bidding, the city should revise its purchasing policy to require its staff to document in the contract file evidence that the price is fair and reasonable.

The Housing Authority should consider options to provide low‑income housing opportunities to more people. Additionally, if the Housing Authority intends to continue providing low‑income housing opportunities in the future, the city should examine the available funding mechanisms to continue providing low‑income housing before it exhausts its Housing Authority Fund balance.

To ensure that all residents have an equal chance to participate in the Housing Authority’s housing programs, the city should remove the long‑term residency priorities from any future housing programs.

To ensure that it continues to properly manage its debt, the city should prioritize developing and implementing a debt management policy.

Agency Comments

Irwindale took issue with some of the conclusions in our report. However, it indicated that it accepts and plans to implement many of the recommendations.



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