Watsonville Grand Jury Report 1.15.2013 by SantaCruzSentinel

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									                                                                                                                          CITY COUNCIL 8.1 (b)
                                                   City of Watsonville
                                                Finance Department

                                                 MEMORANDUM
                                                                                                                        By Carlos J. Palacios at 1:52 pm, Jan 15, 2013




DATE:               January 15, 2013

TO:                 Carlos J. Palacios, City Manager
                                                                                         By Ezequiel Vega at 11:32 am, Jan 15, 2013


FROM:               Ezequiel Vega, Administrative Services Director

SUBJECT:            Receive a Report Regarding the Performance Audit Conducted by Harvey M.
                    Rose Associates, LLC (HMR), a Firm Retained by the Santa Cruz County Grand
                    Jury, and Approve the City’s Response to the Report.

AGENDA ITEM:                   January 22, 2013                                                                                                        City Council

RECOMMENDATION: It is recommended that the City Council of the City of Watsonville receive
a report regarding the Performance Audit conducted by Harvey M. Rose Associates, LLC (HMR),
a firm retained by the Santa Cruz County Grand Jury, and approve the City’s response to the
Report.

DISCUSSION: The Harvey M. Rose Associates, LLC (HMR) firm was retained by the Santa Cruz
County Grand Jury to conduct a performance audit of the City of Watsonville. Performance
audits are a special type of audit designed to provide assurance or conclusions based on an
evaluation of sufficient, appropriate evidence against stated criteria such as specific
requirements, measures, or defined business practices.

The objective of a performance audit is to improve program operations & facilitate decision
making. A performance audit typically asks questions such as:

         Was organization running in economical manner?
         Did organization achieve objectives?
         Did costs under federal grant conform to grant requirements?
         Was program operated in accordance with laws and regulations?

Accordingly, HMR performed the audit with the objective “to assess the risk to the City’s assets
due to its policies and internal controls; assess accountability and transparency in City decision
making; and, to evaluate the City’s compliance with changes in State redevelopment law.” As
part of their report, HMR made findings and recommendations in five areas of City’s
operations:
   1. Financial Condition, Reporting and Controls
   2. Inter-fund Loans and Transfers


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     3. Budget and Expenditure Controls
     4. Capital Budget and Impact Fees
     5. Procurement

The City appreciates the work performed by HMR and acknowledges there are some valid and
useful recommendations in the report; however, the City staff disagrees with certain parts of
the report as they do not fully represent the actual situation of City operations in comparison to
the audit objectives.

City’s Accomplishments

As part of assessing the Financial Condition of the City, HMR tested grants and asset
management and found no significant risks with these components of the audit. In addition, the
City believes a true performance audit would acknowledge the City’s significant achievements
during the time period under study including major projects such as the 1.3 billion gallon Water
Recycling Plant, the LEED Platinum Water Operations Center, the 131,000 square-foot Civic
Plaza Building including the new Main Library, new Superior Courts and 460 car Parking
Structure, over six miles of scenic nature trails, an 850,000 KWH Solar Panel installation, the
Contigo Gang Prevention and Intervention Program, the Urban Greening Plan and the
Watsonville Vista 2030 General Plan. The City actively pursued and was awarded millions of
dollars in grant funding to support these projects which leveraged our limited local funding.

The report attached to this staff report details the findings and recommendations made by
HMR. The summary below shows the City’s response to this audit report. Although the findings
are not numbered in the audit report, this staff report assigns a finding number to each finding
for ease of reference. The numbers were assigned in order of appearance in the report; the first
finding in the report was assigned number 1, the second one number, 2, and so on. There are a
total of 27 findings and 22 recommendations.

     1. Financial Condition, Reporting and Controls

Finding 1: “Like most cities, the financial condition of the City of Watsonville has been negatively
affected by national economic conditions that started in approximately 2008. However, the
economy does not fully explain the City’s current poor financial condition. A pattern of spending
beyond the City’s means, particularly in the case of the General Fund, has contributed to a
depletion of the City’s reserves and net assets, two key indicators of financial well‐being.”

The City agrees that the depletion of reserves has occurred in the General Fund during the time
period encompassed by the Great Recession affecting the entire Nation; however, net assets in
governmental activities have not decreased significantly over the last five fiscal years. In fact,
net assets have increased by 42% during that period. Exhibit 1.1 below shows the overall
increase in net assets with small decreases in FY 2009-10 and 2010-11.




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                                                             Exhibit 1.1
                                                     Change in Net Assets
                                         Governmental Activities, City of Watsonville
                                                  FY 2006-07 through 2010-11
                                                                                FY
                                               2006-07        2007-08        2008-09     2009-10      2010-11
Net Assets Start of the Year                $ 99,690,040 $ 133,326,823 $ 147,275,010 $ 153,202,385 $ 141,343,459
Net Assets End of the Year                  130,994,449     146,776,579    153,773,207  148,106,795  140,987,616
Change in Net Assets                          31,304,409      13,449,756      6,498,197  (5,095,590)    (355,843)
Percent Change                                    31.40%          10.09%          4.41%      -3.33%       -0.25%

Cumulative Increases / (Decreases)                                 45.90%                                          -3.58%

Net Increase / (Decrease)                           42.32%

* Source: City Audited Financial Statements

The City’s Governmental Activities net assets increased from a low of $99.6 million in FY 2006-
07 to the most current $140.9 million. This represents a 42% increase over a five year span with
net assets decreasing 3.58% during FY 2009-10 through 2010-11. This small percentage
decrease can be directly correlated to the period of economic recession. Given these figures the
City generally disagrees with finding 1. Although the decrease in net assets was not significant
over the two last fiscal years, the City staff recognized the financial challenges facing the City
and made proactive changes to improve its financial condition. Some of these changes include:
     Refinancing of the PERS Side fund saving the City financing and PERS retirement costs by
        accessing lower interest rates;
     Implemented a two-tier pension plan and increases in employee’s PERS contributions;
     Increases in employees’ health insurance contribution;
     10% reduction in salary through the reduced work week;
     Freezing of employee step increases for non-public safety staff;
     Limited layoffs of administrative staff.

These saving measures helped the City achieve a balanced budget; however, revenue decreases
in major categories such as property taxes outpaced the savings achieved from these actions,
creating a 3.58% decrease in net assets over the last two fiscal years.

Finding 2: “While the City has made significant reductions in its General Fund expenditures since
Fiscal Year 2009‐10, the reductions have not been sufficient to offset the impacts of General
Fund spending in excess of revenues, particularly since the City was in weak financial condition
for several years prior.”

The City agrees with this finding but feels it is important to provide the context in which these
decisions were made. Unlike other cities, Watsonville has not implemented layoffs to public
safety. During the last three challenging years of the Great Recession, not one Police Officer of
Fire Fighter has been laid off. This was done as a policy decision by the Council who recognized
the importance of public safety as one of the vital services in the community. Nevertheless, the
City has made significant reductions in General Fund expenditures and has consistently


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communicated these reductions with the Council and the public. Even with these changes, the
General Fund reserves have been reduced significantly over the last few years. The City Council
approved a balanced budget for FY 2011-12 and 2012-13. This is the continuation of efforts to
get the City’s General Fund back on track and in recovery after absorbing the blow to our major
revenue sources after the Great Recession. In addition, the City is currently working on refining
its long term plan to bring the City’s reserves to a more acceptable level. More details will be
presented during the mid-year budget report in late February.

Finding 3: “A comparison of Watsonville’s financial condition with other California cities of
comparable size and characteristics shows that the City is worse off based on a number of key
indicators.”

City staff agrees that the City’s General Fund end-of-year fund balance is lower compared to
some other cities. However, the City disagrees with the expenditure amount shown in the
report, the cities being used for comparison, the cash situation of the General Fund, and the
debt to assets ratio.

The audit report includes an expenditure level of $39.9 million in FY 2010-11. When viewed out
of context, this amount presents an inaccurate view of the City's true financial position. This
figure includes a $6.4 million loan as expenditure (This is an internal loan from the City's pooled
investment account used to pay off the PERS Public Safety Side Fund. See attachment 4).
The City believes showing this is inappropriate for the purposes of this report as the expense to
repay the loan will be incurred in the fiscal year when the payments on the loan are due. In
addition, most of the cities used as comparison in the report are not cities in the region facing
similar labor cost, cost of living, and other economic constraints. The City prepared the
following Exhibit comparing to cities closer geographically to Watsonville (see Exhibit 1.2
below).

                                    Exhibit 1.2: Watsonville vs. Comparable Cities FY 2010-11

                     Salinas        Scotts Valley Santa Cruz       Gilroy         Monterey      Morgan Hill    Median        Watsonville
Population 3              150,441      11,580       59,684       52,027       27,810       38,477       45,252       52,543
GF Revenues          $ 80,459,293 $ 7,703,123 $ 77,912,927 $ 36,063,731 $ 59,012,204 $ 23,493,281 $ 47,537,968 $ 31,077,410
GF Expenditures        78,804,888   7,833,807   95,908,015   32,215,955   57,806,922   25,479,076 45,011,439     33,487,519 (1)
GF Fund Balance        11,059,380   6,749,955   25,531,855   25,220,668   33,249,674    7,282,162   18,140,024    1,598,588

Fund Bal, % GF Exp         14.03%         86.16%         26.62%          78.29%        57.52%         28.58%        40.30%          4.77%
General Fund Cash      11,378,862      4,005,490     18,126,982      20,450,350    13,615,450      6,231,090    12,497,156      9,001,593 (2)
Mos.. Cash Avail.            1.73           6.14           2.27            7.62          2.83           2.93          3.33           3.23

GF Assets              23,618,275      7,265,822     28,204,269      25,935,077    55,969,477      9,906,919    24,776,676     12,303,252
GF Liabilities         12,558,895       515,867        2,672,414        714,409    22,719,803      2,624,757     2,648,586      5,343,842 (4)
Liabilities/Assets          53.2%          7.1%             9.5%           2.8%         40.6%          26.5%         10.7%          43.4%

Sources: FY 2010-11 Comprehensive Annual Financial Reports for each City

Notes
(1) Excludes $6.4 million shown in the CAFR as expenditure since amount represents a loan for this amount, not an expense
(2) It includes $7.2 million for one day loan in CAFR shown as due from other funds
(3) 2010 Census Data
(4) This figure includes long term debt amounts which should not be included in the liabilities




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Regarding the debt to assets ratio, the City partially disagrees with the audit finding. Typically, a
long term portion of a loan should not be included in the Governmental balance sheet as
required by Generally Accepted Accounting Principles (GAAP). However, GAAP also has an
exception for internal loans which must be shown in the balance sheet, regardless of the time
horizon on the loan. If the City had chosen to obtain an outside loan such as a bond to pay this
debt, the long term portion of the loan would not show in this statement but would cost the
City almost double in interest payments. Therefore, the City is excluding $5.3 million for the
liabilities shown in the audit report which brings the debt to assets ratio to 43.4%.

The General Fund cash balance for fiscal year end is artificially low due to year end closing
activities. GAAP for governments, indicate funds cannot be presented with negative cash
balances. Accordingly, the General Fund cash has been used in the past to help other funds with
negative cash show a zero cash balance for one day at the end of the fiscal year. This is attained
by performing a one day transfer on June 30 and reversing the transfer the next day. Without
this reporting requirement, cash balance for the general fund at the end of FY 2010-11 was $9
million or 3.23 months of General Fund expenditures. As mentioned in the audit report, the
Government Finance Officers Association (GFOA) believes a standard for cash balances is
typically 2 months. The City’s General Fund cash balance is almost one and half times better
than the standard.

While there are many factors contributing to Watsonville’s expenditure levels and those of the
comparable cities; including the $6.4 million CalPERS side fund loan as part of the analysis
artificially inflates the total expenditure level for the City of Watsonville. Excluding this amount,
and comparing with cities with more similar cost constraints characteristics, the total costs per
capita decreases and shows a more realistic picture than presented in the audit report (see
Exhibit 1.3 below).

                                 Exhibit 1.3 General Fund 2010-11 Expenditures per Capita

                   Salinas      Scotts Valley Santa Cruz Gilroy       Monterey     Morgan Hill Median        Watsonville
GF Expenditures    $ 78,804,888 $ 7,833,807 $ 95,908,015 $ 32,215,955 $ 57,806,922 $ 25,479,076 $ 45,011,439 $ 33,487,519 (1)
Population 3            150,441        11,580          59,684        52,027        27,810        38,477        45,252       52,543
Expend. per capita $        524 $         676 $         1,607 $         619 $       2,079 $         662 $         995 $        637

(1) Excludes $6.4 million shown in the CAFR as expenditure since amount represents a loan for this amount, not an expense


Finding 4: “While information on the City’s financial condition can be distilled from reviewing
publically available City documents, such as the City budget and the Comprehensive Annual
Financial Report (CAFR), these documents alone do not include either sufficiently accurate or
sufficiently analyzed and summarized data to enable the City Council and public to have a full
accurate picture of the City’s financial state and trends.”

Finding 5: “More accurate summarized information needs to be regularly presented to the City
Council on the overall financial position of the City to better assess the impacts of its decisions
on expenditures, revenues, loans, transfers on the City’s short‐ and long‐term financial position.”

The City disagrees with findings 4 and 5. The City staff has continually presented accurate,
summarized data to Council during the Mid-Year budget review and during budget public

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sessions. The auditor’s report correctly indicates that General Fund revenues have been
decreasing over the last five fiscal years. However, the assumption that City staff has not
presented sufficiently analyzed and summarized data nor kept the Council and the public
informed is incorrect. As demonstrated in attachment 1; the City implemented several cost
savings measures over the review period while maintaining constant communication with the
Council and the public. The City’s staff has prepared and presented numerous, accurate
summarized data presentations via staff report and power point presentations at public City
Council meetings. Former Administrative Services Director did an excellent job keeping the City
Council and public informed.

Copies of these reports and presentations were provided to the auditors. Although, there is
always room for improvement and the findings represent more a subjective opinion that one
based on facts, the City will explore additional ways to present more summarized data to the
City Council and the public.

     2. Inter-fund Loans and Transfers

Finding 6: “Like most municipalities, the City of Watsonville loans and transfers cash between its
funds each year. At any point in time, a fund may have idle cash balances that can be used for
short‐ or long‐term loans to another fund to cover the costs of services or a project until
expected revenues have been obtained.”

Finding 7: “Risks associated with inter‐fund loans and transfers are that the loans will not be
repaid in full with appropriate interest if revenues do not materialize as expected, that repeated
loans mask the loan recipient fund’s inability to meet its costs, and that tying up certain fund
monies in loans may prevent the accomplishment of planned projects and services.”

The City agrees with these findings (6 & 7). These are general statements about loans and
transfers commonly known in financial governmental accounting.

Finding 8: “Some City of Watsonville inter‐fund loans reviewed have resulted in lessening
monies available in the loaning fund because some loans do not require interest payments. In
other instances, the full terms and conditions of inter‐fund loans are not fully disclosed in City
Council resolutions or CAFRs. Further, the impact of issuing inter‐fund loans on the loaning fund,
such as delays in planned projects or services, is not formally reported to the City Council and
public.”

Finding 9: “The recurring provision of short‐term General Fund loans to the City’s Airport and
Parking Garages, including the garage adjacent to the Civic Center, reflects ongoing operating
losses at those facilities that are being supported by the General Fund. The City has plans in
place for both operations but the impact on the limited General Fund of supporting these
operations in recent years could have been better reported to the City Council.”

The City partially disagrees with findings 8 and 9. The City generally charges interest for inter-
fund loans. In specific situations, the City Council made the policy decision to approve zero
interest loans as this would benefit economic development within the City in the long run.


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While some of the loans reviewed did not require interest payments, this was done with
presentation and approval by the City Council at a public meeting; therefore providing an
opportunity for the public and Council to ask questions about the transaction. The terms of the
loans were always disclosed in the loan agreements which were approved by the Council.

Other transfers characterized as loans by the audit report are not loans and are not presented
to the Council for approval. These include one day transfers of cash for financial reporting
purposes. For example, some City operations, such as the airport, have experienced negative
cash balances and the General Fund cash has been used for financial reporting purposes to
bring the cash balance to zero on June 30 and the transaction is reversed the next day. This is
done in order to meet accounting reporting requirements. The City Council has had extensive
public discussions on the City's Parking Fund and raised Parking Fees and Parking Ticket
amounts in recent years.
The Airport, despite running short-term deficits, is in good financial condition and has
consistently paid down its debt which was incurred to fund needed aircraft Hangars. A portion
of that debt will be completely paid off in 2014.

Finding 10: “At least three inter‐fund loans and reimbursements reviewed between FYs 2008‐09
and 2010‐11 did not include interest payments, resulting in a loss to the General Fund of an
estimated $740,000, an estimated loss to the City’s Impact Fee Funds of $111,492, and an
estimated loss of $36,597 in interest earnings for a loan issued by the Low‐income Housing
Set‐aside Fund. Two of these loans were approved by the City Council as interest‐free, though
staff reports to the Council about these loans did not present the fiscal impact of the
interest‐free loans. The sources of a multi‐fund loan to the General Fund to pay off a City debt to
CalPERS was disclosed as the City’s pooled money investment account in the City Council
resolution authorizing the loan. However, neither the resolution nor the related staff report
disclosed the individual funds that would be impacted by the loan.”

The City partially disagrees. The loans that resulted in no interest payments ($740,000 and
$111,492) were associated with the construction of the Civic Plaza Building and were presented
to the Council for approval with the terms of the loan clearly indicating there was no interest
being charged on this loan. This was a policy decision made by Council to encourage economic
development in the downtown area.

The audit report also makes reference to a loan and its corresponding interest in the amount of
$36,597 not been credited to the loaning fund. This characterization is incorrect. The item in
question is not a loan but a reserve which was established pursuant to a grant requirement. The
grant required the City to set aside $250,000 in reserve as a condition to receive grant funding.
Any interest earned by this deposit set aside for the benefit of the housing fund receives its
share of interest earned by the pooled investments.

Regarding the investment in a Public Employee Retirement System side fund loan; the auditor’s
report indicates the City did not disclose the funding sources for this loan. However, the City
presented this information to the City Council on June of 2011 to be as follows (see attachment
5): “That the City Council adopts a resolution authorizing and setting forth the terms and
conditions between the General Fund and the City’s pooled money investment account for an


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internal loan of up to $6,454,697 with the City’s 12-month average pooled money portfolio rate
for 13 years and authorize the defeasance of the CalPERS Side Fund Public Safety plans.” The
terms and funding were clearly indicated in the action approved by the Council and the staff
report. Furthermore, this is an investment made following the City’s investment policy which
indicates: “Investments shall be diversified among institutions, type of securities and maturities
to maximize safety and yield with changing market conditions; investments with a maturity at
purchase of more than 5 years shall be approved by City Council.”

This investment was made following the City’s investment policy. Staff explained this to the
auditors; however, the auditors chose to continue to characterize this as a loan and not an
investment.

     3. Budget and Expenditure Controls

Finding 11: “Expenditures for the majority of the City’s General Fund departments exceeded
their approved budgets for each of the three fiscal years ending June 30, 2012. The Fire and
Police Department exceeded their collective budgets by $1.8 and $1.2 million in FY 2009‐10 and
FY 2010‐11, respectively, and the majority of other departments did likewise. While unforeseen
needs can develop in any year that require budget adjustments, the number of departments
that have exceeded their budgets and the absence of a clear process for amending the approved
budget indicate a lack of cost control mechanisms and department management accountability
for controlling costs.”

The City partially disagrees. The audit report is comparing the original adopted budget to the
final actual audited expenditures ignoring any amendments to the budget throughout the year
approved by the City Council. While some departments have exceeded their departmental
budgets, the overall total General Fund budget has not been exceeded. The auditor also
ignored City Manager approved intra-fund departmental budget adjustments as allowed by the
City Council Budget Resolution. The primary area of over-expenditure during these years
occurred in Public Safety overtime. This was partly due to very ambitious budget goals for
overtime control in the original adopted budget. Police overtime has been brought under
control. Fire Department overtime expenditure amounts remain an ongoing concern.

The City staff understands the importance of having good processes in place to monitor the
budget. To that end, Department Directors have received monthly expenditure reports to track
their expenditures and make adjustments to their operations. In addition, City staff has recently
worked to implement a new policy and procedure to track department costs against budget
which requires corrective action plans by departments to bring their costs within budget. Part
of the challenge with implementing these reports is the City's outdated financial management
computer system. The City has planned to update it for many years, but has been unable to do
so because of budget constraints.

Exhibits 3.1 and 3.2 below show audited financial data for FY 2009-10 and 2010-11 respectively.
These exhibits derived from audited data demonstrate that while some Departments exceeded
their budget in FY 2009-10 the General Fund budget was not exceeded. To correct for some
department over-budget expenditures, the City Manager authorized intra-fund budget


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adjustments as allowed by Council Resolution. Nevertheless, the City recognizes there are some
departments, particularly public safety, exceeding their approved budget and the City has
identified these problems and potential solutions in the past as part of the budget and mid-year
budget presentations to the Council.

City staff will again present some options to the City Council during this year’s mid-year budget
presentation.

                                  Exhibit 3.1: FY 2009-10 Budget vs. Actual

                                                                                                                   Percent
                                                                                                                   Variance
                                                                                                                   (over)/
         Department                  Final Budget                           Actual     Variance                    under
         Capital Improvement Program $      28,711.64                  $     10,099.04 $     18,612.60                  64.8%
         Community Development        $ 1,408,059.72                   $ 1,249,465.47 $ 158,594.25                      11.3%
         Finance                      $ 2,164,606.66                   $ 2,336,867.03 $ (172,260.37)                    -8.0%
         Fire                         $ 5,395,397.00                   $ 6,290,471.28 $ (895,074.28)                   -16.6%
         General Government           $ 1,739,906.00                   $ 1,840,303.64 $ (100,397.64)                    -5.8%
         Library                      $ 3,515,931.85                   $    561,817.41 $ 2,954,114.44                   84.0%
         Non Departmental             $    485,412.60                  $    722,119.78 $ (236,707.18)                  -48.8%
         Parks & Community Services   $ 3,682,591.32                   $ 3,567,518.94 $ 115,072.38                       3.1%
         Police                       $ 14,648,242.16                  $ 15,171,181.29 $ (522,939.13)                   -3.6%
         Public Works                 $ 4,068,777.01                   $ 3,446,946.97 $ 621,830.04                      15.3%
         Grand Total                  $ 37,137,635.96                  $ 35,196,790.85 $ 1,940,845.11                    5.2%
          Sources: FY 2009-10 City Audited Financial Data and Comprehensive Annual Financial Report


                                 Exhibit 3.2: FY 2010-11 Budget vs. Actual
                                                                                              Percent
                                                                                              Variance
                                                                                              (over)/
          Department                         Final Budget       Actual        Variance        under
          Capital Improvement Program $ 1,607,380 $                61,357 $      1,546,023      96.18%
          Community Development              $ 1,285,578 $ 1,150,403 $              135,175     10.51%
          Finance                            $ 2,032,959 $ 2,152,956 $             (119,997)     -5.90%
          Fire                               $ 5,316,187 $ 6,148,924 $             (832,737) -15.66%
          General Government                 $ 1,673,849 $ 1,104,820 $              569,029     34.00%
          Library                            $    541,484 $       541,484 $             -         0.00%
          Non Departmental                   $    372,718 $       754,416 $        (381,698) -102.41%
          Parks & Community Services         $ 4,172,497 $ 3,140,084 $           1,032,414      24.74%
          Police                             $ 14,928,277 $ 14,966,519 $            (38,241)     -0.26%
          Public Works                       $ 3,733,704 $ 3,466,555 $              267,149       7.16%
          Grand Total                        $ 35,664,634 $ 33,487,519 $         2,177,115        6.10%
          Sources: FY 2010-11 City Audited Financial Data and Comprehensive Annual Financial Report

In addition, it is worth nothing that a trend of expenditures vs. budget over the last five fiscal
years shows the City has not overspent its approved budget. Exhibit 3.3 shows this data taken
from audited financial statements.




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               Exhibit 3.3: General Fund Five Year Trend of Expenditure vs. Budget
                                                                 CAFR Year
                                          2010-11     2009-10     2008-09     2007-08     2006-07
   Budgeted Appropriations              $35,664,633 $37,101,636 $41,508,725 $42,522,315 $39,323,387
   Actual Expenditures                  $33,487,519 $35,196,791 $38,068,719 $38,897,712 $36,464,073
   Variance                             $ 2,177,114 $ 1,904,845 $ 3,440,006 $ 3,624,603 $ 2,859,314
                                               Sources: CAFR for each fiscal year

Further analysis of expenditures by Department indicates the largest component for over
expenditure in Fire and Police departments was overtime. This situation had already been
reported to the Council in the mid-year report presented to the Council in February of 2012 and
prior budget status reports. More details about overtime will be presented in a separate section
below.

Finding 12: “Appropriation authority for General Fund expenditures in excess of originally
budgeted amounts was covered partially by carrying forward approximately $2.8 million in
unexpended prior year capital project appropriations in FY 2009‐10 and $1.8 million in FY
2010‐11. These appropriations were added midyear without City Council re-appropriation or
approval of new uses of these funds.”

The City disagrees with this finding. The re-appropriation of encumbrances is presented to the
Council and approved by them. This was also the case in FY 2009-10 and 2010-11 as
demonstrated on pages 21-27 of the biennial 2009-10 and 2010-11 budget and on pages2-8 of
the revised biennial budget.

Finding13: “While some overtime is unavoidable for public safety agencies and can even be cost
effective, the extent of the variance between budgeted and actual overtime, particularly for the
Fire Department, is extensive.”

Finding 14: “The City of Watsonville’s public safety costs, measured in costs per resident, are
higher than the median costs for public safety among seven comparable cities.”

The City partially disagrees with the comparison cities being used and agrees that overtime has
been high. A comparative analysis with local cities (Exhibit 3.4) indicates Watsonville is below
the median in public safety expenditures per capita, lower than other communities with similar
characteristics but with more resources such as Santa Cruz and Monterey, and higher than
other similar communities such as Gilroy, Morgan Hill, and Salinas.




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                  Exhibit 3.4: Comparison of Public Safety Costs per Person FY 2010-11
                                          Public Safety                  Cost per
                 City                     Expenditures Population Person
                 Salinas                   $ 55,943,707         150,441 $          372
                 Scotts Valley             $ 4,545,261           11,580 $          393
                 Santa Cruz                $ 34,376,692          59,684 $          576
                 Gilroy                    $ 22,005,580          52,027 $          423
                 Monterey                  $ 24,479,714          27,810 $          880
                 Morgan Hill               $ 16,139,261          38,477 $          419
                 Median                    $ 23,242,647          45,252 $          514
                 Watsonville               $ 22,258,470          52,543 $          424

Regarding overtime costs in public safety, City staff has identified this issue in the past, and has
made presentations to the Council about the problem and provided some recommendations to
improve the situation, and began implementing changes that have generated modest savings
estimated at $100,000 per year. An example of a summary table discussed with the Council in
FY 2009-10 is shown in (Exhibit 3.5).

 However, City staff recognizes more has to be done to alleviate this problem and is working to
identify alternative solutions to resolve this problem, particularly with the Fire Department.
More details will be presented during the mid-year budget review.

                                                            Exhibit 3.5




Finding 15: “The City lacks adequate management tools, reports, and resources to ensure
expenditures are controlled and that all variances with the budget are clearly disclosed. The
City’s finance and accounting system is outdated, lacks flexibility and does not provide sufficient



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timely information for department managers to be able to keep abreast of their budget
variances.”

Finding 16: “The City reports it has implemented a new budget monitoring process since audit
field work was completed.”

The City partially agrees with finding 15 and fully agrees with finding 16. In general, the City has
management tools, reports, and resources to ensure expenditures are controlled and that all
variances with the budget are clearly disclosed. However, the finance and accounting system is
outdated as it uses older, complicated technology which is not easily supported by existing
resources. Due to the current system’s complexity and the lack of expert resources for training,
development of new reports is extremely challenging. Therefore, the system lacks flexibility for
modifying reports easily at the department level. Acquiring a new basic financial system would
cost between $300,000 to $500,000 plus any internal costs for implementation. A more
comprehensive system could cost from $500,000 to $1,000,000 plus internal implementation
costs.

Even with these challenges, City staff has developed a new budget reporting policy and
procedure which helps departments better manage their budget. This practice was previously
in place and has now been formalized and improved. A copy of the policies and procedures,
and a sample report has been provided to the auditors and is included as attachment 2.

Finding 17: “The cash disbursement report provided to the City Council for approval at every
meeting is not an effective cost control mechanism. The reports contain little explanation, are
not tied to baselines, and lack roll‐ups by department or function.”

The City partially agrees with this finding. The cash disbursements report is not intended to
provide cost control information. The report is provided based on the requirements by the
City’s municipal code requiring that “all claims and demands, except fined salaries and wages,
against the City” shall be presented to the Council for approval. However, the “Guide to
Government Finance in California” indicates this practice is outdated and inefficient and
recommends eliminating the practice. Accordingly, City staff will work in developing new
reports that may provide summarized information with rollups by Department. This will likely
require a modification of the City’s municipal code but it is something which is supported by
Government Code Section 37208 (adopted in 1978 and amended in 1986). This legal code
allows local agencies adopting their budget by resolution not to receive governing body
approval before issuing checks to vendors.

Finding 18: “The City’s cost allocation plan for services provided to multiple departments is
based on allocation assumptions from FY 2000‐01, or more than ten years ago.”

The City agrees with this finding. The City had identified this as an item that needed attention
and will continue to move forward with its original plan to develop a new cost allocation plan
during the upcoming budget cycle.




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Finding 19: “The City established formal, written cash handling policies and procedures in the
summer of 2012. Prior to that, such policies and procedures were not in place, in spite of the
fact that tens of millions of dollars are collected each year Citywide. City staff reports that more
such written procedures will be prepared in the near future.”

The City disagrees. Prior to the summer of 2012, the City did have policies and procedures in
each department for cash handling. The City implemented a city-wide comprehensive cash
handling policy in the summer of 2012 which included a refinement of current practices and
policies at the department level. In addition, departmental practices and policies are currently
being reviewed to be aligned with the comprehensive city-wide cash handling policy.

     4. Capital Budget and Impact Fees

Finding 20: “In addition to its operating budget, the City maintains a five year capital
improvement project budget that is subject to approval by the City Council as part of the annual
budget approval process.“

The City agrees with this finding as it merely states the City’s capital budgeting practice.

Finding 21: “The City’s capital improvement project budget provides some important details for
each project including a brief project description, planned expenditures, department, fund, and
name of project manager. However, it is not possible to tell from the document how long
previously approved projects or equipment acquisitions have been underway and how much or
how little has been expended on them. Since timing and costs frequently change over the course
of a capital project, it is critical that the City’s governance board maintain the ability to oversee
progress and costs on capital expenditures.”

The City partially agrees with this finding and will work in implementing a short term and long
term solution to capital projects reporting. The City has always tracked capital improvement
projects in the financial system by assigning a project number which allows for tracking of costs
on the project over time. In addition, the City always tracks capital projects progress by showing
a list of these projects in the budget documents. However, the antiquated financial system the
City owns poses a challenge in easily obtaining reports for these projects and present additional
information other than the details currently provided. In the short term, the City will continue
the current time consuming elaborate process in place. In the long run, the City will seek a
solution tied to the acquisition of a new financial system which will allow for tracking of capital
projects over multiple fiscal years with less time and resource intensive processes.

Finding 22: “One source of City funding for capital projects is development impact fees. These
fees, paid for by developers, are used to cover the costs of new infrastructure and equipment
needed due to development. The bases of many of these fees have not been updated since they
were established in the 1980s. Many are not tied to clearly established standards or clearly
linked to documented development‐related costs. Some of the uses of these fees do not appear
to be growth‐related, as required by State law.”




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 Finding 23: “Required annual reports on the City’s development impact fees, presented to the
 City Council on consent agenda each year, do not contain all information required by State law
 to enable the City Council and public to determine how these funds are being used. Projects that
 can be funded with these fees are limited to growth‐induced needs and some projects funded do
 not appear to be appropriate.”

 Requirements for the establishment and reporting on development impact fees are set by
 government code sections 66000 et seq. The ordinances the City adopted meet the
 requirements of this section. The City will evaluate the past reports and present a separate
 report on impact fees to the Council once the evaluation is completed.

      5. Procurement

 Finding 24: “Adherence to City of Watsonville policies and procedures for procurement is
 inconsistent. For instance, a review of purchase order files demonstrated that 11 out of a
 sample of 20 purchase orders in FY 2011‐12 did not obtain three sources of pricing, either
 through quotes or competitive bids, when policies encourage or require them to do so. Seven of
 these 11 purchase orders were for professional services. Existing policies and procedures for the
 procurement of professional services through competitive bidding are vague and conflicting.”

 City staff reviewed the same sample of purchase orders for compliance with the purchasing
 policies and procedures and found compliance with purchasing policies and procedures for 18
 out of the 20 sampled orders. The backup to each purchase order is with each file reviewed.
 The auditor is aware purchases for professional services are different from buying materials and
 the purchasing requirements are different for those services according to State law and City
 procedures; this accounts for 7 of the 11 purchases the auditor indicates are out of compliance.
                               Exhibit 3.1: Purchasing Samples City of Watsonville
                                                                                              Explanation
                                                                                              for less than
                          Explanations documented on PO      P/W      Professional 3 vendors  3 vendors            Quick   Formal Sole Source -
P.O. #    Amount          request                            Projects Services     documented documented CC RESO Bid       Bid    documented
S004210   $2,265,839.49   Documented                         yes                                            74-10          yes
S004293      $50,000.00   Documented                                  yes                                   29-11
S004472      $25,000.00   Documented                                  yes                                   20-11
S004478     $134,332.42   Documented                         yes                                            131-11

                          Only two vendors make these that
                          can be used by our trucks. Both
                          gave us quotes. Documented
S004479     $27,325.03                                                                         yes
S004497     $99,500.00 Documented                                    yes                                    160-11

S004498     $15,318.04 Only vendor that sells this product                                                                        yes
S004501     $15,634.00 2 vendors documented                yes
S004506     $64,000.00 Signed contract by city                      yes
                       Only vendor that sells this product
S004517     $21,665.16 in CA                                                                                                      yes
S004525     $22,450.00 Bid & Vendors documented            yes                                                       yes
S004535     $45,000.00 Documented                                                                           46-09
S004709     $11,102.02 Documented                                                  yes
S004712     $40,000.00 Documented                                                                           76-11
S004714    $127,000.00 Bid documented                                                                       131-12         yes
S004724    $173,725.00 Documented and cm approved                                                           18-12
S004730     $25,000.00 Documented                                   yes                                     11-12
S004747     $70,034.58 Bid documented                                              yes                               yes
S004757        $800.00                                     under limit for required written documentation
S004803      $6,539.50 City singed contract attached                yes


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This is an incorrect interpretation of the purchasing policies. Of the remaining four, only two did
not have all the required documentation required for competitive bidding (see Exhibit 3.1).

Finding 25: “The City Council does not always approve purchase orders or agreements that are
greater than $50,000, though City policies and procedures require such approval. A review of 21
purchase orders with funds encumbered in FY 2010‐11 that were subject to City Council
approval found that eleven were approved by the City Council but ten were not. Those approved
represented most of the dollar value of the 21 purchase orders, but the ten that were not
approved by the City Council had an aggregate value of $1,486,070 or an average value of
$148,607 each.”

The City disagrees with this finding. Not all purchase orders in excess of $50,000 must be
approved by City Council. The purchasing policy indicates purchases of non-personal services,
services and supplies, and equipment must follow competitive bidding which requires Council
approval. However, Public Works projects have different rules as approved by the Council. In
accordance with the purchasing policies, Public Works projects can be awarded up to $175,000
without obtaining Council approval or conducting formal bidding. Some of the items analyzed
by the auditor fell in this category but the auditor insisted in applying the $50,000 limit on all
purchases. The summary below (Exhibit 5.2) shows two out of 27 sampled purchases did not
fully meet the purchasing requirements. One of those samples is being counted twice; once
under finding 24 and the second time in this sample.




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                                                  Exhibit 5.2: Purchasing Samples in Excess of $50,000
                                              Piggyback
                                              agreement               Explanation
                                              approved                for less than
                        P/W      Professional by CM per 3 vendors     3 vendors                               Sole Source -   Explanations documented
PO #    Amount          Projects Services     reso      documented    documented CC RESO Quick Bid Formal Bid documented      on PO request
S004497      99,500                                                                 160-11                                    documented
S004504   2,954,000                                                                 153-1                                     documented
S004506      64,000             yes                                                                                           Signed contract by city
                                                                                                                              3 vendors documented - 1
S004507         70,767          yes                                                                                           will not reply
S004514      1,256,075 yes                                                         167-11                                     documented
                                                                                                                              only two vendors
S004515        74,501 yes                                                                                                     documented
                                                                                                                              renewal proceesed in
                                                                                                                              approved contract -
S004522       192,252                                                              187-09                                     documented
                                                                                                                              renewal proceese in
                                                                                                                              approced contract -
S004523        95,269                                                              186-09                                     documented
S004534       246,500 yes                                                          184-11                                     documented
                                                                                                                              Bid in 2011 extension in
S004690       124,000 yes                                                                   yes                               contract documented
                                                                                                                              City singed contract
S004698        85,000           yes                                                                                           attached
S004703        82,533
                                                                                                                              Documented and cm
S004708       252,733                       Yes                                                                               approved
S004714       127,000                                                              131-12            yes                      bid documented
S004716        90,888 yes                                                                   yes                               winning bid included
                                                                                                                              Documented and cm
S004719       406,212           yes                                                18-12                                      approved
S004724       173,725                                                              170-11                                     documented
S004727       100,000                                                              13-12                                      documented
S004729       193,000                                                              21-12                                      documented
                                                                                                                              Documented and cm
S004733       328,732                       Yes                                                                               approved
S004736        89,958 yes                                                                   yes                               winning bid included
                                                                                                                              only two local vendors - 1
                                                                                                                              refused to respond
S004739        50,891                                                                       yes                               documented
S004750        70,035                                                                       yes                               bids from 3 vendors
S004752       387,450 yes                                                          193-11            yes                      documented
S004755       148,189 yes                                                                   yes                               3 vendors documented
S004761        62,908 yes                                                                   yes                               3 vendors documented
                                                                                                                              Only vendor to haul
S004800       321,100                                                                                          yes            biosolids documented
S004802       115,812                                                                       yes                               bid documented


Finding 26: “Though the City Council adopted contract change order policies in 1996, those
policies are not included in the City’s Administrative Rules and Regulations. Further, they do not
provide sufficient mechanisms to control contract costs increases resulting from change orders.
For example, a construction agreement for $1,888,429 was approved by the City Council

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because it was the lowest price out of seven bids. However, a change order of $374,162, or a
19.8 percent increase, was approved by the department director and the Purchasing Division
without having to go back to the City Council for approval. The change order amount is more
than twice the $175,001 threshold for City Council approval of new public works contracts.”

The City disagrees with this finding. The City Council designated change order authority up to
25% of the original order to department directors and City Manager according to resolution 91-
96 CM. All change orders follow the authority provided under this resolution. Staff have been
trained an informed about this policy. In addition, the original contract amount was approved
by the Council; so having the change order approved by Council again as the finding suggests
would be irrelevant.

Finding 27: “Formal policies and procedures for Open Purchase Orders for small, repetitive
purchases do not exist. In FY 2011‐12 there were 159 Open Purchase Orders, of which 136
incurred expenditures totaling $3,081,502. However, a majority of these Open Purchase Orders
have not been competitively bid within the past 20 years and most do not have a negotiated
contract with the City to ensure consistent prices and discounts for goods and services.”

The City partially agrees with this finding. The City has had controls in open purchase orders;
however, there is an issue on how purchase orders are tracked in the financial system which
does not allow for clear monitoring of purchase orders. The City has recently formally placed a
policy for dealing with recurring purchase orders and will explore the acquisition of a new
financial system. The acquisition of a new system will cost in the range of $300,000 to
$1,000,000 depending on the modules purchased.

In connection with the findings outlined in this report, there are also 22 recommendations
presented in the performance audit report. Some of these recommendations are valid and
useful and can be implemented quickly, while others could be significantly impactful to
implement given the limited City’s resources. The summary below shows a summarized and
condensed view of the recommendations, their estimated potential impact and feasibility of
implementation by the City. For a complete description of the recommendations, please refer
to the Grand Jury Report Executive Summary.




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                          Estimated    Estimated
Recomm. Estimated         Internal     External    Estimated    City
#          Staff Hours    Cost         Cost        Total Cost   Agrees       Recommendation
       1.1         200     $ 10,000     $    -      $ 10,000     Yes         Annual Summary reports of CAFR
       1.2            5    $     250    $    -      $     250    Yes         Annual Report comparing to other Cities
       1.3         124     $ 6,200      $    -      $ 6,200      Yes         Establish Finance sub-committee
       2.1         102     $ 5,100      $    -      $ 5,100      Yes         Interfund Loans policy
       2.2           20    $ 1,000      $    -      $ 1,000      Yes         Report on impact of interfund loans to other funds
       2.3           10    $     500    $    -      $     500    Yes         Report on impact of interfund loans to other funds
       2.4         -       $     -      $    -      $     -      No          Interfund loans paid with interest (repeat of 2.1)
       3.1         102     $ 5,100      $    -      $ 5,100      Yes         Policy governing budget changes
       3.2         253     $ 12,650     $    -      $ 12,650     Yes         Review of Fire and Police expenditure
       3.3         150     $ 7,500      $    -      $ 7,500      Yes         Report reconciling original budget to approved budget and CAFR
       3.4         125     $ 6,250      $    -      $ 6,250      Yes         Revise municipal code and streamline disbursements report
       3.5         500     $ 25,000     $ 25,000    $ 50,000     Yes         Update Cost allocation plan and update annually (costs are annual)
       3.6         150     $ 7,500      $ 25,000    $ 32,500     Yes         Obtain actuarial reports for internal service funds
       3.7         -       $     -      $    -      $     -      Yes         Charge sufficient rates for health costs (related to 3.7)
       3.8         300     $ 15,000     $    -      $ 15,000     Yes         Continue preparing and updating written policies/procedures
       4.1         150     $ 7,500      $    -      $ 7,500      Yes         Modify capital budget document to include multi-year presentations (annual)
       4.2         250     $ 12,500     $ 25,000    $ 37,500     Yes         Review all impact fees for compliance with requirements
       4.3         300     $ 15,000     $ 15,000    $ 30,000     Yes         Establish service level standards for each impact fee
       4.4         150     $ 7,500      $    -      $ 7,500      Partially   Prepare annual impact fee reports that are fully compliant with requirements
       5.1         100     $ 5,000      $    -      $ 5,000      Yes         Revise administrative rules to improve purchasing procedures (annual)
       5.2         500     $ 25,000     $    -      $ 25,000     Yes         Train City staff involved in purchase process
       5.3         200     $ 10,000     $    -      $ 10,000     Yes         Annual reports summarizing purchase order activity
Totals           3,691     $ 184,550    $ 90,000    $ 274,550


While City staff recognizes it is always prudent to have policies and procedures in place to aid in
the operations of an organization, it is also true that is not feasible or practical to have a policy
for every single aspect of running an organization. Cost and resource constraints will always be
present, and Council Members and City staff must be aware of those constraints in order to
prioritize resources to the most critical areas of operations.

Although the City disagrees with some material presented in the findings outlined in the audit
report, the City staff reiterates its appreciation for the work done by HMR and values the
potential positive impact their recommendations may have on the City.

FINANCIAL IMPACT:
There is no financial impact of receiving and approving the response to the report, but it is
estimated City staff spent 500 staff hours to respond to the Auditor’s requests at an estimated
cost of $25,000. Implementation of all the recommendations is estimated at $275,000; plus an
additional $300,000 to $1,000,000 for purchasing a new financial system in the long term.
Potential savings from implementing recommendations is still undetermined at the time of
writing this report.

ALTERNATIVES: The City Council can choose not to accept the report and direct staff to provide
more information or the Council can approve the report as recommended, or it can approve
the report with suggested modifications.

ATTACHMENTS:
   1) Summary of Information presented to Council
   2) Budget Monitoring Policy and Procedure
   3) Performance Audit of the City of Watsonville
   4) PERS Side Loan Resolution

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      5) PERS Side Loan Staff Report
      6) Response to Recommendations



cc:       City Attorney




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            City of Watsonville Reduction Strategies Implemented Since 2007
The General Fund has suffered greatly from this recent economic recession. As shown in Table 1
below, the City’s management and the City Council have made every effort to get ahead and keep
pace with the rate of economic declines and started reducing services well before most surrounding
agencies.
                                                                                              TABLE 1
                                                                                            Estimated
                                                                                            Annualized
 General Fund Reduction Strategy                                             Timing          Savings
 Hiring freeze for all non-safety General Fund positions                    Winter 2007       $402k
 Reduce Capital projects                                                  Mid-Year 2008       $133k
 Freeze and eliminate various capital projects                              June 2008         $693k
 Staffing reductions implemented                                            June 2008        $1 million
 Increase parking permits & fire false alarm fees; sold excess property     June 2008         $120k
 Reduce General Fund staffing                                              August 2008         $75k
 Reduce General Fund staffing                                              October 2008       $120k
 Holiday temporary layoff plan from 12/22/08 through 1/05/09.             December 2008      Net $440k
 Administrative freeze on General Fund travel and training programs        January 2009        $59k
 Freeze additional position                                                January 2009       $106k
 Reduce General Fund staffing                                             February 2009       $131k
 Increase Parking Citation rates                                            March 2009        $110k
 Massive reduction plan for FY 2009-2010:
      Up to 15% employee comp reduction, Freeze step increases for
      miscellaneous groups, 3 layoffs & 20 unfunded positions;              June 2009       $4.5 million
      unfunded all General Fund Capital Projects; 15% reduction in
      Community/Social grants, 911 Center & Animal Services
 Additional eliminations of General Fund staffed positions &
                                                                            Fall 2009        Net $70K
 implemented a low-cost Voluntary Retirement program.
 Additional reductions of General Fund staffing                           February 2010        $379k

 Amendments to Vehicle Towing Services Ordinance                           March 2010          $183k
 Reduce General Fund staffing, personnel costs and social service
                                                                            June 2010       $1.5 million
 grants, continuing reductions from prior budget cycle
 Mid-year reduction plan
     Eliminated P&CS Superintendent, consolidate programs with
     P&CS, consolidate customer services between departments,               Feb 2011           $301k
     eliminate additional support services, assume maintenance
     contract for Driving Range, increase lease revenue
 Reduce General Fund options with ongoing personnel cost
 reductions, 5% reduction social service grants, and operating
 reductions from prior budget cycles:
     19 Positions eliminated, unfunded and reduced                          June 2011       $1.93 million
     Reduced retirement benefits for all new hires by implementing 2-
     tier system for Miscellaneous and Public Safety groups

 Additional reductions of General Fund staffing through attrition and
                                                                            Feb 2012           $400k
 RAHD staffing due to elimination of Redevelopment Agency


                                                                                          ATTACHMENT 1
                                                                                                 1 of 4
                Budget Reductions and Pension Reform Timeline



Year        Implementation of Reform
June 2007   Negotiated with Police and Fire to pay 9% of employee share of retirement
            contributions. City only pays employer rate.

June 2007   Negotiated with all but one Miscellaneous group to pay 3% of employee share of
            retirement contribution. The City to pay only 4% of employee share. The City
            continued to pay 7% for SEIU Local 521.
June 2009   Major concession negotiated with all groups resulting in up to 15% cut.
            Miscellaneous groups agreed to 10% Salary Cut and Freezing merit step
            increases. Fire union (Local 1272) signs 2 year contract and agrees to 7.5% total
            concession. As part of the negotiations, Fire agrees to pay 7.31% of employer’s
            PERS share. Police agreed to 7.5% concession.
June 2010   Miscellaneous groups and Police unions agreed to extend 2009 concessions for
            another year. No negotiations with Fire union as they had negotiated 2 year
            contract with similar concessions.
June 2011   Signed 2 year MOUs with all bargaining units that included two-tier
            retirement system and agreement by Miscellaneous groups to pick up
            additional 1% in employee share of PERS. Miscellaneous new formula is
            2%@60 and Public Safety is 3%@55. Both formulas call for final compensation
            to be based on highest wages earned in any consecutive 3-yr period.
            Continuation of major concessions resulting in up to 15% cut. Miscellaneous
            groups agreed to 1% pick up of employee PERS share with exception of OE3
            which agreed to 1% additional cut. Mid-Management agreed to pick up
            additional 2% of PERS share in the second year of the contract. Fire union
            agreed to 9.5% total concession. As part of the concession, Fire agreed to pay
            10% of employer’s PERS share. Police agreed to 9% total concession including
            8 furlough days.
September   CalPERS contract amendment becomes effective implementing Miscellaneous
2011        and Public Safety Two-Tier System for new hires

June 2012   14 Miscellaneous employees hired under the new 2% @ 60 w/ 3 yr average
            formula and 2 Police Officers hired under new 3% @ 55 w/ 3 yr average formula.
            Staffing levels have been reduced by 7%. In June 2009 City had a total of 383
            full time and regular part time employees and in June of 2012 there were 356.
January     Since June 2012 another 8 Miscellaneous employees were hired under the new
2013        2% @ 60 w/ 3 yr average formula and another 2 Police Officers and 1 Firefighter
            hired under new 3% @ 55 w/ 3 yr average formula. We have had a number of
            senior level retirements in the last year that need to be replaced. Most of the
            new hires are in non-General Fund positions. The City currently has 367 full time
            and regular part time employees.


                                                                              ATTACHMENT 1
                                                                                     2 of 4
                                       Public Information Disclosure to City Council
 Response to Harvey M. Ross Associates Performance Audit Report: Material Documentation


Audit           Material                                                                                                Information Access
Finding         Source             Nature and Content of Material                                                       Availability
1. Financial Condition, Reporting and Controls

Finding 1, 2    Staff Reports      The City has been proactive in responding to the economic crisis and keeping the     City Council Packet
Financial       PowerPoint         City Council informed. City Council annually is provided with a Mid-Year Review in   Budget Public Hearings
Condition and   Presentations      February and holds Budget Hearings in May to discuss adoption of balanced            Online @ City Website
Spending        2/28/2006          budget. As a standard practice, City Council receives the draft Budget document,     Revenue Ad Hoc Mayor
Patterns        6/27/2007          Staff Reports, PowerPoint presentations with charts and tables analyzing financial   Subcommittee Report
                6/26/2007          condition, and appropriate resolutions or ordinances. City Council makes budget
                6/10/2008          decisions after extensive discussion and public debate. Since late 2008 City
                5/12/2009          Council has implemented hiring freeze, layoffs, salary and benefits cuts, and has
                City Budget SR     prioritized public safety positions to protect the community. On June 27, 2006 in
                Mid-Year Reports   fund balance analysis staff informs Council that “City will continue to experience
                Resolutions        drop in fund/cash balances due to planned capital expenditures.” In response to
                Ordinances         projected deficits, in 2009 the Mayor created a subcommittee to consider various
                                   revenue enhancement options for the City’s GF and potential revenue measures.


Finding 4       Staff Reports &    All City Staff reports include a section on Fiscal Impact of recommendation. Staff   City Council Packet
Fiscal Status   Presentations      annually provides City Council with a comprehensive staff reports with charts and    Public Hearings
                6/26/2008          tables identifying City’s financial condition and an analysis of impacts. Financial  Online @ City Website
                10/14/2008         discussions are held in February during Mid-Year budget review and in May during
                5/26/2009          final budget adoption. City staff always strives to provide City Council with a true
                6/9/2009           picture of impact of decisions using financial data. For example, in June 2007 City
                5/25/2010          Council added 8 public safety positions to GF budget to address public safety
                2/22/2011          concern. Staff recognized Council achievement, but cautioned that “because these
                5/24/2011          proposals negatively impact our out-year projects, staff will closely monitor the
                Resolutions        City’s revenues and operations.” Starting in 2008, Mid-Year and Budget Hearing
                                   staff reports and presentations provided specific details to City Council of looming
                                   deficits and planned mitigations as a result of downturn in the economy.

                                                                                                                              ATTACHMENT 1
                                                                                                                                     3 of 4
Finding 5          Staff Reports         All City Staff reports and presentations strive to regularly provide accurate           City Council Packet
Accurate           PowerPoint            information to help policy makers and the Public have a better understanding of         Public Hearings
information to     Presentations         policy decisions and assist in assessing fiscal impacts of decisions on                 Online @ City Website
assess financial   Watsonville           expenditures. City practice has been to present financial data through written and      City Newsletter-print and on
position of City   Magazine              oral reports with PowerPoint presentations. City staff also makes use of                City Website
                   Newsletters           Government Access Channel (Ch. 70) and quarterly newsletter to keep the public          WATV Channel 70
                                         informed about budget process and state of the local economy. All budget
                                         hearings include presentations with charts on General Fund resources and
                                         expenditures. For example, the May 24, 2011 presentation included detailed charts
                                         with top 5 revenue funds and pie chart listing breakdown of major expenditures
                                         (highlights 63% of cost is due to Public Safety). This same presentation showed
                                         analysis of increases in pension costs, public safety overtime, state takeaways,
                                         and status of local housing market. Staff reports and presentations present a very
                                         detailed picture of overall financial position of the City.
2. Inter-fund Loans and Transfers

Finding 9          Staff Reports         In January 2008 City Council formed a Parking subcommittee to consider                  City Council Packet
Inter-fund         1/8/2008              “proposals to lessen the General Fund subsidy for parking operations (about             Public Hearings
Loans              5/27/2008             $100,000 annually)” Staff Report Pg 7. They went on to recommend a multiyear            Online @ City Website
Disclosure on      Presentation          approach to increase fees and consider revenue options. During budget hearings          Parking Ad Hoc Mayor
Parking            5/27/2008             in 2008 staff presented a slide titled “Parking Garage-Subsidized Program”              Subcommittee
Garages                                  outlining financial implications of subsidy. Parking permits annual rates were
                                         increased over a four year period from $165 in 2008 to $385 in 2013. Parking
                                         citations were also increased. Staff reports to City Council once every three years
                                         regarding parking permit rates.
Finding 10         Staff Report 6.9.11   Both the staff report and resolution clearly indicated funding of loan will come from   City Council Packet
CalPERS            Reso.121-11 CM        “City’s Pooled Money Investment Account” and what percentage of interest to be          Online @ City Website
Side Funds                               charged. This action saved the City money while allowing for better return on
Reporting &                              investment to our Pooled Investment Account. There were only two occasions
Interest                                 where Council made exceptions to charging interest on internal loans and they did
Payments                                 so to promote economic development in downtown.




                                                                                                                                        ATTACHMENT 1
                                                                                                                                               4 of 4
 Attachment 2



                                             City of Watsonville
                                    Administrative Rules and Regulations
                                              Chapter III – Finance
                                           Section 3 – Internal Controls
                                                                                                     Approved by:

3.3.3 Department Review of Financial Reports

                                                          Attachments:
                                                          1 - List of Department Codes and Responsibilities
Established: 10/16/2012                                   2 - List of Funds and Description
                                                          3 - Report Format
                                                          4 - Monthly Closing Schedule
Revised:                                                  Cross Reference:


  I. PURPOSE
     To establish a consistent and documented approach for ongoing review, monitoring, and
     correction of financial activity at the Department level.

  II. POLICY
     Department Heads are responsible for monitoring budgets for the departments and funds
     under their management; as part of this monitoring the Department Head shall write and
     submit a bi-monthly report to the Administrative Services Director (see attachment 3) or type
     explanations to the right of the report prepared by Finance in the network drive.

     If Year to Date (YTD) total expenditures or total revenues varies 5% or greater (+/-) from the
     approved budget; the report will require an explanation to be added indicating the reason for
     the variance and how the variance will be addressed. If the same variance persists for more
     than one period, the department director will need to meet with the City Manager and
     Administrative Services Director to explain the reason for the variance and how this is to be
     corrected.

     Reports will be available in the M Drive the 25th of each month for the preceding month for
     departments to review and prepare their analysis of expenditures in their department.
     Department Heads will have to prepare this report by the 1st of each month following the
     availability of reports.




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III. PROCEDURE

   Generating Reports

   1. The finance department will extract the reports from GEMS by the 25th of each month for
      the preceding month and place the reports in the following path: M:\Finance\Monthly
      Expense Reports
   2. The reports will be organized by month within each fiscal year.
   3. The final report for a fiscal year will not be available immediately but a preliminary report
      will be available by August 25th of each year. The final report will only be available after all
      the audit adjusting entries are performed.

   Report Writing

   4. The top of the report will show you the percent available as the image below shows,
                                                                     City of Watsonville
                                                                           Finance
                                                              Revenue and Expenditure Report
                                                            JUNE 30, 2012 THROUGH JULY 31, 2012
                                                                                  Revised    Expended Expended                  Available Percent
   Account No.                  Description                                       Budget        YTD         PTD      Encumbered  Balance Available
                                7TH, 8TH & 9TH STREETS ASSESSMENT TOTAL:               0.00        0.00        0.00       0.00        0.00        0
    150   230    5288   00000   LEASE MANAGMENT FEE                             (105,000.00)       0.00        0.00       0.00 (105,000.00)     100
    150   230    5311   00000   COST ALLOCATION REIMBURSEMENT                   (578,860.00) (48,238.45) (48,238.45)      0.00 (530,621.55)   91.67
    150   230    5419   00000   LOAN FEES REVENUE                               (172,000.00)       0.00        0.00       0.00 (172,000.00)     100
    150   230    5895   00000   OTHER REVENUE                                    (90,000.00)       0.00        0.00       0.00 (90,000.00)      100
                                FINANCE REVENUE TOTAL:                          (945,860.00) (48,238.45) (48,238.45)      0.00 (897,621.55)    94.9
    150 230 7011 00000          REGULAR SALARIES & WAGES                         491,053.00   53,475.16   53,475.16       0.00 437,577.84     89.11
    150 230 7013 00000          SICK PAY                                               0.00       44.48       44.48       0.00      (44.48)       0
    150 230 7021 00000          TEMPORARY & CASUAL WAGES                          28,251.00        0.00        0.00       0.00   28,251.00      100




   5. Enter data from the report printed into the format described in Attachment C and submit to
      the Administrative Services Director by scheduled date as defined in Attachment D.
      Alternatively, you can enter an explanation to the right of the report shown in item 4 above
      and present this printout to the Administrative Services Director. If the total available
      percentage to date varies by 5% or more from the target for the period; an explanation how
      the variance will be reduced is also required in this report.

   6. If this variance persists for two periods in a row, a meeting with the City Manager and
      Administrative Services Director would be required in addition to the report.

   Research Account Activity



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7. To analyze if the information in the financial report is accurate for a particular line, one can
   use GEMS General ledger drill down.
        a) Open the GEMS system
        b) Click the FMS tab, general ledger, inquiries
        c)     Click on the account summary link
        d) Enter the account number, for example the Finance Department could enter
              2307011 if it wanted to check the regular wages object for variances.
        e) Hit enter and click on the “Current Year Dtl” tab.
        f)    Enter “070112” in the Hit enter one more time.
        g) The details about the salaries will show on the screen.
        h) Click on the “select field”. This will take you to the original transaction where you
           can review its details.




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8. If a specific transaction should not have been charged to this account, report that on the
   report to the Administrative Services Director.
9. The Administrative Services Director will ensure an entry is done to code the cost to the
   correct department and/or fund.




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                                                                                   ATTACHMENT 1
                           List of Department Codes and Responsibilities
Manager
Responsible          Director            Department      Function                Fund-Dept
Airport              PW Director         Public Works    Airport                 730-ALL
Manager
CM Analyst           City Manager        General         City Council            150-110
                                         Government
CM Analyst           City Manager        General         City Manager            150-120
                                         Government
CM Analyst           City Manager        General         City Attorney           150-130
                                         Government
City Clerk           City Clerk          General         City Clerk              150-160,162, & 163
                                         Government
HR Manager           City Manager        General         Personnel               150-210
                                         Government
Deputy City          City Manager        General         PEG                     150-393
Manager                                  Government
CDD Director         CDD Director        Community       TRO                     150-315
                                         Development
PW Director    PW Director               Public Works    Central Office          150-220
PW Director    PW Director               Public Works    Civic Plaza             150-221
PW Director    PW Director               Public Works    Streets                 150-510
PW Director    PW Director               Public Works    MSC                     150-523
PW Director    PW Director               Public Works    Wastewater              710-ALL
PW Director    PW Director               Public Works    Solid Waste             740 & 741 -ALL
PW Director    PW Director               Public Works    Water                   720-ALL
PW Director    PW Director               Public Works    Gas Tax                 305-ALL
PW Director    PW Director               Public Works    CIP Impact Fee Funds    340 & 342 & 344
Admin Services Admin Services            Finance         Finance                 150-230, 231, 235,
Director       Director                                                          240
IT Manager     Admin Services            Finance         Information             150-250 & 251
               Director                                  Technology
Admin Services Admin Services            Finance                                 150-275 & 280, 281
Director       Director                                                          & 282, 290-293
Admin Services Admin Services            Finance         Insurance               780-971
Director       Director
Fire Chief     Fire Chief                Fire            Fire Protection         150-450
Fire Chief     Fire Chief                Fire            Fire Impact Fees        348-948
Admin Analyst RHA Director               RHA             Cal home                210-610
(L)
Project        RHA Director              RHA             Business                225-340
Manager (K)                                              Development

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Manager
Responsible        Director            Department      Function                 Fund-Dept
Eliminated         RHA Director        RHA             Business Boosters        227-345
                                                       Program
Admin Analyst      RHA Director        RHA             Affordable Housing       221-347
(L)
Admin Analyst      RHA Director        RHA             CDBG Administration      205-380
(J)
Admin Analyst      RHA Director        RHA             CDBG Housing Rehab       205-383
(J)
Admin Analyst      RHA Director        RHA             CDBG Economic            205-385
(J)                                                    Development
Fabian             RHA Director        RHA             CDBG Public Facilities   205-386
Admin Analyst      RHA Director        RHA             Rental Rehabilitation    207-387
(L)
Ted (PW)           PW Director         RHA             Civic Center Parking     309-525
                                                       Garage
Ted (PW)           PW Director         RHA             Parking Garage           309-521
Admin Analyst      RHA Director        RHA             Home Program             209-370
(L)                                                    Income
Ted (PW)           RHA Director        RHA             CIP Parking Garage       309-969
Admin Analyst      RHA Director        RHA             Home Admin               209-376
(J)
RHA Director       RHA Director        RHA             RDA Oblig Ret Fund       202-361
RHA Director       RHA Director        RHA             RDA Housing              204-368
Project            RHA Director        RHA             EZ Vouchers              206-364
Manager (K)
Project            RHA Director        RHA             Enterprise Zone          206-364
Manager (K)
Project            RHA Director        RHA             Civic Ctr Lease Mgmt     150-280
Manager (K)
Library            Library Director    Library         Watsonville Library      150-620
Director                                               GF
Library            Library Director    Library         Watsonville Library      250-621
Director                                               SF
Senior             Library Director    Library         Freedom Library GF       150-622
Librarian
(Heather
Geddes)
Library            Library Director    Library         Freedom Library SF       250-623
Director
Literacy           Library Director    Library         Literacy Center          150-626
Coordinator
(Toni Notar)


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Manager
Responsible        Director            Department      Function                Fund-Dept
Library            Library Director    Library         CIP Library             250-935
Director
PCS Director       PCS Director        Parks & Rec     Parks Operations        150-680
PCS Director       PCS Director        Parks & Rec     Special Events          150-685
PCS Director       PCS Director        Parks & Rec     Recreation- NS          150-688
PCS Director       PCS Director        Parks & Rec     Recreation Admin        150-690
PCS Assistant      PCS Director        Parks & Rec     Recreation Centers      150-691
Director
PCS Assistant      PCS Director        Parks & Rec     Recreation Sports Pr    150-692
Director
PCS Assistant      PCS Director        Parks & Rec     LLMAD Bay Breeze        354-958
Director
PCS Assistant      PCS Director        Parks & Rec     LLMAD Vista Special     354-959
Director
Police Chief       Police Chief        Police          Police Support          150-409
Police Chief       Police Chief        Police          Police – General        150-410
Police Chief       Police Chief        Police          Police Investigations   150-411
Police Chief       Police Chief        Police          Police Activities       150-417
                                                       Leagu
Police Chief       Police Chief        Police          Research & Program      150-419
                                                       D
Police Chief       Police Chief        Police          Abandoned Vehicle       245-423
Police Chief       Police Chief        Police          Animal Services         150-430
Police Chief       Police Chief        Police          Police Special Grants   260-336




  3 of 3   Administrative Rules & Regulations | Department Review of Financial Reports Attachments
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                                                                                                                  ATTACHMENT 2

                                    List of Funds and Description

                                              \\fs1\UserProfiles$\ezequiel.vega\My Documents\chart of accounts\[Chart of Accounts 2012.xlsx]FUND


110    Revoloving                                          140        PAYROLL
120    Trust                                               170        INVESTMENT
130    EMPLOYEE CASH DEDUCTIONS FUND                       275        GASB 34 JE's

                                      GOVERNMENTAL TYPE FUNDS

150    GENERAL FUND

SPECIAL REVENUE FUNDS
160   RETIREMENT                                           305        GAS TAX
202   RDA- OBLIGATION RETIREMENT FUN                       307        TRANSPORTATION TAX - ARTICLE 8
204   RDA-OBLGTN RETIREMENT HOUSING                        309        Parking Garage
205   CDBG (Community Dev Block Grant)                     338        Impact fee: GREEN VALLEY/FREEDOM
206   ENTERPRIZE ZONE VOUCHERS                             339        Impact fee: AIRPORT INDUSTRIAL PARK
207   Other HUD grants- RENTAL REHAB                       340        Impact fee: CITY-WIDE TRAFFIC IMPACT
209   H.O.M.E. Grants                                      341        Impact fee: PENNSYLVANIA DR. AREA
210   CAL HOME GRANT FUNDS                                 342        Impact fee: CRESTVIEW AREA
211   U.S.D.A.                                             343        Impact fee: GREEN VALLEY CORRIDOR
212   HOME Program Income                                  344        Impact fee: EAST HIGHWAY 1 AREA
213   LEASEHOLD IMP RELENDING                              345        Impact fee: STRUVE SLOUGH BRIDGE AREA
215   RELOCATION REVOLVING                                 346        Impact fee: WATSONVILLE SLOUGH AREA
221   AFFORDABLE HOUSING                                   347        Impact fee: ERRINGTON/CLIFFORD AREA
225   BUSINESS DEVELOPMENT                                 348        Impact fee: FIRE CAPITAL IMPROVEMENT
227   BUSINESS BOOSTERS LN PROG                            349        Impact fee: PUBLIC FACILITIES IMPACT FEES
228   POLICE - GANG PREVENTION GRANT                       350        Impact fee: STORM DRAIN IMPROVEMENT FUND
245   AVA (Abondoned Vehicle Authority)                    351        Impact fee: ZONE 7 - STORM DRAINS
250   LIBRARY                                              352        Impact fee: ERRINGTON SOUTH BENEFIT AREA
260   SPECIAL GRANTS                                       353        Impact fee: IMPERVIOUS AREA IMPACT FEE FUN
265   PEG (Public Education Fee) - Cable TV                354        LLMAD (Special Districts Fund)
270   911 REVENUE FUND                                     355        WESTSIDE INSUTRIAL AREA
281   PARKS DEVELOPMENT                                    356        AREA OUTSIDE WESTSIDE INDUSTRI
283   LLMAD - CITY PARKS                                   357        UNDERGROUND UTILITY
285   LLMAD                                                825        NARCOTICS FORFEITURE AWARD
303   FEDERAL REVENUE SHARING

510    DEBT SERVICE FUND (CITY)                            516        DEBT SERVICE FUND (RDA)

626    CAPITAL PROJECTS FUNDS

                                       PROPRIETARY TYPE FUNDS
ENTERPRISE FUNDS
710   WASTE WATER                                          730        AIRPORT
720   WATER                                                740        SOLID WASTE
                                                           741        LANDFILL CLOSURE
INTERNAL SERVICE FUNDS
 765  COMPUTER                                             785        HEALTH INSURANCE
 780  WORKERS COMP/LIABILITY




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                                                                                Report Format
                                                                       Monthly Review/ Variance Report
As of:                                                                                   Month, Year
Department                                                                               Police
Fund   DEPT   OBJ /    Description     Actual $         Budget $      %      % of Year Variance Reason for Variance (if Variance)                                Corrective Action (if > than 5% + or -)
              REV                                                     ACTUAL Complete (over)/
                                                                      YTD    d         under
                       Police Vehicle
100    5210   9802     Impound /      $        5,241    $     8,000    65.51%    50.00%    15.51% Officers have increased enforcement on unlicensed drivers and
                       Release Fees                                                               those driving on a suspended license.                         None at this time
                       Police
                       Livescan                                                                   Neighboring jurisdictions have not been providing the LIvescan
100    5210   9804                    $        6,368    $     7,300    87.23%    50.00%    37.23%
                       Processing                                                                 services so many people have been coming to Soledad to
                       Fees                                                                       complete it.                                                   None at this time
                                                                                                  Office hours have decreased due to
                       Police                                                                     minimum staffing and less people are
100    5210   9806                     $       1,346    $     6,000    22.43%    50.00%   -27.57%
                       Services                                                                   requesting reports and applying for
                                                                                                   permits.                                                      None at this time
                       Police POST
100    5210   9807     Reimbursemen $          1,802    $     6,000    30.04%    50.00%   -19.96% Officers have not been attending POST training due to low
                       t Training                                                                 stafffing levels and the cost of backfilling with overtime.    None at this time
                       Police
                       Abandoned                                                                    Quarterly report submitted, but no                        At recent staff meeting, officers were
100    5210   9808                  $             246   $     8,500     2.89%    50.00%   -47.11%
                       Vehcicle                                                                     revenue expected due to decrease in                       directed to increase the idenfifciation,
                                                                                                    staffing levels                                           I asked Finance to provide documentation
                                                                                                                                                              tagging and towing of abandoned vehicles.
                       Authority
                                                                                                                                                              of SRO hours worked for both of the listed
                                                                                                                                                              time periods. CalGRIP Invoice covering
                                                                                                  Two Quarterly SOAR inovices (1. Sent 10-28-11 covering the  October - December will be sent out January
                       Police School                                                              period of 5/16/11-8/15/11 for $15,000 and 2. Sent 11-16-11  31st in the amount of $5,525 (for CalGRIP
100    5210   9810     Resource        $0.00            $83,089.00      0.00%    50.00%   -50.00% covering the period 8/16/11-11/15/11 for $15,000) have been 3). At the end of March 31st, we will invoice
                       Officer                                                                    sent to the Soledad Unififed School District, but           for SRO's time for both CalGRIP 3 and
                                                                                                  reimbursements have not been received.                      CalGRIP 4.

                       Police Court                                                                 County has only partially distributed
100    5210   9814                     $       9,534    $   60,000     15.89%    50.00%   -34.11%
                       Fines                                                                        revenue from fines                                           None at this time




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                                                                                ATTACHMENT

                                 Monthly Closing Schedule


Month       Closing Date                 Report Due Date
July        August 25th                  September 1st
August      September 25th               October 1st
September   October 25th                 November 1st
October     November 25th                December 3rd
November    December 20th                January 7th
December    January 25th                 February 1st
January     February 25th                March 4th
February    March 25th                   April 1st
March       April 25th                   May 1st
April       May 25th                     June 3rd
May         June 25th                    July 1st
June        August 25th                  September 1st




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 Performance Audit of  
The City of Watsonville 
                
                
                
                

        Prepared for: 

     Fiscal Year 2012‐13 
Santa Cruz County Grand Jury 
                

                

                

                

                

                

         January, 2013




                                ATTACHMENT 3
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ATTACHMENT 3
       2 of 72
                                                                    
                                                                    
                                               Table of Contents 
 

Executive Summary  ................................................................................................................... i 

Introduction .............................................................................................................................. 1 

1.                                                 .
        Financial Condition, Reporting and Controls  .................................................................. 1‐1 

2.      Inter‐fund Loans and Transfers ....................................................................................... 2‐1 

3.      Budget and Expenditure Controls ................................................................................... 3‐1 

4.      Capital Budget and Impact Fees ...................................................................................... 4‐1 

5.      Procurement .................................................................................................................... 5‐1 




                                                                                                                             ATTACHMENT 3
                                                                                                                                    3 of 72
Executive Summary 
                                                         
Harvey M. Rose Associates, LLC (HMR) was retained to conduct a performance audit of the City 
of Watsonville by the Fiscal Year 2011‐12 Santa Cruz County Grand Jury. The objectives of the 
audit  were:  to  assess  risk  to  the  City’s  assets  and  resources  due  to  its  policies  and  internal 
controls;  assess  accountability and transparency  in City  decision  making;  and,  to evaluate  the 
City’s compliance with changes in State redevelopment law.  
 
The results of this performance audit engagement are presented in five report sections, each 
containing  findings,  conclusions  and  recommendations.  Altogether,  there  are  22 
recommendations  in  this  performance  audit  report.  A  summary  of  the  findings  and  the 
recommendations from each report section are as follows.  

1. Financial Condition, Reporting and Controls 
    Summary of findings:  
       Like  most  cities,  the  financial  condition  of  the  City  of  Watsonville  has  been  negatively 
        affected by national economic conditions that started in approximately 2008. However, 
        the economy does not fully explain the City’s current poor financial condition. A pattern 
        of spending beyond the City’s means, particularly in the case of the General Fund, has 
        contributed  to  a  depletion  of  the  City’s  reserves  and  net  assets,  two  key  indicators  of 
        financial well‐being.  

       While  the  City  has  made  significant  reductions  in  its  General  Fund  expenditures  since 
        Fiscal Year 2009‐10 (July 1, 2009 through June 30, 2010), the reductions have not been 
        sufficient  to  offset  the  impacts  of  General  Fund  spending  in  excess  of  revenues, 
        particularly since the City was in weak financial condition for several years prior.  

       A  comparison  of  Watsonville’s  financial  condition  with  other  California  cities  of 
        comparable size and characteristics shows that the City is worse off based on a number 
        of key indicators.  

       While  information  on  the  City’s  financial  condition  can  be  distilled  from  reviewing 
        publically  available  City  documents,  such  as  the  City  budget  and  the  Comprehensive 
        Annual  Financial  Report  (CAFR),  these  documents  alone  do  not  include  either 
        sufficiently  accurate  or  sufficiently  analyzed  and  summarized  data  to  enable  the  City 
        Council and public to have a full accurate picture of the City’s financial state and trends.  

       More  accurate  summarized  information  needs  to  be  regularly  presented  to  the  City 
        Council on the overall financial position of the City to better assess the fiscal impacts of 
        its decisions on expenditures, revenues, loans and transfers.  




                                                                               Harvey M. Rose Associates, LLC 
                                                      i                                           ATTACHMENT 3
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                                                                                          Executive Summary 


Based on the above findings, the following recommendations are submitted:  
 
The City Council should direct the City Manager to:  
 
    1.1 Prepare  annual  reports  summarizing  and  distilling  the  Comprehensive  Annual 
           Financial  Report  (CAFR)  to  provide  the  City  Council  with  a  complete  and  candid 
           assessment of the City’s financial position including past and future multi‐year trend 
           data  and  a  comparison  of  actual  audited  revenue  and  expenditure  data  with 
           budgeted and projected revenues and expenditures.  

    1.2    Prepare an annual report comparing the City of Watsonville’s financial position with 
           other comparable cities, measured in key areas such as net assets, General Fund net 
           revenues,  General  Fund  balance  as  a  percentage  of  General  Fund  expenditures, 
           liabilities  relative  to  assets,  cash  on  hand  relative  to  monthly  expenditures,  and 
           other measures. 

    1.3    Consider establishment of a City Council audit or finance sub‐committee to ensure 
           that  the  City’s  financial  condition  receives  concentrated  attention  from  the 
           governing board and that a worsening of current financial conditions is prevented to 
           the extent possible.  

2. Inter‐fund loans and Transfers 
   Summary of findings:  
      Like  most  municipalities,  the  City  of  Watsonville  loans  and  transfers  cash  between  its 
       funds each year. At any point in time, a fund may have idle cash balances that can be 
       used  for  short‐  or  long‐term  loans  to  another  fund  to  cover  the  costs  of  services  or  a 
       project until expected revenues have been obtained.  

      Risks associated with inter‐fund loans and transfers are that the loans will not be repaid 
       in  full  with  appropriate  interest  if  revenues  do  not  materialize  as  expected,  that 
       repeated loans mask the loan recipient fund’s inability to meet its costs, and that tying 
       up  certain  fund  monies  in  loans  may  prevent  the  accomplishment  of  planned  projects 
       and services.  

      Some  City  of  Watsonville  inter‐fund  loans  reviewed  have  resulted  in  lessening  monies 
       available in the loaning fund because some loans do not require interest payments. In 
       other instances, the full terms and conditions of inter‐fund loans are not fully disclosed 
       in City Council resolutions or CAFRs. Further, the impact of issuing inter‐fund loans on 
       the loaning fund, such as delays in planned projects or services, is not formally reported 
       to the City Council and public.  

      The  recurring  provision  of  short‐term  General  Fund  loans  to  the  City’s  Airport  and 
       Parking  Garages,  including  the  garage  adjacent  to  the  Civic  Center,  reflects  ongoing 
       operating  losses  at  those  facilities  that  are  being  supported  by  the  General  Fund.  The 

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        City has plans in place for both operations but the impact on the limited General Fund of 
        supporting these operations in recent years could have been better reported to the City 
        Council.  

       At least three inter‐fund loans and reimbursements reviewed between FYs 2008‐09 and 
        2010‐11 did not include interest payments, resulting in a loss to the General Fund of an 
        estimated $740,000, an estimated loss to the City’s Impact Fee Funds of $111,492, and 
        an estimated loss of  $36,597 in interest earnings for a loan issued by  the Low‐income 
        Housing  Set‐aside  Fund.  Two  of  these  loans  were  approved  by  the  City  Council  as 
        interest‐free, though staff reports to the Council about these loans did not present the 
        fiscal impact of the interest‐free loans. The sources of a multi‐fund loan to the General 
        Fund  to  pay  off  a  City  debt  to  CalPERS  was  disclosed  as  the  City’s  pooled  money 
        investment account in the City Council resolution authorizing the loan. However, neither 
        the resolution nor the related staff report disclosed the individual funds that would be 
        impacted by the loan.   

Based on the above findings, the following recommendations are submitted:  
 
The City Council should: 
 
   2.1     Direct the City Manager to prepare formal written policies and procedures regarding 
           inter‐fund loans and transfers requiring that the repayment schedules, principal and 
           interest  amounts,  loaning  fund(s)  and  all  other  terms  and  conditions  of  such 
           transactions  be  fully  disclosed  in  required  City  Council  resolutions  authorizing  any 
           loan of more than one year.  
   2.2     Direct  the  City  Manager  to  report  the  service  or  program  impact  on  the  loaning 
           funds of having some or all of their resources tied up for the term of the loan as part 
           of the staff report accompanying all inter‐fund loan authorizing resolutions.   
   2.3     Direct  the  City  Manager  to  prepare  an  annual  report  on  all  short‐term  inter‐fund 
           loans at the end of each year, including past year loans and disclosure of any funds 
           repeatedly receiving loans due to chronic revenue shortfalls or expenses in excess of 
           revenues.  
   2.4     Establish  a  policy  requiring  that  all  inter‐fund  loans  be  repaid  with  interest  at  the 
           same rate as earned by the City’s pooled investment fund.  
 
3. Budget and Expenditure Controls 
    Summary of findings:  
       Expenditures  for  the  majority  of  the  City’s  General  Fund  departments  exceeded  their 
        approved budgets for each of the three fiscal years ending June 30, 2012. The Fire and 
        Police  Department  exceeded  their  collective  budgets  by  $1.8  and  $1.2  million  in  FY 
        2009‐10  and  FY  2010‐11,  respectively,  and  the  majority  of  other  departments  did 
        likewise.  While  unforeseen  needs  can  develop  in  any  year  that  require  budget 
        adjustments,  the  number  of  departments  that  have  exceeded  their  budgets  and  the 

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       absence  of  a  clear  process  for  amending  the  approved  budget  indicate  a  lack  of  cost 
       control mechanisms and department management accountability for controlling costs.  

      Appropriation authority for General Fund expenditures in excess of originally budgeted 
       amounts  was  covered  partially  by  carrying  forward  approximately  $2.8  million  in 
       unexpended prior year capital project appropriations in FY 2009‐10 and $1.8 million in 
       FY  2010‐11.  These  appropriations  were  added  midyear  without  City  Council  re‐
       appropriation or approval of new uses of these funds.  

      While  some  overtime  is  unavoidable  for  public  safety  agencies,  and  can  even  be  cost 
       effective, the extent of the variance between budgeted and actual overtime, particularly 
       for the Fire Department, is extensive.  

      The City of Watsonville’s public safety costs, measured in costs per resident, are higher 
       than the median costs for public safety among seven comparable cities. 

      The  City  lacks  adequate  management  tools,  reports,  and  resources  to  ensure 
       expenditures are controlled and that all variances with the budget are clearly disclosed. 
       The  City’s  finance  and  accounting  system  is  outdated,  lacks  flexibility  and  does  not 
       provide  sufficient  timely  information  for  department  managers  to  be  able  to  keep 
       abreast of their budget variances.  

      The City reports it has implemented a new budget monitoring process since audit field 
       work was completed.  

      The cash disbursement report provided to the City Council for approval at every meeting 
       is  not  an  effective  cost  control  mechanism.  The  reports  contain  little  explanation,  are 
       not tied to baselines, and lack roll‐ups by department or function. 

      The City’s cost allocation plan for services provided to multiple departments is based on 
       allocation assumptions from FY 2000‐01, or more than ten years ago.  

      The  City  established  formal,  written  cash  handling  policies  and  procedures  in  the 
       summer of 2012. Prior to that, such policies and procedures were not in place, in spite 
       of  the  fact  that  tens  of  millions  of  dollars  are  collected  each  year  Citywide.  City  staff 
       reports that more such written procedures will be prepared in the near future. 

Based on the above findings, the following recommendations are submitted:  

The City Council should direct the City Manager to:  

   3.1       Establish  a  mechanism  to  ensure  adherence  to  City  policies  dictating  levels  of 
             authority for making changes to the budget in the interest of controlling costs to the 
             budget, to include the level of authority department directors have for shifting funds 
             within their budget, the authority of the City Manager to make budget changes, and 
             the criteria that would trigger further review and action by the City Council. 


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    3.2   Conduct  further  review  of  expenditures  in  the  Fire  and  Police  Departments  and 
          assess  and  report  on  alternative  cost  saving  plans  and  structures  to  reduce  public 
          safety  expenditures  comparable  to  similar  sized  and  neighboring  cities,  including 
          consideration of contracting with other firefighting agencies if more cost‐effective to 
          do so.  

    3.3   Revise the annual budget document and Mid‐Year Financial Reports to include year‐
          to‐date  actual  revenues  and  expenditures,  a  distinction  between  management 
          proposed and City Council adopted budgets, a clear summary of the fiscal results of 
          past  actions  taken  by  the  City  Council  to  increase  revenues  or  reduce/increase 
          expenditures,  and  an  explanation  of  the  difference  between  actual  amounts 
          reported  in  the  budget  and  the  amounts  reported  in  the  City’s  Comprehensive 
          Annual Financial Reports.   

    3.4   Revise  the  Municipal  Code  and  streamline  information  provided  in  disbursement 
          reports for City Council review to include only: 
          a) New  disbursements  not  tied  to  items  previously  reviewed  by  the  City  Council, 
             such as approved budgets, expenditure plans and contracts; 
          b) Disbursements representing significant changes to previously approved budgets, 
             expenditure  plans,  contracts,  and  purchase  orders,  defined  as  a  flat  threshold 
             amount  determined  by  the  City  Council,  a  percentage  threshold  based  on  the 
             previously approved amount, or changes in the scope of the project or program; 
             and, 
          c) Significant expenditures on Open Purchase Orders.  

    3.5   Conduct  a  new  cost  allocation  study  and  develop  a  new  plan  to  appropriately 
          allocate City costs to departments, and update the plan annually. 

    3.6   Obtain actuarial reports for its Internal Service Funds that more adequately estimate 
          expected costs. 

    3.7   Charge  insurance  rates  that  are  sufficient  for  (a)  meeting  expected  costs  and  (b) 
          increasing the assets and fund balance for Internal Service Funds to build sufficient 
          reserves for a 50% to 80% confidence level of funding, as practiced by many public 
          jurisdictions. 

    3.8   Continue  preparing  and  updating  written  policies  and  procedures  in  all  areas  of 
          financial management and internal controls.   
 




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4. Capital Budget and Impact Fees 
   Summary of findings:  
      In addition to its operating budget, the City maintains a five year capital improvement 
       project  budget  that  is  subject  to  approval  by  the  City  Council  as  part  of  the  annual 
       budget approval process.  

      The City’s capital improvement project budget provides some important details for each 
       project  including  a  brief  project  description,  planned  expenditures,  department,  fund, 
       and  name  of  project  manager.  However,  it  is  not  possible  to  tell  from  the  document 
       how long previously approved projects or equipment acquisitions have been underway 
       and  how  much  or  how  little  has  been  expended  on  them.  Since  timing  and  costs 
       frequently  change  over  the  course  of  a  capital  project,  it  is  critical  that  the  City’s 
       governance  board  maintain  the  ability  to  oversee  progress  and  costs  on  capital 
       expenditures.   

      One source of City funding for capital projects is development impact fees. These fees, 
       paid for by developers, are used to cover the costs of new infrastructure and equipment 
       needed due to development. The bases of many of these fees have not been updated 
       since  they  were  established  in  the  1980s.  Many  are  not  tied  to  clearly  established 
       standards or clearly linked to documented development‐related costs. Some of the uses 
       of these fees do not appear to be growth‐induced, as required by State law.  

      Required annual reports on the City’s development impact fees, presented to the City 
       Council on consent agenda each year, do not contain all information required by State 
       law to enable the City Council and public to determine how these funds are being used.  
       Projects  that  can  be  funded  with  these  fees  are  limited  to  growth‐induced  needs  and 
       some projects funded do not appear to be appropriate.  

Based on the above findings, the following recommendations are submitted:  
 
The City Council should direct the City Manager to: 
 
   4.1 Modify  the  capital  budget  document  to  include  multi‐year  presentations  of  all  capital 
           projects including: 

       a. Funds  already  spent  on  previously  approved  projects  and  date  of  project 
          commencement; 

       b. Funds budgeted in the current and future years on previously approved projects;  

       c. Identification of changes in previously approved project budgets; 

       d. Funds  proposed  for  current  and  future  years  on  projects  for  which  approval  is 
          requested; 


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      e. Funding sources and an indication of whether or not funding has been obtained yet;  

      f. Brief explanations of any changes in project timing.  

   4.2    Review the bases of all development impact fees and report back to the City Council 
          on  whether  or  not  the  fees  are  in  compliance  with  State  Mitigation  Fee  Act 
          requirements including the bases of the fees and the projects for which they have 
          been used. 

   4.3    Establish service level standards to serve as the basis of each development impact 
          fee such as acres of park per resident, fire department response time, etc.  

   4.4    Prepare  annual  impact  fee  reports  that  are  fully  compliant  with  all  reporting 
          requirements in State law.  

5. Procurement 
  Summary of findings:  
     Adherence  to  City  of  Watsonville  policies  and  procedures  for  procurement  is 
      inconsistent. For instance, a review of purchase order files demonstrated that 14 
      out of a sample of 20 purchase orders in FY 2011‐12 did not obtain three sources 
      of pricing, either through quotes or competitive bids, when policies encourage or 
      require  them  to  do  so.  Six  of  these  14  purchase  orders  were  for  professional 
      services.  Existing  policies  and  procedures  for  the  procurement  of  professional 
      services through competitive bidding are vague and conflicting.  

     The  City  Council  does  not  always  approve  purchase  orders  or  agreements  that 
      are  greater  than  $50,000,  though  City  policies  and  procedures  require  such 
      approval. A review of 21 purchase orders with funds encumbered, or earmarked 
      as financial obligations, in FY 2010‐11 that were subject to City Council approval 
      found  that  eleven  were  approved  by  the  City  Council  but  ten  were  not.  Those 
      approved  represented  most  of  the  dollar  value  of  the  21  purchase  orders,  but 
      the  ten  that  were  not  approved  by  the  City  Council  had  an  aggregate  value  of 
      $1,486,070 or an average value of $148,607 each.  

     Though  the  City  Council  adopted  contract  change  order  policies  in  1996,  those 
      policies  are  not  included  in  the  City’s  Administrative  Rules  and  Regulations. 
      Further,  they  do  not  provide  sufficient  mechanisms  to  control  contract  cost 
      increases resulting from change orders. For example, a construction agreement 
      for $1,888,429 was approved by the City Council because it was the lowest price 
      out  of  seven  bids.  However,  a  change  order  of  $374,162,  or  a  19.8  percent 
      increase, was approved by the department director and the Purchasing Division 
      without  having  to  go  back  to  the  City  Council  for  approval.  The  change  order 
      amount is more than twice the $175,001 threshold for City Council approval of 
      new public works contracts.  


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         Formal  policies  and  procedures  for  Open  Purchase  Orders  for  small,  repetitive 
          purchases do not exist. In FY 2011‐12 there were 159 Open Purchase Orders, of 
          which  136  incurred  expenditures  totaling  $3,081,502.  However,  a  majority  of 
          these Open Purchase Orders have not been competitively bid within the past 20 
          years  and  most  do  not  have  a  negotiated  contract  with  the  City  to  ensure 
          consistent prices and discounts for goods and services 

Based on the above findings, the following recommendations are submitted:  

The City Council should direct the City Manager to:  

   5.1       Revise  the  City’s  written  Administrative  Rules  and  Regulations  to  include  the 
             following: 

             (a) Requirement for competitive bidding for all professional service contracts above 
                 a  designated  amount  such  as  $15,000  without  requiring  that  contracts  be 
                 awarded  to  the  lowest  responsible  bidder  (qualified  contractor  or  vendor  that 
                 meets bid specifications at the lowest cost), but rather, the most qualified if the 
                 lowest responsible and most qualified bidder are not the same;  

             (b) Require  executed  contracts  for  all  Open  Purchase  Orders  that  include:  a) 
                 contract  term;  b)  annual  or  contract  term  limit  for  expenditures,  prices,  and 
                 discounts;    c)  mechanisms  to  approve  changes  in  prices  and  discounts;  and,  d) 
                 City Council approval for all Open Purchase Orders estimated to exceed $50,000; 

             (c) Clear  procedures  for  approving  change  orders  to  all  purchase  orders,  including 
                 Open Purchase Orders, such as requiring City Council approval for change orders 
                 that  (i)  result  in  a  total  purchase  order  greater  than  $50,000  (or  $175,001  for 
                 public works), including the sum of previous change orders, or (ii) exceed a ten 
                 percent increase over the original purchase order amount; 

             (d) Monitoring  and  reporting  procedures  for  Open  Purchase  Order  expenditures, 
                 such  as  monthly  reports  by  the  Purchasing  Division,  that  could  result  in 
                 requesting  change  orders  for  approval  by  City  Council,  or  halting  ongoing 
                 expenditures for the remainder of the year; and, 

             (e) Examples  of  when  the  City  Council  should  approve  purchase  orders  that  are 
                 $50,000 or less.   

   5.2       Train  all  City  staff  involved  in  purchase  orders  on  the  revised  Administrative  Rules 
             and  Regulations  to  ensure  proper  and  consistent  implementation  of  policies  and 
             procedures,  including  City  Council  approval  of  all  purchase  orders  greater  than 
             $50,000. 

   5.3       Provide annual reports to the City Council summarizing purchase order and contract 
             activity  for  the  past  year,  including  original  contracts  and  amounts,  number  and 

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value  of  change  orders,  and  number  and  value  of  purchases  from  Open  Purchase 
Orders.   




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Introduction 
                                                      
Harvey M. Rose Associates, LLC (HMR) was retained by the FY 2011‐12 Santa Cruz County Grand 
Jury  to  conduct  a  Performance  Audit  of  the  City  of  Watsonville.  This  performance  audit  was 
conducted for the Santa Cruz County Grand Jury pursuant to its authorities defined in California 
Penal Code Section 925, et seq.1 

Project Purpose and Scope 
The  Performance  Audit  of  the  City  of  Watsonville  was  designed  to  accomplish  the  following 
objectives: 

        Assess  risk  to  the  City’s  assets  and  resources  due  to  its  policies  and  internal  controls, 
         particularly  in  the  areas  of  financial  and  grants  management  and  controls  over 
         procurement, contracts and cash management. 
        Assess accountability and transparency in City decision making, including an analysis of 
         information  flow  between  City  management  and  the  City  Council,  other  City  policy 
         makers and the public. 
        Evaluate  the  City’s  compliance  with  changes  in  State  redevelopment  law,  including  its 
         processes for determining its redevelopment obligations and financial commitments as 
         successor agency. 

Methodology 
This  Performance  Audit  was  conducted  in  accordance  with  Government  Auditing  Standards, 
prepared  by  the  United  States  Comptroller  General  and  promulgated  by  the  United  States 
Government  Accountability  Office  (USGAO).    Also  known  as  generally  accepted  government 
auditing standards (GAGAS), these standards provide a framework for performing high‐quality 
audit work with competence, integrity, objectivity, and independence.  

This  Performance  Audit  was  conducted  in  two  phases.  Phase  1  involved  an  initial  assessment 
and profile of the state of the City of Watsonville to identify areas of high risk of to the City’s 
assets  and  resources.  Phase  2  consisted  of  detailed  field  work  to  evaluate  financial 
management  and  internal  controls,  accountability  and  transparency  in  City  decision  making, 
and  the  City’s  compliance  with  changes  in  State  redevelopment  law.  Specific  field  work 
activities included: 

        Entrance conference with representatives from the City of Watsonville. 

        Compilation of key documents to profile the City finances and organization. 

1
  California Penal Code Section 925 states, “The grand jury shall investigate and report on the operations, accounts, 
and  records  of  the  officers,  departments,  or  functions  of  the  county  including  those  operations,  accounts,  and 
records of any special legislative district or other district in the county created pursuant to state law for which the 
officers of the county are serving in their ex officio capacity as officers of the districts.” 

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                                                                                              Introduction 

       Interviews with City Councilmembers and managers. 
       Presentation  of  a  profile  of  the  current  state  of  the  City  and  risk  assessment  to  the 
        Grand Jury. 
       Evaluation  of  financial  management  and  internal  controls,  including  a  review  of  the 
        City’s audited financial statements and budget documents. 
       Evaluation of comparable cities’ audited financial statements and analysis. 
       Transaction  testing  and  file  review  for  purchase  orders,  payments,  contracts,  bidding 
        process, grants, and assets. 
       Evaluation of the current state of the City’s former redevelopment agency efforts. 
       Evaluation of financial and other relations between the City General Fund and other City 
        funds. 
       Evaluation of the use, deferral, and reporting of development impact fees. 
       Evaluation of agendas, minutes, and reports for City Council meetings. 

Though  transaction  testing  was  completed  to  assess  grants  and  assets  management,  no 
significant risks were identified. Therefore, these analyses were excluded in the report.  

A  draft  version  of  this  report  was  provided  to  the  City  of  Watsonville  for  review,  factual 
clarifications,  and  comments,  and  a  performance  audit  exit  conference  was  conducted 
November 26, 2012. Revisions to the report were then made and the final document submitted 
to the Santa Cruz County Grand Jury.   

Acknowledgements 
Harvey  M.  Rose  Associates,  LLC  would  like  to  thank  the  Santa  Cruz  County  Grand  Jury,  City 
Councilmembers, the City Manager and his management staff for their time and assistance. City 
of Watsonville staff, particularly the Administrative Services Director and the Assistant Finance 
Officer,  were  extremely  helpful  and  professional  and  took  the  time  necessary  to  provide 
detailed information to the project team.  
 
 
 




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       Like most cities, the financial condition of the City of Watsonville has been negatively 
        affected  by  national  economic  conditions  that  started  in  approximately  2008. 
        However,  the  economy  does  not  fully  explain  the  City’s  current  poor  financial 
        condition. A pattern of spending beyond the City’s means, particularly in the case of 
        the General Fund, has contributed to a depletion of the City’s reserves and net assets, 
        two  key  indicators  of  financial  well‐being.  While  the  City  has  made  significant 
        reductions  in  its  General  Fund  expenditures  since  Fiscal  Year  2009‐10  (July  1,  2009 
        through June 30, 2010), the reductions have not been sufficient to offset the impacts 
        of General Fund spending in excess of revenues, particularly since the City was in weak 
        financial condition for several years prior.  

       A  comparison  of  Watsonville’s  financial  condition  with  other  California  cities  of 
        comparable  size  and  characteristics  shows  that  the  City  is  worse  off  based  on  a 
        number  of  key  indicators.  The  City’s  General  Fund  end‐of‐year  fund  balance  for  FY 
        2010‐11, the last date for which audited data is available, was only 4 percent of City 
        expenditures, compared to 42.8 percent for the comparison cities. The City had only 
        one half of a month’s worth of cash on hand compared to 2.3 months’ worth in the 
        other  cities.  Watsonville’s  General  Fund  level  of  indebtedness  as  of  June  30,  2011 
        amounted  to  87  percent  of  its  assets,  compared  to  only  10.7  percent  in  the  other 
        cities.  

       While  information  on  the  City’s  financial  condition  can  be  distilled  from  reviewing 
        publically  available  City  documents,  such  as  the  City  budget  and  the  Comprehensive 
        Annual  Financial  Report  (CAFR),  these  documents  alone  do  not  include  either 
        sufficiently accurate or sufficiently analyzed and summarized data to enable the City 
        Council  and  public  to  have  a  full  accurate  picture  of  the  City’s  financial  state  and 
        trends.  

       To  ensure  that  the  City  Council  can  fulfill  their  obligation  as  fiscal  stewards,  more 
        accurate summarized information needs to be regularly presented to the City Council 
        on  the  overall  financial  position  of  the  City  to  better  assess  the  fiscal  impacts  of  its 
        decisions on expenditures, revenues, loans and transfers.  

To  provide  the  City  Council  with  assurance  that  adequate  financial  controls  are  in  place, 
comprehensive  written  financial  policies  and  procedures  are  needed  detailing  tools  and 
methods  governing  all  financial  transactions.  A  review  of  the  City  of  Watsonville’s  prepared 
Comprehensive  Annual  Financial  Reports  for  the  five  fiscal  years  ending  June  30,  2011  (the 
most recent available) shows that the City’s financial condition was worsening during that time, 
as  measured  by  key  indicators  of  financial  position  such  as  net  assets,  level  of  indebtedness, 



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reserves  and  fund  balances.  Exhibit  1.1,  which  presents  the  City’s  net  assets  for  government 
activities1  during  that  period,  shows  that  net  assets  declined  for  each  of  the  last  three  years 
shown,  from  approximately  $153.8  million  in  Fiscal  Year  (FY)  2008‐09  to  $141  million  in  FY 
2010‐11. A  decrease in net assets can be an indicator of a city’s worsening financial position, 
whether due to a reduction in assets, an increase in liabilities, or a combination of the two.  

Exhibit  1.1  shows  a  decline  in  the  City’s  overall  financial  position  during  the  period  covered. 
What  is  most  significant  about  the  decline  is  that  it  was  largely  due  to  a  decrease  in  cash, 
leaving the City with fewer liquid assets to cover its operational costs.  

                                                                     Exhibit 1.1 
                                                               Change in Net Assets,  
                                                       Government Activities, City of Watsonville  
                                                               FYs 2006‐07 – 2010‐11 
                                                    2006‐07          2007‐08           2008‐09           2009‐10           2010‐11 
    Net assets, start of yr.                     $99,690,040       $133,326,823      $147,275,010      $153,202,385   $141,343,459 
    Net assets, end of yr.                       130,994,449        146,776,579       153,773,207       148,106,795       140,987,616
    Change in net assets                         31,304,409        13,449,756         6,498,197         ‐5,095,590         ‐355,843 
                                                     31.40%          10.09%             4.41%             ‐3.33%            ‐0.25% 
Source: City Comprehensive Annual Financial Reports, FYs 2006‐07 – 2011‐11 

Exhibit 1.2 presents expenses and revenues for the City’s government activities for the five year 
period  between  FY  2006‐07  and  2010‐11.  The  five  year  trend  has  been  that  revenues  have 
declined while expenditures have gone up and down. Revenues were less than expenditures for 
two of the last three fiscal years shown. This means that the fund balance had to be used to 
cover expenses for those two years.  

                                                                      Exhibit 1.2  
                                                              Revenues and Expenditures   
                                                        Government Activities, City of Watsonville  
                                                                FYs 2006‐07 – 2010‐11 
                                                       2006‐07         2007‐08           2008‐09           2009‐10          2010‐11 
     Government Activities 
    Revenue                                        $74,420,729       $64,752,117       $54,583,012       $53,678,487      $54,392,929  
    Government Activities 
    Expends                                        $47,178,104       $55,979,833       $50,124,903       $57,904,273      $54,748,771  
    Net Revenue                                    $27,242,625       $8,772,284        $4,458,109        ($4,225,786)      ($355,842) 
Source: City Comprehensive Annual Financial Reports, FYs 2006‐07 – 2011‐11 

                                                            
1
  Net assets are defined as City assets less liabilities. Government activities, as defined in the CAFR, includes all 
financial transactions and funds except for the City’s enterprise activities (i.e., utilities, airport).  

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While  the  City  has  been  affected  by  the  decline  in  economic  conditions  nationwide,  which 
particularly  affected  property  tax  revenues,  it  also  experienced  a  significant  decline  in  grant 
revenue between FY 2007‐08 and 2008‐09 which did not come back during the five year period 
(2006  through  2011).  Expenditures  decreased  in  FY  2010‐11,  primarily  in  the  area  of 
redevelopment  and  housing  expenditures  and  also  due  to  the  City  reducing  the  number  of 
positions  Citywide.  City  management  points  out  that  the  City  took  other  actions  during  this 
period  to  reduce  costs  such  as  requiring  higher  employee  PERS  and  health  insurance 
contributions.  However,  even  with  these  decreases,  expenses  still  outpaced  revenues  for  the 
City’s government activities.  

The trend of expenditures outpacing revenues was more pronounced within the City’s General 
Fund. Exhibit 1.3 shows that General Fund expenditures outpaced revenues (before transfers‐
in) for each of the five years through FY 2010‐11. Besides base General Fund revenues such as 
property,  sales  and  utility  users  tax  revenue,  the  General  Fund  also  receives  transfers  from 
other  funds  which  support  General  Fund  activities.  These  include  transfers  from  the  City’s 
Retirement Tax Fund, which is used to support City employee retirement benefits, and Gas Tax 
Fund monies, which, consistent with State law, are transferred to the General Fund to pay for 
street improvements,.  

However, as shown in Exhibit 1.3, even after transfers to cover certain General Fund costs, the 
General Fund was still in a deficit situation for four of the five years reviewed. The size of the 
deficit was reduced in FY 2010‐11 compared to the prior two years as a result of reductions in 
General Fund expenditures and higher transfers in, though approximately half of the transfers 
represent  one‐time  monies.  However,  net  revenues  for  the  year  were  still  negative  and 
unaudited FY 2011‐12 records show the General Fund deficit trend likely to continue when the 
final audited numbers are prepared.  
                        Exhibit 1.3: General Fund Trends, FYs 2006‐07 – 2010‐11 
                                   2006‐07      2007‐08      2008‐09      2009‐10       2010‐11 
    GF Revenues                  $33,348,718  $32,684,775  $30,714,756  $31,400,184   $31,077,410 
    GF Expenditures              36,464,073  38,897,712  38,068,719  35,196,791  39,971,715 
    Subtotal: net revenues       (3,115,355)      (6,212,937)      (7,353,963)     (3,796,607)     (8,894,305) 
    Other Financing: 
       Transfers in               4,800,025       3,266,674    3,131,186     2,711,000               8,256,955 
    Total net revenues           $1,684,670      ($2,946,263) ($4,222,777) ($1,085,607)             ($637,350) 
    GF Fund Balance, year‐end    $6,983,724       $6,651,312       $2,820,710      $1,896,570      $1,598,588 
    Fund Balance as % 
    Expends                         19.2%            17.1%            7.4%             5.4%            4.0% 
    Cash                          2,171,811        1,136,890         363,731        1,902,722       1,714,477 
    Months cash available            0.71             0.35            0.11             0.65            0.51 
Source: City Comprehensive Annual Financial Reports, FYs 2006‐07 – 2011‐11 
Note: The City paid a $6.5 million loan to CALPERS in FY 2010‐11 to cover certain retirement costs for some Fire 
and Police Department employees in FY 2010‐11. This is a one‐time General Fund expense funded by a loan from 
other City funds. The City did not have that expense in FY 2011‐12. 
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Exhibit  1.3 shows that the General Fund year‐end fund balance decreased each year of the five 
years  reviewed,  starting  at  nearly  $7  million  in  FY  2006‐07,  or  19.2  percent  of  General  Fund 
expenditures,  and  decreasing  to  approximately  $1.6  million  in  FY  2010‐11,  or  4  percent  of 
General Fund expenditures for that year. The smaller this amount is, the less flexibility the City 
has for meeting increased or unexpected costs.  

As another measure of its weak financial position, the City’s CAFRs show that the General Fund 
had  very  low  amounts  of  cash  available  in  each  of  the  five  years  reviewed.  Exhibit  1.3  shows 
that the cash position of the General Fund over the five year period reviewed was poor relative 
to  best  practices.  Specifically,  the  Government  Finance  Officers  Association  recommends  that 
two  months’  worth  of  expenditures  be  maintained  in  cash  to  cover  unexpected  costs  and/or 
downturns in revenue. As shown in Exhibit 1.3, the City has had under one month’s worth of 
expenditures  in  cash  as  of  June  30  of  each  year  for  the  last  five  years.  Having  such  a  small 
amount of cash on hand may have had less impact in the years prior to the national economic 
recession but the combination of low cash balances and low fund balances during the five year 
period made it difficult for the City to maintain all of its positions and services when revenues 
decreased  and  redevelopment  funds  became  no  longer  available  with  the  State‐mandated 
dissolution of redevelopment agencies in California. 

City management states that actual cash available for the General Fund is greater than reported 
in  the  CAFRs  because,  to  comply  with  CAFR  protocols,  additional  cash  had  to  be  temporarily 
loaned to other funds with negative cash balances. However, this situation indicates that there 
were  weaknesses  in  those  other  City  funds,  for  which  the  General  Fund  is  ultimately 
responsible.  This  situation  was  either  not  true  in  the  comparison  cities  or,  if  any  of  the 
comparison  cities  did  loan  General  Fund  cash  to  other  funds,  they  still  had  more  reported 
General Fund cash available than the City of Watsonville.  

More  details  on  General  Fund  expenditures  and  revenues  are  provided  in  Section  3  of  this 
report.  

A  final  measure  of  the  City’s  financial  position  is  its  level  of  General  Fund  indebtedness,  or 
liabilities.  Exhibit  1.4  presents  General  Fund  liabilities  relative  to  its  assets  for  the  five  fiscal 
years  ending  June  30,  2011  as  reported  on  the  balance  sheet  in  the  City’s  CAFRs.  As  can  be 
seen, the City’s General Fund has maintained high liabilities relative to its assets in all five years. 
Further, its liabilities have increased substantially in each of the last three fiscal years, ending in 
an amount equal to 87 percent of General Fund assets.  

                       Exhibit 1.4: General Fund Trends, FYs 2006‐07 – 2010‐11 
                             2006‐07        2007‐08             2008‐09         2009‐10          2010‐11 
     GF Assets              13,411,298     11,450,149          7,565,639       6,866,753        12,303,252 
    GF Liabilities          6,427,974      4,798,837           4,744,929       4,970,183        10,704,664 
    Liabilities % Assets      47.9%           41.9%             62.7%            72.4%            87.0% 
Source: City Comprehensive Annual Financial Reports, FYs 2006‐07 – 2011‐11 

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The General Fund did not have a strong base of assets during the five years reviewed. During 
that period, its assets have consisted mostly of a small amount of cash, as described above, and 
balances  due  to  the  General  Fund  from  short‐term  loans  to  other  funds.  Liabilities  have 
consisted  primarily  of  accrued  personnel  costs  such  as  vacation  leave  balances  owed  to 
employees  in  the  future  and,  for  FY  2010‐11,  loan  payments  due  to  other  funds  (discussed 
further in Section 2).  

The  information  in  Exhibits  1.1  through  1.4  is  available  in  the  City’s  Comprehensive  Annual 
Financial  Reports,  all  of  which  are  public  documents,  accessible  to  the  City  Council  and  the 
public.  However,  the  information  in  those  audit  reports  is  not  formally  summarized  or 
presented  to  the  City  Council  and  public  by  City  staff  to  provide  an  understanding  on  the 
implications of decisions with fiscal impacts. The document on its own does not lend itself to a 
quick  understanding  of  the  City’s  financial  position  and  multi‐year  trends.  Similarly,  the  City’s 
budget  documents  and  report  contain  a  great  deal  of  useful  detailed  information  but  the 
information is not summarized to provide an accessible picture of the City’s budget situation.  

Comparison with other cities  

While many of the poor financial indicators above are tied to national economic conditions in 
recent  years,  a  comparison  with  other  California  cities  that  have  also  been  affected  by 
economic  conditions  shows  that  the  City  of  Watsonville  is  worse  off  in  many  respects.  As  a 
result, Watsonville has had to reduce its workforce and service levels in recent years and is still 
in  a  precarious  state  in  terms  of  its  ability  to  meet  ongoing  regular  expenditures,  maintain 
services levels and cover any unexpected costs.  

Exhibit 1.5 presents comparisons of key financial measures with other cities. All the cities are of 
comparable  size  as  Watsonville,  though  the  City  of  Santa  Cruz  has  fewer  characteristics  in 
common with Watsonville than the other comparison cities because it has a stronger economic 
base. Though it has a larger population, the City of Salinas was added to the comparison group 
at the request of City of Watsonville management.  




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                                                           Exhibit 1.5: Watsonville vs. Comparable Cities, FY 2010‐11
                          Cathedral 
                                City           Colton            Gilroy         Hanford        Porterville          Salinas     Santa Cruz           Median        Watsonville
 Population                        52,381            52,940            49,582           54,284           55,023         152,994           60,342            54,284           51,586
GF Revenue                 27,732,595    25,143,393    36,063,731   20,444,156   22,080,187   80,459,293   77,912,927    27,732,595   31,077,410
GF 
Expenditures               32,202,922    27,641,201    32,215,955    20,392,760    21,341,142    78,804,888    95,908,015    32,202,922    39,971,715
GF Fund 
Balance Year‐
end                                                                                                                                           1,598,588
                           13,791,984      3,287,230    25,220,668    13,843,789    21,841,056    11,059,380    25,531,855    13,843,789       
Fund Balance, 
% GF 
Expenditures                     42.8%                 11.9%                78.3%                 67.9%              102.3%                 14.0%                 26.6%                42.8%                  4.0%
General Fund 
Cash                                                                                                                                                1,598,588
                             9,560,263      3,917,115    20,450,350      6,776,398          142,264    11,378,862    18,126,982      9,560,263       
Months Cash 
Available                               3.56                 1.70                 7.62                 3.99                 0.08                 1.73                 2.27                   2.3                 0.48
GF Assets                  17,023,101      6,694,847    25,935,077   15,482,986   23,622,719   23,618,275   28,204,269    23,618,275   12,303,252
GF Liabilities               3,231,117      3,407,617          714,409     1,649,197     1,781,663   12,558,895     2,672,414      2,672,414   10,704,664
Liabilities/         
Assets                           19.0%                 50.9%                  2.8%                10.7%                  7.5%               53.2%                  9.5%                10.7%                 87.0%  
Sources: FY 2011‐11 Comprehensive Annual Financial Reports for each city. Population estimates for each city as of 
July 1, 2011 from U.S. Census Bureau EST 2011‐03‐06.   

As shown in Exhibit 1.5, Watsonville’s General Fund end‐of‐year fund balance, at approximately 
$1.6 million, is extremely low compared to the median of $13.8 million in the comparison cities. 
As  a  percentage  of  expenditures,  Watsonville’s  end‐of‐year  fund  balance  amounted  to  4 
percent of General Fund expenditures compared to a median of 42.8 percent in the other cities. 
The  comparison  cities  had  cash  available  that  would  cover  a  median  of  2.3  months  of  their 
General  Fund  expenditures  compared  to  only one‐half  of  a  month’s  worth  of  expenditures  in 
cash in Watsonville. At 87 percent, the City of Watsonville has a high level of liabilities relative 
to its assets compared to a median of 10.7 percent in the comparison cities.  

While there are undoubtedly many factors contributing to the disparity between Watsonville’s 
financial  condition  and  that  of  the  comparison  cities,  Exhibit  1.6  shows  that  at  $775, 
Watsonville’s  General  Fund  expenditures  per  capita  are  higher  than  the  $522  median  of  the 
comparison cities. In fact, the City of Watsonville’s expenditures per capita are higher than all of 
the  other  cities  except the  City  of  Santa  Cruz, which  also  has  a  much  higher  revenue  base  as 
shown  above  in  Exhibit  1.5.  The  same  information  is  presented  for  FY  2009‐10  in  Exhibit  1.7, 
when  the  City  did  not  have  the  one‐time  expense  for  paying  off  its  PERS  loan  as  it  did  in  FY 
2010‐11. As can be seen, at $686 per capita, the City of Watsonville was still above the median 
amount of the comparison cities, though the difference was not as great as in FY 2010‐11. Only 
two other cities, Santa Cruz and Cathedral City, had higher per capita General Fund expenditure 
levels in FY 2009‐10 than the City of Watsonville.   




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                                                    Exhibit 1.6: General Fund FY 2010‐11 Expenditures Per Capita
                  Cathedral 
                        City            Colton              Gilroy            Hanford           Porterville            Salinas          Santa Cruz          Median            Watsonville
GF Expenditures $ 32,202,922 $       27,641,201 $         32,215,955 $20,392,760 $21,341,142 $78,804,888 $95,908,015 $                                     32,202,922 $39,971,715
 Population                52,381            52,940            49,582           54,284           55,023         152,994           60,342            54,284           51,586
Expenditures 
per capita      $               615 $               522 $               650 $               376 $               388 $               515 $           1,589 $               522 $               775
Sources: FY 2011‐11 Comprehensive Annual Financial Reports for each city. Population estimates for each city as of July 1, 2011 
from U.S. Census Bureau EST 2011‐03‐06.   

                                                         Exhibit 1.7: General Fund FY 2009‐10 Expenditures Per Capita
                       Cathedral 
                          City                Colton            Gilroy            Hanford           Porterville            Salinas          Santa Cruz            Median           Watsonville
GF 
Expenditures          $ 35,431,227 $      31,333,606              n/a       $ 
                                                                             20,346,682 $     21,185,526 $     83,768,355 $    97,605,583    33,382,417 $ 35,196,791
 Population                      51,515            52,331            48,946           54,050           54,326         150,829           60,049            54,050           51,300
Expenditures 
per capita            $               688 $               599                   $               376 $               390 $               555 $           1,625 $               577 $               686  
Sources: FY 2009‐10 Comprehensive Annual Financial Reports for each city. Population estimates for each city as of July 1, 2010 
from U.S. Census Bureau EST 2011‐03‐06.   

Accurate, well summarized public information key to effective financial control environment 

The  City’s  Comprehensive  Annual  Financial  Reports  (CAFRs)  contain  much  of  the  key 
information  presented  above  though  the  document,  like  CAFRs  for  most  cities,    is  not 
summarized to present key factors and measures that should be of concern to the City Council 
and  public.  The  CAFR  is  a  public  document  and  provided  to  Councilmembers,  but  it  is  not 
formally  presented  and  summarized  at  City  Council  sessions  as  a  control  measure  to  ensure 
that  a  candid  assessment  of  the  City’s  financial  position  is  provided  to  the  governing  board. 
Further,  the  City  Council  does  not  have  an  audit  or  finance  sub‐committee,  as  some  city 
councils do, to focus on financial matters exclusively and to receive more in‐depth analyses and 
information  about  the  City’s  audits  and  finances.  This  can  be  a  more  efficient  structure  than 
attempting to present and discuss often complex financial matters at a full City Council session.  

City staff does prepare and present financial information about the City in conjunction with the 
annual  budget  proposal  and  the  midyear  budget  report.  Staff  presentations  in  recent  years 
have  identified  declining  revenues  and  alternative  approaches  to  reducing  expenditures.  The 
budget  document  itself  includes  detailed  information  about  each  City  fund’s  revenues, 
expenditures and fund balance projections. However, the discussion and City Council sessions 
at  those  times  is  also  about  making  decisions  on  funding  levels  for  each  department  and 
services to be provided in the coming year and less about  assessing trends and prospects for 
the City’s overall financial position.  

Further,  the  fund  analyses  contained  in  the  budget  are  prepared  before  the  official  audited 
amounts  have  been  identified  by  the  City’s  external  auditor.  As  a  result,  certain  values  are 
projected or estimated, and not actual. This leaves the City Council with a not always accurate 
picture of the City’s financial position at a time when they are making spending decisions. While 
the  timing  for  approving  the  annual  budget  and  having  actual  audited  expenditures  and 
revenues  does  not  coincide,  the  City  Council  should  formally  receive  and  be  briefed  on  the 
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actual  amounts  at  another  point  in  the  year,  after  the  CAFR  is  complete,  and  provided  with 
financial trend and context information.  

Exhibit 1.8 presents some differences between General Fund information presented in the Fund 
Analysis section of the proposed Fiscal Year 2010‐11 budget and actual amounts as presented 
in the FY 2010‐11 CAFR. While it is not possible to have final actual revenue and expenditure 
amounts available at the time the budget is being considered in May and June of each year, the 
discrepancies in these amounts show the need for the City to have a separate public discussion 
and  presentation  to  the  City  Council  and/or  an  audit  committee  of  audited  final  amounts 
compared  to  budgeted  amounts  at  a  point  in  the  year  when  final  audited  amounts  are 
available.  

               Exhibit 1.8: Differences between General Fund Amounts Presented in                       
                                 Budgets vs. Audited Actual Amounts
                                                    Projected in 
                                                     FY 2011‐12                  Difference 
                                       Original        Budget         Audited  Budgeted vs.  Percent 
                                        Budget       Document          Actual      Actual    Difference
Start‐of‐year fund balance            $5,643,022         n.a.       $2,235,938 ($3,407,084)   ‐60.38%
General Fund Revenues                 29,780,956     29,279,643     31,077,410 $1,296,454       4.35%
Transfers in                           2,749,219      3,298,000      8,256,955  $5,507,736    200.34%
Revenues + transfers in               32,530,175     32,577,643     39,334,365 $6,804,190      20.92%
General Fund Expenditures             32,530,175     32,857,210     39,971,715 $7,441,540      22.88%
Net Revenues                               0          ‐279,567        ‐637,350   ($637,350)
End‐of‐year‐end fund balance          $5,643,022         n.a.       $1,598,588 ($4,044,434)   ‐71.67%  
Sources: City of Watsonville’s FY 2010‐11 Comprehensive Annual Financial Report and FY 2011‐12 Proposed 
Budget 

As  can  be  seen  in  Exhibit  1.8,  there  were  some  significant  differences  in  fund  information 
reported in the FY 2010‐11 budget document and the actual audited amounts reported in the 
CAFR.  In  many  cases,  the  actual  results  were  worse  for  the  City  than  those  reported  in  the 
budget document.  

Actual General Fund balance available at the start of the year, for example, was $3.4 million less 
than the $5.6 million amount reported in the budget document. Actual revenues and transfers 
to the General Fund were $6.8 million higher, and expenditures were $7.4 million higher than 
presented in the budget document. As a result of these differences, the actual FY 2010‐11 year‐
end fund balance was approximately $4 million less than the amount included in the FY 2010‐
11 budget. 

Conclusions  
The  City  of  Watsonville’s  financial  position  is  poor,  has  worsened  over  the  five  fiscal  years 
through  FY  2010‐11  and  General  Fund  expenditures  appear  to  be  outpacing  revenues  for  FY 
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2011‐12.  Though  information  about  this  situation  can  be  extracted  from  the  City’s 
Comprehensive  Annual  Financial  Reports  (CAFRs)  and  budget  documents,  such  information  is 
not being routinely summarized by staff and provided to the City Council in a way that provides 
a  full  picture  of  the  current  financial  position  and  trends  over  time.  Presentations  to  the  City 
Council  are  needed  summarizing  the  annual  CAFRs,  reconciling  actual  revenues  and 
expenditures with budgeted and projected amounts, and providing multi‐year trend analyses.  

Even though complete audited final revenue and expenditure information on the current fiscal 
year  cannot  be  available  at  the  time  the  subsequent  year’s  budget  is  being  decided,  more 
current estimates should be provided to the City Council. When the final audited amounts are 
available, they should be provided to the City Council and the public, with comparisons to what 
was assumed in the originally adopted budget so adjustments can be made as necessary and 
long‐range plans adopted to achieve the City’s financial goals.  

The  City’s  poor  financial  position  is  due  in  part  to  national  economic  conditions  but  a 
comparison  of  Watsonville’s  financial  indicators  with  those  of  other  comparable  cities  shows 
that  the  City  of  Watsonville  is  in  worse  condition  than  the  other  jurisdictions  that  have  also 
been affected by economic conditions.  

Recommendations 
The City Council should direct the City Manager to:  

     1.1    Prepare  annual  reports  summarizing  and  distilling  the  Comprehensive  Annual 
            Financial  Report  (CAFR)  to  provide  the  City  Council  with  a  complete  and  candid 
            assessment of the City’s financial position including past and future multi‐year trend 
            data  and  a  comparison  of  actual  audited  revenue  and  expenditure  data  with 
            budgeted and projected revenues and expenditures.  

     1.2    Prepare an annual report comparing the City of Watsonville’s financial position with 
            other comparable cities, measured in key areas such as net assets, General Fund net 
            revenues,  General  Fund  balance  as  a  percentage  of  General  Fund  expenditures, 
            liabilities  relative  to  assets,  cash  on  hand  relative  to  monthly  expenditures,  and 
            other measures. 

     1.3    Consider establishment of a City Council audit or finance sub‐committee to ensure 
            that  the  City’s  financial  condition  receives  concentrated  attention  from  the 
            governing board and that a worsening of current financial conditions is prevented to 
            the extent possible.  

Costs and Benefits 
The City will have more information and analysis at its disposal for management and the City 
Council to use in making decisions and controlling costs. The Council can better achieve goals 
such  as  improving  the  City’s  financial  position  if  it  has  a  regular  source  of  reliable,  clear 
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information  on  current  and  past  conditions  to  use  in  making  decisions  for  the  future.  Key 
information  on  fund  balance,  reserves  and  City  indebtedness  will  be  presented  to  the  City 
Council. Preparation of this information will require staff time but the Administrative Services 
Manager and other staff are already allocating time to preparing financial and budget reports 
so this should not result in a significant additional staff time requirement.  




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2.  Inter‐fund Loans and Transfers  
       Like most municipalities, the City of Watsonville loans and transfers cash between its 
        funds each year. At any point in time, a fund may have idle cash balances that can be 
        used for short‐ or long‐term loans to another fund to cover the costs of services or a 
        project  until  expected  revenues  have  been  obtained.  Transfers  between  funds  are  a 
        mechanism  for  one  fund  to  pay  another  for  legitimate  purposes,  either  with  or 
        without the expectation of repayment.  

       Risks  associated  with  inter‐fund  loans  and  transfers  are  that  the  loans  will  not  be 
        repaid in full with appropriate interest if revenues do not materialize as expected, that 
        repeated loans mask the loan recipient fund’s inability to meet its costs, and that tying 
        up certain fund monies in loans may prevent the accomplishment of planned projects 
        and services. To minimize such risks, it is critical that the City of Watsonville have clear 
        policies  and  procedures  governing  such  loans  and  that  the  terms  and  conditions  are 
        clearly disclosed in authorizing resolutions approved by the City Council as well as fully 
        reported in the City’s Comprehensive Annual Financial Report (CAFR).  

       Some City of Watsonville inter‐fund loans reviewed have resulted in lessening monies 
        available in the loaning fund because some loans do not require interest payments. In 
        other  instances,  the  full  terms  and  conditions  of  inter‐fund  loans  are  not  fully 
        disclosed in City Council resolutions or CAFRs. Further, the impact of issuing inter‐fund 
        loans  on  the  loaning  fund,  such  as  delays  in  planned  projects  or  services,  is  not 
        formally reported to the City Council and public.  

       The  recurring  provision  of  short‐term  General  Fund  loans  to  the  City’s  Airport  and 
        Parking  Garages,  including  the  garage  adjacent  to  the  Civic  Center,  reflects  ongoing 
        operating losses at those facilities that are being supported by the General Fund. The 
        City has plans in place for both operations but the impact on the limited General Fund 
        of supporting these operations in recent years could have been better reported to the 
        City Council.  

       At  least  three  inter‐fund  loans  and  reimbursements  reviewed  between  FYs  2008‐09 
        and 2010‐11 did not include interest payments, resulting in a loss to the General Fund 
        of  an  estimated  $740,000,  an  estimated  loss  to  the  City’s  Impact  Fee  Funds  of 
        $111,492,  and  an  estimated  loss  of  $36,597  in  interest  earnings  for  a  loan  issued  by 
        the  Low‐income  Housing  Set‐aside  Fund.  Two  of  these  loans  were  approved  by  the 
        City Council as interest‐free, though staff reports to the Council about these loans did 
        not  present  the  fiscal  impact  of  the  interest‐free  loans.  The  sources  of  a  multi‐fund 
        loan to the General Fund to pay off a City debt to CalPERS was disclosed as the City’s 
        pooled money investment account in the City Council resolution authorizing the loan. 
        However,  neither  the  resolution  nor  the  related  staff  report  disclosed  the  individual 
        funds that would be impacted by the loan.   

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Loans  and  transfers  between  the  General  Fund  and  other  City  funds  are  classified  in  one  of 
three  ways  for  financial  reporting  purposes:  1)  short‐term  loans  expected  to  be  paid  back 
within one fiscal year; 2) long‐term loans not expected to be paid back within one year; and 3) 
transfers  where  monies  are  moved  from  one  fund  to  another,  without  payback  expected,  to 
pay for services provided or to make debt service payments through an appropriate fund (e.g., 
a transfer from the General Fund to the Debt Service fund to make a payment on bond debt). 
The City of Watsonville, like most cities, executes inter‐fund loans and transfers each year. In 
some  cases,  these  transactions  provide  temporary  cash  flow  for  a  fund  so  it  can  meet  its 
expenses  before  expected  revenues  have  been  received.  These  transactions  can  also  be  a 
routine reimbursement such as transferring Gas Tax Fund money to the General Fund to cover 
the latter fund’s costs incurred for street repair and improvement, consistent with the legally 
restricted use of Gas Tax Fund monies.  

To ensure proper control, it is critical that inter‐fund loans and transfers be treated like formal 
loans  from  private  lenders,  with  clear  documentation  of  the  term  of  the  loan,  a  repayment 
schedule  detailing  the  principal  and  interest  amounts  and  payment  dates,  and  any  other 
conditions to ensure that the fund granting the loan is kept whole over time. This is particularly 
important for special revenue funds such as the Gas Tax and Impact Fee funds whose uses are 
legally  restricted  and  cannot  be  used  for  other  purposes,  though  they  can  be  temporarily 
loaned to other funds.  

What  is  critical  about  inter‐fund  loans  and  transfers  from  a  management  perspective  is  that 
loans are not masking structural problems such as excessive costs and/or insufficient revenues 
in the fund receiving the loan and that programs and services of the funds providing the loan 
are not being reduced or delayed due to their full resources not being available while they are 
loaned out.  

In  reviewing  the  City’s  financial  audits  and  budgets  from  the  past  several  years,  the  City  has 
issued short‐ and long‐term General Fund loans for a variety of purposes, some of which have 
worsened  the  General  Fund’s  weak  position,  as  discussed  in  Section  1.  Some  of  the  General 
Fund  loans  represent  long‐term  or  ongoing  commitments  of  General  Fund  resources  at  the 
same  time as  many  core  City  services  and  positions  have  been cut  back  and  as  General  Fund 
reserves have been depleted.  

The City’s CAFRs show that the General Fund and other City funds have been covering deficit 
operations  at  two  departments  that  were  established  and  should  be  operating  as  self‐
supporting  enterprise  departments.  These  funds  are  the  Airport  and  the  Parking  Garages, 
including the garage adjacent to City Hall. In addition, General Fund resources have been used 
to cover costs that would normally have been paid by development impact fees and some costs 
associated with the downtown redevelopment activities. City management reports that funds 
with negative cash balances are charged interest to make up the difference of any reductions in 
the  City’s  pooled  investment  fund’s  interest  earnings  caused  by  the  negative  balance  funds. 
While this will keep the pooled investment fund whole, the situation is still problematic when 
there are certain funds with chronic deficits because General Fund resources must be used to 
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support  the  deficit  fund  operations.  Further,  the  financial  position  of  the  funds  with  chronic 
negative balances is worsened because they have to pay interest on their negative balances.  

Agreements  were  executed  for  eventual  reimbursement  of    General  Fund  expenditures  from 
redevelopment property tax increment monies, but not for a minimum of five years, and with 
no  interest  payments,  leaving  the  General  Fund  with  less  buying  power  when  reimbursed. 
Loans  between  other  City  funds  have  also  been  issued  without  interest  payments  or  without 
clear documentation and disclosure of their impact on the loaning funds. These loans include 
the $250,000 Low‐Income Housing Set‐aside Fund loan for insurance, Redevelopment Agency 
obligations  to  the  General  Fund  and  Impact  Fee  Fund,  and  the  PERS  loan  pre‐payment  from 
individual funds in the pooled money investment account.  

Short‐term loans from General Fund supporting enterprises with deficits 
Short‐term  loans  between  funds  are  most  typically  made  to  cover  cash  shortages  in  other 
funds.  For  example,  a  grant  funded  project  may  commence  using  monies  borrowed  from 
another  fund  to  cover  initial  costs  until  the  committed  grant  funds  are  received.  Such  loans 
should be documented in the City’s CAFR but do not go through a formal loan process with a 
loan repayment schedule and City Council approval, since they are short‐term transfers of cash 
only. Other short‐term loans are shown in the CAFR for reporting purposes only to comply with 
accounting practices that do not allow funds to report certain negative balances.  

Exhibit 2.1 shows short‐term loans made by the General Fund for the three fiscal years ending 
June 30, 2011.  
                                              

                         Exhibit 2.1: Short‐Term Loans from the General Fund to  
                              Other Funds, FY 2008‐09 through FY 2010‐11 
                                                   FY 2008‐09          FY 2009‐10        FY 2010‐11 

              Airport                               $3,714,967                $27,000     $2,882,023 
              Parking Garages                                               $738,069       $855,832 
              Abandoned Vehicle                                               $32,051       $71,883 
              Internal Service Fund                                                       $1,153,414 
              Redevelopment Special Revenue                                               $1,528,764 
              Retirement Tax                                $806,130        $979,341       $795,200 
              Total                                     $4,521,097          $1,776,461    $7,287,116 

             Sources: City of Watsonville FY 2008‐09 through FY 2010‐11 CAFRs  

Of the short‐term loans made from the General Fund and shown in Exhibit 2.1, those issued to 
the Airport and Parking Garages present financial management issues for the City. The loans to 
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those  two  enterprises  have  been  made  each  year  because  the  two  enterprises  are  not 
generating  enough  revenue  to  meet  their  costs.  Though  classified  as  short‐term  loans  in  the 
CAFR  so  that  the  two  enterprise  departments  are  not  reported  with  negative  cash  balances, 
they actually represent operating subsidies from the General Fund because the two enterprises 
have not been able to meet all of their obligations.  

At  present,  the  Airport  is  developing  a  business  plan  to  improve  its  revenues  through  better 
management of its properties and possible adjustment to hangar rates. Additionally, the Airport 
was issued a separate long‐term loan from the General Fund that should be paid off by 2014, 
which will further improve the Airport’s financial position and should at least break even at that 
point. The management issue is how the Airport continued to operate at a deficit for a number 
of years without the City taking actions to improve the financial position of the Airport. Airport 
operations  have  produced  a  deficit  every  year  since  at  least  FY  2009‐10.  A  review  of  budget 
documents,  staff  reports  and  PowerPoint  presentations  from  FY  2006‐07  through  FY  2011‐12 
indicate  that  City  staff  either  reported  projected  positive  net  revenues  each  fiscal  year  or 
omitted  projections  of  net  revenues.  However,  the  implications  of  annual  operating  deficits, 
where  actual  audited  expenditures  exceeded  actual  audited  revenues  were  not  presented  to 
City Council. Better reporting on the City’s and Airport’s financial condition, including multi‐year 
trend  data  and  specific  staff  proposals  for  improvement,  were  needed  to  avoid  the  ongoing 
deficit  operations  that  occurred  at  the  Airport.  City  staff  did  report  proposals  for  increased 
hangar rates and consolidation of management in a presentation to City Council in FY 2011‐12, 
even though the Airport had operating deficits in multiple prior fiscal years. 

Similarly,  the  parking  garages  fund,  including  the  one  garage  built  near  City  Hall  in  2009,  has 
operated  at  a  deficit  since  its  opening  and  has  required  General  Fund  subsidies  to  cover  its 
costs.  The  City  is  presently  considering  options  such  as  making  the  Garages  a  general 
government  City  department  rather  than  continuing  its  status  as  a  self‐supporting  enterprise 
department. If that occurs, a portion of its operations will become a regular General Fund cost. 
As  with  the  Airport,  better  reporting  of  multi‐year  trend  data  and  the  consequences  to  the 
General Fund of continually subsidizing this operation should have been presented to the City 
Council and public. Such reporting could be accomplished with CAFR summary and distillation 
reports, recommended in Section 1 of this report.  

Long‐term loans not always  adequately  documented  and  some  repaid  without 
interest  
Long‐term inter‐fund loans1 should be documented with City Council resolutions approving the 
loan and a detailed repayment schedule showing the amounts of principal and interest due on 
each payment date. The loan amount and repayment schedule should also be presented in the 
City’s CAFRs. This serves as a control for ensuring that the lending fund is not harmed through 

                                                            
1
     Long‐term inter‐fund loans are defined as those not expected to be repaid within a year.  

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the  transaction  and  that  any  borrowed  funds  will  be  repaid  as  opposed  to  becoming 
permanent, subsidizing contributions to the borrowing fund.  

A  review  of  outstanding  loans  between  the  General  Fund  and  other  City  funds  reported 
between  FY  2008‐09  and  FY  2010‐11  showed  that  such  documentation  is  not  always  in  place 
and that interest is not always included in the loan terms and conditions. The loans in question 
are:  

1) a $250,000 loan from the Low‐income Housing Set Aside Fund to the City’s Internal Service 
   Fund for an insurance reserve;  

2) a  $4.4  million  reimbursement  agreement  between  the  Redevelopment  Agency  and  the 
   General Fund to reimburse General Fund costs associated with the Civic Center building and 
   parking garage redevelopment project; 

3) a  $700,000  reimbursement  agreement  between  the  Redevelopment  Agency  and  the 
   Development Impact Fee Funds for deferred impact fee payments associated with the Civic 
   Center building and parking garage redevelopment project; and 

4) A loan for $5.4 million in total obtained, according to the City’s FY 2010‐11 CAFR, from each 
   of the City’s utility’s funds, the Impact Fee Fund, the Parks Development Fund, the Gas Tax 
   Fund  and  the  Library  Fund  to  the  General  Fund  to  pre‐pay  a  loan  to  CalPERS  for  public 
   safety employee retirement benefits.  

$250,000 Low‐Income Housing Set‐aside Fund Loan for Insurance  

Though posted in the City’s CAFR as a long‐term loan, the City has not provided the audit team 
with  requested  loan  agreements  or  other  documentation  pertaining  to  a  $250,000  loan  from 
the  Low‐income  Housing  Set‐aside  Fund  to  the  City’s  Internal  Service  Fund.  City  staff  has 
explained that the funds are for an insurance reserve required for the Youth Build project.  

While  the  CAFRs  show  that  $250,000  is  being  held  in  cash  in  the  Internal  Service  Fund, 
documentation  of  the  terms  and  conditions  upon  which  it  will  be  repaid  to  the  Low‐income 
Housing  Set‐aside  Fund  have  not  been  provided.  According  to  City  staff,  the  funds  are 
technically in a pooled investment and are not part of a loan. However, the $250,000 cannot be 
used by the Housing Set‐aside Fund during the ten year term while they are on reserve for the 
insurance requirement.  

Formal  documentation  of  the  repayment  schedule  and  the  interest  to  be  paid  back  to  the 
Housing Set‐aside Fund should have been approved by the City Council and maintained in City 
records.  Interest  earnings  on  the  $250,000  in  funds  during  the  ten  year  loan  term  should  be 
tracked and paid to the Low‐income Housing Set‐aside Fund when the funds are paid back. If 
$250,000 is returned to the Low‐Income Housing Set‐aside Fund, without any interest, then the 
funds will have less purchasing power when reimbursed than when it was first transferred into 
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the  Internal  Service  Fund.  Assuming  an  interest  rate  of  3  percent  per  year,  the  Low‐income 
Housing Set‐aside Fund would be owed an additional $36,597 at the end of the ten year term.  

$4.4 Million Redevelopment Agency obligation to General Fund not posted in CAFR and not 
reimbursed with interest, depriving the General Fund of an estimated $740,000  

The Redevelopment Agency transferred approximately $4.4 million to the City’s General Fund 
in  FY  2010‐11,  pursuant  to  reimbursement  agreements  from  2004,  as  amended  in  2006  and 
2011. The purpose of the transfer was to reimburse the City for General Fund costs associated 
with the Civic Center building and parking garage redevelopment projects. Most of the costs of 
the  projects  were  funded  by  a  $20  million  bond  issue  but  these  General  Fund  costs  were 
apparently  not  covered  by  bond  proceeds.  The  City  has  not  provided  documentation  to  the 
audit team of the $4.4 million of General Fund costs incurred on these projects.   

This  $4.4  million  reimbursement  obligation  was  not  reported  as  a  Redevelopment  Agency 
liability  in  the  Agency’s  CAFRs  after  the  agreements  with  the  City  were  executed,  nor  was  it 
posted as an asset in the City’s CAFRs. Such reporting serves as a control to ensure that inter‐
fund  loan  repayment  occurs  in  the  event  that  other  City  financial  records  are  incomplete  or 
accidentally modified or destroyed. The absence of CAFR reporting presents the risk that if staff 
did not execute the repayment provision, the General Fund might not have been repaid.   

The 2006 agreement called for reimbursement of the loaned funds on either July 1, 2011 or any 
July 1 in years thereafter, depending on the City’s request for payment. There was no provision 
for  interest  payments  in  the  reimbursement  agreements.  While  the  City  Council  approved  of 
the  reimbursement  agreement  without  interest,  a  review  of  the  staff  report  provided  to  City 
Council  on  June  23,  2006,  prior  to  City  Council  approval,  revealed  a  lack  of  information 
regarding interest rates for the reimbursement agreements. In contrast, an agreement for the 
deferral of $242,305 in impact fees did include interest charges. The interest rate charged was 
clearly disclosed in staff reports to the City Council dated June 13 and 23, 2006.  It is not clear 
from the staff reports why one agreement included interest payments and the other did not.  
At 3 percent per year, interest earned on the $4.4 million between 2006 and 2011 would have 
been approximately $740,000 for the General Fund.  

When the Governor’s proposal to abolish redevelopment agencies became known in 2011, the 
City  amended  its  reimbursement  agreements  with  the  Redevelopment  Agency  to  allow  for 
immediate repayment to the General Fund. This repayment occurred in FY 2010‐11.  

State  legislation  adopted  in  June  2011  that  dissolved  redevelopment  agencies  does  not  allow 
for  modifications  to  redevelopment  agency  obligation  agreements.  However,  because  the 
amendments to the agreements between the City and its Redevelopment Agency occurred in 
March  2011  and  the  full  obligation  was  paid  off  shortly  thereafter,  the  amendment  does  not 
appear to be a violation of this provision of State law. Further, the agreements were therefore 
not subject to a determination of whether or not they qualified as enforceable obligations, as 

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was required by State law for all other outstanding redevelopment agency debt and obligations 
as of June 27, 2011.  

Another  provision  of  State  law  related  to  redevelopment  agency  dissolution  prohibits  asset 
transfers  from  redevelopment  agencies  to  sponsoring  cities  after  January  1,  2011  unless  the 
agency that received the assets is contractually committed to a third party for expenditure or 
encumbrance  (legal  claim)  of  those  assets.  Transferred  is  defined  as  instances  where  the 
transmission of money is not in consideration for goods or services received.   

The State Controller is required by State law to review all asset transfers that took place after 
January, 2011 between redevelopment agencies and sponsoring cities. When such a review is 
eventually conducted for the City of Watsonville, the State Controller will have to determine if 
the amounts transferred to the City General Fund represented legitimate redevelopment costs. 
For  the  transfer  to  be  confirmed  as  legitimate,  the  City  will  likely  need  to  document  that  it 
incurred  $4,429,230  in  General  Fund  costs  for  the  Civic  Center  building  and  parking  garage 
redevelopment projects since that was the amount in the reimbursement agreement that was 
transferred  from  the  Redevelopment  Agency  to  the  General  Fund.  As  mentioned  above,  the 
City has not provided documentation of these costs to this audit team.  

The  $4.4  million  repayment  to  the  General  Fund  from  redevelopment  funds  provided  much 
needed  revenue  in  FY  2010‐11.  Without  it,  negative  General  Fund  net  revenues  of  $637,350 
would have been $4.4 million worse, or approximately a negative $5 million.  

Reimbursement from redevelopment funds to Impact Fee Fund in 2011 for deferred impact 
fees  on  Civic  Center  projects  did  not  include  interest,  depriving  the  Impact  Fee  Fund  of  an 
estimated $114,492   

A reimbursement similar to the General Fund reimbursement described above took place in FY 
2010‐11  with  redevelopment  funds  reimbursing  the  City’s  Impact  Fee  Fund  $700,000  for 
deferred  development  impact  fees  related  to  the  downtown  Civic  Center  redevelopment 
projects. Unlike the General Fund reimbursement agreement, these obligations were reported 
in  City  and  Agency  CAFRs  and  documented  in  the  City  Council  resolution  approving  the 
reimbursement agreements.  

However,  like  the  General  Fund  reimbursement  agreement,  the  Impact  Fee  Funds 
reimbursement  agreements  did  not  call  for  interest  payments  along  with  the  reimbursement 
also scheduled for five or more years later. As a result, the Impact Fee Fund was left with less 
buying power for its restricted purpose: growth‐related public improvements. The Impact Fee 
Fund would have received an additional $114,492 in reimbursement from the redevelopment 
funds in addition to the $700,000 reimbursement in deferred impact fees, assuming 3 percent 
interest and a five year term.  

While  the  downtown  Civic  Center  redevelopment  project  may  have  been  perceived  as  very 
beneficial  to  the  City  and  worthy  of  contributions  from  other  City  funds,  the  decision  to 
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subsidize it with General Fund and Impact Fee Fund monies has resulted in fewer resources for 
the purposes intended for those funds.   

PERS loan pre‐payment resolution did not document source of loan to General Fund or that 
General Fund would also be contributing to the payment  

A loan was made to the General Fund in FY 2010‐11 from a variety of other City funds for up to 
$6.5 million to pay off what is known as the “PERS side loan”.  The purpose of the loan was to 
prepay PERS for pension benefits for the City’s uniformed public safety employees.  

As  shown  in  Exhibit  2.2,  the  City’s  FY  2010‐11  CAFR  reports  that  $5.4  million  was  borrowed 
from  a  number  of  City  funds,  including  each  City  utility  fund,  the  Gas  Tax  Fund,  the  Library 
Fund,  and  the  Parks  Development  and  Impact  Fee  Funds.  The  source  of  the  $1.1  million 
difference between the $6.5 million payment to CalPERS (which was the loan amount approved 
by the City Council) compared to the $5.4 million loan reported in the CAFR is not disclosed in 
the CAFR or the resolution authorizing the loan, but was presumably the General Fund itself.  

Unlike the three loans discussed above, the resolution adopted by the City Council approving 
the  CalPERS  loan  includes  a  13  year  repayment  schedule  detailing  the  principal  and  interest 
payments  by  payment  date  at  3  percent  interest  per  year.  However,  the  schedule  does  not 
disclose which specific funds are providing the loan, though that information is detailed in the 
CAFR.  The  resolution  only  shows  that  the  funds  will  be  repaid  to  the  City’s  investment  pool, 
which  is  where  all  City  monies  are  kept  to  earn  interest  until  they  are  needed  (with  their 
balances and interest earnings tracked separately).  

 
                            Exhibit 2.2: Sources of Loan to General Fund 
                                      to Pre‐pay CalPERS Loan 
                Source                                                      $ Amount  
                Solid Waste Utility Fund                                     $1,496,579 
                Sewer Utility Fund                                            910,956 
                Gas Tax                                                       825,802 
                Impact Fee Fund                                               730,795 
                Library Fund                                                  615,425 
                Water Utility Fund                                            570,286 
                Parks Development Fund                                        210,979 
                Total Borrowed                                              $5,360,822 
                Loan authorized by City Council                             $6,454,697 
                Difference (assumed General Fund contribution)              $1,093,875 
                Source: FY 2010‐11 CAFR 

While  the  approach  to  paying  off  the  PERS  loan  saved  the  City  from  paying  the  7.75  percent 
annual interest rate that CalPERS was charging on the loan, the process did not fully disclose to 
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the City Council and the public which funds were going to be used and what the impact would 
be  on  the  planned  uses  of  those  funds  over  the  13  year  period.  According  to  City  staff,  the 
funds listed in Exhibit 2.2 represent a one day snapshot prepared for the FY 2010‐11 CAFR , and 
the actual funds covering the loan are taken from the pooled investment in general rather than 
any  specific  funds.  However,  this  could  be  problematic  for  any  fund  that  would  require 
immediate cash held in the pooled investment fund. For example, the loan sources on June 30, 
2011 included the City’s Parks and other Impact Fees funds. Those funds are collected and held 
in  reserve  to  pay  for  public  improvements  needed  due  to  growth  in  the  City.  Similarly,  any 
impacts of loaning the funds on operations and activities of the City’s utilities should have been 
identified  to  ensure  that  the  City  Council  and  public  were  fully  informed  of  the  impacts  of 
approving the inter‐fund loan on delays or deferrals of planned projects over the 13 year loan 
term. Although City staff state that the City has sufficient cash in the pooled investment fund, 
the City is exposed to the risk of insufficient cash if several funds require immediate cash at one 
time.  In  addition,  Department  heads  and  managers  should  be  able  to  know  how  much  funds 
are available to them and is at their immediate disposal, which is impossible to do without full 
disclosure of the sources of funds and interest payment for the PERS loan. 

Conclusion 
The  City  does  not  follow  consistent  policies  and  procedures  regarding  inter‐fund  loans  and 
transfers. Since there is a risk of funds being inappropriately depleted of resources if loans are 
not structured and reported properly, it is critical the City establish and adhere to a consistent 
approach  to  inter‐fund  loans  and  transfers.  Specifically,  all  such  loans  should  be  treated 
formally,  with  a  documented  repayment  schedule  and  a  fair  interest  rate.  The  City  Council 
should  be  required  to  approve  all  inter‐fund  loans  of  one  year  or  more,  with  all  repayment 
details fully disclosed. Finally, the impact of inter‐fund loans and transfers on the fund providing 
the resources should be summarized by staff and presented to the City Council in conjunction 
with any proposed loan. Short‐term loans reflecting chronic shortfalls in other funds should be 
disclosed.  

Recommendations 
The City Council should: 

    2.1     Direct the City Manager to prepare formal written policies and procedures regarding 
            inter‐fund loans and transfers requiring that the repayment schedules, principal and 
            interest  amounts,  loaning  fund(s)  and  all  other  terms  and  conditions  of  such 
            transactions  be  fully  disclosed  in  required  City  Council  resolutions  authorizing  any 
            loan of more than one year.  

    2.2     Direct  the  City  Manager  to  report  the  service  or  program  impact  on  the  loaning 
            funds of having some or all of their resources tied up for the term of the loan as part 
            of the staff report accompanying all inter‐fund loan authorizing resolutions.   

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    2.3     Direct  the  City  Manager  to  prepare  an  annual  report  on  all  short‐term  inter‐fund 
            loans at the end of each year, including past year loans and disclosure of any funds 
            repeatedly receiving loans due to chronic revenue shortfalls or expenses in excess of 
            revenues.  

    2.4     Establish  a  policy  requiring  that  all  inter‐fund  loans  be  repaid  with  interest  at  the 
            same rate as earned by the City’s pooled investment fund.  

Costs and Benefits 
We  estimate  that  developing  and  establishing  policies  will  require  less  than  .25  full‐time 
position equivalents (FTE) for one year or less. Producing annual reports on all short‐term loans 
could be efficiently accomplished if they are done in conjunction with preparation of the annual 
CAFRs.  If  the  recommendations  are  implemented,  then  all  City  funds  will  be  kept  whole  by 
consistently  requiring  that  interest  be  included  in  all  inter‐fund  loan  repayments  at  the  rate 
that they would have otherwise earned from the City’s pooled investment fund. In the case of 
the General Fund reimbursement agreement with the Redevelopment Agency, this would have 
meant payment of an estimated additional $740,000 along with the $4.4 million reimbursed to 
the  General  Fund  in  FY  2010‐11  for  costs  associated  with  the  Civic  Center  redevelopment 
project, if the City Council had a consistent policy on interest rates. The City Council will receive 
more  complete  information  on  all  proposed  inter‐fund  loans  and  the  City’s  Comprehensive 
Annual  Financial  Reports  (CAFRs)  will  include  more  complete  information  on  such  loans.  The 
risk to all City funds of losing some of their resources or delaying their programs and services 
due to inter‐fund loans will be reduced. 




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     Expenditures for the majority of the City’s General Fund departments exceeded their 
      approved budgets for each of the three fiscal years ending June 30, 2012. The Fire and 
      Police  Department  exceeded  their  collective  budgets  by  $1.8  and  $1.2  million  in  FY 
      2009‐10  and  FY  2010‐11,  respectively,  and  the  majority  of  other  departments  did 
      likewise.  While  unforeseen  needs  can  develop  in  any  year  that  require  budget 
      adjustments,  the  number  of  departments  that  have  exceeded  their  budgets  and  the 
      absence of a clear process for amending the approved budget indicate a lack of cost 
      control mechanisms and department management accountability for controlling costs.  

     Appropriation  authority  for  General  Fund  expenditures  in  excess  of  originally 
      budgeted  amounts  was  covered  partially  by  carrying  forward  approximately  $2.8 
      million in unexpended prior year capital project appropriations in FY 2009‐10 and $1.8 
      million in FY 2010‐11. These appropriations were added midyear without City Council 
      re‐appropriation or approval of new uses of these funds.  

     While some overtime is unavoidable for public safety agencies, and can even be cost 
      effective,  the  extent  of  the  variance  between  budgeted  and  actual  overtime, 
      particularly  for  the  Fire  Department,  is  extensive.  The  City  of  Watsonville’s  public 
      safety  costs,  measured  in  costs  per  resident,  are  higher  than  the  median  costs  for 
      public safety among seven comparable cities. 

     The  City  lacks  adequate  management  tools,  reports,  and  resources  to  ensure 
      expenditures  are  controlled  and  that  all  variances  with  the  budget  are  clearly 
      disclosed.  The  City’s  finance  and  accounting  system  is  outdated,  lacks  flexibility  and 
      does not provide sufficient timely information for department managers to be able to 
      keep  abreast  of  their  budget  variances.  The  City  reports  it  has  implemented  a  new 
      budget monitoring process since audit field work was completed.  

     The  cash  disbursement  report  provided  to  the  City  Council  for  approval  at  every 
      meeting  is  not  an  effective  cost  control  mechanism.  The  reports  contain  little 
      explanation, are not tied to baselines, and lack roll‐ups by department or function. 

     The City’s cost allocation plan for services provided to multiple departments is based 
      on  allocation  assumptions  from  FY  2000‐01,  or  more  than  ten  years  ago.  Based  on 
      restructuring and reductions in staff in recent years, the cost allocation plan may be 
      inapplicable. Departments may be inappropriately overcharged for citywide services, 
      impacting their ability to provide core services that are aligned with the departments’ 
      functions, and potentially violating State laws.  

     The  City  established  formal,  written  cash  handling  policies  and  procedures  in  the 
      summer of 2012. Prior to that, such policies and procedures were not in place, in spite 
      of the fact that tens of millions of dollars are collected each year Citywide. City staff 
      reports that more such written procedures will be prepared in the near future. 

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As  discussed  in  Section  1,  General  Fund  expenditures  have  exceeded  revenues  over  the  last 
four  fiscal  years.  Contributing  to  this  trend  is  the  lack  of  adequate  management  tools  and 
resources  to  control  City  expenditures.  During  the  course  of  this  audit,  City  management  has 
implemented  new  budget  monitoring  procedures,  the results  of  which  cannot  be assessed  as 
part of this audit since they are still so recent.  

Actual Expenditures Exceed Approved Budget 
The  City  budget  cites  provisions  from  the  City’s  budget  ordinance  that  require  City  Council 
approval before actual expenditures can exceed budgeted expenditures for any fund. The City 
Manager may  transfer appropriations  within  a fund  provided  that  doesn’t  increase  total  fund 
expenditures (e.g., from one department to another) and the Administrative Services Director 
may transfer appropriations within a department except for salary and capital accounts. In spite 
of  these  codified  controls,  most  General  Fund  departments  exceeded  their  budgeted 
appropriations  in  the  three  fiscal  years  ending  June  30,  2012.  City  management  reports  that 
these expenditures were allowed because total General Fund expenditures did not exceed the 
total  General  Fund  appropriation  approved  by  the  City  Council.  As  long  as  the  total  fund 
appropriation  is  not  exceeded,  City  policy  allows  the  City  Manager  to  move  funds  between 
departments and budget line items.  

However, the final General Fund appropriation that City management classifies as approved by 
the  City  Council  includes  $2,958,448  for  FY  2009‐10  and  $1,280,539  for  FY  2010‐11  in 
unexpended  funds  carried  forward  from  prior  fiscal  years.  These  funds  were  reportedly 
encumbered  (earmarked  as  financial  obligations)  for  Civic  Center  capital  projects1  but  were 
subject  to  being  carried  forward  to  FY  2009‐10  and  FY  2010‐11  since  they  were  not  fully 
expended in prior years. These appropriation authorities were added to the revised FY 2009‐10 
and FY 2010‐11 General Fund budgets midyear by City management. The City Council did not 
re‐appropriate the funds in the FY 2009‐10 and FY 2010‐11 capital improvement plan budgets, 
consistent with the City practice for capital projects that span multiple years. 

While the transfer of approved General Fund appropriations approved in prior fiscal years from 
capital projects to other uses may have been generally consistent with City budget policy, it is 
problematic in that: 1) the funds were not included for re‐appropriation by the City Council in 
the capital improvement plan budgets for FY 2009‐10 and FY 2010‐11; and 2) the funds were 
not included in the original FY 2009‐10 and FY 2010‐11 operating budgets to show they were 
being unencumbered from their original purpose to be used for other purposes in FY 2009‐10 
and FY 2010‐11. As a result, $2,958,448 and $1,280,539 in appropriations were included in the 
FY  2009‐10  and  FY  2010‐11  General  Fund  budgets,  respectively,  without  explicit  City  Council 
review or approval.             




1
  City Council had approved a City contract with Griffin Structures, Inc. for up to $13,288,789 for improvements to 
the Civic Center structure in FY 2006‐07. 

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To ensure proper controls and City Council oversight of the General Fund, the carryover funds 
previously  appropriated  for  capital  project  purposes  should  have  either  been  re‐appropriated 
by  the  City  Council  in  the  FY  2009‐10  and  FY  2010‐11  capital  budgets  for  the  Civic  Center 
project, as originally approved, or included in the original FY 2009‐10 and FY 2010‐11 operating 
budgets for approval by the City Council for new purposes if management no longer intended 
to use funds appropriated in prior years for their originally approved purposes.   

The unexpended capital project funds included midyear as carryover encumbrances represent a 
significant  portion  of  the  increase  between  the  original  budget  approved  by  City  Council  and 
the revised budget presented by City management to the City Council midyear.  For example, 
the  $2,958,448  in  carryover  encumbrances  for  the  Civic  Center  structure  in  FY  2009‐10 
represented 72.8 percent of the $4,065,505 increase between the original and final budget. In 
FY  2010‐11,  the  $1,280,539  in  carryover  encumbrances  represented  14.9  percent  of  the 
$8,583,639 increase between the original and final budget. Excluding the City Council approved 
expenditure  of  $6,484,196  for  the  PERS  side  loan,  discussed  in  Section  2,  the  carryover 
encumbrances  in  FY  2010‐11  represented  61  percent  of  the  $2,099,443  ($8,583,639  less 
$6,484,196) increase between the original and final budget. 

The inclusion of carryover encumbrances in revised General Fund expenditure budgets results 
in General Fund actual expenditures appearing to be less than the total revised budget. This is 
problematic,  particularly  because  there  were  no  actual  expenditures  tied  to  the  originally 
approved  expenditures,  while  other  departments  were  significantly  over  budget  (as  further 
discussed below). Therefore, carrying forward appropriation authority from prior years masks 
over‐expenditures in other departments relative to the originally approved budget. Therefore, 
this report compares actual expenditures to the original budgets of each fiscal year, which are 
the only comprehensive budgets approved by City Council. 

Though written budget control policies appear to be in place, the City needs to ensure that it 
has the adequate management tools and resources to control City expenditures and that clear 
responsibility  and  accountability  for  staying  within  approved  budgets  is  delegated  to  every 
department director.  

Most  individual  departments  have  consistently  incurred  expenditures  that  exceed  their 
approved budgets. While some departments have been able to spend less than their budgets, 
the overall result is that the City General Fund continues to incur expenditures that exceed the 
approved  budget,  on  top  of  decreasing  revenue.  As  a  result,  the  City  has  been  depleting 
General Fund reserves to meet expenditure needs, as discussed in Section 1. Exhibits 3.1 and 
3.2 below illustrate which departments exceeded their budgets in FY 2009‐10 and FY 2010‐11. 




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                        Exhibit 3.1:  Budget vs. Actual Expenditures, FY 2009‐10 
                                      Orig. Budget         Actual       Over/(Under)  % Over/(Under) 
                                     Approved by       Expenditures        Approved         Approved Orig. 
            Department                  Council      Reported in GEMS Orig. Budget             Budget 
    Police                             $13,967,316         $14,920,510         $953,194               6.8%
    Fire                                $5,395,397          $6,290,470          $895,073            16.6%
    City Council/General Gov’t          $1,366,865          $1,599,487          $232,622            17.0%
    Finance                             $2,107,515          $2,336,867          $229,352            10.9%
    Non‐Departmental1                     $171,806            $311,867          $140,061            81.5%
    City Clerk                            $577,115            $651,069            $73,954           12.8%
    Library                               $541,484            $561,817            $20,333             3.8%
    Capital Improvement Program                  $0            $10,099            $10,099              N/A
    Parks and Community Services        $3,530,795          $3,534,419             $3,624             0.1%
    Community Development               $1,334,055          $1,251,274          ($82,781)           (6.2%)
    Public Works                        $3,803,126          $3,445,138       ($357,988)             (9.4%)
    Grand Total                        $32,795,474         $34,913,019       $2,117,545               6.5%
Sources:  City  of  Watsonville  FY  2009‐10  approved  budget  and  actual  expenditures  provided  by  Finance 
Department 
1
   Non‐departmental expenditures are those that cannot be easily assigned to one department. Examples include 
dues and fees for associations, such as the California League of Cities, and pre‐payment of PERS obligations. 
 
                        Exhibit 3.2:  Budget vs. Actual Expenditures, FY 2010‐11 
                                      Orig. Budget        Actual              Over/(Under)  % Over/(Under) 
                                     Approved by       Expenditures            Approved       Approved Orig. 
              Department                Council      Reported in GEMS         Orig. Budget       Budget 
    Non‐Departmental1                       $71,804        $6,208,480           $6,136,676          8,546.4%
    Fire                                $5,267,196         $6,148,924              $881,728            16.7%
    Police                             $14,599,489        $14,962,047              $362,558              2.5%
    City Council/General Gov’t          $1,361,396         $1,574,294              $212,898            15.6%
    Finance                             $2,041,919         $2,152,956              $111,037              5.4%
    City Clerk                            $592,821           $629,571               $36,750              6.2%
    Library                               $541,484           $561,971               $20,487              3.8%
    Capital Improvement Program                  $0             $3,693               $3,693               N/A
    Community Development               $1,243,098         $1,162,338             ($80,760)            (6.5%)
    Public Works                        $3,551,680         $3,466,555             ($85,125)            (2.4%)
    Parks and Community Services        $3,259,288         $3,096,413            ($162,875)            (5.0%)
    Grand Total                        $32,530,175        $39,967,243           $7,437,068             22.9%
    Total Excluding PERS loan          $32,530,175        $33,483,047              $952,872              2.9%
Sources:  City  of  Watsonville  FY  2010‐11  approved  budget  and  actual  expenditures  provided  by  Finance 
Department 
1
   Non‐departmental expenditures are those that cannot be easily assigned to one department. Examples include 
dues and fees for associations, such as the California League of Cities, and pre‐payment of PERS obligations. 


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As  shown  in  Exhibits  3.1  and  3.2  above,  at  $32,530,175,  the  City  budgeted  a  lower  level  of 
General  Fund  expenditures  in  FY  2010‐11  than  in  FY  2009‐10,  when  budgeted  General  Fund 
expenditures  were  $32,795,474.  However,  in  both  fiscal  years,  General  Fund  expenditures 
exceeded the approved budget. In FY 2010‐11, the City incurred $6,484,196 in expenditures for 
the  PERS  side  loan,  discussed  in  Section  2.  Excluding  the  unbudgeted  PERS  loan  from  actual 
expenditures,  the  City’s  actual  expenditures  in  FY  2010‐11  were  $33,483,047,  still  more  than 
the $32,530,175 budgeted for that year. Although the City has been able to reduce budgeted 
and  expected  expenditures  over  time,  it  could  achieve  more  cost  savings  if  departments 
consistently  remained  within  their  budget.  Or,  if  circumstances  change  so  midyear  budget 
increases  are  necessary,  such  increases  should  be  made  through  formal  amendment  to  the 
budget by the City Council. 

In October of 2012, during the course of this audit, City management implemented a new policy 
for  monthly  reporting,  reviewing,  monitoring,  and  correcting  of  financial  activity  at  the 
department level. This policy requires departments to report to City management when total 
expenditures  or  total  revenue  varies  five  percent  or  greater  (above  or  below)  from  the 
approved  budget  and  develop  a  corrective  action  plan.  While  the  new  policy  represents  an 
improvement  in  City  management  budgetary  oversight  and  may  help  address  the  problems 
developed over multiple years and identified in this report, the impact of the new policy could 
not be reviewed as part of this audit since it was implemented after the audit field work was 
completed.  

A more in‐depth review of two departments’ budget versus actual expenditures demonstrates 
the type of analysis department directors and City management should conduct to control City 
expenditures. 

Fire and Police Over‐expenditures 

Fire and Police department expenditures exceeded their budgets in FYs 2009‐10 and 2010‐11, 
as shown in the exhibits above. The following exhibits display what factors contributed to the 
over‐expenditures in each fiscal year. 

 

 

 

 

 

 

 

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           Exhibit 3.3: Fire Department Personnel & Operations Expenditures, 
                                 FY 2009‐10 and FY 2010‐11 
                                 Original 
                                Approved             Actual          Over (under)  Percent 
                                 Budget           Expenditures         Budget      Variance 
        FY 2009‐10  
       Personnel                  $4,920,614          $5,681,824         $761,210        15.5% 
       Operations                  $474,783            $608,646          $133,863        28.2% 
       Total                      $5,395,397          $6,290,470         $895,073        16.6% 
        FY 2010‐11  
       Personnel                  $4,781,213          $5,496,620         $715,407        15.0% 
       Operations                  $485,983            $652,305          $166,322        34.2% 
       Total                      $5,267,196          $6,148,925         $881,729        16.7% 
       Sources:  City  of  Watsonville  FY  2009‐10  and  FY  2010‐11  approved  budgets.  Actual 
       expenditures provided by Finance Department. 

As shown in Exhibit 3.3  above, the Fire Department exceeded both its original personnel and 
operations  budget  in  FY  2009‐10  and  FY  2010‐11,  though  most  of  the  variance  was  in  its 
personnel  budget.  In  FY  2009‐10,  $761,210,  or  85  percent of  the  Fire Department’s  $895,073 
over  expenditures,  was  attributed  to  personnel  costs,  while  $715,407,  or  81  percent  of  its 
$881,728 in over‐expenditures in FY 2010‐11 was due to personnel expenditures. As shown in 
Exhibit  3.4  below,  the  specific  personnel  expenditure  that  most  appears  to  lack  adequate 
controls is overtime, though salaries and wages were also over budget in FY 2010‐11. 

Although  City  staff  has  reported  overtime  expenditures  to  City  Council  and  has  tried  to 
implement various measures to reduce overtime, including hiring part time firefighters, these 
efforts have thus far not been successful.  

 

 

 

 

 

 

 

 



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                   Exhibit 3.4: Fire Department Key Personnel Expenditures, 
                                     FY 2009‐10 and FY 2010‐11 
                                        Original                                 Over 
                                                             Actual                             Percent 
                                       Approved                                 (under) 
                                                          Expenditures                          Variance 
                                        Budget                                  Budget 
          FY 2009‐10  
         Salaries & Wages2               $3,643,234         $3,683,328             $40,094          1.1% 
         Overtime                         $115,000           $815,907             $700,907        609.5% 
         Total                           $3,758,234         $4,499,235            $741,001         19.7% 
          FY 2010‐11  
         Salaries & Wages1               $3,490,519         $3,700,453            $209,934          6.0% 
         Overtime                         $115,000           $595,948             $480,948        418.2% 
         Total                           $3,605,519         $4,296,401            $690,882         19.2% 
        Sources:  City  of  Watsonville  FY  2009‐10  and  FY  2010‐11  approved  budgets  and  actual 
        expenditures provided by Finance Department 

Actual combined expenditures for salaries, wages and overtime for the Fire Department in FY 
2010‐11 were $202,834 less than for the prior fiscal year. This was largely due to a reduction in 
overtime expenditures  in  FY  2010‐11,  while actual  expenditures  on  salaries and  wages  ended 
up  more  than  actual  FY  2009‐10  expenditures.  However,  actual  overtime  expenditures  were 
still $480,984, or 418.2 percent, more than budgeted.  

The City of Watsonville should explore alternative cost saving plans and staffing structures to 
minimize Fire Department personnel and overtime expenditures. The City needs to review and 
agree  to  minimum  staffing  needs  for  the  Department  and  a  reasonable  overtime  budget 
amount. The $115,000 budgeted for Fire Department overtime in FYs 2009‐2010 and 2010‐11 
may also be an unrealistically low amount as it represents approximately 3 percent of budgeted 
payroll  when  6  to  10  percent  of  payroll  is  a  common  benchmark.  However,  actual  overtime 
expenditures in FYs 2009‐10 and 2010‐11 amounted to 22.2 percent and 16 percent of payroll 
respectively, so overtime expenses incurred may also reflect an overuse of overtime in lieu of 
management control of staff absences for vacations, sick leave and training.     

 

 
                                                                 




2
 According to the Finance Department, sick pay for the Fire Department is included in the budgeted salaries and 
wages.  However,  actual  sick  pay  expenditures  are  recorded  in  a  separate  line  item.  Therefore,  the  actual 
expenditures  for  salaries  and  wages  in  the  table  above  include  actual  expenditures  in  sick  pay  and  salaries  and 
wages, as reported by the Finance Department.

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             Exhibit 3.5: Police Department Personnel & Operations Expenditures, 
                                   FY 2009‐10 and FY 2010‐11 
                                        Original 
                                                              Actual             Over (under)  Percent 
                                       Approved 
                                                           Expenditures            Budget      Variance 
                                        Budget 
          FY 2009‐10  
         Personnel                     $11,046,181             $11,981,004            $934,823            8.5% 
         Operations                     $2,918,462              $2,939,506             $21,044            0.7% 
         Total                         $13,964,643             $14,920,510            $955,867            6.8% 
          FY 2010‐11  
         Personnel                     $11,828,725             $11,669,444          ($159,281)          ‐1.3% 
         Operations                     $2,770,764              $3,292,603            $521,839          18.8% 
         Total                         $14,599,489             $14,962,047            $362,558           2.5% 
        Sources:  City  of  Watsonville  FY  2009‐10  and  FY  2010‐11  approved  budgets  and  actual 
        expenditures provided by Finance Department 

In  contrast  to  the  Fire  Department,  factors  contributing  to  Police  Department  over‐
expenditures are inconsistent. For example, actual personnel expenditures in FY 2009‐10 were 
8.5 percent more than budgeted, yet the Police Department achieved savings of 1.3 percent in 
their  personnel  costs  in  FY  2010‐11,  as  shown  in  Exhibit  3.5  above.  Over‐expenditures  in 
operations were only 0.7 percent more than budgeted in FY 2009‐10, but 18.8 percent more in 
FY 2010‐11. 
                 Exhibit 3.6: Key Areas of Police Department Over‐expenditures, 
                                     FY 2009‐10 and FY 2010‐11 
                                        Original                                     Over 
                                                               Actual                               Percent 
                                       Approved                                     (under) 
                                                            Expenditures                            Variance 
                                        Budget                                      Budget 
          FY 2009‐10  
         Salaries & Wages3               $7,437,394              $7,905,216          $467,822            6.3% 
         Overtime                         $471,782                $843,338           $371,556           78.8% 
         Total                           $7,909,176              $8,748,554          $839,378           10.6% 
          FY 2010‐11  
         Salaries & Wages2               $8,076,794              $7,933,631        ($143,163)           ‐1.8% 
         Overtime                         $401,523                $463,439            $61,916           15.4% 
         Total                           $8,478,317              $8,397,070          ($81,247)          ‐1.0% 

        Sources:  City  of  Watsonville  FY  2009‐10  and  FY  2010‐11  approved  budgets  and  actual  expenditures 
        provided by Finance Department 


3
  According to the Finance Department, sick pay for the Police Department is included in the budgeted salaries and 
wages.  However,  actual  sick  pay  expenditures  are  recorded  in  a  separate  line  item.  Therefore,  the  actual 
expenditures  for  salaries  and  wages  in  the  table  above  include  actual  expenditures  in  sick  pay  and  salaries  and 
wages, as reported by the Finance Department. 

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Similar  to  the  Fire  Department,  overtime  and  sick  pay  contribute  to  over  expenditures  in  the 
Police  Department,  as  illustrated  in  Exhibit  3.6  above.  However,  miscellaneous  other  charges 
not  shown  in  the  exhibits  above  also  contributed  to  over  expenditures  in  the  Police 
Department,  resulting  in  $106,590  in  expenditures  over  the  FY  2009‐10  original  budget  and 
$233,743  over  the  FY  2010‐11  original  budget.  The  Finance  Department  reports  that 
miscellaneous  expenditures  are  those  that  were  not  accounted  for  in  the  original  budget.  In 
these  particular  fiscal  years,  the  miscellaneous  charges  were  for  fleet  services  and  parts 
provided to the Police Department.  

Public Safety Expenditures in Comparable Cities 
While  personnel  and  overtime  costs  comprise  most  of  the  expenditures  of  all  police  and  fire 
departments,  a  comparison  of  total  public  safety  costs  per  person  among  comparable  cities 
suggests  that  other  cities  may  have  found  ways  to  better  budget  and  control  public  safety 
expenditures such as overtime. As shown in Exhibit 3.7 below, the City of Watsonville spends 
more  than  the  median  of  $366  per  resident  for  public  safety  than  found  in  six  comparable 
cities. In fact, only the Cities of Santa Cruz and Gilroy have higher public safety expenditures per 
capita than the City of Watsonville. 

 

                      Exhibit 3.7: Comparison of Public Safety Costs per Capita  
                                        Fiscal Year 2010‐11 
                                                   Public Safety                             Cost per 
              City                                 Expenditures         Population            Capita 
              Cathedral City                       $22,153,417            52,381               $423 
              Colton                               $19,379,791            52,940               $366 
              Gilroy                               $22,005,580            49,582               $444 
              Hanford                              $13,277,169            54,284               $245 
              Porterville                          $14,289,727            55,023               $260 
              Salinas                              $49,255,020           152,994               $322 
              Santa Cruz                           $34,376,692            60,342               $570 
               MEDIAN                              $20,692,686            54,284               $366 
              Watsonville                          $22,258,470            51,586               $431 
             Sources:  City CAFRs  for  Fiscal  Year  ending  June  30,  2011  and  California  State  Controller’s  website. 
             Population estimates for each city as of July 1, 2010 from U.S. Census Bureau EST 2011‐03‐06.   

The City of Watsonville should further review expenditures in the Fire and Police Departments. 
The  City  should  assess  alternative  cost  saving  plans  and  structures  to  reduce  public  safety 
expenditures to comparable levels of similar sized and neighboring cities. This will include City 
management  analyzing  and  determining  minimum  staffing  levels  for  the  two  departments, 
using  the  benchmark  target  of  between  six  and  ten  percent  of  payroll  for  overtime  expenses 
and  considering  cost‐saving  options  such  as  contracting  with  the  County  or  other  firefighting 
agencies.  

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Budget Information Provided to City Council 

The key information provided to the City Council pertaining to the City budget is the proposed 
budget  document  in  May  and  the  Mid‐Year  Financial  report,  usually  presented  to  the  City 
Council in February. Budget documents, study sessions and Mid‐Year Financial reports available 
online  and  provided  by  City  staff  were  reviewed  by  the  audit  team.  The  budget  document 
includes  a  great  deal  of  detailed  information  pertaining  to  the  City’s  finances  as  a  whole  and 
each department’s revenues and expenditures. It also includes a section providing an analysis 
of each City fund’s revenues and expenditures.  

What the City budget document lacks is summaries of the detailed information to enable the 
City Council and public to obtain a rapid understanding of the financial status of the City and 
what  is  being  proposed  for  the  ensuing  fiscal  year.  Specifically,  there  is  no  clear  distinction 
between what is proposed by the City Manager and what is approved by the City Council, after 
they have made any changes. The document should include both sets of numbers.  

The  annual  budget  documents  show  projected  revenues  and  expenditures  for  the  current 
budget  year  but  a  comparison  to  subsequently  audited  amounts  for  the  same  years  show 
variances between what is presented in the budget document and actual amounts reported in 
the City’s financial system and Comprehensive Annual Financial Reports (CAFRs). While this is 
partly a matter of timing since final amounts for the current year are not all known at the time 
the  budget  document  is  prepared,  some  of  the  variances  between  budgeted  and  actual 
amounts  should  be  known  at  the  time  the  budget  documents  are  prepared  and  should  be 
reported.  Further,  some  of  the  prior  years’  actual  revenues  and expenditures  reported  in  the 
budget  document  do  not  match  actual  amounts  reported  in  the  City’s  CAFRs  (e.g.,  actual  FY 
2008‐09  General  Fund  expenditures  and  revenues).  Such  discrepancies  should  be  either 
corrected  or  explained  in  the  budget  document  and  separately  explained  in  a  budget/CAFR 
reconciliation  City  Council  presentation  at  another  point  in  the  year,  as  recommended  in 
Section 1.  

The  Mid‐Year  Financial  Report  provides  very  detailed  information  about  the  City’s  overall 
financial  state  and  presents  tables  with  the  adopted  budget  vs.  projected  revenues  for  each 
fund  for  the  year  and  the  adopted  budget  vs.  projected  expenditures  for  each  department. 
What the document is lacking is actual year‐to‐date expenditures for the current year to allow 
the  City  Council  and  public  to  understand  where  changes  have  occurred  and  to  assess  the 
reasonableness  of  the  year‐end  projections.  Since  actual  expenditures  for  FYs  2009‐10  and 
2010‐11  were  substantially  more  than  the  amounts  projected  in  their  respective  Mid‐Year  
Financial  Reports,  it  is  important  to  disclose  as  much  current  information  as  possible  to 
minimize the number of unexpected variances in revenues and expenditures at year‐end.  

The  Mid‐Year  Budget  Reports  for  FYs  2010‐11  and  2011‐12  both  present  summaries  of 
proposed  cost  reductions  and  revenue  increases  to  the  General  Fund,  and  noted  they  were 
adopted  by  the  City  Council  in  2007.  The  two  reports  provide  estimated  annual  savings,  but 
actual  savings  are  not  presented  and  it  is  not  clear  from  the  document  when  the  reductions 

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were  actually  implemented.  It  is  also  not  clear  which  reductions  were  one‐time  changes  and 
which  were  ongoing.  For  example,  the  FY  2010‐11  Mid‐Year  Financial  Report  shows  cost 
reductions and revenue increases that together amount to over $10 million. Since General Fund 
expenditures have decreased by approximately $4 – 5 million per year since FY 2008‐09, many 
of the proposed reductions either have not been implemented or the estimated savings were 
not accurate. Details on the actual results of the proposed reductions should be presented to 
determine if further action is needed to effectuate the originally estimated savings.  

The  Mid‐Year  Budget  Reports  for  FYs  2010‐11  and  2011‐12  both  present  City  Manager‐
recommended amendments to the adopted budget. In both cases they are presented by fund, 
and not by department. Details are provided in the narrative that explains how the funds will be 
used, including the department that will receive the additional funding, but the summary table 
is not clear or consistent with presentation of the City’s two year budget document. In addition, 
information  presented  to  the  City  Council  in  budget  documents  is  sometimes  inaccurate.  For 
example, in the FY 2009‐10 approved budget, the accurate subtotal of $808,036 for line item 
expenditures in the operations budget for the Police Department (Division 410) is greater than 
the $774,436 subtotal printed in the department specific budget. Further, the total budget of 
$9,015,596  for  Division  410  in  the  General  Fund  summary  matrix  is  greater  than  $8,981,966 
printed in the department specific budget, though the summary matrix is accurate. 

Disbursement Reports not an Effective Control 
In accordance with the Municipal Code, a report of disbursements of funds must be approved 
by  the  City  Council  at  each  City  Council  meeting.  These  reports  are  typically  on  the  consent 
agenda, unless a Council member requests to remove the report off of the consent agenda for 
further  discussion.  The  report  itemizes  every  check  issued  since  the  last  report  and  can  be 
several  pages  long.  The  disbursements  for  each  fund  are  not  tied  to  any  baseline  budget  or 
total contract or purchase order amount. As such, the reports can be cumbersome and do not 
serve as adequate reports for the City Council to control costs. Although City staff reports that 
this  is  not  the  original  intention  of  the  disbursement  reports  under  the  Municipal  Code,  staff 
agree that the City Council disbursement oversight process could be more effective.    

The City should revise the Municipal Code and streamline the disbursements presented to the 
City Council for approval. Disbursements related to items already reviewed by the City Council, 
either through the approval of the annual budget or individual contract approval, should not be 
reviewed  unless  there  is  a  significant  variance  between  what  was  originally  approved  by  the 
City  Council  and  what  is  being  disbursed  to  the  vendor.  Significant  changes  to  be  reviewed 
should include change orders for contracts and purchase orders that meet a specific threshold, 
such as a flat amount or percentage of the original contract or purchase order, or changes in 
the  scope  of  a  project  or  program.  Additionally,  significant  expenditures  for  Open  Purchase 
Orders, which are not usually approved by the City Council and are further discussed in Section 
5, should be brought to the City Council for approval. 




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Outdated Cost Allocation Plan 
City  departments  such  as  the  City  Council,  City  Clerk,  City  Attorney,  Finance,  Information 
Systems  and  Purchasing  departments  provide  services  to  multiple  departments.  The  costs  to 
provide these services are thus allocated Citywide. The City provided a cost allocation plan in 
which  an  analysis  conducted  in  FY  2000‐01  was  used  as  the  basis  for  the  current  fiscal  year. 
According  to  the  Finance  Department,  the  City  hired  an  outside  firm  to  complete  the  cost 
allocation  in  FY  2000‐01  based  on  each  individual’s  duties,  corresponding  time  allocation  for 
each duty, and other analyses. 

Although  the  cost  allocation  plan  is  based  on  FY  2008‐09  total  costs  with  an  inflation  rate 
applied to subsequent fiscal years, the allocation of costs across departments is still based on 
the  allocation  assumptions  from  FY  2000‐01,  or  more  than  ten  years  ago.  The  City  has 
undergone restructuring and reductions in staff since FY 2008‐09 and the assumptions applied 
to  allocate  costs  in  FY  2000‐01  may  no  longer  be  applicable.  Departments  that  may  be 
inappropriately overcharged for services received could be subsidizing other City departments. 

Detailed  cost  allocation  principles  are  contained  in  the  Federal  Office  of  Management  and 
Budget (OMB) Rules and Regulations 2‐CFR‐Part 225 (formerly and commonly known as OMB 
Circular A‐87). These principles are applied by local and state governments in determining how 
much of their indirect costs can be charged for federal grant programs. The principles in OMB 
Circular  A‐87  and  guidelines  published  by  the  League  of  California  Cities4  suggest  that  cities 
cannot charge for services in excess of actual cost, plus overhead. While the OMB may require 
annual  updates  from  some,  but  not  all,  jurisdictions,  a  good  practice  in  local  government 
jurisdictions is to update the plan annually. 

Currently,  the  City  of  Watsonville’s  costs  for  services  provided  by  the  City  Attorney,  City 
Manager,  City  Council,  Finance,  Purchasing  and  Information  Services  are  allocated  to  all  City 
departments,  including  the  City’s  utility  departments.  Appropriate  allocations  to  each 
department  are  needed  to  ensure  proper  budgeting  and  cost  accounting.  An  additional 
implication  of  proper  cost  allocations  involves  the  City’s  utility  departments.  If  the  allocated 
costs to the utility departments are inappropriately high, then tax and rate payers could sue the 
City for violating Proposition 218, which restricts the use of fees and charges for services to the 
actual cost to provide services plus appropriate overhead. 

The  City  should  conduct  another  cost  allocation  study  and  plan  given  recently  implemented 
changes  in  staffing  and  organization  in  response  to  the  economic  downturn,  and  reduce  the 
potential risk of lawsuits by tax and rate payers for the inappropriate use of fees and charges 
for  services.  The  Finance  Department  has  reported  that  it  plans  to  do  so  once  funds  become 
available. Further, the City should update the cost allocation plan annually, in alignment with 
best practices and the cost allocation principles in OMB Circular A‐87.  

4
     A Primer on California City Finance, League of California Cities. 

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   Internal Service Funds 

   The  City  of  Watsonville  has  internal  service  funds  for  general  liability  insurance,  workers’ 
   compensation,  and  employee  health  benefits.  Analysis  of  financial  and  other  documents 
   demonstrated that the City (a) has insufficient revenue to meet current expenditure needs and 
   (b) is not adequately planning for future costs through the use of actuarial reports and building 
   up of reserve funds. 

   As  shown  in  Exhibit  3.8  below,  the  Workers’  Compensation  and  General  Liability  Fund 
   generated negative revenues in FY 2008‐09 and FY 2010‐11, while the Health Benefits Fund had 
   negative revenues in each of the last three fiscal years. Expenditures that consistently exceed 
   revenues could be an indication that charges to departments for the Internal Service Funds are 
   insufficient.  
                                                            

                                Exhibit 3.8: Internal Service Fund Revenues 
                             and Expenditures, FY 2008‐09 through FY 2010‐11 
                              Workers' Comp./Gen. Liability                  Health Benefits 
                        FY 2008‐09  FY 2009‐10  FY 2010‐11  FY 2008‐09  FY 2009‐10  FY 2010‐11 
Actual Revenues          $1,866,210     $1,944,310  $2,020,140    $5,526,067    $4,937,471     $5,714,893 
Actual Expenditures      $2,800,325   $1,070,162  $2,775,497  $5,771,510  $5,202,797   $6,599,728 
Total Net Revenues        ($934,115)     $874,148    ($755,357)   ($245,443)    ($265,326)     ($884,835)
   Sources: City of Watsonville FY 2008‐09 through FY 2010‐11 CAFRs  

   In FY 2010‐11, the Internal Service Fund had a cash shortfall of $1,153,414 and required a short‐
   term  loan  from  the  General  Fund.  According  to  the  Finance  Department,  health  insurance 
   claims were more than anticipated during that fiscal year. Although the short‐term loan from 
   the  General  Fund  may  have  been  reversed  in  the  books  within  the  fiscal  year,  the  Health 
   Benefits  Fund  still  has  a  liability  equivalent  to  the  short‐term  loan.  The  Finance  Department 
   reports that the City increased its health insurance rates in FY 2011‐12 for both employees and 
   the City. 

   Instances such as these could be avoided with proper City planning through the use of actuarial 
   reports. The audit team requested actuarial reports for all Internal Service Funds, but received 
   only a summary of Workers’ Compensation claims since FY 1978‐1979 and a one page report 
   for  health  benefits  showing  benefit  rates  based  on  actuarial  calculations.  Several  jurisdictions 
   seek  actuarial  reports  from  actuarial  firms  that  use  city  data  to  estimate  the  liability  for  the 
   unpaid benefit/claims costs due to reported claims for which jurisdictions are currently paying 
   and the unpaid benefit/claims costs for future claims expected to be reported. These are multi‐
   page  reports  with  multiple  year  trends  and  projections,  which  differ  vastly  from  the 
   documentation provided by City staff. The City should seek out actuarial reports and valuations 
   that can more adequately determine expected costs, as opposed to its current methods, which 



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 have resulted in operating deficits for several fiscal years. While the City has increased health 
 insurance rates, an actuarial report could help determine if the increase is adequate. 

 Finally,  the  City’s  insurance  charges  should  not  only  be  sufficient  to  pay  expected  costs,  but 
 best practices suggest that the City’s revenue and assets should be sufficient to build a reserve 
 of  funds.  Reserves  established  at  expected  cost  are  technically  referred  to  as  being  set  at  a 
 “50% confidence level”, which is a measure of statistical probability that reserves are sufficient 
 to  pay  claims  cost.  Reserves  may  be  established  at  any  specific  confidence  level.  A  50% 
 confidence level means that there is a 50% chance that the actual claims cost can be paid with 
 reserves  and  a  50%  chance  that  the  actual  claims  cost  cannot  be  paid  with  reserves.  An  80% 
 confidence level means that there is an 80% chance that sufficient reserves will be available and 
 a 20% chance that reserves will not be available to pay the actual cost of claims.  

 The  California  Code  of  Regulations  requires  that  private  sector  self‐insurance  plans  fund 
 estimated liabilities at the 80% confidence level.5 The purpose of this conservative requirement 
 is to ensure that companies have set aside sufficient funds for their estimated claims liability in 
 the event they go out of business or otherwise become incapable of funding their claims cost. 
 However,  because  governments  have  taxing  authority  and  are  considered  to  be  perpetual 
 entities, public sector self‐insurance funds are not subject to these same regulations. 

 Despite  this  distinction,  many  public  jurisdictions  follow  more  conservative  private  sector 
 practices. However, the City of Watsonville does not attempt to fund its Internal Service Funds 
 based on any funding probability. This is further demonstrated by the negative fund balances 
 (when liabilities exceed assets) for the Internal Service Funds, shown in Exhibit 3.9 below. 
                                                      

                                    Exhibit 3.9: Internal Service Fund Assets 
                                  and Liabilities, FY 2008‐09 through FY 2010‐11 
                             Workers' Comp./Gen. Liability                    Health Benefits 
                       FY 2008‐09  FY 2009‐10  FY 2010‐11  FY 2008‐09  FY 2009‐10  FY 2010‐11 
Assets                   $1,647,756     $861,539      $814,911      $650,538       $231,738   ($345,219)
Liabilities              $5,990,703   $4,407,044  $4,145,347  $1,477,946  $1,155,707   $1,838,475 
Fund Balance           ($4,342,947)  ($3,545,505) ($3,330,436)    ($827,408)     ($923,969)  ($2,183,694)
 Sources: City of Watsonville FY 2008‐09 through FY 2010‐11 CAFRs  

 Based  on  actuarial  studies,  the  City  should  charge  sufficient  insurance  rates  that  can  (a) 
 increase  the  assets  and  fund  balance  for  the  Internal  Service  Funds  and  (b)  build  sufficient 
 reserves for a 50% to 80% confidence level of funding, as practiced by many public jurisdictions. 
 City staff agreed with such a policy, but noted that establishing such a reserve would require 
 effort over multiple years. 



 5
      California Code of Regulations, Chapter 8, Subchapter 2, Article 13, §15475(d)(8). 

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Comparison with Other Cities 
A comparative analysis of Workers’ Compensation and General Liability Internal Service Funds 
demonstrates that the City of Watsonville’s insufficient (a) revenues, (b) fund balance (c) cash, 
and  (d)  assets  are  significantly  worse  than  the  median  for  four  comparable  cities—Colton, 
Gilroy, Hanford, and Santa Cruz. 

 
    Exhibit 3.10: Comparison of Workers’ Compensation and General Liability Internal Services 
                                       Funds, FY 2010‐11 
                  Colton          Gilroy            Hanford            Santa Cruz       MEDIAN           Watsonville  
Revenues            $2,432,856        $872,654         $1,081,749       $4,979,970       $1,757,303          $2,020,140 
Expenditures        $2,433,761   $1,606,895               $972,672      $5,244,314       $2,020,328          $2,775,497 
Net Revenues            ($905)      ($734,241)            $109,077       ($264,344)       ($132,625)         ($755,357)
Cash                 $558,391   $1,020,388             $3,785,699       $9,670,423       $2,403,044             $250,000 
Assets               $607,971      $1,020,388          $3,785,699     $14,381,814        $2,403,044             $814,911 
Liabilities         $2,370,129   $2,117,832               $134,031      $9,323,373       $2,243,981         $4,145,347 
Fund Balance     ($1,762,158)  ($1,097,444)            $3,651,668       $5,058,441       $1,277,112       ($3,330,436)
Sources: Cities of Colton, Gilroy, Hanford, Santa Cruz, and Watsonville FY 2010‐11 CAFRs 

As  shown  in  Exhibit  3.10  above,  Colton,  Gilroy,  Santa  Cruz,  and  Watsonville  had  insufficient 
revenues  in  FY  2010‐11,  resulting  in  negative  net  revenues.  However,  the  City  of  Watsonville 
had the largest deficit of all four cities. While negative net revenues can be offset by adequate 
fund balance reserves, Watsonville is one of three cities with negative fund balances as of FY 
2010‐11.  Watsonville’s  negative  fund  balance  of  $3,330,436  is  greater  than  the  combined 
negative fund balances of Colton and Gilroy, or negative $2,859,062. Additionally, Watsonville’s 
$250,000  cash  balance  as  of  FY  2010‐11  is  approximately  10.4  percent  of  the  median  cash 
balance  of  $2,403,044  for  the  four  comparable  cities.  Finally,  although  Colton’s  $607,971  in 
assets  is  less  than  Watsonville’s  assets  of  $814,911  in  FY  2010‐11,  Watsonville’s  assets  is  still 
significantly lower than the median value of assets for all four comparable cities, or $2,403,044. 

These  statistics  further  indicate  that  the  City  of  Watsonville  should  plan  accordingly  for  its 
insurance  costs  through  the  use  of  actuarial  reports,  and  should  charge  sufficient  insurance 
rates to meet expected costs and build up reserves for potential future costs.

Cash Handling Procedures 
Until  the  summer  of  2012,  the  City  did  not  have  formal,  written  cash  handling  procedures  in 
place in spite of the fact that tens of millions of dollars are collected each year Citywide by the 
utility departments and various General Fund departments such as the Parks and Community 
Services  and  Community  Development  departments.  Though  some  departments  have  had 
informal  procedures  in  place  regarding  cash  handling,  formal  management‐approved  cash 
handling policies and procedures are a key element of an internal control system.  

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City  management  did  prepare,  approve  and  disseminate  formal,  written  cash  handling 
procedures  for  the  Parks  and  Community  Services  Department  and  Citywide  in  August  2012, 
while  this  audit  was  in  progress.  City  staff  reports  that  more  such  written  procedures  will  be 
prepared in the near future. This is an important step in improving the City’s internal control 
system. It will be equally important to train staff on these policies and procedures and regularly 
conduct reviews or audits of City staff’s adherence to the policies.  

Conclusions 
The City of Watsonville’s management tools and resources to control City expenditures could 
be  improved.  Although  the  annual  approved  budget  is  supposed  to  serve  as  a  control  on 
expenditures,  for  at  least  the  last  three  fiscal  years,  most  General  Fund  department 
expenditures have exceeded their approved budgets.  

Though City policy calls for City Council approval to changes in any funds’ budget that will result 
in that fund exceeding its originally approved amount, such approvals are not on record. Annual 
General Fund expenditures have exceeded annual revenues for the last three fiscal years and 
the City has been required to use depleting General Fund Balance, or reserve, when revenue is 
insufficient to meet its expenditures. The Finance Department’s financial system has limitations 
such  as  not  providing  effective  and  timely  reports  to  City  managers  for  measuring  budget 
variances.  While  the  annual  budget  document  and  Mid‐Year  Budget  Report  both  contain 
valuable  details  on  the  City’s  budget  and  financial  state,  they  lack  key  summary  and  baseline 
information and timely revenue and expenditure data to facilitate decision making and public 
understanding of the City’s financial course. Information provided to the City Council is either 
insufficient  or  too  cumbersome  to  allow  effective  discussions  and  decision  making  toward 
controlling City expenditures.  

The  cost  allocation  plan  for  the  City  is  outdated,  which  could  result  in  inadequate 
reimbursements  for  services  provided  by  City  departments  to  other  departments,  or 
conversely, overcompensation for services provided.  

The City’s Internal Service Funds have insufficient revenue to meet current expenditure needs 
and the City is not adequately planning for future costs through the use of actuarial reports and 
building up of reserve funds.  

The City did not have written cash handling procedures for the Parks and Community Services 
Department and Citywide until August 2012, while this audit was in progress. City staff reports 
that more such written procedures will be prepared in the near future, which is an important 
step in improving the City’s internal control system. 




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Recommendations 
The City Council should direct the City Manager to:  

    3.1.   Establish  a  mechanism  to  ensure  adherence  to  City  policies  dictating  levels  of 
           authority for making changes to the budget in the interest of controlling costs to the 
           budget, to include the level of authority department directors have for shifting funds 
           within their budget, the authority of the City Manager to make budget changes, and 
           the criteria that would trigger further review and action by the City Council. 

    3.2.   Conduct  further  review  of  expenditures  in  the  Fire  and  Police  Departments  and 
           assess  and  report  on  alternative  cost  saving  plans  and  structures  to  reduce  public 
           safety  expenditures  comparable  to  similar  sized  and  neighboring  cities,  including 
           consideration of contracting with other firefighting agencies if more cost‐effective to 
           do so.  

    3.3.   Revise the annual budget document and Mid‐Year Financial Reports to include year‐
           to‐date  actual  revenues  and  expenditures,  a  distinction  between  management 
           proposed and City Council adopted budgets, a clear summary of the fiscal results of 
           past  actions  taken  by  the  City  Council  to  increase  revenues  or  reduce/increase 
           expenditures,  and  an  explanation  of  the  difference  between  actual  amounts 
           reported  in  the  budget  and  the  amounts  reported  in  the  City’s  Comprehensive 
           Annual Financial Reports.   

    3.4.   Revise  the  Municipal  Code  and  streamline  information  provided  in  disbursement 
           reports for City Council review to include only: 

           (a) New  disbursements  not  tied  to  items  previously  reviewed  by  the  City  Council, 
               such as approved budgets, expenditure plans and  contracts; 

           (b) Disbursements representing significant changes to previously approved budgets, 
               expenditure  plans,  contracts,  and  purchase  orders,  defined  as  a  flat  threshold 
               amount  determined  by  the  City  Council,  a  percentage  threshold  based  on  the 
               previously approved amount, or changes in the scope of the project or program; 
               and, 

           (c) Significant expenditures on Open Purchase Orders.  

    3.5.   Conduct  a  new  cost  allocation  study  and  develop  a  new  plan  to  appropriately 
           allocate City costs to departments, and update the plan annually. 

    3.6.   Obtain actuarial reports for its Internal Service Funds that more adequately estimate 
           expected costs. 


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    3.7.   Charge  insurance  rates  that  are  sufficient  for  (a)  meeting  expected  costs  and  (b) 
           increasing the assets and fund balance for Internal Service Funds to build sufficient 
           reserves for a 50% to 80% confidence level of funding, as practiced by many public 
           jurisdictions. 

    3.8.   Continue  preparing  and  updating  written  policies  and  procedures  in  all  areas  of 
           financial management and internal controls.   

Costs and Benefits 
Additional  staff  time  and  resources  will  be  needed  to  implement  these  recommendations, 
which are estimated to require .25 of a full‐time equivalent (FTE) in the first year, and less staff 
time  after  that.  However,  clearly  established  policies  and  adequate  management  tools  and 
reports to facilitate the control of City expenditures could result in City departments meeting 
budget targets. As a result, the City could reverse recent trends and begin to replenish General 
Fund reserves that have been depleted over the years to meet City expenditure needs. 




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4.  Capital Budget and Impact Fees 
       In addition to its operating budget, the City maintains a five year capital improvement 
        project  budget  that  is  subject  to  approval  by  the  City  Council  as  part  of  the  annual 
        budget approval process. The capital improvement project budget consists of budgets 
        for  the  subsequent  five  fiscal  years  for  new  equipment,  buildings  and  structures, 
        maintenance,  computers  and  vehicles.  The  capital  improvement  project  budget  also 
        presents  projects  and  purchases  approved  in  prior  years  that  have  not  been 
        completed or possibly have not yet commenced.  

       The  City’s  capital  improvement  project  budget  provides  some  important  details  for 
        each project including a brief project description, planned expenditures, department, 
        fund,  and  name  of  project  manager.  However,  the  document  lacks  key  information 
        needed to ensure adequate City Council oversight and control over City resources and 
        for  public  understanding  of  these  projects.  Such  information  should  include  actual 
        year–by‐year  project expenditures and timing relative to original and revised budgets 
        and timelines and planned year‐by‐year expenditures and funding sources, if known. 
        Currently, it is not possible to tell from the document how long previously approved 
        projects or equipment acquisitions have been underway and how much or how little 
        has been expended on them. Since timing and costs frequently change over the course 
        of a capital project, it is critical that the City’s governance board maintain the ability to 
        oversee progress and costs on capital expenditures.   

       One source of City funding for capital projects is development impact fees. These fees, 
        paid  for  by  developers,  are  used  to  cover  the  costs  of  new  infrastructure  and 
        equipment  needed  due  to  development.  The  bases  of  many  of  these  fees  have  not 
        been updated since they were established in the 1980s. Many are not tied to clearly 
        established  standards  or  clearly  linked  to  documented  development‐related  costs. 
        Some  of  the  uses  of  these  fees  do  not  appear  to  be  growth‐induced,  as  required  by 
        State law. Required annual reports on the City’s development impact fees, presented 
        to  the  City  Council  on  consent  agenda  each  year,  do  not  contain  all  information 
        required  by  State  law  to  enable  the  City  Council  and  public  to  determine  how  these 
        funds  are  being  used.    Projects  that  can  be  funded  with  these  fees  are  limited  to 
        growth‐induced  needs  and  some  projects  funded  do  not  appear  to  be  appropriate. 
        Future uses of the funds should be reviewed and approved by legal counsel.  

The City of Watsonville’s process for developing and approving its capital improvement project 
budget is specified in the Charter, which requires the City Manager to include a statement of 
pending capital projects and proposed new capital projects, showing the amounts to be raised 
by  appropriation  in  the  budget  and  the  funding  to  be  raised  from  other  sources.  The  Charter 
also calls for the City Manager to include in the budget message a “program of proposed public 


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improvements  for  the  ensuing  five  (5)  year  period  prepared  by  the  Planning  Commission...”.1  
The Planning Commission is required by the Charter to list and “classify all public improvements 
recommended by officers, departments, board of commissions of the City and… to recommend 
to the Council and the City Manager a coordinated program of proposed public improvements 
for the ensuing five year period, according to a logical order or priority.”2  

The City’s budget documents include both the required list of projects and a statement in the 
City  Manager’s  message  that  the  Planning  Commission  has  certified  that  the  projects  are 
consistent with the General Plan. The budgets for recommended new projects are shown, along 
with  the  fund  that  will  be  paying  for  them  and  the  project  manager.  The  two  year  budget 
covering  FYs  2011‐12  and  2012‐13  presents  the  “top  10  projects”  recommended  to  the  City 
Council  by  staff  for  those  two  years,  with  a  total  cost  of  $15.35  million  dollars,  then  a  list  of 
other projects comprising a “top six projects” list for the two subsequent fiscal years, FYs 2013‐
14 and 2015‐16, with a total cost of $15.35 million. The budget also contains a table showing 
approximately $21.6 million in costs for all projects for the two year cycle, though the individual 
projects  are  not  listed.  The  latter  table  presents  capital  project  costs  for  the  three  years 
following  the  two  year  cycle.  Details  on  individual  projects  for  the  two  year  cycle,  including 
project  titles,  budget,  fund  and  project  manager,  are  presented  on  other  schedules  in  the 
capital budget document. Specific funding sources are not listed.  

The  capital  budget  document  presents  a  great  deal  of  detail  about  individual  projects  but  it 
does not provide a multi‐year schedule to see what projects on the list are already underway or 
how long the new projects are expected to last, since many capital projects span multiple years. 
The same projects reappear on the Top 10 and Top 6 lists in successive budgets but it cannot be 
readily discerned if they were started in the prior budget cycle or not and, if so, how much of 
the  project  has  been  accomplished.  The  capital  budget  document  should  not  only  serve  as  a 
document to facilitate funding decisions but also as a project tracking tool.  

As  an  example,  the  Corralitos  Water  Treatment  Plant  upgrade  is  presented  on  the  Top  10 
project list in the FY 2009‐10 and FY 2010‐11 budgets with a cost of $12 million. It reappears on 
the Top 10 list in the FY 2011‐12/2012‐13 budget but the cost shown is now $6 million. It is not 
clear from the document if this is a new related project, or the carryover from the old project. 
However, the project re‐appropriation schedule in the budget document shows that $11 million 
is being re‐appropriated, so presumably $1 million was spent on the project in the intervening 
years but one would have to cross reference two to three schedules to draw this conclusion.  

The new Maintenance Shop project for the City Treatment Plant is listed as a Top 10 project in 
the FY 2009‐10/2010‐11 budget with a cost of $1.5 million. In the subsequent FY 2011‐12/2012‐
13  budget,  the  project  is  moved  to  potential  project  status  on  the  Top  6  list  for  FYs  2013‐14 
through 2015‐16, still with a $1.5 million budget. However the re‐appropriation schedule in that 
budget shows $1,374,198 to be re‐appropriated, indicating that $125,802 was expended on the 
project.  It  is  possible  the  project  was  started,  then  a  decision  was  made  to  defer  it  for  a  few 
                                                            
1
     Charter of the City of Watsonville, Section 1110.  
2
     Charter Section 907(b).  
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years, possibly for good reason, but it is not possible to tell the status of the project from the 
budget document.  

By  presenting  all  projects  on  a  multi‐year  schedule,  with  originally  approved  budgets,  actual 
expenditures and planned expenditures, by year, the City Council and public would be able to 
determine  exactly  what  new  projects  are  being  appropriated  each  year,  what  previously 
commenced  projects  are  still  underway  and  whether  or  not  they  are  still  on  their  original 
schedule  and  budget.  The  current  document  lists  hundreds  of  projects  in  various  stages  of 
completion, including many approved projects that have never commenced but continue to be 
re‐appropriated. Capital projects are complex and presenting all their details in a clear, easy‐to‐
understand  fashion  is  challenging.  But  the  current  document  does  not  fully  assist  the  City 
Council in fulfilling its role as oversight body and ensuring that capital project dollars are being 
spent effectively and efficiently.  

At  the  time  the  budget  document  is  prepared,  funding  for  some  projects  has  already  been 
secured whereas funding for others has not.  In the latter case, funding such as grants may not 
be secured until after the project is approved. It is not possible to determine from the capital 
budget  the  source  of  funding  for  a  project  or  whether  it  has  been  secured  or  not.  This 
information should be included for each project.  

Development Impact Fees 

One  source of  funding  for  the  City’s  capital  projects  are  development  impact  fees.  Like  many 
cities  in  California,  the  City  of  Watsonville  has  adopted  development  impact  fees  that  are 
charged to developers to recover various City costs for public improvements that are needed 
due  to  new  development.  Fees  are  in  place  to  recover  City  costs  incurred  for  municipal 
facilities,  parks,  traffic  signals  and  related  items,  fire  department  capital  expenses  and 
equipment, and other City infrastructure.  

Development impact fees were first established in the City in 1983 based on a traffic analysis 
study that showed that new development in certain areas of the City would result in the need 
for new traffic signals and controls. It recommended that a portion of those costs be charged to 
land development projects in proportion to the size of the project (i.e., a fee for every square 
foot  developed).  During  the  subsequent  11  years,  a  number  of  traffic  signal  development 
impact fees were established by City ordinance to include other areas of the City. Several of the 
ordinances were also amended during that time to adjust the fees and make other changes.  

Development  impact  fees  currently  in  place,  according  to  the  City’s  2011  annual  impact  fee 
report, are:  

    1. Affordable Housing Fee 
    2. Parks Development Fee 
    3. Fire Capital Improvement Fee 
    4. Public Facility Fee 

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       5. City‐wide Traffic Impact Fee 
       6. Impervious Area Impact Fee 
       7. Storm Drain Fee 
       8. Errington South Benefit Area Fee 
       9. Struve Bridge Fee 
       10. Errington/Clifford Area Fee 
       11. Watsonville Slough Area Fee 
       12. Airport Boulevard Fee 
       13. Pennsylvania Drive Fee 
       14. Crest View Area Fee 
       15. Green Valley Corridor Fee 
       16. East Highway 1 Fee 

In FY 2010‐11, the fees generated approximately $2.3 million in revenue according to the City’s 
Annual Impact Fee Report for that year. State law requires that municipal development impact 
fees  be  based  on  analyses  known  as  nexus  studies  that  identify  the  costs  of  public 
improvements  that  are  tied  to  growth.3  The  fees  can  only recover  those  costs  and  cannot  be 
used  to  support  ongoing  operations.  Cities  are  required  to  do  the  following  to  establish 
development impact fees:  

                     Identify the purpose of the fee;  
                     Identify the improvements to be made with the fees collected;  
                     Determine  a  reasonable  relationship  between  the  fee’s  use  and  the  type  of 
                      development projects for which it is imposed; and, 
                     Determine  a  reasonable  relationship  between  the  fee  and  the  cost  of  the  public 
                      improvement.    
 

Most  of  the  City’s  development  impact  fees  have  not  been  codified  in  the  Municipal  Code 
though  they  have  been  in  place  for  years  and,  if  Watsonville  is  like  most  cities,  are  likely  to 
remain in effect for the foreseeable future. Therefore, they should be included in the Code for 
easy  public  access.  Upon  request  of  the  audit  team,  the  City  provided  some  of  the  early 
ordinances and reports that provided the basis of current fees. The documents reviewed do not 
provide sufficient detail to prove that current fees are appropriate for the City’s costs that they 
are intended to recover. Further, the studies and ordinances for the most part do not set City 
standards  for  services  that  could  serve  as  the  basis  of  the  fees.  For  example,  the  City’s  Fire 
Department  reports  that  its  response  time  goal  is  4‐6  minutes.  A  defensible  fire  impact  fee 
                                                            
3
     See California Government Code Sections 66000‐66025. 
 
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could use that standard to ensure that funds  are available from development fees that could 
pay for new fire stations and/or equipment needed to ensure the City’s response time goal.  

The existing development impact fees do not apply such service level standards such as those 
incorporated in the City’s General Plan. In a number of cases, the fees are simply based on what 
other jurisdictions were charging at the time they were adopted.  

A  review  of  the  expenditure  of  fee  funds  shows  that  they  are  spent  on  a  variety  of 
departmental needs, many of which do not appear to be growth‐related public improvements 
or  certainly  not  geared  to  maintaining  a  formalized  service  level  standard.  For  example,  fire 
impact  fees  have  been  appropriated  in  the  FY  2011‐12  capital  budget  to  replace  rescue 
equipment and fire hoses. Public Facility Impact fees have been used for roof repairs and door 
replacements at Fire Department facilities. These needs could possibly be explained by growth 
in the City but they also could be routine maintenance expenses.  

State  law  calls  for  jurisdictions  with  development  impact  fees  to  prepare  a  public  report  on 
them each year containing, at minimum, the following information:  

           Amount and description of each fee; 
           Beginning and ending balance of each account or fund; 
           Fee and interest revenue; 
           Amount  spent  on  each  public  improvement  for  which  fee  collected,  including 
            percentage of total project cost; 
           Approximate date on which public improvement are to commence;  
           Description of each inter‐fund transfer or loan made including repayment date and 
            rate of interest account or fund will receive; and, 
           Dates by which incomplete public improvements will be completed or fees collected 
            refunded, in instances where sufficient fees have been collected. 
 

The City does prepare an annual report containing most of the elements shown above but it is 
missing the amounts spent on each public improvement funded with each fee’s revenues, dates 
on  which  projects  will  commence,  descriptions  of  any  inter‐fund  transfers  or  loans,  including 
repayment dates and interest, and dates by which incomplete projects will be finished. Details 
from the capital budget may or may not be reconcilable with the annual report.  

The absence of these disclosures makes the annual report less useful as an oversight tool for 
the City Council and the public. It is not possible to tell what projects have been funded or how 
the monies have specifically been used from the contents of the report.  

Conclusions 
Both  the  capital  project  budget  and  the  development  impact  fee  annual  reports  could  be 
improved  to  provide  the  City  Council  and  the  public  more  clear  information  about  how  City 
funds are being spent. The nature of capital projects is complex and can be difficult to present 
in an accessible, clear fashion. But the City Council, as stewards of the City’s resources, should 
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receive information in these important areas that enables them to understand, with reasonable 
effort, how City resources are being utilized to protect and enhance the City’s physical assets 
and to accommodate growth while maintaining desired service levels.  

Recommendations  
The City Council should direct the City Manager to: 

4.1       Modify  the  capital  budget  document  to  include  multi‐year  presentations  of  all  capital 
          projects including: 

              a. Funds  already  spent  on  previously  approved  projects  and  date  of  project 
                 commencement; 

              b. Funds budgeted in the current and future years on previously approved projects;  

              c. Identification of changes in previously approved project budgets; 

              d. Funds  proposed  for  current  and  future  years  on  projects  for  which  approval  is 
                 requested; 

              e. Funding sources and an indication of whether or not funding has been obtained 
                 yet;  

              f. Brief explanations of any changes in project timing.  

    4.2   Review the bases of all development impact fees and report back to the City Council on 
          whether or not the fees are in compliance with State Mitigation Fee Act requirements 
          including the bases of the fees and the projects for which they have been used. 

    4.3   Establish service level standards to serve as the basis of each development impact fee 
          such as acres of park per resident, fire department response time, etc.  

    4.4   Prepare  annual  impact  fee  reports  that  are  fully  compliant  with  all  reporting 
          requirements in State law.  

Costs and Benefits 
Better information and disclosure on the City’s capital projects and use of development impact 
fees will better enable the City Council and public to better assess the efficacy and benefits of 
the allocation of funding for maintaining and improving the City’s physical assets. An estimated 
.1  full‐time  equivalent  position  will  be  needed  to  initially  implement  the  recommendations, 
with  a  lesser  amount  of  staff  time  needed  after  that  to  maintain  the  new  reports  and 
information.  
 



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    Adherence  to  City  of  Watsonville  policies  and  procedures  for  procurement  is 
     inconsistent. For instance, a review of purchase order files demonstrated that 
     14  out  of  a  sample  of  20  purchase  orders  in  FY  2011‐12  did  not  obtain  three 
     sources  of  pricing,  either  through  quotes  or  competitive  bids,  when  policies 
     encourage or require them to do so. Six of these 14 purchase orders were for 
     professional services. Existing policies and procedures for the procurement of 
     professional services through competitive bidding are vague and conflicting.  

    The City Council does not always approve purchase orders or agreements that 
     are  greater  than  $50,000,  though  City  policies  and  procedures  require  such 
     approval. A review of 21 purchase orders with funds encumbered in FY 2010‐11 
     that were subject to City Council approval found that eleven were approved by 
     the  City  Council  but  ten  were  not.  Those  approved  represented  most  of  the 
     dollar value of the 21 purchase orders, but the ten that were not approved by 
     the City Council had an aggregate value of $1,486,070 or  an average value of 
     $148,607 each.  

    Though the City Council adopted contract change order policies in 1996, those 
     policies  are  not  included  in  the  City’s  Administrative  Rules  and  Regulations. 
     Further,  they  do  not  provide  sufficient  mechanisms  to  control  contract  cost 
     increases resulting from change orders. For example, a construction agreement 
     for  $1,888,429  was  approved  by  the  City  Council  because  it  was  the  lowest 
     price out of seven bids. However, a change order of $374,162, or a 19.8 percent 
     increase,  was  approved  by  the  department  director  and  the  Purchasing 
     Division without having to go back to the City Council for approval. The change 
     order  amount  is  more  than  twice  the  $175,001  threshold  for  City  Council 
     approval of new public works contracts.  

    Formal policies and procedures for Open Purchase Orders for small, repetitive 
     purchases do not exist. In FY 2011‐12 there were 159 Open Purchase Orders, of 
     which  136  incurred  expenditures  totaling  $3,081,502.  However,  a  majority  of 
     these Open Purchase Orders have not been competitively bid within the past 
     20 years and most do not have a negotiated contract with the City to ensure 
     consistent prices and discounts for goods and services. Additionally, adequate 
     controls  are  not  in  place  over  procurements  off  Open  Purchase  Orders  in 
     excess  of  their  maximum  amounts.  Payments  to  the  top  ten  Open  Purchase 
     Orders  with  payments  above  authorized  annual  limits  ranged  from  104  to 
     1,377  percent  more  than  their  annual  limit.  Aggregate  purchases  off  Open 
     Purchase Orders resulted in payments to 19 vendors in excess of the $50,000 
     threshold  for  City  Council  approval  of  competitively  bid  purchase  orders. 
     However, these expenditures were not subject to City Council approval.   


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Procurement Policies and Procedures 
Like  all  cities  in  California,  the  City  of  Watsonville’s  procurement  process  is  governed  first  by 
State  law  and  then  by  local  ordinances  and  policies  and  procedures.  State  law  requires  that 
every city adopt policies and procedures, including bidding regulations, by ordinance covering 
the  purchase  of  supplies  and  equipment1.  State  law  also  establishes  dollar  thresholds  for 
bidding  regulations  for  “public  projects” (improvements  to  or  construction  of  public  facilities) 
for cities that agree to adhere to uniform construction cost accounting procedures, which the 
City of Watsonville has done.  

Local ordinances and procedures for the City of Watsonville are promulgated in the Municipal 
Code2,  Administrative  Rules  and  Regulations3,  City  of  Watsonville  Intranet4,  and  California 
Public  Contract  Code  Section  22030‐22045,  which  require  competitive  bidding  for  the 
procurement of supplies, equipment, and non‐personal contractual services and awards bids to 
vendors  that  offer  the  lowest  cost  to  the  City.  However,  the  Municipal  Code  states  that  the 
following are exceptions to these requirements:  
        An  emergency  requiring  that  an  order  be  placed  with  the  nearest  available  source  of 
         supply; 
        A commodity can be obtained from only one vendor; or, 
        The amount involved is less the than the amount established by Council resolution for 
         informal bidding.  

Individual  departments  are  responsible  for  obtaining  and  providing  documentation  of 
competitive  prices  for  the  supplies,  services,  and  equipment  they  wish  to  procure,  unless 
exempt  for  the  reasons  above.  The  departments  then  submit  “Requests  for  Checks”  or 
purchase  order  requisitions,  along  with  any  required  documentation  and  approval  from 
authorized  department  staff,  to  the  Purchasing  Division  of  the  Finance  Department  to  allow 
disbursements of funds for the requested goods or services. 

When the City’s written procurement policies and procedures were requested at the beginning 
of the audit, the City of Watsonville provided only its Administrative Rules and Regulations. The 
policies on procurement in the Administrative Rules and Regulations were last updated in July 
of  2000.  However,  dollar  threshold  amounts  for  procurement,  which  are  not  included  in  the 
Municipal Code, were updated in January of 2011. These policies, including a few City Council 
resolutions  regarding  procurement,  were  not  provided  to  the  audit  team  until  after  a  draft 
audit report was submitted to the City. In addition, many of these policies are not included in 
the  Administrative  Rules  and  Regulations.  However,  the  City  reports  that  staff  is  informed  of 

1
   California Government Code 54202. 
2
    “Chapter  5:  Purchasing  Procedure,”  and  “Chapter  14:  Public  Works  Bid  Requirements,”  City  of  Watsonville 
Municipal Code. 
3
   “Chapter VII: Purchasing,” City of Watsonville Administrative Rules & Regulations.  
4
   City of Watsonville Intranet: “Purchasing Overview”. 

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changes  in  procurement  policies  through  e‐mails  and  the  Intranet.  The  City  of  Watsonville 
should update its Administrative Rules and Regulations to reflect all City Council resolutions and 
changes  in  procurement  policies  so  that  existing  and  new  staff  may  reference  a  single 
document with up to date procurement information.  

Exhibit  5.1  below  describes  the  (a)  procurement  dollar  amount  thresholds  listed  in  the  City’s 
procurement  policies  and  procedures  that  require  or  are  exempt  from  competitive  bid 
procedures, (b) documentation required to determine the least expensive price to the City, and 
(c) level of final approval or authorization for the purchase order based on procurement.  

                   Exhibit 5.1:  Procurement Thresholds, Documentation, and Approval 
                                                                         Quote and Bidding                 Highest Level of 
            Amount                  Procurement Process                     Requirements                 Authorized Approval 
    Non‐Public Works:                                                                                               
    $0.01 ‐ $9,999                Purchase Requisition only                3 verbal quotes                  Department5 
                                                                           recommended 
    $10,000 ‐ $14,999             Purchase Requisition only               3 written quotes                    Department 
                                                                              required 
    $15,000 ‐ $49,999               Informal “QuickBid”6                   Minimum 3 bids                     City Manager 
    $50,000+                             Formal Bid                         Not specified                      City Council 
    Public Works:                                                                                                     
    $0.01 ‐ $45,000               Purchase Requisition only              3 quotes suggested                   Department 
    $45,001 ‐ $175,000              Informal “QuickBid”6                   Minimum 3 bids                     City Manager 
    $175,001+  
                                           Formal Bid                        Not specified                     City Council 
Sources: City of Watsonville Intranet, “Chapter 14: Public Works Bid Requirements,” City of Watsonville Municipal 
Code and California Public Contract Code Section 22030‐22045 

As shown in the exhibit above, the City requires at least three different sources of pricing for 
procurements  greater  than  $10,000  for  non‐Public  Works  purchase  orders  and  $45,001  for 
Public  Works  purchase  orders,  allowing  the  City  to  determine  and  select  the  least  expensive 
price in an open and competitive market.  

Adherence to City Policies is Inconsistent  
Although  written  procurement  policies  and  procedures  appear  to  encourage  competitive 
pricing through quotes or bids and also include internal controls, a review of a sample of active 
purchase  orders  with  encumbered  funds  in  FY  2011‐12  revealed  that  adherence  to  these 
policies is inconsistent. 


5
    Each  department  submits  to  the  Purchasing  Division  a  list  of  authorized  personnel  to  sign  off  on  requests  for 
checks and purchase order requisitions. The management levels of authorized staff vary across departments, from 
Department Heads to Administrative Analysts. 
6
   The primary distinction between Informal and Formal Bids is the requirement for Council approval of (a) the call 
for bids and (b) bid award. 

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In  FY  2011‐12,  the  City  had  136  active  purchase  orders  with  encumbered  funds  with  96 
vendors.  Of  the  96  vendors,  22,  or  22.9  percent,  had  multiple  purchase  orders  with  the  City. 
The total value of the active purchase orders with encumbered funds was $17,596,184.  

From the list of purchase orders with encumbered funds, the audit team selected a judgmental 
sample of 20 purchase orders, representing various funds and departments, costs, and type of 
procurement  (i.e.  equipment,  supplies,  services,  and  public  works  projects).  The  audit  team 
then conducted a review of the transaction files for the sample of purchase orders to review 
the  following  documents:  Request  for  Checks,  Purchase  Order  Requisitions,  purchase  orders, 
pricing  quotes,  invitations  to  bid,  bid  proposals,  bidder  scoring  criteria  and  staff 
recommendations,  contracts,  resolutions  for  City  Council  approval,  invoices,  and  copies  of 
disbursed  checks.  Exhibit  5.2  below  provides  a  breakdown  of  the  types  of  purchase  orders 
selected  in  the  sample  file  review  and  observed  inconsistencies  in  the  implementation  of 
procurement policies.  These characteristics and inconsistencies are further discussed below. 

                           Exhibit 5.2: Purchase Order Sample Characteristics 
                                                                  # with less                         # Without 
                                                                    than 3          # Without         Required 
                           # in        Quote, Bidding and         Quotes or            Bid             Council 
      Amount             Sample      Approval Requirements           Bids           Documents         Approval 
 Non public works:                                                                                          
 $0.01 ‐ $9,999             2             3 verbal quotes              2 
                                          recommended; 
                                      department approves                                 N/A            N/A 
 $10,000 ‐ $14,999           1      3 written quotes required;         1 
                                      department approves                                 N/A            N/A 
 $15,000 ‐ $49,999                    Minimum 3 bids; City 
                             7         Manager approves                1                   4             N/A 
 $50,000+                              Number of bids not 
                                      specified; City Council 
                             5               approves                  0                   5              1 
 Subtotal: non‐
 public works               15                                         4                   9              1 
 Public works:                                                                                              
 $0.01 ‐ $45,000                        3 quotes suggested; 
                             2         department approves             1                  N/A            N/A 
 $45,001 ‐ $175,000                    Minimum 3 bids; City 
                             1           Manager approves              1                   0             N/A 
 $175,001+                              Number of bids not 
                                       specified; City Council 
                             2                approves                 0                   0              0 
 Subtotal: public 
 works                       5                                         2                   0                
 Total                      20                                         6                   9              1 
Source: City of Watsonville Purchase Order Files 



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Lack of Competitive Pricing and Bidding 
As shown in Exhibit 5.2, City departments do not always obtain three sources of pricing, either 
through  quotes  or  bids,  when  policies  encourage  or  require  them  to  do  so.  Nine  out  of  the 
sample of twenty files reviewed did not contain documentation proving that required bidding 
had occurred.  

Informal Process: Three or more Bids Required 

Of  the  eight  procurement  files  reviewed  where  three  or  more  bids  were  required7  only  four 
contained documentation demonstrating that an informal bid process (two files) or exception 
(two  files)  had  taken  place.  The  other  four  did  not  have  documentation  showing  if  and  how 
many vendors had been solicited by City staff, if the City had received at least three bids and/or 
if they were sole source solicitations that qualified as exempt from the requirement for three 
bids.   

Of  the  four  files  with  documentation,  two  explicitly  stated  that  the  vendor  was  selected 
through a sole source process. However, the justification for using the sole source method was 
not  stated  in  one  of  these  two  procurement  files,  though  such  information  is  required  in  the 
City’s  written  procurement  policies  and  procedures8.  The  remaining  two  purchase  order  files 
contained documents detailing the competitive bidding process. It should be noted, however, 
that  the  two  purchase  order  files  with  bid  documents  only  had  records  of  two  bidders  each 
while the policies and procedures require a minimum of three bids, when possible. The Finance 
Department  stated  that  only  two  vendors  made  the  product  requested  for  one  of  these 
purchase orders and both submitted quotes. However, there was no documentation in the files 
of  the  other  purchase  order  with  bid  documents  indicating  how  many  vendors  had  been 
solicited by City staff.  

Formal Bidding Process  

Five9  of  the  seven  purchase  order  files  reviewed  for  which  formal  bidding  was  required10  did 
not  have  bid  documents  demonstrating  that  formal  bid  procedures  occurred,  as  required  by 
City  policy.  For  example,  a  purchase  order  for  radio  equipment,  estimated  to  cost 
approximately $70,000, had three written quotes from vendors as opposed to formal Invitation 


7
   Regular purchase orders valued at between $15,000 and $49,000 or public works bids valued at between $45,001 
and $175,000.  
8
   The  Finance  Department  reports  that  there  is  only  one  vendor  that  sells  the  products  requested  in  the  sole 
source purchase orders. However, only one of the purchase orders had documentation of this included in the files 
when the audit team conducted its review.
9
   The Finance Department reports that a request for a proposal for one of these five purchase orders was sent to 
three qualified consultants, but the City received only two responses. However, documentation of this solicitation 
was not in the transaction files during the audit review. 
10
    Five regular purchase orders valued at $50,000 or more and two public works projects with a value of $175,001 
or more. . 

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to  Bid  documents,  formal  vendor  bid  documents,  records  of  published  notices,  and  other 
formal bidding documents required by City policies and procedures. 

Smaller Purchase Orders 

Of  the  two  files  reviewed  with  a  purchase  value  of  less  than  $9,999,  one  contained  only  one 
written quote, though three verbal quotes are recommended. The City later reported that the 
original purchase order was cancelled because the department was able to find another vendor 
that offered a lower price for the requested supplies. Obtaining multiple sources of pricing prior 
to  submitting  a  request  for  funds  can  save  staff  time  and  resources,  as  well  as  ensure  cost 
savings for the City. 

Professional Services 

Five of the nine purchase order files reviewed that lacked documentation demonstrating that 
competitive  bidding  had  taken  place  were  for  professional  services.  The  City’s  policies  and 
procedures  for  procuring  professional  services  are  vague  and  conflicting.  For  example,  the 
Administrative  Rules  and  Regulations  state  that  either  formal  or  informal  bidding  procedures 
are  required  for  all  “service,  material,  and  equipment”  procurements  over  $15,000,  without 
exempting  professional  services.  Bidding  procedures  in  the  Municipal  Code  are  required  for 
“supplies,  equipment,  and  non‐personal  contract  services”  but  do  not  include  any  explicit 
provisions  for  personal  or  professional  service  contract  bidding.  The  only  reference  to 
professional  services  in  the  City’s  written  Administrative  Rules  and  Regulations  is  that 
“professional  services  are  to  be  judged  on  quality,  not  solely  on  price.”  This  statement, 
consistent  with  State  law,  does  not  preclude  professional  services  from  participating  in 
competitive  bidding;  it  only  acknowledges  that  the  criteria  for  selection  could  result  in  not 
selecting the lowest price.  

Though professional services contracts are not required by State law or local ordinance to be 
competitively bid, doing so is a best practice and could result in cost savings for the City. Of the 
City’s  active  purchase  orders  with  encumbrances  in  FY  2011‐12,  those  identified  as  being  for 
expert and consultation services, legal services, or other contract services had a total value of 
$4,506,154.  Assuming  a  conservative  cost  savings  of  five  percent  to  account  for  the  price 
benefits  of  competition,  requiring  competitive  bidding  for  most  professional  services  could 
result in an estimated savings of $225,308. The City should revise its policies and procedures to 
encourage competitive bidding for professional services. 

Inconsistent City Council Approval Process   
One of the seven sample purchase order files reviewed that required formal bidding and City 
Council approval11 did not have documentation on file that they received approval from the City 
Council, though such approval is required under City policies and procedures. This conclusion is 


11
     Regular purchase orders valued at $50,000 or more or $175,001 or more for public work projects.

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based  on  a  review  of  the  purchase  order  files,  review  of  City  Council  agenda  items  from  FYs 
2011‐12 and 2010‐11, and subsequent follow up with the Finance Department. 

To test City compliance with City Council approval requirements, the audit team analyzed all FY 
2011‐12  active  purchase  orders  with  encumbrances  and  concluded  that  21  of  those,  with  an 
aggregate value of $7,590,053, should have been approved by City Council. However, according 
to  the  Finance  Department,  only  11  of  the  21  new  contracts,  with  an  aggregate  value  of 
$6,103,983, were approved by the City Council. Documentation of City Council approval of the 
remaining  ten  contracts,  with  an  average  value  of  $148,607,  was  not  found  in  City  Council 
records.  Three of the ten purchase orders that did not have City Council approval in FY 2011‐12 
were  for  professional  services.  However,  as  previously  stated,  policies  and  procedures  for 
procuring professional services are vague and conflicting, including if and when they should be 
approved by City Council. Further, at least two purchase orders for professional services with 
values greater than $50,000 have been approved by City Council. 

In  addition,  there  were  three  purchase  orders  with  a  value  greater  than  $50,000  that  went 
through  the  informal  bid  process  and  were  not  approved  by  City  Council,  even  though  these 
purchase orders met the criteria for formal bid procedures and approval by City Council. One 
purchase order for $321,100, which was awarded on a sole source basis, was never approved 
by the City Council.  

In contrast to the lack of approvals for purchase orders with a value greater than $50,000, five 
of  the  twenty  sample  purchase  orders  reviewed  were  approved  by  the  City  Council,  even 
though the purchase orders were less than $50,000 each. Two of these purchase orders were 
for the use of grant funds, and a City Council resolution was required by the grantors. 

All  purchase  orders  and  proposed  contracts  with  a  value  greater  than  $50,000  for  regular 
purchase orders or $175,001 or more for public work projects should be presented to the City 
Council  for approval  in  order  to  adhere  to  the City’s  procurement  policies.  Documentation  of 
such approval should be included in the purchase order file for review by the City’s Purchasing 
Officer and interested third parties such as auditors. Consistent implementation of this policy 
would ensure City Council oversight of high‐cost purchase orders and reduce risk exposure for 
contract favoritism and potential fraud.  

In addition, the City’s policies and procedures should include specific examples of when the City 
Council should approve purchase orders that are less than $50,000, such as when it is required 
by a funding entity, to ensure efficient and appropriate use of City Council time. 

Insufficient Controls over Change Orders  
According  to  the  FY  2011‐12  purchase  order  encumbrance  report,  there  were  at  least  24 
change orders on 19 purchase orders in FY 2011‐12. The final authorized total value of these 19 
purchase orders was $6,654,722. Unfortunately, due to the way previous fiscal years’ purchase 



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order amounts and change orders are recorded, the audit team could not determine the total 
or average value of change orders. 

The City’s Administrative Rules and Regulations do not discuss the process of approving change 
orders. However, according to a City Council resolution approved in 1996: 
       Changes  in  contract  values  of  less  than  15  percent  may  be  approved  by  Department 
        Heads; 
       Changes  in  contract  value  of  between  15  and  25  percent  may  be  approved  by  the 
        Department Head, after conference with the City Manager and Administrative Services 
        Director, who jointly approve said change orders in writing; and, 
       Changes in contract value greater than 25 percent must be approved by City Council.  

These  policies  do  not  provide  sufficient  mechanisms  to  control  cost  increases  that  arise  from 
change  orders.  The  percentage  increases  resulting  from  change  orders  in  contracts  reviewed 
exceed the common practice of allowing 10‐15 percent contingency reserves for change orders 
without City Council approval. A 25 percent threshold for City Council approval on high value 
purchase  orders  could  expose  the  City  to  the  risk  of  fraud.  For  example,  a  vendor  could 
fraudulently  provide  the  lowest  priced  bid,  knowing  that  they  could  increase  the  cost  of 
services,  supplies,  or  equipment  with  little  to  no  scrutiny  from  the  City,  particularly  if 
department staff is also in agreement with the valid, or fraudulent, increased costs. 

In the sample file review, a construction agreement for $1,888,429 was approved by the City 
Council  because  it  was  the  lowest  price  out  of  seven  bids.  However,  a  change  order  of 
$374,162,  or  a  19.8  percent  increase,  was  approved  by  the  Department  director  and  the 
Purchasing  Division  without  having  to  go  back  to  the  City  Council  for  approval.  Though 
technically  compliant  with  City  policies,  the  change  order  amount  is  more  than  twice  the 
$175,001 threshold for City Council approval of new public works purchase orders. In addition, 
the  new  purchase  order  amount  of  $2,262,591  is  greater  than  the  amount  bid  by  four  other 
competing vendors. As a financial control, the City Council should have reviewed and approved 
the  change  order  to  ensure  that  it  truly  represented  an  unforeseen  change  in  the  scope  of 
services,  as  opposed  to  an  increase  due  to  fraudulent  underbidding  or  unnecessary  or 
inappropriate project costs. 

The  City’s  procurement  policies  and  procedures  should  be  revised,  and  included  in  the 
Administrative Rules and Regulations, to require departments to seek City Council approval of 
change orders if the change order amount (a) results in a total purchase order amount greater 
than  $50,000,  including  the  sum  of  previous  change  orders,  or  (b)  exceeds  a  ten  percent 
increase based on the original purchase order amount.  

Inadequate Policies and Procedures for Open Purchase Orders 
In addition to departments requesting purchase orders for their specific departmental supplies, 
equipment, and service needs, the City also maintains Open Purchase Orders prepared by the 

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Purchasing  Division.  According  to  the  Administrative  Rules  and  Regulations,  Open  Purchase 
Orders  are  “appropriate  for  small,  repetitive  purchases  negotiated  with  a  vendor,”  or  as 
Finance  Department  staff  reports,  when  multiple  departments  utilize  the  same  vendor.  Open 
Purchase Orders may be used, for example, by a City crew working in the field and needing to 
buy some unforeseen parts for their job that day.  

According to a report provided by the Purchasing Division, there were 159 vendors with Open 
Purchase  Orders  in  FY  2011‐12,  with  an  aggregate  maximum  allowed  dollar  value  of 
$3,366,48212.  Purchases  were  made  off  136  of  these  Open  Purchase  Orders,  with  a  value 
totaling $3,081,502 in that fiscal year.  

In  contrast  to  the  policies  and  procedures  for  purchase  orders  for  specific  departmental 
supplies and services, the Administrative Rules and Regulations do not elaborate how vendors 
with Open Purchase Orders are selected, require contracts to obtain negotiated price discounts, 
or specify adequate controls over increasing expenditures throughout the year. 

The  City  has  credit  card  accounts  with  five  of  these  vendors.  Procedures  for  the  use  of  the 
credit cards are similar to those for requesting payment for any other vendor with a purchase 
order in that only approved staff have access to the cards and must sign off and submit receipts 
to the Purchasing Division for payment of the monthly statement.  

Open Purchase Order Vendor Selection and Contracts 

Finance Department staff reported that the majority of Open Purchase Orders have not been 
competitively bid in recent years and that the City does not have contracts with these vendors. 
Staff  also  report  that  most  of  the  vendors  have  had  Open  Purchase  Orders  for  over  20  years 
and it is not clear how they were originally selected.  

In  a  review  of  a  judgmental  sample  of  twenty  Open  Purchase  Orders,  documentation 
demonstrating  that  the  vendors  were  competitively  selected  and  had  contracts  with  the  City 
was provided for only four, or 20 percent, of the twenty reviewed. These four contracts were 
not all current and none included the current cost for specific services and goods. For instance, 
one  contract  had  prices  for  an  expired  term,  but  the  new,  negotiated  prices  for  the  current 
term were not included in the files. Additionally, another contract with an expired term did not 
include any prices whatsoever. 

Without clear policies and procedures for vendor selection for Open Purchase Orders, the City 
may  not  fully  achieve  the  benefits  of  competitive  bidding  and  there  is  risk  exposure  for 
favoritism in contracting and potential fraud. A competitively bid contract for items purchased 
at a high volume from multiple departments should include consistent contract discounts and 
stable prices from month to month or year to year. A review of invoices from an office supply 
store with an Open Purchase Order that was not competitively bid and did not have a contract 

12
   This aggregate amount is based on the assumption that the City can incur expenditures up to the limit for each 
credit card each month, as long as the City pays the full balance of the credit card with each statement. 

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revealed that discounts and net prices for the same product varied month‐to‐month. Although 
no fraud was identified in this audit, a vendor could potentially inflate prices charged to the City 
and share the price differential with colluding City staff members abusing the Open Purchase 
Order system, if there is no competition with other vendors or a signed contract. 

Open Purchase Order Cost Controls 

Similar to other purchase orders, each Open Purchase Order includes an estimated amount that 
can be spent on it, as needed, representing estimated expenditures within a year as opposed to 
total maximum expenditures for the term of a contract. According to Finance Department staff, 
the  annual  Open  Purchase  Order  maximum  amounts  are  determined  based  on  past  usage  or 
requests from City staff. 

In  FY  2011‐12,  the  authorized  annual  amount  for  154  Open  Purchase  Orders  (the  159  total 
Open  Purchase  Orders  less  four  that  are  based  on  credit  card  purchases)  was  $2,702,88213. 
However,  the  City  incurred  $3,015,083  in  expenditures,  which  is  $312,201,  or  11.6  percent, 
more than authorized. Expenditures for most of the Open Purchase Orders were less than their 
annual  limits,  saving  the  City  from  any  additional  increases  above  the  authorized  amounts. 
However,  these  cost  savings  were  offset  by  other  Open  Purchase  Orders  that  had  significant 
expenditures  over  their  annual  limit.  Exhibit  5.3  lists  the  top  ten  vendors  with  expenditures 
significantly in excess of their annual limits in FY 2011‐12.  

                               Exhibit 5.3: Top Ten Open Purchase Orders with  
                                        Over Expenditures, FY 2011‐12 
                                                                   Actual  
                                                                 FY 2011‐12           Amount of Over              Percent 
             Vendor                        Annual Limit         Expenditures           Expenditures               Variance 
Calcon Systems, Inc.                           $20,000               $208,596               $188,596                    943%
Golden State Flow 
Measurement                                       $40,000            $208,650                   $168,650                  422%
Bud’s Electric Service, Inc.                      $49,500            $166,051                   $116,551                  235%
Polydyne, Inc.                                    $60,000            $171,753                   $111,753                  186%
Pacific Truck Parts                               $10,000            $110,722                   $100,722                1,007%
Evergreen Oil Inc.                                $40,000            $123,410                    $83,410                  209%
Groeniger & Company                                $6,000             $88,602                    $82,602                1,377%
A‐1 Janitorial                                    $20,000             $74,190                    $54,190                  271%
Large’s Metal Fabrication, Inc.                   $50,000            $101,943                    $51,943                  104%
Mid Valley Supply                                 $20,000             $71,288                    $51,288                  256%
Total                                            $315,500          $1,325,205                 $1,009,705                  320%
Sources: City of Watsonville 2012 Open Purchase Order Vendor List and FY 2011‐12 Transaction Reports 


13
   Credit card expenditures were excluded from this analysis because the “purchase order amount” is the credit 
card  limit  for  balances  at  any  given  time.  The  amount  does  not  represent  an  annual  limit  or  estimate  of 
expenditures.  For  example,  a  credit  card  with  a  $5,000  limit  could  incur  up  to  $60,000  in  expenditures  within  a 
year, as long as the balance on the credit card is paid in full with each monthly statement. 

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As shown in Exhibit 5.3 above, the top ten Open Purchase Orders with expenditures in excess of 
their annual limits incurred additional costs that were 104 percent to 1,377 percent more than 
their annual limits. This indicates that (a) the annual limits do not accurately reflect department 
needs for services and supplies and (b) there are insufficient internal controls in the Purchasing 
Division  to  identify  and  prevent  significant  expenditures  with  a  single  vendor.  For  example,  a 
single transaction of $40,735 for Golden State Flow Measurement already exceeded the annual 
limit  for  that  Open  Purchase  Order.  Similarly,  a  single  transaction  of  $21,194  for  Calcon 
Systems, Inc. also exceeded its annual limit. Additionally, $62,488 in expenditures had already 
been  incurred  for  Calcon  Systems,  Inc.  in  the  month  prior  to  the  $21,194  transaction.  If 
transactions with these vendors had been processed as regular purchase orders, they would all 
have been subject to competitive bidding requirements.  

The  lack  of  internal  cost  controls  for  Open  Purchase  Orders  drastically  contrasts  and  is 
inconsistent with the controls included in approving expenditures for other purchase orders. All 
of  the  top  ten  Open  Purchase  Orders  had  expenditures  exceeding  $50,000,  the  threshold 
amount  for  non‐public  works  contracts  to  be  subject  to  formal  bidding  requirements  and 
approved  by  the  City  Council.  Additionally,  a  single  transaction  for  Calcon  Systems,  Inc. 
exceeded the $50,000 threshold. However, there are no contracts for a majority of the Open 
Purchase Orders and expenditures exceeding annual limits are never reviewed by City Council. 
Transactions  for  Open  Purchase  Orders  are  included  in  the  monthly  disbursement  reports 
provided to the City Council, but the information provided is insufficient for Council members 
to identify that expenditures have exceeded annual limits. 

The  Finance  Department  recognized  that  there  are  problems  with  the  procedures  for  Open 
Purchase Orders and stated they would consider increasing the annual limits to reflect actual 
expenditure  patterns  or  change  some  Open  Purchase  Orders  with  high  expenditures  into 
purchase  orders  that  follow  the  same  purchase  order  procedures  discussed  previously  in  this 
report. 

However, the City of Watsonville should still revise its Administrative Rules and Regulations to 
include  clear  policies  and  procedures  for  Open  Purchase  Orders  that  are  consistent  with  the 
requirements for all other purchase orders. These policies should include: a) a requirement for 
competitive  bidding  for  Open  Purchase  Orders,  unless  explicit  exemption  criteria  are  met;  b) 
the  execution  of  a  contract  that  clearly  states  i)  the  term  of  the  Open  Purchase  Order,  ii)  an 
annual or contract term limit for expenditures, prices, and discounts, and iii) a mechanism to 
approve  changes  in  prices  and  discounts;  as  well  as  c)  internal  controls  for  identifying  and 
approving significant expenditures. Open Purchase Orders that have an annual or contract term 
limit greater than $50,000 should be approved by the City Council, in addition to expenditures 
that exceed the annual or contract term limit and meet the same criteria discussed above for 
change orders requiring City Council review. 

The Purchasing Division should also implement additional monitoring and reporting to facilitate 
cost  control  throughout  the  year.  Because  multiple  departments  may  utilize  the  same  Open 
Purchase  Order,  the  Purchasing  Division  has  a  unique  perspective  and  can  identify  significant 

                                                                                Harvey M. Rose Associates, LLC 
                                                     5‐11                                          ATTACHMENT 3
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                                                                                        5. Procurement 

expenditures  for  a  particular  Open  Purchase  Order.  Monthly  reports  should  be  provided  to 
management  to  identify  Open  Purchase  Orders  with  expenditures  that  exceed  estimated 
average  monthly  expenditures  based  on  the  contract  annual  limit.  The  Purchasing  Division 
could then determine if a change order request for City Council approval is necessary, or if it 
should require departments to limit expenditures for the remainder of the year. 

Additional  staff  may  be  required  to  facilitate  competitive  bidding  and  contract  execution  for 
existing  Open  Purchase  Orders.  However,  estimated  costs  savings  from  the  benefits  of 
competitive  bidding  and  implementing  more  cost  controls  could  offset  staff  costs.  A 
conservative estimate of a five percent reduction in payment to Open Purchase Order vendors 
would  result  in  $154,075  in  cost  savings,  based  on  the  $3,081,502  in  expenditures  for  Open 
Purchase Orders in FY 2011‐12. 

Finally,  all  City  staff  involved  with  purchase  orders,  from  the  various  departments  to  the 
Purchasing Division, should be trained on the revised Administrative Rules and Regulations to 
ensure proper implementation. 

Conclusions 
A review of the City’s policies and procedures along with a review of the files and transactions 
for 20 purchase orders in FY 2011‐12 revealed that adherence to the policies and procedures is 
inconsistent.  Specifically,  three  quarters  of  the sampled  purchase  orders  did  not  obtain  three 
competitive  prices  through  quotes  or  bids,  though  the  policies  encourage  or  require  such, 
depending  on  the  purchase  order  amount.  Lack  of  evidence  of  competitive  bidding  for 
professional  services  was  prevalent,  while  policies  on  competitive  bidding  for  professional 
services are vague and conflicting. The City Council does not always approve agreements that 
are greater than $50,000 for non‐public works purchase orders, though it is required under the 
City’s  policies  and  procedures.  Further,  policies  for  change  orders  approved  through  a  City 
Council  resolution  are  not  included  in  the  Administrative  Rules  and  Regulations  and  are 
insufficient  for  curbing  escalating  and  possibly  unnecessary  costs  through  multiple  contract 
change orders. 

Written policies and procedures for Open Purchase Orders do not exist. In the absence of such 
policies, a majority of the 159 FY 2011‐12 Open Purchase Orders have not been competitively 
bid in over 20 years and most do not have contracts with the City to ensure consistent prices 
and  negotiated  discounts  for  goods  and  services  purchased  at  high  volumes  by  City 
departments. Finally, adequate controls over increasing Open Purchase Order expenditures do 
not  exist.  As  a  result,  some  Open  Purchase  Orders  incurred  single  transactions  that  were 
greater than their annual limit, and some had expenditures exceeding the $50,000 threshold for 
City  Council  approval  of  competitively  bid  purchase  orders.  However,  such  Open  Purchase 
Orders were not brought to the City Council for approval. 




                                                                            Harvey M. Rose Associates, LLC 
                                                  5‐12                                        ATTACHMENT 3
                                                                                                    70 of 72
                                                                                         5. Procurement 


Recommendations 
The City Council should direct the City Manager to:  

   5.1     Revise  the  City’s  written  Administrative  Rules  and  Regulations  to  include  the 
           following: 

           (a) Requirement for competitive bidding for all professional service contracts above 
               a  designated  amount  such  as  $15,000  without  requiring  that  contracts  be 
               awarded  to  the  lowest  responsible  bidder  (qualified  contractor  or  vendor  that 
               meets bid specifications at the lowest cost), but rather, the most qualified if the 
               lowest responsible and most qualified bidder are not the same;  

           (b) Require  executed  contracts  for  all  Open  Purchase  Orders  that  include:  a) 
               contract  term;  b)  annual  or  contract  term  limit  for  expenditures,  prices,  and 
               discounts;    c)  mechanisms  to  approve  changes  in  prices  and  discounts;  and,  d) 
               City Council approval for all Open Purchase Orders estimated to exceed $50,000; 

           (c) Clear  procedures  for  approving  change  orders  to  all  purchase  orders,  including 
               Open Purchase Orders, such as requiring City Council approval for change orders 
               that  (i)  result  in  a  total  purchase  order  greater  than  $50,000  (or  $175,001  for 
               public works), including the sum of previous change orders, or (ii) exceed a ten 
               percent increase over the original purchase order amount; 

           (d) Monitoring  and  reporting  procedures  for  Open  Purchase  Order  expenditures, 
               such  as  monthly  reports  by  the  Purchasing  Division,  that  could  result  in 
               requesting  change  orders  for  approval  by  City  Council,  or  halting  ongoing 
               expenditures for the remainder of the year; and, 

           (e) Examples  of  when  the  City  Council  should  approve  purchase  orders  that  are 
               $50,000 or less.   

   5.2     Train  all  City  staff  involved  in  purchase  orders  on  the  revised  Administrative  Rules 
           and  Regulations  to  ensure  proper  and  consistent  implementation  of  policies  and 
           procedures,  including  City  Council  approval  of  all  purchase  orders  greater  than 
           $50,000. 

   5.3     Provide annual reports to the City Council summarizing purchase order and contract 
           activity  for  the  past  year,  including  original  contracts  and  amounts,  number  and 
           value  of  change  orders,  and  number  and  value  of  purchases  from  Open  Purchase 
           Orders.   




                                                                             Harvey M. Rose Associates, LLC 
                                                  5‐13                                         ATTACHMENT 3
                                                                                                     71 of 72
                                                                                         5. Procurement 


Costs and Benefits 
Implementation  of  all  recommendations  should  be  accomplished  using  existing  resources.  It 
estimated that implementation would require approximately .5 of a full‐time equivalent (FTE) 
position for the first year, and less staff time after that. Competitive bidding of purchase orders, 
including  for  professional  services  and  Open  Purchase  Orders,  could  (a)  result  in  lower  prices 
for the City, including consistent discounts for the purchase of commodities in high volume, and 
(b)  reduce  risk  exposure  to  contract  favoritism  and  potential  fraud.  Improved  controls  over 
change  orders  for  all  purchase  orders  and  expenditures  for  Open  Purchase  Orders  could  also 
result  in  cost  savings.  Conservative  estimates  of  cost  savings  for  competitive  bidding  and 
improved controls include $225,308, or five percent professional service contracts in FY 2011‐
12,  and  $154,075,  or  five  percent  of  FY  2011‐12  expenditures  for  Open  Purchase  Orders.  If 
additional  staff  is  required  to  implement  these  recommendations,  then  the  estimated  cost 
savings would offset the costs of these staff. 




                                                                             Harvey M. Rose Associates, LLC 
                                                   5‐14                                         ATTACHMENT 3
                                                                                                      72 of 72
                                                                                            5026



                                   RESOLUTION NO .	        121-11	   (CM)

        RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
        WATSONVILLE SETTING FORTH INTERNAL LOAN TERMS AND
        CONDITIONS BETWEEN THE GENERAL FUND AND THE CITY'S
        POOLED MONEY INVESTMENT ACCOUNT FOR AN INTERNAL LOAN
        OF UP TO $6,454,697 MILLION AND AUTHORIZING THE CITY
        MANAGER TO PREPAY THE CALPERS POLICE AND FIRE SIDE
        FUNDS

        WHEREAS, at June 30, 2011, the General Fund's California Public Employee

Retirement System's (CaIPERS) Police and Fire "Side Funds" have a cumulative

balance of $6,454,697 at interest rates between 7 .882% and 8 .788% for a period of up

to 156 remaining months ; and

        WHEREAS, the City has from time to time refinanced its obligations through

private placement loans or the bond market ; and

        WHEREAS, the City's Finance Department continually evaluates current financial

market conditions to determine whether it is feasible and prudent to exercise its options

to purchase said obligations in accordance with the City's Investment Policy ; and

        WHEREAS, there is presently an opportunity for the City to use its pooled money

investment account to exercise said options thereby reducing the interest rate on debt

service payable from the General Fund and increase the interest return on funds held in

the City's pooled money investment account ; and

         WHEREAS, the City's Investment Policy requires the City Council approve

investments with a maturity of more than 5 years (60 months) ; and

         WHEREAS, the City's Administrative Services Director has recommended that

the Council authorize said transaction.




Reso No .	    121-11	    (CM)                                                           1
0 :\COUNCIL\2011\061411\Defeasance of CalPers Fund .docx                       ATTACHMENT 4
ri 6/15/2011 5 :26 :39 PM
                                                                                      1 of 3
	




             NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY

    OF WATSONVILLE, CALIFORNIA, AS FOLLOWS:

             1.       The City Manager and Administrative Services Director are hereby

    authorized to transfer not more than $6,454,697 from the City's pooled money

    investment account to fully purchase said CaIPERS side fund liabilities described above.

            2.        Said transfer shall be accounted for as a loan from the City's pooled money

    investment account to the General Fund.

             3.       The terms of said loan account shall be a variable interest rate that shall be

    set each July according to the City's prior 12-month period's average pooled money

    portfolio rate with a maximum cap of 3 .00%, payments due at least once every June 30 th

    and with a term of 156 months, at which time the entire balance of interest will be due

    and payable and that there shall be no pre-payment penalty or reserve requirement.

            4.        The City Manager and Administrative Services Director are hereby

    authorized to execute any documents and do all other things necessary and proper to

    accomplish the payment of said side fund liabilities and account from the City's Pooled

    Money Investment Account to the City's General Fund.


                                             ********************************




    Reso No .	   121-11	     (CM)
    O :\COUNCIL\2011\061411\Defeasance of CalPers Fund .docx
                                                                                                   2
    ri 6/15/2011 5 :26 :39 PM
                                                                                         ATTACHMENT 4
                                                                                                2 of 3
	




             The foregoing resolution was introduced at a joint regular meeting of the Council

    and Redevelopment Agency of the City of Watsonville, held on the 	                        14th	    day of

    June	       , 2011, by Member 	              Bersamin	         , who moved its adoption, which motion

    being duly seconded by Member	                   Rios	     , was upon roll call carried and the resolution

    adopted by the following vote:

    AYES :                     MEMBERS :              Bersamin, Hurst, Martinez, Montesino, Rios,
                                                      Dodge

    NOES:                      MEMBERS :              None

    ABSENT :                   MEMBERS :              Bilicich




    ATTEST:




    Reso No .	   121-11	     (CM)                                                                            3
    O :\COUNCIL\2011\061411\Defeasance of CalPers Fund .docx                                       ATTACHMENT 4
    ri 6/15/2011 5 :26 :39 PM
                                                                                                          3 of 3
                                                                                                                                              5026



                                                                                          By Carlos J. Palacios at 9:07 am, Jun 09, 2011




                                              City of Watsonville
                                             Finance Department

                                            MEMORANDUM


DATE:                      June 9, 2011

TO:                        Carlos J. Palacios, City Manager

FROM:                      Marc Pimentel, Administrative Services Director                        By Marc Pimentel at 9:01 am, Jun 09, 2011




SUBJECT:                   ADOPT A RESOLUTION AUTHORIZING AND SETTING FORTH
                           INTERNAL LOAN TERMS AND CONDITIONS BETWEEN THE
                           GENERAL FUND AND THE CITY’S POOLED MONEY
                           INVESTMENT ACCOUNT OF UP TO $6,454,697 MILLION AND
                           AUTHORIZING THE DEFEASANCE OF THE CALPERS SIDE
                           FUNDS FOR PUBLIC SAFETY PLANS.

AGENDA ITEM:               June 14, 2011                                                              City Council



RECOMMENDATION:
That the City Council adopts a resolution authorizing and setting forth the terms and conditions
between the General Fund and the City’s pooled money investment account for an internal
loan of up to $6,454,697 with the City’s 12-month average pooled money portfolio rate for 13
years and authorize the defeasance of the CalPERS Side Fund Public Safety plans.

DISCUSSION:
As part of a CalPERS action to consolidate plans with under 100 members with other
agencies, the City’s’ Public Safety liabilities were each pooled by type with other agencies
throughout the State. The liabilities at the time of the pooling for the City’s Fire and Police
personnel were subsequently segregated and have an outstanding, combined balance of
$6,454,697 at June 30, 2011. These debt obligations will continue forward for another 13
years at interest rates that average 8.35% (between 7.882% and 8.788%).

Current market conditions and portfolio cash balances allow this outstanding balance to
essentially be refinanced through an internal loan at much lower interest rates. Traditionally,
the City has refinanced debt through private placement loans or on the bond market.
However, City staff have strategically planned for the opportunities to effectively refinance this
and other prior loans using the City’s pooled money investment account. This action lowers
the debt service rates while at the same time providing for a safe rate of return for the City’s
pooled money account higher than other investment opportunities.



                                                    Page 1 of 2
                                                                                                                          ATTACHMENT 5
Writer’s name 6/9/2011 9:00:53 AM
P:\1Marc\DEBT - Financing\2011 Refi\CalPERS sidefund\SR_Interfund-loanf2_2011-0614.docx                                          1 of 4
The terms of the internal loan would be as follows:
      General Fund to borrow up to $6,454,697 to fully defease the CalPERS public safety
      side funds.
      The interest rate would tied to the 12-month average portfolio rate with a cap of 3.00%
      Term would be 13 years with payments due at least once each June 30th
      No pre-payment penalty or reserve requirement
      No external insurance or reporting requirements

The annual interest rate will be adjusted each July according to the City’s prior 12-month
period’s average pooled money portfolio rate. This will allow the portfolio to achieve its
earnings target with a maximum ceiling slightly above the current average 2.84% rate of a 10-
year US Agency and US Treasury note. Prior portfolio loans included within the rate a 0.5%
administrative rate payable to the General Fund. However, since payer and recipient of the
administrative rate are both the General Fund, it was excluded from this loan.

The City’s Investment Policy allows the City to “purchase” such loans in excess of a 5-year
period with City Council authorization. The pooled money account was recently used twice
during 2010 to issue internal loans of $2.8 million and $1.3 million to the Water Enterprise
Fund and the Airport Enterprise Fund to pay off their respective external debt issues. This
proposed action was a planned purchase and therefore sufficient capacity remains available
within the pooled money account for this investment. With current yields at historical lows, the
pooled money account will retain investments as they mature in order to payoff other debt
issues held by the City to improve yields and lower the City’s interest costs.

STRATEGIC PLAN:
This will support the Community Resources strategic goal by provide additional savings to the
General Fund to maintain its operations.

FINANCIAL IMPACT:
This action will provide the required cash flow savings of an estimated $272k to balance the
projected $1.93 Million General Fund 2011-2012 projected deficit. By avoiding an external 3rd
party refinance, the General Fund will save at a minimum $40,000 in issuance costs. In
addition, instead of the interest payments being paid to the State of California, they will be paid
to and retained by the City within its pooled money investment account.

ALTERNATIVES:
The City Council could direct staff to take the refunding to the private market. However, this is
not recommended as the City will incur at a minimum an additional $40,000 in direct legal and
related issuances costs, in addition to our internal legal time. In addition, the General Fund
could continue to pay a higher interest rate through the life of the loan to the State of
California.

ATTACHMENTS:
None

cc:      City Attorney
                                                        Page 2 of 2
Writer’s name 6/9/2011 9:00:53 AM
P:\1Marc\DEBT - Financing\2011 Refi\CalPERS sidefund\SR_Interfund-loanf2_2011-0614.docx   ATTACHMENT 5
                                                                                                 2 of 4
                                   RESOLUTION NO.__________ (CM)

        RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
        WATSONVILLE SETTING FORTH INTERNAL LOAN TERMS AND
        CONDITIONS BETWEEN THE GENERAL FUND AND THE CITY’S
        POOLED MONEY INVESTMENT ACCOUNT FOR AN INTERNAL LOAN
        OF UP TO $6,454,697 MILLION AND AUTHORIZING THE CITY
        MANAGER TO PREPAY THE CALPERS POLICE AND FIRE SIDE
        FUNDS

        WHEREAS, at June 30, 2011, the General Fund’s California Public Employee

Retirement System’s (CalPERS) Police and Fire “Side Funds” have a cumulative

balance of $6,454,697 at interest rates between 7.882% and 8.788% for a period of up

to 156 remaining months; and

        WHEREAS, the City has from time to time refinanced its obligations through

private placement loans or the bond market; and

        WHEREAS, the City’s Finance Department continually evaluates current financial

market conditions to determine whether it is feasible and prudent to exercise its options

to purchase said obligations in accordance with the City’s Investment Policy; and

        WHEREAS, there is presently an opportunity for the City to use its pooled money

investment account to exercise said options thereby reducing the interest rate on debt

service payable from the General Fund and increase the interest return on funds held in

the City’s pooled money investment account; and

        WHEREAS, the City’s Investment Policy requires the City Council approve

investments with a maturity of more than 5 years (60 months); and

        WHEREAS, the City’s Administrative Services Director has recommended that

the Council authorize said transaction.




Reso No.         (CM)                                                                                                                              1
Q:\COUNCIL\2011\061411\Defeasance of CalPers Fund.docx
                                                                     By Carlos J. Palacios at 8:43 am, Jun 09, 2011
                                                                                                                      By Marc Pimentel at 6:30 pm, Jun 08, 2011


ri 6/8/2011 3:58:27 PM                                                               ATTACHMENT
                                                          AJS ______ CJP ______ Finance ______                                                                 5
                                                                                                                                                          3 of 4
        NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY

OF WATSONVILLE, CALIFORNIA, AS FOLLOWS:

        1.       The City Manager and Administrative Services Director are hereby

authorized to transfer not more than $6,454,697 from the City’s pooled money

investment account to fully purchase said CalPERS side fund liabilities described above.

        2.       Said transfer shall be accounted for as a loan from the City’s pooled money

investment account to the General Fund.

        3.       The terms of said loan account shall be a variable interest rate that shall be

set each July according to the City’s prior 12-month period’s average pooled money

portfolio rate with a maximum cap of 3.00%, payments due at least once every June 30th

and with a term of 156 months, at which time the entire balance of interest will be due

and payable and that there shall be no pre-payment penalty or reserve requirement.

        4.       The City Manager and Administrative Services Director are hereby

authorized to execute any documents and do all other things necessary and proper to

accomplish the payment of said side fund liabilities and account from the City’s Pooled

Money Investment Account to the City’s General Fund.


                                       ********************************




Reso No.         (CM)                                                                        2
Q:\COUNCIL\2011\061411\Defeasance of CalPers Fund.docx
ri 6/8/2011 3:58:27 PM                                                              ATTACHMENT 5
                                                                                           4 of 4
                                        Attachment 6
                                     City of Watsonville
                      Grand Jury Performance Report Recommendations


1.1 Prepare annual reports summarizing and distilling the Comprehensive Annual Financial
Report (CAFR) to provide the City Council with a complete and candid assessment of the City’s
financial position including past and future multi‐year trend data and a comparison of actual
audited revenue and expenditure data with budgeted and projected revenues and
expenditures.

The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. The evaluation process
should be completed within 120 days of the date of this report.

1.2 Prepare an annual report comparing the City of Watsonville’s financial position with other
comparable cities, measured in key areas such as net assets, General Fund net revenues,
General Fund balance as a percentage of General Fund expenditures, liabilities relative to
assets, cash on hand relative to monthly expenditures, and other measures.

The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. The evaluation process
should be completed within 120 days of the date of this report.

1.3 Consider establishment of a City Council audit or finance sub‐committee to ensure that the
City’s financial condition receives concentrated attention from the governing board and that a
worsening of current financial conditions is prevented to the extent possible.

The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. The evaluation process
should be completed within 120 days of the date of this report.

2.1 Direct the City Manager to prepare formal written policies and procedures regarding
inter‐fund loans and transfers requiring that the repayment schedules, principal and interest
amounts, loaning fund(s) and all other terms and conditions of such transactions be fully
disclosed in required City Council resolutions authorizing any loan of more than one year.

The City has presented all terms of loans to Council in the past, which have included repayment
schedules and interest amounts, and loaning funds. However, a formal policy will be developed
in the future. The City has always charged interest for inter-fund loans. The recommendation
has not been fully implemented but will be implemented in the future. The City will prioritize all

                                                                                       ATTACHMENT 6
                                                                                              1 of 6
the recommendations, evaluate the resources to implement each recommendation, and begin
implementing the most critical items first. The evaluation process should be completed within
120 days of the date of this report.

2.2 Direct the City Manager to report the service or program impact on the loaning funds of
having some or all of their resources tied up for the term of the loan as part of the staff report
accompanying all inter‐fund loan authorizing resolutions.

The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. The evaluation process
should be completed within 120 days of the date of this report. This recommendation will be
addressed simultaneously with 2.1.

2.3 Direct the City Manager to prepare an annual report on all short‐term inter‐fund loans at
the end of each year, including past year loans and disclosure of any funds repeatedly receiving
loans due to chronic revenue shortfalls or expenses in excess of revenues.

The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. The evaluation process
should be completed within 120 days of the date of this report. This recommendation will be
addressed simultaneously with 2.1.

2.4 Establish a policy requiring that all inter‐fund loans be repaid with interest at the same rate
as earned by the City’s pooled investment fund.

This recommendation repeats the recommendation in 2.1 (see 2.1 above)

3.1 Establish a mechanism to ensure adherence to City policies dictating levels of authority for
making changes to the budget in the interest of controlling costs to the budget, to include the
level of authority department directors have for shifting funds within their budget, the
authority of the City Manager to make budget changes, and the criteria that would trigger
further review and action by the City Council.

The City already has a policy in place for this. However, the recommendation has not been
implemented but will be implemented in the future. The City will prioritize all the
recommendations, evaluate the resources to implement each recommendation, and begin
implementing the most critical items first.

3.2 Conduct further review of expenditures in the Fire and Police Departments and assess and
report on alternative cost saving plans and structures to reduce public safety expenditures
comparable to similar sized and neighboring cities, including consideration of contracting with
other firefighting agencies if more cost‐effective to do so.

                                                                                         ATTACHMENT 6
                                                                                                2 of 6
The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. Staff will present some
recommendations to the Council as part of the mid-year budget process.

3.3 Revise the annual budget document and Mid‐Year Financial Reports to include yearto‐date
actual revenues and expenditures, a distinction between management proposed and City
Council adopted budgets, a clear summary of the fiscal results of past actions taken by the City
Council to increase revenues or reduce/increase expenditures, and an explanation of difference
between actual amounts reported in the budget that vary from amounts reported in the City’s
Comprehensive Annual Financial Reports.

Certain elements of the recommended information are already part of the budget document.
However, the recommendation has not been implemented but will be implemented in the
future. The City will prioritize all the recommendations, evaluate the resources to implement
each recommendation, and begin implementing the most critical items first. The evaluation
process should be completed within 120 days of the date of this report.

3.4 Revise the Municipal Code and streamline information provided in disbursement reports for
City Council review to include only:
a) New disbursements not tied to items previously reviewed by the City Council, such as
approved budgets, expenditure plans and contracts;
b) Disbursements representing significant changes to previously approved budgets, expenditure
plans, contracts, and purchase orders, defined as a flat threshold amount determined by the
City Council, a percentage threshold based on the previously approved amount, or changes in
the scope of the project or program; and,
c) Significant expenditures on Open Purchase Orders.

The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. The evaluation process
should be completed within 120 days of the date of this report.

3.5 Conduct a new cost allocation study and develop a new plan to appropriately allocate City
costs to departments, and update the plan annually.

The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. The evaluation process
should be completed within 120 days of the date of this report.

3.6 Obtain actuarial reports for its Internal Service Funds that more adequately estimate
expected costs.

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The City already obtains actuarial reports for preparation of health insurance rates. The
calculation which incorporates the actuarial figures was provided to the auditors. The
recommendation has already been implemented prior to the performance audit as a standard
practice.

3.7 Charge insurance rates that are sufficient for (a) meeting expected costs and (b) increasing
the assets and fund balance for Internal Service Funds to build sufficient reserves for a 50% to
80% confidence level of funding, as practiced by many public jurisdictions.

The City already charges appropriate insurance rates for meeting expected costs. Increasing the
assets and fund balance will be the next target. The recommendation has been partially
implemented and the remaining parts will be implemented in the future. The City will prioritize
all the recommendations, evaluate the resources to implement each recommendation, and
begin implementing the most critical items first. The evaluation process should be completed
within 120 days of the date of this report.


3.8 Continue preparing and updating written policies and procedures in all areas of financial
management and internal controls.

This recommendation has been implemented. The City continues to update written policies and
procedures in all areas of financial management.

4.1 Modify the capital budget document to include multi‐year presentations of all capital
projects including:
a. Funds already spent on previously approved projects and date of project commencement;
b. Funds budgeted in the current and future years on previously approved projects;
c. Identification of changes in previously approved project budgets;
d. Funds proposed for current and future years on projects for which approval is requested;
e. Funding sources and an indication of whether or not funding has been obtained yet;
f. Brief explanations of any changes in project timing.

The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. The evaluation process
should be completed within 120 days of the date of this report.

4.2 Review the bases of all development impact fees and report back to the City Council on
whether or not the fees are in compliance with State Mitigation Fee Act requirements including
the bases of the fees and the projects for which they have been used.

The City believes is in compliance with reporting requirements, however, the recommendation
has not been implemented but will be implemented in the future. The City will prioritize all the

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recommendations, evaluate the resources to implement each recommendation, and begin
implementing the most critical items first. The evaluation process should be completed within
120 days of the date of this report.

4.3 Establish service level standards to serve as the basis of each development impact fee such
as acres of park per resident, fire department response time, etc.

The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. The evaluation process
should be completed within 120 days of the date of this report.

4.4 Prepare annual impact fee reports that are fully compliant with all reporting requirements
in State law.

The City believes is in compliance with reporting requirements, however, the recommendation
has not been implemented but will be implemented in the future. The City will prioritize all the
recommendations, evaluate the resources to implement each recommendation, and begin
implementing the most critical items first. The evaluation process should be completed within
120 days of the date of this report.

5.1 Revise the City’s written Administrative Rules and Regulations to include the following:
(a) Requirement for competitive bidding for all professional service contracts above a
designated amount such as $15,000 without requiring that contracts be awarded to the lowest
responsible bidder, but rather, the most qualified if the lowest responsible and most qualified
bidder are not the same;
(b) Require executed contracts for all Open Purchase Orders that include: a) contract term; b)
annual or contract term limit for expenditures, prices, and discounts; c) mechanisms to approve
changes in prices and discounts; and, d) City Council approval for all Open Purchase Orders
estimated to exceed $50,000;
(c) Clear procedures for approving change orders to all purchase orders, including Open
Purchase Orders, such as requiring City Council approval for change orders that (i) result in a
total purchase order greater than $50,000 (or $175,001 for public works), including the sum of
previous change orders, or (ii) exceed a ten percent increase over the original purchase order
amount;
(d) Monitoring and reporting procedures for Open Purchase Order expenditures, such as
monthly reports by the Purchasing Division, that could result in requesting change orders for
approval by City Council, or halting ongoing expenditures for the remainder of the year; and,
(e) Examples of when the City Council should approve purchase orders that are $50,000 or less.


The City began implementing this recommendation. The new streamlined policy should be
implemented by the end of January 2013. Not all elements will have the same limits as



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recommended. The City reserves the right to implement the limits best suited for efficient and
effective City operations.

5.2 Train all City staff involved in purchase orders on the revised Administrative Rules and
Regulations to ensure proper and consistent implementation of policies and procedures,
including City Council approval of all purchase orders greater than $50,000.
The City began implementing this recommendation. The new streamlined policy should be
implemented by the end of January 2013. Training of this policy will be ongoing for new staff
and current staff.

5.3 Provide annual reports to the City Council summarizing purchase order and contract
activity for the past year, including original contracts and amounts, number and value of change
orders, and number and value of purchases from Open Purchase Orders.

The recommendation has not been implemented but will be implemented in the future. The
City will prioritize all the recommendations, evaluate the resources to implement each
recommendation, and begin implementing the most critical items first. The evaluation process
should be completed within 120 days of the date of this report.




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