Get documents about "Watsonville Grand Jury Report 1.15.2013
Shared by: SantaCruzSentinel
-
Stats
- views:
- 765
- posted:
- 1/22/2013
- language:
- Korean
- pages:
- 118
Document Sample
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
CoW 01/15/2013 11:31 AM Page 1 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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.
CoW 01/15/2013 11:31 AM Page 2 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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
CoW 01/15/2013 11:31 AM Page 3 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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 $7.2 million for one day loan in CAFR shown as due from other funds
(3) 2010 Census Data
(4) This figure includes long term debt amounts which should not be included in the liabilities
CoW 01/15/2013 11:31 AM Page 4 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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 $6.4 million shown in the CAFR as expenditure since amount represents a loan for this amount, not an expense
Finding 4: “While information on the City’s financial condition can be distilled from reviewing
publically available City documents, such as the City budget and the Comprehensive Annual
Financial Report (CAFR), these documents alone do not include either sufficiently accurate or
sufficiently analyzed and summarized data to enable the City Council and public to have a full
accurate picture of the City’s financial state and trends.”
Finding 5: “More accurate summarized information needs to be regularly presented to the City
Council on the overall financial position of the City to better assess the impacts of its decisions
on expenditures, revenues, loans, transfers on the City’s short‐ and long‐term financial position.”
The City disagrees with findings 4 and 5. The City staff has continually presented accurate,
summarized data to Council during the Mid-Year budget review and during budget public
CoW 01/15/2013 11:31 AM Page 5 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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.
CoW 01/15/2013 11:31 AM Page 6 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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 $250,000 in reserve as a condition to receive grant funding.
Any interest earned by this deposit set aside for the benefit of the housing fund receives its
share of interest earned by the pooled investments.
Regarding the investment in a Public Employee Retirement System side fund loan; the auditor’s
report indicates the City did not disclose the funding sources for this loan. However, the City
presented this information to the City Council on June of 2011 to be as follows (see attachment
5): “That the City Council adopts a resolution authorizing and setting forth the terms and
conditions between the General Fund and the City’s pooled money investment account for an
CoW 01/15/2013 11:31 AM Page 7 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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
CoW 01/15/2013 11:31 AM Page 8 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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.
CoW 01/15/2013 11:31 AM Page 9 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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 $1.8 million in FY
2010‐11. These appropriations were added midyear without City Council re-appropriation or
approval of new uses of these funds.”
The City disagrees with this finding. The re-appropriation of encumbrances is presented to the
Council and approved by them. This was also the case in FY 2009-10 and 2010-11 as
demonstrated on pages 21-27 of the biennial 2009-10 and 2010-11 budget and on pages2-8 of
the revised biennial budget.
Finding13: “While some overtime is unavoidable for public safety agencies and can even be cost
effective, the extent of the variance between budgeted and actual overtime, particularly for the
Fire Department, is extensive.”
Finding 14: “The City of Watsonville’s public safety costs, measured in costs per resident, are
higher than the median costs for public safety among seven comparable cities.”
The City partially disagrees with the comparison cities being used and agrees that overtime has
been high. A comparative analysis with local cities (Exhibit 3.4) indicates Watsonville is below
the median in public safety expenditures per capita, lower than other communities with similar
characteristics but with more resources such as Santa Cruz and Monterey, and higher than
other similar communities such as Gilroy, Morgan Hill, and Salinas.
CoW 01/15/2013 11:31 AM Page 10 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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 $100,000 per year. An example of a summary table discussed with the Council in
FY 2009-10 is shown in (Exhibit 3.5).
However, City staff recognizes more has to be done to alleviate this problem and is working to
identify alternative solutions to resolve this problem, particularly with the Fire Department.
More details will be presented during the mid-year budget review.
Exhibit 3.5
Finding 15: “The City lacks adequate management tools, reports, and resources to ensure
expenditures are controlled and that all variances with the budget are clearly disclosed. The
City’s finance and accounting system is outdated, lacks flexibility and does not provide sufficient
CoW 01/15/2013 11:31 AM Page 11 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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.
CoW 01/15/2013 11:31 AM Page 12 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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.”
CoW 01/15/2013 11:31 AM Page 13 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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 $6,539.50 City singed contract attached yes
CoW 01/15/2013 11:31 AM Page 14 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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 $50,000 limit on all
purchases. The summary below (Exhibit 5.2) shows two out of 27 sampled purchases did not
fully meet the purchasing requirements. One of those samples is being counted twice; once
under finding 24 and the second time in this sample.
CoW 01/15/2013 11:31 AM Page 15 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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 $1,888,429 was approved by the City Council
CoW 01/15/2013 11:31 AM Page 16 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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
$1,000,000 depending on the modules purchased.
In connection with the findings outlined in this report, there are also 22 recommendations
presented in the performance audit report. Some of these recommendations are valid and
useful and can be implemented quickly, while others could be significantly impactful to
implement given the limited City’s resources. The summary below shows a summarized and
condensed view of the recommendations, their estimated potential impact and feasibility of
implementation by the City. For a complete description of the recommendations, please refer
to the Grand Jury Report Executive Summary.
CoW 01/15/2013 11:31 AM Page 17 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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 $1,000,000 for purchasing a new financial system in the long term.
Potential savings from implementing recommendations is still undetermined at the time of
writing this report.
ALTERNATIVES: The City Council can choose not to accept the report and direct staff to provide
more information or the Council can approve the report as recommended, or it can approve
the report with suggested modifications.
ATTACHMENTS:
1) Summary of Information presented to Council
2) Budget Monitoring Policy and Procedure
3) Performance Audit of the City of Watsonville
4) PERS Side Loan Resolution
CoW 01/15/2013 11:31 AM Page 18 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
5) PERS Side Loan Staff Report
6) Response to Recommendations
cc: City Attorney
CoW 01/15/2013 11:31 AM Page 19 of 19
\\fs1\UserProfiles$\ezequiel.vega\My Documents\Grand Jury\Staff Report Grand Jury Report FINAL v 01 15 2013.docx
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.
1 of 4 Administrative Rules & Regulations | Department Review of Financial Reports
ATTACHMENT 2
1 of 10
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
2 of 4 Administrative Rules & Regulations | Department Review of Financial Reports
ATTACHMENT 2
2 of 10
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.
3 of 4 Administrative Rules & Regulations | Department Review of Financial Reports
ATTACHMENT 2
3 of 10
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.
4 of 4 Administrative Rules & Regulations | Department Review of Financial Reports
ATTACHMENT 2
4 of 10
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
1 of 3 Administrative Rules & Regulations | Department Review of Financial Reports Attachments
ATTACHMENT 2
5 of 10
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)
2 of 3 Administrative Rules & Regulations | Department Review of Financial Reports Attachments
ATTACHMENT 2
6 of 10
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
ATTACHMENT 2
7 of 10
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
1 of 1 Administrative Rules & Regulations | Department Review of Financial Reports Attachments
ATTACHMENT 2
8 of 10
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
1 of 1 Administrative Rules & Regulations | Department Review of Financial Reports Attachments
ATTACHMENT 2
9 of 10
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
1 of 1 Administrative Rules & Regulations | Department Review of Financial Reports Attachments
ATTACHMENT 2
10 of 10
Performance Audit of
The City of Watsonville
Prepared for:
Fiscal Year 2012‐13
Santa Cruz County Grand Jury
January, 2013
ATTACHMENT 3
1 of 72
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
4 of 72
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
Harvey M. Rose Associates, LLC
ii ATTACHMENT 3
5 of 72
Executive Summary
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
Harvey M. Rose Associates, LLC
iii ATTACHMENT 3
6 of 72
Executive Summary
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.
Harvey M. Rose Associates, LLC
iv ATTACHMENT 3
7 of 72
Executive Summary
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.
Harvey M. Rose Associates, LLC
v ATTACHMENT 3
8 of 72
Executive Summary
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;
Harvey M. Rose Associates, LLC
vi ATTACHMENT 3
9 of 72
Executive Summary
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.
Harvey M. Rose Associates, LLC
vii ATTACHMENT 3
10 of 72
Executive Summary
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
Harvey M. Rose Associates, LLC
viii ATTACHMENT 3
11 of 72
Executive Summary
value of change orders, and number and value of purchases from Open Purchase
Orders.
Harvey M. Rose Associates, LLC
ix ATTACHMENT 3
12 of 72
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.”
Harvey M. Rose Associates, LLC
1 ATTACHMENT 3
13 of 72
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.
Harvey M. Rose Associates, LLC
2 ATTACHMENT 3
14 of 72
1. Financial condition, reporting and controls
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,
Harvey M. Rose Associates, LLC
1‐1
ATTACHMENT 3
15 of 72
1. Financial condition, reporting and controls
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).
Harvey M. Rose Associates, LLC
1‐2
ATTACHMENT 3
16 of 72
1. Financial condition, reporting and controls
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.
Harvey M. Rose Associates, LLC
1‐3
ATTACHMENT 3
17 of 72
1. Financial condition, reporting and controls
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
Harvey M. Rose Associates, LLC
1‐4
ATTACHMENT 3
18 of 72
1. Financial condition, reporting and controls
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.
Harvey M. Rose Associates, LLC
1‐5
ATTACHMENT 3
19 of 72
1. Financial condition, reporting and controls
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.
Harvey M. Rose Associates, LLC
1‐6
ATTACHMENT 3
20 of 72
1. Financial condition, reporting and controls
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
Harvey M. Rose Associates, LLC
1‐7
ATTACHMENT 3
21 of 72
1. Financial condition, reporting and controls
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
Harvey M. Rose Associates, LLC
1‐8
ATTACHMENT 3
22 of 72
1. Financial condition, reporting and controls
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
Harvey M. Rose Associates, LLC
1‐9
ATTACHMENT 3
23 of 72
1. Financial condition, reporting and controls
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.
Harvey M. Rose Associates, LLC
1‐10
ATTACHMENT 3
24 of 72
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.
Harvey M. Rose Associates, LLC
2‐1
ATTACHMENT 3
25 of 72
2. Inter‐fund Loans and Transfers
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
Harvey M. Rose Associates, LLC
2‐2
ATTACHMENT 3
26 of 72
2. Inter‐fund Loans and Transfers
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
Harvey M. Rose Associates, LLC
2‐3
ATTACHMENT 3
27 of 72
2. Inter‐fund Loans and Transfers
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.
Harvey M. Rose Associates, LLC
2‐4
ATTACHMENT 3
28 of 72
2. Inter‐fund Loans and Transfers
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
Harvey M. Rose Associates, LLC
2‐5
ATTACHMENT 3
29 of 72
2. Inter‐fund Loans and Transfers
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
Harvey M. Rose Associates, LLC
2‐6
ATTACHMENT 3
30 of 72
2. Inter‐fund Loans and Transfers
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
Harvey M. Rose Associates, LLC
2‐7
ATTACHMENT 3
31 of 72
2. Inter‐fund Loans and Transfers
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
Harvey M. Rose Associates, LLC
2‐8
ATTACHMENT 3
32 of 72
2. Inter‐fund Loans and Transfers
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.
Harvey M. Rose Associates, LLC
2‐9
ATTACHMENT 3
33 of 72
2. Inter‐fund Loans and Transfers
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.
Harvey M. Rose Associates, LLC
2‐10
ATTACHMENT 3
34 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐1 ATTACHMENT 3
35 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐2 ATTACHMENT 3
36 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐3 ATTACHMENT 3
37 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐4 ATTACHMENT 3
38 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐5 ATTACHMENT 3
39 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐6 ATTACHMENT 3
40 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐7 ATTACHMENT 3
41 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐8 ATTACHMENT 3
42 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐9 ATTACHMENT 3
43 of 72
3. Budget and Expenditure Controls
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
Harvey M. Rose Associates, LLC
3‐10 ATTACHMENT 3
44 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐11 ATTACHMENT 3
45 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐12 ATTACHMENT 3
46 of 72
3. Budget and Expenditure Controls
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
Harvey M. Rose Associates, LLC
3‐13 ATTACHMENT 3
47 of 72
3. Budget and Expenditure Controls
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).
Harvey M. Rose Associates, LLC
3‐14 ATTACHMENT 3
48 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐15 ATTACHMENT 3
49 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐16 ATTACHMENT 3
50 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐17 ATTACHMENT 3
51 of 72
3. Budget and Expenditure Controls
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.
Harvey M. Rose Associates, LLC
3‐18 ATTACHMENT 3
52 of 72
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
Harvey M. Rose Associates, LLC
4‐1
ATTACHMENT 3
53 of 72
4. Capital Budget and Impact Fees
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).
Harvey M. Rose Associates, LLC
4‐2
ATTACHMENT 3
54 of 72
4. Capital Budget and Impact Fees
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
Harvey M. Rose Associates, LLC
4‐3
ATTACHMENT 3
55 of 72
4. Capital Budget and Impact Fees
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.
Harvey M. Rose Associates, LLC
4‐4
ATTACHMENT 3
56 of 72
4. Capital Budget and Impact Fees
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
Harvey M. Rose Associates, LLC
4‐5
ATTACHMENT 3
57 of 72
4. Capital Budget and Impact Fees
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.
Harvey M. Rose Associates, LLC
4‐6
ATTACHMENT 3
58 of 72
5. Procurement
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.
Harvey M. Rose Associates, LLC
5‐1 ATTACHMENT 3
59 of 72
5. Procurement
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”.
Harvey M. Rose Associates, LLC
5‐2 ATTACHMENT 3
60 of 72
5. Procurement
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.
Harvey M. Rose Associates, LLC
5‐3 ATTACHMENT 3
61 of 72
5. Procurement
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
Harvey M. Rose Associates, LLC
5‐4 ATTACHMENT 3
62 of 72
5. Procurement
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. .
Harvey M. Rose Associates, LLC
5‐5 ATTACHMENT 3
63 of 72
5. Procurement
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.
Harvey M. Rose Associates, LLC
5‐6 ATTACHMENT 3
64 of 72
5. Procurement
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
Harvey M. Rose Associates, LLC
5‐7 ATTACHMENT 3
65 of 72
5. Procurement
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
Harvey M. Rose Associates, LLC
5‐8 ATTACHMENT 3
66 of 72
5. Procurement
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.
Harvey M. Rose Associates, LLC
5‐9 ATTACHMENT 3
67 of 72
5. Procurement
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.
Harvey M. Rose Associates, LLC
5‐10 ATTACHMENT 3
68 of 72
5. Procurement
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
69 of 72
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.
ATTACHMENT 6
3 of 6
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
ATTACHMENT 6
4 of 6
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
ATTACHMENT 6
5 of 6
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.
ATTACHMENT 6
6 of 6
