City of Hemet Responds to State Auditor, Part 3

Is it ‘philosophical differences’ or merely inconclusive facts that keep the city on the auditor’s watch list?

Photo by Melissa Diaz Hernandez/The Valley Chronicle
At the July 25 Hemet City Council Meeting constituents were frustrated with the city’s complacent attitude regarding the state audit.

■ Melissa Diaz Hernandez / Editor

In the last two issues of The Valley Chronicle, I addressed the following concerns about Hemet finances expressed earlier by the state auditor’s office including: Expenditures continuing to outpace revenue, a lack of community engagement, turnover of key city staff, ineffective and inefficient organizational management, inefficient structure of city government, and inconsistencies in outsourcing maintenance activities.

This third and final part will cover 1) rising pension costs; 2) nonresidents supporting the library, and 3) retiree medical costs and unfunded liabilities.

Risk Area: Rising pension costs
The city has maintained employer contributions but faces increasing costs because of its large unfunded liability, the state auditor states. The city, “will incur additional payments if it fills vacant positions.”

City’s Response: The regular monitoring of the citywide budget and update of the five-year financial management plan will allow the City of Hemet to prepare for increases in pension costs. As required by law, all new CaIPERS members will be enrolled subject to PEPRA (California Public Employees’ Pension Reform Act).
The City of Hemet will continue to explore options for the reduction of its unfunded pension liability, including through prepayment and changes to amortization bases, subject to available financial resources and policy approval by the City Council.

Auditor’s Recommendation:
“To ensure that it adequately plans for changes in its pension costs, Hemet should continue to update its five-year projections at least annually to reflect changes to annual pension costs…To attempt to reduce its pension costs, Hemet should continue to explore options and work with CalPERS to reduce payments for its unfunded liability.”

City’s Corrective Action Plan: (1) Work with CalPERS to identify options to reduce payments for unfunded liability. Make recommendations to City Council.
(2) City will evaluate cost effectiveness of annual CaIPERS 2017 prepayment of unfunded liability to take advantage of discounts.
(3) City will analyze a change to the PERS amortization schedule from 30 years to determine if additional savings are achievable.

Timing: (1) Reviewed by City Council on 9/13/16, 10/25/16 and 11/15/16; (2) To be reviewed annually; (3) Completed

The Valley Chronicle (TVC): As we previously reported, with the work of Deputy City Manager/Finance Director Jessica Hurst—before her resignation—the city established an OPEB Trust to address the issue of unfunded liabilities. According to a Council presentation, the prefunding amount of $750,000, in addition to a yearly investment, should address the issues pertaining to the unfunded liability.
Hurst worked to reduce the costs associated with the CalPERS unfunded liability in other ways. The Council unanimously approved staff’s recommendation to move to a 20-year amortization schedule on Nov. 15, 2016. The projected 20-year annual cost would be $165,531,104 with a projected savings of $12.5 million. The City will get a 2 percent to 3 percent prepayment discount by paying the unfunded liability in July instead of in monthly payments. By switching to the 20-year amortization schedule, the City can never change the amortization period back to 30 years.
In a post on the State Auditor’s website July 25, the auditor states that if “Hemet can adhere to this payment schedule over the next 20 years, it should save a substantial amount in future years.”

Risk Area: Use of city supported library by nonresidents
The city spent $1.8 million in fiscal year 2014-15 on library operations. The library serves patrons throughout the region, of which nearly half are not Hemet residents.

City’s Response: The City presently has a total of 144,033 registered library users. Of the City’s 83,000 residents, 76,816 are library customers. From the unincorporated areas of Hemet, an additional 24,700 customers have library cards. The remaining 42,487 Hemet Library borrowers do not reside in the city or its unincorporated areas, and of this number, 21,502 reside in San Jacinto. Annual circulation of 321,074 was recorded in FY 15-16. The library was open 201 days during the last fiscal year. The daily average circulation is 1,602 with a daily hourly check-out of 170 items.

Auditor’s Recommendation:
“Hemet should seek legal guidance to adopt an annual library user fee structure to charge individuals other than city inhabitants and nonresident taxpayers for the use of the library resources.”

City’s Corrective Action Plan: (1) Evaluate adoption of library user fee structure and potential impacts to outside funding sources and existing cooperative agreements.

Timing: On 08/23/16, City Council considered and rejected implementation of a library user fee structure to preserve the opportunity to receive grants and maintain its relationship with the State Library.

TVC: The auditor recommended that nonresidents pay $50 annually. If “half of nonresidents who used the Hemet library paid a $50 annual fee, the city could generate over $800,000 per year.” Hemet argued that they would lose $187,000 in grants and about $7.5 million in e-books. The auditor’s July 25 response outlines that Hemet has not provided support for the reason they rejected the auditor’s recommendation. The auditor’s issue is that the city is paying for services that benefit nonresidents.

Risk Area: Significant retiree medical costs and unfunded liabilities
City had large retiree medical obligations due to past promises of fully covered health care, but has since shifted approximately two-thirds of its remaining plan participants to lower-cost health plans. City continues to incur a large unfunded liability.

City’s Response: The City of Hemet will continue the process of reducing retiree medical costs through the elimination of the highest costing plans as of Sept.1, 2016. Regular monitoring of the status of retirees for Medicare eligibility and for coverage need will ensure appropriate expenditure levels. The City of Hemet will continue to explore alternative plan options annually to identify opportunities for cost savings while maintaining comparable coverage for retirees.

Auditor’s Recommendation:
Hemet should continue to research the feasibility of ways to pay down the city’s unfunded liability for retiree health plan costs and take appropriate action based on the research performed.

City’s Corrective Action Plan: (1) Discontinue the highest-cost plans from the menu offered to retirees (policy direction given by City Council in 2015). (2) Continue to explore alternative plan options while maintaining comparable coverage. (3) Seek Council direction to establish an Other Post-Employment Benefits (OPEB) trust and draft funding policy.

Timing: (1) Completed on 9/1/16; (2) Ongoing; (3) Studied by City Council on 10/11/16, and approved to 10/25/16

TVC: As we previously reported, according to the audit report, the retirees that switched their plans received a $5,000 incentive to do so. Even though the improvements have been made, the auditor warned that the unfunded liability is still an issue.
The auditor’s July 25 response indicated that this is only partially addressed because establishing the fund is a step in the right direction. However, it is not certain if this will completely address the $87,000,000 question.

Questions Remain
Why was the city’s initial response to the audit one of unconcern? Why was the hearing in Sacramento in January 2016 attended by Mayor Linda Krupa and then Deputy City Manager/Finance Director Jessica Hurst kept so hush-hush? The city continues to see maximum turnover and minimal community engagement.
The city’s next update to the state auditor is due this month. Let’s see if they get this one in on time, or will delays in hiring a city manager, assistant city manager and finance director hold up the response? The city is recruiting a finance director whose compensation is listed at $138,600 with the job closing Aug 17.

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