The Valley Chronicle - State auditor responds to City of Hemet’s corre

[caption id="attachment_5262" align="alignright" width="576"] Photo source: http://auditor.ca.gov/bsa/high_risk_local_cities
While Hemet was originally one of six cities in the state of California designated as high-risk, four of those cities have provided acceptable corrective action plans, leaving Hemet and Maywood designated as high risk. California has 482 incorporated cities. [/caption] ■ By Mary Ann Morris / Editor The city of Hemet (Hemet) provided its first update to its corrective action plan on May 25, 2017, more than three months after its original due date in February. In its response, Hemet has revised the timelines of many of the proposed corrective action items, and has simply not taken any action on other items, according to the office of State Auditor Elaine Howle. And while the city of Hemet has been hopeful that their efforts thus far are enough to remove the “high risk” designation for the city, so far the “high risk” designation sticks. The city of Hemet is one of two out of 482 incorporated cities in the state designated as “high risk.” To put that into percentages, 99.995 percent of California cities are run better than Hemet. The city is supposed to provide another status update in August 2017. However, due to the rapid turnover of City Engineer Derek Wieske, who was employed for about six weeks, the abrupt departure of administrative services consultant Joy Canfield, who was contracted to the city through MV Cheng & Associates to temporarily replace former Deputy City Manager/Finance Director Jessica Hurst, and the unexpected announcement of Police Chief Dave Brown’s retirement by December to seek a possible run as Riverside County Sheriff in 2018, it is unlikely that Howle will find this a positive move, especially in light of Hemet’s issue of high turnover in key positions and lack of consistent leadership. As of the last City Council meeting, City Manager Alex Meyerhoff stated that MV Cheng & Associates had not yet identified a replacement consultant for Canfield. Below is the state auditor’s assessment of Hemet’s corrective plan, submitted May 25. Expenditures continue to outpace revenue, impeding Hemet’s ability to meet its financial obligations Issue of Concern: Ongoing budget deficit California State Auditor’s Assessment Status: Pending Hemet provided an updated five-year plan that it expanded to include additional years through fiscal year 2024-25. The updated plan projects slightly higher revenues from the prior version of the five-year plan, mainly from higher property tax and motor vehicle tax revenue, and also higher expenses, primarily from increased pension costs. Further, the updated plan notes that Hemet expects its expenses to exceed its revenues until fiscal year 2023-24. Although Hemet projects that expenditures will exceed revenues by less than $1 million annually up until then, it should still take further action to eliminate its budget deficit sooner, as prolonging such a deficit makes it more vulnerable to economic downturns and unanticipated expenses. As Hemet notes, voters approved a 1 percent sales tax measure in November 2016. However, Hemet has not revised its five-year plan to incorporate these additional revenues and related expenses. Without such revisions, Hemet’s five-year plan does not accurately reflect its budget deficit. Issue of Concern: Rising pension costs California State Auditor’s Assessment Status: Partially Addressed In its initial corrective action plan from August 2016, Hemet stated that it would evaluate the cost-effectiveness of prepaying its unfunded liability to CalPERS. In November 2016, the Hemet city council directed staff to move forward with CalPERS to change how the city would pay for the unfunded portion of its pension costs. Hemet plans to reduce the overall period for paying its unfunded liability from 30 years to 20 years. As a result, Hemet will incur larger payments during the next 20 years but projects that it will save $12.6 million over the original 30-year period because of reduced interest payments. If Hemet can adhere to this payment schedule over the next 20 years, it should save a substantial amount in future years. [caption id="attachment_5261" align="alignleft" width="225"] Photo by Mary Ann Morris/The Valley Chronicle
Hemet City Manager Alex Meyerhoff sent to the state auditor a letter with the revised corrective plan, in the hopes to remove the “high-risk” designation from Hemet. The auditor is not satisfied and the high-risk designation remains.[/caption] Issue of Concern: Use of city-supported library by nonresidents California State Auditor’s Assessment Status: No Action Taken Hemet’s update to its corrective action plan removes its previous reference to pursuing a regional partnership as an action item. Instead, the city states that it evaluated our recommendation of a library user fee. On page 15 of our audit report, we projected that if half of the nonresidents who used the Hemet library paid a $50 annual fee, the city could generate more than $800,000 per year. However, Hemet’s City Council expressed some reservations about implementing a library user fee during an August 2016 city council meeting. City staff claimed that if Hemet implemented a fee, the city would lose out on $187,000 in grants it had applied for and $7.8 million in current services, comprised primarily of $7.5 million in e-books. However, Hemet did not provide support or explanations for these assertions. Although Hemet informed us that it will not implement our recommendation to address the cost of nonresidents using its library services, it has not taken any other action to address this concern. As we note on page 13 of our audit report, Hemet spent about $1.8 million of its limited general fund money in fiscal year 2014-15 on a service for which nearly half of those who benefit are nonresidents. Issue of Concern: Significant retiree medical costs and unfunded liability California State Auditor’s Assessment Status: Partially Addressed In October 2016, the Hemet City Council voted to establish another post-employment benefits (OPEB) trust and made an initial contribution of $750,000. The adopted policy of the City Council is for the city to contribute $250,000 annually into the trust. The city expects to contribute $12 million in total over 45 years. Although the establishment and funding of the trust is a positive step, it is not clear that the actions will be sufficient to address Hemet’s OPEB liability, currently valued at $87 million. We expect at its next update that Hemet will be able to describe its approach to address its entire unfunded liability. Ineffective and inefficient organizational management negatively affects Hemet’s provision of public services Issue of Concern: Underfunded fire department California State Auditor’s Assessment Status: Partially Addressed Hemet has taken initial steps toward addressing its underfunded fire department. In December 2016, it issued a job bulletin for a battalion chief and recently filled this key position. Although the Hemet City Council voted in September 2016 to not implement our recommendation for an emergency medical services first responder fee, voters subsequently approved a 1 percent sales tax in November 2016 that the city states will be dedicated toward police and fire services. Hemet’s update to its corrective action plan states that it completed a comprehensive fee analysis and created a comprehensive staffing plan for its fire department in September 2016, before the passage of its tax measure. Given the new funding available to the fire department, we would expect that Hemet would update its staffing plan and fee analysis. Issue of Concern: Lack of coordinated approach to promote community engagement California State Auditor’s Assessment Status: Pending Hemet plans to develop a public involvement program pending city council approval of its fiscal year 2017-18 budget. Issue of Concern: Inefficient structure of city government California State Auditor’s Assessment Status: Pending Despite its previous statements that it would plan to begin an organizational analysis in September 2016 and conduct a work study of staff implementation of the organizational analysis in May 2017, the city now states that initiation of these analyses are pending approval of its fiscal year 2017-18 budget. As such, Hemet has made no progress on addressing this area of risk. We recommended on page 26 of our report that Hemet conduct an organizational analysis to better align similar functions and leverage staff to address the inefficiencies we identified. We expect Hemet’s next update to include specific dates for completion of its organizational analysis and steps it has taken to achieve that goal. Issue of Concern: Turnover of key positions and lack of consistent leadership California State Auditor’s Assessment Status: Pending Despite its previous statements that it would complete a comprehensive organizational analysis and a succession plan by May 2017, Hemet now states that it will begin work on these critical planning efforts in fiscal year 2017-18 after an assistant city manager is hired. In a subsequent conversation, the city manager stated that he plans to complete recruitment for the assistant city manager in July 2017. As such, Hemet has not made any progress on addressing this area of risk. Since our audit, Hemet has continued to experience turnover and could have benefitted sooner from having a plan. We expect Hemet’s next update to include specific dates for completion of its strategic plan and succession plan and steps it has taken to achieve that goal. Issue of Concern: Inconsistencies in outsourcing maintenance activities California State Auditor’s Assessment Status: No Action Taken In September 2016, the Hemet City Council rejected a proposal to outsource its maintenance activities. However, the analysis presented by staff to the City Council differed significantly from the analysis we performed during the audit. During the audit, we spoke with the public works director who confirmed that if Hemet outsourced its parks maintenance, $465,295 of the department’s annual costs of $1,003,000 would be retained by the city. However, the city’s analysis concluded that $615,063 of the department’s annual costs of $944,820 would be retained by the city, a difference of more than 30 percent from our calculation. Because the analysis presented by staff to the City Council showed that outsourcing would increase city costs, the City Council chose not to outsource this function. However, we stand by our analysis that the city could reduce more of its costs if it outsourced parks maintenance, resulting in an annual savings for the city.