CA State Auditor Response to El Cerrito Report of March 2022

Yesterday the CA State Auditor finally released its response to the El Cerrito March 2022 report. The State Auditor retired earlier this year and thus things are moving slowly. We have been told by their office that they anticipate updating the At Risk Dashboard in October/November. We hope it happens before the election. They are also releasing reports on two cities ranked even worse than El Cerrito in October.

All bold quotes are from this author, not the auditor.

What does the report say? It says the same things we have been saying. There is a reserve now which is good. However, the reserve is based on high real estate sales and federal bailout money. Which means it is not sustainable. They said

“El Cerrito’s ability to meet its goal of a sufficient reserve can be attributed to multiple factors that it may not be able to rely on in the future, risking the depletion of that reserve. First, the city’s increased revenue can largely be attributed to an unexpectedly robust real estate market. The city’s real estate transfer tax generated $4 million in fiscal year 2020–21, 53 percent more than expected. If the city’s real estate market slows, the city may not generate sufficient revenue to cover its costs. If the city had received the amount of the transfer tax that it budgeted for, the city would have $1.4 million less in revenue. A highly variable revenue source such as this tax can leave the city vulnerable to overspending if the city increases its revenue projection based on a peak year but ultimately receives a much lower amount. As we note in our audit report, El Cerrito’s financial challenges occurred in large part because it did not adjust its spending to match its revenue.” (CA State Auditor Response to El Cerrito March 2022 update.)

The Auditor is concerned that the city continues to ignore its pension crisis.

Moreover, El Cerrito has taken only initial efforts to address its pension costs. As the city noted in its September 2021 update and reiterated in its March 2022 update, its police chief and fire chief, who are part of a union, agreed to pay a higher proportion of their pension costs. However, other unions that represent most employees have not agreed to deferrals of salary increases that could help control pension spending. El Cerrito also indicates that it is researching vendors to establish a Section 115 trust that can be used to pre-fund pension costs, but does not expect to finalize this strategy until fiscal year 2022–23.” (CA State Auditor Response to El Cerrito March 2022 update.)

The Auditor continues to be confused as to why El Cerrito is not addressing some of their hiring and compensation decisions.

“Further, El Cerrito continues to defer a decision to permanently end its system of allowing certain management employees the ability to receive salary increases above the threshold established in the city’s salary schedules. At this time, the city states that it has indefinitely suspended this process but does not indicate why it has not decided to discontinue it entirely. Our audit cited specific examples of management employees being paid in excess of the city’s salary schedule and greater than similar positions of nearby cities, so we are unclear why this process has not been eliminated.”(CA State Auditor Response to El Cerrito March 2022 update.)

Finally, they stated that the city is not following through on cost management for services. They wanted the city to be cost-neutral on senior services and recreation services. Certainly in the past recreation services were a money maker. Senior services were always subsidized. An argument can be made that they should be subsidized but at the end of the day if the money is not there it can’t happen.

“El Cerrito continues to defer taking specific actions that could increase its revenue and contribute to more financial stability. El Cerrito’s corrective action plan update notes that the city increased fees for its recreation services. However, it made those changes in May 2021 and previously reported them in its September 2021 corrective action plan update. The city continues to report that it will conduct a demand and cost recovery analysis for recreation services after normal operations resume but states that it cannot estimate when that will occur. Further, El Cerrito’s corrective action plan update states that the city is currently charging for senior services at normal cost recovery. However, when we asked for documentation of this practice, city staff provided budgetary and financial information indicating that the city continues to subsidize the senior services program. Moreover, El Cerrito expects the cost of operating its swim center in fiscal year 2021–22 to exceed the revenue obtained from fees, resulting in the city once again needing to subsidize those services. El Cerrito should prioritize efforts to ensure that its fees cover the cost of its services regardless of changes in demand.” (CA State Auditor Response to El Cerrito March 2022 update.)

For as many times as this author has been told they don’t know what they are talking about by City Staff and Council members it seems that the CA State Auditor agrees with everything, this blog has been saying for several years.