Legislative Recommendations

City of Lindsay It Must Take Substantial Action to Address Its Financial Problems and Its Inadequate Management Practices August 2021 REPORT 2020‑804 CALIFORNIA STATE AUDITOR 621 Capitol Mall, Suite 1200 | Sacramento | CA | 95814 916.445.0255 | TTY 916.445.0033 For complaints of state employee misconduct, contact us through the Whistleblower Hotline: 1.800.952.5665 Don’t want to miss any of our reports? Subscribe to our email list at auditor.ca.gov For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255 This report is also available online at www.auditor.ca.gov | Alternative format reports available upon request | Permission is granted to reproduce reports Elaine M. Howle State Auditor August 26, 2021 2020‑804 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: As directed by the Joint Legislative Audit Committee, my office presents this audit report regarding the city of Lindsay (Lindsay), which we conducted as part of our high‑risk local government agency audit program. Our assessment focused on Lindsay’s financial and operational risks, and we found that the city is at high risk because of its financial problems and management practices. Lindsay has improved the condition of its general fund over the past several fiscal years, and it appears to have recently met recommended reserve levels. However, this apparent turnaround was largely because the city forgave more than $6 million in loans from restricted funds to its general fund, a violation of Proposition 218, which restricts the use of certain local government funds. This unlawful action has exposed the city to possible litigation from taxpayers and utility ratepayers, and it obscures what we estimate to be a general fund deficit of more than $3 million as of June 30, 2020, instead of its apparent surplus. Because of both Lindsay’s loan forgiveness and the fact that it has not regularly updated the fees and rates it charges for city services and utilities, it lacks resources in some of its utility funds. The city’s water fund recently incurred a nearly $1 million deficit and is unable to pay for necessary infrastructure projects, forcing Lindsay to seek to increase ratepayers’ water rates. Not only has Lindsay forgone revenue by not adjusting the majority of its fees and rates for years, its general fund must now cover some of the city’s costs to provide utilities and other services. Finally, the city lacks a long‑term financial plan to adequately address its financial problems, which include the need to pay for its aging public safety vehicles and retirement obligations, such as its retiree health care costs. Among the actions we believe the city should take to address our concerns, we recommend that Lindsay develop a plan to fully repay its utility funds for the loans it unlawfully forgave, implement a plan to update its fees and rates, and formally adopt a long‑term financial plan that addresses its liabilities and financial stability. Respectfully submitted, ELAINE M. HOWLE, CPA California State Auditor 621 Capitol Mall, Suite 1200 | Sacramento, CA 95814 | 916.445.0255 | 916.327.0019 fax | www.auditor.ca.gov CALIFORNIA STATE AUDITOR iv August 2021 | Report 2020-804 LOCAL HIGH RISK Selected Abbreviations Used in This Report CalPERS California Public Employees’ Retirement System GFOA Government Finance Officers Association HCD California Department of Housing and Community Development OPEB other post-employment benefit CALIFORNIA STATE AUDITOR v Report 2020-804 | August 2021 LOCAL HIGH RISK HIGH RISK ISSUES City of Lindsay, Tulare County Risk Designation: High Risk ISSUE PAGE Lindsay’s Actions Raise Doubt About the Financial Stability of Its General Fund • In Improving Its Financial Condition, the City Violated State Law, Exposing It to Litigation • Lindsay Has Not Ensured That Its Street Improvement Program Complies With State Law • Lindsay Has Found New Sources of Revenue in Recent Years, but These Have Not Adequately Improved Its 9 Financial Condition • The City Reduced Some Liabilities and Expenditures, Which Partially Improved Its Finances, but Other Financial Problems Remain Lindsay Must Increase Its Efforts to Address Deficits in Its Enterprise Funds • Deficits and Inappropriate Loan Forgiveness Led to Negative Balances in the City’s Enterprise Funds, Limiting Its Ability to Effectively Operate Its Utilities 17 • Lindsay Has Not Ensured That Its Service Fees and Utility Rates Sufficiently Cover Its Costs Lindsay Must Improve Its Management Practices to Effectively Plan for Its Financial and Operational Needs • The City’s Lack of a Long‑Term Financial Plan Is Hindering Its Efforts to Achieve Financial Sustainability • Lindsay Needs to Address Its Rising Employee Retirement Costs 23 • Lindsay Has Not Adequately Planned for Public Safety Training and Equipment Needs Appendices Appendix A—Scope and Methodology 29 Appendix B—The State Auditor’s Local High‑Risk Program 33 Agency Response City of Lindsay 35 California State Auditor’s Comments on the Response From the City of Lindsay 43 CALIFORNIA STATE AUDITOR vi August 2021 | Report 2020-804 LOCAL HIGH RISK Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR 1 Report 2020-804 | August 2021 LOCAL HIGH RISK Risks the City of Lindsay Faces The City of Lindsay (Lindsay) faces several Table 1 significant risks related to its financial and Some of Lindsay’s Risk Indicator Levels Have operational management, and it would Recently Improved benefit from better long‑term planning. In November 2019, the California State Auditor’s FISCAL YEAR Office (State Auditor) informed the city that 2017–18 2018–19 2019–20 Lindsay had been selected for review under General Fund Reserves High High Low* the high‑risk local government agency audit Debt Burden High High High program. This program authorizes the State Liquidity High High Low* Auditor to identify local government agencies Revenue Trends Low Low Moderate that are at high risk for potential waste, fraud, Pension Obligations Moderate Moderate Moderate abuse, or mismanagement or that face major Pension Funding Moderate Moderate Moderate challenges associated with their economy, Pension Costs Moderate Moderate Moderate efficiency, or effectiveness. Future Pension Costs High High High We first identified that Lindsay might be Other Post-Employment Low Low Low Benefit (OPEB) Obligations at high risk based on publicly available OPEB Funding High High High audited financial statements and unaudited pension‑related information from the Source: Analysis of risk indicator levels. California Public Employees’ Retirement * The improvement in Lindsay’s general fund reserves and liquidity System. Table 1 summarizes our risk levels that resulted in its “low risk” ratings for fiscal year 2019–20 assessment of the last three fiscal years of are misleading because they are primarily the result of unlawful forgiveness of loans from its utility funds to its general fund Lindsay’s financial indicators. We conducted in violation of Proposition 218, which we describe further in a review in December 2019 and identified the report. concerns regarding its financial stability, including its continued operating deficits, its use of funds restricted for other purposes Lindsay has taken several steps to improve to support the general fund, and other its financial condition; for example, it operational risks, such as its approach to has reduced expenditures and increased providing public safety with combined police revenues through an increased sales tax and and fire services. For example, Lindsay used by permitting certain cannabis businesses. funds from its water utility to pay general city However, our audit found that the city has expenses, a violation of state law, and it has made some questionable decisions that not planned for the expensive replacement violated state law, and until it addresses of very old vehicles that its Public Safety these decisions, it will struggle to create a Department is using. After approval from the sustainable financial future. For example, Joint Legislative Audit Committee, we began as of June 30, 2020, the city had nearly a our audit of the city in January 2021. $3.2 million surplus in its general fund, the result of turning its $9.5 million general fund deficit into a surplus over the course of the three previous fiscal years. However, this CALIFORNIA STATE AUDITOR 2 August 2021 | Report 2020-804 LOCAL HIGH RISK turnaround was largely accomplished to increase ratepayers’ water rates to fund its by forgiving major loans from its utility utility operations and future infrastructure funds to its general fund in 2019. The city’s needs. In general though, Lindsay has not decision to forgive these loans violated adjusted the majority of its fees and rates for Proposition 218, which was passed in 1996 years, likely resulting in missed revenues. and restricts how cities can use funds derived These outdated rates may no longer cover the from property‑related fees and charges, city’s costs to provide utilities, such as the such as for water and sewer utility services. cost to maintain its water system, and other Because the city used fees paid by utility services. As a result, the city’s general fund ratepayers for general government purposes must cover these costs, but it has a limited rather than for utility projects and expenses, capacity to do so. the city may be liable for a repayment of more than $6 million. If utility ratepayers decide Lindsay would benefit from better long‑term to sue, are successful, and obtain monetary planning. Although the city has worked to relief, court orders, or attorneys’ fees, the increase revenues, reduce expenses, and city will face significant financial hardship, decrease its liabilities, it must make additional and it would have a negative general fund substantial efforts to address its financial balance of more than $3 million instead management problems and ensure that it of its current surplus. We also found that can afford to maintain its services for its Lindsay violated a different provision of residents into the future. Lindsay does not Proposition 218 through fund transfers to currently have a long‑term financial plan, its Street Improvement Program (streets which would provide useful insight into its program). Although Proposition 218 restricts future financial situation and help the city the use of utility funds, a nonutility fund may develop and deploy strategies for long‑term be reimbursed for costs it incurs on behalf of sustainability. Instead, Lindsay has relied only the utility, so long as the city demonstrates on its annual budget process to address its that those amounts reasonably represent short‑term financial problems. The city also the cost of street repairs and maintenance lacks plans to address its growing costs for its that result from damage, such as leaking, employees’ post‑employment health benefits caused by those utilities. However, we found and to replace its aging police and firefighting that Lindsay has failed to demonstrate that vehicles. Without a long‑term financial the nearly $900,000 it has been annually plan to ensure that the city is proactive and transferring from its utility funds to the transparent about addressing and resolving streets program comply with that provision of its fiscal challenges, including its Water the law. Fund deficit, Lindsay continues to be at high financial risk. As a result of Lindsay’s unlawful loan forgiveness, as well as the fact that it has not To help Lindsay address the risk factors regularly updated the fees and rates it charges we identified, we developed numerous for city services and utilities, it lacks resources recommendations the city should implement, in some of its utility funds, which creates including the following: risk to its ability to meet its infrastructure needs. For example, when Lindsay forgave • Address past violations of state law by nearly $2 million in loans from its Water developing and implementing a plan Fund to its general fund, it no longer had to fully repay its utility funds and by the capital necessary to pay for certain water documenting how the amount of utility infrastructure projects in the city. Recently, funds it transfers to its streets program because the city’s Water Fund has incurred a accurately reflects the allowable costs. nearly $1 million deficit, Lindsay has sought CALIFORNIA STATE AUDITOR 3 Report 2020-804 | August 2021 LOCAL HIGH RISK • Develop and implement a plan that includes an update to its fees and rates to ensure that it has the necessary resources in its enterprise funds to pay for needed infrastructure. • Formally adopt a long‑term financial plan that addresses its liabilities, including its post‑employment benefit liabilities and all of its infrastructure and capital needs. Agency’s Proposed Corrective Action Lindsay disagreed with several of our conclusions, including that its unlawful loan forgiveness violated Proposition 218. Nonetheless, it did agree with some of our recommendations and highlighted various efforts that it has taken or plans to take to address its financial condition. However, because Lindsay did not submit a corrective action plan as part of its response, we look forward to receiving the plan by November 2021 to understand the specific actions it has undertaken or plans to take to address the conditions that caused us to designate it as high risk. CALIFORNIA STATE AUDITOR 4 August 2021 | Report 2020-804 LOCAL HIGH RISK Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR 5 Report 2020-804 | August 2021 LOCAL HIGH RISK Introduction The city of Lindsay (Lindsay), located in served as the finance director. The city hired Tulare County, has approximately 13,000 a permanent finance director in May 2021, residents. Lindsay is a charter city and after filling the role on an interim basis therefore has authority over its municipal with its subsequent city manager and later affairs and may establish certain local with a contracted finance director. The city ordinances beyond those state law allows for manager and finance department prepare and general law cities.1 For fiscal year 2020–21, administer the city’s annual budget, and the Lindsay had 45 full‑time budgeted positions. city council is responsible for safeguarding City staff provide many services to residents, the city’s financial health and adopting its including public safety, utilities, and budget. In 2018 the city’s voters elected two recreational activities. Lindsay has combined of the current city council members. In 2020 its police and fire services into a single public the three other more experienced members safety department, and its practice is to stepped down from their positions. Just cross‑train its police officers in firefighting. before stepping down, the five members The city operates under a council‑manager of the city council appointed—in lieu of an form of government. Thus, the city’s voters election—three new members to replace the elect officials to a five‑member city council council members who were stepping down. serving staggered four‑year terms, and the council in turn appoints a city manager to Lindsay’s general fund makes up nearly execute the council’s actions and to act as the half of the city’s overall operating budget. chief executive and administrative officer of For fiscal year 2020–21, Lindsay adopted the city. The city manager is also responsible a $15 million operating budget, of which for keeping the city council fully informed the general fund accounted for about about Lindsay’s financial condition, including $6 million. Lindsay’s general fund revenues any financial challenges. have fluctuated in the last five fiscal years, as shown in Figure 1. The city’s main source of income for its general fund is tax revenue, Background accounting for more than $5 million in fiscal year 2019–20. The city also annually transfers Lindsay has undergone changes in important nearly $900,000 from its utility funds to leadership positions, including a complete the general fund’s Street Improvement turnover in its city council members during Program (streets program) to pay for street the last three years. In March 2020, Lindsay repair and maintenance. The remainder of hired a new city manager following the the city’s general fund revenue comes from January 2020 resignation of the former other smaller sources, including revenue interim city manager, who had simultaneously from licenses, permits, and fees. Under state law, Lindsay can use general funds for any legitimate governmental purpose, including funding basic city operations. 1 Unlike a general law city, charter cities have the authority to adopt ordinances and regulations regarding municipal affairs that may be inconsistent with state law that is otherwise applicable to cities. Figure 1 Lindsay’s General Fund Revenues and Expenditures Have Fluctuated Over the Last Five Fiscal Years $12,043,000 2015–16 Additionally, the city has revenue in its for the construction of the McDermont enterprise funds, which come from fees Field House sports complex. In 2008 the charged to users for city services, such as city completed construction of the sports water distribution and waste collection. complex, which is in a former citrus packing Proposition 218 requires the city to spend warehouse, intending for it to become a revenues derived from property‑related fees regional draw for sports competitions and to and charges to benefit the users of those generate revenue for the city. However, the city services. Some enterprise funds that sports complex sustained annual operating Proposition 218 affects include the Water losses of nearly $1 million until the city leased Fund and the Sewer Fund, which property the complex to a third‑party operator in owners pay into for those services. Lindsay December 2017, which we describe further in also maintains a Wellness Center Fund that the report. users of its facilities pay to support; because property‑related fees and charges are not used to support the fund, Proposition 218 does not apply to the Wellness Center Fund. As highlighted in Figure 2, the majority of Lindsay’s general fund expenditures pay for services such as public safety, public works, streets, and parks. The city also pays nearly $200,000 annually for bond repayments snoilliM nI CALIFORNIA STATE AUDITOR 6 August 2021 | Report 2020-804 LOCAL HIGH RISK Revenues Expenditures $8 PROJECTED 7 6 5 4 3 2 1 0 2016–17 2017–18 2018–19 2019–20 2020–21 Fiscal Years Source: Lindsay’s audited financial statements for fiscal years 2015–16 through 2019–20 and its fiscal year 2021–22 budget. CALIFORNIA STATE AUDITOR 7 Report 2020-804 | August 2021 LOCAL HIGH RISK Figure 2 Lindsay’s Budgeted General Fund Expenditures for Fiscal Year 2021–22, by Category 49% | Public Safety 14% | Capital Outlay* 8% | Public Works 6.6 $ 5% | Debt Service $12,043,000 MILLION 5% | Streets 5% | City Council, Manager, and Attorney 4% | Finance 4% | Overhead 3% | Parks 3% | Community Development Source: Lindsay’s adopted budget for fiscal year 2021–22. * The Capital Outlay category covers capital projects such as building improvements at city hall and purchasing police vehicles. CALIFORNIA STATE AUDITOR 8 August 2021 | Report 2020-804 LOCAL HIGH RISK Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR 9 Report 2020-804 | August 2021 LOCAL HIGH RISK Lindsay’s Actions Raise Doubt About the Financial Stability of Its General Fund In Improving Its Financial Condition, the City Although the city’s recent general fund Violated State Law, Exposing It to Litigation balance appears to have met recommended levels, Lindsay’s loan forgiveness makes that Lindsay artificially improved its financial surplus misleading. The Government Finance condition by unlawfully forgiving loans, Officers Association (GFOA) recommends which created liabilities that undermine that cities maintain a general fund balance its future financial condition. After years sufficient to cover at least two months of of deficits, the city achieved a general fund operating expenses.2 The GFOA makes this surplus of nearly $3.2 million in fiscal year recommendation so that cities can mitigate 2019–20, a $12.6 million improvement current and future financial risks, including from fiscal year 2016–17, when it had a unplanned expenditures or revenue shortfalls. deficit of nearly $9.5 million. The general However, as Figure 3 shows, from fiscal fund balance is the accumulated amount of years 2015–16 through 2018–19, Lindsay’s revenues over expenditures. However, much general fund balance was below the GFOA of the improvement in Lindsay’s general recommendation. The city finally met fund balance was due to a substantial loan the minimum level in fiscal year 2019–20 forgiveness decision that was unlawful. but only by inappropriately forgiving the The city violated state law when it forgave $6.3 million in loans. $6.3 million in loans that it had previously made to its general fund, including about To sustain its basic operations in the face $2 million each from its Water Fund and of budget deficits over many years, Lindsay Sewer Fund with the remainder coming from made transfers totaling $6.3 million from other funds, including its Street Improvement its restricted funds to its general fund and Fund. Specifically, state law as amended by subsequently formalized those transfers Proposition 218, restricts cities from using as loans, which was allowable; but then revenues derived from property‑related fees in February 2019, it forgave the loans in and charges to pay for general government violation of state law. Table 2 shows the operations. Although state law allows a amount of each restricted fund that the city city to temporarily loan restricted funds to transferred to its general fund. The city’s its general fund, here the city’s forgiveness financial statements show that it made effectively converted those restricted funds the transfers over several years, at least as into general funds, a violation of state law. far back as fiscal year 2009–10, so that its Half of the city’s financial improvement since general fund could maintain the city’s basic fiscal year 2016–17 thus was a result of this operations. Before October 2017, the city unlawful action. Without the loan forgiveness, inappropriately presented these transfers in we estimate that Lindsay’s general fund would its annual financial statements as short‑term have had a $3.2 million deficit in fiscal year loans that it expected to pay back within one 2019–20 rather than the surplus it presented year. However, the city’s external auditor in its financial statements. 2 The GFOA represents public finance officials, and its mission is to advance excellence in public finance, which it does by publishing best practices for governments to follow. Figure 3 Lindsay Recently Met the Minimum Recommended General Fund Balance Threshold Because of Its Unlawful Loan Forgiveness $12,043,000 2015–16 2016–17 2017–18 2018–19 Fiscal Years had recommended since at least fiscal year have been appropriate if it had eventually 2009–10 that the city stop presenting them repaid the loans and the interest, but it chose as short‑term loans because its general fund not to do so. did not have enough funds to repay them on that schedule. State law allows a city Instead, Lindsay forgave the loans because it to loan money from a restricted fund to believed that it did not have better options the general fund if the action meets three for resolving its financial difficulties. In its conditions: the restricted fund has a surplus, fiscal year 2016–17 financial audit, the city’s the loan does not interfere with the purpose external auditor concluded that the loans of the restricted fund, and the borrowing raised significant doubt about the city’s ability fund repays the loan as soon as possible. In to meet its financial obligations because it October 2017, the city council formalized could not repay them in a timely manner. In the loans to its general fund, changing them response, in February 2019 staff asked the city from short‑term to long‑term with interest council to formally forgive the $6.3 million and with dates on which it expected to repay in loans to the general fund, which would the funds. The city did not violate state law by resolve the external auditor’s finding. formalizing the loans, and its actions would Specifically, staff noted in that request that if the city did not forgive the loans, it would )snoilliM nI( CALIFORNIA STATE AUDITOR 10 August 2021 | Report 2020-804 LOCAL HIGH RISK $6 4 (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:22)(cid:29)(cid:22)(cid:21)(cid:26)(cid:20)(cid:24)(cid:19)(cid:18)(cid:29)(cid:28)(cid:24)(cid:17)(cid:26)(cid:20)(cid:26)(cid:29)(cid:16)(cid:22) 2 (cid:23)(cid:19)(cid:15)(cid:14)(cid:24)(cid:13)(cid:22)(cid:16)(cid:12)(cid:11)(cid:11)(cid:22)(cid:29)(cid:28)(cid:22)(cid:28)(cid:24)(cid:17)(cid:26)(cid:20)(cid:26)(cid:29)(cid:16)(cid:22) 0 -2 (cid:23)(cid:22)(cid:29)(cid:22)(cid:21)(cid:26)(cid:20)(cid:24)(cid:19)(cid:18)(cid:29)(cid:28)(cid:24)(cid:17)(cid:26)(cid:20)(cid:26)(cid:29)(cid:16)(cid:22)(cid:24)(cid:10)(cid:9)(cid:16)(cid:20)(cid:18)(cid:28)(cid:30)(cid:29)(cid:8) (cid:31)(cid:12)(cid:26)(cid:29)(cid:24)(cid:19)(cid:12)(cid:21)(cid:8)(cid:30)(cid:7)(cid:22)(cid:29)(cid:22)(cid:27)(cid:27)(cid:6) -4 -6 -8 -10 -12 2019–20 2020–21 Source: Lindsay’s audited financial statements, adopted budget for fiscal year 2021–22, and GFOA best practices. Note: The general fund balance noted for fiscal year 2020–21 is a projection, as the city does not expect to complete the financial audit of these numbers until 2022. * Although Lindsay forgave the loans in February 2019, the city did so as part of finalizing its fiscal year 2017–18 financial statements. For accounting purposes, the forgiveness took place in that fiscal year and therefore first appears in the city’s fiscal year 2017–18 financial statements. CALIFORNIA STATE AUDITOR 11 Report 2020-804 | August 2021 LOCAL HIGH RISK receive a finding from its external auditor on has only informally discussed this potential its upcoming financial statements that the repayment and does not have a formal plan city was insolvent. However, the staff report for doing so. However, because the city did not identify other options for the city currently does not have a sufficient general to consider when it forgave the loans, such fund balance to repay these loans, it would as adjusting the repayment schedule for the need to do so over multiple years. Although loans or issuing municipal bonds to cover its the city confirmed that no one has made a deficits. The former finance director indicated claim for refund or sued it yet, its ratepayers that the city was aware that forgiving the may choose to do so, which could result in loans potentially violated state law and that the city being liable for monetary relief, court it did consider other options before forgiving orders, and attorneys’ fees if the ratepayers the loans, including adjusting repayment are successful. schedules and bankruptcy. He indicated that the city ruled out those options and that forgiving the loans was the only option it Table 2 had at the time to address the city’s financial Lindsay Transferred $6.3 Million From Restricted difficulties. However, as we discuss above, Funds to Its General Fund Over Many Years forgiving the loans violated state law, and we (In Thousands) therefore do not believe it was an appropriate action for the city to take. FUND AMOUNT TRANSFERRED Street Improvement* $1,557 By forgiving the loans, the city violated Water 1,907 Proposition 218, and doing so has exposed Sewer 2,108 it to possible litigation from taxpayers and Refuse 402 utility ratepayers. Specifically, Proposition 218 Other† 358 amended the California Constitution to Total $6,332 prohibit local governments from spending revenues from property‑related fees and Source: Staff report, city council resolution, and audited financial charges on general government operations. statements. Lindsay’s restricted funds include its * Lindsay’s Street Improvement Fund contains dollars from the Water, Sewer, and Refuse utility funds. However, the city did utility funds, which receive revenue from not provide a breakdown of the amounts within the Street property‑related fees charged to utility Improvement Fund that came from each of the utility funds. ratepayers, which we refer to as utility rates. † Other funds include a Park Improvement Fund and a Storm Drain Fund. By forgiving the loans, the city transferred $6.3 million from its utility funds to its general fund, including about $2 million each from the Water Fund and the Sewer Fund, as Lindsay Has Not Ensured That Its Streets Table 2 shows. The city uses its general fund Program Complies With State Law to pay for services including police, fire, and city administration. By transferring revenues In addition to its unlawful loan forgiveness, from property‑related fees to pay for these Lindsay has also violated Proposition 218 services, the city violated Proposition 218. In by transferring money from its utility fact, the city has known about this violation funds to pay for its streets program. As for several years because its external auditor described previously, Proposition 218 identified in each of the city’s past three restricts cities from using revenues derived financial audits that its actions had violated from property‑related fees and charges, Proposition 218. The city manager indicated such as utility rates, to pay for general that the city would like to repay the Water government operations. However, state law Fund and Sewer Fund, but explained that it does allow local governments to charge CALIFORNIA STATE AUDITOR 12 August 2021 | Report 2020-804 LOCAL HIGH RISK their utilities for the cost of street repairs actually damage, which again state law does and maintenance that result from damage not allow. If so, this unsupported transfer by those utilities. For example, the water would violate Proposition 218 and could utility’s water lines run underneath city expose Lindsay to litigation from its taxpayers streets and may cause damage to the streets and utility ratepayers. through leaks and projects to replace or repair the lines. Under Proposition 218, the city must demonstrate that a charge for Lindsay Has Found New Sources of Revenue in repairs or replacement reasonably represents Recent Years, but These Have Not Adequately these costs. Improved Its Financial Condition In 2004 the city published a study of its water, To improve its financial stability, Lindsay has sewer, and refuse rates and increased them, in employed several approaches to generate part, to fund its streets program, which pays additional revenue. For example, the city for the damage to the streets caused by the council placed a proposed local 1 percent city’s utility operations. However, Lindsay did increase to its sales tax on the ballot, which not demonstrate that the amount generated it estimated would generate approximately by the rate increases represented the actual $900,000 annually and which Lindsay’s voters costs of the damage those utilities caused. For approved in June 2017. The tax is a general instance, Lindsay could have had the engineer sales tax, and the city may use its revenue in charge of the study analyze and report for any legitimate government purpose, the damage that each type of utility had such as public safety, infrastructure, and caused to its streets so as to identify what the general services. The tax became effective in appropriate amount would be to charge each October 2017 and has generated $1.1 million fund going forward. Instead, the city began in revenue annually—more than the city transferring a flat 23.6 percent of all its utility initially projected. In fiscal year 2019–20, the rates to its streets program and continues to sales tax accounted for more than 15 percent do so today. These transfers averaged nearly of Lindsay’s general revenues. Lindsay’s $900,000 annually during fiscal years 2017–18 external auditor acknowledged in the city’s through 2019–20. fiscal year 2018–19 financial statements that the sales tax is bringing needed revenue The finance director indicated that she to the city. does not know whether the 23.6 percent is currently appropriate. For example, the The city has also worked to increase revenue current rate does not account for the greater by adopting an ordinance in May 2019 wear that the finance director indicated permitting certain cannabis businesses, heavier refuse vehicles are causing to its including retailers and cultivators, to roads. However, the city acknowledged operate in the city. State law authorizes that it has never performed an analysis to local governments to regulate or ban these demonstrate how much damage its utilities activities, and the city’s ordinance allows it cause and how much it should be paying to to issue permits and collect fees. The city the streets program to cover these damages. subsequently collected nearly $100,000 Until it performs this analysis, the city will in revenue from cannabis businesses for not know whether it is using funds to pay fiscal year 2019–20, although that was less for street projects that it should be spending than the $125,000 it had budgeted for the instead on utility infrastructure. In addition, year. However, the city budgeted $175,000 the city may be using utility ratepayer funds in revenue earned from cannabis retailers for nonutility purposes, such as paying to and cultivators for fiscal year 2020–21, improve streets that the city’s utilities did not and cannabis‑related revenues exceeded CALIFORNIA STATE AUDITOR 13 Report 2020-804 | August 2021 LOCAL HIGH RISK those expectations. The city now projects most negatively affected by COVID‑19 and in its budget for fiscal year 2021–22 that it updating its water and sewer infrastructure. will receive $300,000 in cannabis‑related The city must determine which of its needs revenues. The city manager believes that it will fund with the American Rescue Plan the expansion of the cannabis industry in money. Lindsay is a key component to increasing the city’s revenue. Similarly, in 2020 the city received other federal funding to help it respond to the In addition, Lindsay will receive significant COVID‑19 pandemic. Specifically, the city revenue from the federal government for received $160,000 in federal COVID‑19 COVID‑19 relief that it can use for a variety relief from the Coronavirus Aid, Relief, and of purposes. In March 2021, Congress passed Economic Security Act, known as the CARES the $2 trillion American Rescue Plan Act of Act, for COVID‑19‑related expenses. These 2021 (American Rescue Plan), which includes funds had more restrictive provisions than funding for state and local governments based the American Rescue Plan funds, and the on their populations. Federal law allows cities city used them to pay its employees a hazard to use these funds to respond to the negative supplement for providing services that effects of the COVID‑19 pandemic, to make increased their risk of exposure to COVID‑19, up for lost revenues, or to make investments as provided in the federal guidelines. in utility infrastructure. In June 2021, the federal government provided the first batch of funds to California, which is responsible The City Reduced Some Liabilities and for distributing the funds using a federal Expenditures, Which Partially Improved Its allocation formula for cities with populations Finances, but Other Financial Problems Remain under 50,000, which includes Lindsay. The American Rescue Plan requires states to Lindsay also improved its financial position distribute the funds using a population‑based by reducing expenditures and addressing formula. The Department of Finance has several significant liabilities that were initially identified an allocation of $3.2 million driving its general fund deficit. Between to Lindsay over two years from that act, and fiscal years 2016–17 and 2019–20, the city the city should receive $1.6 million each year moved its unrestricted general fund balance in 2021 and 2022. from a nearly $9.5 million deficit to a nearly $3.2 million surplus. As Figure 4 shows, this Lindsay has not yet specifically planned how approximately $12.6 million improvement it will spend all of these funds. According primarily was the result of Lindsay’s unlawful to the city manager, the city intends to forgiving of loans and increasing its sales use at least part of the funding to perform tax. In addition, Lindsay reached settlement needed capital work on its water and sewer agreements that reduced the impact of a large infrastructure. In its fiscal year 2021–22 long‑term liability on the general fund. capital improvement plan, the city indicated it would use American Rescue Plan funding Lindsay reduced its expenditures in several for some projects, but it did not identify ways. Between fiscal years 2015–16 and which ones. Until it develops a plan that 2019–20, it lowered its annual expenditures describes how it will spend these funds on for operating the city government by its highest needs, the city risks not using $600,000, or 45 percent. A total of them appropriately. For example, the city $400,000 of this reduction was before fiscal has various needs that the American Rescue year 2016–17 and, as Figure 4 shows, about Plan money could help address, such as to $200,000 was after fiscal year 2016–17. pay for services to help those of its residents It achieved the $600,000 in reductions CALIFORNIA STATE AUDITOR 14 August 2021 | Report 2020-804 LOCAL HIGH RISK Figure 4 Several Factors Contributed to Lindsay’s General Fund Balance Turnaround From Fiscal Years 2016–17 Through 2019–20 $12 Million $1,148,000 $12,043,000 (cid:14)(cid:28)(cid:29)(cid:16)(cid:15)(cid:24)(cid:5)(cid:28)(cid:10)(cid:24)(cid:4)(cid:30)(cid:6)(cid:20)(cid:16)(cid:28)(cid:15)(cid:16) $3.0M $34,000 (cid:31)(cid:30)(cid:29)(cid:25)(cid:27)(cid:31)(cid:30) $2,500,000 (cid:11)(cid:10)(cid:9)(cid:16)(cid:30)(cid:8)(cid:18)(cid:13)(cid:25)(cid:20)(cid:16)(cid:24)(cid:7)(cid:16)(cid:8)(cid:25)(cid:6)(cid:13)(cid:18)(cid:22)(cid:30)(cid:15) $0.2M $1,143,000 (cid:31)(cid:30)(cid:29)(cid:26)(cid:27)(cid:29)(cid:25) (cid:14)(cid:16)(cid:13)(cid:13)(cid:29)(cid:16)(cid:12)(cid:16)(cid:30)(cid:13) $2.5M $126,000 (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:29)(cid:24)(cid:23)(cid:22)(cid:28)(cid:30)(cid:24)(cid:21)(cid:22)(cid:20)(cid:19)(cid:18)(cid:17)(cid:16)(cid:30)(cid:16)(cid:15)(cid:15) $6.3M $670,000 $62,000 (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:29)(cid:26) $6,300,000 Source: Lindsay’s audited financial statements and city council minutes. Note: From fiscal years 2016–17 through 2019–20, the city improved its general fund balance by $12.6 million in total. Figure 4 shows the impact of specific actions the city took to improve the general fund balance and does not account for all of the general fund improvement. by reducing staff, among other things. year in fiscal years 2015–16 and 2016–17, and Specifically, the city eliminated 36 positions, by nearly $1 million in fiscal year 2017–18. In nearly half of its previous staffing level. response to the city’s financial challenges, in Although the city manager believes the December 2017 the city council leased the city has sufficient staff to provide essential sports complex to a third party, which became services, he noted that further reductions to contractually responsible for all expenses city staffing levels would negatively affect its associated with operating the complex. In ability to do so. Additionally, it limited staff entering into this lease, the city no longer had training costs by approving only its most to incur the sport complex’s operating costs, critical training needs, such as those related to which were nearly $3 million in fiscal years its police officers. 2015–16 and 2016–17, including the significant costs for its employees. However, the city Lindsay also previously operated a sports continues to pay debt service costs of nearly complex, which it built in 2008 to be a $200,000 annually related to a loan it entered regional attraction and a revenue source for into in 2009 to cover the sports complex’s the city. Lindsay paid for its construction operational cash shortfalls. from its general fund. However, the sports complex’s costs outpaced the revenues that it generated by more than $1 million each CALIFORNIA STATE AUDITOR 15 Report 2020-804 | August 2021 LOCAL HIGH RISK Lindsay could earn money from this that the city repay approximately $1 million in agreement if the sports complex is profitable fiscal year 2016–17. Following negotiations, in after the deduction of maintenance costs. 2019 the city accepted a settlement offer from Under the terms of the lease, the operator Caltrans that required repayment of nearly of the complex must pay half of its annual $350,000, which the city must pay in equal net profit to the city each year. In 2018, its installments over a seven‑year term. Although first full year of operations, the third‑party this settlement did not increase the city’s operator did earn a small profit, of which it general fund balance, it significantly reduced shared $15,000 with the city. However, the the city’s financial obligation to Caltrans and third‑party operator has not earned a profit mitigated the potential financial burden of the since 2018. repayment on the city’s general fund. Lindsay also saved money through legal Recommendations to Address This Risk settlements. In September 2020, Lindsay settled with the California Department of • To address the $6.3 million it Housing and Community Development improperly transferred to its general (HCD) over the city’s inappropriate use fund, Lindsay should, by February 2022, of state and federal housing grant funds, re‑establish the loans to its restricted which reduced its general fund deficit by funds, and develop and implement a $2.5 million. The city had inappropriately used plan to fully repay those funds. HCD program funds to pay for city‑sponsored activities and to cover operating deficits in its • To make prudent investments from general fund. Between 2008 and 2017, Lindsay federal funding to address its highest borrowed HCD program funds to pay for needs, Lindsay should develop a plan by operating deficits in its general fund, sports November 2021 for how it will effectively complex, and Wellness Center (Wellness Center). A result of the settlement agreement use all American Rescue Plan funds. is that Lindsay no longer has to reflect a $2.5 million liability in its general fund, which • To ensure that its transfers of utility significantly improved that fund’s balance. funds to the streets program comply According to the terms of the settlement with state law, Lindsay should perform agreement, instead of requiring Lindsay to a study to determine the appropriate repay the $2.5 million immediately, HCD level of funding from its utility funds required the city to make an initial payment of for that program by August 2022 $10,000, and 30 annual payments of roughly and update that study every three to $90,000 thereafter. five years. Lindsay also reached a settlement agreement with the California Department of Transportation (Caltrans) that reduced some of the city’s financial obligations but did not change its general fund balance. Specifically, Caltrans found that Lindsay had billed it for services, materials, and labor costs that the city could not support with source documentation and that Lindsay mismanaged construction change orders for multiple projects it completed using state funding in the early 2000s. Caltrans initially demanded CALIFORNIA STATE AUDITOR 16 August 2021 | Report 2020-804 LOCAL HIGH RISK Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR 17 Report 2020-804 | August 2021 LOCAL HIGH RISK Lindsay Must Increase Its Efforts to Address Deficits in Its Enterprise Funds Deficits and Inappropriate Loan Forgiveness Fund; however, by doing so, the city created Led to Negative Balances in the City’s Enterprise a deficit in the Water Fund of $585,000.3 In Funds, Limiting Its Ability to Effectively Operate addition, the Water Fund has operated at a Its Utilities loss in recent years, with operating deficits of $143,000 in fiscal year 2018–19 and $149,000 Lindsay’s annual deficits and loan forgiveness in fiscal year 2019–20. The cumulative effect have led to negative balances in its enterprise of these two problems has led to a nearly funds. Table 3 provides information on the $1 million negative balance in the Water balances of three of the city’s main enterprise Fund at the end of fiscal year 2019–20, which funds from fiscal years 2015–16 through Table 3 shows. 2019–20. Each of these funds is responsible for receiving and spending revenue for specific This deficit in Lindsay’s Water Fund is limiting utilities, such as water and sewer, or the city’s the city’s ability to effectively operate its water recreational services, which the city provides system. Specifically, the Water Fund has no through the Wellness Center Fund. Two of money for capital improvements or unexpected these funds, the Water Fund and Wellness repairs to keep the system running safely and Center Fund, are currently in hundreds of efficiently. In a 2019 budget presentation, the thousands of dollars of deficit. city indicated that its Water Fund could not adequately fund needed projects, such as The Water Fund’s nearly $1 million deficit was replacing a main water line or renovating a caused by the city’s loan forgiveness and by the water storage tank. Similarly, in Lindsay’s fiscal city spending more than the fund receives in year 2019–20 financial audit, city management revenue from users. As we describe previously, stated that the Water Fund has no money in 2019 the city violated state law by forgiving available for unplanned maintenance or other a nearly $2 million loan from the Water necessary capital improvements. The city Fund to its general fund. Lindsay forgave the loan because it believed that the general 3 This deficit appears in the fiscal year 2017–18 financial statements fund could not realistically repay the Water because of the timing and method of the loan forgiveness. Table 3 Lindsay’s Enterprise Funds Experienced Frequent Deficit Balances From Fiscal Years 2015–16 Through 2019–20 (In Thousands) Fund 2015–16 2016–17 2017–18 2018–19 2019–20 Water $1,039 $1,100 $(585) $(771) $(966) Sewer (1,094) 1,253 (535) 36 341 Wellness Center (940) (879) (283) (360) (319) Source: Lindsay’s audited financial statements. Note: These amounts include the effect of both operating and nonoperating revenues and expenditures, and therefore the operating deficits discussed in the report do not correspond directly to these amounts. CALIFORNIA STATE AUDITOR 18 August 2021 | Report 2020-804 LOCAL HIGH RISK manager indicated that the city’s general fund $3.2 million in federal American Rescue Plan would need to pay for any emergency expenses funds that it may use for utility infrastructure. that arise in the water system. The deficit in the Lindsay’s city manager indicated that the city Water Fund also leaves the city ill‑prepared to intends to use those funds for some necessary manage crises, including the current drought. capital projects, including $500,000 in water Governor Newsom declared a drought and sewer projects. However, the city has not emergency in May 2021 in portions of the determined whether this is the highest and best State, including Tulare County, where Lindsay use of those funds. The city manager indicated is located. During a drought, households must that the city will develop a plan for spending conserve water, reducing their water usage; those funds once the federal government however, this conservation would likely reduce issues final spending guidelines. The city also the utility revenues that the city receives plans to contract for a utility rate study in the through water rates. A reduction in revenue fall of 2021 that will include the Water Fund, from the drought would drive the Water Fund Sewer Fund, and Refuse Fund, and potential into a deeper deficit. adjustments to utility rates. However, until it receives the results of that study, the city does “ not know to what extent rate increases will address the current fund balances, including the The deficit in the Water Water Fund deficit. As we discuss above, the city improperly transferred nearly $2 million Fund also leaves the city from the Water Fund to the general fund. The city explained that it intends to repay the Water ill‑prepared to manage Fund from the general fund, but it does not have crises, including the a formal plan to do so and has only informally ” discussed repayment. current drought. The wellness center manages many of the city’s parks and recreation functions, such The city’s Sewer Fund is also unable to as rentals at city parks, a recreation center, adequately fund projects. Lindsay’s Sewer and a swimming pool. The Wellness Center Fund had a positive balance at the end of fiscal Fund has had a deficit since at least fiscal year year 2019–20, in contrast to its other enterprise 2015–16, and it ended fiscal year 2019–20 with funds; however, that positive balance is a result a $319,000 deficit. The city uses general funds of the city not investing in its infrastructure. to cover the annual deficit in this fund. In fiscal Specifically, the city has not had the resources year 2019–20, the city transferred $200,000 to update its sewer infrastructure as needed, from the general fund to the Wellness Center despite the positive balance. For example, Fund. Similarly, the city projects that it will need although the city plans to replace its main to transfer $500,000 from the general fund in sewer line, renovate its wastewater treatment fiscal year 2020–21, in part due to the pandemic. plant, and replace equipment, it cannot do so Although the wellness center uses important with the limited resources in its Sewer Fund. general fund resources, the center provides As a result, the city is reviewing its sewer rates health and social benefits to city residents, and and may need to increase them to fund such the city manager is not concerned with the city’s infrastructure needs. use of general funds for this purpose. The city manager stated that because the fund provides Although Lindsay has discussed some methods for general parks and recreation expenses, for addressing such deficits and limited including the swimming pool, the Wellness resources, it lacks a formal plan to do so. As Center Fund is an extension of the city’s general we describe previously, the city will receive government activities. CALIFORNIA STATE AUDITOR 19 Report 2020-804 | August 2021 LOCAL HIGH RISK In addition, the local hospital district swimming pool fees, a planning fee, and a contributes $230,000 annually to the wellness public safety fee. Although the city’s municipal center, which significantly reduces the center’s code requires it to annually evaluate whether operating loss. In 2021 the local hospital district the fees and rates it charges recover the full increased its contribution by a total of $375,000 cost to provide the associated services, Lindsay over three years to pay for capital improvements has failed to do so. Specifically, we found that at the wellness center. State law grants hospital the city last updated four of the seven fees districts in California the power to carry out and rates we selected in 2004, more than activities that are necessary for the maintenance 15 years ago. Lindsay could not identify when of good physical and mental health in the it last updated two of the fees and rates that communities they serve. The local hospital we reviewed, and it updated one in 2019. As district’s activities in the area include supporting shown in Table 4, Lindsay has not regularly services at the wellness center. In part, because reviewed and updated its fees and rates the city has partnered with the local hospital as required. district to obtain resources to cover the operating loss of the Wellness Center Fund, we “ agree that the activities of the wellness center provide an important service to the residents of The city last updated Lindsay and we do not have significant concerns about the deficit in this fund. four of the seven fees and rates we selected Lindsay Has Not Ensured That Its Service Fees in 2004, more than and Utility Rates Sufficiently Cover Its Costs ” 15 years ago. Lindsay has not ensured that it collects sufficient revenue to cover the costs of services it provides because it does not periodically The city attributes its failure to update its review and update its fees and rates. Further, fees regularly to the turnover in its finance the city may have foregone revenue that could department and to limited staffing. As we help relieve some of its financial burdens. describe previously, the city reduced its Under state law, a city can establish fees and workforce by several dozen positions over the rates at levels that allow it to recoup the full last several years. Further, the finance director cost of services it provides as long as these do position, which is responsible for many of not exceed the reasonable costs of providing the steps involved in updating fees and rates, those services—a concept referred to as full has been filled by several directors since cost recovery. The city’s fees cover services January 2017. Although the city reported having such as issuing building permits and business adequate staff to provide essential services, it licenses, facilitating background checks, and did not consider these administrative activities use of the wellness center. Lindsay’s rates help as essential. We note, however, that since we pay for services such as water, sewer, and began our audit, the city has updated its fees for refuse collection. building permits and related activities as well as some of its public safety fees without increasing We reviewed seven of more than 240 fees and its related staffing levels. In response to our rates in order to identify when the city last questions about its lack of updating fees and updated them, the city’s cost of providing the rates, the city manager stated that he intends for related services, and whether the fees or rates the city to review all of its fees and rates over the cover the city’s costs. Our selection included next year or two but does not have a schedule a residential water rate, two sewer rates, two for doing so. CALIFORNIA STATE AUDITOR 20 August 2021 | Report 2020-804 LOCAL HIGH RISK Table 4 Lindsay Does Not Follow Its Own Requirements for Regularly Reviewing Fees and Rates LINDSAY’S PROCESS LINDSAY MUNICIPAL CODE REQUIREMENT COMPLIES? X Set fees and rates to support the full cost of operations, including indirect costs. City manager must annually: X Review all fees and rates. X Provide city council with the costs of all city services.* X Recommend fee and rate adjustments to city council. City council must: X Annually meet to review proposed changes to fees and rates. X Set fees and rates as part of the annual budget process. Source: Lindsay Municipal Code, and analysis of seven of the city’s fees and rates. * Although the city manager does not provide this information for each city service, the annual budget that the city manager creates does include the overall costs for all city services. The city’s municipal code requires Lindsay’s In total, the city’s fees and rates generate city council to set fees and rates at amounts almost $5 million annually in revenue, or that cover the full cost of operations, including approximately one‑third of Lindsay’s overall indirect and capital costs whenever possible. revenues. As Table 5 shows, the city does not For example, its municipal code requires the know whether annual revenue from six of city to include the overhead costs associated the seven fees and rates that we reviewed, with staff provision of services, such as including one of its monthly water rates and building and equipment maintenance and two of its sewer rates, covers its costs to operations; communications expenses; and provide those services. Because Lindsay has computer, printing, vehicle, and insurance not regularly evaluated its service costs, it expenses, when it sets fees and rates. risks both undercharging and overcharging However, we found that the city did not for those services. For example, we estimate always follow this requirement. For example, that the city has been losing approximately Lindsay set its newly revised fingerprinting $5,800 a year in fingerprinting revenue, a fee at a level that only recovers the salary costs potential loss of up to $93,000 since the for the public safety officer conducting the city last updated the fee in 2004. Lindsay fingerprinting and does not include indirect also could be overcharging for a service, for costs, such as office space or supplies. Thus, example if it streamlined a process so that it the city is undercharging for this service and requires less staff time to conduct, but we did not recovering its full costs, as its municipal not identify any examples of overcharging. code requires. CALIFORNIA STATE AUDITOR 21 Report 2020-804 | August 2021 LOCAL HIGH RISK Table 5 Lindsay Has Not Evaluated Whether Its Fees and Rates Cover Related Costs COST OF TYPE OF FEE OR RATE FEE OR RATE WE REVIEWED DATE LAST REVISED SERVICE KNOWN? Planning fee* Home occupation permit 2019 Public safety fee* Fingerprinting 2004 Sewer rate Hotels, motels, and hospitals 2004 Sewer rate Residential and commercial 2004 Water rate 1” water meter 2004 Wellness center fee* Swimming pool rental for 0–25 guests Unknown† Wellness center fee* Spring/summer swimming pool membership Unknown† Source: Fee and rate documentation, and interviews with city staff. * The city reviewed these fees in 2021 after we brought the outdated fees to its attention. † The city was unable to identify when this fee was last revised. Because of its limited accounting records, This difference obviously contributes to the Lindsay was also unable to identify the precise deficit in the Wellness Center Fund that amount of revenue it collects from some the general fund must cover. of its fees and rates. For example, the city could not identify its revenue from individual Lindsay is at risk of subsidizing its services wellness center fees, such as the swimming because it is undercharging, or it risks a pool membership it charges for spring and lawsuit from taxpayers if it is overcharging summer. According to the recreation director, for its services. By not regularly assessing the city records that revenue in a larger its costs and adjusting the fees and rates category of swimming pool fees that includes to cover them, Lindsay is continuing public swim fees and lap swim day passes, to miss an opportunity to minimize all of which the city deposits into a single burdens on its finances. Specifically, if it fund. As a result, the city cannot determine undercharges for services, the city must whether its swimming pool membership fees subsidize those services with its limited appropriately cover the costs to operate its general funds. However, if it overcharges, swimming pool during those times when it the city exposes itself to taxpayer lawsuits is open only to members. Because the city for imposing a tax in violation of state law. has not done so itself, we estimated the cost Specifically, state law defines a charge for Lindsay incurred to operate its swimming a service that exceeds the reasonable price pool for members during fiscal year 2019–20 of providing the service as a tax, which is and found that it was more than $186,000. then subject to the State’s requirements for However, the city collected only about $8,500 imposing taxes, including a requirement that in total swimming pool fees during that time. the city submit and obtain voter approval in order to implement the tax. CALIFORNIA STATE AUDITOR 22 August 2021 | Report 2020-804 LOCAL HIGH RISK Recommendations to Address This Risk • To ensure that it maintains adequate balances in its enterprise funds for significant purchases or capital expenditures, Lindsay should develop and implement a plan by June 2022 to build and maintain these balances. • To ensure that the rates and fees it charges are appropriate to cover the cost of the related services, by August 2022 Lindsay should do the following: » Determine its cost to provide each of the services for which it charges a fee or rate and, as necessary, improve its accounting records to identify these costs. For any fees or rates that do not cover the costs of their related services, consider increasing those fees or rates, including a phased approach for large increases. For any fees or rates that are above the cost to provide the related service, consider reducing those fees or rates. » Improve its accounting records so as to identify how much revenue it receives from each fee or rate. CALIFORNIA STATE AUDITOR 23 Report 2020-804 | August 2021 LOCAL HIGH RISK Lindsay Must Improve Its Management Practices to Effectively Plan for Its Financial and Operational Needs The City’s Lack of a Long‑Term Financial Plan the GFOA, a long‑term financial plan should Is Hindering Its Efforts to Achieve Financial include several key elements, such as revenue Sustainability and expenditure forecasts, strategies for achieving and maintaining financial stability, Although Lindsay has taken some steps to and a process for periodically reviewing and improve its financial position in the short term, updating the plan. Figure 5 shows how Lindsay it has no clear plan for its long‑term financial could use the GFOA’s best practices to respond decision making. The GFOA recommends to the audit findings in our report. We include that all governments regularly engage in a discussion of the city’s financial obligations long‑term financial planning as part of their related to retiree costs in the following section overall strategic planning efforts. According to of the report. Figure 5 Implementing GFOA Best Practices for a Successful Financial Plan Would Help Lindsay Address Our Recommendations (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:29)(cid:25)(cid:31)(cid:24)(cid:23)(cid:22)(cid:21)(cid:20) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:26)(cid:25)(cid:24)(cid:23)(cid:29)(cid:22)(cid:21)(cid:20)(cid:29)(cid:20)(cid:27)(cid:19)(cid:22)(cid:18)(cid:18)(cid:27)(cid:24)(cid:17)(cid:16)(cid:26)(cid:25)(cid:22)(cid:24)(cid:28)(cid:29)(cid:16)(cid:28)(cid:29)(cid:28)(cid:22)(cid:18)(cid:27)(cid:29)(cid:22)(cid:15)(cid:29)(cid:25)(cid:26)(cid:28)(cid:29)(cid:15)(cid:25)(cid:24)(cid:16)(cid:24)(cid:19)(cid:25)(cid:16)(cid:14)(cid:29)(cid:23)(cid:22)(cid:16)(cid:14)(cid:28)(cid:13) (cid:12)(cid:25)(cid:24)(cid:17)(cid:28)(cid:16)(cid:30)(cid:29)(cid:19)(cid:22)(cid:21)(cid:14)(cid:17)(cid:29)(cid:16)(cid:17)(cid:17)(cid:20)(cid:27)(cid:28)(cid:28)(cid:29)(cid:26)(cid:11)(cid:27)(cid:18)(cid:29)(cid:26)(cid:11)(cid:20)(cid:22)(cid:21)(cid:23)(cid:11)(cid:29)(cid:16)(cid:29)(cid:15)(cid:25)(cid:24)(cid:16)(cid:24)(cid:19)(cid:25)(cid:16)(cid:14)(cid:29)(cid:10)(cid:14)(cid:16)(cid:24)(cid:9) (cid:30)(cid:19)(cid:25)(cid:28)(cid:25)(cid:18)(cid:19)(cid:28)(cid:26)(cid:27)(cid:17)(cid:26)(cid:28)(cid:25) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26) GOAL STABILIZE GENERAL FUND (cid:18)(cid:29)(cid:20)(cid:17)(cid:29)(cid:25)(cid:22)(cid:25)(cid:23)(cid:16)(cid:15) 1 (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:31)(cid:26)(cid:22) 1 Develop a long-term financial plan to align financial (cid:31)(cid:30)(cid:29)(cid:30)(cid:28)(cid:27)(cid:30)(cid:26)(cid:25)(cid:28)(cid:24)(cid:26)(cid:23)(cid:22)(cid:21)(cid:30)(cid:28)(cid:24)(cid:20)(cid:19)(cid:27)(cid:18)(cid:30)(cid:26) resources with strategic goals. $12,043,000 (cid:17)(cid:16)(cid:18)(cid:30)(cid:15)(cid:25)(cid:14)(cid:19)(cid:26)(cid:13)(cid:16)(cid:18)(cid:26)(cid:12)(cid:11)(cid:26)(cid:10)(cid:30)(cid:25)(cid:18)(cid:14) 2 Address improper transfers to general fund. (cid:9)(cid:30)(cid:8)(cid:19)(cid:26)(cid:7)(cid:16)(cid:14)(cid:20)(cid:19)(cid:20)(cid:16)(cid:28)(cid:26)(cid:25)(cid:28)(cid:24) GOAL ADDRESS ENTERPRISE FUND DEFICITS 2 (cid:6)(cid:5)(cid:16)(cid:18)(cid:24)(cid:25)(cid:8)(cid:20)(cid:4)(cid:20)(cid:19)(cid:3)(cid:26)(cid:6)(cid:28)(cid:25)(cid:4)(cid:3)(cid:14)(cid:20)(cid:14) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:31)(cid:26)(cid:22) 1 Identify any fees or rates that do not cover the costs of providing the related services and consider (cid:6)(cid:28)(cid:25)(cid:4)(cid:3)(cid:14)(cid:20)(cid:14)(cid:26)(cid:16)(cid:13)(cid:26)(cid:17)(cid:20)(cid:28)(cid:25)(cid:28)(cid:15)(cid:20)(cid:25)(cid:4) increasing those fees or rates. (cid:23)(cid:28)(cid:29)(cid:20)(cid:18)(cid:16)(cid:28)(cid:2)(cid:30)(cid:28)(cid:19) 2 Determine the appropriate level of funding for the streets program by the utility funds. (cid:1)(cid:19)(cid:18)(cid:25)(cid:19)(cid:30)(cid:127)(cid:20)(cid:30)(cid:14)(cid:26)(cid:13)(cid:16)(cid:18)(cid:26)(cid:6)(cid:15)(cid:129)(cid:20)(cid:30)(cid:29)(cid:20)(cid:28)(cid:127)(cid:26)(cid:25)(cid:28)(cid:24)(cid:26) (cid:141)(cid:25)(cid:20)(cid:28)(cid:19)(cid:25)(cid:20)(cid:28)(cid:20)(cid:28)(cid:127)(cid:26)(cid:17)(cid:20)(cid:28)(cid:25)(cid:28)(cid:15)(cid:20)(cid:25)(cid:4)(cid:26)(cid:143)(cid:25)(cid:4)(cid:25)(cid:28)(cid:15)(cid:30) GOAL ADDRESS RETIREE COSTS 3 (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:31)(cid:26)(cid:22) (cid:7)(cid:4)(cid:25)(cid:28)(cid:26)(cid:141)(cid:16)(cid:28)(cid:20)(cid:19)(cid:16)(cid:18)(cid:20)(cid:28)(cid:127)(cid:26) 1 Identify a goal for prefunding retirement liabilities. (cid:141)(cid:30)(cid:15)(cid:129)(cid:25)(cid:28)(cid:20)(cid:14)(cid:2)(cid:14) 2 Identify the resources necessary to meet that goal and develop a plan for doing so. Source: GFOA best practices and this report’s recommendations. CALIFORNIA STATE AUDITOR 24 August 2021 | Report 2020-804 LOCAL HIGH RISK However, Lindsay does not have a written position and has hired a permanent director long‑term financial plan, and the long‑term of finance, it is imperative that Lindsay planning it has conducted omitted its general begin to develop a long‑term financial plan. fund. When we asked the city manager about Without a strategic framework to guide the Lindsay’s current financial plan, he stated that city’s budgetary decision making, Lindsay the only financial planning documents the will likely continue to struggle to address city has created are its annual budgets and its long‑term needs and to achieve financial the capital improvement plan it presented stability. For example, if Lindsay were to alongside its fiscal year 2021–22 budget implement the GFOA best practices that we document. However, the city’s budget does present in Figure 5 through a full financial not include long‑term projections for its plan, the city could prioritize the many most important fund, the general fund, which financial challenges and risks that we have directly affects the city’s ability to provide identified, such as its general fund balance essential services to its residents. Therefore, and deficits in its enterprise funds. the budget document does not provide the long‑range perspective of a plan that looks five to 10 years into the future, the time Lindsay Needs to Address Its Rising Employee horizon that GFOA recommends for such Retirement Costs plans. Further, in the capital improvement plan that it presented with its fiscal year Lindsay has not prefunded its OPEB liabilities 2021–22 budget, Lindsay included five years as best practices recommend, and the city’s of anticipated capital improvement projects future pension costs are contributing to its for its various funds, including the Water high‑risk status. The GFOA recommends Fund, Sewer Fund, and Wellness Center that cities fully contribute to their pension Fund. However, the capital improvement plan plan each year and prefund OPEB liabilities, includes several projects that cite the city’s which are the expected future costs for general fund as a funding source, but without employees who no longer work for the city, a long‑term plan for its general fund, the city such as health benefits for retired workers, cannot ensure that these projects are feasible. to ensure the sustainability of these benefits. Finally, the city’s budget does not develop However, at present Lindsay covers only the and then use substantive strategies to achieve annual cost of the benefits for its current long‑term financial sustainability, such as retirees and does not prefund OPEB costs for the goals and actions included in Figure 5. health benefits, including for future retirees For example, to ensure that it can meet its and for future years for current retirees. This long‑term obligations, Lindsay could develop lack of prefunding has caused the city’s OPEB and implement a detailed plan for prefunding liabilities to increase by 36 percent from fiscal its pension and other post‑employment years 2017–18 through 2019–20. benefit (OPEB) liabilities. Because of its limited long‑term financial planning, Lindsay Lindsay’s OPEB benefits are limited to lacks a clear picture of how best to address its a health plan that covers future benefits financial and operational needs. for 33 current city employees and current benefits for five retirees as of fiscal The city manager and director of finance year 2019–20. The city contributes all of stated that developing a long‑term financial the funding to the plan. The retired city plan is a goal for the city, but they explained employees did not contribute to the plan, that the city had not done so previously due nor do current city employees contribute. As to financial instability and significant turnover Table 6 shows, between fiscal years 2017–18 of top finance department staff. However, and 2019–20, Lindsay’s required annual given that the city has improved its financial contribution—the minimum amount it CALIFORNIA STATE AUDITOR 25 Report 2020-804 | August 2021 LOCAL HIGH RISK must pay—grew by more than $10,000 and described in the text box. Three of Lindsay’s its liabilities grew by more than $500,000. pension risk indicators—pension obligations, In fiscal year 2019–20, the city’s total OPEB pension funding, and pension costs—are liabilities were nearly $2 million and it paid at moderate risk, as Table 1 shows, but the only about $41,000, just enough to cover city’s future pension costs are high risk. We the actual health care benefits for the city’s classify cities as having high‑risk pension retirees. The city did not prefund future costs when their projected future costs exceed benefits at all. a threshold of 10 percent of their current revenues. We calculated the future pension costs for Lindsay using unaudited information Table 6 provided by the California Public Employees' Lindsay’s OPEB Annual Contributions and Unfunded Retirement System (CalPERS) and compared Liability Have Increased Over the Last Three those numbers to the city’s audited financial Fiscal Years statements. By using fiscal year 2026–27 pension contribution estimates from CalPERS to analyze future pension costs, we project FISCAL YEAR OPEB CONTRIBUTION OPEB LIABILITY that Lindsay’s required contributions to 2017–18 $31,000 $1,441,000 its pension plan will reach the 10 percent 2018–19 38,000 1,608,000 threshold that year.4 This means that five years 2019–20 41,000 1,958,000 from now, Lindsay’s pension costs could begin to place a financial burden on the city if the Source: Lindsay’s audited financial statements. city does not take substantial action. Lindsay has not prefunded its OPEB liabilities because of its poor fiscal condition, and it State Auditor’s Local Government High‑Risk has no formal plans to do so. Specifically, as Dashboard Pension Indicators we discuss previously, the city had a deficit Obligations: The amount a city owes to employees for in its general fund until fiscal year 2019–20. their retirement benefits. A large unfunded obligation The city manager stated that prefunding means higher pension contributions over time, straining OPEB is a secondary priority to addressing the ability to provide other services. other financial issues, such as the deficits in its enterprise funds. However, the manager Funding: The assets a city has set aside to pay for did state that the city might begin prefunding employee pension benefits. Insufficient pension assets also require higher contributions in the future. OPEB liabilities in future fiscal years if it has extra revenue in its general fund. If the city Current Costs: The current financial burden of pension does not begin prefunding its OPEB liabilities costs. High pension costs can cause cities to curtail or have employees begin to contribute to critical services. its funding, it will quite likely have to make Future Costs: The future financial burden of pension costs, higher contributions from its general fund which pose the same risk of curtailing critical services. in future years, displacing other spending Source: California State Auditor’s Local Government priorities such as public safety. High-Risk Dashboard. Although the city does require its employees to contribute to their pension benefits, Lindsay also has some future pension costs that are high risk. We identify four 4 Our methodology for this calculation is explained in greater different indicators of pension risk in our detail at the following link: https://www.auditor.ca.gov/local_ local government high‑risk dashboard, as high_risk/process_methodology CALIFORNIA STATE AUDITOR 26 August 2021 | Report 2020-804 LOCAL HIGH RISK The city must ensure that it is able to pay has not ensured that either of the two public for its pension plan in future years. CalPERS safety officers it hired in the past three years, annually determines Lindsay’s required out of 13 total public safety officers, have contribution, which covers the cost of received training from a fire academy. As pension benefits earned by its current a result, when these officers respond to a employees that year and an additional amount fire emergency, a public safety lieutenant for beginning to address unfunded liabilities. explained, the city typically limits their role Lindsay makes the required payment each to support functions rather than firefighting. year, but it had unfunded liabilities of To the extent that the city needs additional $9.3 million as of June 2020. If the city paid resources to adequately respond to fires or more than the required contribution, it would emergencies, such as in case of a structural reduce its unfunded liabilities and therefore fire or if an additional paramedic is required, its future annual contributions. This action it relies on the county to assist through a could help the city to avoid the financial stress mutual aid agreement, one that does not of reaching the 10 percent threshold in its require reimbursement by the city. pension contributions and could reduce the burden on the city to pay for those pension “ costs instead of other priorities. Lindsay has not Lindsay Has Not Adequately Planned for Its ensured that two Public Safety Training and Equipment Needs recently hired public Lindsay does not appear to be committed safety officers have to its current integrated public safety received training from approach and must evaluate whether its ” combined police and fire department is a fire academy. still an appropriate model for providing services to its community. According to a local newspaper, since the late 1970s and Lindsay’s director of public safety has in response to its financial difficulties at not prioritized training the newly hired the time, Lindsay has employed a public police officers in firefighting because that safety model that integrates police and would require them to stop their police firefighting services into a single public safety work and attend a fire academy. According department. A 2016 report by Michigan to the director, he wants to move away State University noted that Lindsay is one from the integrated public safety model of approximately 130 cities nationwide toward a separate police department and and only a handful in California that have a semi‑volunteer fire department. He such combined departments. Lindsay’s believes the current integrated model is public safety director explained that the not sustainable because the two disciplines city generally hires police officers who have of police and fire have different mindsets completed training that has been approved by and it is difficult for public safety officers to the Commission on Peace Officer Standards maintain their continuing training in both and Training and then provides them with professions. According to the director, the training in firefighting.5 However, Lindsay current city council is in favor of this change. However, the city manager has yet to formally propose to the city council that it separate the 5 State law established the Commission on Peace Officer police and fire services into two departments. Standards and Training to set minimum selection and training standards for California law enforcement officers. Until the city council approves such an CALIFORNIA STATE AUDITOR 27 Report 2020-804 | August 2021 LOCAL HIGH RISK organizational change, the Public Safety As a result, the department will continue to Department must continue to ensure that all face escalating maintenance costs, which will of its public safety officers are duly trained to hinder the city’s overall efforts to improve its respond to both police and fire emergencies. financial position. By not ensuring such training, Lindsay risks the safety of its residents and must rely more heavily on its mutual aid agreement with the Figure 6 county for fire response services. Lindsay’s Police Vehicle Maintenance Costs Are Rising $50,000 Although we did not identify any problems with the Public Safety Department’s response times, the age of both its police and fire 40,000 vehicles could affect the safety of Lindsay’s residents should those vehicles break down while responding to an emergency. 30,000 The National Fire Protection Association recommends that fire departments only use properly maintained fire trucks older than 20,000 15 years as backup equipment for newer fire trucks and retire fire trucks that are older than 25 years. However, Lindsay uses a 21‑year‑old 10,000 fire truck as a primary fire response vehicle. Lindsay’s police vehicles are also old, averaging 13 years—significantly older than those of 0 other cities that we reviewed, whose average 201718 201819 201920 vehicle ages ranged from 4.5 to 8 years old.6 We found that the city has recently taken Fiscal Years steps to address the age of its public safety vehicles. In 2021 the city published a capital Source: Lindsay Public Safety Department police vehicle maintenance records. improvement plan that included replacement of five of its 16 police vehicles over the next three fiscal years at a cost of about $1 million. Recommendations to Address This Risk However, we expected Lindsay to identify a schedule that details when it must retire or • Lindsay should adopt a policy for replace all of its public safety vehicles as well as long‑range financial planning by the expected costs to replace those vehicles. February 2022 that, at a minimum, identifies the forecast period for the Lindsay also faces increasing maintenance costs for its public safety vehicles. As Figure 6 plan, the funds it will include, efforts shows, the city’s cost to maintain its public the city will make to increase revenues safety vehicles nearly doubled in two years, and decrease expenditures, and the from $23,000 in fiscal year 2017–18 to $44,000 frequency with which the finance in fiscal year 2019–20. According to a public director and the city manager will safety lieutenant, it intends to absorb these review the plan and propose any updates maintenance costs in its existing budget. to the city council. 6 We compared Lindsay with two of its geographic and economically similar neighboring cities, Exeter and Farmersville, and one city with a combined public safety department, Sunnyvale. CALIFORNIA STATE AUDITOR 28 August 2021 | Report 2020-804 LOCAL HIGH RISK • City management should develop, • To ensure that its fire vehicles meet and the city council should formally industry standards and its police adopt, a long‑term financial plan vehicles are replaced in a timely by August 2022 that aligns with best manner, by November 2021 Lindsay practices published by the GFOA. should develop a sufficiently detailed public safety capital improvement plan • Lindsay should include in that financial that provides for the replacement of plan a discussion of how it will reduce those vehicles. its pension and OPEB liabilities. As part of that plan, the city should consider requiring current employees to begin contributing to the future cost of their retirement health care benefits. • To ensure that Lindsay’s public safety model still meets the city’s needs, Lindsay should do the following: » Evaluate the effectiveness of using a combined police and fire department by August 2022 and make any necessary changes. » Ensure that all public safety officers receive any necessary training within six months of employment beginning August 2022, including any public safety officers who are expected to respond to fires or emergencies. We conducted this audit under the authority vested in the California State Auditor by Government Code section 8543 et seq. and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Respectfully submitted, ELAINE M. HOWLE, CPA California State Auditor August 26, 2021 CALIFORNIA STATE AUDITOR 29 Report 2020-804 | August 2021 LOCAL HIGH RISK Appendix A Scope and Methodology Based on our initial assessment, we identified In February 2020, the Joint Legislative concerns about Lindsay’s financial condition Audit Committee (Audit Committee) and financial stability as well as aspects of its approved a proposal by the State Auditor to operations that were potentially ineffective perform an audit of Lindsay under the local or inefficient. The following table lists high‑risk program. We conducted an initial the objectives that the Audit Committee assessment of Lindsay in December 2019 in approved and the methods we used to which we reviewed the city’s financial and address them. operating conditions to determine whether it demonstrated characteristics of high risk pertaining to the following six risk factors specified in state regulations: • The local government agency’s financial condition has the potential to impair its ability to efficiently deliver services or to meet its financial or legal obligations. • The local government agency’s ability to maintain or restore its financial stability is impaired. • The local government agency’s financial reporting does not follow generally accepted government accounting principles. • Prior audits reported findings related to financial or performance issues, and the local government agency has not taken adequate corrective action. • The local government agency uses an ineffective system to monitor and track state and local funds it receives and spends. • An aspect of the local government agency’s operation or management is ineffective or inefficient; presents the risk for waste, fraud, or abuse; or does not provide the intended level of public service. CALIFORNIA STATE AUDITOR 30 August 2021 | Report 2020-804 LOCAL HIGH RISK Audit Objectives and the Methods Used to Address Them AUDIT OBJECTIVE METHOD 1 Review and evaluate the laws, Reviewed relevant state laws and regulations, municipal codes, and other background materials ordinances, rules, and regulations applicable to the city. significant to the audit objectives. 2 Evaluate Lindsay’s current financial • Evaluated the city’s financial statements to determine its financial condition, including its general condition and ability to meet its fund balances, revenues and expenditures, and other major fund balances. short-term and long-term financial • Assessed the city’s financial condition and its ability to meet its obligations by reviewing audited obligations while continuing to provide financial statements. services to its residents. • Reviewed outstanding pension and OPEB liabilities and annual contributions. 3 Identify the causes of Lindsay’s • Identified and documented the major events and actions that caused Lindsay’s financial financial challenges, and determine challenges, including loans, transfers, and advances over the last three fiscal years, and the city’s whether the city has developed an efforts to address those challenges. adequate plan for addressing those • Reviewed the city’s forgiveness of loans from its utility funds to its general fund to assess whether challenges, including the following: it violated Proposition 218 and the city’s response to address the violation. a. Assess the appropriateness of any interfund loans, transfers, and • Interviewed city council members and the former finance director to assess the city’s forgiveness advances over the last three fiscal of loans from its utility funds to its general fund. years; determine whether Lindsay • Reviewed the city’s streets program to determine whether the city’s approach to funding the complied with applicable laws and program violated Proposition 218. followed best practices in making such transactions; and evaluate the • Evaluated the sales tax proposal approved by city voters and compared the city’s revenue city’s ability to repay its interfund projections to actual amounts collected. loans, transfers, and advances in a timely manner. • Consulted with the city manager to identify the city’s attempts to pursue and promote economic development opportunities. In particular, we evaluated the city’s efforts to increase revenue by b. Assess the city’s efforts to improve allowing and licensing cannabis businesses, to resolve outstanding financial liabilities to state its financial condition by increasing agencies, and to reduce expenditures. revenues and reducing expenses. 4 Determine whether Lindsay’s • Reviewed GFOA budgeting best practices and identified key practices that the city should follow. budgeting processes comply with • Reviewed whether the city’s budget practices are timely and in line with the key GFOA budgeting best practices. In addition, evaluate best practices we identified. the city’s procedures and underlying assumptions for projecting future • Examined Lindsay’s budgets for the past three fiscal years and assessed the reasonableness revenues and expenditures, and and accuracy of the projections it used by comparing budgeted and actual revenues determine whether they result in and expenditures. balanced budgets and accurate financial forecasts. 5 Assess Lindsay’s process for setting, • Interviewed staff to obtain an understanding of the city’s policies, processes, and practices for increasing, or decreasing fees or setting fees and rates. rates to ensure that it complies with • Identified all the fees and rates Lindsay charges. Selected seven fees and rates and reviewed the applicable laws, rules, ordinances, city’s cost of providing each service. Determined when the city last updated each fee or rate and regulations, and best practices. For assessed whether the fee or rate covers the city’s costs of providing the relevant services. a selection of these fees and rates, determine if they cover the city’s costs • For three of the fees and rates, we tested whether their last increases complied with applicable of providing services. city laws and policies. 6 Determine whether the city council • Identified and documented best practices related to training new city council members. provides adequate oversight of city • Interviewed staff and reviewed documentation related to training that the city has provided to operations and the governance council members since 2018 and compared this training to the best practices we identified. We necessary to ensure that Lindsay meets did not identify any problems with the city’s process for training council members. its fiduciary duties to its residents. • Documented city council oversight and decision making related to the city’s financial affairs from 2018 through 2020 and determined that it has increased that oversight. CALIFORNIA STATE AUDITOR 31 Report 2020-804 | August 2021 LOCAL HIGH RISK AUDIT OBJECTIVE METHOD 7 Evaluate Lindsay’s efforts to address • Identified major findings from the external auditor’s last four annual audit reports. the deficiencies noted by its external • Assessed whether Lindsay’s efforts for tracking and responding to the findings have been auditor during the most recent audit of sufficient. We found that Lindsay has sufficiently tracked and responded to audit findings, other the city’s financial statements. than those related to its violation of Proposition 218. 8 To the extent possible, determine the • Reviewed information about integrated public safety models and their use in California. impact of Lindsay’s integrated public • Identified recruitment and training standards and best practices for police officers and firefighters. safety model and resources on its ability to protect its citizens. • Identified how Lindsay recruits and trains its public safety officers and assessed the adequacy of these efforts. We found that its recruitment process was adequate. • Compared Lindsay’s public safety response times, staffing levels, and capital assets to those of three comparable cities and industry averages to determine whether they are sufficient to protect the public’s safety. Lindsay has slightly more firefighters and slightly fewer police personnel than the average for other small California cities. • We attempted to compare Lindsay’s combined public safety model with those of other cities in California; however, their models or demographics were not similar enough to Lindsay’s to make a valid comparison. 9 Review and assess any other issues that • Reviewed best practices for recruitment of key city leaders and compared them to Lindsay’s are significant to the audit. practices and, in general, found that Lindsay employed those best practices. • Assessed strategic and succession planning efforts. Although the city does not have a formalized strategic plan, we found that the city does undertake some strategic planning as part of its budget development process. However, we identified concerns with the city’s financial planning efforts, which we discuss in the report. We found that although the city lacks a succession plan, it has adequately filled its key leadership positions, including its city manager and finance director positions. Source: Audit workpapers. Assessment of Data Reliability entirely electronic and there are no paper source documents against which to check The U.S. Government Accountability Office, the data. Consequently, we found the whose standards we are statutorily required 9‑1‑1 database data to be of undetermined to follow, requires us to assess the sufficiency reliability for the purposes of calculating and appropriateness of computer‑processed the exact response times for Lindsay’s information that we use to materially Public Safety Department. Although this support our findings, conclusions, or determination may affect the precision of recommendations. In performing this audit, the numbers we present, there is sufficient we relied on electronic data obtained from evidence in total to support our findings, the Tulare County ADSi CADForce database conclusions, and recommendations. (9‑1‑1 database). We performed dataset verification procedures and testing of key data elements and found that about 15 percent of the data were not logical, indicating data entry errors and calls in which dispatchers canceled officers’ responses. We otherwise did not identify any issues with the data. We did not perform accuracy and completeness testing of these data because the system is CALIFORNIA STATE AUDITOR 32 August 2021 | Report 2020-804 LOCAL HIGH RISK Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR 33 Report 2020-804 | August 2021 LOCAL HIGH RISK Appendix B The State Auditor’s Local High‑Risk Program challenges, we conducted initial assessments to further evaluate the risks those cities faced. Government Code section 8546.10 authorizes We performed independent, data‑driven the State Auditor to establish a local high‑risk analyses to determine which cities to program to identify local government send audit teams into to get local officials’ agencies that are at high risk for potential perspective regarding our areas of concern. waste, fraud, abuse, or mismanagement or Our initial assessment concluded that that have major challenges associated with Lindsay’s circumstances warranted an audit. their economy, efficiency, or effectiveness. In February 2020, we sought and obtained Regulations that define high risk and describe approval from the Audit Committee to the workings of the local high‑risk program conduct an audit of Lindsay. became effective on July 1, 2015. Both the statute and regulations require that the If a local agency is designated as high risk State Auditor seek approval from the Audit as a result of an audit, it must submit a Committee to conduct audits of high‑risk corrective action plan. If it is unable to local entities. provide its corrective action plan in time for inclusion in the audit report, it must To identify cities that may be at high risk for provide the plan no later than 60 days after fiscal distress, we analyzed audited financial the report’s publication. It must then provide statements and unaudited pension‑related written updates every six months after the information for more than 470 California audit report is issued regarding its progress cities. This review included using various in implementing the corrective action plan. financial indicators to assess the fiscal health This corrective action plan must outline of cities and rate them based on their risk of the specific actions the local agency will experiencing fiscal distress. These indicators perform to address the conditions causing us enabled us to assess each city’s ability to to designate it as high risk and the proposed pay its bills in both the short and long term. timing for undertaking those actions. We Specifically, the indicators measure each city’s will remove the high‑risk designation when financial reserves, debt burden, cash position we conclude that the agency has taken or liquidity, revenue trends, and ability to pay satisfactory corrective action. for employee retirement benefits. In most instances, the financial indicators rely on information for fiscal years 2016–17 through 2018–19.7 Based on our analysis from 2019, we identified several cities, including Lindsay, that met the criteria for being at high risk. After establishing our list of cities facing fiscal 7 As we describe in Appendix A, we conducted our initial assessment of Lindsay in December 2019. In November 2020, we updated our financial indicators to include information through fiscal year 2018–19. CALIFORNIA STATE AUDITOR 34 August 2021 | Report 2020-804 LOCAL HIGH RISK Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR 35 Report 2020-804 | August 2021 LOCAL HIGH RISK * * California State Auditor’s comments begin on page 43. CALIFORNIA STATE AUDITOR 36 August 2021 | Report 2020-804 LOCAL HIGH RISK CALIFORNIA STATE AUDITOR 37 Report 2020-804 | August 2021 LOCAL HIGH RISK 1 2 CALIFORNIA STATE AUDITOR 38 August 2021 | Report 2020-804 LOCAL HIGH RISK 3 4 CALIFORNIA STATE AUDITOR 39 Report 2020-804 | August 2021 LOCAL HIGH RISK 4 5 CALIFORNIA STATE AUDITOR 40 August 2021 | Report 2020-804 LOCAL HIGH RISK 6 CALIFORNIA STATE AUDITOR 41 Report 2020-804 | August 2021 LOCAL HIGH RISK 7 CALIFORNIA STATE AUDITOR 42 August 2021 | Report 2020-804 LOCAL HIGH RISK Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR 43 Report 2020-804 | August 2021 LOCAL HIGH RISK Comments CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE CITY OF LINDSAY To provide clarity and perspective, we are commenting on Lindsay’s response to our audit. The numbers below correspond to the numbers we have placed in the margin of Lindsay’s response. 1 The city mischaracterizes our finding. As we explain on page 9, Proposition 218 prohibits a city from using revenues derived from property‑related fees, such as fees for water service, for general government operations. We did not consider, as the city’s response suggests, whether the city’s residents were overcharged for services. Therefore, we stand by our finding that Lindsay’s transfers and subsequent loan forgiveness violated this provision of Proposition 218. Further, Lindsay’s response incorrectly cites state law relating to the statute of limitations that governs legal actions regarding the validity of property assessments when, in fact, the city derived these revenues from fees—paid by ratepayers such as for water and sewer utility services. We found no specific statute of limitations; therefore, the default three‑year statute of limitations would apply to an action seeking judgment on the improper use of revenue derived from property‑related fees. 2 Lindsay misrepresents the city’s obligations and the reasonableness of its engineer’s report related to the streets program. As we explain on pages 11 and 12, although Proposition 218 prohibits a city from using property‑related services for general government services, a city may charge its utility funds for the costs it incurs against the general fund, such as for the costs of street repair and maintenance. However, a city must be able to demonstrate that those transfers reasonably represented those costs. As we describe on page 12, the 2004 engineer’s report that supports those transfers—which averaged nearly $900,000 annually—did not demonstrate that the amount generated by the rate increases represented the actual costs of the damage the city’s utilities caused. Instead, we noted on the same page, that the city should analyze and report the damage that each type of utility has caused to its streets to identify what the appropriate amount would be to charge each fund going forward. Finally, Proposition 218 provides that in any challenge to the validity of a property‑related fee or charge, the burden is on the local agency—in this case, the city of Lindsay—to demonstrate compliance. Thus, we stand by our finding. CALIFORNIA STATE AUDITOR 44 August 2021 | Report 2020-804 LOCAL HIGH RISK 3 Again, Lindsay mischaracterizes our finding and refers to provisions of Proposition 218 relating to property assessments, which do not apply here. Our report focused on property‑related fees, not assessments, which are distinct and governed by different provisions of Proposition 218. As we state on pages 11 and 12, those provisions of Proposition 218 allow the city to charge its utilities for the cost of street repairs and maintenance that result from damage by those utilities so long as the city demonstrates that a charge for repairs or replacement reasonably represents those costs. Thus, we stand by our recommendation on page 15 that Lindsay should perform a study to determine the appropriate level of funding from its utility funds for the streets program and update that study every three to five years. 4 We agree with Lindsay that this report “is not a court of law” and that, as of yet, a court of law has not imposed legal liability on the city for violating state law. However, audit standards require us to review the legal criteria governing the city’s actions, to gather and consider sufficient and appropriate evidence, to identify any bad effects, and to report our findings with recommendations where appropriate. Here we have done so, including reporting on the risk that its noncompliance poses to the city if challenged in court. We offer our conclusions solely for helping the city avoid an adverse judicial ruling and related financial award. Similarly, we note on page 11 that the city’s external auditor also reached the conclusion that the city’s actions violated Proposition 218. Thus, we stand by our findings and recommendations. 5 During the course of our audit, the city did not share with us information regarding its approval of the levy and collection of charges related to its utilities. We look forward to reviewing this information when it provides an update on its progress toward implementing our recommendation on page 22 that it develop and implement a plan to build and maintain adequate balances in its enterprise funds. 6 The city misrepresents its efforts to improve its financial policies as steps towards long‑term financial planning. Although a long‑term financial plan could include a component for updating financial policies, the city’s efforts to update its financial policies are not part of a larger, long‑term financial plan. Instead, the city has proceeded through its financial challenges in a piecemeal approach, such as by updating these policies, without having a larger framework in place to comprehensively address these challenges. Thus, we stand by our recommendation. CALIFORNIA STATE AUDITOR 45 Report 2020-804 | August 2021 LOCAL HIGH RISK The city’s response incorrectly implies that we recommended it 7 create a separate, stand‑alone fire department. We explain on page 26 the director of public safety’s perspective that the current integrated model is not sustainable, and that the city manager has yet to formally propose to the city council that it separate the police and fire services into two departments. On the same page, we note that until the city council approves such an organizational change, the Public Safety Department must continue to ensure that all of its public safety officers are duly trained to respond to both police and fire emergencies. Thus, we stand by our recommendation on page 28 that the city evaluate the effectiveness of using a combined police and fire department and ensure all of its public safety officers have training to respond to fires or emergencies.