Inglewood, City of - Internal Control System

CITY OF INGLEWOOD Review Report INTERNAL CONTROL SYSTEM October 1, 2016, through September 30, 2018 BETTY T. YEE California State Controller May 2020 BETTY T. YEE California State Controller May 4, 2020 Artie Fields, City Manager City of Inglewood 1 Manchester Boulevard Inglewood, CA 90301 Dear Mr. Fields: The State Controller’s Office reviewed the City of Inglewood’s internal control system to determine the adequacy of the city’s controls for conducting operations, preparing financial reports, safeguarding assets, and ensuring proper use of public funds. Our review found deficiencies in the city’s internal control system. Our evaluation was based on conditions that existed during the review period of October 1, 2016, through September 30, 2018. We used Standards for Internal Control in the Federal Government (Green Book), established by the Government Accountability Office, to assess various aspects of the city’s internal control system. The Green Book outlines the fundamental components, principles, and attributes of effective internal control systems. Of the 48 control attributes evaluated, we found 15, or 31%, were present but not functioning; and 33, or 69%, were present and functioning. The City of Inglewood should develop a comprehensive plan to address these deficiencies. The plan should identify the tasks to be performed, as well as milestones and timelines for completion. The City Council should require periodic updates at public meetings of the progress in implementing this plan. Furthermore, we request that the city provide the State Controller’s Office with a progress update of its plan six months from the issuance date of this report. If you have any questions, please contact Efren Loste, Chief of our Local Government Audits Bureau, by telephone at (916) 324-7226. Sincerely, Original signed by JIM L. SPANO, CPA Chief, Division of Audits JLS/as Artie Fields, City Manager -2- May 4, 2020 cc: The Honorable James T. Butts Jr., Mayor City of Inglewood George Dotson, Councilmember City of Inglewood Ralph Franklin, Councilmember City of Inglewood Eloy Morales Jr., Councilmember City of Inglewood Alex Padilla, Councilmember City of Inglewood David L. Esparza, Assistant City Manager/Chief Financial Officer City of Inglewood Sharon Koike, Assistant Finance Director City of Inglewood City of Inglewood Internal Control System Contents Review Report Introduction ....................................................................................................................... 1 Background ........................................................................................................................ 1 Objectives, Scope, and Methodology ............................................................................... 2 Conclusion .......................................................................................................................... 2 Views of Responsible Officials .......................................................................................... 3 Restricted Use .................................................................................................................... 3 Findings and Recommendations ........................................................................................... 4 Appendix—Evaluation of Internal Control System ........................................................... A1 Attachment—City of Inglewood’s Response to Draft Review Report City of Inglewood Internal Control System Review Report Introduction The State Controller’s Office (SCO) reviewed the City of Inglewood’s internal control system for the period of October 1, 2016, through September 30, 2018 (fiscal year [FY] 2016-17 and FY 2017-18). When information obtained from city officials, independent auditors, and other audit reports merited further review, we expanded our testing to include prior-year and current-year transactions. Our review found deficiencies in the city’s internal control system as described in the Findings and Recommendations section of this report. Background The City of Inglewood is located in southwestern Los Angeles County, within the Los Angeles metropolitan area. The city was founded in 1887, incorporated as a general-law city in 1908, and chartered by a vote of its people in 1926. The city has a total area of 9.1 square miles, and a population of 110,598 according to the city’s 2018-19 Adopted Annual Budget. According to the U.S. Census Bureau, the City of Inglewood has a 20% poverty rate, higher than the nation-leading California poverty rate of 13%. The City of Inglewood has a council–manager type of government. The city is governed by a five-representative City Council. Each of the city’s four council districts elects one representative; the city at large elects the Mayor as the fifth member. City Councilmembers are elected to four-year terms on a staggered basis every two years. As the city’s legislative body, the City Council acts upon city laws and is bound to uphold state and federal laws; the city adopted its current charter on June 5, 2018. The city sets its own laws and policies by ordinance, resolution, and minute action. The City Council adopts the annual city budget and establishes goals, objectives, and performance measures for the City Manager. The City Manager is appointed by majority vote of the City Council and acts as the Chief Executive Officer of the city. The City Manager implements the legislative policies of the City Council, manages the day-to-day operations of the city, and is responsible for efficient and effective delivery of municipal services. The five elected City Councilmembers are:  James T. Butts Jr., Mayor  George Dotson, Councilmember  Ralph Franklin, Councilmember  Eloy Morales Jr., Councilmember  Alex Padilla, Councilmember The City Manager is Artie Fields. -1- City of Inglewood Internal Control System We conducted a review of the city’s internal control system pursuant to Government Code section 12422.5, which authorizes the State Controller to “audit any local agency for purposes of determining whether the agency’s internal controls are adequate to detect and prevent financial errors and fraud.” We used Standards for Internal Control in the Federal Government (Green Book), established by the Government Accountability Office, to assess various aspects of the city’s internal control system. The Green Book outlines the fundamental components, principles, and attributes of effective internal control systems. This assessment is intended to help management evaluate how well the city’s internal control system is designed and implemented, and determine where improvements can be made. Objective, Scope, The objective of our review was to evaluate the city’s internal control system for FY 2016-17 and FY 2017-18 to ensure the: and Methodology  Effectiveness and efficiency of operations;  Reliability of financial reporting;  Compliance with applicable laws and regulations; and  Adequate safeguarding of public resources. To accomplish our objective, we:  Evaluated the city’s formal internal policies and procedures;  Conducted interviews with city employees and observed the city’s business operations to evaluate the city’s internal control system;  Reviewed the city’s supporting documentation, including financial records;  Performed tests of transactions on a non-statistical sample basis to ensure adherence with prescribed policies and procedures, and to test and validate effectiveness of controls; and  Evaluated various aspects of the city’s internal control system in accordance with the Green Book. Conclusion Our review found deficiencies in the city’s internal control system, as described in the Findings and Recommendations section of this report. These deficiencies include the following:  Mayor and City Council expenditures substantially higher than comparable cities (Finding 1);  Lack of individualized justification for executive bonuses (Finding 2);  Failure to monitor and write off Transient Occupancy Tax (TOT) revenues (Finding 3); -2- City of Inglewood Internal Control System  Lack of proper and accurate accounting for fixed assets (Finding 4);  Outdated administrative policies and procedures manuals (Finding 5);  Lack of an audit committee (Finding 6);  Lack of active oversight of city vehicle usage (Finding 7); and  Failure to comply with policies for General Fund minimum balance (Finding 8). Of the 48 control attributes evaluated, we found 15, or 31%, were present but not functioning; and 33, or 69%, were present and functioning. The results of our review and evaluation of the city’s internal control system are included in this report as an appendix. Views of We issued a draft review report on February 5, 2020. City Manager Artie Fields responded by letter dated March 3, 2020. The city’s response is Responsible included in this report as an attachment. Officials Restricted Use This review report is solely for the information and use of the City of Inglewood and SCO; it is not intended to be and should not be used by anyone other than these parties. This restriction is not intended to limit distribution of this report, which is a matter of public record and available online at www.sco.ca.gov. Original signed by JIM L. SPANO, CPA Chief, Division of Audits May 4, 2020 -3- City of Inglewood Internal Control System Findings and Recommendations FINDING 1— The Mayor and City Council expenditures are substantially higher than Mayor and City the majority of charter cities of comparable area and population within Los Angeles County. We found that between FY 2014-15 and Council expenditures FY 2017-18, the city’s Mayor and City Council budgeted expenditures substantially higher were approximately 100% greater than the average of comparable charter than comparable cities, as shown in the table below: cities Mayor and City Council Adopted Budgets Budget Area City Population (Square Miles) FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 Alhambra 8 3,089 7.63 $ 341,945 $ 345,634 $ 346,119 $ 352,928 Burbank 1 03,340 17.39 520,059 642,424 618,896 626,068 Compton 9 6,455 10.12 1,290,671 1,345,611 1,158,963 1,160,754 Downey 1 11,772 12.57 287,312 267,859 280,949 319,951 Total $ 2,439,987 $ 2,601,528 $ 2,404,927 $ 2,459,701 Average $ 609,997 $ 650,382 $ 601,232 $ 614,925 Inglewood 1 10,598 9.09 1,261,060 1,323,552 1,542,109 1,841,961 Difference from other citiesʼ average budgets $ 651,063 $ 673,170 $ 940,877 $ 1,227,036 Percentage of difference from average budget 106.73% 103.50% 156.49% 199.54% The largest contributing factor to the city’s higher expenditures for the Mayor and City Council is wages. Mayor and City Council Salaries For 2018, of the 482 cities in California that reported government compensation to SCO, the Mayor of Inglewood was the ninth highest-paid mayor. Mayors receiving higher pay than the Mayor of Inglewood include those of much larger cities (Los Angeles, San Francisco, Oakland, Long Beach, Chula Vista, San Jose, Fresno, and Sacramento). Mayors in the comparable charter cities, identified in the table above—Alhambra, Burbank, Compton, and Downey—earn annual salaries of $11,340, $16,242, $15,000, and $9,851, respectively. The Mayor of Inglewood earns the considerably higher salary of $111,303. Members of the Inglewood City Council are the ninth highest-paid City Councilmembers in the state. Only eight cities—Los Angeles, San Jose, Oakland, San Diego, Fresno, Sacramento, Chula Vista, and National City—pay their City Councilmembers higher salaries. From 2015 through 2018, salaries for the Mayor and Councilmembers increased by $4,857, or 1%, compared to the salary increases of approximately $400,000 (or 100.08%), for support staff. The city also paid salary bonuses totaling $59,108 to the Executive Assistant between 2016 and 2018. -4- City of Inglewood Internal Control System The total wages paid to the Mayor, Councilmembers, and support staff members for 2015 through 2018 is shown in the table below: Wages for Mayor, City Council, and Support Staff Total Wages (Calendar Year) Positions 2015 2016 2017 2018 Mayor $ 111,303 $ 111,303 $ 111,303 $ 111,303 Councilmember 63,060 62,460 60,660 60,660 Councilmember 60,675 60,660 60,660 60,660 Councilmember 60,660 60,660 60,660 60,660 Councilmember 60,660 60,660 60,660 67,932 Subtotal $ 356,358 $ 355,743 $ 353,943 $ 361,215 Executive Assistant to the Mayor and City Manager $ 90,323 $ 128,059 $ 245,436 $ 306,284 Senior Assistant to the City Council 100,538 108,677 117,366 104,848 Assistant to the City Council 52,467 72,464 80,259 78,183 Assistant to the City Council 50,287 71,609 77,921 77,143 Assistant to the City Council 50,084 69,040 76,819 80,583 Assistant to the City Council 48,353 67,542 76,819 77,143 Senior Management Assistant - - 45,185 58,839 Senior Account Clerk - - - 4 ,179 Subtotal $ 392,052 $ 517,391 $ 719,805 $ 787,203 Total $ 748,410 $ 873,134 $ 1,073,748 $ 1,148,419 Recommendation We recommend the city:  Re-evaluate the Mayor and City Council office expenditures, especially for support staffing levels and salaries for the Executive Assistant and Council Assistant positions; and  Thoroughly examine the relevance and importance of the support staff members to the city’s overall purpose and operation. City’s Response Looking at a singular indicia like expenditures without context or other indicia is insufficient. A large portion of the measured expenditures are the salaries (VOTER APPROVED) of our elected officials which are pedestrian when compared to salaries leaders of private sector organizations far less accomplished than the leadership of Inglewood. Inglewood cannot be compared to other cities of a similar size. We are far more complex and successful…. As always, the City will continue to review and analyze the division expenditures and evaluate the appropriate level of staffing necessary for the city’s overall operations. SCO Comment Our finding and recommendation remain unchanged. The city disagreed with the finding, but has agreed to continually review and analyze the division expenditures and evaluate the appropriate level of staffing necessary for the city’s overall operations. -5- City of Inglewood Internal Control System The city did not have adequate documentation to individually support and FINDING 2— justify bonuses paid to Executive Directors (city department heads). Lack of individualized justification for From FY 2015-16 to FY 2017-18, city management approved a total of executive bonuses $701,482 in merit bonuses to 11 Executive Directors. We requested supporting documentation that justified the Executive Directors’ merit bonuses. However, city management indicated that written support was not required because bonuses were allowable per the Inglewood Executive Organization Memorandum of Understanding (MOU), valid October 1, 2016, through December 31, 2020. Instead of written support, the city provided a transcript of a verbal report presented to the City Council that attributed the city’s accomplishments to the Executive Directors. We found the report was insufficient because it did not directly identify the individual efforts of the beneficiaries; instead, it credited the city’s success to the group as a whole. The MOU only identifies criteria that executives are required to meet; the MOU is not written justification indicating which executives meet the required criteria. Without written justification to support the Executive Directors’ bonuses, the city lacks transparency and accountability for merit bonuses. The city did not have policies and procedures to ensure city management retained written justification for merit bonuses. Recommendation We recommend the city develop and implement formal written policies and procedures to ensure city management retains written justification for merit bonuses, to increase transparency and accountability. City’s Response The City follows the language in the Inglewood Executive Organization (IEO) MOU to process the Executive Bonuses, as the MOU is the authority for approving them. Additionally, the City has developed a single policy that provides guidance on issuing the bonuses to the Executives. This policy will encapsulate what the City has already been performing when approving the bonuses for Executives. The city failed to promptly monitor and collect TOT revenue of $306,490 FINDING 3— for FY 2009-10 through FY 2016-17; and $131,527 in TOT-related late Failure to monitor and penalty fees for FY 2014-15 through FY 2016-17. and write off Transient The city also failed to implement the write-off process for the TOT Occupancy Tax revenue and fees, which had an estimated value of up to of $438,017 revenues between FY 2009-10 and FY 2016-17. -6- City of Inglewood Internal Control System Chapter 9, Article 8, section 9-61 (Penalties and Interest) of the city’s Municipal Code, states: (1) Original Delinquency. Any operator who fails to remit any tax imposed by this Article within the time required shall pay a penalty of ten percent (10%) of the amount of the tax in addition to the amount of the tax. (2) Continued Delinquency. Any operator who fails to remit any delinquent remittance on or before a period of thirty (30) days following the date on which the remittance first became delinquent shall pay a second delinquency penalty of ten percent (10%) of the amount of the tax in addition to the amount of the tax and the ten percent (10%) penalty first imposed. Section 2.5 (Write Offs For Bad Debt) of the city’s Accounts Receivable Policies and Procedures states, in part: Bad debt is defined as “payment for actual costs incurred on any given customer that is deemed uncollectible.” The Finance Department will recognize bad debts arising from accounts receivables after all appropriate, internal and external collection efforts have proven unsuccessful. 1) A debt will be deemed to be a bad debt after having given the collection agency a 6 month period to collect. TOT revenues and fees are a funding source for the city’s General Fund. The city failed to collect the TOT revenues and fees because it did not regularly review the Accounts Receivable Customer Aging By Fund Reports and write off accounts that were over six months old. Recommendation We recommend the city:  Adhere to TOT-specific Municipal Code and to Accounts Receivable Policies and Procedures; and  Regularly review the Accounts Receivable Customer Aging by Fund Reports to check for accounts that are over six months old, and begin the write-off process promptly. City’s Response The Finance department has established an updated collection policy that applies to all account receivables. The policy includes the initial invoicing and several follow-up notices sent out on all accounts. The collection policy was revised and updated on 9/12/2017 and includes a process to submit outstanding accounts to a collection agency after city staff have made several attempts to collect the account. At this time, the Finance department is scheduled to request the authorization from City Council to write off all old outstanding receivables that have been deemed to be uncollectible. This request is scheduled to be presented at the April 7, 2020 Council meeting. Going forward, the Finance department will continue to review all outstanding -7- City of Inglewood Internal Control System receivables on a regular basis, send out notifications, and for those accounts that receive no response or payment, the account will be submitted to a collection agency. According to city staff, the city has not performed a physical inventory FINDING 4— count of its fixed assets for the past five years. Furthermore, we requested Lack of proper and records of the most recent physical inventory, but the city did not provide accurate accounting any. for fixed assets The city’s fixed assets include:  Buildings and improvements  Vehicles  Equipment  Road networks  Landscaping  Armored rescue vehicles  Scissor lift trailers  Lawnmowers The city’s Fixed Asset Listing for FY 2017-18 shows the city’s total fixed assets, net of depreciation, are valued at $137,416,651. The city’s Fixed Asset Policy states that every department is required to conduct an inventory count on an annual basis to verify the existence and condition of all items in the Fixed Asset Listing. Section VII. (Asset inventory) of the city’s Fixed Asset Policy states, in part: A departmental inventory count shall be conducted annually to verify the existence and condition of all items listed in the fixed asset records. (When reconciled, the inventory provides evidence that each department head is meeting his or her stewardship duties over department assets. An inventory may also help departments plan for future purchases by identifying unanticipated wear and tear of equipment before the equipment breaks down.) All fixed assets owned and purchased by the city should be properly recorded and accounted for in the city’s Fixed Asset Listing, and in Comprehensive Annual Financial Reports and Financial Transaction Reports submitted to SCO. Without regular physical inventory counts, the city does not have an accurate and complete Fixed Asset Listing. These records are essential to city governance and management. An up-to-date Fixed Asset Listing helps the city:  Safeguard fixed assets to ensure assets can be easily located and maintained; -8- City of Inglewood Internal Control System  Identify unanticipated wear and tear to help manage equipment replacement;  Identify missing fixed assets;  Report capitalized cost and depreciation;  Record replacement and insurance values;  Calculate overhead rates; and  Comply with reporting requirements to ensure accountability. The city failed to adhere to its Fixed Asset Policy, and did not assign staff stewardship responsibilities for valuable assets. Recommendation We recommend the city:  Perform a physical inventory count of its fixed assets;  Maintain a complete and accurate listing of fixed assets of significant value;  Adhere to its Fixed Asset Policy to ensure accordance with Generally Accepted Accounting Principles, Statements of the Governmental Accounting Standards Board, and other applicable government accounting standards; and  Assign stewardship responsibilities for valuable assets. City’s Response The City has policies and procedures that include conducting a physical inventory of all significant city assets. Since the Finance department is in the final phase of implementing the integrated Fixed Asset module, the City will conduct periodic physical inventories of all significant city assets. The city did not periodically review and update its administrative policies FINDING 5— and procedures manuals. Outdated administrative According to city management, the city follows the Civil Services Rules policies and and Regulations Manual, which was last revised on March 30, 1971. City procedures manuals management stated that the city was revising and updating the Civil Services Rules and Regulations Manual, and the process included a thorough administrative review. City management estimated this process will take another 12 months to complete. The city acknowledges it does not have computer disaster recovery policies and procedures, and indicated the city was developing them. A well-designed and properly maintained system of accounting policies and procedures enhances accountability and helps improve business processes and efficiency. The resulting documentation can also serve as a useful training tool for staff. Incomplete and outdated policies and related -9- City of Inglewood Internal Control System internal controls results in unclear roles and responsibilities, and leads to improper handling of transactions. Monitoring is an essential element of internal control; this includes verification by management that policies and procedures are regularly updated to address new challenges identified by ongoing risk assessments. Recommendation We recommend the city:  Perform periodic review of administrative policies and procedures manuals to ensure proper documentation, accuracy, and completeness;  Develop a formal employee handbook, and formal policies and procedures for computer disaster recovery; and  Disseminate the updated administrative policies and procedures manuals to all employees and provide training when necessary. The manuals should clearly state the authority and responsibility of all employees, especially the authority to approve transactions and the responsibility for the safekeeping of assets and records. City’s Response All policies are current and in use. The fact that they have stood the test of time is no indicia of a necessity to change them for the sake of change. The City has an Administrative manual that has several policies and procedures documented that are currently still being followed. Although many of the policies are dated with the initial date the policy was originated or updated, the policies are still being followed. The Human Resource department is putting together an Employee Handbook for distribution to all employees. The City does have a computer disaster recovery policy and vehicle usage policy that are currently in place. SCO Comment Our recommendation is for the city to periodically review its manuals to ensure they are accurate and complete. We updated our recommendation to remove the remark on the vehicle usage policy. We received from the city a copy of the vehicle usage policy, but we have not received a copy of the computer disaster recovery policy. The city lacks an audit committee to advise the City Council. The FINDING 6— primary purpose of an audit committee is to provide oversight of the Lack of an audit financial reporting process, the audit process, the entity’s system of committee internal controls, and the entity’s compliance with laws and regulations. On June 30, 2012, the Los Angeles County Civil Grand Jury (Grand Jury) issued a final report of its findings and recommendations pertaining to county government matters during FY 2011-12. In this report, the Grand Jury recommended to 15 charter cities within Los Angeles County—the City of Inglewood included—that they establish formal audit committees to provide independent review and oversight of the cities’ financial reporting processes, internal controls, and independent auditors. -10- City of Inglewood Internal Control System On February 6, 2013, the city responded to the Grand Jury Report regarding the audit committee issues, stating that it agreed with this recommendation; however, the city has yet to implement the recommendation. The City Council is responsible for establishing an audit committee. According to city management, the city has appropriate processes and controls in place specifically over the accounting and audit functions. City management also mentioned the auditing structure has been successful, and consists of a team composed of an assistant finance director with a CPA license and a city staff member with accounting and auditing experience. However, the city should establish an audit committee to further demonstrate its commitment to accurate financial reporting, regulatory compliance, and responsible use of public resources. The audit committee’s oversight of independent auditors ensures their integrity and objectivity, thus ensuring audit results are reliable. Recommendation We recommend the city formally establish an audit committee that would be primarily responsible for providing oversight of the financial reporting process, the audit process including the selection and retention of independent auditors, the city’s system of internal controls, and the city’s compliance with laws and regulations. The audit committee should be formally established through a city resolution. City’s Response The City of Inglewood does have in place appropriate and highly effective processes and controls specifically over the accounting and audit functions. Over the last eight years, annual independent audit results have demonstrated marked improvement. Our auditing structure has been overwhelmingly successful and consist of a team composed of city staff and external financial expertise with expertise in specific financial areas that needed improvement. The City’s structure has been successful, as audit results demonstrate. More than 67 audit findings over the last eight years have been addressed, and the most recent audit as of 9/30/2018 had only 3 audit findings, none being significant deficiencies. SCO Comment Our finding and recommendation remain unchanged. The city claims to have in place an appropriate and highly effective process and controls specifically over the accounting and audit functions. However, the city has not formalized an audit committee through a city resolution. Best business practices dictate the audit committee be independent and consist of a majority of individuals who are not responsible for the day-to-day operations of the city. This independent perspective is lacking in the city’s current governance structure. -11- City of Inglewood Internal Control System We urge the city to consider implementing the Grand Jury’s recommendation to establish an independent audit committee. Among many benefits, an audit committee would provide these principal benefits:  Provide objective advice and recommendations to the City Council on whether the city’s system of internal controls is appropriate, functioning, and effective; and  Help to meet taxpayers’ increasing demands for transparency and accountability. FINDING 7— The city lacked active oversight of city vehicle usage. Lack of active We assessed the city’s policies and procedures regarding city vehicle oversight over city usage to ensure these control procedures were complete and sufficient to vehicle usage protect public resources from misuse. We noted the city did not have the following vehicle usage controls in place for all departments:  Requirement for drivers to sign documents agreeing to only use vehicles for work-related purposes; and  An activity log or sign-in sheet. Some departments, such as Public Works, use a sign-in sheet to keep track of vehicle usage; however, other departments including the City Manager’s department do not. Without active oversight for city vehicle usage, the city may have failed to deter employees from using city vehicles for non-work-related purposes. Recommendation We recommend the city develop and implement tracking methods to ensure city vehicles are used only for work-related purposes. City’s Response The City updated and revised its vehicle usage policy which includes log sheets to document vehicles used for work-related purposes. For FY 2017-18, the city approved General Fund budgeted expenditures FINDING 8— that were in excess of the amount allowed by the city’s General Fund Failure to comply minimum fund balance policy. with policies for General Fund City of Inglewood Resolution No. 14-79 states, in part: minimum balance At the end of each fiscal year, the General Fund should have a minimum fund balance of 25% of the next fiscal year’s General Fund annual budgeted operating expenditures, as calculated by the Chief Financial Officer. This target amount has been established in order to provide a reasonable level of assurance that the City’s day-to-day operations will -12- City of Inglewood Internal Control System be able to continue even if circumstances occur where revenues are insufficient to cover expenditures. The minimum fund balance is shown in the annual financial statements as unassigned fund balance. Per the city’s annual budget, the approved General Fund expenditures exceeded the allowable amount by $23.3 million, calculated below. FY 2017-18 Approved General Fund Operating Budget FY 2016-17 unassigned fund balance $ 2 4,864,659 Adjustment from FY 2017-18 Audited Financial Statement 1,286,300 Adjusted FY 2016-17 unassigned fund balance 26,150,959 25% Allowable FY 2017-18 operating expenditures based on 25% limit 1 04,603,836 FY 2017-18 budgeted operating expenditures 1 27,943,354 Excess amount $ 2 3,339,518 According to city officials, the city’s budget expenditures for FY 2017-18 exceeded the allowable amount because the city increased its public safety allocations to support the city’s police department. The city also increased its unassigned fund balance for FY 2017-18 by refinancing its pension obligation bonds, which resulted in a one-time infusion of $35 million. The city approved a General Fund annual budget based on the General Fund total fund balance rather than the unassigned fund balance. As a result, the budgeted General Fund expenditures for FY 2017-18 exceeded the allowable amount—thus providing the city with a lower level of assurance that it would be able to cover the cost of day-to-day operations. Although the city ended FY 2017-18 with a positive General Fund balance, the city should consistently adhere to the General Fund minimum balance policy to prevent overspending. Recommendation We recommend the city:  Develop procedures to comply with its policy for General Fund minimum balance when approving the General Fund operating budget; and  Monitor the changes to its General Fund balance to ensure revenues received are equal to or greater than expenditures incurred. City’s Response The policy was generated by the Mayor and City Council and was extremely ambitious. It is odd [that] the City would be criticized for instituting a policy that few cities would be bold enough to strive for. This finding relates to the 2014-2015 fiscal year when the City fell short of this policy goal. We have far exceeded this goal every year since…. -13- City of Inglewood Internal Control System …Moody’s Investors Service issued the following statement as an Issuer Comment in January of 2016 (Attachment A): “Finances: The financial position of the city is robust and is a notable strength when compared to its A1 rating. The cash balance as a percent of revenues (41.9%) is stronger than the US median. Moreover, the fund balance as a percent of operating revenues (46.4%) far surpasses other Moody’s-rated cities nationwide and saw an impressive increase from 2011 to 2014.” The City has received 5 bond rating upgrades during the past 9 years; rising from BBB- to AA-; an incredible success story. At present and for the past 4 years, the City has far exceeded our self-generated General Fund balances vs. City Budget goal. SCO Comment Our finding and recommendation remain unchanged. We did not criticize the city for instituting the policy. We merely noted the city did not meet its policy relating to General Fund minimum balance for FY 2017-18. -14- City of Inglewood Internal Control System Appendix— Evaluation of Internal Control System1 Present? Functioning? Internal Control Attributes Y / N Y / N Explanations/Conclusions CONTROL ENVIRONMENT 1. Demonstrates Commitment to Integrity and Ethical Values a. Sets the tone at the top X X b. Establishes standards of conduct X X c. Evaluates adherence to standards of conduct X X 2. Exercises Oversight Responsibility a. Establishes oversight structure and responsibilities X X Refer to Finding 6. b. Provides oversight for the system of internal control X X Refer to Finding 5. c. Provides input for remediation of deficiencies in the X X internal control system 3. Establishes Structure, Authority, and Responsibility a. Considers organizational structures X X b. Defines, assigns, and limits authorities and responsibilities X X c. Develops and maintains documentation of the internal X X Refer to Finding 5. control system __________________________ 1This evaluation tool is based on guidelines established by GAO’s Standards for Internal Control in the Federal Government. The evaluation tool helps local agencies to identify internal control weaknesses. SCO uses the same evaluation tool for all of its internal control system reviews of local government agencies, regardless of size. -A1- City of Inglewood Internal Control System Appendix (continued) Present? Functioning? Internal Control Attributes Y / N Y / N Explanations/Conclusions 4. Demonstrates Commitment to Competence a. Establishes expectations of competence for key roles X X b. Attracts, develops, and retains competent personnel X X c. Plans and prepares for succession X X 5. Enforces Accountability a. Enforces accountability of personnel through mechanisms X X such as performance appraisals and disciplinary actions b. Considers excessive pressures X X RISK ASSESSMENT 6. Defines Objectives and Risk Tolerances a. Defines objectives in specific and measurable terms X X b. Considers risk tolerances for the defined objectives X X 7. Identifies, Analyzes, and Responds to Risks a. Identifies risks throughout the entity to provide a basis for X X analyzing risks b. Analyzes the identified risks to estimate their significance X X c. Determines how to respond to risks X X -A2- City of Inglewood Internal Control System Appendix (continued) Present? Functioning? Internal Control Attributes Y / N Y / N Explanations/Conclusions 8. Assesses Fraud Risk a. Considers various types of frauds X X Refer to Finding 7. b. Assesses fraud risk factors - incentives and pressures, X X Refer to Finding 7. opportunities, and attitudes and rationalizations c. Analyzes and responds to identified fraud risks X X Refer to Finding 7. 9. Identifies, Analyzes, and Responds to Change a. Identifies and assesses changes that could significantly X X impact the entity’s internal control system b. Analyzes and responds to identified changes and related X X risks in order to maintain an effective internal control system CONTROL ACTIVITIES 10. Designs Control Activities a. Designs control activities in response to the entity’s X X Refer to Findings 1 and 2. objectives and risks b. Designs appropriate types of control activities for the X X Refer to Findings 1 and 2. entity’s internal control system c. Considers at what level activities are applied X X d. Addresses segregation of duties X X -A3- City of Inglewood Internal Control System Appendix (continued) Present? Functioning? Internal Control Attributes Y / N Y / N Explanations/Conclusions 11. Designs General Control over Information System a. Designs the entity’s information system to respond to the X X Refer to Finding 5. entity’s objectives and risks b. Designs appropriate types of control activities – general and X X application control activities, in the entity’s information system c. Designs control activities over the information technology X X infrastructure to support the completeness, accuracy, and validity of information processing d. Establishes relevant security management process control X X activities e. Establishes relevant technology acquisition, development, X X and maintenance process control activities 12. Implements Control Activities a. Documents in policies and procedures the internal control X X Refer to Finding 4. responsibilities of the organization b. Reassesses policies and procedures through periodic review X X Refer to Finding 5. of control activities -A4- City of Inglewood Internal Control System Appendix (continued) Present? Functioning? Internal Control Attributes Y / N Y / N Explanations/Conclusions INFORMATION AND COMMUNICATION 13. Uses Quality Information a. Identifies information requirements X X b. Obtains relevant data from reliable internal and external X X Refer to Finding 5. sources in a timely manner c. Processes the obtained data into quality information within X X Refer to Finding 5. the entity’s information system 14. Communicates Internally a. Communicates internal control information throughout the X X Refer to Finding 5. entity using established reporting lines b. Selects appropriate methods of communication and X X considers factors such as audience, nature of information, availability, cost, and legal or regulatory requirements 15. Communicates Externally a. Communicates to external parties, and obtains quality X X information from external parties using established reporting lines b. Selects appropriate methods of communication and X X considers factors such as audience, nature of information, availability, cost, and legal or regulatory requirements -A5- City of Inglewood Internal Control System Appendix (continued) Present? Functioning? Internal Control Attributes Y / N Y / N Explanations/Conclusions MONITORING 16. Conducts Ongoing Monitoring Activities a. Establishes a baseline to monitor the internal control system X X Refer to Findings 3 and 8. b. Considers a mix of ongoing and separate evaluations X X c. Objectively evaluates and documents the results of ongoing X X monitoring and separate evaluations to identify internal control issues 17. Evaluates Issues and Communicates and Remediates Deficiencies a. Reports internal control issues through established reporting X X lines to the appropriate internal and external parties in a timely manner b. Evaluates and documents internal control issues and X X determines appropriate corrective actions for internal control deficiencies c. Monitors, completes, and documents corrective actions X X -A6- City of Inglewood Internal Control System Attachment— City of Inglewood’s Response to Draft Review Report State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 www.sco.ca.gov S19-LGO-9000