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Corrective Action Plan & Assessment
The City of Hemet


Click to view Hemet's update to its Corrective Action Plan (PDF) from August 3, 2017


The city of Hemet (Hemet) provided its second update to its corrective action plan on August 3, 2017. Due to the short time frame between its first and second updates, many of the areas of risk remain pending or partially addressed. Further, Hemet's city manager resigned from his position shortly after preparing this most recent update. Hemet appointed a new interim city manager in August 2017, resulting in additional time passing before Hemet provided information to substantiate the statements made in its update. Accordingly, we will continue to maintain the high risk designation of the city and will reassess that status upon review of Hemet's next update, which is due in February 2018.



Expenditures continue to outpace revenue,
impeding Hemet’s ability to meet its financial obligations
Ongoing Budget Deficit
California State Auditor’s
Assessment Status:

Pending

In our assessment of Hemet's May 2017 update, we stated that Hemet's five-year plan did not accurately reflect its budget deficit because the plan did not incorporate revenues from its recently enacted sales tax increase (Measure U). Hemet subsequently revised its budget to incorporate Measure U revenue and expenditures. However, this presentation is misleading because it does not accurately reflect how the city plans to spend the additional revenue generated by Measure U. Although Hemet's August 2017 update indicates that its general fund revenue will exceed expenditures by $1.3 million, its fiscal year 2017-18 budget states that its revenue will exceed expenditures by $1.8 million in fiscal year 2017-18, as shown in Table 1. Included in Hemet's fiscal year 2017-18 general fund budget is an assumption that Measure U will generate $10 million for the city and that new public safety spending promised in the passage of Measure U would be $7 million. According to Hemet's city manager, the city intends to designate the remaining $3 million of funds for future public safety spending. Because Measure U funds will not be available to support any type of general fund expenditures, it should not be factored in determining whether Hemet's general fund revenues will exceed expenditures. If Measure U revenues and expenditures are excluded from the general fund budget, Hemet's projections will show that its expenditures exceed its revenues.

Table 1
Analysis of Hemet's Fiscal Year 2017–18 General Fund Budget
(in Millions)

Fiscal Year 2017–18 Budget Fiscal Year 2017–18 Measure U Projections Fiscal Year 2017–18 Budget Excluding Measure U
Revenues $50.4 $10.0 $40.4
Expenditures (48.6) (7.0) (41.6)
Totals 1.8 3.0 (1.2)

Source: Fiscal Year 2017-18 General Fund Budget for the City of Hemet.


We are concerned not only because Hemet continues to spend more than its revenues but also because this excess spending may increase in future years if Hemet continues to follow its plans for enhancing public safety. As noted, Hemet intends to spend $7 million of Measure U revenue in fiscal year 2017-18 to supplement its public safety spending. However, that amount accounts for only 33 of the 73 additional public safety staff called for under Measure U. Hemet's city manager stated that the city does not plan to spend in excess of the revenues collected under Measure U, but the remaining $3 million does not seem sufficient to fund the remaining 40 positions. Consequently, the city would likely have to use additional general fund revenues to supplement those costs, thereby further depleting its fund balance.

 
Rising Pension Costs
California State Auditor’s
Assessment Status:

Partially Addressed
In its initial corrective action plan from August 2016, Hemet stated that it would evaluate the cost-effectiveness of pre-paying its unfunded liability to CalPERS. In November 2016, the Hemet city council directed staff to move forward with CalPERS to change how the city would pay for the unfunded portion of its pension costs. Hemet plans to reduce the overall period for paying its unfunded liability from 30 years to 20 years. As a result, Hemet will incur larger payments during the next 20 years but projects that it will save approximately $12.5 million over the original 30-year period because of reduced interest payments. As we stated in our assessment of Hemet's May 2017 response, if Hemet can adhere to this payment schedule over the next 20 years, it should save a substantial amount in future years.
 
Use of City-Supported Library by Nonresidents
California State Auditor’s
Assessment Status:

No Action Taken
In its August 2017 update, Hemet states that it was informed by the State Librarian that if it implemented our recommendation, it would lose eligibility for state and federal funding and may be liable to repay a $5 million grant used for construction of its library. Hemet also indicated it would lose other services. Subsequent to its submission of its August 2017 update, Hemet provided us the letter it received from the State Librarian. In that letter, the State Librarian stated that if Hemet imposed a non-resident user fee, it would be ineligible to be a member in the Inland Library Cooperative System. According to that letter, the Inland Library Cooperative System gives the Hemet Library access to interlibrary loans and discounted broadband internet connections. The letter also stated that membership in the system also makes it easier to obtain federal grants. The letter did not state that Hemet would lose eligibility for state and federal funding and may be liable to repay the grant used for creation of the library. We expect Hemet to provide at its next update information substantiating the potential costs identified by the State Librarian, such as the cost of undiscounted broadband internet connections. As we estimated on page 14 of our report, a library fee could raise between $333,890 and $2.5 million annually.
 
Significant Retiree Medical Costs and Unfunded Liability
California State Auditor’s
Assessment Status:

Partially Addressed
In October 2016, the Hemet city council voted to establish an other post-employment benefit (OPEB) trust and made an initial contribution of $750,000. The adopted policy of the city council is for the city to contribute $250,000 annually into the trust. The city expects to contribute $12 million in total over 45 years. Although the establishment and funding of the trust is a positive step, it is not clear that the actions will be sufficient to address Hemet's OPEB liability, currently valued at $87 million. As it continues to develop a plan to address its entire unfunded liability, we expect that Hemet will provide updates on its progress.
Ineffective and inefficient organizational management
negatively affects Hemet’s provision of public services
Underfunded Fire Department
California State Auditor’s
Assessment Status:

Partially Addressed
In our assessment of Hemet's May 2017 update, we stated that Hemet should update its staffing plan for its fire department given the new funding provided by Measure U, which passed in November 2016. Since then, Hemet has hired three battalion chiefs, and its fiscal year 2017-18 budget calls for $1.3 million in new spending funded by Measure U. This amount includes the hiring of an Emergency Services Coordinator, three fire captains, and two public safety dispatchers. In addition to those positions, Measure U calls for hiring three more fire captains, three fire engineers, three firefighters, four public safety dispatchers, and a media analyst by 2018. However, as we note in the Ongoing Budget Deficit risk area, adhering to its plan may cause Hemet to spend more than its Measure U revenue.
 
Lack of Coordinated Approach to Promote Community Engagement
California State Auditor’s
Assessment Status:

Pending
This update states that an assistant city manager the city planned to hire in August 2017 would be responsible for developing a community engagement plan. In its May 2017 update, Hemet stated that it would create a plan for community engagement and develop a public improvement program, which Hemet's former city manager confirmed were synonymous. Subsequent to the submission of the August update, Hemet appointed a new interim city manager. We expect that Hemet's new leadership will inform us of its progress on development of a community engagement plan in its next update, scheduled for February 2018.
 
Inefficient Structure of City Government
California State Auditor’s
Assessment Status:

Pending
This update states that an assistant city manager the city planned to hire in August 2017 would be responsible for creating a comprehensive organizational analysis, including reviewing work assignments and reporting relationships. Subsequent to the submission of the August update, Hemet appointed a new interim city manager. We expect that Hemet's new leadership will inform us of its progress on creation of an organizational analysis in its next update, scheduled for February 2018.
 
Turnover of Key Positions and Lack of Consistent Leadership
California State Auditor’s
Assessment Status:

Pending
Hemet continues to experience turnover in key positions. Its deputy city manager left the city in February 2017, and its city manager resigned in August 2017. Further, its police chief, who has served as acting city manager in the past, announced that he would retire by the end of 2017. This update states that an assistant city manager the city planned to hire in August 2017 would be responsible for creating a comprehensive organizational analysis that would include goals for the city. The assistant city manager would also be responsible for developing a succession plan. Subsequent to the submission of the August update, Hemet appointed a new interim city manager. We expect that Hemet's new leadership will inform us of its progress on development of a strategic plan and succession plan in its next update, scheduled for February 2018.
 
Inconsistencies in Outsourcing Maintenance Activities
California State Auditor’s
Assessment Status:

No Action Taken
In September 2016, the Hemet city council rejected a proposal to outsource its maintenance activities. However, the analysis presented by staff to the city council differed significantly from the analysis we performed during the audit. During the audit, we spoke with the public works director who confirmed that if Hemet outsourced its parks maintenance, $465,295 of the department's annual costs of $1,003,000 would be retained by the city. However, the city's analysis concluded that $615,063 of the department's annual costs of $944,820 would be retained by the city, a difference of over 30 percent from our calculation. Because the analysis presented by staff to the city council showed that outsourcing would increase city costs, the city council chose not to outsource this function. However, we stand by our analysis that the city could reduce more of its costs if it outsourced parks maintenance, resulting in an annual savings for the city.


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