Risks the City of El Cerrito Faces
The city of El Cerrito (El Cerrito) is at high risk of financial instability because of consistent overspending that threatens its future provision of city services. For many years, El Cerrito's costs have exceeded its revenue, resulting in the city exhausting its reserves in fiscal year 2016–17. Since then, it has depended on short-term loans each year to meet its financial needs. However, the cost to the city for these loans has increased as the city's financial health continues to decline, creating additional strain on city resources. Further, the city's pension costs have continued to increase because it has not set aside enough funding to cover its pension obligations.
El Cerrito overspends because of its poor budget development and monitoring practices. The city assumes that its departments will spend more each year when developing its budget but does not sufficiently justify the specific needs of the departments. For example, the city's fiscal year 2018–19 budget included an 8 percent increase in planned expenditures over the prior year without providing an appropriate rationale for the increased amounts. Moreover, the city's budget policy does not address procedures for tracking departmental spending, such as producing reports that compare its budgeted expenditures to actual spending or holding departments accountable for explaining budget variances. In addition, the finance department allows departments to spend beyond their budgets by routinely overriding budgetary safeguards in the city's financial accounting system. These poor practices defeat the purpose of developing balanced budgets.
In its fiscal year 2020–21 budget, El Cerrito began to take steps to reduce its planned spending, but those changes will not be sufficient to improve its financial condition. Some of the reductions, such as deferred cost-of-living increases for employees, are temporary savings that merely delay the actions needed to address rising costs. The fiscal year 2020–21 budget does not specify how the city will achieve the planned savings needed to carry out other proposed reductions. Although city management began presenting monthly budget reports to the city council in September 2020, these reports do not present financial information at a sufficient level of detail to control departmental spending. El Cerrito's failure to adequately address these deficiencies can be partially attributed to the absence of a comprehensive financial recovery plan to ensure a sustained and coordinated approach for reducing its costs and creating a sufficient financial reserve.
To address its overspending, El Cerrito needs to prioritize efforts to reduce expenditures and increase revenue. About 75 percent of the city's costs are for employee salaries and benefits, of which the majority pertain to staff within the fire and police departments. For instance, the city's firefighter positions have a higher base salary than the average salaries of comparable positions in nearby cities. In addition, the city authorized discretionary salary increases for its fire department battalion chiefs that increased their salaries above the average maximum salary for similar positions in nearby cities. El Cerrito's police department employs more than a quarter of all city staff and has a higher staffing ratio per capita than other cities in Contra Costa County and in the State as a whole. To achieve meaningful savings, El Cerrito will need to find ways to reduce these costs. In doing so, it needs to explore the appropriateness of its employee compensation and identify areas of inefficiency or overlap among positions throughout the city. El Cerrito also needs to pursue opportunities to increase its revenue. The city uses its general fund to subsidize the costs incurred to provide recreational services—specifically those for its swim center and senior services—but has not attempted to adjust its fees so that they cover the costs of providing those services, unlike the fees for other programs in the city.
To help El Cerrito address the risk factors we identified, we have developed several recommendations the city should implement, including the following:
- Develop and adopt a financial recovery plan that addresses the city's overspending and specifies the corrective action it will undertake to ensure accountability in its fiscal recovery process. The plan should identify the city's goals and intended corrective actions, the prioritization of its resources, and individuals responsible for monitoring its progress in implementing each action, and it should outline when the city anticipates completing key milestones related to each action. City management should also inform the city council on a quarterly basis of its progress in implementing the plan.
- Document the assumptions and data used to develop each department's projections of revenue and expenditures for the fiscal year and provide this information to the city council during the budget approval process.
- Present monthly updates to the city council on the status of departmental budgets and promptly seek approval from the city council of proposed budget adjustments when warranted. City management should prepare and provide supporting documentation to justify any proposed budget increases.
- Conduct analyses of its management and staff positions that address their responsibilities, reporting relationships, and total compensation packages compared to similar positions in comparable cities to identify inefficiencies and overlapping areas of responsibility. Based on these analyses, El Cerrito should pursue opportunities to consolidate positions and reduce personnel expenditures.
- Seek opportunities to fully recover the costs of fee-based services for its swim center and senior services.
Agency's Proposed Corrective Action
El Cerrito generally agreed with our recommendations, although it requested flexibility with the timing of their implementation. The city highlighted various efforts that it has taken or plans to take to address its financial condition. However, because El Cerrito did not submit a corrective action plan as part of this response, we look forward to receiving the plan by May 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.