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- El Cerrito's Failure to Manage Its Spending Resulted in the Depletion of Its General Fund Reserves
- Without a More Coordinated Effort, El Cerrito's Financial Condition Will Continue to Deteriorate
El Cerrito's Failure to Manage Its Spending Resulted in the Depletion of Its General Fund Reserves
Because It Consistently Overspends, El Cerrito Is in a Weak Financial Position, as Demonstrated by a Deficit in Its General Fund, Reliance on Costly Short-Term Loans, and Rising Pension Costs
El Cerrito is at high risk of being unable to meet its financial obligations because it consistently spends more than the revenue it generates. Because of this overspending, its general fund reserves declined during the past decade from a peak of $2.6 million in fiscal year 2011–12 and eventually were exhausted in fiscal year 2016–17. The city has used short-term loans since fiscal year 2012–13 to meet its financial obligations and remains dependent on them, rather than using them only as temporary financing tools, as is typically recommended. The interest and other financing costs of these loans have been increasing as the city's fiscal condition has worsened, further negatively affecting the city's finances. In addition, through the first half of fiscal year 2020–21, the city collected substantially less revenue than expected, increasing its financial stress. Moreover, the city is facing rising pension costs primarily because it has not set aside sufficient funds to address its pension liability.
Since fiscal year 2009–10, El Cerrito consistently spent more than it received in revenue, leaving it in a precarious financial condition. To maintain financial stability, a city should strive to keep its spending within the revenue it generates. However, because El Cerrito does not exercise sufficient management oversight of its spending, as we discuss later, it spent more from its general fund than it received in revenue in eight of the past 11 years. During these years, the city relied on nonoperating revenue, such as transfers from other funds or the sale of land, to cover its excessive costs. If nonoperating revenue was unavailable or insufficient, as was the case in some of these years, the city was forced to rely on its general fund reserves, until it completely depleted them in fiscal year 2016–17.
El Cerrito's annual general fund revenue grew by 37 percent between fiscal years 2014–15 and 2019–20, from $29.1 million to $40 million. The largest source of its revenue is property taxes, which represented 25 percent of the city's general fund revenue in fiscal year 2019–20. Another significant city revenue source is sales tax, which amounted to 17 percent of its general fund revenue in fiscal year 2019–20. These two revenue sources have grown by 45 percent and 38 percent, respectively, since fiscal year 2014–15. In addition, in November 2018, voters approved a new tax on the sale and transfer of properties, which generated $3.5 million in fiscal year 2019–20, or 9 percent of the city's total general fund revenue. Figure 1 shows the city's various sources of general fund revenue.
El Cerrito Received General Fund Revenue From a Variety of Sources in Fiscal Year 2019–20
Source: El Cerrito's audited fiscal year 2019–20 comprehensive annual financial report.
Note: Intergovernmental Revenue includes revenue received through a contract El Cerrito has with a fire protection district serving the adjacent community of Kensington. Other Revenue includes inflows from other sources, including licenses and permits, fines and penalties, and franchise fees.
During this same time frame, El Cerrito's expenditures increased along with its revenue. Total annual general fund expenditures increased by 36 percent, from $29.1 million in fiscal year 2014–15 to $39.7 million in fiscal year 2019–20. The largest areas of increased spending during these years were in two of the city's seven departments: fire and police. Total annual expenditures for these two departments increased by $2.6 million and $2.3 million, respectively. The majority of El Cerrito's spending is for salaries and benefits, as Figure 2 illustrates. In its budget for fiscal year 2020–21, the city reported $30.3 million in annual personnel expenditures, representing 75 percent of its total general fund expenditures. The fire and police departments' personnel costs each represent about one‑quarter of the city's costs.
The Majority of El Cerrito's General Fund Expenditures Are for Salaries and Benefits
Source: El Cerrito's annual budget for fiscal year 2020–21, adopted in October 2020.
Depleted General Fund Reserves
El Cerrito's history of overspending resulted in the depletion of its general fund reserves.The city's general fund reserves consist of the portion of its fund balance that the city has not limited to a specific purpose. Such reserves should provide the city with resources to address any budget shortfalls that occur. However, as Figure 3 shows, the fund balance for the general fund has been negative since fiscal year 2016–17, meaning that the city has not had the financial reserves on hand to absorb its overspending. As we reported in the November 2020 update of our local government high risk dashboard, we designated El Cerrito's negative general fund reserves as a high risk indicator for fiscal years 2016–17 through 2018–19.
El Cerrito Depleted Its General Fund Reserves in Fiscal Year 2016–17
Source: El Cerrito's audited comprehensive annual financial reports for fiscal years 2014–15 through 2019–20.
Notes: Consistent with the methodology used in our local government high risk dashboard, we calculated reserves for the general fund as the committed, assigned, and unassigned portions of the city's fund balance as reported in the city's audited financial statements. Restricted fund balances are amounts not available for use by the city, and were therefore excluded from the total reserve amount.
El Cerrito's general fund reserves fluctuate each year primarily because of differences between revenue and expenditures as well as other increases and decreases, such as transfers from and to other city funds, and nonoperating activity, such as the sale of land.
The Government Finance Officers Association (GFOA), which publishes best practices for governments, recommends that cities maintain a reserve balance equivalent to a minimum of two months of expenditures or revenue, representing a minimum of 17 percent of annual expenditures or revenue. In fiscal year 2019–20, this recommended level equated to a minimum reserve of $6.8 million for El Cerrito, based on 17 percent of the city's expenditures.Because El Cerrito's financial policies require that the city maintain a general fund reserve of at least 10 percent of general fund expenditures, we used expenditures, rather than revenue, as the basis of our comparison. However, as Table 1 shows, the city was unable to achieve this threshold during any of the fiscal years from 2009–10 through 2019–20. Additionally, the city has been unable to meet its own goal of maintaining a reserve of at least 10 percent of annual expenditures—equating to $4 million in fiscal year 2019–20—during any of the past 11 years. El Cerrito's inability to meet this significantly lower threshold is of even greater concern.
El Cerrito Has Consistently Failed to Meet General Fund Reserve Goals
|GFOA general fund reserve goal
(as a percentage of annual expenditures)
|El Cerrito's general fund reserve goal
(as a percentage of annual expenditures)
|Fiscal Year||El Cerrito's Reserves
as a Percentage of Annual Expenditures
Source: El Cerrito's audited comprehensive annual financial reports for fiscal years 2009–10 through 2019–20.
* 17 percent represents two months of a full year (2 divided by 12) of expenditures, which is the GFOA's recommended minimum.
Overuse of Short-Term Loans
Because it has exhausted its reserves, El Cerrito has been relying, in part, on short-term loans to pay its bills and avoid insolvency. In each year since fiscal year 2012–13, the city has obtained a loan, generally at the beginning of the fiscal year with a one-year term, to provide temporary funding to cover its immediate costs. For example, the city must rely on loan proceeds to cover payroll costs from July until December, when it receives substantial property tax revenue. The size of the loan that the city obtained each year grew from $5 million in fiscal year 2015–16 to a peak of $9 million in fiscal year 2019–20 and declined slightly to $8.5 million in fiscal year 2020–21. Although short-term loans can address temporary financial difficulties, GFOA best practices recommend that cities perform ongoing cash forecasting to ensure sufficient cash liquidity and mitigate any potential revenue shortfalls, thereby reducing the need for short‑term borrowing. However, El Cerrito has relied on short-term loans annually for nine years and is not in a financial position to discontinue its use of these loans, according to its finance director. Nevertheless, continued reliance on these loans has led the city to deemphasize the urgency of addressing a critical financial concern.
The Standard & Poor's Global Rating Scale Identifies the Creditworthiness of Entities
|Credit Rating||Ability to Meet Financial Commitments|
|BBB||Adequate, but likely to weaken under adverse economic conditions|
|BB–C||Vulnerable to nonpayment|
Note: Individual ratings may also be denoted with a + (more creditworthy) or – (less creditworthy) to indicate the degree of creditworthiness within a rating.
In addition, the interest costs and financing fees associated with these loans have increased in recent years because of the city's ongoing poor financial performance. The city's continued use of these loans means it will continue to bear these costs for the foreseeable future. Credit rating agencies such as Standard & Poor's Global Ratings assign specific ratings to credit seekers based on a forward-looking opinion of their creditworthiness. These ratings are indicative of a city's financial performance and aid creditors in making decisions when lending money to potential borrowers. A rating is based on a variety of factors, including the likelihood that a borrower will be able to meet its financial commitments in accordance with the terms of a loan agreement. As shown in the text box, these ratings vary from AAA, the highest rating, which indicates that an entity's ability to meet its financial commitments is extremely strong, to a rating of D, which indicates that the entity is already in default, meaning that it has neglected to fulfill a financial obligation or has filed for bankruptcy. El Cerrito's credit rating over the past four years has deteriorated from an AA- rating in 2016 to a BBB- rating in 2020, reflecting weakened creditworthiness as a result of its dwindling reserve levels.
Because of El Cerrito's worsening financial condition, the interest rate it pays for these short-term loans has doubled from 1.5 percent in fiscal year 2016–17 to 3 percent in fiscal year 2020–21. Because interest rates declined to record lows during the same period, such an increase particularly underscores the increasing financial risk to the city. Further, as we note above, the amount borrowed each year has also increased over the years, which in turn drives up interest costs. Because of the city's increasing interest rate and the growing size of its loans, its annual interest costs more than tripled from nearly $72,000 in fiscal year 2015–16 to more than $254,000 expected in fiscal year 2020–21. Similarly, other fees and financing costs associated with the procurement of these loans increased from about $36,000 to $91,000. Figure 4 shows the rising costs to El Cerrito of borrowing. If the city does not address its overspending, its costs for these short-term loans will continue to increase, thereby compounding its already precarious financial situation.
El Cerrito's Costs of Borrowing Continue to Increase as Its Credit Rating Weakens
Source: El Cerrito's financial accounting system, loan documents, and Standard & Poor's Global Ratings credit profile reports.
Potential Revenue Reductions
El Cerrito's budget for fiscal year 2020–21 projects that the city's general fund revenue will be lower than its actual revenue from the prior year by $845,000, or 2 percent. The projected decline is based on a forecast, performed by the city's fiscal consultant, that anticipated a recession resulting from the COVID-19 pandemic (pandemic). However, during the first half of fiscal year 2020–21, the city collected $1.8 million, or 10 percent, less in general fund revenue than it collected during the same period in the prior year from sources including sales tax, utility user tax, and recreation program fees. Such a decline indicates that the city's revenue for the current fiscal year may be substantially less than expected.
For example, El Cerrito's recreation department, which receives fees for services such as child care, recreation facility rentals, and its swim center, is currently unlikely to meet its revenue goals for fiscal year 2020–21. From July to December 2019, the city collected $2 million in recreation fees, but from July to December 2020, the city collected only $839,000. Such a substantial decline will force the city to seek other revenue sources to offset costs incurred by the recreation department. Furthermore, the city's expectation that the recreation department would collect $4 million in fiscal year 2020–21 appears to be unrealistic, given that it collected only 21 percent of that amount through the first half of the year. Some of the revenue decline can be attributed to fewer recreational activities because of the pandemic, which has also resulted in a reduction of about $1 million or one-third of the recreation department's costs during these first six months compared to the costs incurred during the same period in fiscal year 2019–20. To address the shortfall in revenue, the city council stated at a December 2020 city council meeting that it would seek additional reductions in recreation programs, including reductions in services provided by its swim center and activities offered by its senior services program. However, the city council did not direct city management during that meeting to address the declines in other revenue outside of the recreation department.
Similarly, El Cerrito's sales tax revenue has declined more than expected. From July to December 2020, the city collected only $2.5 million, or 38 percent of the $6.5 million in sales tax revenue it budgeted to collect in fiscal year 2020–21. City management has not yet reassessed the reasonableness of its projection for this revenue source. However, the finance director stated that there is usually a lag of one or two months in the collection of this revenue and that the city would amend the budget for any anticipated increases or decreases. Although El Cerrito is not heavily reliant on sales tax revenue, even small reductions in the amount of sales tax generated can be significant, given the city's financial condition. These decreases in otherwise reliable revenue sources underscore the need for El Cerrito to immediately reduce its spending to mitigate potential revenue reductions.
Substantial Increases in Pension Payments
A significant portion of El Cerrito's increasing financial obligations can be attributed to its pension liability, which it has been unable to reduce. This liability pertains to the pension plan it offers its employees through the California Public Employees' Retirement System (CalPERS). The city's net pension liability grew by 67 percent from the end of fiscal year 2014–15 through the end of fiscal year 2019–20.Net pension liability represents the employer's obligation to pay for all of the pension benefits it has promised in the future but has not yet funded. Pension liabilities increase because of many factors, such as additional benefits that are earned under the pension plan for each year employees work and as their salaries increase. As of June 2020, the city had a net pension liability of $65.8 million. A city with a large net pension liability will incur increasing pension costs over time because of the need to pay down the liability, which may strain its ability to provide services to its residents, particularly during periods of significant revenue decline.
A city's net pension liability will grow substantially over time if it delays efforts to set aside funds to pay for retirement benefits already earned by employees that will need to be paid in the future. If a city dedicates specific funds early, it can invest them for a longer period, resulting in a higher amount of earnings from those investments to cover subsequent benefit payments as employees retire. However, a city that does not set aside enough funding for this purpose will experience significant growth in its net pension liability because it does not have the investment earnings to cover its future costs. As a result, it will need to allocate a much higher proportion of funds in the future to pay for those costs. As we reported in our local government high risk dashboard, El Cerrito has invested only 68 percent of the amount it needs to pay for the pension benefits it has promised to its employees, a funding ratio that we consider high risk.Pension funding and other financial risk indicators are reported in the local high risk dashboard at https://auditor.ca.gov/local_high_risk/dashboard-csa
The amount El Cerrito pays toward its pension liability continues to grow because the city pays only the minimum amount required each year as determined by an actuary. State law requires CalPERS' actuaries to determine the amount of the minimum employer contribution a participating public entity should pay each year to fund the provision of pension benefits. That contribution includes a portion to fund the benefits earned during the year by current employees as well as a portion designated to reduce the entity's net pension liability. CalPERS bases the amount of the contribution on several factors, including the projected cost of pension benefits.
According to El Cerrito's finance director, the city does not plan to pay more than the minimum required employer contribution each year. Although the annual contribution is intended to eliminate the net pension liability in 20 years based on the actuary's determination, paying the minimum amount alone is unlikely to reduce El Cerrito's liability significantly in the short term. Similar to the concept of a home mortgage loan, payments made by the city toward its pension liability consist of a portion to reduce the principal owed, with the remainder applied to interest charged on the outstanding balance of the liability. However, a substantially higher proportion of the payment during the early years applies to interest costs, resulting in only a small amount of the liability actually being reduced. Further, because future benefit payments will continue to grow as employees' salaries increase, the minimum amount needed to cover these obligations will correspondingly continue to increase. The minimum contribution that El Cerrito must pay may also change based on fluctuations resulting from the return on its invested funds, changes in city staffing levels, and actuarial assumptions such as life expectancy.
As Figure 5 shows, the minimum amount that El Cerrito was required to pay each year grew considerably from fiscal years 2014–15 through 2019–20. In fiscal year 2020–21, the minimum amount El Cerrito must pay is projected to be $7.6 million, which represents 20 percent of its total budgeted general fund expenditures, and by fiscal year 2026–27, CalPERS estimates that the minimum amount will exceed $10 million. To address the amount that needs to be invested to reduce the size of the net pension liability, the city could establish a pension trust fund. El Cerrito could periodically contribute to the fund and also negotiate with employees for them to contribute on an ongoing basis, thereby reducing the burden on the amount the city needs to contribute toward pensions each year.
El Cerrito's Minimum Required Payments to Address Its Pension Costs Have Steadily Increased and Are Projected to Increase Substantially in the Future
Source: El Cerrito's audited comprehensive annual financial reports for fiscal years 2014–15 through 2019–20, El Cerrito's fiscal year 2020–21 budget, and projection for fiscal year 2026–27 based on the California State Auditor's local high risk dashboard.
Retiree Health Care Benefits
El Cerrito's policy of allowing its retirees to remain in its health insurance plan increases the plan's overall cost to the city. The city allows its retired employees to retain their health care benefits upon retirement if desired. It requires those individuals to pay their own premiums, which are the same rates as those charged to active employees. However, health care costs for retirees are generally higher than those of current city employees. When determining the premium amounts, the city's health insurance plan pools the costs of both current and retired employees, resulting in the premium for current employees being higher than if the retirees' costs were excluded. Because the city pays current employees' premiums, it is essentially subsidizing the premium rates for retirees by bearing the additional cost.
El Cerrito has various options that it could consider to reasonably address the additional costs incurred by its decision to allow retirees to remain in the city's health care plan. For example, the city of Beverly Hills offered its current employees a one‑time payment to voluntarily terminate their eligibility for retiree health care benefits, and it discontinued its policy of providing such benefits to newly hired employees. These two actions significantly reduced Beverly Hills' projected liability for retiree health care costs. Alternatively, the city of Chula Vista determined the additional costs pertaining to the higher premium rates for retiree participation in its health plan and established an agreement with its employee bargaining groups in fiscal year 2011–12 to require new employees to pay those costs if they choose to remain in the plan upon retirement. Chula Vista later eliminated this benefit entirely for subsequent new hires.
Deferral of Maintenance and Capital Projects
Because of its financial condition, El Cerrito has delayed efforts to address the maintenance and repair of its facilities and the development of needed capital projects. The city presents a list of desired capital projects and maintenance projects within its annual budget. In total, El Cerrito identified in its fiscal year 2020–21 budget $245.4 million in projects for both necessary repairs and desired improvements. However, the city expects that it will be able to spend only $21.4 million for these projects from fiscal years 2020–21 through 2024–25, an average of $4.3 million per year. Much of the planned spending comes from state transportation funds and El Cerrito's Measure A funds, which may only be used to fund street repair and maintenance projects.
At that rate of spending, it would take the city more than 50 years to fund the projects it has currently identified, even though many of these projects involve the need to address existing deficiencies. For example, El Cerrito's master plan for parks and recreation, approved by the city council in April 2019, identified $9.7 million in existing deficiencies in its facilities that would require specific action, such as accessibility modifications required to comply with the Americans with Disabilities Act and replacement of assets that have worn down or no longer function. However, El Cerrito's fiscal year 2020–21 budget assigned only $152,000 in total from fiscal years 2020–21 through 2024–25 to address projects specified in that master plan, representing less than 2 percent of its immediate need. In addition, El Cerrito's public works director stated that the city will need to replace its public safety building, which was built in the 1960s and houses its police and fire departments, within the next decade. The city projected that the replacement building will cost $35.6 million, although it has not developed a plan or timeline to pay for this capital project. In the long term, deferring necessary maintenance and capital projects can lead to increased costs because of the more extensive repairs or asset replacement that will be needed due to prolonged inattention to deteriorating facilities.
Recommendations to Address This Risk:
- To eliminate its reliance on short-term loans, El Cerrito should address its overspending and its revenue shortfalls as discussed throughout this report.
- To ensure that its rising pension costs do not jeopardize the city's ability to provide services to its residents or contribute to potential insolvency, El Cerrito should identify and use alternative methods of paying for the obligation, such as establishing a trust funded by the city or through employee contributions that invests amounts that can be used to pay for future pension benefits and reduce future pension costs.
- To ensure that its policy of allowing individuals to remain as members of city-sponsored health care plans upon retirement does not result in additional costs for the city, El Cerrito should calculate the subsidy it provides to those retirees and charge them for the difference in cost resulting from their inclusion in the health care pool.
Ineffective Budget Development and Monitoring Practices Drive Overspending
The budget practices used by El Cerrito's management fail to follow budgeting best practices and do not ensure sufficient monitoring of departmental spending. The finance director is responsible for initiating the development of the city's budget, which serves as the city's financial plan for the fiscal year. The finance director meets with department heads to discuss budget adjustments and verify personnel costs. The city manager ultimately presents a final proposed budget to the city council for approval. However, the city's approach for developing its budget is flawed because it does not appropriately justify the needs of its departments and does not provide sufficient information to the city council to enable it to review the reasonableness of the proposed spending. Moreover, city management does not adequately monitor departmental spending against the approved budget, nor does it periodically update the city council on any deviations from the budget during the fiscal year. In addition, finance department staff have the ability to circumvent the safeguards in the financial accounting system to allow departments to exceed their spending authority. This lack of accountability has enabled departments to routinely exceed their budgets without any consequences.
El Cerrito's budget development process does not conform to best practices. The GFOA recommends that local governments develop revenue projections based on an analysis of past performance as well as assumptions regarding future performance. Further, GFOA best practices for projecting expenditures recommend that governments account for all services provided to the community, such as public safety, community development, and recreation, as well as the key issues that may affect the actual amounts being spent. The GFOA also specifies that the assumptions used for expenditure projections be described in relation to revenue assumptions. However, El Cerrito initiates its budget development process by assuming that its departments' budgets will increase each year. This approach conveys an assumption among city departments that increased spending is expected instead of an awareness by the departments that they should be assessing and justifying the amounts that they actually need. The accounting supervisor stated that the city assumes that both revenue and expenditures will increase by 3 percent each year but does not conduct an analysis of whether such increases are justified. The finance director indicated that this amount is based on inflation as well as commitments pertaining to various contract agreements for non-personnel expenditures such as the city's police dispatch contract. However, because city management routinely increases department budgets annually without sufficient scrutiny, there is no incentive for departments to manage costs or financial resources.
El Cerrito's use of a baseline assumption for its annual budget growth may have led it to spend more than the baseline and more than its revenue could support. For example, the city increased its planned expenditures in its fiscal year 2018–19 budget by 8 percent above the amounts in the prior-year budget but did not provide any reasonable justification in the budget document for those higher costs. The fiscal year 2018–19 budget included a summary, for comparison, of the final expenditures the city was expecting to incur for fiscal year 2017–18 at the time it prepared its budget in June 2018. This comparison indicated that expenditures the city expected to incur for fiscal year 2017–18 would exceed the amount budgeted in that year by $1.5 million, or 4 percent. The budget for fiscal year 2018–19 then increased the amount the city planned to spend by $1.2 million, which resulted in an increase of 8 percent over the fiscal year 2017–18 budget. However, the budget lacked detailed explanations for why expenditures should increase by this amount. For example, the budget projected fire department costs to increase by 15 percent in fiscal year 2018–19 and 6 percent in fiscal year 2019–20. Although the budget provided high-level descriptions of anticipated increases in certain citywide costs, such as personnel and supplies, it did not include any explanations specifically pertaining to the fire department's increases.
The deputy city manager informed us that city management meets with department heads each year when developing the budget. Nevertheless, the city was unable to provide documentation of the results of such interactions, so it is unclear why the city increased its projections for specific expenditures. Failure to document the reasoning for the increases reduces transparency and limits the ability of decision makers to ensure that the changes to the budget are appropriate. Further, because of the lack of sufficient detail describing how the city determined these amounts, it is unclear why the city believed it could afford them.
El Cerrito's budget does not sufficiently explain the reasons for changes in revenue and expenditure projections for departments compared to prior years, and in some cases the prior-year amounts included for comparison are inconsistent with audited financial statements. Without these key pieces of information, the city council's ability to evaluate the reasonableness of the projections is limited. GFOA best practices encourage local governments to provide a financial overview as part of their budgets that clearly describes the financial position of the city, including comparisons of budgeted amounts and actual financial activity from prior periods, so that stakeholders have the information necessary for budgetary decision making. To facilitate the monitoring of budgetary performance, the overview should provide the specific reasons for any deviations from prior-year amounts, including whether they are expected to be temporary or long-term. However, we found that the information reported in the budget focused only on the activities each department accomplished during the past few years. The budget does not provide stakeholders with explanations of any deviations that occurred, nor does it describe how long those deviations are expected to continue.
Once it has developed and approved its budget, El Cerrito does not sufficiently monitor departmental spending and hold departments accountable for adhering to the budget. The city manager is responsible for organizing and directing a team of department directors and staff members to administer programs and deliver public services as well as to ensure that the departments have adequate financial resources for those functions. The city's finance director is similarly tasked with managing and supporting the budgeting process and developing financial policies. Both positions are responsible for overseeing the development of a balanced budget and the monitoring of departmental spending to guide the city in operating in a fiscally sound manner. However, the oversight that city management has provided has not been sufficient to control departmental spending, and the city does not have appropriate financial policies to promote effective stewardship of public resources.
In particular, the city's budget policy does not address procedures for tracking departmental spending, such as producing reports that compare budgeted expenditures to actual spending or requiring the finance director to review the comparisons and request explanations from department directors for significant differences. Instead, the policy states only that department heads are responsible for ensuring that expenditures stay within the budget. Further, the city's policies do not specify any form of accountability among departments to assure that they adhere to their budgets or alert city management or the city council when they are at risk of overspending. Consequently, the city was unable to demonstrate that it requires departments to justify excessive spending.
The lack of policies related to budget monitoring and accountability has resulted in a history of overspending. From fiscal years 2015–16 through 2019–20, El Cerrito's spending exceeded its budget by up to 7 percent each year. In particular, as Figure 6 illustrates, annual budgeted expenditures for the city management department have consistently increased from fiscal years 2015–16 through 2019–20.For budget purposes, El Cerrito groups expenditures for its city council, city manager, city attorney, city clerk, information systems unit, and human resources unit within a single category titled city management. Further, during each of these years, the department spent more than the amounts adopted in its budgets. If the city management department had adhered to its spending limits, the city could have saved $1.9 million in total from fiscal years 2015–16 through 2019–20, an amount that would have offset the city's negative reserve balance as of June 2020.
El Cerrito's City Management Department Consistently Spent Beyond Its Budget Even as the City Continued to Approve Annual Budget Increases
Source: El Cerrito's annual budgets and audited comprehensive annual financial reports for fiscal years 2015–16 through 2019–20.
Departments are able to overspend their budgets because finance department staff circumvent safeguards in the city's financial accounting system, as Figure 7 illustrates. According to the finance department's accounting supervisor, the city's financial accounting system is designed to restrict disbursements of funds to prevent overspending by department staff. When the budget is initially approved by the city council, the finance department records in the system the authorized limit to be spent for each expenditure category for each department. The accounting supervisor further stated that the system designates the authorized limit as the maximum amount that the department is allowed to spend during the fiscal year. As a department incurs costs, the city records expenditures in the system that are tracked against the authorized limits. However, according to the accounting supervisor, when a department attempts to spend beyond the authorized limit, the system alerts finance department staff, who then routinely override the alert without review or approval from the finance director, thus allowing the overspending to go unquestioned and rendering such safeguards meaningless. When we discussed this process with the finance director, he indicated that the finance department's practice is to ensure that payments are made on time and that the city's departments charge costs to the correct account codes. Further, he stated that the departments are responsible for adhering to their budgets. However, the finance department should be responsible for maintaining controls over spending throughout the city. Its practice of overriding controls allows departments to spend beyond their approved budgets without concern for the limits imposed in the budget.
By Overriding Budgetary Safeguards in the City's Financial Accounting System, El Cerrito's Finance Department Allows Departments to Overspend
Source: Interviews with El Cerrito finance department staff and review of safeguards.
As a result, the city has allowed its departments to spend beyond their approved budgets for years without explicit approval from the city council. For example, in fiscal year 2018–19, the city council approved total budgeted expenditures of $2,269,000 for the community development department. Although the city recorded that total as the authorized limit in its financial accounting system, the department incurred additional expenditures of $253,000 beyond that limit. Without enforcing appropriate management processes in the financial accounting system to ensure that departments spend within their approved limits, those departments will continue to exceed their spending authority.
In addition, El Cerrito's city council does not have sufficient information to properly monitor the city's financial condition and budgetary performance throughout the year. Although the city council is responsible for approving the initial budget, city management does not provide the city council with detailed, periodic budget-to-actual spending comparisons for departments during the year. Consequently, the city council does not have enough information to identify whether departments are adhering to their spending plans to provide city services. According to GFOA best practices, regular monitoring of a city's budgetary performance and its actual expenditures in comparison to its budget allows stakeholders to more readily identify any deviations from the amounts that were approved by the city council. Further, providing this information to decision makers on a routine basis is considered crucial for enforcing budgetary accountability by department heads related to spending. GFOA best practices also recommend that cities develop monthly or at least quarterly revenue and spending plans in which they compare actual results to the amounts that were initially budgeted. Moreover, it is the responsibility of city management to prepare and provide this information to the city's governing body and to develop proposed solutions to remediate potential problems.
In September 2020, city management began providing to the city council monthly reports of revenue and expenditures showing year‑to‑date actual amounts for the current fiscal year compared to the budget and prior-year actual amounts. However, the reports do not identify expenditures by individual departments. Instead, they simply break out citywide expenditures into eight categories, such as personnel and professional services. The city manager explained that she believes that presenting financial information at the fund level is most relevant for the city council's needs. Nevertheless, this lack of detail impedes the city council's ability to analyze spending of specific departments and makes it difficult to understand the causes for any deviation from budgeted expectations. When we inquired of city council members regarding their expectations for reporting on the city's financial status, some members indicated that they would like to receive more detailed financial information than the reports that are currently being provided.
Beyond the recently instituted monthly reporting, the only formal process in which El Cerrito's city management communicates interim budgetary performance is through its midyear budget update to the city council. However, this process lacks sufficient detail and is frequently not timely, thus limiting the city council's ability to exert authority over the city's spending. The midyear budget update, presented by the finance director, is intended to address large variances from the initial budget. Although such variances could be tracked by the spending history of individual departments, El Cerrito's midyear budget update does not present specific information in that format but instead summarizes requested budget increases by accounting fund type, such as the general fund, and by expenditure category, such as employee salaries and operating costs. Information presented in such a format obscures accountability by the departments, as it does not identify whether certain departments are exceeding their projected spending. Additionally, El Cerrito's midyear budget update has historically been presented to the city council as late as 10 months into the fiscal year, which is too late to effectively address any significant deviations. According to the city's finance director, the city's goal is to produce this report by mid-February, as it needs time to obtain input from individual departments. Nevertheless, even under that time frame, no formal evaluation of the city's financial condition would occur for more than half of the fiscal year.
In addition, we question the reliability of the estimates reported in the midyear budget update. In our review of midyear budget updates from fiscal years 2015–16 through 2019–20, we found that the city presented overly optimistic projections of revenue exceeding expenditures when, in fact, the actual financial activity reported at the end of the fiscal year showed that expenditures generally exceeded revenue. For example, in its midyear budget update in March 2018, the city projected that revenue would exceed expenditures for fiscal year 2017–18 by $225,000. However, actual revenue for that year was $731,000 less than actual expenditures, representing a difference of nearly $1 million. According to the city's finance director, the additional expenditures that made up this significant variance were largely because of public safety overtime, which was higher than the amount anticipated at the time of the midyear budget update.
Moreover, the limited information in the city's budget and midyear update may result in the city council being unaware of potential recurring budget overages. The GFOA recommends that budget documents include comparisons between budgeted and actual spending to evaluate budgetary performance. Even though El Cerrito's budget document provided to the city council includes comparisons of the proposed budget to prior-year actual spending, it does not include the original budget from the prior year. Consequently, a city council member would need to gather information from the prior‑year budget, the midyear budget update from that prior year, and actual spending from the city's financial statements to evaluate how the city performed in the prior fiscal year compared to its budget.
Although the city council reviews information and approves resolutions necessary to fulfill its duties, it ultimately bears the responsibility for ensuring the financial health of the city. According to a council member, the city council needs additional information in the financial materials that city management provides to increase transparency and allow the city council to develop alternatives for addressing the city's financial condition. Without accurate and timely information, the city council and the public cannot effectively monitor the city's financial condition or determine whether El Cerrito is efficiently using its resources to meet its goals.
Recommendations to Address This Risk:
- El Cerrito should adopt GFOA budgeting best practices that specifically include the following:
- Using historical trends and analysis as the basis for financial projections.
- Expanding its monthly revenue and expenditure budget updates to include comparisons to actual results to minimize overspending.
- Establishing procedures to prevent, detect, and correct deviations from adopted budgets during the fiscal year to ensure that departments do not significantly overspend.
- To ensure accountability in the budget development process, city management should document the assumptions and data used to develop each department's projections of financial activity for the fiscal year. This information should be made available to the city council during the budget review and approval process.
- To ensure accountability in monitoring the budget, city management should present monthly updates to the city council on the current status of departmental budgets and comparisons to prior-year budgeted and actual amounts. City management should promptly seek approval from the city council of proposed budget adjustments by departments when warranted. City management should also prepare and provide to the city council supporting documentation to justify any proposed budget increases.
- To guard the fiscal health of the city, the city council should direct city staff to provide the information described above and regularly review such documents.
- To ensure that departments do not exceed their budgeted spending authority, the city should establish and enforce safeguards within its financial accounting system that prevent expenditures from being incurred without appropriate budget authorization.
Without a More Coordinated Effort, El Cerrito's Financial Condition Will Continue to Deteriorate
El Cerrito Lacks a Comprehensive Framework That Would Help It Resolve Its Financial Challenges
El Cerrito does not have a comprehensive framework to address its financial sustainability and has not sufficiently demonstrated how it will be able to halt its recurring overspending. The city's budget documents do not adequately provide such detail, and the city's current fiscal response plan lacks the structure required to reduce its recurring general fund deficit. After initially contracting with a consultant in fall 2019 to assist with developing a strategic plan, El Cerrito redirected the consultant in March 2020 to develop a fiscal response plan to address the city's financial condition, given the impact of the pandemic. Although the consultant prepared the fiscal response plan in August 2020 and provided it to the city for use in developing the budget for fiscal year 2020–21, that plan does not contain several elements that are essential for ensuring sustained focus toward curtailing excessive spending and replenishing the city's general fund reserves.
The city's fiscal response plan consists of two components: a recession model forecast and a list of budget strategies. The forecast includes revenue and expenditure projections based on an assumption that the pandemic would result in a recession. The forecast also includes assumptions used to determine changes in revenue and expenditures needed to maintain the city's service levels. In particular, the consultant predicted that the city would continue to experience reductions in the reserve balance of its general fund totaling $1.1 million in fiscal years 2021–22 and 2022–23 but would achieve growth beginning in fiscal year 2023–24. The budget strategies include a set of proposed goals, with the highest priority placed on long-term financial sustainability. The consultant recommended that El Cerrito implement the strategies recommended in the fiscal response plan and estimated that doing so would result in reduced annual costs of $1.5 million starting in fiscal year 2020–21 that would lead to achieving a general fund reserve goal of 17 percent in fiscal year 2025–26.
Although the fiscal response plan references El Cerrito's financial condition at a broad level, it does not provide the city with the necessary accountability for ensuring sustained progress toward resolving its financial challenges. Most importantly, the fiscal response plan does not identify specific action items to be performed by departments, the individuals within city management and the departments who are responsible for implementing the plan, and the time frames for completion of tasks. The absence of such information raises concerns about how the city would be able to hold individuals and departments accountable for achieving the city's goals. Moreover, even though El Cerrito included the consultant's narrative summary of the fiscal response plan in its fiscal year 2020–21 budget document, the budget does not sufficiently describe how the city planned to implement the budget strategies from the plan through specific reductions to budgeted expenditures.
Following years of excessive spending, El Cerrito adopted a fiscal year 2020–21 budget in October 2020 that includes $1.7 million less in spending than actual expenditures it reported for fiscal year 2019–20—representing a 4 percent reduction—and projects that the city's revenue will exceed its expenditures by $663,000. To ensure that it had appropriate spending authority in fiscal year 2020–21 until it was able to assess the financial impact of the pandemic, the city first adopted a budget in June 2020 that included a summary of potential budget reductions. In October 2020, El Cerrito approved an updated budget that incorporated its estimates of how the pandemic would affect revenue and expenditures. This information included revenue projections revised from the initial budget, a list that references further planned reductions in expenditures, and the budget strategies presented by its consultant.
However, El Cerrito's fiscal year 2020–21 budget does not clearly identify how it plans to reduce spending, raising concerns about whether it will actually achieve those reductions. GFOA best practices state that a complete and comprehensive budget is necessary to provide decision makers with the ability to determine how effectively all of the different aspects of the budget fit together and whether there is an appropriate balance of resources and assigned uses. Although El Cerrito's budget identifies the categories of expenditures by department that the city plans to reduce, such as salaries and operating costs, it lacks specific detail to allow the city council and the public to see exactly how the city expects to achieve less spending and whether and how the reductions will affect the provision of city services.
Another deficiency in El Cerrito's fiscal year 2020–21 budget is the amount of inconsistent information provided. The budget makes reference to multiple cost reductions, yet none of them reconcile to the expenditure amounts budgeted. In addition to the reductions of $1.5 million proposed in the consultant's fiscal response plan, the approved budget includes a narrative describing another set of cost reductions developed by the city totaling $2.7 million in ongoing costs and $1 million in one-time savings. And even though the budget projected total expenditures that are $1.7 million less than the fiscal year 2019–20 actual expenditures reported by the city, that total does not reconcile to specific actions described in either set of budget reductions. Moreover, the city's budget does not clearly demonstrate that any of the proposed reductions actually resulted in decreases to budgeted expenditures. For example, the proposed reductions from the fiscal response plan specified that the police department's budget would be reduced by $595,000 because of the restructuring of police operations, yet the budget presented an increase of $34,000 from prior-year actual costs.
When we inquired about this apparent contradiction, the city manager stated that the $595,000 reduction was incorporated in the budget and that the police department's costs would be higher if the reduction had not been included. However, El Cerrito's budget document does not present information about amounts that the city initially intended to spend and how the stated reductions affected those amounts. Consequently, the budget document in its current format does not provide city council members with the necessary information to evaluate whether city management's proposed reductions are reasonable and attainable. Moreover, the absence of a detailed description of the $1.7 million in budget reductions raises concerns as to whether the city actually adjusted its budgeted spending to align with the reductions it claims it will make, and if so, by how much. To provide clarity, the city could have prepared a summary identifying the total budget reductions for fiscal year 2020–21 compared to actual expenditures incurred in fiscal year 2019–20. In addition, the city could have specified the staff positions it expected to reduce or eliminate to achieve the total proposed personnel savings.
Another concern with El Cerrito's budget is that it does not contain sufficient detail to demonstrate the actions its departments will perform to achieve $1.7 million of reduced spending throughout the city. For example, the city's budget includes reductions to its city attorney budget of $168,000, or 35 percent less than the prior year's estimated actual expenditures it reported, as well as reductions to its police department's overtime budget of $182,000, or 31 percent less than the prior year's actual expenditures. However, the city does not provide explanations of how either of these reductions will be accomplished. In another instance, El Cerrito reduced its budget for property and capital acquisitions by 28 percent, yet the only reference to this change in the budget is a statement that the city is making a small reduction in costs from prior-year amounts. Further, the budget includes reductions in most departments, but the city has been unable to substantiate many of the specific reductions for each department and the reasons for those decreases. Without such detail in its budget document, city management will not be able to use the budget to hold departments accountable for making desired reductions, and the city council will not be able to oversee city management's progress in achieving all of the intended budget reductions.
Moreover, some of El Cerrito's projected savings are not ongoing and will result in future budget challenges. In its budget, the city approved various cost-saving strategies for fiscal year 2020–21, some of which it expects to be ongoing, whereas others are intended to be one-time savings. For example, the fiscal year 2020–21 budget includes $959,000 in cost savings based on a one-time agreement to furlough staff throughout the year. Additionally, the city reported the elimination of cost-of‑living salary increases for staff during fiscal year 2020–21, for a total expected savings of $750,000. However, this reduction will not result in long-term savings because the contracts between the city and its employee unions contain a provision for the salary increases to take effect in fiscal year 2021–22. The city manager stated that the city is in discussions with various employee unions regarding deferring these salary increases, although there is no assurance of future salary savings. Because these two items are one-time savings only for fiscal year 2020–21, the city should expect its costs to increase by at least $1.7 million in fiscal year 2021–22, thereby placing greater pressure on it to identify other cost reductions.
Additionally, some of the city's planned budget reductions will not result in cost savings because they do not reduce actual spending. Specifically, the fiscal year 2020–21 budget reported $1.6 million in reductions pertaining to decreased spending by departments. Yet $700,000 of this amount is attributed to positions in its police and community development departments that have been vacant for multiple years and would not result in an actual reduction in spending. For instance, the city claimed that it would reduce personnel costs by not filling a senior records specialist position in the police department, although this position has been vacant since at least fiscal year 2015–16, and similarly that it would not fill three police officer positions that have been vacant since fiscal year 2017–18. We question how the city will meet its goals to reduce its spending when some of these proposed cost savings are not actually reductions from prior‑year spending.
Although El Cerrito consistently spends more than it takes in and has exhausted its reserves, city leadership has not developed a comprehensive framework for improving its long‑term financial health. As previously discussed, the consultant's fiscal response plan lacks the breadth and depth required of such an approach. City leadership would benefit from creating a formalized financial recovery plan that not only identifies the most effective combination of citywide and departmental strategies to address the city's financial condition but also provides the level of detail that would enable the city to commit to implementing these strategies. The GFOA notes that a written financial recovery plan is a useful tool that can help a city's leadership focus its direction and give its stakeholders greater confidence in the recovery process.
The GFOA further explains that key elements of an effective financial recovery plan include financial forecasts and an operational action plan. El Cerrito's existing budget process is not sufficient to serve this purpose because it does not direct city staff to take long‑term actions to address the city's financial condition but instead focuses on reducing budgeted spending for a single year. As we discuss above, city departments routinely overspend their budgets, which negatively affects the city's financial outlook. Without a comprehensive plan that holds both the individual departments and city management accountable, it is unclear whether or when the city will be able to address its overspending. Additionally, a formalized plan would give stakeholders, including city residents, greater assurance that the city is taking steps to improve its financial condition, as well as a means to evaluate the city's performance.
Recommendation to Address This Risk:
To ensure accountability in its fiscal recovery process, El Cerrito should develop and adopt a financial recovery plan by July 2021 that describes its goals and intended corrective actions, prioritizes its resources, identifies individuals responsible for monitoring its progress in implementing each action, and outlines when it 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.
El Cerrito Is Not Sufficiently Reducing Its Ongoing Costs
El Cerrito is not thoroughly seeking opportunities to reduce its spending and improve its financial health. In particular, the city is not taking sufficient action to manage its salaries, which represent the largest component of its spending, and is not actively seeking potential reductions by identifying positions that have a higher base salary than positions in comparable cities. In addition, the city has the discretion to give certain management employees potentially excessive salary increases. Further, El Cerrito has not focused enough attention on reducing or controlling spending in its fire and police departments, which represent most of the city's spending on salaries.
Even though most of El Cerrito's general fund expenditures are for salary and benefits, the city has not sufficiently pursued long-term reductions to help address its overspending in these areas. In its budget for fiscal year 2020–21, the city projected $29.5 million in personnel expenditures from its general fund out of $38.7 million in total expenditures for the year, amounting to 76 percent of the budget. Accordingly, El Cerrito's primary focus should be on reducing or controlling its personnel costs. If city employees accepted a 1 percent salary reduction, the city would save about $260,000 annually. However, the city has not sought a long-term reduction of this nature. To do so, it would need the cooperation of its employee unions because more than two-thirds of city employees as of November 2020, including police and fire department management, are represented by unions. The city's employee unions agreed to forgo their 2020 salary increase but negotiated with the city for raises in a later year. Consequently, nearly all represented staff are scheduled to receive a 3 percent raise in 2021, for an expected increase in spending of about $400,000 that the city cannot afford.
When considering salary reductions, El Cerrito should pursue opportunities to reduce its salary costs for positions that have salaries higher on average than those of surrounding cities. We compared El Cerrito's fiscal year 2019–20 salaries for key positions to those of Alameda, Albany, Hayward, Pinole, and Richmond (comparison cities). Our comparison focused on base salaries and did not include special increases that employees may be eligible for, such as education incentives, pay for additional responsibilities, or longevity pay. These cities are included in the group of cities that El Cerrito uses when performing compensation comparisons and are within close proximity in the Bay Area. For example, we identified that El Cerrito's annual base salary for firefighters is $5,000, or 6 percent, higher than the average of similar positions in the comparison cities. El Cerrito planned to spend about $1.7 million for the firefighter positions in fiscal year 2020–21, representing 4.5 percent of the city's general fund spending. El Cerrito could conduct a compensation study to identify similar instances in which its compensation and benefits are higher than those of other cities. Based on the results of the study, El Cerrito could attempt to negotiate adjustments to the salary schedule of specific positions or freeze pay increases until the salaries align with those of other cities.
In addition, El Cerrito pays higher amounts for some of its highest-paid classifications. Like many cities, El Cerrito establishes a salary range for each of its positions. The ranges for each of its management positions include a threshold that the city considers the top salary step. However, employees in certain management classifications can be paid up to 25 percent more than this upper threshold based on exceptional performance. According to the city manager, the purpose of paying employees above the threshold is to reward exceptional performance for management employees and to allow for flexibility in recruitment and hiring. We identified eight individuals, as Table 2 shows, whose salaries are above the upper threshold for their salary ranges. Since November 2018, the city has authorized or agreed to salary increases for each of these positions, either resulting from a merit increase or as part of a negotiated contract with the city. Moreover, the salaries for five of these employees are higher than the average top salaries of similar positions at the comparison cities. When we inquired about these increases, a council member stated that El Cerrito is competing with other cities in the Bay Area for high-quality personnel and needs to offer competitive salaries to attract such individuals. Nevertheless, the higher salaries not only place greater strain on the city's finances but also increase the city's costs to provide pension benefits for these individuals. Given that the city exhausted its general fund reserves in fiscal year 2016–17 and needs to reduce its spending, we question the appropriateness of the city's continued practice of authorizing or agreeing to raises for employees that would exceed the threshold for their salary ranges.
El Cerrito Established Salaries for Eight Positions That Exceed the City's Salary Threshold, and Several Also Exceed Top Salaries at Comparison Cities
|Position||Annual Salary||Salary Threshold per Salary Schedule||Amount Exceeding the Threshold||Average of Top Salaries at Comparison Cities|
|Battalion Chief / Training Officer*||198,411||185,568||12,843||178,192|
|Public Works Director||193,050||183,828||9,222||206,615|
Source: El Cerrito's personnel budget for fiscal year 2020–21 and salary schedules for the cities of Alameda, Albany, Hayward, Pinole, and Richmond.
Note: Highlighted positions have annual salaries that exceed the average of top salaries at the comparison cities we reviewed.
* This position is eligible to receive overtime compensation. The annual salary and threshold represent base pay exclusive of any overtime worked.
According to the city manager, El Cerrito has not conducted any analyses since the 1990s to assess the classification, structure, or compensation of its positions. In 2014 El Cerrito performed a limited analysis of salaries for many of the city's positions, including department directors and staff, but that analysis did not assess their job duties or reporting structure. The city manager stated that the information from the analysis helped the city understand the market of similar positions at other public agencies. According to the International City/County Management Association, an association of local government professionals that advocates for public sector best practices, employee compensation should be based on the position requirements, the complexity of the job, the leadership needed, labor market conditions, the cost of living in the community, and the organization's ability to pay. Completing a comprehensive classification study would provide city management with information on the responsibilities of each position within the city and identify any overlap or redundancy. Further, an analysis of the structure of city positions could enable management to consolidate or remove unnecessary positions and identify long-term savings. In addition, a comprehensive salary study could provide up-to-date information on how El Cerrito's compensation packages compare with those of neighboring cities and identify potential areas of overspending. For example, many employees in El Cerrito's police and fire departments contribute 12 percent of their salaries for pension benefits, with the remaining costs funded by the city. In contrast, the comparison cities we reviewed structured their compensation packages to require certain police and fire personnel to contribute up to 22 percent of their salaries for pension benefits, resulting in a lower share of costs to those cities. The city manager stated that the city would benefit from completing a study of this nature, but she does not believe that the city currently has funds to prioritize doing so. Nevertheless, a salary study could identify long-term savings for the city that could outweigh the short-term costs of the study.
Cost Reductions for the Fire and Police Departments
Because nearly two-thirds of the city's budgeted fiscal year 2020–21 general fund spending is for its police and fire departments, El Cerrito will need to pursue decreases in the expenditures of these two departments if it is to make significant reductions in spending. However, the city has not fully explored opportunities to reduce the cost of these services. The fire department's budgeted general fund expenditures increased from $8.4 million in fiscal year 2015–16 to $11.6 million in fiscal year 2020–21. These budget increases averaged nearly 6.7 percent each year, a faster rate of growth than the city's budgeted expenditures as a whole. Nearly all of these increases—$2.8 million in total—were for personnel expenditures. To adhere to minimum recommended staffing levels for operating its fire engines, El Cerrito must maintain the appropriate number of staff at its fire stations. Consequently, the city's efforts to manage the personnel costs of its fire department may result in more achievable savings if it focused on pursuing reductions in salaries and benefits, rather than on eliminating staff positions. As discussed above, the salaries of some positions in the fire department are higher than those of similar positions in the comparison cities. The city could also conduct an analysis of the costs and benefits of contracting with another agency for fire services as a way to reduce its costs. According to the city manager, El Cerrito has not considered contracting out its fire services.
El Cerrito has maintained a source of revenue that helps offset its fire department costs but also limits the impact of cost reductions by its fire department. In 1995 the city contracted with a fire protection district (district) that serves Kensington, an unincorporated community within Contra Costa County that borders El Cerrito to the southeast, to provide fire protection services to the district. El Cerrito's contract, which was most recently amended in 2019, allows it to operate the district's fire station and provide service to Kensington. In exchange for this service, the district pays El Cerrito an amount that is calculated using predetermined percentages of the city's expenditures for the fire department. For example, according to its contract, the district pays 27.75 percent of El Cerrito's fire department salaries and 33.33 percent of costs for uniforms. In fiscal year 2019–20, the district paid El Cerrito approximately 28 percent of the estimated total annual cost of El Cerrito's fire department. We analyzed service call data from January 2015 through November 2020 to determine the proportion of calls that originated from Kensington and found that only 11 percent of the calls that the fire department responded to were in Kensington, meaning that El Cerrito fully recovered the costs of responding to those calls. Because Kensington pays a percentage of El Cerrito's fire department costs, any reduction in these costs will also reduce the revenue that El Cerrito receives from this contract. El Cerrito will need to take such revenue loss into consideration when making efforts to address its fire department spending.
El Cerrito has also not made concerted efforts to reduce spending in its police department, despite the large number of staff in that department. As of November 2020, the police department had 47 employees, representing 28 percent of total city staff. Those employees included 39 sworn officers. The department provides a range of services, including investigations, traffic enforcement, and K‑9 (police dog) services. In fiscal year 2019–20, the police department paid $588,000 in overtime costs, representing 4.5 percent of the department's overall spending. The relatively low amount of overtime costs is an indication that the police department may be overstaffed. However, a police department is likely to incur some overtime costs even when overstaffed, because an officer who responds to a call at the end of a shift may have to continue working until the conclusion of the call.
Other entities have noted that El Cerrito's police department may be overstaffed. According to a May 2020 report by the Contra Costa County Civil Grand Jury (grand jury report), El Cerrito has 1.77 officers per 1,000 residents, compared to a ratio of 1.48 for the State as a whole and 1.09 overall for Contra Costa County. Even after we adjusted the ratio to account for the size of El Cerrito's police department as of November 2020, this updated ratio of 1.53 officers per 1,000 residents continues to be higher than the state and county benchmarks. The grand jury report also states that El Cerrito's police staffing level is the second highest among cities in the county. Additionally, the city's fiscal consultant recommended eliminating three police department positions, although those reductions were not included in the city's fiscal year 2020–21 budget. The consultant recommended eliminating these three positions in the traffic enforcement division and merging those and other special operations functions into other areas of the department. The fiscal year 2020–21 budget instead eliminated two school resource officer positions and a management analyst position from the police department. El Cerrito previously established an agreement with a local school district to jointly pay for the officers. However, El Cerrito eliminated those positions after the board of the school district voted to eliminate funding for them. According to the city manager, El Cerrito's goal is to reduce staffing in the police department through attrition rather than through eliminating staff positions. However, this approach does not involve the city actively taking steps to reduce its spending.
To reduce expenditures at the police department, the city proposed in its fiscal year 2020–21 budget a plan for reorganization that, in addition to the changes above, includes eliminating the special operations division and moving its staff and functions into other divisions. However, the overall impact of this reorganization is limited, as it appears to be driven by the retirement of an officer rather than by a proactive assessment of the police department's functions. According to the police chief, he expects a lieutenant to retire in fiscal year 2020–21. The plan eliminates the lieutenant's position and the division that the position oversees and shifts the staff to other divisions. If the city does not fill the lieutenant's position and does not hire other positions in the police department to compensate for staff taking on the lieutenant's duties, it will save more than $300,000 annually. The police chief further stated that he expects additional retirements in fiscal years 2020–21 and 2021–22 and could hold those positions vacant to reduce costs. Nevertheless, relying on the retirement of specific employees is not an effective approach to address the city's financial condition. In addition to restructuring its police department, El Cerrito could conduct an analysis of the costs and benefits of contracting with another entity to provide police services as a way to reduce its costs, similar to the approach discussed previously for the fire department. However, the city manager stated that El Cerrito has not considered contracting out its police services.
Although the police department has a relatively low amount of overtime costs, the city could seek to reduce that amount even further by negotiating with the police union to revise the overtime pay structure for its sworn officers. As previously mentioned, overtime expenditures for the police department totaled $588,000 in fiscal year 2019–20. Federal law allows public agencies to pay employees engaged in law enforcement overtime compensation when their work hours exceed certain thresholds over certain work periods. In its union contract, the city agreed to a work schedule for its sworn police officers of 80 hours over 14 days, including meals and other time incidental to a normal shift. Officers who work in excess of 80 hours over 14 days receive overtime pay. However, federal law permits law enforcement officers to receive overtime pay for hours worked in excess of 86 hours in a 14-day work period. Therefore, the city could potentially reduce its overtime costs if it were to renegotiate the overtime threshold with its police union. If this scheduling change saved an average of six hours of overtime per work period per police officer, corporal, and sergeant, the department could save about $130,000 per year. When we asked the police chief about the possibility of changing the overtime threshold, he did not agree that a change of this nature would result in fair compensation for police department staff. Nevertheless, federal law allows such an overtime structure.
Recommendations to Address This Risk:
- To identify potential savings and efficiencies, El Cerrito should perform the following tasks:
- By September 2021, conduct an analysis of the organizational structure of the city and assess the functions it needs to achieve its goals.
- Based on the results of the organizational structure study, conduct an analysis of the duties and responsibilities assigned to each of the city's current staff positions to identify any overlapping areas of responsibility and inefficiencies.
- Using the results of its organizational structure study and its analysis of duties and responsibilities, conduct a compensation study by comparing total compensation for its staff positions with compensation paid by other similar cities. Based on the results of this study, implement personnel and salary changes that would result in ongoing cost reductions.
- To better control its salary costs, El Cerrito should end its practice of providing city management authority to pay certain employees over the threshold established in its salary ranges.
- Based on the results of its comprehensive analysis, El Cerrito should do the following:
- Freeze salary increases for management positions with salaries above those of comparable cities until they are in line with those salaries. For positions with salaries above those of comparable cities that are represented by bargaining units, the city should not agree to additional salary increases until those positions' salaries are in line with the salaries in comparable cities.
- Seek to eliminate or consolidate positions that have overlapping responsibilities.
- To reduce its fire department's costs, El Cerrito should develop a timeline by July 2021 for controlling the department's personnel expenditures, such as through negotiated salary reductions or freezes.
- To reduce its police department's costs, El Cerrito should perform the following by December 2021:
- Assess the services provided by the police department to identify opportunities to reduce its staffing levels.
- Negotiate with its police union to increase the overtime threshold for sworn officers to 86 hours over 14 days, from 80 hours over 14 days.
- To identify all available options to reduce its costs for its fire and police services, El Cerrito should perform an analysis by December 2021 to determine whether it would be more cost-effective to contract with nearby fire or police departments for services.
El Cerrito Is Missing Opportunities to Increase Its Revenue
From fiscal years 2015–16 through 2019–20, El Cerrito subsidized the cost of its recreation services with revenue from other sources in its general fund each year because the recreation department had not established certain fees at sufficient levels to fully cover the costs of its programs. This subsidy ranged from $682,000 to $890,000 in fiscal years 2015–16 through 2018–19 and increased to $1.7 million in fiscal year 2019–20 as total revenue from recreation programs dropped significantly. The text box identifies the programs offered by the recreation department. In particular, the city's swim center and senior programs both incurred significantly more costs than the revenue they generated during the past several years. In fiscal year 2019–20, the swim center's expenditures exceeded its revenue by $403,000, and expenditures for its senior programs exceeded revenue by $354,000. In contrast, the revenue generated by the recreation department's other programs has been sufficient to cover those programs' costs in recent years. Consequently, by not charging adequate fees for its swim center and senior programs, the city is missing opportunities to obtain additional revenue for these programs. If the city cannot generate sufficient fees for these programs, it may be unable to continue to provide these services to its residents in the future.
Programs Operated by El Cerrito's Recreation Department
- Swim center
- Child care programs
- Youth programs
- Adult/community programs
- Senior programs
Source: El Cerrito's budget reports.
Although the costs to operate the swim center have increased during the past several years, the city has not sufficiently increased its fees to cover those additional costs, resulting in the recreation department having to rely on subsidies from the general fund. For example, the department maintained the price of a 30‑day swim pass for residents at $88 per month during fiscal years 2015–16 through 2019–20 rather than increasing that fee proportionately to cover the increased costs of operating the swim center. The city also charges the same single-use fee for swimmers regardless of residency status and fluctuations in demand. During peak demand, such as weekends and summer vacation, the city may be able to charge a higher fee to achieve full cost recovery. Because the fee revenue the city generated did not increase in proportion to its expenditures, its swim center experienced a cumulative deficit of $1.4 million from fiscal years 2015–16 through 2019–20.
El Cerrito's recreation director stated that municipal-operated pools focus on providing fitness and swimming programs to the general public at affordable rates and that those services are generally subsidized by other funding sources. However, based on his review of other cities' recreation programs, he believes that El Cerrito's cost recovery for its swim center is better than that of most other cities. Nevertheless, the city continues to subsidize its swim center by a significant amount each year, furthering the drain on its general fund.
During the pandemic, the city temporarily raised fees for the use of its swimming pool. According to the recreation director, the department increased the fees because of pool capacity limits resulting from the social distancing requirements of public health orders. Despite limited usage, swim center revenue sufficiently covered expenditures through the first five months of fiscal year 2020–21, demonstrating some level of acceptance by city residents for fee increases. Although usage patterns may differ after the pandemic and costs may increase when the hours of operation expand, the fee increases have nonetheless allowed the city to sufficiently recover its costs so far in this fiscal year. As the pandemic subsides, the city should reassess its fee structure and consider revising its fees to continue its efforts to achieve full recovery of operating costs.
El Cerrito also has not charged sufficient fees to cover the full costs of its senior services. Currently, the recreation department offers free and low-fee activities to seniors, including the county nutrition program, presentations, and classes on topics such as art, fitness, and technology. The city incurs costs to provide these activities, including costs for personnel, supplies, and overhead. Given El Cerrito's financial condition, the city will need to consider recovering a greater proportion of these costs by either charging increased fees for existing fee-based activities or charging for activities that are currently free. If the city cannot sufficiently address its financial condition through other means, it may ultimately need to reduce or cancel these services and those of its swim center, as the city council contemplated during its December 2020 meeting.
In addition, since 2018 the city has paid more than $125,000 annually to lease modular buildings for senior center activities. The city entered into the lease, which expires in April 2023, when the lease for the facilities it had previously used was terminated. According to the recreation director, however, the city-owned community center and clubhouses should be able to accommodate its senior activities. Our review of the booking schedules for the community center for various weeks in 2019 and 2020 confirms that many of its rooms are available for use throughout the day. Nevertheless, the city is obligated through April 2023 to pay for the use of the modular buildings at a total cost of more than $684,000 because the lease contract requires payment of an early termination fee that the lessor informed the recreation director would be equal to the amount owed on the lease if the city were to cancel. The recreation director also stated that the city has been actively seeking renters to sublease the modular buildings but has not yet been successful, possibly because of the current lack of demand for indoor activities.
Unlike the recreation department, the city's community development department and public works department both structure their fees to recover the full costs of providing direct services, such as permits, planning, and recycling. The two departments strive for full cost recovery by basing their fees on estimated expenditures and the outcomes of fee studies or projections. For example, the community development department conducted a comprehensive fee study in 2018 to determine the full costs of supporting activities for which the city can charge fees, such as building permits and inspection services. The community development director stated that costs for the fee study were $18,000, and they were recovered through the fees charged by that department. Similarly, the public works department produced 10-year projections for its recycling fees by estimating future revenue and expenditures based on the prior year's activity to assist its efforts to fully cover its costs. Accordingly, the recreation department can take similar action to achieve full cost recovery for its services.
In our initial assessment, we identified a potential opportunity for El Cerrito to increase its revenue by collecting fees for the emergency medical services that the city's fire department provides. About 44 percent of the calls that the fire department responded to from January 2015 through November 2020 involved paramedic or first responder emergency medical services that result in significant costs to the department. Unlike some other cities, El Cerrito does not charge individuals for these services. We subsequently determined that El Cerrito receives revenue for providing emergency medical services through an interagency agreement with Contra Costa County, in effect from July 2019 through June 2022. The agreement stipulates that El Cerrito's fire department will provide prehospital first responder services within its jurisdiction and in Kensington until Contra Costa County or its contractor assumes care of the patient. Under the agreement, the county pays El Cerrito up to $111,000 annually for its services.
El Cerrito's fire chief informed us that the city has not conducted an analysis to determine whether the amount it receives from the county is sufficient, and he also stated that the intention of the funding agreement was to provide a means of offsetting the fire department's costs for the emergency services. However, considering that the fire department's emergency medical service calls make up a large proportion of the department's overall service demand, $111,000 is unlikely to cover the actual cost of providing those services each year. El Cerrito may have an opportunity to offset its costs by charging first responder fees similar to those charged by other nearby cities, such as Albany and Alameda. If the city determines that the costs incurred to provide emergency medical services exceed the amount received through its agreement with the county, it could explore renegotiating its contract to recover more of its costs and pursue other alternatives, such as charging fees for those services.
Recommendations to Address This Risk:
- To more fully recover costs at its swim center after the pandemic, the city should perform the following:
- Conduct an analysis to identify the demand for the swim center under normal conditions at different times—including holidays, weekends, and when the public has restricted access to neighboring swim centers—and determine whether increasing single‑use fees during these hours could better cover the costs of operating the swim center.
- Establish separate single-use fees in its master fee schedule for nonresidents at the swim center, in order to increase revenue.
- To more fully recover costs for its senior services, the city should do the following:
- By August 2021, assess free and low-fee senior activities and prepare an analysis for the city council that includes a plan for recovering the full cost of these activities.
- Continue to seek opportunities to sublease its modular building and move senior activities to the city-owned community center or clubhouses.
- To more fully recover the costs of the emergency medical services it provides, El Cerrito should conduct an analysis by July 2021 to identify the cost to the city of providing such services. Using this analysis, El Cerrito should consider the following:
- Determine whether it can renegotiate its contract with Contra Costa County.
- Determine whether charging fees for its services would be cost‑effective, considering any additional administrative costs it may incur.
- Pursue other options to generate revenue.
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.
ELAINE M. HOWLE, CPA
California State Auditor
March 16, 2021