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California State Auditor Logo COMMITMENT • INTEGRITY • LEADERSHIP

City of El Cerrito

Excessive Spending and Insufficient Efforts to Address Its Perilous Financial Condition Jeopardize the City's Ongoing Fiscal Viability

Report Number: 2020-803

Figure 1
El Cerrito Received General Fund Revenue From a Variety of Sources in Fiscal Year 2019–20

Figure 1 is a donut chart showing the various categories of general fund revenue that El Cerrito received during fiscal year 2019-20. Each category is identified as a percentage of total revenue as follows: Property Tax 25%; Sales Tax 17%; Other Revenue 17%; Charges for services 14%; Intergovernmental Revenue 10%; Real Property Transfer Tax 9%; Utility Users Tax 8%.

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Figure 2
The Majority of El Cerrito's General Fund Expenditures Are for Salaries and Benefits

Figure 2 is a donut chart showing the various categories of El Cerrito's general fund expenditures, as reported in the city's fiscal year 2020-21 budget. Each category is identified as a percentage of total expenditures as follows: Police Department Salaries and Benefits 26%; Fire Department Salaries and Benefits 25%; Salaries and Benefits for Other City Departments 24%; Professional Services 9%; Other Expenditures 8%; Purchased Property Services 5%; Financing 3%.

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Figure 3
El Cerrito Depleted Its General Fund Reserves in Fiscal Year 2016–17

Figure 3 is a line graph showing the overall decline in El Cerrito's general fund reserves from fiscal years 2014-15 through 2019-20. The year-end reserve balance starts at $1.3 million for fiscal year 2014-15, increases to $1.7 million for fiscal year 2015-16, decreases to a balance of negative $0.2 million for fiscal year 2016-17, and then drops significantly to negative $2.2 million for fiscal year 2017-18. The reserve balance increases to negative $1.7 million for fiscal year 2018-19 and decreases slightly to negative $1.8 million for fiscal year 2019-20.

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Figure 4
El Cerrito's Costs of Borrowing Continue to Increase as its Credit Rating Weakens

Figure 4 is a stacked bar chart displaying the interest paid and loan fees pertaining to El Cerrito's increasing costs of borrowing from fiscal years 2015-16 through 2020-21, along with the city's weakened credit ratings. The chart identifies loan fees and interest paid as stacked bars for each fiscal year as follows: loan fees of $35,588 and interest paid of $71,875 for fiscal year 2015-16; loan fees of $49,488 and interest paid of $71,875 for fiscal year 2016-17; loan fees of $32,242 and interest paid of $104,708 for fiscal year 2017-18; loan fees of $39,262 and interest paid of $134,625 for fiscal year 2018-19; loan fees of $40,500 and interest paid of $196,553 for fiscal year 2019-20; loan fees of $91,183 and interest paid of $254,292 for fiscal year 2020-21. Directly below the bar chart is a dotted arrow pointing from left to right, depicting the change in El Cerrito's credit rating during this period, starting with an AA minus credit rating in fiscal year 2015-16 and ending with a BBB minus credit rating in fiscal year 2020-21.

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Figure 5
El Cerrito's Minimum Required Payments to Address Its Pension Costs Have Steadily Increased and Are Projected to Increase Substantially in the Future

Figure 5 is a bar chart that summarizes the steady increase in El Cerrito's minimum required payments to address its pension costs. The minimum required payment increased as follows: $3.7 million for fiscal year 2014-15; $4.6 million for fiscal year 2015-16; $5.1 million for fiscal year 2016-17; $5.7 million for fiscal year 2017-18; $6.4 million for fiscal year 2018-19; $7.2 million for fiscal year 2019-20. The projected minimum required payment for fiscal year 2020-21 is $7.6 million and the projected payment for fiscal year 2026-27 is $10.2 million.

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Figure 6
El Cerrito's City Management Department Consistently Spent Beyond Its Budget Even as the City Continued to Approve Annual Budget Increases

Figure 6 is a line graph displaying that El Cerrito's city management department consistently spent beyond its budget from fiscal years 2015-16 through 2019-20. The figure shows two upward-trending lines. One line represents the city management department's budgeted expenditures per year as follows: $2.6 million for fiscal year 2015-16; $3.3 million for fiscal year 2016-17; $3.4 million for fiscal year 2017-18; $4.0 million for fiscal year 2018-19; $4.1 million for fiscal year 2019-20. The other line represents the city management department's actual spending per year as follows: $3.1 million for fiscal year 2015-16; $3.6 million for fiscal year 2016-17; $3.8 million for fiscal year 2017-18; $4.4 million for fiscal year 2018-19; $4.4 million for fiscal year 2019-20. The space between the two lines at each data point is connected with an arrow that is explained with a note above the graph that states "El Cerrito could have saved a total of $1.9 million if the city management department had followed its approved budgets for fiscal years 2015-16 through 2019-20."

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Figure 7
By Overriding Budgetary Safeguards in the City's Financial Accounting System, El Cerrito's Finance Department Allows Departments to Overspend

Figure 7 is a flow chart that describes safeguards in El Cerrito's financial accounting system and how the city's finance department staff are able to override them. Step 1 states "After the city council approves the city's budget" followed by an arrow that leads to "finance department staff record the authorized limit in the financial accounting system for each expenditure category." Next, an arrow leads to Step 2 that states "During the fiscal year, a department approves a payment request to the finance department for a purchase." An arrow then leads to "However, the purchase results in year-to-date expenditures exceeding the authorized limit for that particular expenditure category." Another arrow continues the flow to Step 3, which states that "Finance department staff enter the expenditure transaction in the accounting system." A new arrow then points to a red warning message that states "The system generates an alert message warning that the recording of the transaction would result in total expenditures exceeding the authorized limit." Lastly, a red arrow points to text that states "Finance department staff select the option to bypass the warning, thereby allowing the transaction to be posted and the payment to be authorized." Directly below the flow chart is a list of three items under the header of "Consequences of Circumventing Safeguards" with a red "X" next to each item. These consequences are as follows: "Departments are able to spend beyond their approved budgets."; "The city manager and finance director cannot control excessive spending."; "The city council cannot rely on the budget when it attempts to oversee the city's financial condition."

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