Appendices

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Appendix A—Scope and Methodology
Appendix B—The State Auditor’s Local High Risk Program

Appendix A

Scope and Methodology

In February 2020, the Audit Committee approved a proposal by the State Auditor to perform an audit of San Gabriel under the local high risk program. We conducted an initial assessment of San Gabriel in December 2019, in which we reviewed the city’s financial and operating conditions to determine whether it demonstrated characteristics of high risk pertaining to the following six risk factors specified in state regulations:

The local government agency’s financial condition has the potential to impair its ability to efficiently deliver services or to meet its financial or legal obligations.
The local government agency’s ability to maintain or restore its financial stability is impaired.
The local government agency’s financial reporting does not follow generally accepted government accounting principles.
Prior audits reported findings related to financial or performance issues, and the local government agency has not taken adequate corrective action.
The local government agency uses an ineffective system to monitor and track state and local funds it receives and spends.
An aspect of the local government agency’s operation or management is ineffective or inefficient; presents the risk for waste, fraud, or abuse; or does not provide the intended level of public service.

Based on our initial assessment, we identified concerns about San Gabriel’s financial condition and financial stability as well as aspects of its operations that were ineffective or inefficient. The table lists the objectives that the Audit Committee approved and the methods we used to address them.

Table

Audit Objectives and the Methods Used to Address Them

AUDIT OBJECTIVE		METHOD
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	Reviewed relevant state laws, regulations, municipal code, and other background materials applicable to the city.
2	Evaluate San Gabriel’s current financial condition and ability to meet its short‑term and long‑term financial obligations while continuing to provide services to its residents.	Developed and analyzed trends of revenues, expenditures, liquidity, and other relevant financial risk indicators from fiscal years 2014–15 through 2019–20. Evaluated San Gabriel’s funding sources (general fund, special revenue funds) that paid for services relevant to our audit objectives. Assessed the city’s financial condition and ability to meet its obligations by reviewing audited financial statements and budget reports. Obtained the perspective of management and other relevant staff regarding our findings.
3	Identify the causes of San Gabriel’s financial challenges, and determine whether the city has developed an adequate plan for addressing those challenges, including the following: a. Evaluate the decisions and conditions surrounding the city council’s approval of loans, the impact of the loans on the city’s financial condition, the policies governing such loans, and to the extent possible, determine whether the loans complied with state law and aligned with best practices. b. Assess the city’s efforts to improve its financial condition by increasing revenues and reducing expenses.	Assessed whether the city complied with state law and best practices when it acquired two loans. Evaluated the decision‑making process for both loans to ensure that the city followed its policies. Interviewed staff and city council members to review the loan approval process and the reasons the city entered into the loan that restricts its cash. Reviewed loan documents and city council approval minutes related to the two loans. Evaluated the impact of the loan terms on the city’s financial condition and the city’s plans to restructure or refinance the loans. Evaluated the latest information on expenditures and revenues, including the amount and timing of revenue from the recently approved tax measure. Reviewed projections for revenues and expenditures in the fiscal year 2020–21 budget and five‑year forecast to determine whether the city has the financial resources to meet its financial obligations.
4	Determine whether San Gabriel’s budgeting processes comply with best practices. In addition, evaluate the city’s procedures and underlying assumptions for projecting future revenues and expenditures and determine whether they result in balanced budgets and accurate financial forecasts.	Evaluated the policies, processes, and practices the city used to develop its budgets compared with applicable criteria and GFOA best practices. Interviewed relevant staff to obtain an understanding of the budget process. Evaluated whether changes to the budgeting process since 2019 have led to balanced budgets and more accurate financial forecasts by doing the following: Analyzing the city’s budgets from fiscal years 2014–15 through 2020–21. Analyzing the forecasts for the next five years. We also reviewed the city’s assumptions related to the financial impacts of the pandemic. Interviewed staff to obtain the city's perspective regarding the results of our audit.
5	Assess San Gabriel’s process for setting, increasing, or decreasing fees or rates to ensure that it complies with applicable laws, rules, ordinances, regulations, and best practices. For a selection of these fees and rates, determine whether they cover the city’s costs of providing services.	Interviewed staff to obtain an understanding of the city’s policies, processes, and practices for setting fees. Reviewed the city’s fee schedule adopted in fiscal year 2019–20, evaluated the city’s process to ensure that fees cover its costs of providing services, and determined the extent to which the city adjusted its fees. Estimated the amount of revenue the city failed to collect by not increasing half of its general fund fees to keep pace with the average rate of inflation between fiscal years 2016–17 and 2019–20.
6	Evaluate the information about San Gabriel’s financial condition that city management presented to the city council and residents, and determine whether that information accurately depicted the city’s financial condition.	Evaluated whether the city’s financial position was, and is, accurately communicated to the city council and its residents by doing the following: Comparing meeting documents presented to the city council and the public with actual financial reports, budgets, and other relevant data. Interviewing city council members and obtaining their perspective on the financial condition of the city, and what their role is in ensuring that management provides adequate and accurate information. Determined whether city management fully disclosed, presented, or communicated relevant financial/budget information to the city council by reviewing the information provided to the city council and the information that city council members requested from city management.
7	Examine San Gabriel’s efforts to fill key management positions and maintain organizational and leadership continuity within city operations.	Interviewed staff and reviewed succession plans, personnel records, and staff reports to identify turnover in key management positions and efforts to fill vacancies. We found that the city’s efforts to maintain continuity were generally appropriate.
8	Review San Gabriel’s policies and practices for overseeing and approving contracts and expenditures and determine whether they are in compliance with relevant laws, policies, and best practices.	Reviewed San Gabriel’s purchasing policies and practices and evaluated compliance with relevant laws and best practices related to effective contracting, competitive bidding, and other relevant practices. Reviewed contract lists created by city staff and payment records to identify contracts. Although we found the lists to be incomplete, we used other sources to inform our selection of contracts for testing. Judgmentally selected eight contracts based on size, contracting department, and type of work. Determined the extent to which the city complied with its contracting and competitive bidding policies. Reviewed the city’s payment records and staff reports to identify expenditures. Judgmentally selected 12 expenditures based on size and type of expenditure from the city’s accounting system, which we determined to be complete for our purpose. Assessed the extent to which the city complied with its purchasing policies and identified no reportable issues. Interviewed city staff to determine how the city performs oversight of contracts and purchases.
9	Review and evaluate San Gabriel’s hiring process. At a minimum, determine the extent to which hiring policies and practices for key management positions include appropriate levels of screening and evaluation to ensure that individuals hired meet the minimum job requirements and qualifications for the positions.	Interviewed the human resources director and other personnel responsible for hiring staff to get an understanding of the hiring process, the process for determining qualifications or hiring criteria, and the process for determining whether someone meets the qualifications or criteria. Evaluated the hiring and performance review policies and practices and determined whether they complied with relevant laws and best practices. Reviewed job qualifications and salaries for seven key management positions and compared those to similar positions at comparable cities. We found that the qualifications and salaries were generally comparable with those in other cities. Reviewed files of six (total) past and current key management positions based on the city’s organizational chart to determine whether the positions were advertised and individuals were hired through an appropriate screening and evaluation process to ensure that they met minimum qualifications. Additionally, reviewed personnel files to determine whether individuals received periodic performance reviews. We determined that the hiring and performance review practices were generally appropriate.
10	Review and assess any other issues that are significant to the audit.	We did not identify any additional issues that are significant to the audit.

Source: Analysis of documents, interviews, and data obtained from San Gabriel.

Assessment of Data Reliability

The U.S. Government Accountability Office, whose standards we are statutorily obligated to follow, requires us to assess the sufficiency and appropriateness of the computer‑processed information we use to support our findings, conclusions, or recommendations. In performing this audit, we obtained data from San Gabriel’s financial accounting system to review its expenditures for fiscal years 2015–16 through 2019–20. To evaluate San Gabriel’s data, we reviewed existing information about the data, interviewed staff knowledgeable about the data, and performed electronic testing and compared the data to other sources. We found these data to be sufficiently reliable for our purposes.

Appendix B

The State Auditor’s Local High Risk Program

Government Code section 8546.10 authorizes the State Auditor to establish a local high risk program to identify local government agencies that are at high risk for potential waste, fraud, abuse, or mismanagement, or that have major challenges associated with their economy, efficiency, or effectiveness. Regulations that define high risk and describe the workings of the local high risk program became effective on July 1, 2015. Both statute and regulations require that the State Auditor seek approval from the Audit Committee to conduct high risk audits of local entities.

To identify local entities that may be at high risk, we analyzed audited financial statements and pension‑related information for more than 470 California cities. This detailed review included using the financial data to calculate indicators that may be indicative of a city’s fiscal stress. These indicators enabled us to assess each city’s ability to pay its bills in both the short and long term. Specifically, the indicators measure each city’s financial reserves, debt burden, cash position or liquidity, revenue trends, and ability to pay for employee retirement benefits. In most instances, the financial indicators determined in 2019 rely on information for fiscal year 2016–17.⁴As we describe earlier in Appendix A, we conducted our initial assessment of San Gabriel in December 2019 based on this detailed review. In November 2020, we updated our financial indicators to include information through fiscal year 2018–19.

Based on our analysis from 2019, we identified several cities, including San Gabriel, which appeared to meet the criteria for being at high risk. We visited each of these cities and conducted an initial assessment to determine the city’s awareness of and responses to these issues, as well as to identify any other ongoing issues that could affect our determination of whether the city was at high risk. After conducting our initial assessment, we concluded that San Gabriel’s circumstances warranted an audit. In February 2020, we sought and obtained approval from the Audit Committee to conduct an audit of San Gabriel.

If the local agency is designated as high risk as a result of the audit, it must submit a corrective action plan. If it is unable to provide its corrective action plan in time for inclusion in the audit report, it must provide the plan no later than 60 days after the report’s publication. It must then provide written updates every six months after the audit report is issued regarding its progress in implementing the corrective action plan. This corrective action plan must outline the specific actions the local agency will perform to address the conditions causing us to designate it as high risk and the proposed timing for undertaking those actions. We will remove the high risk designation when we conclude that the agency has taken satisfactory corrective action.