Risks Facing the City of West Covina
In December 2019, the California State Auditor’s Office (State Auditor) informed the city of West Covina (West Covina) that it had been selected for review under the high‑risk local government agency audit program. This program authorizes the State Auditor to identify local government agencies that are at high risk for potential waste, fraud, abuse, or mismanagement or that face major challenges associated with their economy, efficiency, or effectiveness. We first identified that West Covina might be classified as a high‑risk local government entity based on publicly available information. We conducted an initial assessment of the city in January 2020 and identified concerns regarding its financial stability. Its general fund reserves had steadily declined over the past several years, potentially straining its ability to continue providing essential services to its community and to meet its obligations in the event of a fiscal emergency. In addition, we identified operational risks related to West Covina’s governance and management controls. The city had experienced significant turnover of key management positions, and the State Controller’s Office reported in 2015 that it had serious and pervasive weaknesses in its administrative and internal accounting controls, concluding that such controls were in effect nonexistent.
West Covina agreed with the risks that we identified in our initial assessment, but it asserted that it was taking actions to address our concerns. For example, the West Covina city council (city council) had authorized a special election so that residents could vote on a local tax measure that the city estimated would increase its revenue by $9.7 million annually; however, the city’s residents did not ultimately approve the measure. The city’s leadership also planned to issue municipal bonds to raise more than $200 million to pay down its California Public Employees’ Retirement System (CalPERS) unfunded pension liability. Despite these efforts, based on our continued concerns regarding its financial and operational management, we recommended an audit of West Covina, which the Joint Legislative Audit Committee (Audit Committee) approved in February 2020.
Our audit found that West Covina faces several significant risks related to its financial and operational management. In particular, its financial condition is rapidly deteriorating, as demonstrated by the city’s continued reliance on its general fund reserves to support its operations, its questionable uses of city resources, and its lack of sufficient analyses to support its financial decisions. West Covina’s year‑end general fund reserves dwindled from $20.5 million in fiscal year 2014–15 to $9.9 million at the end of fiscal year 2018–19, placing the city on a path to further deplete its reserves. The city also faces rising employee salary and benefit costs. Finally, its purchasing and contracting processes have deficiencies that its leadership has allowed to persist over several years, exposing the city to the risk of fraud and perpetuating its susceptibility to wasted public funds.
West Covina’s leadership has identified several actions that the city has taken or plans to take that the city manager believes will improve its financial condition. For example, the city is in the process of selling a large parcel of land; if completed, this sale will result in a one‑time revenue gain of $13.5 million that will be used to repay bond debt and replenish its reserve balance. Additionally, the city became a member of the California Joint Powers Insurance Authority (CJPIA), which the city manager believes will reduce the city’s exposure to significant litigation expenditures. Further, as it had planned, the city sold $204 million in municipal bonds to pay down the amount it owes to CalPERS for pension costs; as a result, although the city will pay significantly smaller unfunded pension liability payments to CalPERS, it will need to make bond debt payments through fiscal year 2044–45. However, the city’s leadership has not performed the analysis necessary to determine the combined results of these actions, nor has it created a comprehensive plan to ensure its success in implementing them. As a result, West Covina continues to be at risk of depleting its general fund reserves and of not being able to adequately provide public services in the near future.
To help West Covina address the risk factors we identified, we have developed numerous recommendations the city could implement, including the following:
- Increase city fees and seek opportunities for cost sharing to eliminate its reliance on its general fund reserves to support its operations.
- Prepare financial analyses that evaluate both the short‑term and long‑term financial implications of significant spending decisions.
- Develop a financial recovery plan that accounts for the city’s rising costs and the actions that it will take to improve its financial condition. The plan should include a long‑term financial projection, prioritize the resources that the city will use to improve its financial condition, identify individuals responsible for monitoring the city’s progress in implementing each action, and outline when the city anticipates it will complete key milestones related to each action.
- Improve its internal processes to reduce its susceptibility to waste and fraud.