Response to the Audit
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November 8, 2018
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA. 95814
Dear Ms. Howle,
Attached to this cover letter, you will find a response to the California State Draft Audit Report for the City of Lynwood – Poor Management Has Contributed to Its Financial Instability and Led to Its Failure to Comply with State Law.
The draft has been shared with all Department Directors, and have prepared a response to the areas of concern listed therein:
- Inadequate Financial Management Hinders Lynwood’s Financial Stability
- Violation of State Laws, Weak Oversight, and Policy Breaches Increase Lynwood’s Susceptibility to Fraud and Waste
- Ineffective Organizational Management Diminishes Lynwood’s Ability to Provide Public Services
Each point within the report has been addressed and a summary response to the report is enclosed.
Jose E. Ometeotl
City of Lynwood
Inadequate Financial Management Hinders Lynwood’s Financial Stability (pg 9)
The City has run into deficits in the past, however, under the City Council’s direction, new tax measures have been approved by the voters that will alleviate the structural problems. The fiscal year 2016-17 ended with a positive fund balance of $2.5 million and current unaudited projections for 2017-18 indicate another increase of approximately $1.9 million.
The City’s financial projection used to estimate the ending General Fund fund balance for FY 2017-18 is tracking close to the actual year-end results. The budget projection estimated an ending fund balance of $4.6 million and the current unaudited financial results reflect a $4.5 million ending fund balance, a 2.17% margin.
Lynwood At Risk of Not Meeting Its Future Financial Obligations (pg 9)
The state auditor’s assertion that the City is “…at Risk of Not Meeting Its Future Financial Obligations” is based on a fundamentally flawed assumption that the City would not make adjustments to its operations, as warranted by the economic conditions the agency operates in, on an on-going basis. Staff throughout the agency work with various state and federal agencies and consultants monitoring and refining projections on revenue streams to ensure funding for City services. This is evidenced by monitoring State of California’s Department of Finance projections, Metropolitan Transportation Authority’s projections, as well as meeting on a quarterly basis with consulting firms specializing in forecasting sales and property taxes. These sources are used to make mid-year corrections on an annual basis. This has been demonstrated in March of 2018 where an analysis on revenues was performed for the 2017-18 fiscal year. Revenue estimates were projected to come in lower than budgeted. The City implemented a hiring freeze along with departmental budget cuts to avoid any structural problems. As result, the City’s General Fund’s is anticipated to have an excess of revenues over expenditures of approximately $1 million dollars based on unaudited financials, excluding transfers.
Fund Balance Estimates (pg 10)
The State auditors assert that the beginning Fund Balances for FY 2018-19 may be inaccurate based on prior years’ reports. The Finance Department uses Audited Financial Information from the Comprehensive Annual Financial Report (CAFR) as the basis for beginning fund balances. As such, estimated ending fund balances are derived from utilizing audited fund balances, estimated revenues as well as estimated expenditures based on projections from a variety of sources including external sources such as state and local agencies, consulting firms with specific revenue type knowledge along with internal expertise from staff within the City that have many years of experience with revenues and cost. For fiscal year end 2017-18, the City unaudited actual results are coming in within $100,000 dollars of estimates.
Table 3 (pg 12)
While the Community Development Director is unable to comment on how past budget projections were forecast, she is able to comment on how it will be done in the future. The Community Development budget process kicks-offs with the updating of the department’s financial forecast. This helps in determining the department’s financial status and would highlight some of the major challenges the department will need to address in the future budget. Since it projects the revenues the department will receive and the expenditures it will occur in the upcoming year, it sets a starting point as to the resources available to fund necessary expenses.
The next step in the cycle is the development of the proposed budget. In developing the proposed budget each section is reviewed with the appropriate manager/supervisor. Each line item is reviewed against current budget as well as the prior budget year to determine allocation spending habits. In addition, future projects and needs are reviewed to determine if additional funding will be needed. All line items include the detail on how the funding was arrived at and will be allocated in the next year’s budget.
Once the budget has been completed, then it would be reviewed with the City Manager and Finance Director to determine if the needed funding exists or if line items need to be cut or deferred to the next fiscal year.
Budget Calendar (pg 13)
During the fiscal year 2017-18, the 2018-19 budget calendar was delayed due to staffing issues within the Finance Department. However, the 2018-19 operational budgets were prepared in great detail to ensure integrity and accuracy with the planned operational and capital activities of the City. As such, detailed sub-schedules were prepared for every non-labor general ledger account. Further, personnel master files were prepared, breaking down labor cost on an expenditure-type basis per authorized position. These cost were then allocated to their respective departments as determined by the City’s senior staff and department heads. Therefore, while the timeline for the budget development process was compressed, it was developed from a bottom up detailed approach.
For the upcoming budget season, the budget cycle will start in January culminating in the adoption and approval of the Bi-annual 2019-20, 2020-21 Operating and Capital budgets. The five year Capital Improvement Plan will begin in December of 2018.
One-time Revenue (pg 13)
The City is currently negotiating the exchange of restricted utility credits that are allowed under the California Public Utilities Commissions’ Rule 20a program with another agency within the Southern California region. The anticipated revenue from this exchange of restricted credits will flow into the City’s unrestricted General Fund. Many Cities within the state exchange these Rule 20a credits, which can only be used for very limited purposes for unrestricted monies at an exchange rate generally ranging from 50% to 60% on the dollar. The City is entitled to a $2.7 million dollar Rule 20a credit and therefore is estimating approximately $1.5 million of one-time monies from this exchange for FY 2018-19. In the event that the exchange is not executed, the City will continue soliciting exchange bids from other agencies. Further, the City will adjust its annual budget at mid-year if it appears unlikely to perform an exchange within the fiscal year. The state auditor’s implication that the City would not adjust its budgets presents an unrealistic scenario.
As discussed by the City Manager, if the City did not execute an exchange agreement within the 2018-19 fiscal year, the City would eliminate two expenditures totaling approximately $960,000 from future years budgets, reducing the summer law enforcement team and deferring certain road maintenance and improvement projects. In addition, the City would freeze current vacancies and seek departmental savings.
Lynwood Did Not Adhere to Main Best Practices When Preparing Its Budget (pg 16)
- The Finance department will be developing a multi-year budget for the City beginning with the FY 2019-20, 2020-2021 fiscal years.
- Finance will also be developing a five year Capital Improvement Plan that will be presented to the City Council beginning with the FY 2019-20 year.
- Finance will perform a mid-year in-depth analysis and make budget recommendations to prevent any structural problems as well as to ensure that reserves levels are maintained.
GFOA Best Practices in Budgeting (pg 16)
- The State Auditor’s draft report list out the Government Finance Officers Association’s (GFOA) best practices for preparing a governmental agency’s budget. However, these practices are guidelines and it is up to each agency to determine which of these practices are best suited to them based on resources and the size of the agency.
- One of the GFOA’s best practices is to develop a multiyear budget. We agree. Therefore, the Finance Department will be preparing a two year operational and capital budget starting in January 2019. In addition, Finance, in coordination with the Public Works and Community Development departments, will be preparing a five year Capital Improvement Plan (CIP). The five year CIP Plan will take six months to develop and will be incorporated into the annual budget adoption process.
Fund Balance Reserves
- The State Auditor’s assertion that the City does not follow GFOA’s best practice on General Fund balance reserves is an area that the City could improve upon. While the GFOA’s guidelines on General Fund balance reserves states that the reserves should cover two months of operational expenditures, the Finance department’s view on reserves is that they should be based on an extensive analysis and assessment of the City’s current and future risks. Therefore, the Finance department in coordination with the City’s new Risk Manager will be developing a risk assessment model to provide a comprehensive approach to setting reserve goals.
- For FY 2016-17 the City’s reserves fell below the City’s 10% policy, however, the City will be exceeding the 10% reserve policy for FY 2017-18.
Lynwood Compounded Its Structural Deficit by Significantly Increasing the Number of Employees and Their Salaries When It Could Not Afford To Do So. (pg 19)
The audit stated that the City increased its total employee count in FY 19 from 190.5 to 211.5, implying that the City was deficient in its decision making. Almost all of the increases in staff were in the Parks and Community Services and Public Works departments. The increases were necessary to meet the growing demand for services. In addition, in the Public Works department, the increase in the staff was attributed to the increase in infrastructure projects mostly funded by other than the General Fund.
The report states that the City should not have given increases in light of hiring freeze that was implemented in March of 2018. However, nearly all of the increases were implemented before the “hiring freeze”. In addition, the hiring freeze is a misnomer, in that the City still continued to fill critical and non-general funded. The implementation of a hiring slow-down was prudent fiscal management on the part of the City and not indicative of poor decision making.
The report states that the City increased salaries when it could not afford to do so, and therefore, compounded its financial problems. This argument is flawed and does not account for the considerable cost of employee turnover and low morale. In order to provide services to the public, the City must recruit and retain qualified staff. Even after the City provided employees with a moderate 1% Cost of Living Adjustment in 2017, the salary surveys conducted showed that nearly every City position benchmarked was below the market. Moreover, studies show that the cost of employee turnover ranges from 20% to 40% of the annual salary. This does not include the loss of productivity or the effect on morale that low salaries and high employee turnover costs the organization. A moderate raise, provided to employee to appropriately compensate them for the work performed generally costs the city less over the long run by decreasing turnover and increasing productivity.
Figure 4 (Salary Surveys) (pg 20)
A significant amount of time and an analysis was spent on the salary surveys that were conducted. As explained to the auditors, there is no legal requirement that a salary survey be conducted in order to increase the salary of a classification. It was stated in the report that the City of Lynwood did not use appropriate benchmark cities in order to compare salaries, therefore, the studies were not valid. The City of Lynwood strongly disagrees with this statement. There are no formal benchmarking standards universally adopted by any governing body. Generally speaking, positions would be benchmarked from agencies within a city’s relevant job market, taking into account certain factors such as similar economic challenges. Lynwood’s relevant job market would extend from Los Angeles County, Orange County, and into the Inland Empire, given the mobility of Southern Californians. One of the most important factors in benchmarking positions would not be the size of the agency, but matching the job duties of the two comparable positions. Many smaller cites contract out their functions, and, as such, Lynwood cannot always benchmark its positions against smaller agencies. A review of every salary survey conducted by the City of Lynwood for FY 17-18 by an experienced HR professional did not demonstrate any comparisons that stood out as wholly inappropriate. Most where LA and Orange county cities, none of the cities were those that stood out as being excessively economically stronger, and none of the surveys showed insufficient benchmark agencies. The report went onto the state that the salary comparisons in one case used LA County and a school district. However, as stated earlier, it is important to have a good match of the work performed. LA County and a school district might have been a good comparison for that classification, given the duties analysis. Without having all of the information as to why the consultants selected certain agencies to benchmark, the conclusion reached by the report that the surveys were not valid is not justified by the facts.
In addition, beyond external salary comparisons, Lynwood would consider the following factors when making a salary determination:
- Internal Benchmarking/Internal Equity. Within an organization, two classifications can perform responsibilities that have the same level of independence, consequence of error, require a similar skill set to perform and are organizationally viewed as peers. In that case, in order to maintain internal equity, a city might set one salary at the same level as another, despite having a salary survey that recommends a different range.
- Recruitment and Retention Issues: The City might set a salary slighter higher than the market analysis if there have been historical recruitment and retention issues with the classification. A higher salary may attract qualified candidates, especially for those difficult to fill positions.
- Supervisory to Subordinate Salary Compression: A salary might be set higher than was benchmarked in order to ensure that there is no compression between a subordinate and supervisor.
The report stated that for 10 of the 40 classifications benchmarked, the City Council approved salaries that were above those surveyed. This statement is disingenuous. In nearly all of the cases, the salary where the initial step was higher (Step A), the salary at the final step (Step E) was lower. The salary ranges were chosen to conform to existing salary ranges rather than create all new salary ranges, which would overcomplicate the City’s compensation system. While a few new ranges were created, most were slotted into the existing compensations ranges considering the following factors:
1. Compensation (Benchmarking) Surveys
2. Internal Equity
3. Recruitment and Retention issues
4. Subordinate Salary Compression
5. Labor Negotiations.
The final factor being that salaries are a mandatory subject of bargaining and the two labor unions representing Lynwood employees contributed to the decision-making process in setting the salaries.
The report goes onto the state that the City was not able to explain why staff presented to the City Council for approval, salaries that were higher than those in the survey. However, the City of Lynwood was not asked this question by the Auditor, and therefore, the conclusion reach is just supposition. For the reasons indicated above, a salary might be set higher than is benchmarked, which would still be in keeping with appropriate business practices. Moving forward, the City will work to better document decision-making.
Violation of State Laws, Weak Oversight, and Policy Breaches Increase Lynwood’s Susceptibility to Fraud and Waste
Lynwood Violated State Law Through Its Inappropriate Use of Water and Sewer Funds (pg 22)
The State Auditor asserted that the City inappropriately used water and sewer revenue to fund two staff members. To avoid any potential Proposition 218 violations, the City has transferred the cost of the two identified positions from the water and sewer funds to the General Fund for FY 2017-18 and reallocated their cost for FY 2018-19 as well. (See attached JE 1812082 for reallocation of cost for FY 2017-18)
Lynwood’s Use of Competitive Bidding Exception Within its Municipal Code and Insufficient Contract Management Increases its Risk of Waiting for Public Funds (Pg 29)
The report questions the use of a contractor to conduct the salary surveys. At the time the City conducted the surveys, there was no permanent Human Resources Director, and there were two other vacant fulltime positions in the department of 5. The existing staff could not conduct wide-spread salary market analyses and still perform the day-to-day functions of an HR department such as hiring employees, managing the city’s benefits and risk management programs and compliance with state and federal employment laws. It is very common for agencies to outsource HR projects to consultants and the firm used by Lynwood has been around since 2001. The firm is a JPA specifically created to assist government agencies, and was therefore qualified to assist Lynwood with its human resources functions. In addition, the city takes exception to the conclusion that the salary benchmarking fell outside the scope of services for the contract. The contract states that the firm shall provide analyses and reports for a wide variety of human resources issues. Conducting salary comparisons falls within that scope of services.
Lynwood Has Several Recurring Control Weaknesses in Its Financial Operations That Make it Susceptible to Fraud and Waste (pg 33)
Regarding the assessment that the City has not implemented half of the findings from the fiscal year 2015-16 external audit, the Finance department has made vast improvements in its internal controls since the initial findings were assessed. These include having bank reconciliations prepared on a timely basis, specific budgetary and encumbrance controls to monitor procurement processes along with monitoring budget to actuals within departments and funds. In addition, the Finance department will continue to develop and implement the remaining findings from the FY 2015-16 report.
Specific Assertions and Comments (pg 33)
- City does not have adequate policies and procedures addressing operational areas, such as its procurement and financial reporting functions . The City currently maintains 31 policies and procedures related to on-going operations, including cash reconciliations, purchasing and capital assets along with many more illustrated from the following table.
|City of Lynwood's Current List of Policies and Procedures|
|Anti-Fraud Policy||Fund Balance Policy|
|Bank Reconciliation Procedures||General Reserve Policy|
|Bankruptcy Procedures||Internal Controls Policies for Cash|
|Capital Asset Policy||Lien Procedures|
|Capital Financing and Debt Policy||Lien procedures for Closed Accounts|
|Cash Policies||Lynwood Utility Authority Policy|
|Cash Receipt Procedures||Petty Cash Policy|
|Check Signing Policy||Positive Pay Procedures|
|Closed Accounts Collection Procedures||Posting Lien Payments Procedures|
|Closing the Month Procedures||Purchasing and Accounting Procedures – Eden System|
|Collection Procedures||Purchasing from Local Vendors|
|Credit Card Policy||Purchasing Policy Ordinance (New)|
|Demand Procedures||Receivership Procedures|
|Fixed Asset Policy||Refund Procedures|
|Foreclosure Procedures||Stale Dated Check Policy/Procedures|
Purchase Order Finding (pg 33)
- The State Auditor restating an audit finding from the City’s external auditor’s FY 2015-16 audit report regarding purchase orders made subsequent to the related purchase has already been address with new internal control procedures. During the development of the FY 2018-19 budget, the Finance department developed detailed lists of activities for every non-labor general ledger account. The primary purpose of these documents are to prevent over commitments of funds. Further, the accounts payable section of finance will not process an invoice without an authorized purchase order. This procedure is expressly stated within in the City’s Purchasing Policies and therefore, this was an instance (exception) of non-compliance due to staff turnover within the Finance Department.
Timely Bank Reconciliations (pg 34)
- During the City’s FY 2015-16 financial audit, the City’s external auditor’s identified instances of bank reconciliations that were not completed in a timely manner. While the State auditor’s restatement of the findings from two years ago, has already been addressed during the 2017-18 fiscal year, the State auditors have continued to list an outdated finding.
Year End Financial Closing Procedures (pg 34)
- The State Auditor has identified as a finding that the Finance Department does not have a documented procedure for closing the City’s financial system and therefore may prevent the timely production of accurate financial statements. We agree that procedures for closing the financial system should be documented as an internal control. Therefore, the Finance Department will be developing documented procedures in fiscal year 2018-19.
Future Audit Findings (pg 34)
- The State auditor has recommended developing plans for resolving issues and findings that may arise during future audits. The Finance department agrees. Therefore, a listing of any future findings from an annual audit will be scheduled out an assigned to the appropriate staff to resolve within the subsequent fiscal year and a status report will be submitted to the City Manager annually.
Ineffective Organizational Management Diminishes Lynwood’s Ability to Provide Public Services
Lynwood’s Leadership Has Not Created a Strategic Plan that Would Direct Its Departments’ Goals and Objectives Towards a Unified Vision (pg 36)
The State Auditor’s has indicated that the City has not developed any strategic plans. This is incorrect. The City Administration along with Executive met with City Council members to develop an overall long term vision and plan for the City in February 2017. The strategic goals of the meeting were grouped into specific areas such as infrastructure, economic development, public safety, financial & infrastructure planning and strengthening the City organization.
Subsequent and complimentary to this process, the City Manager and all department directors and key management personnel met for a day long retreat on May 3, 2018. Out of this retreat, the team identified challenges and threats to accomplishing the organizational goals and established specific solutions for addressing the challenges. A formal document was produced from this session and shared with the management team and the City Council. While a formal Strategic Plan has not been created, Lynwood has a solid foundation onto which a more formal long-range plan can be adopted and the departments are currently operating with broad goals established by the City Council. Copies of these work plans reside with the City’s Human Resource Department.
Moreover, the City will be developing strategic work plans for all departments as part of the two-year budget process for fiscal years 2019-20 and 2020-21. Lack of strategic plan. Approach (uniformity) to report on goals, objectives and measures through the City’s annual budget. For the upcoming bi-annual budget, reports on goals and objectives will be measured against the adopted departmental work plans to benchmark performance goals.
The audit stated that the City did not have a formal succession plan. However, a formal Succession Plan was adopted by the Lynwood City Council at its November 6, 2018, meeting. In addition, the City Council allocated $10,000 for a consultant to create a leadership and development program specifically designed to groom and develop future leaders within the organization. Lynwood has not only adopted a formal Succession Plan, we are our way to implementing the components of the plan.
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE CITY OF LYNWOOD
To provide clarity and perspective, we are commenting on Lynwood’s response to the audit. The numbers below correspond to the numbers we have placed in the margin of its response.
Lynwood’s response uses page number references from a draft copy of our report. Since we provided Lynwood the draft copy, page numbers have shifted.
We disagree with Lynwood’s statement that its new tax measures will alleviate the city’s structural budget deficit. As depicted in Figure 1, Lynwood projects that even with its approved new tax revenue and one‑time revenue from selling utility credits, the city’s operating revenue for fiscal year 2018–19 will outpace its operating expenditures by only $100,000. As we state here, this amount provides the city a narrow margin for addressing unexpected costs without relying on reserves in its general fund. Further, Figure 1 shows our projection of the city’s financial outlook for fiscal year 2019–20 after the one‑time revenue goes away, but still accounts for the new tax revenue. Our fiscal year 2019–20 projection highlights an operating deficit of $425,000, which as we state here, the city has not yet developed a specific plan to address.
We stand by our conclusion that Lynwood is at risk of not meeting its future financial obligations. Although Lynwood indicates that it would make adjustments to its operations as warranted by the economic conditions, we are concerned that it will still be unable to meet these obligations for the following reasons. As we show in Table 1, the city has a history of relying on its general fund reserve to balance budget deficits, and consequently it seems reasonable the city may return to this practice. Additionally, as we discuss here, the city had difficulty estimating its general fund starting balances for its budgets. Lynwood’s difficulty in developing these estimates causes us to question whether the city has an accurate understanding of its current financial position.
Throughout its response, Lynwood asserts that it has established new policies, procedures, and financial estimates that will address our findings and recommendations. We look forward to reviewing Lynwood's corrective action plan, due in February 2019, which we expect will include additional details to demonstrate how it has addressed the risk factors we identified.
Lynwood’s statement is inaccurate. We determined that the city did not use its CAFR as the basis for developing the beginning fund balance in its budgets for fiscal years 2017–18 or 2018–19. As we note in the footnote, Lynwood did not issue its fiscal year 2016–17 CAFR until July 2018, more than a year after it prepared its fiscal year 2017–18 budget. Further, Lynwood was unable to use audited financial information for developing its fiscal year 2018–19 budget because it had not yet issued its fiscal year 2017–18 CAFR. Consequently, it would not have been able to use audited financial information from the CAFR to develop that budget as it claims. Moreover, if Lynwood improves the accuracy of its estimates of beginning fund balance, as we recommend here, it would not need to rely on its external auditor to determine its actual fund balance.
Although Lynwood describes that Rule 20A credits are generally exchanged at a rate ranging from 50 percent to 60 percent on the dollar, as we note here, we found that eight cities received an average of only 46 percent of their credits’ value through similar sales, with the highest return being 55 percent. Therefore, we believe that Lynwood may have overestimated the revenue it will generate from selling its utility credits. Table 4 shows that Lynwood needs to sell the credits for at least 56 percent to balance its budget for fiscal year 2018–19.
Lynwood mischaracterizes our concern. We acknowledge here that the city manager expected to make cost reductions among various city departments to address the projected shortfall we identified. However, our concern focuses on the city manager not having a specific plan to address the shortfall. Although the city stated that the reductions would be made to department‑specific consulting and discretionary expenditures, it is unclear whether any subsequent reductions would be for recurring costs because the city has not yet made this determination. Further, we question Lynwood’s statement that it could adjust its fiscal year 2018–19 budget by reducing the summer law enforcement team because the city council approved this expenditure to occur during the summer 2018, which was the first quarter of Lynwood’s fiscal year 2018–19. Thus, if this expenditure has occurred, the city would not be able to eliminate it to help balance its budget.
The city’s statement that the GFOA’s best practices are guidelines is inaccurate. Rather, as the GFOA describes on its website, these budgeting best practices are a comprehensive set of processes and procedures that define an accepted budget process. Further, as we state here, the GFOA has identified budgeting as one of the most important activities undertaken by governments and an operational area in which many governments are in need of guidance. Given the concerns we reported starting here pertaining to Lynwood’s budgeting practices, we believe that the GFOA’s best practices represent suitable activities that the city should adhere to when preparing its budget.
We do not say or imply that Lynwood was deficient in its decision making when increasing its staffing. Rather, as we state here, we concluded that some departments claim to be under staffed but they do not effectively measure their staffing needs. For example, the public works director indicated to us that he relies on his supervisors’ observations of staff workloads to anecdotally determine the need for more staffing. Therefore, we recommended that Lynwood should conduct a staffing analysis to determine appropriate staffing levels for each of its departments, then adjust its departments’ staffing levels to align with their predicted workloads.
The city’s statement that nearly all of its salary increases were implemented before the hiring freeze is misleading. As Figure 3 shows, the city implemented a hiring freeze for fiscal year 2016–17 and implemented another hiring freeze from March 2018 to June 2018. Between those two hiring freezes, the city council approved salary increases for 146 staff as Figure 3 shows. Further, we find it peculiar that Lynwood characterizes the term hiring freeze as “a misnomer” because the city’s finance department used this specific phrase in a fiscal year 2016–17 city resolution, as well as when it presented the action as a recommendation to its city council in a March 2018 staff report.
We stand by our conclusion that Lynwood made a questionable decision to increase salaries given its poor financial condition and its two hiring freezes. As we describe here, by increasing its staff salaries, Lynwood has committed itself to increased personnel costs that it may not be able to sustain given its current revenue structure. Further, we disagree with Lynwood’s characterization of the salary increases as a moderate raise, given our conclusion here that the salary increases we reviewed ranged from 2 to 72 percent and averaged 27 percent overall.
Lynwood has mischaracterized our conclusion. Starting here, we describe that the city could not explain why its survey used information from cities with populations and budgets substantially larger than Lynwood, leading us to question their comparability. Moreover, many of the cities Lynwood included in its survey are located outside of the relevant job market it describes in its response.
Although Lynwood indicates that matching the job duties of comparable positions is an important factor in determining whether to modify salaries of its classifications, the city did not provide us with any analysis demonstrating that it performed such matching. In addition, Lynwood did not provide us with any evidence that an experienced human resources professional reviewed the comparability of positions. Further, we are unclear about Lynwood’s statement that none of the cities used in the survey stood out as being excessively economically stronger. Figure 4 shows that we evaluated cities’ economies by comparing their total expenditures and found 27 cities in the survey that had expenditures at least three times greater than Lynwood’s expenditures. In fact, one city’s expenditures were 268 times greater than Lynwood’s.
Lynwood’s statement is inaccurate. We state here that the salary survey included other entities, namely school districts and counties, which serve different purposes than Lynwood. However, we do not specify that the salary comparisons in one case used Los Angeles County and a school district. Moreover, we stand by our conclusion that a more reasonable approach would have been for Lynwood to use a focused survey of cities that were similar in population, geographic size, and expenditures.
Lynwood misstates our report’s conclusion. As noted here, we concluded that the city was unable to justify the amounts of its salary increases and may have increased salaries higher than market rates. We believe our conclusion is justified based on the information the city provided to us.
Although Lynwood describes in its response other factors it would consider when making a salary determination, it did not provide us with any evidence substantiating its consideration of these factors when making those decisions.
Lynwood is wrong. When reviewing salary increases, we evaluated the change in both the initial step and the highest step of each range and found that both steps increased in all but one of the 40 position classifications we evaluated. We determined that the initial step increased by an average of 27 percent—as we state here—and the highest step increased by an average of 26 percent. After providing Lynwood with the draft audit report, we subsequently revised the text here to clarify that the city council approved base salaries that were above the average rates identified of those in the survey.
Lynwood is incorrect in its statement that we did not question the city about why it presented to the city council for approval salaries that were higher than those in the survey. On the contrary, we asked the mayor, city manager, and the city’s human resources director about the reason for these higher salaries, but none of them were able to provide us an explanation.
After we informed Lynwood about the inappropriate funding of the two staff members, the city responded by reallocating these personnel costs for fiscal year 2017–18 from the water and sewer funds to the general fund. However, it did not provide evidence that it had performed a similar reallocation of the costs pertaining to fiscal year 2018–19. Nonetheless, we stand by our conclusion that the city violated state law by budgeting the personnel costs of two finance department staff members to be paid from its water and sewer funds in both fiscal years 2017–18 and 2018–19.
To clarify, as we note here, we question the reasonableness of Lynwood using its consultant to conduct the salary survey given the fact that the consultant’s scope of services did not include performing this work. We believe that the city should have sought bids from other vendors who may have offered a better value to the city in terms of cost and quality.
Lynwood’s statement does not directly address the concerns expressed in our report. In Appendix B, we identified that Lynwood has not implemented five of the 12 recommendations its external auditor reported as part of the city’s fiscal year 2015–16 financial audit. Although Lynwood’s response lists numerous policies and procedures pertaining to financial management, the city does not identify how any of them address the outstanding audit recommendations. Moreover, as of November 8, 2018, the city has not indicated that its external auditor has issued its findings for fiscal year 2016–17, which would include an update on the status of the fiscal year 2015–16 findings that we list in Appendix B. We look forward to hearing from Lynwood in its corrective action plan about how it plans to address those recommendations.
Although Lynwood asserts that it has already addressed the external auditor’s finding pertaining to delayed bank reconciliations, that finding, as described in Appendix B, also states that the city does not have a method for ensuring that timely and complete year‑end closing procedures are in operation. Because Lynwood has not created year‑end closing procedures, which it confirms in this response, we conclude that it has not implemented the external auditor’s recommendation. Also, as noted in our previous comment, the city has not indicated that its external auditor has issued its findings for fiscal year 2016–17, which would include an update on the status of this finding.
Lynwood misrepresented our conclusion on its strategic planning efforts. We state here that Lynwood lacks a comprehensive and cohesive framework, such as a strategic plan, for guiding its departments. Lynwood describes in its response various actions that appear to be activities related to strategic planning. However, it also acknowledges that it has not created a formal strategic plan. Formalizing such a plan will direct its departments’ delivery of services in the most effective manner. Consequently, we stand by our conclusion and look forward to hearing from Lynwood in its corrective action plan how it plans to formalize its strategic planning efforts.
Lynwood did not have a formal succession plan in place during the period in which we conducted our audit. However, we acknowledged here that the city completed a draft plan in October 2018 that it intended to submit to its city council for approval in early November 2018. We look forward to hearing from Lynwood in its corrective action plan about how it plans to align the succession plan with the strategic plan that we recommended the city create.