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 Blythe under the local high risk program. We conducted an initial assessment of Blythe 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 Blythe’s financial condition and financial stability as well as aspects of its operations that were ineffective or inefficient. The table lists the resulting audit objectives and related procedures that address these risk factors.

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.	Identified and reviewed relevant laws, regulations, and other background materials applicable to Blythe.

2	Review and evaluate Blythe’s current financial condition and ability to meet its short‑term and long‑term financial obligations while continuing to provide services to its residents.	Evaluated the city’s financial statements to determine its financial condition based on local high risk program financial indicators. Reviewed financial statements to determine all outstanding bonds, loans, and leases, and worked with the finance director to calculate annual payments and balances. Determined that the city is largely using dedicated revenue for bond and loan or lease payments; however, in the report we discuss a loan to the golf course that does not have a dedicated revenue source. Reviewed the city’s former redevelopment agency’s implementation plans. Reviewed outstanding pension and OPEB liabilities and projections of those liabilities.

3	Identify the causes of Blythe’s financial challenges and determine whether the city has developed an adequate plan for addressing those challenges, including the following: Determine whether the city uses revenue generated for specific purposes appropriately. Assess the city’s efforts to improve its financial condition by increasing revenue and reducing expenses.	Identified the city’s dedicated revenue sources; determined the legal authority to increase tax revenue; and evaluated revenue estimates, actual amounts, and projections. Assessed the city’s procedures for tracking restricted funds and determined they were reasonable. Evaluated the two tax proposals approved by voters, reviewed projections and, as available, actual amounts collected. Consulted with the interim city manager to identify the city’s attempts to pursue and promote economic development opportunities. In particular, we evaluated the former redevelopment agency’s attempt to eliminate blight by reviewing implementation plans. Reviewed the city’s financial statements and consulted the finance director to identify significant expense reductions.

4	Determine whether Blythe’s budgeting processes comply with best practices. Evaluate the city’s procedures and underlying assumptions for projecting future revenue and expenditures, and determine whether they result in balanced budgets and accurate financial forecasts.	Reviewed GFOA budgeting best practices and identified key practices that the city should follow. Reviewed the city’s documentation and interviewed city staff to compare Blythe’s budget practices to the budgeting best practices we identified, and determined whether Blythe is following each. Evaluated the city’s process to establish financial forecasts and projections.

5	Assess Blythe’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.	Determined the city’s process for assessing rates and fees, and if necessary, changing its water and solid waste utility rates. Reviewed financial statements and reports and interviewed key personnel to determine whether the city’s rate‑setting strategy is on track to cover the cost of its water and solid waste utilities. Determined the city’s process for setting, increasing, or decreasing user fees for city services. Determined whether the city complied with applicable laws, policies, and best practices when changing its user fee rates for the selected program areas.

6	Examine Blythe’s efforts to fill key management and staff positions and maintain organizational and leadership continuity within city operations.	Reviewed the city’s staffing records for the past five fiscal years to determine when the city had an interim city manager or finance director. For a selection of other key positions, identified when there were vacancies and how general staffing levels have changed from fiscal years 2015–16 through 2019–20. Evaluate whether turnover among Blythe’s finance director, city manager, or overall staffing correlates with any issues identified in the city’s efforts to reduce expenses, resolve negative fund balances in enterprise and nonmajor governmental funds, or the process to establish financial forecasts and projections.

7	Determine the effectiveness of Blythe’s financial and organizational internal controls.	Reviewed the U.S. Government Accountability Office’s (GAO) guidance for internal controls and identified key internal controls for good city governance. Determined whether the city has implemented key controls by reviewing applicable city documentation and interviewing city staff. For a selection of five major city expenditures within the last three fiscal years, reviewed city contract and financial documentation to evaluate whether the city complied with applicable requirements.

8	Evaluate the financial viability of Blythe’s police and fire departments and its ability to provide effective public safety services to its residents, given its resource constraints.	Reviewed the city’s financial reports for the police and fire departments to determine changes in each department’s funding levels. Interviewed relevant staff to identify any outstanding needs the departments have and how they determined those needs. Identified best practices in a selection of cities that have experienced and ameliorated issues with vacant buildings and associated crime.

9	Review and assess any other issues significant to the audit.	Not applicable.

Source: Analysis of information and documentation identified in the column titled Method.

Assessment of Data Reliability

The GAO, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that is used to support our findings, conclusions, and recommendations. In performing this audit, we relied on data from Blythe’s financial accounting system for the purposes of evaluating the city’s budget assumptions. We verified the accuracy and completeness of these data by comparing the amounts reported to the city’s actual revenue and expenditures and other supporting documentation. Accordingly, we found the city’s financial accounting system to be sufficiently reliable for the purposes of the analysis we conducted. Further, we relied on electronic reports we obtained from the city’s personnel system for the purposes of evaluating employment history. We performed dataset verification and testing of key data elements in these reports and did not identify any issues. We therefore determined that the personnel records used in our analysis are sufficiently reliable for the purposes of the analysis we performed. We also obtained and relied on electronic contract data for the purposes of evaluating Blythe’s internal controls. We performed dataset verification and testing of key data elements and identified issues with these data. To assess completeness, we obtained physical files on-site and identified further inconsistencies with these data. Therefore, we determined that these contract data were of undetermined reliability, and we describe these limitations in the report. Although we recognize that these limitations may affect the precision of numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

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, each year we analyze audited financial statements and pension‑related information for more than 470 California cities. This detailed review includes using 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 reserve, 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 from fiscal year 2016–17.

Based on our analysis from 2019, we identified several cities, including Blythe, 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 potential high‑risk 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 Blythe’s circumstances warranted an audit. In February 2020, we sought and obtained approval from the Audit Committee to conduct an audit of Blythe.

If a local agency is designated as high risk as a result of an 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 its 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 the agency has taken satisfactory corrective action.