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City of San Gabriel

Its Ongoing Deficit Is Inhibiting Its Financial Recovery

Report Number: 2020-805

Risks the City of San Gabriel Faces

In November 2019, the California State Auditor’s Office (State Auditor) informed the city of San Gabriel (San Gabriel) that it had been selected for review under the high‑risk local government agency audit program (local high risk 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 San Gabriel might be classified as a high‑risk local government entity based on publicly available audited financial statements and unaudited pension‑related information from the California Public Employees’ Retirement System (CalPERS). We conducted an initial assessment of the city in December 2019 and identified concerns regarding its financial condition. The city had depleted its general fund reserves to such an extent that it was relying on borrowing from other city funds to cover its short‑term expenses. San Gabriel had also entered into a loan in fiscal year 2014–15 to build a public works facility (public works loan) that set aside millions of dollars of its general fund cash for 10 years—further inhibiting its ability to pay its bills. In addition, we found that its former city management had failed to disclose issues related to the city’s financial stability, and the city did not have a comprehensive plan to adequately address San Gabriel’s dire financial condition. The city also appeared to lack adequate management controls over its contracting processes.

In its response to our December 2019 assessment, San Gabriel generally agreed that the city’s depleted general fund reserves put it at financial risk should an economic downturn occur, but it suggested that we should monitor its progress over time to allow it to take actions to address the issues we raised in our assessment. For example, city management expected to generate additional revenue from a sales tax measure that its voters approved in March 2020. The city also intended to refinance the loan that caused its initial cash flow problems and to revise its fiscal policies. Nevertheless, based on our continued concerns about its financial and operational management, we recommended an audit of San Gabriel, which the Joint Legislative Audit Committee (Audit Committee) approved in February 2020.

Our audit found that San Gabriel still faces several significant risks related to its financial condition and operational management. For example, for fiscal year 2019–20, the city’s general fund reserves had a deficit of $8.1 million. The city consistently received less revenue than it budgeted but did not curtail spending between fiscal years 2015–16 and 2017–18, which resulted in the city overspending and depleting its general fund reserves. One reason may be that, for years, former city officials did not provide the city council with accurate information on the city’s financial condition, while the city council in turn failed to exercise its own due diligence in overseeing city management. Moreover, when the city council approved the public works loan and the associated collateral, it essentially constrained the city from accessing a significant amount of its general fund cash, which has eroded the city’s ability to pay for city services from the general fund. The city’s attempts to refinance this loan have not been successful, greatly hampering its financial recovery.

Despite the city’s poor financial condition, the city has still not developed a comprehensive financial recovery plan, and it continues to use its general fund to subsidize activities it cannot afford. For example, the city has relied on its general fund to sustain the operations of its Mission Playhouse, a performing arts venue and community center, by contributing over $4.2 million between fiscal years 2014–15 and 2019–20, which has further exacerbated its general fund deficit. Additionally, the city has not adjusted the majority of its fees for services for years, likely causing it to forgo additional revenue. The city is also unable to track all of its current contracts or the associated costs, likely contributing to some city programs routinely exceeding their contractual expenditure budgets. For example, San Gabriel exceeded its total citywide budget for contractual service expenditures by $468,000, or 19 percent, in fiscal year 2017–18.

Although current city management has taken some steps to improve its financial practices and has developed projections that suggest it will be able to increase its general fund balance, those projections do not consider key factors. For example, the unexpected onset of the COVID‑19 pandemic (pandemic) has hampered the city’s efforts to rebuild its general fund reserves and may have longer‑term negative impacts on revenues. By lacking a comprehensive recovery plan to ensure that the city management is transparent and proactive about addressing the city’s financial challenges, San Gabriel continues to be at a high financial risk.

To help San Gabriel address the risk factors we identified, we developed numerous recommendations the city should implement, including the following:

Agency’s Proposed Corrective Action

San Gabriel generally agreed with our recommendations. The city highlighted various efforts that it has taken or plans to take to address its financial condition. However, because San Gabriel did not submit a corrective action plan as part of its response, we look forward to receiving the plan by June 2021 to understand the specific actions it has undertaken or plans to take to address the conditions that caused us to designate it as high risk.

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San Gabriel is located in the San Gabriel Valley of Los Angeles County and has approximately 40,000 residents. San Gabriel is a general law city and is therefore subject to the State’s general law that governs municipal affairs.Unlike a charter city that has authority to adopt ordinances and regulations regarding municipal affairs that may be inconsistent with state law that is otherwise applicable to cities, a general law city’s ordinances and regulations cannot conflict with the State’s general laws.  For fiscal year 2020–21, San Gabriel authorized nearly 200 full‑time city staff members to provide services to residents, including public safety, public works, recreational and cultural activities, planning, zoning, and general administrative services. The city operates under a council‑manager form of government: residents elect officials to a five‑member city council serving staggered four‑year terms; they in turn appoint a city manager to carry out the council’s initiatives and provide administrative direction to the city. The city manager is also responsible for keeping the city council fully advised of San Gabriel’s financial condition, including any financial challenges.

San Gabriel’s Governance Structure and Financial Resources

Although city council membership has largely remained consistent over the past seven years, the city has recently undergone changes in other important leadership roles. Three of the five current city council members have served on the council since at least 2014 and one former council member currently serves as the city’s treasurer. Another former council member served from 2014 until the election in 2020. The current city manager and finance director inherited the poor financial situation of the city when they began their employment. The previous city manager was with the city for nine years until his retirement in January 2018; in February 2018, the city council appointed the current city manager. The former finance director held his position for almost 19 years before retiring in early 2019; two individuals then served in an interim capacity until the current finance director began his employment in January 2021. The city manager and finance department prepare and administer the city’s annual budget; the city council is responsible for safeguarding the city’s financial health and adopting its budget.

In fiscal year 2019–20, San Gabriel adopted a $67 million operating budget, of which the general fund accounted for nearly $42 million. The city’s main sources of income for its general fund include tax revenue and transfers from the Retirement Special Revenue Fund (retirement fund). The general fund obtains 58 percent of its revenue through taxes, such as property taxes, utility users’ taxes, and sales taxes, and 22 percent from transfers from the retirement fund. Specifically, San Gabriel receives revenue from a property tax to pay for the city’s share of CalPERS retirement costs. Additionally, the city has special revenue funds; these revenues are from sources restricted to expenditures for specific purposes. Some special revenue funds include the Capital Improvements Program Fund, the Sewer Fund, and the Waste Management Fund. As highlighted in Figure 1, the majority of San Gabriel’s general fund expenditures go toward funding services such as public safety (police and fire), public works, and community development. Additionally, of the nearly $42 million total general fund expenditures, approximately 71 percent, or $30 million, pay for personnel costs, including salaries and retirement benefits.

Figure 1

San Gabriel’s Budgeted General Fund Expenditures for Fiscal Year 2019–20 by Category

A donut chart that displays the various categories of budgeted expenditures for San Gabriel’s general fund for fiscal year 2019-20.

Source: San Gabriel’s adopted budget for fiscal year 2019–20.

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