BDO USA, P.C, a Virginia professional corporation, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
SEPTEMBER 2024
City of Torrance
FORENSIC REVIEW OF FISCAL
MANAGEMENT PROCESSES
2 Table of Contents
Executive Summary
Background and Approach
Events and History Leading Up to the Fiscal Crisis
Root Cause Analysis
City Response to Fiscal Crisis and Fiscal Management
Improvements since 2020
Effectiveness of City’s Response
Maturity of Fiscal Management Processes and Controls
Fiscal Management Recommendations and Action Plan
Benchmarking results
FISCAL MANAGEMENT REVIEW REPORT
3 3
Executive Summary
FISCAL MANAGEMENT REVIEW REPORT
4 Executive Summary
Conduct a forensic review of the
City’s fiscal management processes
from FY 2014-15 through FY 2022-23
to understand the causes of the
reserve depletion that led to a
financial crisis in 2020, the factors
that led to the issues, and whether
the City managed the resulting fiscal
issues appropriately.
BDO USA, P.C (BDO) performed
interviews of finance staff,
department heads, City Council
members, and audit personnel. The
review also included an evaluation of
the City's fiscal management and
budget documentation against
Government Finance Officers
Association (GFOA) best practice
guidance. Additionally, BDO
benchmarked budgeting processes
through interviews with other cities
and a survey.
The forensic review concluded that
five key root causes led to the 2020
fiscal crisis. Since then, the City has
made significant improvements in
financial management and budgeting
processes, including the adoption of
zero-based budgeting. However,
further enhancements are needed to
improve early warning systems,
detect factors that could cause
budget overruns, and increase
visibility on the use of unassigned
reserves. These steps are essential for
ensuring continued financial stability
and health.
OBJECTIVE
OVERVIEW
CONCLUSION
FISCAL MANAGEMENT REVIEW REPORT
5 Executive Summary
ROOT CAUSES
1. Unsustainable budgeting practices
leading to a consistent annual budget
shortfall from 2015 - 2020
2. Insufficient financial transparency and
accountability
3. Inadequate time and resources to
analyze and deliberate prior to budget
approval
4. Lack of control over the use of
unassigned reserves
5. Insufficient risk assessment, controls,
and contingency planning
IMPROVEMENTS SINCE 2020
1. Implemented zero-based budgeting
2. Enhanced transparency and
accountability with budget-to-actual
monitoring and follow-up of variances
greater than 5%
3. Replenished the General Fund from
0.3% of operating expenditure budget
in 2020 to 24% in 2023
4. Improved understandability and
clarity with newly developed 1st Qtr,
Mid-Year , and Annual Budget Books
5. Increased communication to internal
and external stakeholders, including
a "Budget in Brief"
6. Improved (S&P) credit rating from
AA- (negative watch) to AA stable
SELECTED IMPROVEMENTS RECOMMENDED
1. Sustainable Budgeting Practices : Establish documented controls related to revenue projections, budget-vs-actual variance reporting, and other relevant Government Finance Officers Association (GFOA) controls
2. Financial Transparency and Accountability: Continue to report the balance and use of unassigned reserves in the Budget Book. Install department accountability for variance reporting and justification.
Create metrics and alerts in staff and Council fiscal reporting
3. Budget Workshops : Offer "sleeves up" workshops for Council and key staff to improve clarity, diligence, thoroughness, and transparency in the budget review and approval process
4. Controls Over Use of Unassigned Reserves : Require Council approval for the use of unassigned reserves
5. Risk, Controls, Contingency Planning : Establish formal risk assessment, internal auditing, and contingency planning practices over fiscal management
Five key root causes of the 2020 fiscal crisis were identified. Since 2020, the City has made significant improvements to enhance its fiscal management and budgeting processes. Based on an analysis of the current state, BDO also identified areas for further improvement to further ensure sustainable financial stability and effectiveness.
FISCAL MANAGEMENT REVIEW REPORT
6 6
Background and
Approach
FISCAL MANAGEMENT REVIEW REPORT
7 FISCAL MANAGEMENT REVIEW REPORT
Background
In FY19-20 like many municipalities throughout the
country, the City of Torrance experienced a financial
downturn from various factors including the COVID19
pandemic.
In June 2020, the City was required to tap into nearly all unassigned financial reserves, depleting reserves to a
historical low of $581,000.
The City has since passed a sales tax increase, key revenue sources have rebounded, and several financial
improvements have been implemented. Although the fiscal health of the City is currently headed in a sustainable trajectory, the City Council requested a “forensic review” to determine the causes of the reserve depletion that led to a financial crisis in 2020, what factors lead to the issues and whether the City managed it appropriately.
8 FISCAL MANAGEMENT REVIEW REPORT
Scope and Approach
Scope
•This analysis covers fiscal management processes and controls between FY2014-15 and FY 2022-2023 with special attention paid to the period before and after FY2019-2020. Audit Planning
•Conducted scoping and risk assessment of the fiscal management area, developed an audit work program, and obtained approval by City Management
Audit Fieldwork
•Conducted in-depth interviews with key stakeholders to gather qualitative insights into the fiscal management practices of the organization, including City staff, Council members, and benchmark city representatives •Reviewed current and historic documentation to understand the underlying factors around the fiscal crisis of 2020 including existing and past fiscal management processes and controls. The documentation reviewed included but was not limited to information for fiscal years 2014 through 2024: ACFRs, budget reports, internal audit reports, policy and procedure manuals, strategic plans and KPIs. 9 FISCAL MANAGEMENT REVIEW REPORT
Scope and Approach, continued
Audit Fieldwork, continued
•Assessed the previous and current state of the organization's fiscal management practices against each of the 28 sections of the Government Finance Officers Association (GFOA) budget best practice guidance. This assessment aimed to determine the maturity level of the organization's fiscal management practices both in the current state, and prior to the 2020 fiscal crisis. The best practice guidance is included in Appendix 1 of this report for reference.
•Surveyed five benchmark cities to understand priorities, controls, and fiscal management directions among peers. The benchmark cities were Pasadena, Santa Monica, El Segundo, Burbank, and Glendale. Audit Reporting and Wrap Up
•Observations and the draft report were reviewed with management to validate accuracy. •A separate report of the survey of fiscal management practices of five benchmark cities was produced under separate cover and will be shared with participant cities. •Presentation made to the City Council.
10 10
Events and History Leading Up to
Fiscal Crisis
FISCAL MANAGEMENT REVIEW REPORT
11 FISCAL MANAGEMENT REVIEW REPORT
Events and History Leading Up to the Fiscal Challenges
The historical issues and significant unanticipated external events illustrated on the following pages highlight the fiscal challenges faced by the City of Torrance, culminating in the 2020 fiscal crisis.
RECURRING USE OF
RESERVES
Expenses exceeded revenue
from 2015 through 2020,
draining unassigned
reserves.
HIGH RISK FINANCIAL
HEALTH
By 2019, the State Auditor
rated Torrance "high risk" due
to a significant reduction in
general fund reserves and
liquidity brought attention to
the City’s precarious financial
position. This was followed by
a reduction in S&P rating.
RAPID DROP IN
REVENUE INCLUDING
SALES AND HOTEL
TAXES
The lack of sufficient
reserves, combined with the
cyber incident, the
pandemic, and the resulting
rapid drops in sales and
hotel taxes, left the City
facing a fiscal crisis.
CYBER INCIDENT AND
COVID-19 PANDEMIC
The drained reserves were
coupled with a cyber
incident on March 1, 2020,
followed by the COVID-19
pandemic announced on
March 20, 2020.
12 Root Causes – Expenses Exceeded Revenue
170.0
175.0
180.0
185.0
190.0
195.0
200.0
205.0
210.0
215.0
2014 2015 2016 2017 2018 2019 2020
Actual Revenue Actual Expenditure
Expenditures
exceeded revenue
since 2015
From 2015 to 2020, the city consistently spent more than it earned and used its savings to cover the extra costs.
Key Events: EXXON/Mobil
Refinery Explosion
- COVID-19 Pandemic
- Cyber IncidentToyota Departs
FISCAL MANAGEMENT REVIEW REPORT
13 170.0
175.0
180.0
185.0
190.0
195.0
200.0
205.0
210.0
215.0
2014 2015 2016 2017 2018 2019 2020
Amended Budgeted
Revenue
Actual Revenue
170.0
175.0
180.0
185.0
190.0
195.0
200.0
205.0
210.0
215.0
2014 2015 2016 2017 2018 2019 2020
Amended Budgeted
Expenditure
Actual Expenditure
FISCAL MANAGEMENT REVIEW REPORT
Root Causes – Spending More than Earned
170.0
175.0
180.0
185.0
190.0
195.0
200.0
205.0
210.0
215.0
2014 2015 2016 2017 2018 2019 2020
Actual Revenue
Actual Expenditure
Optimistic revenue
projections not met
since 2015
Expenditures
exceeded revenue
since 2015
1 3
From 2015 to 2020, the city consistently spent
more than it earned and used its savings to cover
the extra costs: (1) budgeted revenue was higher
than actual revenue, (2) budgeted expenditures were
about the same as actual, (3) actual expenditures
exceeded actual revenue, and unassigned reserves
were used to compensate for cost overruns.
Budget vs. actual
expenditures
tracked well
2 14
14 Root Cause Analysis
FISCAL MANAGEMENT REVIEW REPORT
15 Pre-2020 Root Causes
1 Unsustainable
Budget
Practices
2 Insufficient
Transparency
and
Accountability
3 Limited
Time for
Council
Analysis and
Deliberation
4 Insufficient
Control
Over Use of
Unassigned
Reserves
5 Insufficient Risk
Assessment,
Controls,
Monitoring,
Contingency
Planning
1. Overly optimistic revenue
projections were made.
2. Expenditures projections
were carried forward from
prior year without adequate
challenge to underlying
assumptions.
3. Actual revenues at year-end
were less than actual
expenditures resulting in a
budget shortfall.
1. The budget shortfall was not
clearly communicated in
following year’s budget
documents, leading to a lack
of understanding among the
Council and the public.
2. Inadequate budget to actual
reporting, including overspend
without significant
consequences.
1. Voluminous budget book,
complex municipal budgeting
practices.
2. The implications of financial
decisions were not thoroughly
set out to the Council.
3. Lack of detailed training for
Council on budget
complexities, assumptions,
projections and estimates.
1. Insufficient controls and
oversight over the use of
unassigned reserves.
2. Lack of documentation and
reporting of reserve balances
and usage.
3. Unclear disclosure that
reserves were being used to
offset budget shortfalls.
4. Absence of policies for
approving the use of reserves.
5. Lack of documented
notification by the Council for
reserve use.
1. Failure to implement financial
controls and financial
management strategies.
2. Lack of resilient systems to
mitigate financial impacts
from external events. Refer to
the next slide for a timeline of
the significant events.
3. Lack of contingency planning.
4. Internal Audit division was not
empowered to address
financial and operational risks
and was limited to monitoring
only.
Unsustainable budget practices, insufficient transparency and accountability, inadequate Council briefing and deliberation time, lack of controls over unassigned reserves, lack of budget-to-actual performance monitoring, and poor risk assessment and contingency planning contributed to a depletion of reserves. When combined with COVID-19 and a cyber incident, these factors undermined financial and operational resiliency, leading to the 2020 fiscal crisis.
FISCAL MANAGEMENT REVIEW REPORT
16 16
City Response to Fiscal Crisis and
Fiscal Management Improvements Since 2020
FISCAL MANAGEMENT REVIEW REPORT
17 FISCAL MANAGEMENT REVIEW REPORT
City Response to the Fiscal Crisis – Short
Term Actions
To address the fiscal crisis, the City responded with short term actions:
•Employee Concessions: Employee contracts for
miscellaneous (non-public safety) employee groups were
"frozen" (no pay increases).
•Use of Reserves: The City used its financial reserves to cover immediate shortfalls while longer-term solutions
were put in place. In June 2020, the City tapped into
nearly all unassigned financial reserves, depleting
reserves to a historical low of $581,000.
•Hiring and Expenditures: Hiring was frozen,
extraordinary expenditures were canceled or delayed.
•Cost Savings: The 2014 certificates of participation
were refunded saving the City $4.2m in 2021 and 2022.
18 FISCAL MANAGEMENT REVIEW REPORT
City Response to the Fiscal Crisis – Longer Term Actions The City designed a longer term, comprehensive strategy to stabilize the City’s finances and ensure the continued delivery of essential services, including:
•Cost Reductions: The City made significant cuts (~12%, or $20m) to its budget, including reducing departmental expenditures and delaying non-essential projects. •Tax Revenues: Key revenue sources rebounded such as sales tax recovery beginning in 2021 and hotel occupancy post-pandemic.
•Sales Tax Increase: In June 2022, the City passed a sales tax measure to provide an estimated $18m per year to help fund essential services like public safety, including police and fire, quality of life, deferred maintenance projects, and $5 million to help rebuild the city’s financial reserve. •Cost Savings: The City issued $349.5m of lease revenue bonds to pay off the CalPERS unfunded liability, saving ~$8m per year.
•Revenue Enhancements: The city explored other revenue-generating opportunities, such as adding new fees and increasing the cost recovery for existing fees. Promoting economic development incentives to attract new business and support existing ones by expediting permitting. Implementing the Emergency Medical Services transport program, achieving over $2.3m in revenues. •Financial Planning: Developed and implemented 10-year financial projections. 19 FISCAL MANAGEMENT REVIEW REPORT
Fiscal Management Improvements Since 2020
City management implemented improvements to create a more robust, transparent, and accountable fiscal management system, ensuring the long-term financial health and sustainability of the City of Torrance. •Implemented Zero-Based Budgeting
- Efficient Resource Allocation: Ensures every dollar spent is justified for each new period, leading to more efficient resource allocation.
- Cost Control: Identifies and eliminates unnecessary expenditures, promoting cost savings. - Department heads are a key input into the budgeting process and have frequent communication with Finance.
•Enhanced Transparency and Accountability with Budget-to-Actual Monitoring - Increased Accountability: Holds departments accountable for their spending. - Early Detection of Issues: Identifies variances for corrective actions when possible. - Trust Building: Enhances trust among stakeholders through transparency. - Risk Based Internal Audits have been implemented.
20 FISCAL MANAGEMENT REVIEW REPORT
Fiscal Management Improvements Since 2020, continued
•Replenished the General Fund from 0.3% of Operating Expenses in 2020 to 24% in 2023 - Financial Stability: Provides a financial cushion to absorb unexpected expenses or revenue shortfalls. - Risk Mitigation: Reduces the risk of fiscal emergencies by maintaining a healthy reserve. - Creditworthiness: Improves the City's credit rating, potentially lowering borrowing costs. •Improved Understandability and Clarity with Newly Developed Budget Books & “Budget in Brief” - “Budget in Review”: Makes budget information more accessible and understandable. - Informed Decision-Making: Provides clear information for informed financial decisions. - Transparency: Promotes transparency by presenting budget information in a user-friendly format. •Increased Communication to Internal and External Stakeholders - Stakeholder Engagement: Ensures relevant parties are informed and engaged in the fiscal management process (Budget Review Team, Annual Public Workshops).
- Collaboration: Fosters collaboration and input from various stakeholders (department heads, finance, City Council, residents).
- Trust and Confidence: Builds trust and confidence by keeping stakeholders informed about the City's financial status and plans.
21 FISCAL MANAGEMENT REVIEW REPORT
Fiscal Management Awards
The awards received by the City of Torrance demonstrate to council members and citizens the City's commitment to transparency, excellence in financial reporting, and sound fiscal management. These accolades underscore the City's efforts to adhere to high standards in budget preparation and financial disclosure, providing a higher level of assurance regarding the state of their budget and fiscal management.
Despite earning the GFOA Certificate of Achievement for Excellence in Financial Reporting (COA) since 1987, this award primarily focuses on the quality and transparency of financial reporting rather than assessing the financial health of the government. This distinction explains why the award did not foretell the 2020 fiscal crisis.
In contrast, the GFOA Distinguished Budget Presentation Award and the CSMFO Operating Budget Excellence Award provide a higher level of assurance. These awards recognize the City's budget documents for their quality, adherence to best practices, and effectiveness as policy documents, financial plans, operations guides, and communication tools. This comprehensive evaluation ensures that the City's budgeting process is robust and transparent, further reinforcing confidence in its fiscal management. •GFOA Certificate of Achievement for Excellence in Financial Reporting (COA) Program o Received from 1987 through our currently completed FY22-23 ACFR document. Anticipated to be received going forward. o Link: https://www.gfoa.org/coa-award
•GFOA Distinguished Budget Presentation Award Program
o Received for our FY22-23 Adopted Operating Budget and Capital Improvement Plan and our FY23-24 Adopted Operating Budget and Capital Improvement Plan. Anticipated to be received going forward. o Link: https://www.gfoa.org/budget-award
•CSMFO Operating Budget Excellence Award
o Received for our FY23-24 Adopted Operating Budget. Anticipated to be received going forward. o Link: https://csmfo.org/page/budget-awards
22 22
Maturity of Fiscal Management
Processes and Controls
FISCAL MANAGEMENT REVIEW REPORT
23 FISCAL MANAGEMENT REVIEW REPORT
Fiscal Management Process Maturity
The Overall Maturity of City of Torrance fiscal management processes was assessed against the Government Financial Officers Association (GFOA) best practice guidelines for budget management. •Prior to 2020, the City’s fiscal management processes were rated 1.6 (out of 5.0), below acceptable standard.
•In 2024, the City was assessed with a rating of 3.1 across 28 GFOA categories, meaning the organization’s controls are DEFINED – processes were documented, standardized, and communicated. All controls were weighted equally and the scores, by areas of focus, were averages within the area of focus. See the next pages for maturity assessment details.
BDO commends the City on attaining a 3.1 maturity level in its first year of measurement and recommends the City seek to achieve a rating of at least 4.0 over time, to ensure processes and controls are tested and verified to be operating effectively as designed. Attaining a 5.0 – Optimized maturity level - should be weighed against the City’s scarce resources; the City may want to consider strategically seeking a 5.0 maturity rating in selected areas.
24 FISCAL MANAGEMENT REVIEW REPORT
Maturity Scale Definitions
Characteristics of Capability Maturity
1 2 3 4 5
Initial Informal Defined Managed, Measured
Sustainable,
Continuously
Improving
Fiscal management processes and
controls are not in place;
are localized (if at all), ad hoc,
unpredictable, and reactive
which increases risk and
inefficiency.
Fiscal management processes and
controls likely to depend on
individual efforts and not
considered to be repeatable.
Would not be replicated if
individuals were to leave.
Fiscal management processes and
controls are generally not
documented, there may be some
standard practices communicated
on the job. Would likely not be
replicated if knowledgeable
individuals were to leave.
Some departments may have
undocumented, but partially
standardized processes.
Risks and corresponding controls
are not generally defined.
Controls are generally not
consistently performed, reliable,
or repeatable.
Fiscal management processes and
controls are documented,
standardized, communicated, and
easily accessible to all
stakeholders.
Executive management receive
internal control risk overviews and
reports.
Policies and processes are well
established, enforced, and
provide guidance across projects,
programs and portfolios;
supported by training.
Organizational processes are
aligned with strategies, controls
and metrics/KPIs.
Fiscal management controls are
documented, communicated,
tested, and discussed
transparently up, down, and
across the organization,
reinforced through training.
Fiscal management control
mindset is a part of leadership
discussions and day-to-day
operations and is incorporated
into performance management
objectives.
Focus is on continually improving
fiscal management controls
through strategic measurement,
key performance indicators,
innovative changes, and continual
analyses/assessments.
Fiscal management controls are
integrated into organization
values, culture, strategy,
planning, development,
and services, reinforced through
training.
Processes are continuously
improving, tested, and
benchmarked.
INCREASING MATURITY
Torrance’s 2024 Maturity
Level
The Overall Maturity of City of Torrance fiscal management processes was assessed in 2024 against the GFOA best practice guidelines for budget management at a rating of 3.1 - Defined. 25 FISCAL MANAGEMENT REVIEW REPORT
Maturity Scale Calculations Across 28 GFOA Categories
# Category Pre-2020 Current State
1 Structurally Balanced Budget 1 3
2 Adopting Financial Policies 1.5 3
3 Fund Balance Guidelines for the General Fund 1 3
4 Recommended Budget Practices from NACSLB 1 2.5
5 Working Capital Targets for Enterprise Funds 2 2
6 Strategic Planning 1.5 3
7 Long-Term Financial Planning 2 3.5
8 Role of the Finance Officer in Supporting Fiscal Sustainability 1 3.5 9 Establishing an Effective Grants Policy 2 2
10 Establishing Government Charges and Fees 2.5 4
11 Pricing Internal Services 3 3
12 Evaluating Service Delivery Alternatives 3 3.5
13 Financial Forecasting in the Budget Preparation Process 2 3.5 14 Inflationary Indices in Budgeting 2 4
15 The Use of Trend Data and Comparative Data for Financial Analysis 1 3 16 Basis of Accounting versus Budgetary Basis 3 3
17 Effective Budgeting of Salary and Wages 1 2
18 Public Engagement in the Budget Process 3.5 3.5
19 Role of the Finance Officer in Collective Bargaining 1.5 3 20 Strategies for Managing Health-Care Costs 1.5 4.5
21 Budget Monitoring 1 2.5
22 Performance Measures 1 2.5
23 Accurately Displaying Total Expenditures in Budget Presentations 1.5 3 24 Capital Budget Presentation 1 3.5
25 Departmental Presentation in the Operating Budget Document 1 3.5 26 Making the Budget Document Easier to Understand 1 3.5 27 The Statistical/Supplemental Section of the Budget Document 1 3.5 28 Website Posting of Financial Documents 1 4
45 88
1.6 3.1
Rating Definition
1 Initial
2 Informal
3 Defined
4 Managed, Measured
5 Sustainable, Continuously Improving
This page outlines the
calculation of Torrance’s
maturity level prior to
the 2020 fiscal crisis and
the current state as of
2024. The maturity was
assessed based on the
GFOA Budgeting Best
Practice Guidelines and
shows marked
improvement.
Maturity Level
Pre-2020 1.6
2024 3.1
26 26
Fiscal Management Recommendations
and Action Plan
FISCAL MANAGEMENT REVIEW REPORT
27 Recommendations
1 Sustainable
Budget
Practices
2 Financial
Transparency
and
Accountability
3 Budget
Workshops
4 Increased
Control
Over Use of
Unassigned
Reserves
5 Increased Risk
Assessment,
Controls,
Contingency
Planning
•Establish documented
controls related to revenue
projections, budget-vs-
actual variance reporting,
and other relevant
Government Finance
Officers Association (GFOA)
controls.
•Continue to separately report
the balance and use of
unassigned reserves in the
Budget Book.
•Install department
accountability for variance
reporting and justification.
•Create metrics and alerts in
staff and Council fiscal
reporting.
•Continue to offer a variety of
methods for Council and key
staff to improve clarity,
diligence, thoroughness, and
transparency in the budget
review and approval process
such as "sleeves up" workshops
for Council and key staff
•Require Council
approval for the use of
unassigned reserves
•Establish formal risk assessment to
identify, evaluate, and mitigate
potential financial risks to City’s
financial health
•Allocate resources for internal
auditing focused on revenue
projections and budget-to-actual
controls to ensure that financial
practices are aligned, and
discrepancies are promptly addressed.
•Initiate formal contingency planning
and tabletop scenario practices to
ensure robust preparedness and
proactive fiscal management.
To ensure the City of Torrance maintains a strong fiscal position and continues to uphold the highest standards of financial management, the following recommendations are proposed. These recommendations focus on sustainable budgeting practices, enhancing financial transparency and accountability, improving the budget review process, and strengthening controls over the use of unassigned reserves. Additionally, they emphasize the importance of risk assessment, internal auditing, and contingency planning to safeguard the city's financial health.
FISCAL MANAGEMENT REVIEW REPORT
28 Action Plan
•Objective
Achieving robust fiscal management is a critical objective for the City of Torrance. This action plan outlines the necessary steps to enhance the city's financial practices and establish robust processes and controls.
•Key Benefits
- Improve organizational integrity.
- Ensure financial stability.
- Foster a culture of continuous improvement and accountability. - Address current financial management improvements.
- Position the City of Torrance for long-term success.
- Align with GFOA best practices.
•Key Points
- The following 5 pages provide an analysis of recommendations for each of the 5 root cause areas. Recommendations are categorized into two implementation timelines:
o NOW: Actions to be taken within the next budget cycle or within the next 12 months. o LATER: Actions to be taken beyond 12 months.
- All recommendations must be considered in tandem with the available resources that can be applied to these solutions.
o For example, providing regular internal auditing over budget-to-actual controls and reporting may require added resources.
o Management and Council will have to determine whether added internal audit resources are the highest and best use of resources; internal audit should recommend their best reasoned approach, based on a risk-based analysis. 29 Root Cause, Improvements and Recommendations
Additional Improvements Recommended
Now
1. Develop formalized, written policies for budgeting practices based on the current processes. (GFOA 1&2)
2. Create documented revenue projection review and approval controls to prevent over-optimistic targets. (GFOA 1)
3. To enhance alignment between strategic planning, measurable KPIs, and related costs, develop an integrated strategic planning framework that connects organizational goals with departmental objectives and SMART KPIs.
Align budget allocations with these KPIs, implement robust performance monitoring, and foster continuous improvement through regular reviews and feedback. Each budget line should be tied to a specific KPI. (GFOA 6)
1. Unsustainable
Budget
Practices
Later
1. Explore API connections between AchieveIt and OpenGov to streamline data integration and reporting. (GFOA 22)
2. Reduce the number of KPIs and ensure there is rigorous review by finance and operations to ensure they are achievable, relevant, and aligned with strategy. This should include defining the specific performance measures by which the KPIs can be tracked and benchmarked and validating the measure against the desired result. (GFOA 22)
3. Continue to assess the strategy and plan to address the unfunded pension liability, each considering different costs and timeframes, for presentation to Council. (GFOA 7)
4. Adjust the budget to reflect realistic staffing levels based on historical data, ensuring transparency in allocating any cost savings from unfilled vacancies. (GFOA 17)
The actions below are
recommended to further improve
fiscal management, processes and
controls related to unsustainable
budgeting practices. These
improvements are aligned with
GFOA best practice guidelines.
FISCAL MANAGEMENT REVIEW REPORT
30 Additional Improvements Recommended
Now
1. Explore options for filling any vacancies in the Budget team, to ensure the team can operate at full capacity. (GFOA 13)
2. Establish clear variance thresholds in the budget monitoring process that trigger investigation and follow-up actions by Finance. Exceptional variances should also be defined and reported to the City Manager. (GFOA 21)
2. Insufficient
Transparency
and
Accountability
Later
1. Continue to include trend data in the budget book for transparency purposes. (GFOA 15)
2. Develop documented procedures for newer processes, including, including monthly and quarterly budget reviews and variance analysis, to ensure consistency and clarity in the process. (GFOA 21)
3. Simplify the budget analysis process by reducing the number of account codes, making it easier to track and manage financial data. (GFOA 21)
4. Include more detailed descriptions and timetables for capital projects in the budget book or dashboard.
This will be strengthened by rolling out the capital projects dashboard. (GFOA 24)
5. Enhance the level of detail included in the departmental section by defining the challenges faced by each department, alongside opportunities. Further, add prior year comparisons and trend information as this new section of the budget book continues to grow. (GFOA 25)
6. Consider translating budget documents to include non-English speaking residents. (GFOA 26)
7. Consider adding a section on climate data to provide a holistic view of the city's environment and its potential impact on budgeting and planning. (GFOA 27)
8. Add prior year comparisons and trend information the statistical section of the budget book continues to grow. (GFOA 27)
9. Consider adding an explanation of the benchmarking figures when comparing metrics with other cities to offer clearer insights when items may not be comparable. (GFOA 27) The actions below are
recommended to further
improve fiscal
management, processes
and controls related to
transparency and
accountability. These
improvements are
aligned with GFOA best
practice guidelines.
Root Cause, Improvements and Recommendations
FISCAL MANAGEMENT REVIEW REPORT
31 Additional Improvements Recommended
Now
1. Continue to help decision-makers understand the implications of their decisions through clear communication. (GFOA 8)
2. Ensure that key indicators and alerts are present and obvious in the budget materials and reviewed carefully for their implications to the City’s fiscal health.
Annually review to ensure the indicators remain relevant. (GFOA 26)
3. Enhance the understandability of the budget book by providing a summary of the key points to the Council when it is presented for their review. (GFOA 26)
4. Add definitions for terms such as assigned, unassigned, and restricted reserves to the glossary, with links in the budget book. (GFOA 26)
3. Limited time
for Council
Analysis and
Deliberation
Later
None
The actions below are
recommended to further improve
fiscal management, processes
and controls related to Council
Analysis and Deliberation. These
improvements are aligned with
GFOA best practice guidelines.
Root Cause, Improvements and Recommendations
FISCAL MANAGEMENT REVIEW REPORT
32 Additional Improvements Recommended
Now
1. Uses of the unassigned reserves above a pre-defined threshold or for pre-defined exception reasons should be approved by the City Council and supported by documented justification for the use of the unassigned reserves. (GFOA 3)
2. Continue to focus on replenishing the General Fund Unassigned Reserves, with the aim of increasing the reserves to six months of expenditure. (GFOA 3)
3. Develop and implement policies and procedures over the use of the General Fund Unassigned Reserves. Currently, the policy states approved is only required for use of the Economic Anomaly reserve. (GFOA 3)
4. Insufficient
Control Over
Use of
Unassigned
Reserves
Later
None
The actions below are
recommended to further
improve fiscal management,
processes and controls related
to the use of unassigned
reserves. These improvements
are aligned with GFOA best
practice guidelines.
Root Cause, Improvements and Recommendations
FISCAL MANAGEMENT REVIEW REPORT
33 Additional Improvements Recommended
Now
1. An annual internal audit of the budgeting process should be conducted to provide an independent review of the process, identify areas for improvement, and ensure that financial practices align with best practices and regulatory requirements. (GFOA 1)
2. Increase resources in internal audit to enable them to implement year-end and mid-term audits of budget-to-actual to validate management’s variance analysis and reporting,
including validation of controls over the use of unassigned reserves. (GFOA 1) Implement regular reviews of vacancies to determine whether adjustments are required. (GFOA 17)
3. Implement finance approval at the Purchase Order stage to ensure purchases are being coded to the correct line, and that there is sufficient budget available for the purchase. (GFOA 21)
5. Insufficient Risk
Assessment,
Controls,
Monitoring,
Contingency
Planning
Later
1. Develop a formal grant policy to enhance fiscal sustainability and transparency in grant management, ensuring consistent oversight and compliance across all departments. (GFOA 9)
2. Ensure that all inter-departmental charges and indirect costs are clearly defined and adjusted to avoid double counting in the budget book. If it is determined that the risk of double counting is immaterial, this should be clearly stated in the budget book. (GFOA 23)
3. Explore the possibility of implementing an automated control over all procurement that verifies the existence of sufficient budget prior to purchase. (GFOA 21)
The actions below are recommended
to further improve fiscal
management, processes and controls
related to Risk Assessment, Controls,
Monitoring and Contingency
Planning. These improvements are
aligned with GFOA best practice
guidelines.
Root Cause, Improvements and Recommendations
FISCAL MANAGEMENT REVIEW REPORT
34 34
BENCHMARK SURVEY
SUMMARY
FISCAL MANAGEMENT REVIEW REPORT
35 Fiscal Management Current State
All five cities rated their fiscal management policies as effective or very effective at achieving a structurally balanced budget in their city. A summary of the practices used is included below. Budgeting and Financial Planning
̶ Two-year operating and capital budget.
̶ A target unassigned reserve of 15% - 25% of annual general fund operating and capital expenditures.
Reporting and Analysis
̶ Variance analysis and management reviews.
̶ Monthly and quarterly budget to actual reporting to the departments and Council. ̶ Quarterly open capital projects updates.
Long-Term Financial Projections
̶ Five-year or ten-year financial forecast for all city Funds every fiscal year, prior to development of the operating and capital budget.
Cost Management and Allocation
̶ Citywide fee studies and citywide cost allocation plans every two years. Stakeholder Engagement and Professional Development
̶ Regular meetings with community partners such as the Chamber of Commerce, travel/tourism organizations, school districts, and local businesses to keep informed on trends and challenges impacting the community.
̶ Attending meetings and seminars on relevant issues, for example, CalPERS, CSMFO, and GFOA.
FISCAL MANAGEMENT REVIEW REPORT
36 The five cities reported common challenges in achieving a structurally balanced budget.
These have been summarized below.
Budget Tracking and Compliance
̶ Lack of enforcement of budget tracking and compliance to standards increasing the risk of overspending and financial mismanagement.
̶ Limited budget software technology in place causing inefficiencies in budget tracking.
̶ Difficulty reporting budget and actuals based on Council or Community priorities. Revenue and Financial Stability
̶ The reduced revenues associated with the Covid-19 Pandemic impacting financial stability.
̶ The Unfunded Actuarial Liability (UAL) for CalPERS posing long-term financial risks.
Service Levels and Staffing
̶ Recent hiring freezes and other temporary budget restrictions increasing the difficulty of maintaining current service levels.
Transparency and Public Engagement
̶ Complicated budget documents that are difficult to understand by the public hindering transparency and public engagement.
Council Review and Oversight
̶ Limited time for Council to review budget documentation.
Fiscal Management Challenges
FISCAL MANAGEMENT REVIEW REPORT
37 Fiscal Management Future Initiatives
The following initiatives are being considered across the five cities that participated in the survey:
Budget Tracking and Enforcement
̶ Future enforcement of budget tracking.
Training and Education
̶ Implementation of comprehensive training provided during orientation of Council members, and as requested. This is to ensure Council are aware of the financial health and the impact of their decisions.
̶ Providing one-on-one training for Council members and Department Heads with Finance staff or subject matter experts.
Committees and Oversight
̶ Implementation of a Vacancy Review Committee created to reevaluate vacant positions.
̶ Creation of a Finance Committee which includes two Council members. Policy and Planning
̶ Revision of fiscal policies to incorporate plans to address contingent liabilities. ̶ Implementation of plans to fund aging infrastructure. Revenue Generation
̶ New tax measures.
FISCAL MANAGEMENT REVIEW REPORT
About BDO USA
At BDO, our purpose is helping people thrive, every day. Together, we are focused on delivering exceptional and sustainable outcomes — for our people, our clients and our communities. Across the U.S., and in over 160 countries through our global organization, BDO professionals provide assurance, tax and advisory services for a diverse range of clients.
BDO is the brand name for the BDO network and for each of the BDO Member Firms. BDO USA, P.C, a Virginia professional corporation, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
www.bdo.com
Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your needs. © 2023 BDO USA, P.C. All rights reserved.