10A
Date: November 19, 2024
To: Honorable Mayor and Members of the City Council
From: Sheila Poisson, Finance Director
By: Jason Nishiyama, Deputy Finance Director | [email protected] Subject: Finance - Accept and File Forensic Review of Financial Processes Report.
Expenditure: None.
RECOMMENDATION
Recommendation of the Finance Director that City Council accept and file the forensic review of the City’s financial processes report.
FUNDING
None required.
DISCUSSION
On November 14, 2023, Councilmember Kaji, with concurrence from the full City Council, requested staff to develop a scope and determine the potential cost for a third-party review of the City’s fiscal management processes from fiscal year 2014-15 through fiscal year 2022-23. The objective of the review is to determine the causes that led to a depletion of the City’s General Fund unassigned fund balance to an all-time low of $581,449 in fiscal Year 2019-20, what factors were involved, and whether the City managed it appropriately.
On February 27, 2024, staff presented the results of the request for proposals (RFP) which confirmed a review of fiscal management processes is possible. Based on the information provided, City Council directed staff to proceed with the procurement phase, which included reviewing and scoring all proposals and reporting results to the City Council at a later date.
On April 23, 2024, staff presented the results of the competitive procurement process and scoring of proposals to the City Council. City Council directed staff to award a contract to BDO USA, P.C. (BDO) of Los Angeles, CA and begin the work.
In September 2024, BDO completed their third-party forensic review of financial processes. The final report issued by BDO is attached to this staff report and contains their detailed analysis, findings and conclusions. Below is a summary of BDO’s findings.
City Council
November 19, 2024
The third-party review concluded that there were five key root causes that lead to the 2020 fiscal crisis:
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.
The report also details significant improvements that the City has made since 2020 to enhance its fiscal management and budgeting processes. Improvements included:
•Implemented zero-based budgeting;
•Enhanced transparency and accountability with budget-to-actual monitoring and follow-up of variances greater than 5%;
•Replenished the General Fund from 0.3% of operating expenditure budget in 2020 to 24% in 2023;
•Improved understandability and clarity with newly developed First Quarter, Mid-Year, and Annual Budget Books;
•Increased communication to internal and external stakeholders, including a "Budget in Brief";
•Improved credit rating from AA- (negative watch) to AA stable (S&P).
Finally, BDO also identified areas for further improvement to further ensure sustainable financial stability and effectiveness.
1.Sustainable Budgeting Practices: Establish documented controls related to revenue projections, budget-vs-actual variance reporting, and other relevant best practices suggested by Government Finance Officers Association (GFOA)
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 City Council
November 19, 2024
All findings and improvement recommendations were reviewed with Finance Department management. It is the recommendation of the Finance Director that City Council accept and file the forensic review of the City’s financial processes report.
ATTACHMENTS
1. Forensic Review of Financial Processes Report (Limited Distribution)