California state auditor requires Lindsay to pay back money to their own enterprise funds reversing course from a 2019 decision
LINDSAY – Way back in 2019, before the pandemic changed the pace of work as we know it, Lindsay was designated the fourth most fiscally challenged city in California.
As of October 2019 Lindsay ranked as “high” risk in nearly every category, including liquidity, debt burden, general fund reserves, current and future pension costs, and how much money the city has set aside for other post-employment benefits (OPEB) funding. The news came as a part of the California state auditor’s online dashboard that ranked more than 470 California cities based on detailed information about their fiscal health.
But finally, after two years, and a slew of staff and organizational changes, Lindsay City Council passed a resolution and plan intended to claw their way out of their less than advantageous position. Unfortunately, part of the plan will undo $6.3 million in loans that they had previously relieved their general fund of in February 2019.
You can’t do that
The most important item that needed to be handled right away during their Nov. 9 city council meeting was approving a corrective action plan, complete with monthly benchmarks well into 2022.
The plan outlines the specific actions Lindsay will take to address the conditions that caused the state auditor to designate them as high risk. Most important on the list was the mandate that Lindsay reverse $6.3 million it improperly transferred from their enterprise funds to their general fund. That essentially amounts to an additional $6.3 million of debt that the city’s general fund was not accounting to pay back.
The $6.3 million were considered a loan from the enterprise funds to the general fund, until February 2019. Under former city manager Bill Ziegler and former finance director Bret Harmon the city attempted to relieve $6.3 million it owed to a slew of their own enterprise funds by converting those loans into transfers, which do not need to be repaired. The move at the time was intended to help Lindsay remove some of their longstanding findings from their annual audit. It was also intended to give the city a better opportunity at borrowing money if they needed.
At that point in their financial history, it was obvious that the city was struggling mightily. According to a February 2019 city staff report, Harmon stated that the city was “functionally bankrupt” in their current position, which became the impetus for the loan to transfer conversion. But as the state auditor has stated, the city can’t do that.
As of next February, the city needs to reestablish loans to the streets fund, park improvements fund, water fund, sewer fund, refuse fund, wastewater cap reserve fund, curb and gutter fund and storm drain system fund. And the city must develop and implement a plan to repay those funds. How that will impact the general fund moving forward is currently unclear.
Other items of note
On top of adding a $6.3 million burden to their general fund, Lindsay also has until February 2022 to adopt a policy for long range financial planning that, at a minimum, identifies the forecast period for the plan, the funds it will include, efforts the city will make to increase revenues and decrease expenditures, and the frequency it will be reviewed and propose any updates to the city council.
The state auditor has already recommended that the city make prudent investments with their American Rescue Plan Act funding, by April 2022. Lindsay has already worked on at least a preliminary plan for the $3.2 million ARPA allotment. In September city staff recommended $1.4 million in their water fund, and another $600,000 in their sewer fund. With that money they hope to knock out capital improvement projects until the money runs out. Tanner added that investing in those projects helps keep rates lower for residents.
City manager Joe Tanner told the council that staff will be making a “strong push” to recommend spending $800,000 on investment for economic recovery, as well.
By June 2022 the city needs to maintain “adequate balances” in their enterprise funds for significant purchases on capital expenditures. One of them might be a new well or other water treatment projects. In the recent past the city has struggled to repair or replace municipal wells.
Most of the work the state auditor has recommended the city work on, is due by August 2022. The first change the auditor wants Lindsay to make is utility fund transfers that comply with state law. “Lindsay should perform a study to determine the appropriate level of funding from its utility funds for that program by August 2022 and update that study every three to five years,” a city staff report states.
In order to ensure the city is charging an appropriate rate for their services, the state auditor suggested that the city conduct surveys to ensure their fees are in line. “For any fees or rates that do not cover the costs of their related services, consider increasing those fees or rates, including a phased approach for large increases. For any fees or rates that are above the cost to provide the related service, consider reducing those fees or rates,” a staff report stated.
One of the biggest obstacles to long term sustainability for Lindsay, but really any city in California, is public pension obligations. The state auditor is suggesting the city should consider requiring current employees to begin contributing to their future cost of retirement health care benefits.
Lastly, the city was pressed on their police and fire department combination. Lindsay has had their officers pulling double duty as fire fighters for a long time. Initially as a way to save money, the state auditor is asking how effective it really is. By August the city will have to evaluate the effectiveness of using a combined police and fire department and make any necessary changes.
In addition, Lindsay will have to ensure that all public safety officers receive any necessary training within six months of employment beginning in August 2022. That includes any public safety officers who are expected to respond to fires or emergencies.