Novato's Chronic Fiscal Deficits: a Call to Action

F1

The City of Novato is facing an ongoing structural financial deficit. Response: Agree.

Related Recommendations (1)

R1

By December 31, 2023, design and begin implementation of a plan to address Novato's ongoing structural financial deficit. This plan should include resources, staff, and systems necessary to institute strong financial controls to improve its financial condition and to enable timely independent financial audits. This recommendation has not yet been implemented, but will be implemented in Response: the coming months. The City Council directed staff to pursue several fiscal sustainability actions at their Strategic Plan workshop held on August 4 and 5, 2023. On prior occasions, the City Council voiced strong interest in incorporating fiscal sustainability measures into the new Strategic Plan, including on the dates noted below. At their March 14, 2023 (Item E2.) meeting, the City Council discussed creating a new fiscal sustainability plan. It was generally felt that the item should be moved forward and brought back to Council at a later date. The item was again discussed on May 9, 2023 (Item J.2.), when it was unanimously agreed that the City Council should further discuss the topic at the upcoming strategic planning session. At the City Council meeting of August 22, 2023 (Item G14.), the Council approved adding new resources to the Finance Department to continue building strong financial controls and accelerate completion of outstanding financial audits. The reorganization of internal functions provides enhanced oversight of finance activities and other internal service areas including Information Technology, Human Resources and Risk Management; reassigns staff with knowledge and expertise in areas identified the City Council's Strategic Plan (including fiscal sustainability efforts), to focus on solutions to address the City's structural deficit; and adds an additional full- time equivalent managerial position to the Finance Department to focus on process development and completion of outstanding audits.

F2

The City Council has not adequately pursued options for ongoing sources of revenue, including increasing its local sales tax. Disagree Partially. Response: In February 2020, the City Council prioritized five areas for Staff to research aimed at increasing revenue as shown in the table below. The current status of each is also included. Council Prioritized Options for Revenue Exploration One-Time Ongoing Revenue Revenue Category Status Transient Occupancy Tax Complete. Х (TOT) Measure 2% change approved by Voters November 2020. Sales Tax Measure Х Pending. Hamilton Trust Utilization Complete. Х Х Х Disposition of City-Owned Council provided direction on Properties 09/22/20 to proceed with actions necessary to sell four identified properties. X Solid Waste Franchise Fee Complete. While an additional local sales tax has not been approved by voters, significant work has been completed to evaluate the feasibility of a sales tax measure. On February 15, 2022, Staff provided the City Council with an update on the status of the above areas (Item J.2.). At that meeting, the City Council directed Staff to move forward with the next steps in exploration of a potential sales tax measure for the November 2022 General Election. In March 2022, a statistically valid sales tax / voter preference survey was conducted. The results, which indicated that there was not adequate voter support for approval of a sales tax measure, were presented to the City Council on May 24, 2022 (Item C.4.). At that meeting the City Council encouraged Staff to continue educating the community about the City's fiscal challenges. At the City Council's Strategic Planning workshop held on August 4 and 5, 2023, the City Council directed staff to continue exploring the feasibility of a sales tax measure for consideration by voters on the November 5, 2024, ballot (Attachment 1 - Adopted Strategic Plan). In addition to the above areas, the City Council approved a comprehensive update to the User Fee schedule in May 2022. The updated fees are anticipated to recover over $1 million annually for services provided for the benefit of an individual user or business owner. Further, completion of a Development Impact Fee Study and update has been identified as a City Council priority. Finally, the City Council approved placement of Measure C, a 1/4 cent local sales tax on the ballot in November 2015, which was approved by voters. Measure C replaced Measure F the prior ½ cent local sales tax.

Related Recommendations (1)

R2

By December 31, 2023, the City Council, in consultation with the Finance Advisory Commission, should consider creating and funding a new position of an independent internal auditor with the authority to investigate and report on City operations. This recommendation will not be implemented because it is not warranted or is not Response: reasonable. As identified in the Grand Jury report, the City already faces significant fiscal challenges and implementation of this recommendation will add new ongoing expense to the City's already strained operating budget. The City Council believes the City's limited resources are best used to retain the existing staff that have demonstrated a commitment to implementing operational efficiencies, and rebuilding needed internal processes and financial controls; and ensure they have the resources needed to continue catching up outstanding audits. Over the past three years, Finance staff have rebuilt and further strengthened many internal controls, improved segregation of finance duties, and created new approval processes ensuring proper fiscal oversight. For the first time in memory, a Certified Public Accountant has been hired into a managerial finance position to ensure internal financial processes comply with current accounting standards and best practices. Daily financial transactions are current, bank accounts are being reviewed consistently, capital project activity that was not reconciled for many years has been reconciled, and modern financial policies have been implemented. These improvements have been possible because the City Council, Finance Advisory Commission (FAC), and management recognized the need to restore the internal processes required to support the organization's operations. The FAC is now provided with detailed information about outstanding areas of financial concern and routinely engages with Finance Staff on the status of improvements at public meetings. For the past year, the FAC and City Council have received quarterly budget status reports which enhance oversight and transparency over public funds. The City Council now consistently receives quarterly warrant reports and investment reports. Further, the City's independent auditors, who report directly to the City Council, have found no evidence of fraud, abuse, embezzlement, etc. and have publicly stated that the lack of internal controls was primarily the result of chronic staff turnover in the Finance Department: Finance staffing has stabilized over the past three years, and significant progress has been, and continues to be, made to re-establish organizational efficiencies. Additionally, the City periodically engages consulting firms to assess operational areas and provide recommendations intended to improve the efficiency and effectiveness of operations. For example, in the past four years, studies have been completed in the Parks, Recreation and Community Services Department and the Information Technology Division; additionally, a study is currently underway in the Community Development Department.

F3

The City's financial deficits have resulted in reductions in City staff, and difficulties in hiring and retaining employees. Response: Agree.

Related Recommendations (1)

R3

By December 31, 2023, require the Finance Advisory Commission to issue quarterly financial reports on the City's financial condition and require that the reports be discussed at City Council meetings. This recommendation will not be implemented because it is not warranted or is not Response: reasonable. As noted in F10, the Finance Advisory Commission's role (per Resolution 2022-079) is advisory in nature; their responsibility is to review financial information, not prepare it. For Fiscal Year 2022/2023, Staff began preparing quarterly budget status reports for presentation and review to the Finance Advisory Commission and City Council. The reports provide detailed information about the status of the City's operating budget. Staff continue to develop and expand the quarterly reports to enhance transparency. Beginning with Fiscal Year 2023/2024, the report will include a year-over-year comparison column and analysis to provide additional context about the status of the budget. Reporting on additional funds will also be added to the report.

F4

The City's financial deficits have resulted in a reduction of City services. Response: Agree.

Related Recommendations (1)

R4

By December 31, 2023, develop a schedule to install and maintain comprehensive records management systems for all City operations by June 30, 2025. This recommendation requires further analysis. In Fiscal Year 2021/2022 the City Response: Council dedicated one-time funding in the amount of $26,000 to implement a comprehensive records management system. An appropriate system has been purchased and implementation is underway. The current schedule identifies implementation to include the City Clerk's Office, Human Resources, and Finance in fall 2023, with expansion to other departments as resources are identified and available. The new system includes a portal that will allow the public to access City records more easily. The current implementation schedule provides that the public portal will be available by December 31, 2023, and will include access to records including resolutions, ordinances, and minutes. The timeline to achieve organization-wide implementation required further analysis. Organization- wide implementation is dependent upon available funding for future expansion and available labor (staff and contractors) to organize, scan and index records.

F5

The City's financial deficit will significantly increase once new labor contracts go into effect. Response: Agree. New labor contracts intended to retain existing employees were approved by the City Council on June 27, 2023. The fiscal impact of the contracts increased ongoing operating costs by $1.3 million for Fiscal Year 2023/24.

Related Recommendations (1)

R5

By October 1, 2023, begin strategic planning to increase the City's sales tax. Response: This recommendation requires further analysis. The City Council directed staff to study the potential for a sales tax measure and other revenue ideas at their Strategic Planning session on August 4 and August 5, 2023. With adoption of the new Strategic Plan at the August 22, 2023, meeting, Staff will initiate contracts for the communications and consultant resources needed to support this analysis. Ultimately, any sales tax increase must be approved by Novato voters.

F6

The City's Finance Department's inadequate staffing resulted in insufficient financial controls, incomplete records, and a loss of financial accountability. Response: Disagree Partially. While inadequate staffing (including chronic turnover pre-2020 and later pandemic challenges in hiring staff) was a major factor in the breakdown of finance operations, implementation of a new financial system without adequate support resources, and a state and nationwide shortage of qualified accountants, were also significant factors in creating this situation.

Related Recommendations (1)

R6

By December 31, 2023, initiate a comprehensive inventory and review of the City's entire portfolio of properties to identify opportunities for more cost-effective use of each holding. The assessment, including recommendations and timelines for implementation, should be completed no later than May 1, 2024. This recommendation has not yet been implemented, but work to implement began Response: in May 2023 per City Council direction and will continue to be implemented in the coming months. Staff is compiling a comprehensive list of properties for potential sale and/or lease and other opportunities to optimize use of properties. The analysis is being done incrementally, starting with the most valuable City-owned property. As specific actions for each property are identified, they will be brought to the City Council for action, as appropriate.

F7

The City lacks comprehensive and functional records management systems. Response: Agree.

Related Recommendations (1)

R7

By December 31, 2023, implement a plan to address the operational and financial condition of the MVMCC, including an evaluation of options for rent increases. This recommendation has not yet been implemented, but will be implemented in Response: the future. This work was initiated in early 2023 and will continue when staff resources are available. Initial work, including a study of projected capital needs, is complete. A meeting was held with MVMCC residents on June 19, 2023, to provide preliminary information about the park's fiscal status. For Fiscal Year 2023/2024, the City Council took action to increase space rents by 5.0%, this was the first increase since January 2016. It is anticipated staff will be available to continue work on this project in fall 2023. OF NOVATO CALIFORNIA STRATEGIC PLAN JULY 1, 2023 - JUNE 30, 2025 TTACHMENT VERVIEW Living Well Together, Great Places, This strategic plan is a tool to help our Environmental Stewardship, A City that City work together — to focus our Works and Economic Vitality. energy, to ensure that the Novato Community values the same goals, and The Strategic Plan is a two-year plan. It to assess and adjust, when necessary, guides both capital and operating budget the City's direction in response to a development. To ensure effective changing environment. Strategic implementation and accountability, the planning is a disciplined effort to make City Council and community will review fundamental decisions that shape and progress toward objectives quarterly and guide the present to our desired future. adjust the work plan and objectives as needed. The Strategic Plan and its When making decisions, everyone needs updated work plans will be posted on to keep our shared goals and objectives the city website at novato.org/strategicplan. as the primary focus. The city staff is charged with implementing the Please join us in collectively creating an Strategic Plan through the work plan even better future for Novato. items listed under each of the five Goals: CITY OF NOVATO IFORNIA ATTACHMENT 1 MISSION VISIO Dedicated to quality services, Novato will be a vibrant, safe, financial strength and sustainability inclusive, and sustainable community that enriches and supports the with a welcoming atmosphere in quality of life for everyone within which to live, work, shop, play, visit and thrive. our community. Cooperation & Equity & Fairness

F8

The City lacks a plan to optimize revenue from its existing properties, including the sale of City owned properties. The City owns many properties that are vacant or in disrepair, and others where ongoing expenses exceed income. Response: Disagree Partially. On February 11, 2020 and September 22, 2020, the City Council directed Staff to evaluate City properties for potential sale. Four properties were subsequently identified for sale, with sale transactions complete on two of those properties. On May 9, 2023, the City Council directed Staff to examine and analyze all City property with the view to understanding the optimum way to utilize those properties for the benefit of the entire community. Analysis would be done incrementally, starting with the most valuable City-owned property. Additionally, a review and analysis of other City owned property that could be made available for lease (or lease updates) was initiated in early 2023. Staff continue to work on these initiatives, as well as development of a long-term plan to optimize use or sale of other City owned properties.

Related Recommendations (1)

R8

Explore opportunities to install solar together to reduce climate impacts and energy systems in the Hamilton Open adapt to the local consequences of climate Space, other City-owned properties, and change will reduce greenhouse gas other opportunities to reduce energy emissions and resource use and increase costs and possibly generate revenue. community awareness of our collective impact on the natural world.

F9

The City has not provided sufficient financial and operational oversight of the Marin Valley Mobile Country Club. The property operates at a substantial deficit, has ongoing deferred maintenance, and presents increasing administrative and financial burdens on the City. Disagree Partially. Response: As referenced in F6., for several years, the City experienced insufficient financial controls, incomplete records, and a loss of financial accountability. This operational breakdown and significant staff turnover across several departments resulted in less-than-optimal oversight of all City financial operations, including Marin Valley Mobile Country Club (MVMCC). As the City's financial records are not yet up to date, Staff is currently unable to accurately project whether or not MVMCC is currently operating at a deficit. The FY2019/20 audit identified MVMCC's net Operating Income at $862,4891. This is the last year that audited data is available. Budget data for the subsequent years is in the table labeled "FY2023/24 Budget Document: 651-MVMCC" below, this represents the information depicted in the FY2023/24 draft budget2 and amended for debt service corrections as noted. If capital expenditures and associated revenue (FY2021/22 = $3M) are removed from the budgets, operating revenue exceeds expense for each year as summarized in this table: MVMCC Budget Without Capital Expense FY22/23 FY23/24 FY20/21 FY21/22 $287K $293K $1.4M $755K 1 FY19/20 ACFR ( ): https://www.novato.org/home/showpublisheddocument/35449/638127587521600000 2 FY23/24 Draft Budget ( ): https://legistarweb-production.s3.amazonaws.com/uploads/attachment/pdf/2031195/Attachment 1 - Draft Preliminary Budget Document.pdf FY2023/24 Budget Document: 651- MVMCC FY23/24 FY21/22 FY22/23 FY20/21 Revenues 877,833 921,394 995,599 1,154,477 Charges for Services Use of Money and 2,416,676 2,455,330 2,454,212 2,454,344 Property 3,008,7083 7,280 458,780 8,540 Other Revenues 3,617,087 3,790,825 6,384,446 3,420,815 Total Revenues Expenses Professional Services 355,860 510,775 887,615 355,800 3,700 3,700 4,950 Training and Travel 3,700 13,494 13,626 Rentals and Leases 13,230 13,362 285,155 157,205 258,825 343,155 Repairs and Maintenance 296,560 239,810 Materials and Supplies 241,930 242,030 1,081,705 1,230,091 Utilities 1,000,223 1,252,932 2,536,345 1,991,500 780,000 780,000 Capital Expenses 651,1725 Debt Service 635,6834 651,172 651,173 20,000 22,700 62,000 12,000 Other Expenses 3,913,789 4,104,419 Total Expenses 4,964,116 4,620,854 3 City's $3M federal American Rescue Plan contribution for capital project. Adjusted to include principal payment for Bank of Marin debt in amount of $517,896, which was erroneously not included in the FY23/24 adopted budget. Reference MVMCC budget as of 05/13/2019: https://legistarweb- production.s3.amazonaws.com/uploads/attachment/pdf/357675/Attachment 1 MVMCC 19- 20 Final Proposed Operating Budget.pdf Adjusted to include principal payment for Bank of Marin debt in amount of $548,754, which was erroneously not included in the FY23/24 adopted budget document. Reference MVMCC budget as of 06/27/2023: https://legistarweb-production.s3.amazonaws.com/uploads/attachment/pdf/2031201/Attachment 3 - MVMCC Operating and Capital Budget.pdf On March 28, 2023, the City Council received a report on the projected fiscal outlook of MVMCC operations and capital needs. A study of MVMCC's long-term capital needs identified that the park would begin operating at a loss within the next 3-5 years. At that meeting, the City Council directed Staff to hold a workshop to explore the item further. Without additional study and a reserve analysis, it is currently unknown whether existing and future capital needs are currently underfunded. Due to further Staff turnover, the workshop initially scheduled for July 2023, to continue exploring these issues, has been postponed. To the best of the City's knowledge, MVMCC has never received any General Fund subsidies or funding. The one contribution the City is aware of is that in FY2021/2022 the City Council made the decision to fund an important project at MVMCC using $3 million of the City's federal American Rescue Plan Act funds (March 2, 2022, Item G8.).

Related Recommendations (1)

R9

Update the City's purchasing, contract- ing, and consulting policies, procedures, Workplan items and ordinances to give a preference to local businesses and those that advance

F10

The City's Finance Advisory Commission has the responsibility, but lacks the authority, to effectively oversee the City's financial condition and operations. Response: Disagree. The City's Finance Advisory Commission is advisory to the City Council on a variety of finance matters as outlined in City Council Resolution 2022-079 (Attachment 2). The Commission is not responsible for overseeing the City's financial condition and operations. The City of Novato operates under a Council / Manager form of government. The City Council is elected by the voters to provide policy direction to the City Manager. Authority to implement the City Council's policies, including management and oversight of the City's financial condition and operations rests with the City Manager, serving at the will of the City Council. Final responsibility for oversight of the City's financial condition and operations resides with the City Council. RESPONSE TO GRAND JURY RECOMMENDATIONS

Related Recommendations (1)

R10

Authorize a study of potential targeted plan to address deficiencies and outsourcing opportunities that would deferred maintenance in our existing improve service delivery and reduce parks, recreational facilities and short- and long-term costs. City-owned infrastructure.

Novato's Chronic Fiscal Deficits: a Call to Action*

Findings and Recommendations 10 findings