County of SAN Bernardino Grand Jury

Additional Recommendations 14

These recommendations are not explicitly linked to specific findings.

• R1

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  The District is non-responsive to LAFCO’s multiple Public Records Act requests for Data to complete the mandatory Municipal Service Review/Sphere of Influence update as well as written requests from the ACR for submission of monthly financial statements, annual budgets and annual Audits, as required by Health & Safety Code 9007 (Public Cemetery Law) and Government Code 26909. As of November 18, 2008, the ACR indicated that they had just received the Audit for FY 2004-05.
• R2

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  Large sums have been transferred from the endowment fund to the operating fund. Pursuant to Public Cemetery District Law, only interest and gains may be utilized from the Endowment Fund. Since the District only submitted audits for FY 2003-04 and FY 2004-05, LAFCO was unable to determine with certainty that principal was transferred.
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  Human Services/Economic Development
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  Public Support & Services Each of these committees is responsible for handling assignments within the cities and County, including special districts and redevelopment agencies. For whatever reason, when it is felt that a standing committee is unable to absorb an issue into its scope, an ad hoc committee is formed to examine that specific problem or issue. The 2009-2010 Grand Jury formed six ad hoc committees. Two of these committees are providing the following information for this Final Report. 50 2009-2010 San Bernardino County Grand Jury Final Report BARSTOW CEMETERY DISTRICT DBA MOUNTAIN VIEW MEMORIAL PARK SUMMARY The Barstow Cemetery District is one of the very few Independent Special District Cemeteries in the County. The Cemetery was created in 1937. The County took it over in 1947 as a Special District. The Barstow Cemetery District is a very small operation. They have a Superintendent who manages the Cemetery, a part time office assistant, and three groundskeepers. The governing board is made up of five members. They do not have a bookkeeper and the County’s Auditor Controller/Recorder’s (ACR) office pays all of their bills. Since they are an Independent Special District, the County’s Special District Department has no oversight of this Cemetery and plays no ongoing role. The Local Agency Formation Commission (LAFCO) for the County has the only oversight on Independent Districts. They provide a “Sphere of Influence” review every 4 1/2 years and can recommend that an Independent Special District be dissolved. In the fall of 2008, the Barstow Cemetery District’s Sphere of Influence review gave them a score of ‘0’ and recommended their dissolution. As of this date, this action has not taken place. Government Code Section 56076 defines a sphere of influence as “a plan for the probable physical boundaries and service area of a local agency as determined by the commission.” In simple terms, a sphere of influence is a planning boundary within which a city or district is expected to grow into over time. The purpose of a sphere of influence is to encourage the “logical and orderly development and coordination of local government agencies so as to advantageously provide for the present and future needs of the county and its communities.” 51 2009-2010 San Bernardino County Grand Jury Final Report The LAFCO “Sphere of Influence” review listed the following issues:
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  Summary of Conclusions and Recommendations.................................................16 RESPONSE FROM THE ADELANTO CITY MANAGER................................18 April 8, 2010 Kent Fogleman, Foreman Members of the 2009-10 North Arrowhead Avenue, Room 200 San Bernardino, CA 92415-0243 Dear Mr. Fogleman and members of the 2009-10 San Bernardino County Grand Jury: Harvey M. Rose Associates, LLC is pleased to submit this report on the Financial and Budget Analysis of the City of Adelanto. This report was prepared in accordance with the scope of work described in our contract with the Grand Jury dated January 8, 2010. The intent of the analysis was to examine the City of Adelanto’s overall financial condition and ascertain whether the City has sufficient resources to fund the cost of its operations and service the debt incurred by the City and its Redevelopment Agency (RDA). The report concludes that the City is facing significant financial challenges that have been exacerbated by the current recession and rising costs of public safety services provided by the County of San Bernardino. At the end of FY 2009-10, the City will have a General Fund budget deficit of approximately $4.2 million on base expenditures of approximately $13.7 million, representing approximately 30 percent of its annual costs. During the recession, the City has relied upon accelerated payments of debt owed by the Adelanto Public Utility Agency (APUA) to the General Fund to close this deficit. However, this source of funding will decline by $3.2 million beginning in FY 2010-11, due to decisions surrounding a recent APUA bond issue. The City now intends to supplement its operating budget with the proceeds from the sale of the Adelanto Community Corrections Facility in June 2010. However, this one-time source of funds will be depleted within six years. Similarly, the Adelanto Redevelopment Agency (RDA) is unable to service its debt with the amount of property tax increment that it receives. As a result, it has been borrowing funds from the County of San Bernardino under the terms of a 1996 settlement agreement to meet its debt obligations. Since FY 2006-07, the amount of this debt has grown by $4.9 million, or 39.8 percent, increasing the City’s total debt by approximately 5.0 percent. Unless the City is able to negotiate revisions to the settlement agreement, this debt will continue to grow into the foreseeable future. Kent Fogleman, Foreman Members of the 2009-10 San Bernardino County Grand Jury April 8, 2010 The sale of the Adelanto Community Correctional Facility and other short-term solutions to the City’s financial difficulties will provide only temporary deficit relief. Accordingly, the City is pursuing a number of long-term strategies to strengthen its tax base and draw development to the community. However, to accomplish these long-term strategies, City officials will need to clearly communicate the severity of its financial difficulties to its citizens and investors, while simultaneously increasing public confidence in the reasonableness of solutions that it pursues. The report includes several recommendations that, if implemented, would aid the City in these efforts. A response to these recommendations from the City Manager has been attached for the Grand Jury’s consideration. Thank you for this opportunity to serve the 2009-10 San Bernardino County Grand Jury. Please don’t hesitate to call with any questions that the members may have. Sincerely, Stephen Foti Principal/Partner Introduction The 2009-10 San Bernardino County Grand Jury requested that Harvey M. Rose Associates, LLC conduct a financial and budget analysis of the City of Adelanto to evaluate the financial condition of the City and to ascertain whether the City will have sufficient resources to fund its operations and service debt obligations incurred by the City and its Redevelopment Agency (RDA) in the foreseeable future. The Grand Jury’s concerns were influenced by the conclusions reached in a 2009 San Bernardino County Local Agency Formation Commission (LAFCO) Community Service Review of the City of Adelanto. That review concluded: • As of September 3, 2009, the City had not yet produced audited financial statements for fiscal years 2005-06, 2006-07, 2007-08 or 2008-09. • As of June 30, 2005, the City had substantial long-term debt obligations related to its capital projects, redevelopment and enterprise fund activities. In addition, the General Fund had advanced approximately $2.1 million to the RDA that was not expected to be repaid within one-year. • As of June 30, 2005, fund balance deficits existed in the General Fund, Sanitation Special Revenue Fund, Maverick Stadium Special Revenue Fund and RDA Project Area 3 Capital Projects Fund. Although the City stated that these deficits would be eliminated with future revenue growth, it is likely that recovery has been impacted by the economic downturn. • Approximately two-thirds of the City’s territory lies within redevelopment areas. As a result, the City does not have access to property tax revenues that otherwise could have been used for general operations, had development occurred outside of the redevelopment areas. • Due to the lack of audited financial statements and uncertainty regarding the validity of fund balance estimates included in the adopted budgets, the overall financial condition of the City could not be determined. • A dramatic decline in assessed valuation, evidenced by County Assessor records and supported by high foreclosure rates and a drop in construction activity, indicate that the City may have significant difficulty funding service levels and servicing its debt in future years. In summary, LAFCO concluded that: “the City has and continues to experience financial challenges. This is evidenced by the challenges in reducing debt, the deferral of payments of certain debt, excess of expenditures over appropriations in more than one fund, which includes the General Fund, and the lack of funding to adequately provide non-enterprise services. In addition, the use of reserves generated during the building boom of the past couple of years to balance the current budget, in staff view, signals a continuing financial challenge for the City of Adelanto. LAFCO staff expresses concern that with the downturn in the economy, the reduction in assessed valuation due to the high foreclosure rate in Adelanto, and the sharp decline in construction activity, the use of reserves may not be able to close future budget gaps due to their depletion in prior years.” Harvey M. Rose Associates, LLC 1 Introduction Our review generally supports the conclusions reached by LAFCO in its 2009 review. Most of the conditions cited in LAFCO’s Community Service Review continue to exist and an evaluation of budget and financial records, as well as information received from City officials during interviews, suggest that the City will be depending on various strategies that include the sale of its most valuable assets, negotiations with the County of San Bernardino for debt relief and service reductions to the community. Although many of the solutions being sought by the City are likely to provide temporary financial stability, the continuing recession, an imbalance between available revenues and the cost of services that results in a severe structural deficit, as well as other economic factors impacting the future of the community, make the long term financial viability of the City uncertain. The remainder of this report discusses these areas of concern in more detail and provides the basis for our conclusions regarding the City’s overall financial condition and viability. Acknowledgements We would like to thank the Adelanto City Manager and Finance Director for their cooperation and assistance throughout this review. It is clear that they are facing difficult challenges as they move forward and have creatively pursued solutions that they believe will provide additional time to resolve the problems that lie at the core of their financial difficulties. Harvey M. Rose Associates, LLC 2
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  Most of this increase occurred in FY 2007-08 and FY 2008-09 as a result of a unilateral decision by the County to replace pay-call firefighters with full-time firefighter-emergency medical technicians (EMT), providing constant staffing at the facility with EMT trained personnel. However, even after considering this dramatic rise in costs, since FY 2007-08, the City’s cost of fire services has increased at rates surpassing those charged by the Sheriff for police services, by an average of approximately 7.9 percent per year. At the time of this report, the County Fire Department had not notified the City of contract cost increases for FY 2010-11. Absent this information, but assuming that these expenses rise at the same average rates as in prior years, the City could face additional costs of over $580,000 for basic police and fire services next year. Financial Outlook The General Fund financial outlook for the City is not promising. The lingering effects of the recession continue to adversely impact sales tax and other sources of local tax revenue, and financial consequences arising from the State’s budget crisis make the reliability of certain tax revenues uncertain. Further, building and development activity remains low. The City’s own projections of operating revenues assume that income will remain stagnant or continue to decline in the short term. Based on discussions with the City’s Finance Director and as noted in the City’s most recent Interim Financial Report6 , payments from APUA for the purchase of the sewer and water systems will be reduced by $3.2 million in FY 2010-11. According to the Finance Director, these reductions are necessary to conform with the underlying assumptions contained in the $76.8 million in the 2009 Series A - Adelanto Public Utility Authority Refunding Bonds issued earlier this fiscal year. Stagnant revenues, the potential for substantial additional costs for police and fire services, and the loss in income from the sale of the sewer and water utilities, present serious financial difficulties for the City. To resolve these financial difficulties, City representatives state that they are relying on the sale of the Adelanto Community Correctional Facility to a private correctional services provider for approximately $28 million. Reported widely in the press, a final agreement has been entered into with a closing date of June 4, 2010. The City has also taken steps to terminate employees who currently operate the jail facility as of that date, as part of the transition plan from City to private operation of the facility. These actions will provide such staff with a severance package that will extend pay and benefits to August 4, 2010. November 17, 2009, Thirteenth Amendment to Contract with City of Adelanto for the Sheriff’s Department to Provide Law Enforcement Services, Schedule A 6 City of Adelanto Interim Financial Report, Fiscal Year 2009/10, 50% of the Fiscal Year Complete, July 1, 2009 – December 31, 2009 Harvey M. Rose Associates, LLC 6 Section 1: General Fund Financial Condition For the long-term, the City has discussed the possibility of asking the voters to create a fire district that would be financed through an additional property tax levy or parcel tax. This may provide a long-term, partial solution for addressing the structural budget deficit. However, the experiences of a neighboring jurisdiction earlier this decade, to extend property taxes established to support fire district operations7, failed to obtain approval from a 2/3 voter supermajority that was necessary for passage. In Adelanto, voters may be even more reluctant to impose additional taxes on themselves, given the City’s current economic environment and recent decisions by the City to increase water service charges by 229 percent over the next five years.8 Lastly, the City should seriously consider long-term cost savings solutions to its structural deficit. This could include reductions in the number of hours that fire stations are manned, based on call volume and activity, as well as the number of hours that patrol deputies are on duty. Although the review of such alternatives was outside of the scope of this analysis, the City should immediately evaluate the impact they would have on the Adelanto community. Further, the City Council should convene a public workshop to evaluate the current and long-term financial condition of the City and to explore solutions to the structural deficit. This process should be designed to obtain input directly from Adelanto taxpayers. Lack of Reliable Financial Data It should be noted that this analysis was conducted primarily from data reported in the City’s various budget documents and interim financial reports. Audited financial statements were not finalized for the year ending June 30, 2007 until just prior to the release of this report, although a draft report was provided earlier; and, financial statements for the years ending June 30, 2008 and 2009 have not been prepared. This is a significant cause for concern, since the City cannot expect confidence in its financial data without a thorough review by an independent auditor. This deficiency was noted in the September 2009 LAFCO Community Service Review. At that time, the Adelanto Finance Director stated in a letter to LAFCO that the final June 30, 2007 comprehensive annual financial report (CAFR) would be produced in September 2009, a draft June 30, 2008 CAFR would be available in September 2009 and the audit of the June 30, 2009 financial statements would begin in October 2009. When we initially met with the City in early February, we were told that the June 30, 2007 CAFR would be finalized within days, the June 30, 2008 CAFR would be complete within “one to two weeks” and that the June 30, 2009 CAFR would be completed “ ” At the exit conference for this report, we were provided with a copy of the final 2007 CAFR. However, the City also confirmed that work on the 2008 and 2009 CAFRs had been suspended because the financial auditors needed to complete work on the June 30, 2008 Adelanto Public Utility Authority financial statements and June 30, 2009 Adelanto Redevelopment Agency financial statements. Work on these CAFRs has now resumed with a goal of completing them as expeditiously as possible. November, 2002, City of Hesperia, Measure B 8 2009 Series A - Adelanto Public Utility Authority Refunding Bond Issue, Harvey M. Rose Associates, LLC 7 Section 1: General Fund Financial Condition We understand the current challenges facing City staff. However, the successful completion of the City’s financial statements is essential for increasing the public’s confidence in the reported financial condition of the City. Unless this situation is resolved, it will become even more difficult to convince voters of the need to approve additional local taxes. Given the inability of the City to meet self-imposed deadlines to date, this continues to be an area of concern. Harvey M. Rose Associates, LLC 8
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  This proposal is pending and the outcome is uncertain. The RDA’s financial situation has a direct impact on the General Fund. First, it is highly unlikely that the RDA will be able to repay the $2,524,243 advance that it received from the General Fund in prior years, since this obligation is subordinate to all other debt. Further, to the extent RDA resources are needed to meet the terms of the County settlement agreement and retire accumulating debt, the City will be hampered in its ability to develop and attract Sales Tax generating retail business or other development that would benefit the General Fund. Adelanto Redevelopment Agency Basic Financial Statements, June 30, 2009, Notes to Basic Financial Statements, Note 7H. Harvey M. Rose Associates, LLC 13
• R23

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  These funds are substantial. However, the bond agreement rate model assumes that the City will no longer be able to accelerate payments from the Water Utility to resolve a General Fund deficit, should one occur. Accordingly, beginning in FY 2010-11, the decision by the City to re- fund APUA debt essentially contributed to a $3.2 million General Fund operating deficit from FY 2009-10 levels. Because the payments to the General Fund will remain fixed through FY 2022-23, the impact from this decision will grow with inflationary cost increases, unless other sources of income are identified by the City. The basis for this analysis is provided in Table 3 and Table 4, below. Table 3 Schedule of APUA Payments to the General Fund FY 2005-06 through FY 2008-09 Beginning Scheduled Surplus Total Ending Balance Payments Revenues Payments Balance Wastewater FY 05-06 6 ,431,169 3 21,558 (49,583) 271,975 6 ,431,169 FY 06-07 6 ,431,169 3 21,558 26,439 347,997 6 ,431,169 FY 07-08 6 ,431,169 3 21,558 37,613 359,171 6 ,431,169 FY 08-09 6 ,431,169 3 21,558 46,716 368,274 6 ,431,169 Total 1,286,232 61,185 1,347,417 Water FY 05-06 2 6,485,464 1 ,324,273 478,752 1,803,025 2 4,562,413 FY 06-07 2 4,562,413 1 ,228,121 2,023,912 3,252,033 2 1,841,391 FY 07-08 2 1,841,391 1 ,092,070 2,848,759 3,940,829 1 8,255,019 FY 08-09 1 8,255,019 9 12,751 3 ,718,975 4,631,726 1 4,089,328 Total 4,557,215 9,070,398 13,627,613 Grand Total FY 05-06 3 2,916,633 1 ,645,831 429,169 2,075,000 30,993,582 FY 06-07 3 0,993,582 1 ,549,679 2,050,351 3,600,030 28,272,560 FY 07-08 2 8,272,560 1 ,413,628 2,886,372 4,300,000 24,686,188 FY 08-09 2 4,686,188 1 ,234,309 3,765,691 5,000,000 20,520,497 Total 5,843,447 9,131,583 14,975,030 Note: Budgeted payments in FY 2009-10 were $5.4 million with a note that the transfer will decline to approximately $2.2 million in FY 2010-11. Harvey M. Rose Associates, LLC 10 Section 2: APUA Asset Purchase Payments Table 4 Schedule of Anticipated APUA Payments to the General Fund FY 2009-10 through FY 2022-23 Fiscal Year Wastewater Water Total FY 10 3 86,835 5,013,165 5 ,400,000 FY 11 3 41,601 1,888,399 2 ,230,000 FY 12 3 44,077 1,885,923 2 ,230,000 FY 13 3 47,079 1,882,921 2 ,230,000 FY 14 3 50,791 1,879,209 2 ,230,000 FY 15 3 55,492 1,874,508 2 ,230,000 FY 16 3 61,629 1,868,371 2 ,230,000 FY 17 3 69,966 1,860,034 2 ,230,000 FY 18 3 81,929 1,848,071 2 ,230,000 FY 19 1 ,365,711 864,289 2 ,230,000 FY 20 2 ,230,000 - 2,230,000 FY 21 2 ,230,000 - 2,230,000 FY 22 2 ,230,000 - 2,230,000 FY 23 1 ,424,507 - 1,424,507 It is important to note that the APUA increased both wastewater and water rates to finance operations and pay its debt obligations in preparation for the 2009 Series A - Adelanto Public Utility Authority Refunding Bond Issue. In August 2009, wastewater fees were increased to levels that would cover operations plus the debt incurred with the 2009 refunding, including the payment of outstanding principal and interest to the General Fund. Similarly, in that same month, water rates were increased by approximately 229 percent through FY 2014-15 for the same purposes. Therefore, it is highly unlikely that the APUA will default on its debt service obligations, so the General Fund can rely on these payments as a stable source of income for the next twelve to thirteen years. Harvey M. Rose Associates, LLC 11
• R10-40

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  Direct the City Manager and staff to complete the comprehensive annual financial audit reports for the fiscal years ending in June of 2008 and 2009 no later than July 31, 2010.
• R10-41

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  Direct the City Manager and staff to produce the completed annual financial audit report of the year ending June 30, 2010 by September 30, 2010. This is contingent on the schedule of the independent auditor that the City contracts with.
• R10-42

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  Request that the City Manager develop and present a comprehensive financial projection and plan for resolving the City’s structural deficit in the next five years, by using the audited numbers and expenditure trends shown in the ending budget of June 30, 2010 as the base. This should be 57
• R10-43

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  Immediately start discussions with the San Bernardino County Sheriff’s Department and the San Bernardino County Fire Department in a concerted effort to reduce the cost of services provided to the City by both departments. This may involve the very difficult task of reducing selective services provided by the departments for a period of time until the financial situation begins to improve. This could include but is certainly not limited to the reduction in the hours that patrol deputies are on duty or the hours that fire stations are manned. There are other services that both departments provide that could be limited depending on the work load or specific requirements of the City.
• R10-44

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  It is strongly recommended that a series of public workshops be held to discuss the financial condition of the City and to explore all possible solutions to the deficit that faces the City. We understand that the problems are many, very complex, and some very hard decisions will have to be made. The more input and assistance that can be obtained from the citizens would be of tremendous help to the Council and Staff. One possibility would be requesting the citizens to approve a fire district to assist in funding this function. Although we understand this is a very unlikely possibility due to the present economic situation and the recent failure to obtain the necessary support in local adjacent communities. This is another reason that we recommend the Adelanto taxpayers be made aware of the problems that are facing the city and the possible alternatives if the situation is not dealt with in a timely fashion.
• R10-45

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  It is recommended that the City negotiate with the County to modify the terms of the Redevelopment Agency (RDA) settlement agreement to 58