State auditor’s report angers Montebello official

By Alfredo Santana

Contributing Writer

MONTEBELLO — A recent state’s auditor financial health risk report with a two-year time lag for the economic health of cities in fiscal year 2020-21 ranked Montebello as the fifth worst out of 430 municipalities for alleged financial and operational risks.

However, the fiscal assessment was lambasted by City Manager Rene Bobadilla, who questioned the veracity of the findings given that Montebello qualified to get a $60 million loan to pay for a local project, earned an A-plus rating from Standard and Poor’s and has a $75 million cash cushion for emergency expenses.

“What this report created was fear,” an angry Bobadilla said. “We have employees wondering whether they are going to get paid tomorrow.”

Montebello received a score of 41.51 out of 100 possible points, and high-risk marks on six of 10 categories used by the state auditor to measure overall fiscal health, including general fund reserves, liquidity related to cash and investments, pension obligations, pension funding, future pension costs and retiree health, and dental and other post-employment benefits funding.

Public records for fiscal year 2020-21 indicate that Montebello reported total revenues of $139.25 million and expenses of $144.04 million, with a deficit of nearly $4.79 million recorded from three of six funds that compose the entire budget.

The latest high-risk ranking arrived after the state audited the cities’ finances in 2018 and 2021, while recommending improvements at its golf course operations and in multiple areas such as updating requirements in its city code for competitive bidding.

Bobadilla said at a recent council meeting that he spoke to colleagues in other cities, who expressed disappointment about the methodology used to rank municipal financial risks.

“The last three years we spent thousands of hours combing through documents and bringing stuff to council to address a lot of deficiencies, a lot of policies that weren’t in place,” Bobadilla said. “We produced three balanced budgets. We received three awards for our budgets.”

Bobadilla acknowledged that Montebello’s fiscal woes date back to 2011, when the state auditor and controller started to peruse the books and found bogus financial reports and missed money.

Before Bobadilla was hired, the 2018 audit found similar issues with the accounting practices, he said.

According to the state auditor’s risk assessment report, the city did not have enough money in its general fund to cover emergency expenses and it only saved funds to cover one month with declining reserves of 25% a year up to that point.

Another worrisome category, according to the state auditor was the city’s debt burden, with long-term money owed at 107% of the total revenues, a load that may be too high for the city to pay back “without significant financial strain,” the report stated.

The auditor also found that the city’s unfounded pension obligations are larger than the yearly government revenues, a category that needs funds to be set aside to meet future payments to employees. Growing unfunded pension obligations require local governments to make higher contributions on the long term to close the gap, the auditor said.

On future pension costs, the city’s projected payments to the state’s public employees retirement system, or CalPERS for 2028-29 are elevated compared to revenues, making it high-risk because it exceeds 5% of projected cash flow.

The last ailing bracket is the retiree health, dental and other post-employment benefits funding, with zero percent of coverage costs, whereas it should have assets to fund more than 80% of its costs.

Amid those red flags, the report gave positive marks to the city in the categories of revenue trends, pension funding, pension costs and retiree, health, dental and other post-employment benefit obligations.

Revenue trends increased an average of 14% a year in the last few years, giving the city greater flexibility to respond to economic changes and pay rising costs of services, while the city has assets to fund 114% of staff’s pension costs, more than the 80% threshold to be considered low risk.

Contribution to its pension costs are less than 5% of its total annual revenues, a statistic that earned another low-risk mark, while a similar trend was recorded on its retiree, health, dental and other post-employment benefit obligations.

Ryan Grossy, policy and communications specialist with the California State Auditor’s office, said the high-risk dashboard report underscores that Montebello’s fiscal health is moving in the right direction.

“This is an evaluation based on publicly made statements,” Grossy said. “Our goal is to be able to show state and local stakeholders a snapshot of the fiscal health of the cities so they can make the right decisions,”

The city of Compton was placed in the top spot of the high-risk financial list for the fifth consecutive year for financial mismanagement and lack of leadership, the state auditor’s office said, while San Gabriel landed at the third riskiest slot with 33.54 points out of 100.

Michael Bush, CEO of Urban Futures and Montebello’s financial adviser, said he is involved in the process to restructure the fiscal viability of San Gabriel and Lindsay, a city in the Central Valley that was ranked fourth in the fiscal health risk list, while both shared the feature of running negative fund balances in the general budget for years.

Negative fund balances are run when cities borrow from internal funds to cover deficits in other funds that compose total budgets.

Bush said that in addition to large sums of cash in the bank, Montebello has unallocated emergency funds from the American Rescue Plan Act for $16.5 million, and underscored that cities cannot operate solely on what they save for the general funds, largely used to pay salaries and run services.

For 2020-21 Montebello reported a balanced general budget with revenues of $55.70 million and expenses of $55.68 million, and a surplus of $19,600 accomplished with voters’ passage of Measure H to raise sales taxes and efforts to control expenses.

Bush mentioned that the state takes a rear-view mirror approach to evaluating cities performances, whereas a full evaluation of fiscal fitness should have a forward view.

That fiscal fitness is evaluated when cash, budget and service insolvencies appear.

“When you have an issue of fiscal insolvency, these are things that pop up,” Bush said. “Can you pay your bills? You never had a problem paying bills. San Gabriel had a problem paying bills a few years ago. That’s what they had to fix,” Bush said.

He added that Montebello reported a general budget surplus of $695,700 on its most recent budget, and said he was “unaware” of cutbacks on services “or a need to do that.”

“Over the last several years working with San Gabriel, [Montebello], as well as Lindsay, all three cities tried to access the market, and [Montebello is] the only one that has been able to do it,” Bush said. “San Gabriel and Lindsay could not access capital.”

Bush said the state report forces Montebello to face a level of headline risk, meaning that investors considering purchasing city bonds may get spooked, and advised cities to prepare a 10-year financial forecast to shield against similar assessments.