Auditor Findings to El Cerrito City Council Raises Red Flags

At the November 20, 2018 El Cerrito Council meeting the new independent City Auditor Ahmed Badawi presented on the findings.

cityhallFirst a bit of history. The City of El Cerrito’s last 6 audits were conducted by the same auditor. For the 2016-2017 audit,  the El Cerrito Financial Advisory Board (FAB) recommended that the city put out a bid for a new auditor. The bid was late and as a result, the 2016-17 audit only recently came before the City Council in November. Although the auditor completed the final Comprehensive Annual Financial Report (CAFR) in August of 2018, it is not known why the presentation to the Council did not occur until this November meeting.

The findings of the auditor are sobering, according to City Council Member Quinto. To see the video please click here and then go to the Baldawi presentation. Findings included the following:

  • For the last three years the City has been borrowing money from the General Fund to various agencies such as Integrated Waste Management. Those loans totaled about 2 million dollars. For the most part very little if any of that borrowed money has been repaid. The auditor stated that typically loans such as these are used as bridge funds.

For example, city projects that are grant funded are often reimbursable grants.  The City can temporarily use general funds to front projects costs and the City is then reimbursed. This is generally done on a quarterly basis and considered short-term. However, in this case, funds have been outstanding, without reimbursement for almost three years.  As a result, the “so called” balance budget reported by the City staff, and passed by the Council, is by no means balanced. When funds were transferred out of the general fund it was done without action by the Council and without a plan for repayment. The auditor also reported most of those agencies did not have any identifiable ways to pay back the money. He also stated in most cities something like this would normally be approved by council and there would either be a write off of these funds or a repayment plan.

  •  As a result of the above borrowing for the the last three years, the city budget has been showing these loans as assets even though they were not. That money should have been marked as unusable. Essentially the city was spending money they did not actually have.City staff convinced the auditor to postpone the adjustment of  the city budget for this approximately 2 million dollar deficit for FY 16/17 until the completion of the 2018 audit.  There is the suggestion that revenues not previously reported may be forthcoming and reimbursed into the General Fund based on the timing of the review.  The auditor reported that thus far in FY 2018 approximately $300, 000 has been repaid. He anticipates a budget deficit of over 2 million dollars.
  • According to the auditor, the deficit needs to be addressed before any other spending priority. The city cannot operate with a negative balance sheet.
  • During the presentation Councilperson Abelson suggested using transfer tax monies (the result of the passing of Prop V). City staff also said none of that money should be spent until this was figured out.
  • Other council members asked questions that seemed to indicate that they did not understand the severity of this issue. They were talking about building a reserve. The auditor clearly stated you cannot have a reserve if you have a deficit.
  • There was no discussion on how this happened or what was going to change to make this not happen again. The auditor suggested a policy that such loans be approved by city council and the council asked if other councils did this. He answered” yes.
  • The auditor also found a few additional deficiencies. A prior financial report had to be amended due to be incorrect.
  • The closing of the fiscal year was reported to be not done in a timely manner.

Again the auditor is currently working on the FY2018 audit and more information will be known when that report is completed.

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