Report Offers First Hard Look Into City’s Finances

By: Richard Montenegro Brown | Original Article at pe.com

Consultants are managing other consultants; accounting methods and cost justifications are unlike most other municipalities; and officials have not adjusted their budgeting to the rate of growth and change the city has experienced over time.

These were among the key takeaways from a report Tuesday that gave Beaumont officials the first hard look – albeit incomplete – at which revenues can be expected for the fiscal year that began July 1.

The council was told to be prepared to make budget cuts to offset operational expenses by its recently hired financial consultants.

In the wake of investigations into the city’s finances, the council – left with unclosed books for the last fiscal year and limited participation in past budget processes – contracted Urban Futures Inc. to help prepare the fiscal 2015-2016 budget.

A special meeting was set Tuesday to hear the first report from Urban Futures that will be used as part of the budgeting process. The revenue report could be considered one-half of the draft operating budget, considering the next step will be for Urban Futures to prepare the city’s expenditures and present the whole document in mid-August.

“The city hasn’t been living within its means,” said Bob Deis of the Public Management Group, who is working alongside Urban Futures. “Budget reductions are likely going to be required to balance the budget going forward.”

City Manager Alan Kapanicas, who is on paid administrative leave while investigations continue by the state Controller’s Office and the Riverside County District Attorney’s Office, was among a key circle of city officials responsible for preparing annual budgets. Audits have found those were running at deficit levels for several years and improperly using restricted funds to balance the budget. In that circle were consultants with Urban Logic Inc., a relationship that is under scrutiny by the District Attorney’s Office.

Deis delivered the big-picture financial view of the city, while the more detailed revenue picture was painted by Michael Busch, CEO of Urban Futures, which is not associated with Urban Logic.

Although Urban Futures was missing information from the city to build its revenue numbers, the preliminary report anticipates $25.8 million. Revenue for fiscal 2014-2015, which ended June 30, was $27.56 million. It was projected at $29.4 million at the time the 2014-2015 budget was passed.

Deis expressed concerns to the council over department heads continually exceeding budgets without controls or consequences, as there is both a lack of monthly budget tracking or internal checks.

He also spoke of the high costs of contractors used by the city.

“Contracting can be a good thing. Some contracts are cheaper than if you do it in house,” he said.

But he said there are cases of the “contractors managing contractors.” Saying it could be justified in some cases, Deis warned to stay on top of it. This year’s proposed expenditures have not been made available, but according to the 2014-2015 budget, consulting services cost the city $8.2 million.

“What’s important,” Deis said, “is that the profit motives of the vendors don’t get in the way of the best interests of the city.”

A revenue line of concern was the cost allocation revenue budgeted at $2.3 million for at least the last two years, Busch said.

Cost allocations are the indirect or overhead costs associated with providing general services to the public, such as policing and utility services. Cost allocations can include the department-level administrative costs and central services like payroll or IT.

Busch said the city had an unclear methodology to arrive at those eligible revenues. He said he could not justify adding any more than $600,000 in the proposed revenues for 2015-2016. He also didn’t see how $2.3 million was part of past budgets without a better handle on costs to deliver those services.

He added that finding backup information to justify the cost allocation revenue has been and still is difficult.

Some of the incomplete nature of the revenue report comes from the city not having closed the books on fiscal 2014-2015. It doesn’t allow Urban Futures to determine an end balance, if any. Bank reconciliations – monthly cash balances vs. monthly bank statements – are still being completed from December.

Busch said the improving economy and unemployment in Beaumont, along with steady growth of construction works in the city’s favor, but the city has too often relied on one-time fees to bolster the budget. He said setting aside money for economic development to draw in businesses could bring more balance to the revenue side.

Property taxes, he said, are expected to come in about $1 million less than the previous year. In addition, Busch added that with building occurring on land annexed from the county, a portion of that property tax stays with the county.

Deis and Busch said the city should set its sights on trying to assess the cost to provide services to each new home built to see whether the costs are being met, then use that to negotiate with future developers.

Also, the city’s revenues and expenditures should be forecast for five years out, to start over every year, in addition to monthly budget reports. Neither are done now.

Deis said the city lacks a contingency fund, which most cities have, to account for unforeseen costs.