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Hemet City Council hears 2019-2020 may be another deficit budget year unless tough action is taken

 

Last updated 5/26/2019 at 10:05am

Tony Ault photo

Deanna Eliano, center, holds a proclamation from the Hemet City Council, left, Mayor Pro tem Russ Brown, Linda Krupa, Karlee Meyer, Mayor Bonnie Wright and Michael Perciful congratulating her for her many years of service to the city as its Community Development Director. Eliano retired from her position May 14.

In a lengthy city council meeting, Hemet councilmembers expressed dissatisfaction with an auditor's report and struggled with a warning by the interim city manager, the city is facing yet another deficit year unless serious action is taken to balance the budget.

The annual year-end audit made by The Pun Group accountants and presented by Lorena Rocha, director of finance reported although the city's revenue increased in the 2017-2018 year its net position also increased from a deficit of $58.5 Million in 2017 to a deficit of $95.9 million in 2018. The Pun auditors said the net position of the city's governmental activities decreased by 2% from $277.6 million to $272.2 million.

"This decrease was primarily due to the implementation of Government Accounting Standards Board," according to the report.

After hearing the presentation, council questioned some of the 213-page report's conclusions and asked the accountants to meet with them soon to explain how they arrived at their final figures and the new GASB standards. The firm's representative agreed to meet with the ad hoc finance committee of council to go over the auditor's conclusions.

The audit report was followed by a fiscal year 2019-2020 budget update by Interim City Manager Christopher R. Lopez who gave the city staff's recommendations in ways to cut expenses to overcome a predicted 2019-2020 fiscal year deficit and come closer to balancing the budget and still satisfy the more recent state auditors recommendations critical of the city's financial status.

"Hemet is at a critical juncture," Lopez said. "Rising operational costs have placed a significant strain on the general fund. These costs include rising pension costs, rising other post-employment benefit costs and rising service demands on our city operations.

"While general fund revenues have seen significant gains since 2010, the last few years have shown relatively flat growth. While we are proud to see the revenue increase, unfortunately, expenditures over the same time frame have grown at a faster pace than the growth revenues," he said.

Supporting his conclusion, he showed a listing of city's revenue streams from property taxes, sales tax, franchise fees and other taxes and the transient occupancy tax in fiscal year 2009-2010 and fiscal year 2017-2018 omitting the Measure U sales taxes. He also showed a department-by-department expenditure listing with their increases from 2009-2010 and 2017-2018 that went from $32,547,799 to $42,017,338 in that time frame.

Dividing up the general fund expenses between public safety operations and non-safety operations he showed the former, which included fire, police and public safety, went from $24,867,116 to $31,777,453 for an increase of $6,910,337 or 73%. All other departments, including city council to finance and engineering, went from $7,680,883 to $10,238,884 accounting for the remaining 27% of the general fund. The Measure U funding that brought in more than $10 million this past fiscal year was used outside of the general fund to hire new police and firefighters to bolster the departments and provide better public safety as demanded by city residents.

"For the bulk of the years (2010-2018) expenditures have outpaced revenues." Lopez said. "Hemet has been able to maintain service and expenditures levels by the use of fund balances in excess of the emergency reserve."

The city council seeks to maintain 20% of its general fund revenues as an emergency reserve in case of a major disaster or emergency – approximately three months of its operations.

Lopez pointed out that the city, while maintaining the 20% reserve often tries to increase it each year. The use of the excess reserve allocation has "helped Hemet maintain service levels in the absence of the revenues to sustain them."

He placed the blame for the continuing city deficits, not on council's decisions, but "there were multiple noteworthy items which impacted all cities in California," Lopez said. "The dissolution of RDA (Redevelopment Agency funding), new laws related to public safety realignment and additional state mandates have required the city to absorb new costs with no new revenue stream provided."

He said to overcome this the city made a number of changes to help lower expenditures that included adjustments to retiree health plans, reductions in personnel, implementation of a tiered pension plan for new employees as well as rollover budgets to help minimize budget expenditures.

Hemet Councilman Michael Perciful after hearing this part of the report said, "Yeh. It's the states' fault."

At the start of last year's budget process, the city staff projected a $3.5 million deficit. As a result, the city council at that time, used $1.5 million in fund balances from three service funds that had accumulated a balance over the years; instituted a hiring moratorium that did not impact the Measure U positions saving approximately $1 million more. They reduced training and education for all departments by half saving $87,000 and saved $517,000 by not replacing aging equipment. Deferred facilities maintenance projects save $505,000.

This fiscal year Lopez and the staff report the city may face a projected $5.2 million deficit unless measures are taken by council and departments.

Lopez said the recommended budget balancing measures council may consider are using all remaining accrued and not used fund balances in each department, defunding the non-safety vacant positions, and continued non-replacement of aging vehicles and consideration of attrition and delays in hiring non-safety personnel.

He said he and the staff needed direction from council in which areas the predicted budget deficit can be overcome.

In the request he brought up using Measure U funds in excess of the $10 million to fund public safety and only Public Safety in the General Fund. The same request in last year's budget hearings brought a howl of dissent from residents who voted for Measure U believing all the measures be set aside for new police and firefighters. It sparked some discussion by council members saying it again could be an issue in the final budget approvals. Lopez said the excess, estimated at $1.2 million, even though transferred to the general fund would still be used in the police and fire departments general fund budget and no other department. He also suggested council look into lowering council required 20% reserve fund, another problem issue.

Police Chief Rob Webb was called on by council to gain his view on using the excess Measure U funds in the general fund. He saw it as acceptable – if the money was placed in the department's general fund budget. But, he left it in the hands of council.

Lopez in his report emphasized the Measure U fund excess will be used to offset "only public safety costs. Measure U revenues would not be used for non-safety costs in the general fund."

City Attorney Eric Vail reminded council that any sales tax revenues always are considered general fund money by law, but the council maintains the Measure U sales tax money can only be used for public safety as the public is demanding.

Lopez concluded that the preliminary numbers provided by the city management team, approximately 79.78% of general fund revenues in fiscal year 2019-2020 will be utilized to fund police and fire departments. He suggested council consider a gradual decrease from that percentage back down to the current 72% in the course of a few years, but the finance team keep a closer watch on those department's future expenditures.

He gave several other measures council might take to cut costs. They included lowering the 20% reserve even more; the elimination of special events spending, outsourcing the maintenance of the city parks, streetscapes and library, improving operation productivity, prioritize CDBG grant money placing more into citywide costs away from the nonprofits, update the city's fee services, rates and charges .and update the Development Impact Fees.

Lopez said that the latter part of the additional recommendations are also suggested in the state auditor's report that is critical of how the city collects its fees.

Council agreed that no matter what the city had to resolve the state auditors' recommendations to get the city out of the "at risk" category.

The recommendations to offset the predicted budget deficits left council that evening asking for another in-depth meeting with the city manager and department heads to review the recommendation before the 2019-2020 fiscal year budget is forwarded to the public ahead of the June 30 fiscal year budget deadline. The meeting was adjourned at 11:15 p.m. that evening with council still needing to go into special session to deliberate several legal matters.

The 2019-2020 fiscal year budget update report may be seen in the Hemet City Council webpages under the city clerk's documents and the audit report in http://www.cityofhemet.org/DocumentCenter/View/5316.

Tony Ault may be reached by email at [email protected]

 

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