Beaumont Finances Reveal Serious Problems

This a Press Release from the Committee to Elect Lloyd White to Beaumont's City Council

The City of Beaumont’s Finance department, under the direction of the City Manager Allan Kapanicas, after receiving notice from the Superior Court for the County of Riverside of a filing, recommended the City Council to make available the Internal Controls Report submitted with the 2012-2013 audit. The audit was approved earlier this year. The delay in releasing the IC report this year was of particular concern since the City had announced last month that they would be requesting bids from accounting firms to prepare a review of the City’s cash handling processes. Last year, Moss, Levy & Hartzheim, the City’s auditors, advised the council against an internal controls audit.

The surprise move by the council to request bids for a review of the internal controls over cash management in the middle of an election season increased interest in the report. Last year Mayor Roger Berg (currently running for his 6th term on the council) said no amount of signatures on a petition would convince him to request any kind of audit of the finance department’s internal controls. What was in the report that convinced the Council to vote 5-0 to request a review?

Tuesday night the report was released.

Following is a professional analysis of the report. 

  • The entity is negative net assets
  • The entity has a potential receivable write-off of more than $20mm.
  • The entity has a litigation liability of more than $40 mm and does not have the ability to pay
  • The entity is continuing to run deficits.
  • The entity has multiple internal control deficiencies that have not been remediated for multiple years.  The auditor evaluated them as a significant deficiencies.  However, the auditor also indicated that they found and recorded material audit differences, therefore the entity's internal controls did not prevent these errors, one would need to evaluate whether all of these matters aggregated to a material weakness in internal controls over financial reporting.  Perhaps competence of individuals, weaknesses in a number of COSO Control Components. 


Fundamental issues:

Governance - continued deficit spending and lack of timely remediation of previously identified control deficiencies

Accounting staff - inability to close the books without the auditors needing to identify and post material corrections.  Lack of timely remediation of fundamental control deficiencies.

 

Lloyd's Analysis:

The City is covering the deficits by borrowing from the Capital Projects Fund. This is the fund where our annual Mello-Roos/CFD fees are held for future capital projects. It may be legal to “borrow” from these funds but I don’t believe it is a prudent or sustainable strategy for our future. This is the third consecutive year the auditors warned of the consequences of borrowing from this fund.

Here’s what the auditors reported this year:

A material deficit in unassigned fund balance is an indication that the City has had significant deficit spending in its general operations. The General fund is the operating fund of the City with potential RDA advances that cannot be collected. The City will not have working capital to operate if it continues to have operating deficits.

Management’s response:

The City is aware of the deficit unassigned fund balance and has implemented a hiring freeze over the last two fiscal years along with analyzing all expenditures with department heads and reviewing possible new revenue sources. Staff is working with the State of California Finance Department on the repayment of loans made to the former Redevelopment Agency of the City of Beaumont.

Please take the time to read the report for yourself, don’t take my word for it. It shouldn’t take you more than 15-20 minutes. Pay particular notice of the deficit spending and cash handling processes, I believe they reveal a serious problem.

It is clear why the auditors are concerned about the cash controls and why the Council is soliciting bids to review the cash controls but there was a lot more to be concerned about in the report. This is not a sustainable strategy.

The current council and staff have proven they know how to build housing developments. They have also proven they need help with managing the budget and finance of our city.

If I am elected, I will work to move the city in a new direction. On my first day in office, I will request the State Controller’s office perform a full internal controls audit. We need to know where we stand financially before we are able move forward. I will ask the California Department of Finance for a ruling on whether the City of Beaumont will ever see the $20 million from the RDA loan the City’s auditors claim is uncollectable. I will encourage the other council members to recruit and hire staff with the financial and management skills best suited for the challenges we are facing.

Beaumont needs the leadership for a new direction. I will provide that leadership. No citizen should have to pay for Council’s mistakes.  

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