State Finds 'Widespread Deficiencies' in Beaumont's Fiscal Controls

The California state controller’s office announced Tuesday that it has completed an audit on the city of Beaumont, finding “widespread deficiencies” in the city’s accounting controls, among other things.

Here is the full news release from the state:

State Controller Betty T. Yee today announced that her team’s detailed review of the City of Beaumont’s accounting controls found widespread deficiencies that rendered them effectively non-existent, with 75 of 79 internal control elements determined to be inadequate.

City officials already have taken steps to address the pervasive shortcomings, with plans to make major changes in how the city does business.

“These kinds of deficiencies are of great concern, especially to the citizens of Beaumont, who rightly expect their city government to safeguard their tax dollars,” Controller Yee said. “However, I am encouraged that city leaders now recognize the need to implement major improvements.”

Controller Yee announced in May that her office would audit the city of 40,000 in Riverside County to resolve significant differences between the city’s financial transaction reports to the Controller’s Office and its audited financial statements over two fiscal years. The month before, the Federal Bureau of Investigation and the Riverside County District Attorney’s Office had served search warrants on Beaumont City Hall.

Among the findings:

• The city failed to properly account for bond transactions by three of its units, including financing and utility authorities and a community facilities district that together issued $626 million in bonds. As a result, the Controller’s team could not determine whether the bond proceeds were used for the intended purposes.
• The former city manager and former public works director, both principals of outside consultants that provided city staff, received fees from bond proceeds for their services. In the absence of any written agreements, it was unclear whether these services were separate from their responsibilities as city officials. These two officials approved payments to the consulting companies where they were principals, creating conflicts of interests.
• In 2008, Beaumont obtained a reseller’s permit from the state Board of Equalization, allowing it to purchase items outside the city without paying sales tax, even though the city did not appear to be in the business of selling goods. Beaumont also allowed one of its vendors to use the permit. The arrangement allowed the city to shift sales tax revenues from other jurisdictions by moving the supposed point of sale within its boundaries.
• The city did not consistently follow its competitive bidding laws. City staff bought equipment or let contracts for public works without competitive bidding, arguing that the vendor was the only source, yet failed to provide documents supporting this claim. In 2013, the city entered into a no-bid contract with Urban Logic Consultants that allowed engineering projects to be approved through “job cards” rather than open, competitive bidding.
• The city lacked receipts and descriptions for credit card purchases, supporting documentation for loans made to employees, and sufficient records for a loan to a private business. Invoices were missing, including purchases from a construction company totaling more than $1 million.
• For five years in a row, the city ended the fiscal year with material deficits of as much as $10 million in its General Fund. It did not have sufficient revenue to fund existing levels of service. The city said it would cover these deficits with $21.5 million owed by its redevelopment agency. However, the redevelopment agency has been dissolved and it is highly uncertain that amount can be collected.
• Beaumont failed to do timely bank reconciliations and did not segregate staff duties.

The city documented many corrective actions it has taken or plans to take in response to the Controller’s review, available here .

In response, the city of Beaumont released their own statement, as follows:

The State Controller’s Office just released their audit report for the City of Beaumont. Most of the audit findings validate what the relatively new City Council and new City Management team have uncovered this summer. As a result, in the City’s response to the draft audit report, the City said it, “…has no qualms or concerns about any material aspect of your findings and recommendations”. The City provided a detailed response for each finding.

The audit documents a myriad of poor management practices under the auspices of “administrative and internal controls”. Some examples include: mandated state controller’s reports that were generated by the City were materially different from the audited financial statements; a lack of accounting and questionable use of bond proceeds; poor accounting for equipment and other assets; questionable use of the Beaumont Financing Authority’s seller’s permit; lack of oversight for contract awards by the City; lack of receipts for credit card usage; lack of administrative policies; concerns over fund balance and cash deficits; lack of performance evaluations, lack of bank reconciliations; and other concerns.

Since the appointment of a new Acting City Manager, Elizabeth Gibbs-Urtiaga, the City has been busy examining the books, soliciting independent reviews of administrative controls, developing new budget cuts so spending is in line with current revenues and City Council adopted new “checks and balances” to address many of the issues highlighted in the audit report. Additionally, the Acting City Manager immediately stopped the questionable use of the BeaumontFinancing Authority’s use of its sellers permit upon her appointment in June.

The Acting City Manager’s budget message that was developed in August outlined many of the concerns that were summarized in the State Controller’s audit. She proposed a 4-point plan to address the City’s difficult financial status. The plan included:

• Cutting the budget by $4 million to operate within incoming revenues;
• Formulating and implementing a Work Out Plan to Sustainability which will address the deficit fund and cash balances highlighted by the State Controller;
• Reconciling the books and adopting a new capital budget; and
• Proposing a new comprehensive set of Financial Management Policies to ensure this is not repeated in the future.

The Mayor of Beaumont, Brenda Knight, says, “This audit validates what we have uncovered this past summer. We have been very busy correcting the business practices going forward and have put people and new rules in place to reduce the chance of this repeating in the future. However, much more work lies ahead. We have to have a full accounting of where our money was spent and we need to put the City’s finances on a sustainable path for the future. These are the priorities in the near term”.

The City has received kudos about the new transparent budget and transparent procedures from various people that have been watching City Council. To read the full audit, please visit www.BeaumontCares.com

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