Thursday, August 30, 2018

Baldwin Park cooks its books to give $1.7 million in raises, but will overspend $14.5 million next year.

by Banksy
Modified by me
Baldwin Park officials will give raises to all the city officials, including the mayor, council members, and city clerk and to its directors in the total amount of $1.7 M (million) for the fiscal year of 2018-2019. But how could it do this, when my independent audit reveals that the City is estimated to overspend $14.5 M in total next year, $9.8 M of which is in operational cost alone. Has Rose Tam, the City's finance director cooked the books again?

The budget appears to be misrepresented in mainly three ways: (1) inflating the city's income stream, (2) hiding ballooning legal costs, and (3) hiding and mis-categorizing the city's current debt and accruing interest. After the audit, the key finding is that the City will spend $1.7 in giving out raises, 71% of which will go to the city officials, directors, and the police brass. The City has decided to do this, even when it appears that the City will be running an operational deficit of $9.8 M and a capital deficit of $4.7 M**. In total, that's $14.5 M.

The following article explains what's happening in the budget and where the city officials are planning to do. All this is very concerning.

Here's a summary of a more accurate view of the City's finances. The analysis follows on how these figures have been reached.

Summary of City of Baldwin Park's Financial Project for 2018-2019 (In the Millions; doesn't include capital projects.)

Description Amount
General revenue $28.6
Operational Costs -$29.5*
Litigation Costs -$3.6
Interest Costs -$5.3**
Operational Total: -$9.8

The City grossly inflates it's revenue stream; hence, the deficit will be closer to -$14.5 M, not $6.1 M.

The City is grossly inflating the amount of money it brings in. The City inflates it's revenue stream in two categories: (1) the general fund and the (2) internal service fund.

The key finding are as follows: (1) The City is more likely to be bringing in $28.6 M in revenue, not $37.9; (2) the City's operating cost will be at a loss of $9.8 M, and (3) the total loss project for next year, when capital projects are included, is -$14.5 M.

Here's how the actual numbers were figured.

The first red flag in the General Fund is that the City says it's going to make an incredible $4.4 M more this year in a category called "Charges for Services." But in 2016-2017, what the City actually brought in was $2.0 M in this category. (Even then, there's also a problem with these actuals, as the numbers don't match up to the actuals of the previous budget; I suspect they're being fudged to not make these cost increases look so big.) So, how did the projections jump by $2.4 M?

Then the City says it's going to bring in $2 M in marijuana money, called "Community Development Enhancement" fund. This is owed by business that received a marijuana license.

But Tam cleverly shows in her budget that money is put aside. Why? Because it hasn't even been collected yet, and against the City's own contract, Mayor Lozano gave out those licenses and still hasn't collected the money owed to the City. It's questionable if that money will ever be collected.

It appears, that the City is making up revenue, as it did with the successor agency, to make it's numbers look good. But unless that money is in their hands, they don't have $2 M.

Also, the City says it gets money from a vague category called "internal service funds" in the amount of $4.8 M. Apparently, that's money it used to collect but no longer does so. I asked an expert forensic auditor about this category of revenue, and she said that it's not real. Another lie, essentially. In short, the City is alleging $9.2 M more than it actually will have.

So, really after adjusting for all these numbers, the General Fund, which is meant for operational costs, should have about $28.6 M, compared to the City's alleged $37.9 M. (This is still a generous revenue estimate, but because it's more closer aligned to the actual figures of financial year 2015 and 2016, this seems like a more plausible sum.)

Next year the City projects that the operational costs - such as the police department, parks and recreation, and the city administrator - will be $33 M. That means, in operational costs alone the City will be running at a loss of -$4.5 M, $5.3 of which will be in paying just interest on loans. That means, the total operational loss will be $9.8 M.

According to the City's budget, the Capital projects will be running at least a $8.1 M loss. (I believe it's more of a $4.7 M loss, because the City adds loans on the interest payment in capital projects, which it is not.) Hence, when you add the operational losses with the capital losses, for next year, the City will be running at -$14.5 M loss, ($9.8 M in operations, and at least $4.7 M in capital projects).

City officials and employees in total will get $1.7 M in raises, even when the City will overspend -$14.5 M next year.

Although the City will be overspending -$14.5 M next year, -$9.8 M of which is for operational costs, such as payroll, litigation expenses, and interest loan payments. The City wants us to believe that it's almost running at $0 loss. But that's far from the truth.

This is how the City tries to deceive us. Next year, the City estimates it will be spending $33 M. If you go with the City's figure, because it brings in at least $33 M in the general fund, there won't be a loss.

But if you go with my estimated revenue stream of $28.6, the City will be running at an actual loss of -$4.4 M in departmental expenses, and another $5.3 in paying interest on its loans.

Here's who's going to get these raises.

-The City Council and City Clerk, asked for a total raise of $238,000+.
-The City treasurer asked for a $7,000 raise.
-The Police administration, such as Captain, perhaps even lieutenants, will get $227,000+.
-The Police Chief, Michael Taylor and his Chief department alone will get $209,000+.
-Rose Tam and her finance department will get $196,000+. (This is a lot of money, considering there are only 8 staff members in Finance. Rose didn't tell us how much is going to her alone.)
-The CEO, Shannon Yauchtzee, asked for $119,000+.
-Parks and Recreation Director, Manuel Carrillo, and his department will get $94,000+.
-The Public Works Director, Sam Gutierrez, and his department will get $67,000+.
-Community development Director, Andre Dupre, will get $25,000.
-Community development, for the Community Development block grant will get $410,000+.
-Of all the departments, the police department got the largest raise, which totals $770,000+.

Hence, the increase in cost of the city officials, the directors, and the top police brass totals $1.2 M out of the $1.7 M budgeted for departmental increase. In other words, 71% of all the raises is only going to the City officials, directors, and police brass and their departments. (This the same city, who gave the head boxing coach a 40 cent an hour raise before firing him. He worked there for the City for 20 years.)

The City hides it's legal costs of an estimated $3.62 M.

The City has it's legal costs spread out in different categories, rather than in one. There's a strong possibility this is being done to hide the real legal costs of the City and the true pay of the city attorney.

The City codes legal costs to the city attorney's office; under various departmental expenses, such as the police and administration; and under nondepartmental costs.

It appears that the largest and most alarming increase in litigation costs is in the non-departmental category, which has increased over $2 M. It appears this is the cost of the City's litigation insurance, which will be $2 M more next year. This generally happens because the insurance actuaries figured that Baldwin Park is too risky to insure, because it's chances of getting sued and losing big damages are incredibly high.

The actual costs of litigation cannot be deciphered in the City Budget. In 2016 - the contracted law firm of Tafoya and Garcia LLC charged the City over $614,000. In 2017, the city attorney charged the City $442,000 and projects to do the same for next year. (It could be much more, as we don't know if the City Attorney charged under other billing codes, which he at least did for administration and the police department.)

Nonetheless, besides hiding litigation expenses by different departments, litigation expenses have also been charged under the categories of "non-departmental" either "contractual services" or "transfer outs" or perhaps both. Besides Tafoya and Garcia, the City has outsourced legal work to at least three other law firms. In 2016, contractual services cost the City $1.01 M. Transfer out costs came to $920,000. Hence, a best guess of the legal fees being charged to the City is around $1.62 M a year.

Hence, legal costs for the next financial year is estimated cost $3.62 (legal fees and litigation insurance).

The City hides it's interest payments of $5.3 M a year.

What's not clear is how much interest the city will owe on the $119 million it's borrowed. The answer is obscured by the confusing breakdown of costs of the successor agency and the names of the various capital projects. (I think of interest payments on existing debt as part of the operational costs; so that's where I added it.)

Another big problem with the budget is that the City doesn't anticipate the interest it has to pay on it's pension bond of $55 M. But it does conveniently remove the cost it won't have to pay CalPERS - which again makes the numbers look better.

The interest the city has to pay on it's loans is estimated to be $5.3 M. The city alleges that its interest payments are about $3.4 M through its successor agency. But again, the city didn't add the interest payment it has to pay on the $55 M bond it wants to get. And if it doesn't get it, it needs to add back the interest payment it owes CalPERS.

A second check shows that $5.3 M is a reasonable estimate of the interest the city owes on its debt. The City owes at least $119 M. An average of 5% interest would make the yearly payment equal $6 M. So, that means the debt is anywhere between $5.3 - $6 M, assuming we found all their loans.

Key findings and Red Flags

The budget is riddled with red flags, stressing problems with accountability and oversight. Besides all the findings presented above, the City has not disclosed on its budgets that it owes $119 M (which is a combination of the pension debt and the loans it owes). In other financial statements, it's made up that it has $22 M in assets in a phantom successor agency. (Isn't that called lying?)

The City budget also doesn't reflect how much it has currently in all of it's bank account. Revenue streams are also missing.

The two big revenue streams missing is how much cash does the recreation program bring in for the City? (Is Carrillo pocketing the money himself?) Also, where is the income stream from the police asset forfeiture or the Baldwin Park Franchise Fund? Are these numbers not being reported, because players are taking this money for themselves?

Also, do the city council meetings reflect when all these financial decisions were made, and when, and why? Under the Brown Act, which requires transparency in government decision making, these decisions should have been presented to the public - before it went into a cryptic and confusing and "cooked" budget report.

It appears that the City's strategy for justifying the lucrative raises it wants to give itself next year is being done by misrepresenting how much money it actually brings in, hiding its debt and the accruing interest, and underestimating the cost of contractors (including the city attorney and legal services).

Thus, 31% of the City's operational costs are going to paying loan interest and litigation costs. Instead of fixing the problem though, city officials, management, and brass have all given themselves raises though.

Conclusion: Future Concerns

This report hasn't explored why the City is expecting to run a loss of -$4.7 to -8.1 M in capital projects. I wonder if this is because it plans to launder the $55 M bond money through contractors involving capital projects. The City of Beaumont did the same thing. It stole $43 million with over 40 secret bank accounts, primarily by using contractors.

At this rate, it won't be long before the City will have to file bankruptcy. Tam's best representation of the reserves is at $14 M. When I looked at the books years ago, it was at $6 M. So, running at a $14.5 M loss would require the City to exhaust its reserves or to go out for loan. (This makes me think that the $55 M bond it's going out for will have to pay some of the current operational cost, and not be used for its intended purpose of paying out the CalPERS debt.)

Although the $55 M bond the city is seeking may buy it 2-3 more years, because a third of its budget is on litigation costs and interest on loans, it cannot continue maintaining operating costs at this level at the current revenue stream. Imagine, if a third of your income went to paying off credit card interest alone.

Although it may be illegal for the City to do so, documents obtained by public records act requests have shown that the City put up the Recreation Center, donated by one the founders of In-n-Out, as collateral to U.S. Bank for all the loans. Hence, the children and senior citizens can lose their recreational programs, because of the city's financial mis-management and corruption.

What I think this is showing, and I'll write a follow up article, is that these city officials and directors want to take out a big $55 M pension bond to give themselves raises and retire lavishly. Follow up article to come.

This case study of dissecting and reconstructing Baldwin Park's budget stresses the problems with oversight and accountability regarding local government. The solution will require processes, law, and enforcement of law to hold accountable those who engage in deceptive practices, such as the one potentially illustrated here. As I studied in Animal Farm: “The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.”

*I've taken out the litigation cost from the $33 M reported by the city, to show it as it's own category.
**The City's put loan interest payments as a capital cost, but it's an operational cost to me. I've removed it as a capital cost, and put it as an operational cost.

By Banksy
It's come down to us checking everything our government does.

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