Auditors are encouraging Fullerton leaders to hire a qualified, government-experienced chief accountant after a multi-million dollar accounting error saw the city run through $10.1 million in unassigned reserves quicker than elected officials expected.
They are also recommending city officials form a financial oversight committee, implement standardized accounting practices and present the budget in a more transparent way to more accurately reflect the city’s financial standing to residents and elected officials.
Anne Layne, director of Risk Advisory for Grant Thornton – the auditing firm hired by the city – said there were issues with financial oversight, how officials report transactions in their financial statements and how city staff is presenting the budget to elected officials.
“Based on the work that we did, we did not find any indicators of fraud or intentional misconduct, and all of the issues that we identified relate to financial policy, accounting presentation, accounting errors, and governance over the finance process,” she said at Tuesday’s city council meeting.
At the same time, Layne admitted they were not tasked to do a fraud investigation.
The Grant Thornton firm was brought in to find out how the blunder happened after city staff told council members in March they used up $10.1 million in unassigned reserves in recent years – a depletion expedited by a $2.9 million accounting error that went unnoticed for years.
[Read: Fullerton Hires Accounting Firm to Review $10 Million Budget Flap]
Councilman Ahmad Zahra questioned how Layne could know there wasn’t any fraud committed if that wasn’t the scope of what they looked at in their audit, also questioning if the budget was propped up to look better.
“You are quite confident in saying that there are no indicators of fraud or intentionality. If you’re not investigating this, how could you come to that conclusion?” he asked. “Could it be possible that this is a case where the budget was presented as a feel-good budget, sort of politically motivated to make it seem like it’s better than it is?”
Layne said she couldn’t speak to the motivations behind the budget presentation and they looked at the depletion of the unassigned reserves and the accounting error – adding that based on documentations they reviewed and interviews with staff, there were no indicators of fraud.
She also said they don’t recommend moving forward with a forensic audit.
How Did Fullerton Run Through $10 Million?
Over the past couple years, Fullerton leaders proudly claimed they’d finally balanced their budget after years of financial difficulties, pointing to a $26 million reserve to protect the city against any problems heading their way.
But in reality, a lot of that money was already assigned to other projects or mislabeled as a reserve.
Roughly $10 million in unassigned reserves got eaten up by a series of projects, such as $4.4 million going to patch the city budget and another $2.7 million allocated for specific purposes like fixing roads and capital projects.
Another $2.9 million was rerouted to the city’s successor agency after staff realized it was improperly marked as a reserve, when instead it was leftover money from a property sale.
The remaining $16 million is all the city has left in reserve, with their budget analysts noting a $13.7 million deficit this year will eat up almost all their remaining money.
“If no adjustments were made, reserve levels would decline to approximately 2% by the end of fiscal year 26-27 which is well below the city’s reserve policy,” said Steven Avalos, interim director of Administrative Services at the March 17 city council meeting.
[Read: Fullerton Plays Hot Potato With Budget Crisis]
Layne said the $2.9 million adjustment was an accounting error due to how the transaction was recorded and the $10 million depletion of the unassigned reserves were primarily caused by a planned city deficit.
“The decline in unassigned fund balance was driven by operating results, including a planned budget deficit, and the numbers and the factors adding to the decline in fund balance were not clearly reconciled or presented, which limited the ability of the city council to understand the city’s financial position,” she said.
The city has not yet approved its budget for next year, with city leaders looking to adopt it on July 21, nearly a month late, with no answers yet on how they’ll cut down their nearly $14 million deficit.
On Tuesday, council members voted 4-1 to keep spending at the same levels as their current budget until they adopt a new one next month. Councilman Nick Dunlap was the dissenting vote.
Will Fullerton Hire a CFO?
Layne said the city needs a qualified chief financial officer to oversee their budget, recommending whoever they hire be both a Certified Professional Accountant and have years of experience in managing municipal budgets.
“What I would expect from a chief financial officer position, as I said, is somebody with a really strong finance and accounting background, preferably CPA, and preferably somebody with lots of governmental experience,” Layne said, noting they need staff who are experienced enough to catch mistakes without having to hire auditors.
Fullerton’s interim head of administrative services Steven Avalos, who oversees the city’s finance department, does not have a degree in finance, according to his LinkedIn.
He has a bachelor’s degree in psychology from UCLA and a master’s in public administration from the University of La Verne, and has worked in various city’s financial departments from 2008 to now.
The city has struggled to hang onto staff in recent years, with Avalos being their third head of administrative services in three years.
The city manager’s office has also seen significant turnover, with city Manager Eddie Manfro being the fifth person to sit in the top office since 2020.
Shawn Stewart, a Grant Thornton partner, recommended prioritizing hiring a chief accountant instead of spending more money on them as consultants to review their processes.
“You currently have an interim CFO, that’s not that individual’s background,” he said. “This is a complicated area so you need more expertise.”
Correction: An earlier version of this article said Manfro was the fourth city manager since 2020. He is the fifth. We regret the error.
Hosam Elattar is a Voice of OC reporter. Contact him at helattar@voiceofoc.org.
Noah Biesiada is a Voice of OC reporter. Contact him at nbiesiada@voiceofoc.org.
