Home » Local News » Calexico Continues ‘Miraculous’ Financial Recovery Amid Release of Audit

Calexico Continues ‘Miraculous’ Financial Recovery Amid Release of Audit

Calexico has a story to tell, and it’s an overwhelmingly positive one that speaks to sacrifices of every city worker who agreed to take a pay cut a few years back, to every department head who is juggling multiple jobs daily, to a unified city council that lives within the tight constraints of a spartan budget.

It’s the story of a city that was on the brink of bankruptcy just three years ago, a city that devised a plan to borrow $3.5 million from its own wastewater funds to help keep Calexico afloat during a nearly catastrophic period of no one minding the proverbial store.

It’s the story of a city that covered some serious ground to make up an average of about $1.7 million a year, starting out with a negative general fund balance of around $4 million in mid-2016, to a city that is projecting to end the current fiscal year, June 30, 2020, with positive cash reserves and having paid back its $3.5 million wastewater fund loan a year ahead of schedule.

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“I am not using hyperbole when I say I think it has been nothing short of a miracle what this city has been able to accomplish with the resources that it has, (and) at the same time come back from such a financial debacle as was seen in this city during 2014-2016,” Calexico City Manager David Dale wrote in a recent email.

At the Oct. 23 city council meeting, Dale and city Finance Director Karla Lobatos would proudly take the council and the community through a first-quarter update of the current 2019-20 fiscal year’s budget.

Employees Get Credit

Calexico Mayor Bill Hodge, who hosted his first town hall meeting Oct. 30, is talking up the city’s dramatic turnaround every chance he gets, fully crediting the financial about-face to city employees.

“It’s due to the major sacrifices of staff and department heads,” Hodge said during an interview Oct. 27. “They are the ones who brought us back from the brink of bankruptcy. It’s nothing short of a miracle.”

The city has essentially overcome more than $8 million in deficit spending, gaining ground at a fast pace, and maintaining city services even with 100 fewer employees now — 140 people work for the city today — than what it employed in 2010, Dale said.

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Through these mitigating circumstances, the city has still been able do some $25 million in capital improvements projects over the last two years, Dale said. A number of these projects have been to refocus Calexico on its neglected streets and to begin the process of upgrading its aging water and sewer plants and old systems of underground water and sewer lines.

Ironically, a day later after Dale and Lobatos’ presentation, Oct. 24, the California State Auditor’s office unveiled a new tool — an online dashboard — that ranked more than 470 California cities based on detailed information about their fiscal health. The ranking is part of the Auditor’s High-Risk Local Government Audit Program for determining whether a local government agency is at risk of fiscal distress.

Calexico ranked as the fifth worst-off city in the state for overall financial stability, literally topping more than 470 other cities in the specific categories of liquidity, general fund reserves, and other post-employment benefits funding.

History of Budget Problems

One may ask how that kind of bad news can come out one day, but only 24 hours earlier city officials were hailing a new era of fiscal health and responsibility.

“I think the release of the report … is a reminder of where the city was. It only serves to confirm the successes that we have had over the past three years in recovering from the financial debacle that plagued every city department,” Dale said when contacted a couple days later to see if the state auditor’s online dashboard dampened his excitement over the city’s hard-won victory over its poorly-managed past.

The data for the dashboard was derived from the most-current available audits the state had, which were from the 2017-2016 fiscal year, which just happened to be one of the two years the California State Controller’s Office audited with a fine-tooth comb. Over the course of the two-year audit period, the Controller’s Office found Calexico was lacking in dozens of internal controls and financial oversight, according to a report released in January.

“Within a two-year span, city management allowed a $4.1 million surplus to become a $4.0 million deficit,” Controller Betty T. Yee stated in her January report, referencing what appeared to be a hands-off spending free-for-all between July 1, 2015, and June 30, 2017.

Yee’s audit team review of Calexico’s internal control system found that of 48 control attributes — government standards for methods and procedures used to verify accuracy of financial statements — Calexico was lacking in 37 areas.

Calexico officials had reportedly engaged in significant deficit spending in fiscal years 2014-2015 and 2015-2016, with expenditures exceeding revenues by $8.1 million, Yee’s report found.

“Clearly, Calexico’s financial controls need improvement,” Yee stated in the report.

Prior Mismanagement

This was around the time when retiree Richard Warne became Calexico interim city manager in June 2014. He was permanently hired in mid-2015, only to be put on leave and shown the door three months later.

That was the start of a revolving door of interim city managers, until the council found Calexico native and former City Manager Armando Villa, who in his short tenure with Calexico — June 2016 to December 2017 — got major concessions from all employee bargaining units, hatched the plan to borrow the wastewater funds to help balance the budget, and steer the city toward a path of austerity that helped it avoid bankruptcy.

Hodge, who was on the council between 2010 and 2014, was among the affirmative votes that hired Warne, and he may have lost his re-election bid because of it.

“I am partly responsible for bringing Warne in. I was a ‘yes’ vote. The damage is done; that was a big mistake,” he said, adding he won re-election in 2016 and has had the opportunity to watch City Manager Dale continues Villa’s work.

“When Dale took over, we continued to stay focused on getting out of the red and tightening our belts. At the end of the year (fiscal 2018-2019 that ended June 30), we were probably a couple hundred thousand dollars in the plus,” Hodge said.

He added that Lobatos has been “a major factor for us being able to break even this year.”

Dale said the total general fund balance in 2015-2016 was a negative $4,042,182. The projections for fiscal 2017-2018 showed that the fund balance would continue to degrade to negative $5,409,935, he said.

Villa Spurs Turn Around

Villa and the council at the time started the change when the fiscal 2017-2018 budget showed a shortfall of $3,268,489, Dale said. By the end of that year, instead of a shortfall, there was a surplus of $337,116. For fiscal 2018-2019, there was an approximate (approximate because it has not been audited) surplus of $1,027,986, Dale said.

After the wastewater fund is paid back, the city still has two years’ worth of payments due to the city’s former insurance carrier, the Joint Powers Insurance Authority, including a $633,000 payment this year that is already part of the budget, Dale said.

Since the internal control measures were lacking by the state controller, Dale, Assistant City Manager Miguel Figueroa and, later, Lobatos, have been able to address almost all of the areas of concern.

What’s more, Calexico’s precarious earlier financial position saw the city lose the ability to apply for federal and state grants and programs, including about a two- or three-year stretch where it could not apply for funds under the state Community Development Block Grant Program. However, through efforts of Figueroa, that ability was restored this year.

Much of this financial turnaround has been done with hardly any revenue from commercial cannabis activity in the city, which has not met revenue expectations, Dale said.

Meanwhile, the city is even working to replenish its reserves, or its rainy-day contingency funds in case of emergencies.

“The city needs to have approximately $4 million to $5 million in reserves, so we are not yet where we want to be, but we are getting there,” Dale added.

Of the overall budget he added, “We’re not where we want to be yet, but getting to this point has not been easy. … We’ve got the momentum train going for the next few years.”