City Responds to Auditor's Rebuttal

Contributed by Carlos Palacios, Watsonville City Manager, and Ezequiel Vega, Watsonville Administrative Services Director 

On June 11, 2013, the Santa Cruz Grand Jury issued a press release regarding a rebuttal to the City’s response to the performance audit report released on January 10, 2013. While the City continues to respectfully disagree with some of the information and conclusions presented in the report, the City also appreciates the work performed and agrees with most recommendations offered by Harvey M. Rose and Associates.  

In fact, the City has already implemented many of those recommendations including the formalization of a City wide cash handling policy, the revamping of the City’s purchasing policy, and implementation of a new budget monitoring policy. Some of the main points in the City’s response to the audit report include the following:

Financial Condition, Reporting, and Controls. The City has faced a difficult financial situation over last five years mainly due to a severe reduction of revenue resulting from the recession, particularly in property taxes and sales taxes. This has resulted in employee furloughs and the reduction of salaries for all employees. However, the City has continued to provide excellent public services to the community while maintaining expenditures within the overall authorized budget as shown in audited Financial Statements and in accordance with City policies.  

Interfund Loans and Transfers. The City’s practice has always been to charge interest for loans between funds within the City. This good practice will continue into the future. The exception which occurred in the interfund loan for the construction of the Civic Plaza building was made because at the time the General Fund had a healthy reserve balance and the City was trying to preserve Redevelopment Funds to the greatest extent possible for the Manabe/Ow business park infrastructure costs and for Downtown Revitalization.  This was a policy decision made by the City Council in a publicly noticed meeting in 2006.  At the time no one foresaw the severity of the coming recession in 2008.  In 2006 the City’s greatest priority was trying to find a way to subsidize the $30 million in Manabe/Ow infrastructure costs using Redevelopment Funds and to find Redevelopment Funds for infrastructure and other improvements to Downtown.

Budget and Expenditure Controls. The City understands the importance of having good processes in place to monitor the budget. Accordingly, the City has always provided monthly expenditure reports to department directors for review and has recently formalized a policy to more closely monitor and continue to spend within the allotted department budgets.  In the past few years, the City froze Capital Improvement Funds to make up for over-expenditures in Police and Fire overtime budgets.   City expenditures have never exceeded budget appropriation levels approved by the City Council in the annual budget.  

Purchasing Practices. The City performed a thorough analysis of purchase orders examined by the Grand Jury auditors and found that 100% of these transactions complied with state and local ordinances, and 90% complied with the City’s purchasing policies.  The main area of disagreement between the City and the Grand Jury auditors in this area remains the treatment of bids for Professional Services Contracts.  The City continues to maintain that bids are not required for Professional Service contracts under state or local law or city policy.  In place of a bid for these services, the City has normally used a Request for Proposal.

• Here is the audit.
• This is the city's first response to the audit. 
• Here is the rebuttal from the auditing firm. 
• This Patch story about the auditor's response.