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Audit Gives Cautious Outlook For City Of Fresno; Warns Of Possible 'Perfect Storm'

May 14, 2014

Fresno City Hall (file photo)

With a budget that's absorbed more than $100 million in cuts since 2009, the City of Fresno's finances are improving.  But major concerns remain, including a possible "perfect storm" that could threaten the city's financial future.  That's the message contained in a draft of the city's 2013 audited financial report, which the council will review on Thursday. 

The independent auditor praised city efforts to fix what it calls a "structural imbalance" in city finances, and paying off internal loans between different city accounts. The report also highlights a two percent increase in property and sales tax receipts. But the audit also remains concerned about the lack of reserves in the city's general fund, high debt service and personnel costs.

The report also warns about what it calls a possible "perfect storm" that could leave the city unable to close its books at the end of the fiscal year. With a poor credit rating making it difficult to borrow outside money, the report says that a delay in receiving federal grant funds, a major legal settlement at the end of the year, or other unexpected bills could result in a major cash crunch.

For the second year, the report includes a statement from the auditor about the city's ability to function as a "going concern." While the report's authors say they expect the city will be able to pay its bills over the next year, they call the inclusion of the "going concern" language "prudent." 

The report also calls for more effective controls on city accounting for grants in the housing department, and better data security measures.

The report details the a possbile "perfect storm" scenario that could result in a cash flow crisis at the end of the fiscal year:

Where does the City borrow from at Fiscal Year End? The only places that it can:

  • The City’s Risk Management Fund
  • The City’s ISD replacement and maintenance funds
  • What is left of the Fleet replacement fund
  • The General Fund when possible

What happens as these funds are depleted?

  • The City may not be able to close its books at year end without borrowing restricted or inappropriate funds resulting in violation of various bond, contract, agreement, etc. covenants.
  • This could ultimately result in a modified auditor opinion (adverse or disclaimer) and could even result in the auditor withdrawing from the engagement.

Currently with no reserves set aside for the delay in these grant reimbursements, it is becoming more and more difficult to close the City’s books at year end

  • The City has no control over the timing of the reimbursements
  • The City can only attempt to curtail grant spending at year end which is not always a possibility depending upon the grant funded project.

What would the “Perfect Storm” look like for the City?

  • Greater and great delays in grant reimbursements at year end
  • A pay period hitting on the last day of the fiscal year end (these run approximately $7 million per pay period for the General Fund and approximately $12 million citywide)
  • A legal settlement requiring payment on the last day of the fiscal year end out of the Risk Fund
  • A sudden and unanticipated large expenditure at year end out of General Fund or the Risk Fund

Could the City borrow funds externally if it had to?

  • Extremely difficult for the General Fund due to current ratings, which make potential interest rates cost prohibitive
  • In addition there are no “essential” assets left to pledge