LOS ANGELES — Industry, Calif.'s leaders say they have implemented 90% of the reforms needed to fix problems identified in a scathing audit by the state controller's office.
Despite the self-declared progress by the city, a place where people who work for its numerous businesses outnumber people who live there by a 400-to-1 margin, one rating agency is taking a long-term wait-and-see approach before it will consider restoring Industry's ratings.
State Controller Betty Yee's January 2016 audit found the city had almost no financial controls, putting the city at risk for fraud and corruption.
The industrial suburb, 22 miles from downtown Los Angeles, has only 206 residents, but 80,000 people are employed by the city's 3,105 businesses, according to a 2015 report from the U.S. Census Bureau.
State Sen. Ed Hernandez, D-West Covina, whose district includes Industry, introduced state legislation to impose reforms on the city in May 2016, but let the bill die in committee after the city hired former State Treasurer Bill Lockyer to act as a compliance monitor on reforms.
Part of Lockyer's charge is to assess the independence of Industry's city-owned housing, which is rented to City Council members, their friends and their family members for subsidized rates of about $700 a month. He also evaluates competitive bidding practices and the city's progress on the controller's other recommendations.
Yee's audit of fiscal years 2012-14 found 85% of the city's internal controls were inadequate. Her office began the audit in May 2015 after a series of reviews performed by KPMG on city contract practices raised questions about $326 million in payments to businesses owned by former Mayor David Perez and his family.
"They have made substantial progress in moving ahead with necessary fiscal reforms," said Lockyer, now an attorney in the Orange County, Calif. law firm Brown Rudnick.
S&P Global Ratings withdrew the ratings on the city's outstanding sales tax and tax increment bonds on Oct. 25, citing a lack of sufficient information of satisfactory quality to maintain the ratings.
They cited a recommendation that Lockyer made in his Aug. 17
The city has only had two contested municipal elections in the past 25 years, said S&P analyst Benjamin Geare.
The former treasurer "recommended the city needs to maintain the changes over several election cycles to demonstrate the changes will stick," Geare said.
S&P analyst Chris Morgan added the time element was important, because though the city has made improvements to its financial processes, it needs time to demonstrate those changes had taken root.
S&P had already withdrawn the ratings on the city's general obligation and lease revenue bonds on Aug. 12.
"Although we view the changes the city initiated—and in many cases already implemented—to be promising, we think the city's management team still needs to demonstrate a strong capacity for planning, monitoring, and management in order to avoid such situations in the future," S&P analysts wrote in the Aug. 12 report. "We believe that it will take several years for the city to sufficiently demonstrate its adherence to improved controls in order to restore our confidence in the reliability of the information provided by the city that we would need to maintain a credit rating on city-related obligations."
The city has $378 million in outstanding debt including $115 million in general obligation bonds, $167 million in revenue bonds and $82 million in tax allocation bonds, according to its audited financial statements for fiscal year 2015.
Moody's Investors Service was confident enough in the city's information to affirm an Aa2 rating on the city's GO bonds in an April 6, 2016 report. It hasn't updated its ratings since.
"Notwithstanding a January 2016 California State Controller Review Report, which noted material deficiencies in the city's internal controls, the fundamental credit quality of the city's general obligation bonds remains sound at the Aa2 level, supported by an unlimited pledge of property taxes," Moody's said.
The assessed valuation of properties within city boundaries, for fiscal 2015-16 was $7.7 billion, a 3% increase from the prior year, according to its audited financial statements.
Noting that the city's small staff may have contributed to some of the weaknesses listed in the controller's report, Moody's analysts said the city had created a new director of administrative services position and hired a controller.
The city approved restructuring its finance department in June 23 to bring those functions in house, according to a 51-slide power point presentation highlighting changes that was provided to The Bond Buyer. The city hired four new full-time members in the finance department in January.
"I felt better about having our finance staff in-house," City Manager Paul Philips said. "We were able to recruit our city controller-finance director from a city that had similar challenges to what we were facing."
The city had already embarked in mid-2015 on some of the changes recommended in the controller's report after a new City Council hired Philips as city manager and Jamie Casso as city attorney, Lockyer said.
Lockyer was asked in May 2016 to be the compliance monitor for reforms recommended by Yee, Sen. Hernandez, and the Industry City Council. He was hired for an 18-month period, but he said the city has the option to extend the contract if needed. He is required to submit quarterly reports. His
The most substantial changes made by the city have been in adopting best practices in purchasing, retention of employees and financial management, Philips said.
He claims the city has established procedures that address 90% of the concerns raised in the controller's report.
The city also has received approval from the California State Board of Equalization to implement an "intercept" mechanism so that sales tax receipts will flow directly from the SBOE to the bond trustee for the payment of debt service on the sales tax revenue bonds.
The controller also gave the city credit for changes implemented by the time of the January 2016 report including reviewing all of its contracts, giving closer scrutiny to invoices and destroying most of its city-issued credit cards.
The controller's audit had found a lack of adherence to competitive bidding requirements, lack of documentation for invoices, inadequate control of government-issued credit cards, conflicts of interest and missing, incomplete or outdated administrative policies. Yee's office found that 67 of 79 internal control elements were inadequate, rendering accounting controls effectively non-existent.
"I think they have been doing a good job of modifying the systems and installing procedures to address the concerns," Lockyer said.
A plan to create more housing would help transform the city, Lockyer said.
The city only has 57 houses and the majority are either owned by the Perez family or the city.
"It has an impact on voter patterns and city influence that needs to get resolved over time to have the city run in a first-class way," Lockyer said. "It is the hardest political issue to address. The city is 92% industrial, 8% commercial and there is no housing element in the plan."
