The South Pasadena City Council on June 24 voted unanimously to adopt what City Manager Stephanie DeWolfe said amounts to “a budget that does not reflect the current economic realities.”
The vote was the culmination of an emotional tug-of-war between groups with widely varying degrees of confidence in city management.
“You are faced with a difficult decision tonight,” DeWolfe told Council members before the vote. Adopting a proposed $45 million fiscal 2020-2021 budget that reflects the significant, $3.5 million estimated loss of revenue projected due to impacts of the pandemic, or a two-month “continuing appropriation” at current spending levels to provide time to complete the City’s delinquent 2018-19 audit and for “some community members to continue to review their opinions of the City’s financial statements.”
Public comment came in strongly in favor of a continuing appropriation, with only one of 13 comments supporting adoption of the draft budget.
The City’s Finance Commission voted unanimously to recommend Council adoption of a new budget but reversed course after learning of dozens of budgeting questions raised by a former city finance director and a separate citizen report showing the budget they’d recommended May 26 was dramatically different from the one presented only days later for Council review.
City Finance Director Karen Aceves said the changes represented updated, pandemic-related internal and external estimates added to make the figures more accurate. But the commission was spooked and on June 18 voted 4-1 in favor of the continuing appropriation advocated by a growing list of citizens.
Council also granted the staff’s request for an extra $80,000 to hire an accountant and purchase software to help speed the ongoing “clean up” of what was called ‘inappropriate accounting practices’ that go back 10 years, the extent of which the city disclosed for the first time this month in connection with the ongoing budget controversy. The nearly two-year-old clean-up effort is now 70 percent, Finance Director Karen Aceves said, but has required considerable resources that have contributed to delays in completing the city’s annual audit and other projects.
Aceves made a presentation and answered additional questions, many of which revolved around the time constraints her department would face depending on how the Council voted. A continuing resolution would require extracting the new budget figures and reinserting this year’s figures into the software. That will take from time needed to complete the already delayed audit. On boarding a new accounting clerk to help with the clean-up could take two months. She said her five-member staff–none of whom have been with the City more than two years — have spent 12 to 15 hours a day on the clean-up, transitioning to automated business licensing and payroll software, building and then rebuilding the budget for pandemic impacts and responding to a separate county audit request, all whilst continuing the day-to-day business of the department.
Councilmember Marina Khubesrian said her constituents care less about “spreadsheets” than about the city’s cash position and credit rating. Aceves said both are good. The city has “a strong cash flow,” “can pay our bills” and has tools to tap for liquidity. Khubesrian wanted to know if the Council could adopt a continuing appropriation with the new budget attached.
City Attorney Teresa Highsmith shot that down. The resolution is what was noticed to the public. The possibility of adopting a budget was mentioned in the staff report, but not in the agenda item title. The Council “can’t shift and suddenly adopt a budget,” Highsmith said. “That would be inappropriate under the Brown Act.”
Council member Richard Schneider moved adoption the continuing appropriation. He complained the staff report misstated the Finance Commission’s position on the budget and that staff seemed to be supporting the budget, arguing against their own recommendation for a continuing appropriation. He took especially great umbrage to the “tone” of the staff report for its “inflammatory” and “derogatory” language and references to “deficiencies” that seem to leave the impression that previous city officials were “incompetent or malfeasant.”
He said extending current spending is “not a big problem” because the Council can revise or change the budget at will. “There is nothing in stone that says you have to spend or collect” a certain amount. Once the audit comes in, the budget can be adjusted. He said he did not question Aceves was trying to get the right figures for a moving target.
Councilmember Diana Mahmud made a lengthy statement noting the unprecedented nature of the times and the extreme uncertainty of the City’s revenues and expenditures over the coming year. She was “extremely uncomfortable” about taking any action that would weaken the city’s chance to negotiate a $400,000 concession from the city’s unions or complicate the city’s prospects of getting voter approval for a Utility Users Tax extension by taking a position that does not suggest the City anticipates a significant reduction in revenue. Doing so “flies in the face of reality.”
“I strongly support the city’s need to be transparent and to explain to our residents past inaccurate financial statements,” Mahmud said. “We need to do this as quickly as possible to restore whatever broken trust our residents have in the city. However, it makes no sense to me to hold next year’s budget hostage to the correction of past accounting errors.”
Councilmember Marina Khubesrian said it was clear the Finance Commission struggled with the issues before making its recommendation. But “the buck stops with City Council.” The audit is backward looking while the budget is forward looking. Citing a comment she’d read from South Pasadena CPA Wendy Kerfoot, she said adopting a continuing appropriation would be like pretending the past three months of pandemic impacts “didn’t happen. It would be foolish.”
The city needs to be in the best financial light it can be, she continued. Emotions and anxieties are high for everyone. “Let’s not let this crisis be so divisive for us that we are not making a decision that is not really based on reality.”
Councilmember Michael Cacciotti, who seconded Schneider’s motion for the continuing appropriation, said he’d feel irresponsible adopting a budget “based on the facts before me” and in the face of the comments from “90 percent” of the people he’s spoken to demanding the resolution. Like Schneider, he took strong exception to the “pejorative” comments he said staff and others made concerning prior city officials. The tone is a complete shift in the community that he could not condone. Cacciotti expressed appreciation for citizens who contributed to the debate, as well as staff, though he also expressed frustration that his many requests for detailed financial information received pushback from one of his Council colleagues and some staff.
As is increasingly common, that left the deciding vote to Mayor Robert Joe. He proposed adopting the continuing appropriation and directing staff within 60 days to bring back final numbers for a 2020-21 budget in the form of a list of revenue and expenditures; appropriating up to $80,000 to both hire an accountant for up to six months and purchase a $20,000 accounting software module.
The Clerk then recorded the unanimous vote, with Mahmud saying her approval was based on the city attorney’s statement that, contrary to how the city manager laid out the choice at the start of the meeting, “we are precluded from voting in the proposed 2020-2021 budget.”
The Council then had one last discussion about what the $80,000 allocation would cover. DeWolfe and Aceves said it depends what the Council wants. Besides day to day operations, the tasks now are to finish the clean-up, complete the audit, put together a new budget, and close out the fiscal year. How extensive the public outreach will be for the new budget remains to be determined.
But DeWolfe said, “The expectation of the community is that we go back and correct all the errors as quickly as possible. I think that is in the best interests of everybody.”