Fiscal mismanagement puts Lynwood at risk for fraud and waste, state audit says

As the city of Lynwood struggled with its finances, its leaders hired more employees, gave hefty raises to more than 100 others and used water and sewer funds to pay for some personnel costs, a violation of state law, according to a report by the California state auditor.

The 54-page report, released Tuesday, said frequent budget deficits, leadership turnover, bypassing of the competitive bidding process and poor accounting of its finances are diminishing the city’s ability to prevent fraud and waste.

As a result, the city saw its general fund balance drop from $6.5 million to $2.6 million in a span of about five years, according to state auditors.

The scathing report comes just two years after the working-class town in southeast Los Angeles County declared a fiscal emergency and enacted a hiring freeze.

Despite its attempt to reduce expenditures, the city began hiring full-time employees between July 2017 and February 2018, increasing its staffing by 15%, from 165 to 190, according to auditors. Additionally, the city also increased salaries for 40 positions that affected about 157 employees.

“We questioned whether increasing salaries was an appropriate decision given the city’s poor financial position,” the report said.

City officials disagree with the findings.

“The state auditor’s assertion that the city is ‘at risk of not meeting its future financial obligations’ is based on a fundamentally flawed assumption that the city would not make adjustments to its operations,” officials said in their response to the state.

The city said the hiring was necessary to keep up with public service demands and to provide its employees with competitive pay.

Officials in Lynwood, a city of about 4.8 square miles with a population of about 70,000, said it used a salary survey to come up with the pay increases. But auditors said the survey included cities with populations and budgets larger than Lynwood’s.

“The survey included other entities, namely school districts and counties, entities serving different purposes than Lynwood,” auditors said in the report.

City officials said they included bigger agencies to benchmark job positions and for recruiting purposes. Lynwood’s city manager and mayor did not respond to requests from The Times for comment.

Auditors also found that Lynwood had violated state law by using its water and sewer funds to pay for staff positions in the finance department, even though the positions were unrelated to the city’s water and sewer operations.

The city told the state it would fix the problem.

State auditors began looking at Lynwood in October last year, when it notified the city that it had been selected to be reviewed under the state’s high-risk program, which aims to identify local government agencies that are at risk for potential waste, fraud and mismanagement.

The program was established after a massive scandal in the nearby city of Bell, where city officials and top administrators were collecting shockingly high salaries. The scandal led to the arrests of eight officials, including the mayor and city manager.

State officials said the program was created to avoid similar corruption scandals.

Located five miles south of Bell, Lynwood found itself under the state auditor’s eyes after the office noticed persistent budget deficits, turnover in key leadership positions and a lack of policies that could potentially encourage better fiscal habits.

Early this year, the city provided the state auditor with an update on its progress and said it had passed a temporary sales tax that would pump $4.5 million into the city’s funds each year, therefore preventing it from tapping into its general fund reserves.

The sales tax went into effect in April 2017.

While city officials express better financial footing for the current fiscal year, state auditors fear the city may have overestimated its figures. They said raised concerns about the city’s poor accounting of its finances and said that on two occasions, the finance department had overestimated its beginning-of-year balance: by $2 million for fiscal year 2016-17 and by more than $1 million for fiscal year 2017-18.

“Accurately estimating the year-end fund balance is critical because that amount establishes the starting point for future budgets,” auditors stated in their report.

State auditors said they would wait until February to hear from the city about its plan to address their concerns.

ruben.vives@latimes.com

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