Outstanding debts and budget shortfalls illuminated by an audit of last year's finances have reignited concerns surrounding Guadalupe's ability to remain a solvent city.
Presenting its preliminary audit to the City Council, Ahmed Badawi, partner at Badawi & Associates, the accounting firm hired to audit Guadalupe's finances, found multiple deficiencies in internal control over financial reporting. The audit is incomplete, Badawi explained, but the report provides a comprehensive overview of the city's financial situation.
Guadalupe ended last fiscal year with deficits to multiple unrestricted and restricted funds. The audit revealed a $684,624 deficit to the city's general fund, and $280,000 and $373,333 in debts to the city's Lighting and Assessment Fund and Water Fund, respectively. The deficit and internal debts are further compounded by a $450,000 court judgement against the city that, if the decision is unsuccessfully appealed, would be paid out of the general fund.
"We fear that the city is out of money," Badawi told the council. "The general fund is in a very poor financial condition and so are a few other funds. The only funds that seem to be in healthy condition are funded by ratepayers or other government agencies."
According to Badawi, the net cost of service required for running city departments exceeds the tax revenue generated by the city. The city generated $2.42 million in tax revenues last year, substantially lower than the $3.38 million in expenses.
"The city has run out of money in certain funds and started tapping into other funds," Badawi explained, adding that the city has relied on interfund transfers from other restricted accounts to maintain solvent.
"We believe the city probably started tapping into gas tax and Measure A funds to cover shortfalls in the general fund," he added. "Those are legally restricted for a specific purpose; the city can find itself noncompliant as a result of that."
In 2015, Guadalupe was investigated by a Santa Barbara County grand jury for, among other things, its use of restricted funds to subsidize general fund shortfalls. Reviewing the city's financial statements from 2002 to 2014, the grand jury found a 12-year history (totaling $7.6 million) of Guadalupe administrators using restricted funds to support general fund expenses.
Given its inability to provide for its citizens given the tax base, the grand jury recommended Guadalupe disincorporate as a city. City officials refused.
"A balanced budget is great, but most cities should have a 10- to 15-percent reserve," Councilwoman Virginia Ponce said. Due to its internal debt and outstanding deficit, the city does not maintain operational reserves.
"I cringe when I see the reports," she said.
Guadalupe City Administrator Cruz Ramos thanked Badawi for his report and said the staff is working to rectify the situation. According to Ramos, the city expects an increase in permitting revenues, property and sales tax as progress on the Pasadera housing development continues.
"Your staff is working on how we can bring you revenue in and how we can cut expenses," she said. "We know that we have constraints, but I want you to know that we're working in every single way that we can to bring you a balanced budget soon. Maybe it will [take] a couple of years, but it will be there."