State Controller Releases Review of East Los Angeles Fiscal Study

By Gloria Angelina Castillo, EGP Staff Writer

A newly released State Controller’s review of the Comprehensive Fiscal Analysis (CFA) for Unincorporated East Los Angeles does not support incorporation proponents’ view that cityhood is financially viable.

Funders of the review, however, claim State Controller John Chiang’s review lacks analytical depth.

Lea esta nota EN ESPAÑOL: Controlador Estatal Hace Conocer Su Revisión del Estudio Financiero del Este de Los Ángeles

Disagreeing with many of the finding in the CFA report prepared earlier this year for LAFCO, the Local Agency Formation Commission, the East Los Angeles Resident’s Association, ELARA, on Oct. 17 exercised their right to request a review of the study by the State Controller’s office.

ELARA paid close to $40,000 for the review, which they hoped would agree with their analysis that many of the costs in the report had been overstated, and that the report failed to account for several sources of revenue.

ELARA President Ben Cardenas said they were expecting Chiang’s office to conduct an audit, but what they got fell far short of that objective.

The review shows a “lack of effort,” says Cardenas, adding that the analysis should have been conducted through a lens of professional skepticism.

In a letter signed Dec. 15, however, Jeffrey V. Brownfield, chief of the Controller’s division of audits, wrote: “The objective of our review is to opine on the accuracy and reliability of the information, methodologies, and the documentation used in the Comprehensive Fiscal Analysis.”

Brownfield stated the review was based on analysis using known and existing past data as prescribed by current law and the Governor’s Office of Planning and Research’s  “A Guide to the LAFCO Process for Incorporation.”

Approximately 126,000 residents live within the proposed 7.4 square mile city boundaries, surrounded by the cities of Los Angeles, Monterey Park, Montebello, and Commerce.

The controller estimates if Unincorporated East LA were to become a city, its first year deficit would be about $27 million, a stark contrast to the $533,000 surplus calculated by ELARA in their request for the review. By the second year, the deficit would drop slightly to $20 million according to the controller, while the proponents calculated a small surplus of $150,000.

ELARA originally requested that eight areas of the study be examined, but Cardenas said they scaled back their request to just four areas when they learned they only had a week to come up with the $87,000 needed to pay for the review, which they had estimated would cost $25,000.

The four areas reviewed were: suspected overstated costs for law enforcement; understated franchise fee revenues; excluded grant revenues; and understated Utility User Tax revenue.
Cardenas said ELARA strongly disagrees with the conclusions of the controller’s review.

Related posts: Cityhood: The Only Way to Go, Says East LA Residents Group,  VIDEOS: East LA Cityhood Study Presentation,  East LA’s CFA Leaves More Questions Than It Answers,   Is East L.A. Ready To Be A City?,   East L.A. Residents Pay for Cityhood Study,   East LA Cityhood Glamour Fades in Recession

The cost for County Sheriff services for the proposed city has generated the most heated debate among stakeholders.  The controller’s review concluded that the CFA’s  “costs estimate may have been understated by $10.1 million plus another $6.8 million in the first-year start-up costs.”

EPS Economic & Planning Systems Inc. (EPS), the independent consultants hired to do the CFA, put the Sheriffs costs at $21.1 million, based on its calculations of services provided to similarly sized cities. The Sheriff’s Department puts its cost at $31.2 million, plus $6.8 million in capital improvements.

ELARA, however, believed the CFA overstated the cost by $2.3 million because it relied on a small sample of comparable cities to establish the proposed city’s law enforcement costs.

Chiang’s office concluded that the CFA’s estimated law enforcement costs for the proposed city is unreliable, and questioned whether using cost comparisons is a valid methodology, since “there are numerous unquantifiable factors that could affect comparability.”

Cardenas says the review took the Sheriff’s self-reported numbers at face value. Besides ignoring comparable cities, it does not compare the estimate to previous fiscal years and fails to state why East LA is so unique that it’s contract would be much pricier than Compton for example, which has similar crime rates. In 2007, the budget was around $24 million, he said. “How can you justify over 30 percent in costs in just three years?”

Cardenas says the CFA’s major flaw is that rather than basing its cost analysis on what it costs to run comparable cities, it uses the county’s current costs, which are higher. He called it an inverse relationship that ends up serving the status quo.

He also said the controller’s review failed to question the Sheriff’s estimated $6.8 million in start up costs and infrastructure improvements.

“It doesn’t take a rocket scientist see that something is wrong with data, or the methodology is wrong,” he said angrily.

ELARA claims the CFA understated franchise fee revenue by $2.3 million because the new city could negotiate a franchise agreement with its utility and service providers such as garbage haulers.

However, the controller agreed that the CFA’s exclusion of solid waste franchise fees was “reasonable” because the county doesn’t currently collect fees. As to ELARA’s estimate of $2.3 million in new franchise fees, the report said, “there is uncertainty as to the amount, if any, to be collected by the new city.”

Cardenas disagrees saying comparable cities should be considered because it’s in a city’s best interest to have healthy revenue sources to provide other services.

Chiang’s office also concluded that it was appropriate for the CFA to exclude grant revenues, which the proponents calculated would bring in about $4 million a year.

The controller’s report technically agrees with ELARA on the last issue, that the Utility User Tax (UTT) revenues are understated because of the failure to include non-residential landline telephones. But the review doesn’t agree with the amount of understated UUTs, which ELARA estimates at $1.7 million, and again concludes there is no guarantee that the new city would be able to collect the amount estimated.

“They agree the UTT is underreported but they don’t know by how much—they didn’t put a dollar figure although they agree. Do you consider that to be an audit?” Cardenas asked.

ELARA will respond in writing to the state controller, Cardenas said. In the meantime, LAFCO will also be working on a report and recommendation that will be  released a week prior to LAFCO’s Jan. 25, 2012 public hearing on East LA’s incorporation.

Cardenas says the incorporation effort has been a fact-finding mission: “We truly want to know what it would cost [to become a city].” The CFA cost $134,000, the controller’s review cost $40,000 and the numbers are still a mystery, he said. “We want to know how much we are [collectively] paying in taxes, how much is coming back, then let people decide at the ballot,” Cardenas said. “If they can’t come up with the accurate numbers, than who can?”

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December 22, 2011  Copyright © 2012 Eastern Group Publications, Inc.


One Response to “State Controller Releases Review of East Los Angeles Fiscal Study”

  1. elamon on December 23rd, 2011 11:26 am

    The controller’s review is stupid! of course there’s no guarantee that the new city council people can collect what is estimated, but if you have a local city council they can set the rules for doing business in the city — its not the same as stoire moving away, if u want contract to pick up trash in ELA you have to be ELA to do it!

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