The City Lacks an Adequate Plan for Addressing Its Financial Challenges

appears to have been to reimburse the general fund for the water department’s share of citywide administrative services, such as activities performed by the city manager’s office and other central service departments. However, Compton has not updated its cost allocation plan—a study performed by governments to determine and justify each program’s or fund’s share of these centralized overhead costs—since 2013. That 2013 plan suggested that the water department’s share of overhead costs was roughly similar to the amounts it has been transferring recently. Nevertheless, the GFOA has indicated that cost allocations should only be used for up to three years; thus, Compton’s 2013 plan relies on information that is now significantly outdated, such as the water department’s total budgeted expenditures from fiscal year 2011–12. In recent years, the water department’s budget has decreased. Further, the city’s budgets indicate that, since at least fiscal year 2017–18, other restricted funds similar to the water fund have not made the same size and types of transfers to the general fund. These factors raise questions about whether the water fund’s transfer amounts are too high or are unjustified.

These annual transfers have indeed been sizable. In fiscal year 2021–22, for instance, the transfer of at least $4.6 million to the general fund represented about 20 percent of the water department’s total budgeted expenditures. According to the former water department general manager, the transfers have reduced the department’s ability to fund essential projects and services such as upgrading water wells. The city controller indicated that she was not aware of a detailed justification supporting the transfer amounts and stated that she previously raised the issue with city leadership and has been working on a new cost allocation plan that will resolve whether the transfer amounts are appropriate. In the meantime, Compton continues to make these transfers without adequate justification, raising concerns that it may be violating requirements in the state constitution that prohibit local governments from imposing property-related fees or charges and then using those funds for unrelated purposes or general government services.

The City Lacks an Adequate Plan for Addressing Its Financial Challenges

Because of these problematic practices and other issues, Compton will likely continue to face significant challenges in maintaining a positive balance in its general fund. Information from recent years—though complicated by a lack of timely, complete, and reliable audited financial statements—indicates that Compton’s general fund revenues have exceeded its expenditures since at least fiscal year 2015–16. Unaudited and preliminary accounting information that the city controller provided to us in August 2022 also indicates that Compton’s general fund balance may have improved to a deficit of about $3.2 million as of the end of fiscal year 2020–21. However, these promising trends are hampered by the fact that Compton has numerous staffing vacancies to fill and salaries it will likely need to increase, as we discuss later, as well as infrastructure projects it will need to pay for—which could further strain the financial resources of its general fund and other funds. In other words, although it appears that Compton could be on the verge of finally eliminating its general fund deficit, the city will still likely need to use millions of dollars in additional revenue to address staff vacancies and salary issues, meet its infrastructure needs, and repay borrowed money.