Appendix A—The State Auditor’s Local High-Risk Program

APPENDIX A

The State Auditor’s Local High-Risk Program

Government Code section 8546.10 authorizes the California State Auditor (State Auditor) to establish a local high-risk program to identify local government agencies that are at high risk for potential waste, fraud, abuse, or mismanagement or that have major challenges associated with their economy, efficiency, or effectiveness. Regulations that define high risk and describe the workings of the local high-risk program became effective on July 1, 2015. Both statute and regulations require that the State Auditor seek approval from the Joint Legislative Audit Committee (Audit Committee) to conduct audits of local entities.

To identify local entities that may be at high risk, we analyze audited financial statements and unaudited pension-related information for more than 470 California cities. This detailed review includes using financial data to calculate indicators that may be indicative of a city’s fiscal stress. These indicators enable us to assess each city’s ability to pay its bills in both the short and the long term. Specifically, the indicators measure each city’s financial reserves, debt burden, cash position or liquidity, revenue trends, and ability to pay for employee retirement benefits.

In October 2019, we determined that Compton potentially met the criteria for being at high risk, and we made a similar determination in November 2020 based on updated financial data. We conducted an assessment in February 2021 to determine the city’s awareness of and responses to these issues as well as to identify any other ongoing issues that could affect our determination of whether the city is at high risk. After conducting our initial assessment, we concluded that Compton’s circumstances warranted an audit. We sought and, in June 2021, obtained approval from the Audit Committee to conduct an audit of Compton.

If a local agency is designated as high risk as a result of an audit, it must submit a corrective action plan. If it has not provided its corrective action plan in time for inclusion in the audit report, it must provide the plan no later than 60 days after the report’s publication. It must then provide written updates every six months after the audit report is issued regarding its progress in implementing its corrective action plan. This corrective action plan must outline the specific actions the local agency will perform to address the conditions causing us to designate it as high risk and the proposed timing for undertaking those actions. We will remove the high-risk designation when we conclude that the agency has taken satisfactory corrective action and the deficiencies identified in the audit have been satisfactorily addressed.

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