INTRODUCTION
Background
Incorporated in 1890, Lincoln is located 27 miles northeast of Sacramento in Placer County. The city, which occupies about 22 square miles, serves a population of more than 47,000 residents and administered more than 2,400 active business licenses as of December 2018. Lincoln employs about 150 full-time employees to provide a range of services, including public safety, water, sewer, garbage collection and disposal, library, community development, and general administration. It obtains water from a wholesale water supplier, Placer County Water Agency (Placer Water). Lincoln also operates a municipal airport and transit system.
City Governance
Lincoln is a general law city, which means that state law establishes its form of government and that it is subject to state law in its ability to govern municipal affairs. As a general law city, it operates under the council-manager structure: the city council is responsible for the city’s governance, while the city manager administers its operations. The city council is composed of five elected officials, each serving a four-year term. Figure 1 shows Lincoln’s elected officials, the positions that the city council appoints, and the departments that the city manager administers. The city uses a mayoral rotation system to select a councilmember to serve as mayor each year. Before the November 2018 election, four of the five councilmembers had served six years or longer. During the election, Lincoln voters elected two new councilmembers, who took office in December 2018.
Figure 1
Overview of Lincoln's Government
Source: Lincoln’s comprehensive annual financial report, website, and ordinance.
The city manager reports to the city council and is responsible for the efficient administration of all Lincoln’s operations. The city manager appoints and supervises the directors of the city departments, who present staff reports and recommendations to the city council. The city manager’s office administers personnel functions, manages public information activities, oversees economic development activities, and coordinates records management. The city manager is also responsible for ensuring the enforcement of all laws and ordinances applicable to city governance. Lincoln’s most recent city manager served from February 2015 through July 2018, when he resigned. The city council appointed an interim city manager in July 2018, and the term of his contract expired in January 2019. The city’s director of public services, who also currently serves as Lincoln’s interim director of support services, is now also serving as interim city manager until the council hires a permanent replacement.
One of the primary responsibilities of the director of support services is to oversee Lincoln’s financial operations. In this capacity, the director of support services manages the city’s financial reporting, utility billing, purchasing, information technology, and risk management. The director of support services also participates in the development of the budget and coordinates the city’s interactions with the external auditor responsible for conducting its annual financial audits. The most recent director of support services, who had served in that role at various times since 2006, separated from the city in January 2019, during our audit.
Lincoln, like other cities, uses fund accounting to comply with legal requirements. Among its other characteristics, fund accounting involves tracking financial activity using restricted and unrestricted funds. For example, Lincoln’s general fund is classified as an unrestricted fund, meaning that the city can use revenue from this fund to pay for any type of government activity. However, other funds are classified as restricted funds, requiring that Lincoln use their revenue only for the specific purposes designated in state law or municipal code. For instance, state law requires Lincoln to spend revenue in the water connections fund only for expanding its access to water capacity. Additionally, Lincoln’s municipal code requires it to spend revenue in its oak tree preservation fund to plant new oak trees or maintain existing trees within the city.
Rapid Growth Followed by a Sharp Decline
From 2000 through 2010, Lincoln experienced tremendous growth, expanding from 11,000 to 43,000 residents. In fact, during that decade, Lincoln was the nation’s fastest growing city of more than 10,000 residents. From 2000 through 2005, it processed an average of 1,852 construction permits annually for new single-family dwellings, with a high of 2,845 permits in 2005. However, with the collapse of the national and local real estate markets after 2007, new construction permits for single-family dwellings in Lincoln fell dramatically, to only 90 permits for the entire year of 2010. Although the number of permits rose after 2010, averaging 229 each year from 2013 through 2017, it has yet to come close to the peak in 2005.
The change in Lincoln’s governmental fund revenue was similar to the growth and decline in the city’s construction. The majority of Lincoln’s revenue in its governmental funds, which includes the general fund, comes from taxes and charges for services. As Figure 2 shows, the city’s revenue peaked in fiscal year 2004–05 at $112 million, followed by a sharp decline to less than $24 million in fiscal year 2010–11. In recent years, the city has experienced some modest revenue growth, rising from $31 million in fiscal year 2013–14 to $37 million in fiscal year 2016–17.
Figure 2
Lincoln’s Government Fund Revenue Rapidly Grew in Fiscal Year 2004–05, Followed by a Significant Decline
Source: Lincoln’s comprehensive annual financial reports.
As Table 1 shows, Lincoln’s general fund revenue has been higher than its expenditures in recent years. From fiscal years 2004–05 through 2016–17, Lincoln’s general fund revenue fluctuated from $10.6 million to $17.8 million annually, while its general fund expenditures ranged from $9.8 million to $16 million during the same period. During that period, the city set aside a certain amount of its general fund balance for specific purposes. For instance, in fiscal year 2016–17, it set aside a $2 million reserve in case of a catastrophic emergency. Since fiscal year 2004–05, Lincoln’s unrestricted general fund balance has varied significantly, plummeting as low as $0 in fiscal year 2008–09 and rebounding to $8.7 million in fiscal year 2016–17.
Table 1
Lincoln’s General Fund Revenue Generally Exceeded Its Expenditures
(in Millions)
| FISCAL YEAR | REVENUE | EXPENDITURES | UNRESTRICTED FUND BALANCE |
|---|---|---|---|
| 2004–05 | $10.6 | $9.8 | $4.2 |
| 2005–06 | 11.4 | 12.1 | 3.1 |
| 2006–07 | 13.9 | 13.3 | 5.3 |
| 2007–08 | 14.1 | 15.8 | 2.7 |
| 2008–09 | 12.9 | 16.0 | 0.0 |
| 2009–10 | 15.5 | 14.1 | 2.5 |
| 2010–11 | 12.3 | 13.0 | 4.1 |
| 2011–12 | 12.1 | 11.9 | 3.5 |
| 2012–13 | 13.9 | 13.2 | 3.7 |
| 2013–14 | 14.3 | 12.8 | 3.8 |
| 2014–15 | 15.7 | 13.7 | 5.6 |
| 2015–16 | 16.0 | 14.8 | 6.5 |
| 2016–17 | 17.8 | 15.5 | 8.7 |
Source: Lincoln’s comprehensive annual financial reports.
Concerns Over City Finances
In 2016 a local citizens group began raising concerns about possible financial improprieties in Lincoln. In February 2017, the group initially submitted a claim to the city for refunds of overcharges, alleging that the city’s water rates were not proportional to the city’s actual cost of providing water to customers. The group alleged that Lincoln violated the provisions of Proposition 218, a constitutional amendment adopted by the voters in 1996 to limit the ability of local governments to impose taxes, assessments, charges, and fees based on property ownership. After the city denied the claim, the group sued it in April 2017. As a result of a mediated settlement, Lincoln agreed to refund residential ratepayers for overcharges from February 2016 to the date the city adopted new water rates, which it did effective October 2018. The city council later decided to provide refunds to commercial ratepayers and to extend its refunds for both groups back to January 2014, when Lincoln first implemented the contested water rates.
Concurrent with its review of Lincoln’s water funds, the citizens group identified several other concerns. It claimed that Lincoln forgave millions of dollars in fees that developers owed the city, while allowing them to continue with their projects. The group also claimed that Lincoln misused public funds by engaging in questionable interfund borrowing and overcharging citizens and ratepayers for rates or fees for services. The group further claimed in December 2017 that Lincoln had not paid for its own water use, and it also claimed that the city falsified reports to the California Department of Water Resources to conceal its water use. In January 2018, the city council initiated an independent investigation, which revealed that city councilmembers, former city managers, and certain city staff were in fact aware that Lincoln had not paid for its own water usage. According to the independent investigation, the city and the public were put on notice of this practice as early as 2004. The concerns that the citizens group raised ultimately led to this audit.