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A new city's first year: a finance director's perspective.

The City of Santa Clarita, California, was incorporated as a general law city on December 15, 1987, after a 20-year period of unsuccessful attempts at cityhood and one effort to separate from Los Angeles County by forming a new county. Comprising four diverse communities, each of which cherished its own hegemony, Santa Clarita is now the fourth-largest city in Los Angeles County with a population approaching 150,000 and an area of 40 square miles. Located about 30 miles northwest of downtown Los Angeles, this new urban center is bounded by major freeway on two sides and by a mountain range to the north. It has a city council/manager form of government.

The birth of this new city affected all its citizens as well as the surrounding communities, the county and the state. Santa Clarita was an instant big city: services were performed by the County of Los Angeles one day, December 14, and then at midnight, a handful of city employees had to assume those responsibilities.

Starting a new city from scratch is a difficult task, especialy in the finance area. This article, written from the finance director's point of view, chronicles the events between September 1988, the month when Santa Clarita's finance director came on board, and September 1989. It highlights the first-year dynamics of starting up a city and how they have influenced subsequent events and organizational changes.

The Infant City

Soon after Santa Clarita's incorporation, an interim city manager set up shop in a storefront next to a motorcycle dealer--the "city hall"--and began organizing the city government, including its finances. The accounting system that was installed relied on record keeping being done by hand, a system that was to result in the first problems faced by the finance director. A community development director was hired immediately, as uncontrolled growth was the main reason the citizens voted for cityhood and planning was perceived to be the major problem of the new city.

Within a few months, the permanent city manager and an assistant city manager were in place to begin recruiting permanent staff. The second department head to be hired was the finance director, who started in September 1988. The only other city employees on hand were the assistant city clerk and clerical staff, a total of 10 people.

Creating a Finance Department

The finance director immediately tackled three tasks:

1) preparation of the city's budget;

2) establishment of a cash management system, an investment policy and an account for all investments; and

3) purchase of computer hardware and software.

The Budget. The accounting records were being kept by a retired part-time bookkeeper when the finance director started. Although a public accounting firm had been hired and banking services were in place, city finances needed structure and refinement.

The chart of accounts, for example, had to be reworked to present a true picture of the projected revenues and anticipated expenses. Since the interim city manager had no data with which to work, he was forced to rely on information provided by the Local Agency Formation Commission (LAFCO) to develop the chart of accounts and the first year's budget, including services and service levels provided in the past to the four unincorporated areas by Los Angeles County. (1) These data proved to be less than desirable. LAFCO had consistently materially underestimated revenues, although estimated expenditures were not accurate. The commission's classification scheme, based on contracting with the county for municipal services rather than performing those services with an in-house city staff, did not lend itself to making timely economic decisions.

Reworking the chart of accounts was the first step to establish fiscal responsibility and to develop a meaningful first-year budget. The hand-written books served as the starting point in developing the chart, which was then completed through a re-analysis of the first nine months' transactions. Besides the chart of accounts, the finance director was able to develop an accurate history of cash flows on which to base revenue projections.

Based on the new chart of accounts and using the reclassified revenues and expenditures, the finance director developed a proposed new first-year budget for fiscal year 1988-89 with a personal computer and an electronic spreadsheet. (2) This document was the focal point of a staff budget retreat to review the preliminary numbers and make appropriate revisions. Participants were the city manager, assistant city manager, the community development director, a consultant hired to act as city engineer and to perform the building and safety functions, county staff for parks and recreation services, and the finance director. The retreat was held at the bank that provided the city's banking services because there was nowhere to meet at the storefront city hall, which was one large room with dividers where newspaper reporters walking in could overhear confidential conversations.

Integrated into the study of the budget document was a critical evaluation of the types and composition of needed reports. This was important to determine whether the finalized chart of accounts was adequate to provide the information. The composition of the chart was linked to the potentials of different types of software in a "fit analysis." Cooperation of software vendors was critical in this endeavor.

Cash Management and Investments. The second problem was determining a proper management system for the city's idle funds. Because of LAFCO's underestimates of revenues, there were more funds available than is normally the case for a new city.

Based on prior experience with investments and reporting, the finance director was appointed treasurer at the second council meeting in September. At that meeting, the city's investment policy was proposed and accepted by the city council. For the initial portfolio of $7 million, a personal computer and an electronic spreadsheet, again, served to develop the monthly investment report. (3) While budgeting and portfolio reporting with PCs and spreadsheets may serve well for smaller cities, larger ones require a modern management information system, and in Santa Clarita both management and staff needed this to be online as quickly as possible.

Computer Hardware and Software. Payroll was the only computerized part of the accounting system being performed by contract with a service bureau. Thus, the city was free to choose the best information system configuration without the fetters of changeover. There were two alternative routes available: 1) purchase personal computers and network them, or 2) plan for a fully integrated citywide computer system which could be phased in as the city developed. The city manager chose the latter option, again based on the assumption of rapid growth.

The task of selecting a computer and appropriate software fell to the finance director, assisted by a temporary accounting clerk, the assistant city clerk who examined word processing capabilities, and the community development director who assessed the software's geographic base potential. A request for proposals was sent to vendors with the stipulation that the system be fully integrated and the payroll be computerized by January 1989, to eliminate double record keeping. Eleven different configurations were examined. During the search, it was essential to consider that the acquired software be able to handle numerous other functions as they came online: parks facility bookings, recreation registration, building and safety permits and fees, project management, law enforcement, fire safety, animal licenses, business licenses, etc.

The first phase of the management information system was approved for purchase by city council and was up and running in January with equipment loaned by the hardware vendor. The initial output was the payroll checks for the first period of 1989.

The next phase was to computerize the remaining finance functions: the general ledger, accounts payable, accounts receivable and cash receipts. With this in mind, the city's accountant was hired. On the first day on the job, the accountant had to begin interviews for the accounting clerks responsible for payroll, accounts payable and cash receipts. The day the payroll clerk started, she began training on the computer software's payroll system. An accounting intern from a local university was employed whose primary task was to account for all the fixed assets, list them by location and account number, and tag them.

The critical need for planning flexiblity when starting a new city was demonstrated by the major change in the original computer implementation projection. Initially, community development was the department scheduled to be computerized after finance, but the director of parks and recreation, hired in January 1989, was quicker in formulating computer plans. Installation of the system moved forward on target, however, with all systems in place and projected deadlines budgeted and ready for the 1990-1991 fiscal year.

Expansions and Financing

A peculiarity of Santa Clarita's organization is the dual role of the finance director, who also serves as director of general services and has responsibility for the physical plant of the city, city hall and all city vehicles.

The city hall of Santa Clarita was at first a storefront shop until the interim city manager had located a more permanent site. Almost a year after the city became incorporated, a suitable city hall opened on the third floor of a bank building, its first phase consisting of 8,000 square feet. In site acquisition, the ability to expand was paramount since the facility had to accommodate the city's burgeoning staff and allow for the city council meetings which were being held at a rented school gymnasium.

Because of the inevitable tension that exists between a city and the county resulting from revenue transfers, a consultant was hired to study sales taxes and examine other revenue records held by the county. Since most of these monies were still being collected by the county, it was imperative that the city determine that it was receiving all funds to which it was entitled.

The finance director helped the assistant city manager select a personal assistant as well as the city manager's administrative assistant. The finance director's participation was vital because of the interdependencies that exist among these functions. The consulting extended to the hiring of two new department heads: public words and parks and recreation.

Planning then began for expanding the square footage of city hall to accommodate the needs of the two new directors. The finance director, as general services manager, coordinated all activities between the directors, office furniture vendors, the building manager and the telephone company. A survey was conducted of existing and predicted computer terminal needs, the cabling necessary to support work stations was put in place, and in March, the second phase of the computer was installed.

The first quarter of 1989 saw increases in the number of finance personnel: a contract with a financial advisor was let, and a revenue collector and computer programmer cam on board. The work of the revenue consultant was bearing fruit--his study yielded an additional $1.2 million in city revenue from the county. It was at this time was well that the finance director presented the revenues portion of the budget to the city council, the budget in general being under the aegis of the assistant city manager.

The first team-building meeting took place with department heads, the city manager and assistant city manager, when all the key players were in place. The aim was to bring the new public works and parks and recreation directors up to speed as members of the management team as quickly as possible. A consulting firm lead the sessions, which were held at an off-site location.

Word processing training was initiated for clerical staff in the spring and a user group for the computer software was formed with three other cities. A purchasing procedures manual was developed and the geographic database was started for the community development department.

Work began on a citywide Mello Roos bond issue in June. (4) The bonds were considered necessary to fund the construction of roads throughout the city, since residents suffered from inadequate roads due to unchecked development before incorporation. A Mello Roos issue requires a two-thirds majority vote of the populace, and Santa Clarita's first bonding effort was defeated at the polls. The citizens felt that they should not have to pay for developers' past lack of providing infrastructure.

The third phase of construction at city hall was initiated in the summer. As the city began developing its general plan, the finance director, consulting with the planning director, developed the finance portion, which involved developing a strategic paln for revenues and financing infrasture, computer needs, and vehicle acquisition and maintenance levels.

The first audit of Santa Clarita's comprehensive annual financial report took place in August and the city received an unqualified opinion by its independent accounting firm, one of the "Big Six."

Growing Pains

The first annexation by the city took place in September 1990--a 1.6 square mile area with a population of 3,000--and by mid-1991 many changes had taken place. A strategic plan was implemented, a sphere of influence prepared, a general plan completed. The city received awards for financial reporting from the California Municipal Finance Officers Association, the GFOA's Certificate of Achievement for Excellence in Financial Reporting in 1990 and 1991, and an award from the Municipal Treasurer's Association for the city's investment policy.

As this story is being writeen, the beginnings of stability are evident although reorganization again looms as a result of, perhaps, too many diversified functions in public works and finance. The composition of the city council has changed as well, with one original council member being replaced at the first election. Flexibility and change are a way of life.

Leased city hall space has expanded to 28,000 square feet, and negotiations are underway for 8,000 additional square feet. The city has 257 employees. A satellite corporation yard of 61,500 square feet was acquired to house the public works department and maintenance crews. A future city hall site has been acquired and the finance director had approval from the city council to establish a joint power authority to finance the preliminary steps of its development. The first city bond financing to purchase buses for the newly formed transit district run by the city was trasacted in June 1991.

Organizational Change

The first lesson learned at the City of Santa Clarita was that flexibility, adaptability and a strong drive to accomplish something must be part of the personality for employees of a new city. It is important that the first administrators be "hands-on" managers and not generalists. However, as the organization grows and additional support staff are hired, the new employees may have a set of values entirely different from the managers who started the city.

The leaders have to be innovators; at the same time, their supporting team may see innovation as a threat, creating the potential for conflict among city personnel. Why? Because in establishing any system, alternatives must be evaluated quickly and effectively in a world of complex and conflicting information. Once the system is operating, however, a routine inevitably sets in. The type of personality content with the day-to-day perspective more than likely will cash with the manager who established the system.

While the day-to-day routine may prove satisfactory, it will remain so for only a relatively short time, since innovation must take place if the organization is to prosper. [5] As most individuals do not like innovation and prefer "changes" that perpetuate current practice, they are willing to radically alter the routine only when faced with a crisis. City management must guard against this happening if it is to deliver maximum service at minimum cost. This requires managers who are able to recognize the pattern of their behavior and be proactive to danger signals.

In a seminal article on organizational change, Larry E. Greiner, professor of organizational behavior at the University of Southern California, noted some essential elements in organizational development--the age and size of the organization, and the stages of evolution and revolution--and identified five phases of evolution and revolution encountered by organizations as they age and grow in size: creativity, direction, delegation, coordination and collaboration. [6]

In the experience of Santa Clarita, some of these developmental phases were evident, but they did not occur in the order outlined by Greiner and, indeed, overlapped. Hiring and training for finance/general services and treasury staff was performed expeditiously to get the financial system in place and operating as soon as possible. This was done to keep operations current while historical data were being entered into the system. Staffing at this time included the department head and the clerical support needed to perform essential functions. This necessitated the finance director's overseeing the start up of all the systems while hiring and training clerical personnel to perform the operations.

The director din not have the luxury of hiring middle-level managers, because events were occuring too quickly. The plan was to hire these people to supervise the clerical functions after the various activities had begun. As a result, the organizations was too flat, with everyone being directed by and reporting to the director.

As the middle-level managers came on board, extensive team building was required because these people brought different management styles: the team was changing, and the organization needed to be adjusted for that. The finance director borrowed an idea from Japanese busines, the practice of quality circles. Although the quality circles technique was developed in a manufacturing environment, the concept also applies to rendering the services provided city government.

The quality circles schema is a multistep process.

* Groups are formed.

* Training takes place with dependence on the leader for training and direction.

* Counterdependence. As members gain a better grasp of their responsibilities and feel moved to challenge program policies and techniques, authority issues emerge and conflicts arise.

* Resolution of authority. Members realize that they must work as disciplined team in conjunction with the leaders, and the concept of supervisor vs. leader is minimized. An equlity of status emerges as leader and members work together as teammates.

* Enchantment. Staff is excited with its new voice in decision making; the staff members are proud of their contributions and the opportunities to demonstrate their ability. Ideas flow freely, problems are solved, rapport is improved among circle members and increased productivity is the result.

* Disenchantment. Members become discouraged because:

* all problems are not resolved;

* implementing change can be frustrating and difficult;

* suggested solutions are rejected or modified by management;

* novelty wears off, challenge now becomes chore and members engage in nonproductive behavior which negatively affects the group.

* Interdependence. After disenchantment is worked through, members are more confident and communicate more effectively with each other and management. A spirit of trust, respect and cooperation prevails. Members realize this is not a problem-solving process, but a people-building one.

This process, defined here in its classical form, is approximately what, indeed happened at Santa Clarita. While some variances occurred, they did not significantly alter the original plan and did result in the desired outcomes.

Lessons Learned

The chronology of events during the finance director's first year on the job at a newly created city offers two lessons. First, flexibility is essential in meeting the demands of the unstable environment encountered in the formation process of government--freezing plans too early will lead to later problems. Second, everybody involved must be "hands-on" types who can effectively deal with the myriad unexpected events that inevitably occur. Their enthusiasm and dedication are essential ingredients for success.

Creativity, the driving force in the birth of an organization, marks the first phase in its evolution, in Greiner's scheme. For Santa Clarita, the founders, the initial management team, provided the creativity that developed the city government. Their long hours of work were rewarded not monetarily, but with the personal satisfaction of accomplishment, what accounting theoreticians call psychic income. The technically oriented founders, although absorbed in their developmental activities, insisted on constant and informal communication among employees.

In the direction phase, the next evolutionary step, the accounting systems and incentives are introduced, while communication becomes more formal and impersonal. The delegation and coordination phases have not yet been encountered at Santa Clarita, but the collaboration phase is definitely present, the emphasis being on solving problems quickly through team action and staff reassignment or recombination. The revolution in response to this phase involves the psychological saturation of employees who have grown mentally and physical exhausted by the intensity of the pressure for innovation solutions. These are the types of problems that Santa Clarita managers are currently trying to solve.

NOTES

(1) In California, Local Agency Formation Commissions work with planned cities on projecting revenues, expenditures and services. The task of these commissions is to get information from countries for the projected city areas, research the information and decide if a city is viable. If the decision is favorable for formation, a vote on cityhood is permitted. Two-thirds majority is needed in the vote.

(2) Daroca, Andrea and Frank P., "Budgeting with Microcomputers for Smaller Cities," Government Finance Review, October 1986, pp. 32-34.

(3) Daroca, Andrea and Frank P., "Computerized Portfolio Reporting," Government Finance Review, December 1987, pp. 22-24.

(4) Mello Roos bonds, named for the legislators who sponsored this California financing tool, can be issued by taxing entities in California that form special community facilities districts. These districts set up special tax rates not based on ad valoren to provide public facilities, infrastructure and/or certain services.

(5) A recent report about Russian Office routine described employees using carbon paper while photocopy machines set idel in another room. The reason for this was reportedly the central government's decree that duplicates be carbon copies.

(6) Greiner, Larry E., "Evolution and Revolution as Organizations Grow," Harvard Business Review, July-August 1972, pp. 37-46.

ANDREA DAROCA, director of finance/city treasurer for the City of Santa Clarita, California, is a member of GFOA's Committee on Cash Management. She has written frequently for various GFOA publications.

FRANK P. DAROCA, Ph.D., CPA, is professor and chairman of the department of accounting at Loyola Marymount University, Los Angeles, California. His publications include articles for Government Finance Review as well as other professional and academic journals.
COPYRIGHT 1992 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:City of Santa Clarita, California
Author:Daroca, Andrea; Daroca, Frank P.
Publication:Government Finance Review
Date:Feb 1, 1992
Words:3665
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