CSA
Summary
Read the report at California State Auditor ↗
Los Angeles
Department of
Water and Power:
Its Transfers of Funds to the City Comply
With the City Charter; However, It Needs
to Improve Its Controls Over Contracts,
Expenditures, and Personnel Records
January 2005
2004-130
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January 26, 2005 2004-130
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents its audit
report concerning certain aspects of the operations of the Los Angeles Department of Water and Power
(department).
This report concludes that the department followed the requirements of the City Charter of the city
of Los Angeles (city) and the terms and conditions of its bond debt when it transferred more than
$82 million from its Water Revenue Fund and almost $575 million from its Power Revenue Fund to the
city’s reserve fund since fiscal year 2001–02. However, the department needs some improvement in its
oversight of its expenditures, contracts, and personnel activities. For example, we found the department
did not award all the contracts we reviewed in compliance with city and department competitive
bidding requirements, ensure that only authorized staff signed contracts, and did not always seek
required approvals from the Board of Water and Power Commissioners. Further, the department did not
ensure that only authorized employees approved invoices for payment. Moreover, the department did
not use available information to consistently assess compliance with, or ensure uniform enforcement
of, the policies regarding the city’s purchasing card program. Additionally, the department’s lack of
central control over personnel files has reduced its ability to ensure that those files contain the records
necessary to support and explain hiring and promotion decisions. Finally, the individuals who occupy
seven of the exempt positions we reviewed carry job titles and perform duties that are different from
those approved by the mayor and city council.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
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CONTENTS
Summary 1
Introduction 7
Chapter 1
The Department’s Transfers of Money to the City
for General Use Are Allowable and Comply With
the City Charter 17
Chapter 2
The Department Needs to Improve Its
Controls Over Contracts, Expenditures,
and Personnel Records 25
Recommendations 47
Response to the Audit
Los Angeles Department of Water and Power 51
California State Auditor’s Comments on the
Response From the Los Angeles Department
of Water and Power 61
SUMMARY
RESULTS IN BRIEF
Audit Highlights . . .
The Los Angeles Department of Water and Power
(department) was established by the city of Los Angeles
Our review of certain aspects
of the operations of the (city) in 1925. The department has sole responsibility for
Los Angeles Department meeting the electric and water needs of its service area—an area
of Water and Power
almost entirely within the city’s boundaries. The Los Angeles
(department) revealed the
following: City Charter (city charter) grants to the department’s governing
board, the Board of Water and Power Commissioners (board),
þ The department followed
the city’s rights and property associated with providing water
the requirements of the
and power to the city’s inhabitants and customers. It establishes
City Charter of the city
of Los Angeles (city) and separate funds for the water and power systems to accumulate
the terms and conditions and account for the revenues and expenditures of the water and
of its bond debt when it
power operations, respectively. The city charter grants the board
transferred more than
$82 million from its the authority to appropriate and spend those funds.
water fund and almost
$575 million from its
The city charter further authorizes the department to transfer
power fund to the city’s
surplus money from the Water Revenue Fund (water fund)
reserve fund since fiscal
year 2001–02. and the Power Revenue Fund (power fund) to the city’s reserve
fund. Although board resolutions currently identify the targeted
þ The department did not
annual transfers as 5 percent of the gross revenue from the
always award contracts in
compliance with city and water fund and 7 percent of the gross revenue from the power
department competitive fund, these transfers are potentially limited by provisions in
bidding requirements,
the department’s bonds. Under the bonds’ provisions, transfers
ensure that staff signed
may not exceed the prior year’s net income and remaining
contracts only when
authorized, and did not equity must meet specified equity-to-debt ratios. Our review
always seek required found that the department followed the requirements of the
approvals from the Board
city charter and the terms and conditions of its bond debt when
of Water and Power
it transferred a total of $82.4 million from the water fund and
Commissioners.
$574.7 million from the power fund to the city’s reserve fund
þ In a November 2004
since fiscal year 2001–02.
report, the department’s
internal auditor reported
that the department’s The department is not unique in transferring money from its
administration of a water fund and power fund to the city each year. According to a
series of contracts and
June 2003 presentation of financial information for 38 electric
purchase orders for
power utilities compiled by Fitch Ratings, a financial research
the implementation of
an automated supply and debt rating company, 32 (84 percent) of the utilities studied
chain management transfer an average of 5.82 percent of their annual revenues to
project, valued at more
city general funds. The department’s annual transfers are close
than $9.7 million, was
materially flawed. to this average.
continued on next page . . .
California State Auditor Report 2004-130 11
As part of this audit, we were asked to review the department’s
policies and procedures for expenditures, contracts, and
þ The department did not personnel. We found the department needs some improvement
ensure that only authorized in its oversight of its business units’ activities in these areas. The
employees approved
department’s Corporate Purchasing Services (CPS) is responsible
invoices for payment.
for processing contracts and purchase orders in compliance
þ The department did not with city and department rules. CPS did not award contracts
use available information
in compliance with city and department competitive bidding
to consistently assess
requirements for two of the 12 contracts we reviewed. According
compliance with,
or ensure uniform to an assistant city attorney, for one of these contracts, the
enforcement of, department has broadly construed the city’s administrative
policies regarding the
code to exempt from competitive bidding all personal services
city’s purchasing card
contracts valued at less than $2 million. Moreover, for the
program—a program that
uses credit cards issued larger of the two contracts, valued at $149,500, the CPS
by a commercial bank to employee who signed the contract obligating the department
provide a cost-efficient
was only authorized to sign contracts with a value of $50,000
procurement process.
or less. In addition, for this contract and five others valued
þ The lack of central control at $150,000 each, CPS violated board policy because these
over the department’s
contracts extended the value of the original contracts beyond
personnel files has
the threshold set by board resolution without receiving approval
reduced its ability to
ensure that it adequately from the board. By not following the department and city
maintains personnel files policies for competitively bidding contracts and seeking board
that contain the records
approval for contracts when required, CPS cannot ensure that
necessary to support
and explain hiring and it procures high-quality goods and services at the best available
promotion decisions. prices and adheres to the board’s control over the department’s
contracts. Additionally, although we did not find any significant
þ The individuals who
issues in the department’s administration of the 12 contracts we
occupy seven of the
exempt positions we reviewed, a November 2004 report prepared by the department’s
reviewed carry job titles internal auditor contained a finding that the department’s
and perform duties that
administration of a series of contracts and purchase orders for
are different from those
approved by the mayor the implementation of an automated supply chain management
and city council. project, valued at more than $9.7 million, was materially flawed.
The department’s accounts payable unit (accounts payable) is
responsible for overseeing payments to suppliers. However, for
16 of the 45 payments we reviewed (36 percent), although proper,
we found that accounts payable’s audit clerks did not ensure
that only authorized employees approved invoices for payment.
Rather, accounts payable relied on business unit managers to
enforce the department’s policies with respect to expenditures. As
a result, accounts payable cannot ensure that it paid only valid
claims for authorized goods and services.
CPS is also responsible for administering the department’s
participation in the city’s purchasing card (P-card) program.
The city initiated the P-card program—a program that uses
22 California State Auditor Report 2004-130 California State Auditor Report 2004-130 33
credit cards issued by a commercial bank—to provide a cost-
efficient procurement process for city employees. However, CPS
has not implemented procedures to use available information
on violations of P-card program policies, such as the results of
CPS audits of cardholders’ purchases and business unit staff
reports of P-card policy violations. Use of such procedures
would enable CPS to consistently assess compliance with, or
ensure uniform enforcement of, P-card program policies. These
policies restrict the uses for the P-cards, including prohibiting
the purchase of certain types of items. They also set daily and
monthly dollar limits on purchases and require business unit
staff to review purchases to ensure they are authorized and
approved. In addition, CPS has not provided clear guidance
to the department’s business unit managers for determining
the appropriate corrective action business units should take
against P-cards in response to P-card policy violations and clear
criteria for determining when it would be appropriate to restrict,
suspend, cancel, or deactivate P-cards.
Further, the department’s lack of central control over personnel
files has reduced its ability to ensure that it adequately
maintains personnel files that contain the records required by
department policy. For example, department policy requires
that documents that support and explain civil service hiring and
promotion decisions be kept in these files. These documents are
an important element of resolving discrimination complaints
that may arise against the department over its hiring or
promotion practices. Each business unit, which may be
located away from the department’s headquarters, maintains
personnel files for its employees. However, the business units
do not always ensure that these files are complete. As a result,
the department could not produce the documents necessary to
support and explain its hiring and promotion decisions for four
of the 12 civil service appointments we reviewed. In addition, the
department’s personnel files did not contain evidence that the
employees who occupied nine of the department’s exempt positions
possess the qualifications the department used to gain approval for
the exemption of the positions from the civil service rules by
the mayor and the city council. Further, according to research
conducted by the department’s human resources director for
seven of the exempt positions we reviewed, the individuals
who occupy them carry job titles and perform duties that are
different from the job titles and duties approved by the mayor and
the city council for these positions. By not using these positions
as approved, the department reduces the city’s control over the
department’s exempt positions and reduces the transparency to the
public of its hiring decisions for exempt employees.
22 California State Auditor Report 2004-130 California State Auditor Report 2004-130 33
RECOMMENDATIONS
To ensure that the department receives high-quality services
and materials at the best available prices, CPS should comply
with department and city competitive bidding policies when
awarding contracts for goods or services. In addition, CPS should
recognize when the contracts it awards are extensions of existing
contracts and seek board approval when the amended amount
exceeds the threshold contained in the department’s policy for
obtaining such approval.
Further, to improve its controls over the contracts awarded
for goods and services, CPS should promptly implement the
recommendations presented in the department’s internal
auditor’s November 2004 report on a series of contracts and
purchase orders for the department’s implementation of a
supply chain management system. CPS also should ensure that
its staff members sign contracts that obligate the department
only when they are authorized to do so.
In order to ensure that the department processes payments
correctly and to ensure that payments are made only for
authorized purposes, accounts payable should strengthen its
internal control procedures to include a process for verifying
that contract administrators at the business unit level review
and authorize invoices before approving them for payment.
To strengthen the oversight over the P-card program and to
obtain the information needed to evaluate the costs and benefits
of the program and minimize abuses, CPS should:
• Collect and use the information that results from CPS audits
of cardholders’ purchases and business unit staff reports of
P-card policy violations to track violations on an ongoing
basis, including repeat violations of P-card policy.
• Track and follow up business unit managers’ responses to
reports of suspected P-card policy violations that result from
CPS audits of cardholders’ purchases to ensure that the
corrective actions business unit managers take against P-cards
are effective and that policies are enforced consistently.
• Provide clear guidance for determining the appropriate
corrective action business units should take against P-cards
in response to violations and clear criteria for determining
when it would be appropriate to restrict, suspend, cancel,
44 California State Auditor Report 2004-130 California State Auditor Report 2004-130 55
or deactivate a P-card. Further, CPS should ensure the
uniform enforcement of such policies through its improved
monitoring efforts.
To ensure that it adheres to its policies for a single
comprehensive record for employees’ work history and uniform
filing and file retention of employee personnel records, the
department should consider changing the decentralized nature
of its personnel record keeping and establish a centralized
system, administered and maintained under the supervision
of the department’s director of human resources. In addition,
the department should seek approval from the mayor and city
council when it uses its exempt positions for duties other than
those previously approved by the city.
AGENCY COMMENTS
The department generally agrees with our recommendations,
except for those related to our findings on its contracting
procedures and its administration of the city’s P-card program.
Our comments follow its response. n
44 California State Auditor Report 2004-130 California State Auditor Report 2004-130 55
Blank page inserted for reproduction purposes only.
66 California State Auditor Report 2004-130 California State Auditor Report 2004-130 77
INTRODUCTION
BACKGROUND
The Los Angeles Department of Water and Power
(department) is the largest municipal utility in the
United States. The department had its beginning in
1902 when the city of Los Angeles (city) established the first
Board of Power Commissioners. In 1911 the city organized
the Los Angeles Department of Public Service to provide water
as well as electricity. The Department of Public Service was
superseded in 1925 when the city adopted a new charter that,
among other things, created the current department. The
department controls its own funds and has full responsibility
for meeting the electrical and water needs of its service area. It
provides electrical and water service almost entirely within the
city’s boundaries, to an area that encompasses 464 square miles
and a population of approximately 3.8 million.
A five-member Board of Water and Power Commissioners
(board) governs the department. Board members are appointed
by the mayor, subject to the approval of the city council, and
serve a term of five years. They may be removed by the mayor
without city council approval. Under the city charter, the board
is granted the possession, management, and control of the city’s
rights, lands, and facilities connected to providing water and
power to the city’s inhabitants and customers. In addition, the
board has the authority, subject to approval by city ordinance,
to set rates for water and power customers from time to time
as necessary to ensure that the rates are uniform for the nature
and quantity of service supplied, and are fair and reasonable. The
city charter also establishes a separate fund for the water system
and one for the power system to accumulate and account for the
revenues and expenditures of the water and power operations,
respectively, and grants the board control over the separate funds,
including the authority to appropriate and spend those funds.
The board has the authority to appoint a general manager for the
department, with the approval of the mayor and city council, and
may remove the general manager with the approval of the mayor.
The general manager administers the department’s affairs. The
department is organized into two functions—the water system
and the power system—each with its separate fund and directed
by its own chief operating officer. The department’s chief
66 California State Auditor Report 2004-130 California State Auditor Report 2004-130 77
administrative officer manages a number of the department’s
activities relating to the water and power systems, and the chief
financial officer manages the department’s financial affairs.
The water and power systems are further broken down into
major organizations commonly referred to as business units.
According to the financial analysis manager of the budget office,
each business unit is led by a director, manager, or assistant
general manager and may consist of various sections of varying
size. For example, under the general manager there are five
business units, under the corporate services division there
are 10 business units, and under employee relations there are
two business units. The department has 34 business units, each
with its own administrative sections to handle functions such as
personnel or budget coordination.
The department’s water system annually supplies an average
of 215 billion gallons of water to its 3.8 million consumers
through aqueducts that carry water from the eastern slope of
the Sierra Nevada, the Sacramento and San Joaquin rivers, the
Colorado River through purchases from the Metropolitan Water
District of Southern California, and groundwater wells through
its groundwater pumping rights. The water is delivered to
customers through a pipeline distribution system that extends
7,100 miles. Based on the department’s most recent audited
financial statements, for the fiscal year ending June 30, 2003,
the department’s water system generated approximately
$572 million in sales revenue and other income and had
roughly $554 million in operating and other expenses. After
adding resources contributed by others and grants for capital
projects and other activities and deducting transfers to the city,
the department retained almost $4.5 million in net income
from its water system operations. Figures 1 and 2 show the water
system’s total revenue and expenses for the fiscal year ending
June 30, 2003.
The department’s power system provides electricity through a
system of coal, natural gas, and large hydroelectric, nuclear, and
renewable energy sources. It receives its power from generating
plants in the Los Angeles basin and from facilities in Nevada,
Utah, and the Pacific Northwest. The power system has a
total generating capacity of 7,000 megawatts to serve a peak
Los Angeles demand of about 5,600 megawatts (one megawatt
equals one million watts) and maintains more than 6,000 miles
of overhead transmission lines and 4,200 miles of underground
distribution lines. Based on the department’s most recent
financial statements, for the fiscal year ending June 30, 2003,
88 California State Auditor Report 2004-130 California State Auditor Report 2004-130 99
FIGURE 1
Water System Revenues for Fiscal Year 2002–03
(in Millions)
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Source: Audited financial statements for the Water Revenue Fund for the fiscal year
ending June 30, 2003.
FIGURE 2
Water System Expenses for Fiscal Year 2002–03
(in Millions)
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Source: Audited financial statements for the Water Revenue Fund for the fiscal year
ending June 30, 2003.
the department’s power system generated approximately
$2.3 billion in sales revenue and other income and reported
almost $2.07 billion in operating and other expenses. After
adding resources contributed by others and grants for capital
projects and other activities and deducting transfers to the city,
88 California State Auditor Report 2004-130 California State Auditor Report 2004-130 99
the department retained almost $68 million in net income
from power system operations. Figures 3 and 4 show the power
system’s total revenue and expenses, respectively, for the fiscal
year ending June 30, 2003.
FIGURE 3
Power System Revenues for Fiscal Year 2002–03
(in Millions)
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Source: Audited financial statements for the Power Revenue Fund for the fiscal year
ending June 30, 2003.
FIGURE 4
Power System Expenses for Fiscal Year 2002–03
(in Millions)
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Source: Audited financial statements for the Power Revenue Fund for the fiscal year
ending June 30, 2003.
1100 California State Auditor Report 2004-130 California State Auditor Report 2004-130 1111
THE DEPARTMENT ANNUALLY TRANSFERS FUNDS
TO THE CITY
The Los Angeles City Charter (city charter) authorizes the
department to transfer surplus money at the end of each fiscal
year from the Water Revenue Fund (water fund) and the Power
Revenue Fund (power fund) to the city’s reserve fund. These
transfers must be authorized by city council ordinance and must
have the consent of the board. A 2001 department press release
quoted the mayor as saying that the transferred funds help the
city continue to provide vital services such as police and fire
protection, libraries, and recreational facilities.
Traditionally, the board has consented to a yearly transfer
of approximately 5 percent of the prior year’s audited gross
operating revenues for both the water and power systems.
However, beginning in fiscal year 2002–03, the board increased
the transfer to the city to 7 percent of the power system’s prior
year gross operating revenues each year. According to the board,
it did so to help the city through a fiscally difficult period. For
fiscal year 2003–04, the department transferred to the city more
than $27.6 million from the water fund and $150.2 million from
the power fund. In fiscal year 2004–05, the power fund made an
additional transfer of $60 million.
The board may elect to transfer funds in addition to the 5 percent
of the water system’s gross operating revenue and 7 percent of
the power system’s gross operating revenue that it transfers
to the city each year, as long as the transfers do not exceed the
restrictions in the department’s bond indebtedness for the two
funds or cause unfair or unreasonable rates to be imposed on the
department’s water and power customers. Under the covenants
for both funds’ bond debt, annual transfers of surplus money to
the city may not exceed the net income from the prior year; nor
may they reduce either fund’s surplus to less than one-third of
its respective total indebtedness.
The city charter establishes two separate funds related to water
and power revenues. All revenues related to the department’s
water assets must be deposited into the water fund, and all
revenues related to the department’s power assets must be
deposited into the power fund. Thus, the rates paid by water
and power customers are deposited into two separate, segregated
funds. The city charter expressly prohibits the transfer of money
from one fund to another or the use of the money in one fund
to pay the demands on another fund; however, the city charter
specifically provides that the city council may, by ordinance and
1100 California State Auditor Report 2004-130 California State Auditor Report 2004-130 1111
with the consent of the board in charge of the fund, direct surplus
money in the water fund or power fund to the city’s reserve fund
at the end of the year. The city charter also allows the transfer of
this money from the city’s reserve fund to its general fund after
the adoption of the city’s annual budget. Consequently, surplus
revenues in the water fund or the power fund may be transferred
to the city’s general fund to meet the city’s needs as defined in the
annual budget adopted by the city council.
Although the city charter permits the department to transfer
surplus funds from its water fund and power fund to the city’s
reserve fund, the department and the city have faced challenges
in court over the legalities of those transfers. For example, in
June 1999 two nonprofit groups and three individuals filed a
class action suit against the city and the department alleging
that they were overcharged for water services and that the
overcharges resulted in surplus funds that could be transferred
to the city. In addition, the suit charged that the surpluses
transferred represented an illegal tax because the payments
for water services that created the surpluses were essentially
property-related user fees or special taxes and, as such, required
voter approval. The courts dismissed the suit because the
plaintiffs did not show the rates were unreasonable, that the
rates constituted taxes, or that the transfers were unauthorized.
Currently, the city and the department are facing another
class action suit challenging their method for determining
the presence of surplus money in the water fund and power
fund and the making of subsequent transfers to the city. The
plaintiffs contend that the department’s water fund and power
fund cannot have surpluses as long as they have outstanding
debt to pay. The plaintiffs are seeking to block future transfers,
to require the city to return to the water fund and power fund
the transfers made since 2000, and to roll back the 11 percent
increase in water rates approved by the department and the city
in June 2004. According to the department’s audited financial
statements, as of June 30, 2003, the water fund was obligated to
repay approximately $1.4 billion in bonds and the power fund
was obligated to repay bonds totaling approximately $3.5 billion.
THE DEPARTMENT’S EMPLOYMENT PRACTICES ARE
SUBJECT TO THE CITY’S CIVIL SERVICE SYSTEM
As part of this audit, we were asked to review the department’s
personnel policies and procedures to determine whether they
comprehensively address hiring, promotions, and firing.
1122 California State Auditor Report 2004-130 California State Auditor Report 2004-130 1133
The city charter requires that the department administer its
personnel system under civil service rules developed by the city’s
Board of Civil Service Commissioners. The city charter allows
for few positions that are exempt from the civil service system.
These exempt positions include the members of the department’s
board, its general manager, two positions in the class of assistant
general manager, the chief financial officer, and a limited number
(up to 15) of other positions that require approval by the mayor
and city council and for which the educational, experience,
and other professional requirements for the positions justify
exemptions from civil service appointment.
In brief, the city’s civil service rules require that new employees
be hired and promotional appointments be made from a
certified list of eligible applicants who have passed open or
promotional examinations and are eligible for appointment
because they have been ranked among the highest scores on the
list. A panel of employees from within and outside the business
unit that is hiring or promoting interviews applicants to
determine those who are most qualified. Under the city charter,
the department may not discharge or suspend a civil service
employee without cause. The cause for discharge or suspension
must be written and presented to the affected employee and
the Board of Civil Service Commissioners. Employees who are
exempt from the civil service rules work at the pleasure of the
general manager. According to the department’s director of
human resources, as of June 30, 2004, the department had 8,109
civil service employees and 19 employees who were exempt
from the civil service rules.
SCOPE AND METHODOLOGY
The Joint Legislative Audit Committee (audit committee)
requested that the Bureau of State Audits (bureau) review certain
aspects of the department’s operations. Specifically, the audit
committee requested that the bureau review how and when the
department transfers money from its water fund and power fund
to the city as well as the department’s policies and procedures
regarding expenditures, contracting, and personnel practices.
To gain an understanding of the policy and legal provisions
regarding the activities covered in the audit request, we reviewed
the relevant articles of the city charter and its administrative
code, department manuals, relevant laws, board resolutions, and
city council ordinances. To determine whether the department
complied with the city charter when transferring funds to the
1122 California State Auditor Report 2004-130 California State Auditor Report 2004-130 1133
city, we reviewed the transfers and supporting financial records
and resolutions to identify the amount transferred to the city
since fiscal year 2001–02, to determine whether the board
and the city council followed the city charter in authorizing
the transfers, and to identify the rationale for permitting or
requiring transfers from the department to the city. In addition,
we reviewed the board resolutions and city council ordinances
and other documents supporting the transfers to determine
whether the transferred funds had been earmarked for any
special use by the city. We also reviewed the department’s
transfers to determine whether they complied with specific
restrictions in the covenants of the department’s outstanding
bond debt.
To determine whether the department’s expenditures are
for authorized purposes, we first reviewed and evaluated the
provisions from the city charter and city administrative code,
as well as the department’s purchasing manuals, to ascertain
whether the policies and procedures contained in them provide
adequate controls over the department’s expenditures. We next
selected a sample of 45 expenditures from fiscal year 2003–04
to determine whether the department adhered to the controls
we had identified. To select our sample, we obtained a report
of direct charges to the department’s water fund and power
fund. We then divided those direct charges into categories
according to the relative risk that the recorded expenditures
might have been for unauthorized purposes. Examples of
lower-risk expenditures include labor costs and lease payments,
and examples of higher-risk expenditures include those for
consultants or professional services. We selected our sample of
expenditures from only those categories we considered to be higher
risk. In addition, we selected a sample of 24 department purchases
made through the city’s purchasing card program. We traced the
expenditures in the sample to invoices, purchase documents,
authorizing signatures, and other supporting documents, such as
the city charter and purchasing manuals, to determine whether the
expenditures were for authorized purposes.
Similar to our tests of expenditures, for our tests of the
department’s contracting practices we reviewed the relevant
articles from the city charter, sections from the city’s
administrative code, and department manuals. In selecting our
sample, we obtained a list of contracts the department entered
into during fiscal year 2003–04 and divided the contracts
according to the risk that the department might not have
followed its procedures or that the language in the contracts
1144 California State Auditor Report 2004-130 California State Auditor Report 2004-130 1155
might not adequately define the scope of work to be performed
or the deliverables to be provided under the contract. Examples
of contracts that we considered to be lower risk include those
for lodging and memberships, while examples of higher-risk
contracts include those for professional services. We reviewed
the files for 12 contracts that we classified as higher risk to
determine whether the department had followed city and
department requirements for awarding and administering the
contracts. Although we have included in our report findings
regarding the department’s practices for awarding contracts,
we did not identify any significant issues in its administration
of the 12 contracts we selected for review. However, a report
prepared by the department’s internal auditor contained a
finding that the department’s administration of a series of
contracts and purchase orders with one vendor was materially
flawed. We present the internal auditor’s findings in Chapter 2.
Finally, we reviewed the city’s policies and procedures for hiring,
promoting, and firing employees. Using a report of personnel
actions for fiscal year 2003–04 prepared by the department’s
personnel unit, we selected a sample of those actions for civil
service employees. We also obtained a list of all the department’s
positions that are exempt from civil service. We then performed
tests to determine whether the department followed the
requirements of the city’s civil service rules, city ordinances, and
the city charter when hiring, promoting, or firing civil service
employees, and reviewed the department’s documents regarding
the selection of exempt employees. n
1144 California State Auditor Report 2004-130 California State Auditor Report 2004-130 1155
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1166 California State Auditor Report 2004-130 California State Auditor Report 2004-130 1177
CHAPTER 1
The Department’s Transfers of Money
to the City for General Use Are
Allowable and Comply With the
City Charter
CHAPTER SUMMARY
The Los Angeles Department of Water and Power (department)
followed the requirements of the Los Angeles City Charter
(city charter) when it transferred money from its Water
Revenue Fund (water fund) and Power Revenue Fund (power fund)
to the city of Los Angeles’ (city) reserve fund for transfers made
since fiscal year 2001–02. During that period, the department
transferred a total of $82.4 million from the water fund and
$574.7 million from the power fund. In addition to complying
with the provisions of the city charter, the department must
comply with the terms and conditions of its bond debt when
transferring surplus funds from the water fund and power fund to
the city. Our review of these transfers of surpluses from the water
fund and power fund found that the department also complied
with the restrictions of its bond debt regarding transfers made to
the city.
The department is not unique in its practice of transferring
money from its water fund and power fund to the city each year.
Fitch Ratings, a financial research and debt rating company, in
a study of 38 electrical power utility systems in 12 states and the
Virgin Islands, found that 32 (84 percent) of the utility systems
transfer money to city general funds. The amount of the transfers
averaged almost 6 percent of the utilities’ annual operating
revenue. This is similar to the annual amounts transferred to the
city from the department’s water and power systems.
TRANSFERS FROM THE WATER FUND AND POWER
FUND COMPLY WITH THE CITY CHARTER
The department followed the requirements of the city charter
when it transferred money from its water fund and power
fund to the city’s reserve fund for the transfers we tested.
1166 California State Auditor Report 2004-130 California State Auditor Report 2004-130 1177
Since fiscal year 2001–02, the department transferred a total of
$82.4 million from the water fund and $574.7 million from the
power fund. Table 1 shows the annual transfers from each fund.
TABLE 1
Transfers of Surplus Money From the Water Fund and
Power Fund Since Fiscal Year 2001–02
(Dollars in Millions)
Transferred Transferred
Fiscal Year Fiscal Year Amount— Amount— Percentage of
Surplus Transferred Water Fund Power Fund Revenues
2000–01 2001–02 $27,247 5%
2000–01 2001–02 $154,153 5
Additional
2000–01 2001–02 25,000 transfer
2001–02 2002–03 27,523 5
2001–02 2002–03 156,358 7
Additional
2001–02 2002–03 29,000 transfer
2002–03 2003–04 27,649 5
2002–03 2003–04 150,214 7
Additional
2002–03 2004–05 60,000 transfer
Totals $82,419 $574,725
Sources: Audited financial statements for the water fund and power fund, Board of Water
and Power Commissioners resolutions, and Los Angeles City Council ordinances.
Note: Transfers from the water fund and power fund are made in the fiscal year after the
surplus funds are earned.
As we discuss in more detail in the Introduction, the city
charter allows the department to transfer surplus money from
the water fund and power fund to the city’s reserve fund. The
city ordinances and Board of Water and Power Commissioners
(board) resolutions that authorize the transfers assign no specific
use to the transferred funds.
Currently, the board passes a resolution after the end of each
fiscal year consenting to a transfer to the city’s reserve fund of
5 percent of the water system’s gross operating revenue for the fiscal
year just ended and 7 percent of the power system’s gross operating
revenue. Beyond the traditional annual transfers, the board has
consented to additional transfers of funds from the power fund.
As shown in Table 1, the department made three additional
transfers from the power fund, ranging from $25 million to
$60 million, during the period we reviewed. According to the
1188 California State Auditor Report 2004-130 California State Auditor Report 2004-130 1199
board, the additional transfers were made to assist the city
through diffi cult fi nancial times. In fact, for the $60 million
additional transfer made in fi scal year 2004–05 from the fi scal
year 2002–03 power fund surplus, correspondence between
the city and the department shows that the city had requested the
additional funds to help it close its projected budget defi cit for fi scal
year 2004–05.
However, in July 2004 the board informed the mayor and the
city council that in future years the city should not rely on
fi nancial assistance from the department beyond the annual
7 percent transfer from the power fund and 5 percent transfer
from the water fund. The board cited the department’s fi duciary
responsibility to continue meeting its core mission of providing
the city’s residents and businesses with cost-effective, reliable,
and high-quality water and power, and to meet its own fi nancial
obligations. Specifi cally, the board cited obligations such as the
rising costs of health care and pension benefi ts and the operating
costs of generating electricity, combined with the modest
revenue growth and frozen customer electric rates, as having
placed pressure on the power fund’s net income.
As we discuss in the Introduction, although the department
complied with the city charter when it transferred these funds
to the city, it has faced challenges in the courts over the legality
of those transfers. The courts have dismissed one of these class
action lawsuits and a second is pending.
TRANSFERS FROM THE WATER FUND AND POWER
FUND COMPLIED WITH THE TERMS OF THE
DEPARTMENT’S BOND PROVISIONS
In addition to complying with the provisions of
the city charter, the department also must comply
Restrictions in the Department’s with the terms and conditions of its bonds when
Bond Provisions on Transfers From transferring surplus funds from the water fund and
the Water Fund and
power fund to the city. The department’s transfers
Power Fund to the City
since fi scal year 2001–02 complied with the
Transfers may not exceed the respective restrictions of the bond debt regarding its transfers
fund’s net income from the prior fi scal year. to the city.
Transfers may not leave surpluses in the
water fund or power fund that are less The board’s master bond resolution, which applies
than one-third of the respective fund’s total
to all the department’s bond issues, and the offi cial
indebtedness, including current liabilities.
statements associated with individual bond issues
constitute the contract between the department
and the owners of the department’s bond debt.
1188 California State Auditor Report 2004-130 California State Auditor Report 2004-130 1199
Because in these documents the department pledges the assets
of the water fund and power fund to repay bond debt, the
terms and conditions of the debt contain two restrictions on
the amount of money that can be transferred to the city each
year. These restrictions are described in the text box on the
previous page. When calculating the equity-to-debt ratios to
measure compliance with the second restriction shown in the
text box, upon the advice of its bond counsel, the department
uses only its long-term debt (due in more than one year) related
to borrowings, such as bonds, notes, and other evidence of
indebtedness as shown on its audited financial statements,
which also includes the current portions of those debts (due in
the forthcoming fiscal year). The comparisons of transfers from
the water fund and power fund to the prior year’s net income
and the remaining surpluses after the transfer to the two funds’
total indebtedness show that the department complied with the
restrictions of its bond debt. For example, Tables 2 and 3 show
that the water fund’s and power fund’s prior year’s net income
exceeded the amounts transferred for each of the three fiscal
years shown. Also, while the bonds’ restrictions require only that
the surplus remaining after the transfers must equal at least one-
third of the outstanding debt, Table 2 shows that the remaining
surplus for the water fund exceeded the total indebtedness for all
fiscal years presented, and Table 3 shows that the remaining surplus
for the power fund nearly equaled total indebtedness for one fiscal
year and exceeded total debt for the other two fiscal years.
TABLE 2
Restrictions and Water Fund Transfers to the City
(in Millions)
Fiscal Year Fiscal Year Fiscal Year
2001–02 Transfer 2002–03 Transfer 2003–04 Transfer
Amount transferred $ 27,247 $ 27,523 $ 27,649
Prior year’s net
income 101,037 84,159 32,021
Fund’s remaining
surplus 1,703,450 1,760,086 1,764,458
Total indebtedness $1,053,918 $1,045,551 $1,344,822
Source: Audited financial statements for the water fund for fiscal years 2000–01
through 2002–03.
Note: The approximately $300 million increase in total indebtedness shown for fiscal
year 2003–04 relates to fixed rate bonds issued by the department to pay for capital
improvements to the water system.
2200 California State Auditor Report 2004-130 California State Auditor Report 2004-130 2211
TABLE 3
Restrictions and Power Fund Transfers to the City
(in Millions)
Fiscal Year Fiscal Year Fiscal Year
2001–02 Transfer 2002–03 Transfer 2003–04 Transfer
Amount transferred $ 179,153 $ 185,358 $ 210,214
Prior year’s net
income 440,161 436,068 253,077
Fund’s remaining
surplus 3,194,813 3,445,523 3,482,848
Total indebtedness $3,446,582 $3,413,588 $3,395,268
Source: Audited financial statements for the power fund for fiscal years 2000–01 through
2002–03.
At the close of each fiscal year, the department’s general
manager and chief financial officer determine whether the
department can transfer the targeted percentages—5 percent of
the water system’s prior year gross revenues and 7 percent of the
power system’s prior year gross revenues, not to exceed the funds’
respective net earnings—based on a review of the operations of the
water and power systems, and they then make a recommendation
to the board. According to the assistant chief financial officer,
the department monitors its compliance with the bonds’
restriction on transfers based on equity-to-debt ratios through
its preparation of long-range financial plans. Each year the
department presents long-range financial plans to the board for
the water and power systems that contain a calculation of the
equity-to-debt ratio for the prior fiscal year and projections of
this ratio for five future fiscal years.
Transfers of funds from the water and power systems have
another implication for the department’s bonds. The practice of
transferring funds to the city can affect the department’s credit
rating, thereby affecting its cost of borrowing funds for needed
capital projects. Maintaining a desirable credit rating allows the
department to sell bonds at the lowest available interest rate.
For bonds the department issued during 2001 and 2004, Fitch
Ratings, Moody’s Investors Service (Moody’s), and Standard &
Poor’s ratings services rated the department as a very low credit
risk, with a strong capacity to meet its financial commitments.
Therefore, the department’s transfers of surpluses from the water
fund and power fund do not appear to affect the funds’ credit
ratings negatively.
2200 California State Auditor Report 2004-130 California State Auditor Report 2004-130 2211
TRANSFERS OF UTILITY FUNDS TO CITY FUNDS ARE
COMMON
The department is not unique in its practice of transferring
surplus money from its water fund and power fund to the city
each year. In its June 2003 Public Power Financial Peer Study, Fitch
Ratings, a financial research and debt rating company, presented
financial information for 38 electrical power utility systems in
12 states and the Virgin Islands. Included in the financial data
is information on transfers of funds from the utility systems to
The percentages city general funds. Thirty-two of the 38 utility systems in the
transferred by the study (84 percent) transfer money to city general funds. Those
department are fairly transfers ranged from 14 percent to 0.2 percent of the utilities’
close to the annual annual revenues, with an average transfer amounting to almost
average transferred by 6 percent of revenue. Therefore, the percentages transferred by
other utilities. the department are fairly close to the annual average transferred
by other utilities.
The department provided a historical perspective on its
transfers to the city. According to the department, it originally
transferred money to the city to repay general obligation
bonds and general fund revenues the city used to finance the
construction of waterworks facilities in the early 1900s. The
earliest readily available audited financial statements, for the
year ending December 31, 1917, show a liability to the city of
slightly more than $16 million. This liability changed through
the years because of the issuance of additional debt, payment
of bond principal and interest from city funds, and payments
to the city by the department. From 1935 through 1946, the
department made annual transfers to the city to reduce the
debt. Those transfers ranged from 3 percent to 15 percent of
gross revenues, with most transfers in the range of 5 percent
to 7 percent. Beginning in 1947, the following formula was
used to determine the annual payment: 2 percent of the earned
surplus balance at the close of the second preceding fiscal year,
but not more than 5 percent of gross operating revenue. In all
instances, the 5 percent limit applied, and this was the beginning
of the department’s practice of making the 5 percent transfers. The
reference to the 2 percent of earned surplus was dropped in 1951.
The department repaid its liability to the city by June 30, 1960,
but the 5 percent annual transfers continued. The formula was
changed in 1961 to the current formula of 5 percent of total
gross operating revenue for the prior fiscal year. As we discussed
previously, the board voted in May 2002 to raise the percentage
transferred from the power fund to 7 percent of gross revenues, and
the transfers from both the water fund and power fund are subject
to the availability of net income and targeted debt-to-equity ratios.
2222 California State Auditor Report 2004-130 California State Auditor Report 2004-130 2233
In an August 12, 2004, letter to the Joint Legislative Audit
Committee, the department’s acting general manager cited a
research report by Moody’s as further rationale for the transfers.
In this report, a June 2003 Special Comment paper titled Moody’s
Perspective on Municipal Electric Utility General Fund Transfers,
Moody’s presented its opinion on the proper role of utility
transfers to a municipality’s general fund. In answer to the
question of whether general fund transfers are merely hidden
taxes, a way to take advantage of available cash, or whether
transfers have a legitimate role in municipal finance, Moody’s
was of the opinion that a reasonable return on a municipality’s
investment in its utility enterprise remains an established basis
for transfers of surplus revenues to a municipality’s general fund.
However, Moody’s cautioned that there are numerous examples
of abuses regarding transfers, and that the establishment of a fair
and equitable return to the municipality for its investment is
sometimes left to the political imagination, which may result in
a drain on enterprise revenues and a pressure on operations.
Moody’s concluded that a sound general fund transfer policy
that is stable and well-defined and that determines annual
With the exception of transfer levels is superior to an open-ended annual budget
three supplemental issue, driven every year by the revenue needs of the general
transfers that it has fund. Moody’s further stated that a municipal policy decided
told the city it no longer by the local governing body with full input from the utility
can depend on, the enterprise’s management that sets transfer levels based on utility
department practices profitability or is linked to operating and financial performance
the type of transfer standards is clearly the soundest type of policy. Moody’s cited as
methodology that an example a policy that establishes the transfer as a reasonable
Moody’s has concluded is percentage of gross revenues or net revenues, characterizing
sound policy. such a policy as giving predictability for both annual budget
and capital improvement planning for the utility and for
city government. With the exception of three supplemental
transfers that it has told the city it no longer can depend on,
the department practices the type of transfer methodology that
Moody’s has concluded is sound policy. n
2222 California State Auditor Report 2004-130 California State Auditor Report 2004-130 2233
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2244 California State Auditor Report 2004-130 California State Auditor Report 2004-130 2255
CHAPTER 2
The Department Needs to Improve
Its Controls Over Contracts,
Expenditures, and Personnel Records
CHAPTER SUMMARY
The Los Angeles Department of Water and Power
(department) needs some improvement in its oversight of
its business units’ contracts, expenditures, and personnel
records. In our review of 12 contracts, we found that the
department’s Corporate Purchasing Services (CPS) did not always
process its contracts in accord with the city of Los Angeles
(city) and department competitive bidding requirements and
did not always obtain appropriate approval from the Board of
Water and Power Commissioners (board). CPS is responsible for
processing contracts and purchase orders in compliance with
city and department rules. By not following the department and
city policies for competitively bidding contracts and not seeking
board approval for contracts when required, CPS cannot ensure
that it procures high-quality goods and services at the best
available prices and does not thwart the board’s control over the
department’s contracts. Further, an internal audit report released
in November 2004 highlighted several issues, some serious and
material, with the department’s administration of a series of
contracts and purchase orders issued to one vendor valued at
more than $9.7 million.
In addition, the department’s accounts payable unit did not
ensure that only authorized employees approved invoices for
payment. As a result, accounts payable cannot be sure that it
paid only valid claims for authorized goods and services.
CPS is also responsible for administering the department’s
participation in the city’s purchasing card (P-card) program,
which uses credit cards issued by a commercial bank to provide
a cost-efficient procurement process for city employees.
The program’s policies restrict the use of P-cards, including
prohibiting the purchase of certain types of items and setting
daily and monthly dollar limits for purchases, and require that
the department’s business unit staff review all purchases for
appropriateness and ensure that all purchases are approved
2244 California State Auditor Report 2004-130 California State Auditor Report 2004-130 2255
properly. However, CPS has not implemented procedures to
effectively assess compliance with, or ensure the uniform
enforcement of, these policies.
Further, the department’s lack of central control over personnel
files has reduced its ability to ensure that it adequately maintains
personnel files containing the records required by department
policy. Each business unit, which may be located away from
the department’s headquarters, maintains personnel files for
its employees. Department policy requires that documents
supporting and explaining decisions regarding hiring and
promotions be kept in these files. However, the business units
do not always ensure that these files are complete. As a result,
the department could not produce the documents necessary to
support and explain its hiring and promotion decisions for four
of the 12 civil service appointments we reviewed.
In addition, the department’s personnel files did not contain
evidence that the employees who occupy nine of the
department’s 19 positions that are exempt from civil service
requirements (exempt positions) possess the qualifications the
department used to exempt the positions from civil service
rules. Further, according to research conducted by the department’s
director of human resources, the individuals who occupy seven of
the exempt positions we reviewed carry job titles and perform duties
that are different from the job titles and duties approved by the
mayor and the city council in exempting these positions.
CORPORATE PURCHASING SERVICES DID NOT
ALWAYS FOLLOW ITS OWN AND THE CITY’S POLICIES
FOR COMPETITIVELY BIDDING CONTRACTS FOR
GOODS AND SERVICES
CPS is responsible for processing contracts and purchase orders
in compliance with city and department rules. However, CPS
did not comply with the department’s and the city’s competitive
bidding policies for two of the 12 contracts we reviewed. One
contract was the third of three consecutive one-year contracts
awarded to the same vendor for graphic art and design services,
valued at $149,500 each. CPS sought competitive bids for the
first of the three contracts but issued the other two contracts to
the vendor without seeking competition. The combined total of
these three contracts is $448,500.
2266 California State Auditor Report 2004-130 California State Auditor Report 2004-130 2277
According to the department’s manual for personal and
According to the professional services contracts, various expert services usually
department’s manual for can be performed by more than one vendor and should be
personal and professional awarded via competitive bid. The manual lists examples of the
services contracts, various types of services that should be bid, including photographic,
expert services usually printing, and publication services. In addition, the city’s
can be performed by administrative code requires the department to seek competitive
more than one vendor bids when practicable. It states that in all cases in which bids
and should be awarded are not required by the city charter, competitive proposals or
via competitive bid. bids shall be obtained as far as is reasonably practicable and
compatible with the city’s interests. However, the city’s
administrative code also exempts certain personal services
contracts that are less than $2 million from that requirement.
The department has construed this provision to exempt
most personal services contracts from competitive bidding.
Nonetheless, the department’s policy still urges competitive
bidding. Because CPS did not adequately explain why obtaining
competitive bids for the contract was not in the city’s interests,
we believe CPS should have followed its policy and sought bids
for this contract, as well as the preceding contract. By applying
the exemption from competitive bidding requirements so
broadly, CPS cannot ensure that it procures high-quality goods
and services at the lowest cost.
According to CPS’s administrative services manager, the contract
we reviewed was for an ongoing need, and CPS decided that
it was not practical to prepare a request for proposals (RFP)
each year. Instead, it issues an RFP once every three years for a
one-year contract. For the second and third years of the three-
year cycle, CPS awards without competition two one-year
contracts to the same vendor with the same terms as the first
contract. However, when we asked the administrative services
manager why it was not practical to prepare an RFP for these
contracts, she was not consistent in her answer and did not
fully address our question. For example, the manager stated
that few expenditures were charged against these contracts
(annual expenditures ranged from more than $6,200 to almost
$23,000), so it was more efficient and effective and in the best
interest of the department and the city to issue two subsequent
one-year contracts to the same vendor with the same terms
and conditions as the one that originally was put out to bid.
However, when we asked why CPS awarded contracts valued at
$149,500 that traditionally have so little charged against them,
the manager replied that it is difficult to anticipate projects
requiring the services provided by this contract. Therefore,
CPS executes contracts in large enough amounts to cover any
2266 California State Auditor Report 2004-130 California State Auditor Report 2004-130 2277
unexpected requirements that may occur. However, it is not
clear from the manager’s statements how the expenditures from
these contracts can be both low and difficult to anticipate.
Further, according to the manager, CPS follows this practice
for certain services for which there is an ongoing need.
When we asked the manager to point us to the section of
the administrative code that allows CPS to award these two
subsequent contracts without seeking competitive bids, she
stated that these requirements have become an issue of legal
interpretation and referred us to the city attorney’s office.
When we contacted the assistant city attorney assigned to the
department, he directed us to Section 10.37.8 (Article 11) of the
city’s administrative code, which allows “service contracts” less
than $2 million to be awarded without competitive bids.
Article 11 requires the city’s service contractors to provide
a living wage to their employees, in order to maximize the
quality and quantity of services rendered by those employees.
It specifically focuses on service contractors who represent the
public face of the city, such as those whose employees work at
the terminals at Los Angeles International Airport, the San Pedro
Port, and golf courses and recreational centers operated by the
city’s Department of Parks and Recreation. Therefore, Article 11
defines a service contract as one that is primarily for services
furnished to or for the city to which any of the following applies:
• At least some of the services rendered are provided by
employees whose work site is on property owned by the city.
• The services could feasibly be performed by city employees
if the awarding authority had the requisite financial and
staffing resources.
• The designated administrative agency has determined in
writing that paying service contract employees a living wage
would further the city’s proprietary interests.
Article 11 also gives examples of the types of employees it is
intended to cover, such as hotel employees, restaurant and
food service employees, janitorial employees, security guards,
and clerical employees. The contract we reviewed is for the
preparation of finished artwork and other related graphic
services—work that does not resemble the services performed by
the employees listed in Article 11 of the administrative code.
2288 California State Auditor Report 2004-130 California State Auditor Report 2004-130 2299
Our counsel believes Article 11 could have been read to apply
only to those types of services listed in the article and not
specialized professional service contracts such as graphic art
services. Another provision of Chapter 1 of the Administrative
Code, Section 10.15 of Article 2, suggests that professional,
scientific, expert, technical, or other special services—which
seem to include graphic design services—are generally subject
to competitive bidding unless the department makes certain
According to the assistant findings. However, according to the assistant city attorney
city attorney assigned assigned to the department, the department has broadly
to the department, the construed Article 11 to exempt most personal services contracts
department has broadly for less than $2 million from competitive bidding, citing a
construed Article 11 to provision of Article 11 that requires “service contract” to
exempt most personal be interpreted liberally to further the policy of the article.
services contracts for According to another assistant city attorney not affiliated
less than $2 million with the department, the Los Angeles city attorney’s office
from competitive has similarly construed Article 11 to exempt from competitive
bidding. However, this bidding all personal services contracts valued at less than
interpretation has the $2 million entered into by the city. Because the exemption
effect of exempting the threshold is so high, the interpretation of Article 11 by the
vast majority of personal department and the city has the effect of exempting the vast
services contracts from majority of personal services contracts from the competitive
the competitive bidding bidding requirements that apply to other kinds of contracts.
requirements that apply to In practice, according to the assistant city attorney, most city
other kinds of contracts. departments have policies or practices more restrictive than
Section 10.37.8 that result in the majority of such contracts
being procured through a competitive selection process. For
example, despite this broad reading of the exemption from
competitive bidding requirements of the administrative
code, the department’s actual policy is to encourage use of
competitive bidding for personal services contracts, which it
did when it awarded the first in a series of contracts to this
vendor. However, the subsequent awards to this vendor were not
bid competitively.
Moreover, the CPS staff member who executed the contract
was not authorized to do so. As stated previously, the contract
we reviewed was valued at $149,500. However, the CPS staff
member who signed the contract had authority at that time to
sign contracts only up to $50,000 in value. CPS’s administrative
services manager agreed that the staff member was not
authorized to sign this contract and stated management would
investigate why this occurred. This same CPS manager later
asserted that this staff member received verbal authorization to
sign this contract from the former assistant purchasing director.
However, the department’s purchasing policies do not provide
2288 California State Auditor Report 2004-130 California State Auditor Report 2004-130 2299
for such verbal authorizations. In addition, the second and third
contracts were awarded to this vendor for the same products
and services and with the same terms as the original contract,
making these two successive contracts extensions of the first
contract. As such, these two successive contracts were also
subject to board approval. In the next section, we discuss the
requirement that the department seek board approval and, in
certain circumstances, city council approval for its contracts.
CPS also processed another contract we reviewed, valued
at $20,000, without obtaining any informal bids, despite
department policy requiring its business units to solicit such
bids for contracts valued at less than $25,000. Unless it processes
all its contracts in compliance with city and department
competitive bidding requirements, CPS risks paying more for its
contracts because of decreased competition.
CORPORATE PURCHASING SERVICES AWARDED
CONTRACTS FOR GOODS AND SERVICES WITHOUT
OBTAINING REQUIRED APPROVALS
CPS does not always obtain required approval for the contracts
it awards. The city’s administrative code requires that the board
approve contracts valued at more than $150,000 or lasting more
than one year. In addition, a 1989 board resolution prohibits the
department from granting through amendments, extensions of
existing contracts that increase the value of the original contract
to more than $100,000. According to CPS’s administrative
services manager, the city attorney’s office advised CPS that
change orders, which amend existing contracts, are a form
of contract, and as such an April 2000 board resolution that
increased the general manager’s authority to execute contracts
up to a value of $150,000 also increased the general manager’s
authority to change contracts up to a total amended value of
$150,000. Further, the city’s administrative code states that
contracts or contract amendments that are not bid competitively
For two of the 12 contracts and obligate the department for a period of more than three
we reviewed, CPS appeared years must be approved by the city council.
to split contracts, which
had the effect of avoiding For two of the 12 contracts we reviewed, CPS appeared to split
the required board contracts, which had the effect of avoiding the required board
approvals. approvals. One was the last of six contracts awarded to the
same vendor in less than five years for video equipment rental
and video assistance. CPS awarded this vendor one contract in
October 1999 valued at $100,000 and, between September 2000
and December 2003, competitively awarded five subsequent
3300 California State Auditor Report 2004-130 California State Auditor Report 2004-130 3311
contracts, each valued at $150,000, thereby falling under the
threshold for formal approval by the board.1 According to CPS’s
administrative services manager, none of these six contracts
required board approval.
As Table 4 shows, the department spent at least 90 percent of the
funds for three of the first five contracts at least three months
before the contract expired. For example, the department had
paid invoices totaling 99 percent of the value of contract 3
almost four months before the contract term ended. Further,
after the first contract, four of the five subsequent contracts had
terms that began before the end of the previous contract’s term.
For example, contract 4 started on March 1, 2002, four months
before the term of contract 3 ended on July 1, 2002. Because
CPS awarded these contracts so frequently, the subsequent five
contracts are essentially extensions of the original contract,
thereby increasing the original contract’s value beyond the
threshold prohibited by board resolution. By not obtaining
required board approval, CPS thwarts the board’s control over
the department’s contracts intended by board resolution.
TABLE 4
Department Video Equipment Rental Contracts With
the Same Vendor
Contract Percent Final
Contract Start Contract Total of Total Payment Contract
Number Date Value Expended Expended Date End Date
1 10/11/99 $100,000 $ 96,035 96% 6/7/00 10/10/00
2 9/12/00 150,000 147,190 98 7/17/01 9/11/01
3 7/2/01 150,000 147,754 99 3/5/02 7/1/02
4 3/1/02 150,000 145,930 97 2/26/03 2/28/03
5 4/15/03 150,000 135,586 90 12/10/03 4/14/04
6 12/22/03 150,000 110,386 74 8/26/04 12/21/04
Source: Department contract and expenditure files.
1 According to CPS’s administrative services manager, board approval formerly was
necessary for contracts valued at more than $100,000. In April 2000, the administrative
code was changed to allow departments to execute contracts valued up to $150,000
without board approval.
3300 California State Auditor Report 2004-130 California State Auditor Report 2004-130 3311
When we asked why it was exempt from obtaining board
approval for any of these contracts, CPS’s administrative services
manager responded that all the contracts are price and time
contracts for specified materials and services with a contractual
period of more than six months and that these contracts expire
when either the time or the dollar limit is reached. She further
stated that the new contracts went through a competitive
bidding process and were awarded under the general manager’s
authority of up to $150,000. However, because CPS failed to explain
adequately how this practice of awarding a series of contracts that
fall just below the threshold for board approval is allowed by board
resolution, we conclude that CPS should have submitted all the
subsequent contracts to the board for its approval.
In the previous section, we discussed a contract with similar
extensions for which CPS should have sought board approval. In
that case CPS twice extended the original contract with a value
of $149,500 and one-year duration, increasing the contract’s
value to $448,500 and extending its term for a total duration of
three years without seeking board approval.
In March 2003, the Los Angeles City Controller (city controller)
released an audit report that identified a similar finding.
According to the city That report found instances of the department entering into
controller’s report, two or more contracts with a single contractor for the same
CPS staff reported that or consecutive terms and similar services. According to the
they avoid the lengthy report, CPS staff reported that they avoid the lengthy process
process of obtaining of obtaining board approval on many contracts by issuing
board approval on many new identical contracts for a new term. In response to the city
contracts by issuing new controller’s findings, the report states, CPS established a unit to
identical contracts for a analyze purchasing trends and to identify more efficient ways
new term. to contract, as well as to identify contract splitting and other
means of avoiding contract requirements. However, according
to its administrative services manager, CPS suspended the unit’s
efforts and redirected the resources of this unit to respond
to the high volume of purchasing requisitions from business
units. She stated that CPS continues to request additional
personnel to implement various reforms and recommendations
from the board, the city controller, and the mayor’s office
regarding the department’s contract management.
3322 California State Auditor Report 2004-130 California State Auditor Report 2004-130 3333
THE DEPARTMENT’S INTERNAL AUDITOR IDENTIFIED
SEVERAL ISSUES RELATED TO ITS ADMINISTRATION OF
A SERIES OF CONTRACTS
In November 2004, the department’s internal auditor issued an
audit report that identified multiple findings related to a series
of contracts and purchase orders the department awarded to a
vendor beginning in 1999. Originally, the department issued
a purchase order valued at $80,000 to begin implementing
an automated supply chain management project, including
electronic requisition and bid processes. Subsequently, the
department amended the original purchase order and awarded
the same vendor five contracts plus four amendments and one
additional purchase order. In total, the series of contracts and
purchase orders awarded to the vendor were valued at more than
$9.7 million.
Despite having received more than $9.6 million in payments
from the department, the vendor gave one day’s notice before
abandoning the automated supply chain management system
contracted for. According to the internal auditor’s report,
in June 2004 the request for a $2.78 million increase in one
of the contracts to provide additional services and system
enhancements was pulled from the board’s agenda. In July 2004
the vendor terminated its services to the department and turned
off the system. As a result of the project’s failure, the internal
auditor reviewed the performance of the department and the
vendor during the project and determined that the department
had not fully adhered to its guidelines and procedures and had
made some inappropriate payments to the vendor.
The department had not
sought competitive bids For example, the department had not sought competitive
for any of the purchase bids for any of the purchase orders or contracts it awarded
orders or contracts it to the vendor, but instead claimed that the vendor was the
awarded, instead basing sole source for the services the department sought, based on its
its decision on its prior prior experience with the vendor. However, the internal auditor
experience with the vendor. determined that the department’s prior experience with this vendor
However, the internal did not justify it as a sole-source provider for the initial purchase
auditor determined that order. In addition, the internal auditor found other problems
the department’s prior with the contracts awarded to this vendor and the department’s
experience did not justify administration of the project, including the following:
claiming this vendor as the
sole-source provider for the • The department’s payments on one of the contracts and an
initial purchase order. amendment exceed their combined value by almost $150,000.
3322 California State Auditor Report 2004-130 California State Auditor Report 2004-130 3333
• The department overpaid invoices where the vendor had
overcharged for labor and direct expenses totaling about
$22,600.
• The department has yet to recover the unused portion of the
$275,000 it prepaid for maintenance fees. The vendor has not
earned all these prepaid fees because of its early termination
of services.
• The department has yet to recover two servers from the
vendor’s premises, costing more than $13,000, which it
purchased to support the system.
• The department failed to include in one contract a refund or
reimbursement clause that would have facilitated a prompt
refund of the amounts the department has paid that the
vendor did not earn. The department also failed to include a
“right to audit” clause in this same contract and one other.
• The department could not locate a complete administrative
file for the purchase orders and contracts, which may make
it more difficult for the department to resolve contract issues
and disputed payments.
As a result of its findings, the internal auditor made
recommendations to the department, including the following:
• CPS should provide sufficient justification for sole-source
contracts.
• Contract administrators should monitor payments to vendors
to ensure that they do not exceed the contract’s limits.
• CPS should refer the vendor’s early termination of one
contract to the city attorney’s office.
• CPS should seek to recover overpayments, unearned prepaid
fees, and property from the vendor.
• CPS should ensure that contracts include the clauses necessary
to protect the department’s interests.
On December 22, 2004, the department responded to the
internal audit—agreeing to implement all the report’s
recommendations except those to recover overpayments,
unearned prepaid fees, and property from the vendor. For those
3344 California State Auditor Report 2004-130 California State Auditor Report 2004-130 3355
recommendations, the department stated that since litigation
was pending, it would defer to the city attorney’s office to affect
the appropriate resolution.
THE ACCOUNTS PAYABLE UNIT DOES NOT ENSURE
THAT EXPENDITURES ARE AUTHORIZED PROPERLY
The department’s accounts payable unit does not have a system
to verify that department staff at the business unit level who are
assigned to oversee contractors’ work (contract administrators)
approve invoices for payment. According to the department’s
contract administrative manual, the contract administrator’s
role is to ensure that the vendor and the department fulfill their
respective commitments contained in the contract, including
approving deliverables and reviewing and certifying proper
invoices for payment. The department’s Financial Services
Administrative Manual, the manual that provides guidance to
the accounts payable unit, states that before an invoice can be
paid, an accounts payable audit clerk must check it against the
purchase authority (a purchase order, a sub-purchase order, a
contract or legal agreement, or a board resolution), verify that
the goods or services invoiced have been received, and verify
that the invoice or request for payment has been approved
by the contract administrator. If followed, these controls
provide assurance that payments are made only for authorized
purposes. However, our review of the department’s practices
and expenditure transactions found that accounts payable relies
on the business units to ensure that only authorized employees
approve payments to vendors.
In our review of 45 payments made to vendors in fiscal year
When we asked accounts 2003–04, we found that the accounts payable audit clerks check
payable how it verified invoices and vouchers only for a signature, initials, or a stamp
that each invoice was of approval from the respective business unit before processing
approved by the contract payments to vendors. They did not check to verify that the
administrator, the assistant individual who initialed the invoice or voucher was, in fact,
manager stated that the contract administrator. When we asked accounts payable
accounts payable is not how it verified that each invoice was approved by the contract
overly concerned with who administrator, the assistant manager stated that accounts payable is
is approving an invoice. not overly concerned with who is approving an invoice. According
to the assistant manager, accounts payable’s concern is that the
contract has been approved and that the invoice is billed according
to the terms of the contract—it is the contract administrator’s
responsibility to review and approve the invoice. Because it has
not ensured that the appropriate contract administrator has
reviewed and approved the invoice, accounts payable cannot be
3344 California State Auditor Report 2004-130 California State Auditor Report 2004-130 3355
certain that payments are authorized properly. Therefore, the
department is at a higher risk of making payments for services
that have not been received or for services outside the scope or
limits of the purchase authority.
We found that many payments approved by the business units
Accounts payable audit were approved by people other than the contract administrator,
clerks have no way such as an engineer or a project manager. Specifically, although
of knowing whether made for appropriate purposes, for 16 of the 45 payments
appropriate staff at the we tested (36 percent), someone other than the contract
business unit approve administrator approved the invoice for payment. Although we
an invoice because they believe it might be reasonable that these individuals review the
do not have a system to respective invoices because they may be the ones with the most
check whether the person direct knowledge of the service that was provided, in failing to
who initialed or stamped verify that the contract administrator approved the invoices,
an invoice is the one accounts payable is disregarding a procedure required by the
authorized to do so. Financial Services Administrative Manual that was intended to
prevent unauthorized payments. As a result, accounts payable
audit clerks have no way of knowing whether appropriate staff
at the business unit approve an invoice because they do not
have a system to check whether the person who initialed or
stamped an invoice is the one authorized to do so.
CORPORATE PURCHASING SERVICES DOES NOT
OVERSEE THE PURCHASING CARD PROGRAM
ADEQUATELY
The department’s board adopted the city’s P-card program in
1996—a program that uses credit cards issued by a commercial
bank—for the purpose of establishing a more efficient, cost-effective
method of paying for transactions involving small dollar amounts.
CPS manages the P-card program. The Purchasing Card Program
Cardholder Manual (P-card manual) states that CPS use both internal
management controls and the P-card system’s reporting features
to ensure that P-card policies and procedures are followed.
However, our review of the department’s practices found that
CPS does not monitor adequately nor uniformly enforce P-card
policies and therefore cannot ensure that it minimizes abuses of
the program, such as unallowable or inappropriate purchases.
Further, despite similar findings by the department’s internal
auditor in 2001, CPS has not taken adequate steps to improve its
procedures and strengthen its internal controls.
3366 California State Auditor Report 2004-130 California State Auditor Report 2004-130 3377
CPS says its limited personnel resources are a barrier to
implementing the prior audit recommendations. CPS’s
administrative services manager stated that CPS has
implemented procedural changes, such as changing the way
business units are notifi ed of P-card violations and expanding
the allowable uses of the P-card, to fulfi ll the program’s goal of
being a more effective and effi cient way for the department to
purchase thousands of items. However, because CPS does not
monitor P-card violations effectively or consistently exercise
its authority to suspend and/or deactivate P-cards when
appropriate, it cannot evaluate the costs and benefi ts of the
program and determine whether it is minimizing abuses.
Corporate Purchasing Services Does Not Monitor P-Card
Activities Adequately
Every month CPS audits 20 percent of the cardholders with
activity on their cards for compliance with P-card policies. Yet,
CPS has not taken steps to use this information to monitor the
compliance level of the program better.
The P-card manual prohibits some actions and the
use of P-cards to purchase certain items, including
Prohibited P-Card those listed in the text box. However, based on the
Purchases and Actions reports of potential violations found by CPS in its
monthly audits, cardholders do not always comply
• Items available in-house or through
with the manual. We asked CPS to provide copies
existing contracts.
of its violation reports, which it compiles quarterly
• Computer hardware or software without
based on monthly audits, on the violations found
approval from the department’s information
technology unit. for fi scal year 2003–04. CPS was able to provide the
reports only for July 2003 through December 2003
• Communications devices and services.
and the month of March 2004. According to
• Car washes, diesel fuel, or gasoline.
CPS, the report for the period April 2004 through
• Travel expenses. June 2004 has not yet been approved, and
the potential violations found in January and
• Offi ce supplies.
February 2004 were omitted inadvertently from the
• Other personal expenses. reports distributed to business units for the quarter
• Splitting purchases to circumvent January through March 2004.
individual purchase limits.
In our review of the potential violation reports
Source: Purchasing Card Program Cardholder Manual.
covering the period from July 2003 through
December 2003 and for March 2004, we noted
358 potential violations found by CPS. As shown
in Table 5 on the following page, other than administrative
violations, such as submitting documents late and missing
approval signatures, the most common P-card violation
3366 California State Auditor Report 2004-130 California State Auditor Report 2004-130 3377
during the seven-month period was the splitting of purchases
Other than administrative to circumvent maximum charge limits. Other common
violations, such as violations—those occurring more than 50 times—were the
submitting documents purchase of prohibited items and the purchase of items available
late and missing approval through an existing contract.
signatures, the most
common P-card violation Similarly, in our testing of 23 P-card purchases made in fiscal
during the seven-month year 2003–04 and one made in fiscal year 2002–03, we found
period was the splitting of one purchase made for a prohibited item, one case in which the
purchases to circumvent cost of a purchase was split to circumvent the daily purchase
maximum charge limits. limit, and one purchase in which the amount charged to the
P-card was $168.87 more than the amount on the vendor’s
invoice the employee submitted to support his purchase on
behalf of the department. In addition, we found that for nine of
the 24 purchases, the receipts did not contain the cardholder’s
name or signature, and therefore we could not verify that the
authorized cardholder purchased the items. Moreover, there
were three other purchases for which someone other than the
authorized cardholder signed the receipts, in violation of the
policy spelled out in the P-card manual. According to CPS, card
sharing has decreased significantly since 2001. However, CPS
was unable to provide documentation to support this claim.
TABLE 5
Potential Violations Found in Corporate Purchasing Service’s Monthly P-Card Audits
July Through October Through March
Type of Violation September 2003 December 2003 2004* Totals
Item purchased was available through an existing contract 13 15 24 52
Item purchased was prohibited 33 6 15 54
Cost of item purchased was split to circumvent maximum
charge limits 83 9 12 104
Item purchased without memo of approval for
computer hardware or software 3 3 0 6
Item purchased was an unallowable communications device 1 0 2 3
No receipt was submitted 12 11 5 28
Cardholder did not submit required documents 28 0 7 35
Cardholder exceeded daily transaction limit 0 0 1 1
Cardholder exceeded monthly transaction limit 0 0 1 1
Administrative policies were not followed 56 14 4 74
Totals 229 58 71 358
Source: Purchasing card violations reports.
*CPS was unable to provide violations data for January and February 2004. According to CPS’s administrative services manager,
the potential violations found in these months were omitted inadvertently from the quarterly violation report. In addition, the
P-card administrator indicated that the audit results for April 2004 through June 2004 were still pending approval.
3388 California State Auditor Report 2004-130 California State Auditor Report 2004-130 3399
Although CPS is aware of the types of violations we
encountered in our testing, it has not taken steps to ensure that
the violations are not repeated, nor has it attempted to use the
information it receives to set performance goals or determine
what an acceptable violation rate might be. According to
CPS, the actual number of violations from monthly audits may
be lower because business units may provide an acceptable
justification for a potential violation. However, as we discuss later,
CPS does not use responses from the business units concerning
potential violations to compute the true violation rate.
In addition to potential violations found in the monthly audits
Although monthly reports performed by CPS, business unit staff also brings potential
submitted by business violations to the attention of CPS. Every month, staff in each
units may contain business unit reconcile the P-card payment records with
valuable information, the bank statements for each cardholder in their unit and
such as instances of summarize policy violations and discrepancies on a report
inappropriate use of the provided to CPS. Although these documents may contain
cards or a lack of receipts, valuable information, such as instances of inappropriate use of
CPS does not retain, the cards or a lack of receipts, CPS does not retain, monitor, or
monitor, or track the track the information contained in these documents and does
information contained not follow up except to determine whether all business unit staff
in these documents and have submitted their cardholders’ monthly statements. In fact,
does not follow up except CPS could locate the business unit summary reports for only
to determine whether nine of the 24 transactions we tested. According to CPS, it plans
all business unit staff to review the current process to assess the appropriateness of
have submitted their tracking these documents in the future.
cardholders’ monthly
statements. Lastly, although CPS requires business unit managers to
document justifications for questioned transactions or the
corrective actions taken in response to potential violations
found among P-card users in their respective business units,
CPS does not follow up on these responses to ensure that
violations are enforced uniformly. After receiving a report of
potential violations from CPS’s monthly audit findings, the
business unit manager is required to justify why the transactions
reported are not violations or document the corrective actions
taken and send this response back to the P-card administrator.
However, CPS does not monitor these responses beyond
checking to see that the business unit manager asserts that
action was taken. Specifically, CPS does not attempt to track this
information to ensure that the actions taken by the business
units are preventing repeat violations or to examine trends in
the information to identify those cardholders who repeatedly
violate P-card policies. Further, as we discuss in the next
3388 California State Auditor Report 2004-130 California State Auditor Report 2004-130 3399
section, business units are not provided with any guidance or
criteria regarding how to enforce P-card policies uniformly or when
employees’ P-cards should be deactivated due to policy violations.
By not sufficiently monitoring the results of its monthly audits
or the violations noted by business unit staff in their monthly
reports, CPS is forgoing opportunities to assess the program’s
By not sufficiently compliance level. Therefore, it cannot determine whether violations
monitoring the results are being repeated by the same cardholders or whether violations in
of its monthly audits or general or of a specific type are on the rise or declining. In addition,
the violations noted by by not actively monitoring the business unit managers’ responses
business unit staff in their to suspected violations through tracking and appropriate follow-
monthly reports, CPS is up, CPS cannot ensure that the actions taken are effective
foregoing opportunities or that P-card policies are being enforced uniformly. Better
to assess the program’s monitoring and analysis of these sources of information
compliance level. could be a valuable tool in assessing the cost-effectiveness of
the P-card program. According to its administrative services
manager, CPS plans to implement a system of monitoring that
includes the following to improve its review process of the
P-card program:
• Retain for three to six months the records of cardholders with
program violations to track whether such violations persist.
• Compile and maintain a database to identify repeat abusers
that will serve as a basis for suspending or revoking P-cards.
• After a thorough review of activities, implement necessary
actions (suspension or cancellation of P-cards) for persistent
violators, with proper notification to the cardholders’
supervisors.
Corporate Purchasing Services Does Not Ensure That P-Card
Policies Are Enforced Consistently
CPS fails to enforce P-card policies consistently. According to CPS,
it has the authority only to restrict, suspend, or cancel P-cards;
the responsibility for enforcing P-card policies by other means
resides with the business units. However, CPS has provided no
guidance to the business unit managers on when it would be
appropriate to take action against the use of P-cards.
As we discussed in the previous section, when CPS finds
suspected violations in its monthly audits, it documents them
and sends a quarterly report to the business unit managers,
who are required to provide a written response justifying why
4400 California State Auditor Report 2004-130 California State Auditor Report 2004-130 4411
questioned transactions are not violations or indicating the
corrective actions taken. However, CPS has not provided any
guidance to the business units, beyond the information in the
P-card manual, on what constitutes appropriate corrective action
against a P-card for the various types of violations or for repeated
violations. Therefore, CPS cannot ensure that the business
units are taking appropriate and consistent corrective action for
similar violations or that they are preventing repeat violations.
In fact, when we contacted two business unit managers and
two directors, we found that the corrective actions taken
in different units for the same type of violation may not be
consistent and that there are no clear guidelines for responding
to P-card violations. Each individual we contacted indicated that
corrective action generally is determined on a case-by-case basis.
CPS has not developed clear criteria for determining when
CPS has not developed it is appropriate to restrict, suspend, cancel, or deactivate
clear criteria for a P-card. For instance, the P-card manual indicates that
determining when it is persistent cardholder violations may result in the suspension
appropriate to restrict, or cancellation of a P-card, but neither CPS nor the business
suspend, cancel, or units have implemented a system for monitoring repeat
deactivate a P-card. violations. Further, CPS does not follow up when the action
taken by a business unit in response to a violation is unclear.
For example, when a cardholder exceeded the established daily
transaction limit, the business unit manager reported to CPS
that the violation was reviewed and the appropriate action was
taken. Without follow-up to determine the exact nature of the
corrective action, CPS cannot ensure that the business unit
appropriately enforced the policy.
Because it has not developed clear criteria for deactivating or
suspending a P-card, CPS cannot ensure that business units or
CPS itself consistently responds to violations. According to CPS,
there were two instances in fiscal year 2003–04 in which CPS
suspended a P-card for persistent and gross violations of program
policy. In one case, the card was canceled because it exceeded
the monthly $20,000 limit. However, CPS appears to have been
inconsistent in how it responds to this type of violation. During
our testing, we asked CPS whether any cardholders selected
in our sample had been included in its monthly audits, and
we were advised that one cardholder in our sample had been
audited and was found to have exceeded the $20,000 monthly
credit limit. When we asked why this violation, which occurred
in March 2004, did not appear on the March 2004 violation
list, the administrative services manager for CPS told us that it
was omitted inadvertently from the violation list because the
4400 California State Auditor Report 2004-130 California State Auditor Report 2004-130 4411
cardholder had transferred to another business unit and had
been issued a new card. We then asked CPS to explain why
one card was canceled for exceeding the monthly credit limit
and this one was not, and the manager reiterated the reason
she had given previously for not including the violation in
the March 2004 violation list. She did not explain why the
cardholder’s new card was not canceled.
In addition, CPS has not developed criteria or a process
CPS has not developed for deactivating long inactive P-cards to reduce the risk of
criteria or a process for inappropriate use and to ensure that access to P-cards is secure.
deactivating long inactive According to the administrative services manager for CPS, the
P-cards to reduce the risk business units are responsible for notifying CPS if a card no
of inappropriate use and longer is needed for their operations and requesting the card’s
to ensure that access to cancellation. Apparently, however, this rarely occurs. CPS has
P-cards is secure. access to reports of P-card activity that list the number of cards
that have shown no purchase activity for one or more months.
The June 2004 report lists 41 cards that have been inactive for
24 months or more. Of these cards, 14 have a monthly charge
limit of $20,000 each. According to CPS, it has contacted some
business unit managers about the inactive cards assigned to their
units, and they asked to keep the cards for possible future use.
CPS states that it will develop a policy for deactivating P-cards
that show no activity for a period that will be determined with
input from the business units, because some cards are held for
the purpose of responding to emergencies based on the nature
of the business units’ operations.
The Department Has Not Responded Adequately to Past
Audit Findings Relating to Its Purchasing Card Program
A prior audit conducted by the department’s internal auditor
reported findings similar to ours concerning the types of
noncompliance, the lack of monitoring, and the need to enforce
P-card policies better. However, the department has been unable
to provide evidence that it has taken any substantive action to
correct or control the program’s deficiencies. The internal audit
report, released in March 2001, found that some purchases
lacked original receipts, were split to circumvent maximum
purchase limits, were made for items available through an
existing contract or found in current inventory, were made by
someone other than the cardholder, or contained clerical errors
on purchasing activity reporting forms. In addition, it found
that disciplinary actions were not enforced effectively and
unissued cards were not secured. As we discussed previously, our
4422 California State Auditor Report 2004-130 California State Auditor Report 2004-130 4433
testing as well as CPS’s monthly audits continue to find many of
the same kinds of violations as those noted in the March 2001
internal audit report.
CPS responded to the department’s 2001 internal audit report
by attempting to create a policy implementing a progressive
system of warnings to cardholders concerning policy violations
and, after the first three P-card policy violation letters had been
sent, suspending the cardholder’s P-card for a fourth violation.
However, the department’s labor relations office advised CPS
that the way the proposed policy was written was confusing
and conflicted with current disciplinary policies. Therefore,
CPS revised its guidelines and instead implemented a process
for notifying business units of potential P-card violations found
in monthly audits and requiring the business unit manager to
respond to CPS with the justification for questioned transactions
or the corrective actions taken. Before the department’s internal
audit report, violation notices were sent directly to the cardholder.
In addition, CPS indicated that it now emphasizes the
unacceptable uses of P-cards, such as the splitting of purchases
and card sharing, in its cardholder training sessions. However,
it was unable to demonstrate whether this increased emphasis
has had an impact on the violation rate. In CPS’s formal
response to the 2001 internal audit report, it set performance
goals of decreasing the rate of violations involving the splitting
of purchases from 5 percent to 2 percent, decreasing the
rate of unallowable purchases from 6 percent to 2 percent,
and eliminating card sharing altogether. However, it has not
effectively tracked these types of activities or implemented
other procedures to achieve these goals. According to its
administrative services manager, CPS is unable to measure
its progress in achieving such goals because the number of
cardholders has increased over the years and the number
of transactions audited has decreased from 100 percent to
20 percent. Additionally, she indicated that some purchases that
previously were not allowed, such as dues and memberships, are
now allowable with general manager approval and, therefore,
it would be difficult to compare past and current violations. We
do not believe that any of the reasons stated prevent CPS from
using the information it already has to assess its progress in
these areas.
4422 California State Auditor Report 2004-130 California State Auditor Report 2004-130 4433
DECENTRALIZED RESPONSIBILITY FOR MAINTAINING
PERSONNEL FILES REDUCES COMPREHENSIVE
PERSONNEL RECORD KEEPING AND OVERSIGHT
OF POSITIONS
The department’s policy of decentralizing its personnel record-
keeping functions has reduced its ability to ensure that it
adequately maintains personnel files that contain the records
required by department policy. According to the director of
human resources, the department maintains a personnel office
in each of its 34 business units. These personnel offices are
For four of the 12 civil responsible for administrative and clerical functions, such as
service personnel ensuring that all personnel transactions are consistent with
actions we reviewed, the city’s civil service rules and policies and with the city
the department’s charter, scheduling training, and maintaining personnel files
business units could not for business unit employees. However, for the 12 civil service
provide the documents personnel actions we reviewed, the department’s business units
necessary to support and could not locate in the prescribed personnel files documents
explain their hiring and supporting the civil service appointments for two of four new
promotion decisions for employees and for two of four promoted employees. As a result,
these positions. the business units could not provide the documents necessary
to support and explain their hiring and promotion decisions for
these positions.
Further, we reviewed the department’s 15 positions that the
mayor and the city council approved as exempt from the
city’s civil service system (exempt positions). We found that
for nine of these exempt positions the department could not
locate evidence demonstrating that the employees who occupy
them possess the educational, professional, or work experience
qualifications the department used to justify exempting these
positions from civil service regulations. However, nothing
came to our attention to suggest that these candidates were not
qualified for their appointments. According to the department’s
director of human resources, during the course of our audit the
acting general manager took action to correct this condition
by instructing her to ensure that each of the personnel files for
the department’s exempt employees contain résumés describing
their qualifications and to ensure that the personnel files for
these exempt employees are maintained by the assistant general
manager for employee relations.
Except for specific positions exempted by the city charter or by
approval from the mayor and the city council, the department
is subject to the city’s civil service system and is required
to follow the city’s civil service rules and city charter when
executing personnel actions, such as hiring, promoting, or
4444 California State Auditor Report 2004-130 California State Auditor Report 2004-130 4455
firing. Under the city’s civil service rules, an appointment to
Although nothing came a position, through either hiring or promotion, is determined
to our attention to through a competitive process and can be made only from a
suggest that nine of the list of eligible applicants. This list must be certified by the city’s
department’s civil service personnel department to contain the persons ranked with the
exempt employees highest three examination scores or at least five more applicants
were not qualified for than the number of vacancies to be filled. Although the city’s
their appointments, personnel department is responsible for providing a certified list
the department’s of eligible candidates for the department’s vacant positions, the
business units could department is responsible for ensuring that its business units
not locate evidence follow the city’s rules for selecting their appointees from the
demonstrating that certified list.
these exempt employees
possess the educational, In addition to its civil service positions, the department
professional, or work maintains 19 positions that are exempt from the city’s civil
experience qualifications service system. These positions are primarily the general
the department used manager, assistant general managers, executive assistants to
to justify exempting the general manager, and the chief financial officer. Four of
these positions from civil these positions are expressly exempted from the civil service
service regulations. system by the city charter, and the mayor and city council must
approve the remaining 15 exempt positions. To gain approval for
these 15 exempt positions, the department must provide to the
mayor and city council a request that includes the educational,
professional, or work experience requirements for the positions
that justify their exemption from the civil service rules.
Under its current policy, the department is to maintain a
single personnel file for each employee to document his or her
work history at the department. The personnel office of each
business unit is to maintain these personnel files for its current
employees. When employees transfer between business units
within the department, the business units are to ensure that the
employees’ personnel files are forwarded to the business unit
to which they are transferred. The department’s administrative
manual details the types of documents that should and should
not be maintained in these personnel files. Included in the list of
documents to be maintained are those that support and explain
the department’s selection process for new and promoted civil
service employees. The department’s policy further requires
that business units review and maintain these documents for
a minimum of two years and then forward them to records
retention. The department’s stated priorities for its policy
regarding the maintenance of personnel files include:
• Ensuring that an employee’s complete department work
history is maintained in only one file.
4444 California State Auditor Report 2004-130 California State Auditor Report 2004-130 4455
• Ensuring that supporting documentation is available for
the verification of critical data entered into the automated
personnel and payroll systems.
• Providing for uniform filing and records retention of
employee personnel records.
Further, the department’s administrative process for resolving
employment discrimination complaints includes a review of the
documents necessary to investigate the complaint. Documents
that are needed to support or explain the department’s selection
of new or promoted employees would be necessary to investigate
such complaints.
However, based on the results of our review, in which the
department’s business units could not provide supporting
documentation for one-third of the civil service personnel actions
and three-fifths of the exempt personnel actions we selected, the
department’s current policy of decentralizing the maintenance of
employees’ personnel files does not further its priorities regarding
the documents to be retained in personnel files.
Moreover, according to research conducted by the department’s
director of human resources, for seven of the department’s
exempt positions, the individuals who occupy them carry job
titles and perform duties that are different from the job titles
and duties the department provided to the mayor’s office and
the city council to gain exemption from the city’s civil service
system. In fact, the director’s research shows that the titles and
duties of these seven positions do not match any positions that
the mayor and city council approved. Table 6 contains the job
titles assigned to the seven employees that occupy the exempted
positions approved by the mayor and city council.
We asked the acting general manager why the department
has used these exempt positions for duties other than what
When the department uses they were approved for, but he did not respond. When the
its exempt positions for job department uses its exempt positions for job duties other than
duties other than those those approved by the mayor and city council, it reduces the
approved by the mayor control that the city charter intended the city to have over
and city council, it reduces these positions. Moreover, because the city council’s approval
the control that the city is granted through public hearing and city ordinance, the
charter intended the city to department’s current practice regarding these exempt positions
have over these positions. reduces the transparency to the public of the department’s use of
exempt positions.
4466 California State Auditor Report 2004-130 California State Auditor Report 2004-130 4477
TABLE 6
Exempt Employees Whose Assigned Duties Do Not Match
the Approved Exempt Positions They Occupy
Assigned Title Approved Exempt Position Occupied
Assistant general manager, customer service organization Assistant general manager, power distribution
Assistant general manager, business process improvement
program Director of customer services
Executive assistant to the chief administrative officer Director of government, regulatory, and legislative affairs
Medical director Director of policy development
Executive assistant to the assistant general manager for
power generation Budget director
Director of power supply operations Assistant director of distribution
Manager of equal employment opportunities Manager of water resources
Source: The department’s director of human resources.
RECOMMENDATIONS
To ensure that the department receives high-quality services and
materials at the best available prices and does not thwart the
board’s control over the department’s contracts, CPS should:
• Comply with department and city competitive bidding
policies when awarding contracts for goods or services.
• Recognize when the contracts it awards are extensions of
existing contracts and seek board approval when the amended
amount exceeds the threshold contained in the department’s
policy for obtaining such approval.
• Promptly implement the recommendations presented in the
department’s internal auditor’s November 2004 report on a
series of contracts and purchase orders for the department’s
implementation of a supply chain management system.
Further, to improve its controls over the contracts awarded for
goods and services, CPS should ensure that its staff members
sign contracts that obligate the department only when they are
properly authorized to do so.
In order to ensure that the department processes payments
correctly and to ensure that payments are made only for
authorized purposes, accounts payable should strengthen its
internal control procedures to include a process for verifying
4466 California State Auditor Report 2004-130 California State Auditor Report 2004-130 4477
that the contract administrator at the business unit level
reviewed and authorized the invoice before approving that
invoice for payment.
To strengthen the oversight over the P-card program and obtain
the information needed to evaluate the costs and benefits of the
program and minimize abuses, CPS should:
• Collect and use the information that results from CPS audits
of cardholders’ purchases and business unit reports of P-card
policy violations to track violations on an ongoing basis,
including repeat violations, of P-card policy.
• Track and follow up business unit managers’ responses to
reports of suspected P-card policy violations that result from
CPS audits of cardholders’ purchases to ensure that the
corrective actions business unit managers take against P-cards
are effective and that policies are enforced consistently.
• Provide clear guidance for determining the appropriate
corrective action business units should take against a P-card
in response to violations and clear criteria for determining
when it would be appropriate to restrict, suspend, cancel,
or deactivate a P-card. Further, CPS should ensure the
uniform enforcement of such policies through its improved
monitoring efforts.
• Develop criteria or a process to deactivate long inactive
P-cards to reduce the risk of inappropriate use and to ensure
that access to P-cards is secure.
• Use the information and data available, such as transaction
data, compliance data, and activity data, to establish goals
for minimizing the rates of policy violations for the P-card
program on an ongoing basis.
To ensure that it achieves its policy for a single comprehensive
record for employees’ work history and uniform filing and records
retention of employee personnel records, the department should
consider changing its policy of decentralized personnel record
keeping and establish a centralized system, administered and
maintained under the supervision of the department’s director of
human resources. In addition, the department should seek approval
from the mayor and city council when it uses its exempt positions
for duties other than those previously approved by the city.
4488 California State Auditor Report 2004-130 California State Auditor Report 2004-130 4499
We conducted this review under the authority vested in the California State Auditor by
Section 8543 et seq. of the California Government Code and according to generally accepted
government auditing standards. We limited our review to those areas specified in the audit
scope section of this report.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
Date: January 26, 2005
Staff: Doug Cordiner, Audit Principal
Norm Calloway, CPA
Matt Espenshade
Alysha Loumakis-Calderon
4488 California State Auditor Report 2004-130 California State Auditor Report 2004-130 4499
Blank page inserted for reproduction purposes only.
5500 California State Auditor Report 2004-130 California State Auditor Report 2004-130 5511
Agency’s comments provided as text only.
Department of Water and Power
111 North Hope Street
Los Angeles, CA 90012-2607
January 7, 2005
Ms. Elaine M. Howle, State Auditor*
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, California 95814
Dear Ms. Howle:
Re: Audit of Los Angeles Department of Water and Power
Thank you for the opportunity to review the Bureau of State Audits’ draft report on the audit
requested by the Joint Legislative Audit Committee. Your staff is to be congratulated on their
thorough, detailed and objective analysis of the Department of Water and Power’s transfers of
funds, contracting policies, and personnel procedures.
Those who are charged with the responsibility of ensuring that all monetary transfers to
Los Angeles’ Reserve Fund fully comply with our municipal charter are gratified by the audit’s
finding that “the Department’s transfers of money to the City for general use are allowable and
complied with the City Charter.” This conclusion is further supported by your demonstration that
transfers from the Water and Power Revenue Funds complied with the terms of the Department’s
bond provisions. Moreover, you have demonstrated that such transfers of municipal utility funds to a
city’s general fund is a common practice among California cities. I fully endorse the audit’s findings
on the propriety of this Department’s intra-city transfer of funds.
The draft audit’s findings that the Department needs to improve its controls over contracts,
expenditures and personnel records will be studied in depth. Recommended improvements in these
areas not already implemented will be given great weight in this Department’s ongoing review of
contracting and personnel policies. Your report will assist in our efforts to improve service to our
customers and the citizens of Los Angeles. Department of Water and Power staff have prepared
detailed comments to each of the sections of the draft audit. They are enclosed herewith for your
* California State Auditor’s comments begin on page 61.
5500 California State Auditor Report 2004-130 California State Auditor Report 2004-130 5511
Ms. Elaine M. Howle
Page 2
January 7, 2005
reference. It is requested that this written response and all attachments be considered in the
process of final editorial review and included in the final report when issued.
Sincerely,
(Signed by: Ronald F. Deaton)
Ronald F. Deaton
General Manager
Enclosures
5522 California State Auditor Report 2004-130 California State Auditor Report 2004-130 5533
Los Angeles Department of Water and Power
Response to California State Auditor Report Entitled:
“Los Angeles Department of Water and Power: Its Transfers of Funds to the City
Comply With the City Charter; However, It Needs to Improve Its Controls Over Contracts,
Expenditures, and Personnel Records”
SUMMARY
Transfers of Funds to the City
The Department concurs with the audit’s factual findings and conclusion that the transfer complies
with the City Charter.
Contracts and Purchase Orders
Corporate Services Response:
Corporate Purchasing Services (CPS) operates within the governance of the City Charter, the L. A.
Administrative Code, and City programs in addition to the principles and practices advocated by the
Institute of Supply Management and the California Association of Public Purchasing Officers.
There are several factors to consider in the analysis and determination of the procurement method
most appropriate for the Department’s needs or requirements. Input from the requesting operating
business units and the assigned procurement professional, and advice from the City Attorney’s
Office are considered in determining the procurement method to be used by the Department.
The audit consistently refers to procurement of goods and services at the “best available prices”;
however, City Charter Section 371 states:
Contracts shall be let to the lowest responsive and responsible bidder furnishing
satisfactory security for performance. This determination may be made on the basis of
the lowest ultimate cost of the items in place and use. Where the items are to constitute
a part of a larger project or undertaking, consideration may be given to the effect on the
aggregate ultimate cost of the project or undertaking.
There are a number of exceptions to the competitive bid process as indicated in City Charter
1
Section 371(e). Competitive bidding is solicited whenever practicable. There are instances where
bidding is not in the best interest of the Department and does not provide the lowest ultimate cost.
The Charter also recognizes there are operating requirements where the standard for award is not
the lowest cost but the lowest ultimate value provided by a responsive and responsible vendor for
products or services complying with specifications.
LADWP Response 1-7-05 1
5522 California State Auditor Report 2004-130 California State Auditor Report 2004-130 5533
We concur with the auditor’s findings that there were no significant issues in the administration of
the twelve contracts reviewed.
The auditors were also informed that signature authority of the Senior Utility Buyer who signed the
2
contract referred to in the Summary had authority to review up to $100,000. However, Senior Utility
Buyers were given verbal authority to sign contracts up to $150,000, in the absence of the manager
who had signature authority up to $150,000. The Assistant Purchasing Director at that time (now
retired) had given that authority to the Senior Utility Buyers.
Payments to Suppliers
Financial Services – Information factually presented
Purchasing Card Program
Corporate Services Response:
3
The broad statement in paragraph 6 that CPS has not implemented procedures regarding the
P-card program violations is inaccurate. CPS has developed policies, guidelines, and a training
manual concerning the use of P-cards. In addition, training has been provided to cardholders on
the use of the P-cards. CPS has been consistently assessing compliance with program policy
within the staffing and resources available in the business unit. Changes have been implemented
as recognized by the auditors in their discussion in Chapter 2.
The auditor acknowledges that the Department revised its guidelines and implemented a process
for notifying business units of potential P-card violations found in monthly audits and requiring the
business unit manager to respond to CPS with the justification for questioned transactions or the
corrective actions taken. Prior to the department’s internal audit report, violation notices were sent
directly to the cardholder.
Any corrective actions taken in response to employee violations of P-card program policies are the
4
responsibility of the individual’s supervisor or manager. The Department is reviewing its policies
and procedures to ensure uniform enforcement of its P-card program.
Personnel Records
Employee Relations – Information factually presented.
LADWP Response 1-7-05 2
5544 California State Auditor Report 2004-130 California State Auditor Report 2004-130 5555
INTRODUCTION
BACKGROUND
Information factually presented
THE DEPARTMENT ANNUALLY TRANSFERS FUNDS TO THE CITY
Information factually presented
THE DEPARTMENT’S EMPLOYMENT PRACTICIES ARE SUBJECT TO THE CITY’S
CIVIL SERVICE SYSTEM
Employee Relations - Information factually presented.
SCOPE AND METHODOLOGY
Financial Services – Information factually presented.
Employee Relations - Information factually presented.
Corporate Services – We concur with the Auditor’s findings that there were no significant
issues in the administration of the 12 contracts reviewed.
CHAPTER 1
The Department’s Transfers of Funds to the City for General Use Are Allowable and
Complied With the City Charter
CHAPTER SUMMARY
Information factually presented.
TRANSFERS OF WATER AND POWER FUNDS COMPLY WITH THE CITY CHARTER
The Department concurs with the audit’s factual findings and conclusion that the transfer
complies with the City Charter.
LADWP Response 1-7-05 3
5544 California State Auditor Report 2004-130 California State Auditor Report 2004-130 5555
TRANSFERS FROM THE WATER FUND AND POWER FUND COMPLIED WITH THE
TERMS OF THE DEPARTMENT’S BOND PROVISIONS
The Department concurs with the audit’s factual findings and conclusion that the transfer
complies with the terms of the Department’s bond provisions.
TRANSFERS OF UTILITY FUNDS TO CITY FUNDS ARE COMMON
Information factually presented.
CHAPTER 2
The Department Needs to Improve Its Controls Over Contracts, Expenditures, and
Personnel Records
CHAPTER SUMMARY
Financial Services Response:
While the contract administrator may delegate the approval function, Accounts Payable
staff performs a second line review consisting of a three-way match to ensure that it pays a
valid claim. Accounts Payable requires an approval signature/stamp in the approval block of
voucher control forms. However, as the Audit Report points out, Accounts Payable does not
validate the signature against a centralized signature authority list. We are implementing
process changes to address this issue.
Employee Relations - Information factually presented.
Corporate Services Response:
5
The Department does not concur with the finding that CPS failed to follow department and
city policies.
6
In paragraph 2, CPS does not provide oversight to Accounts Payable Unit. The
Accounts Payable unit is a part of the Financial Services Organization.
CPS has been continually assessing compliance with the P-Card program policy within the
7
staffing and resources available in the business unit. Changes have been implemented as
recognized by the auditors in their discussion in Chapter 2.
LADWP Response 1-7-05 4
5566 California State Auditor Report 2004-130 California State Auditor Report 2004-130 5577
CORPORATE PURCHASING SERVICES DOES NOT ALWAYS FOLLOW ITS OWN AND
THE CITY’S POLICIES FOR COMPETITIVE BIDDING CONTRACTS FOR GOODS AND
SERVICES
Corporate Services Response:
The auditors were informed that signature authority of the Senior Utility Buyer who signed
2
the contract referred to in the Summary had authority to review up to $100,000. However,
Senior Utility Buyers were given verbal authority to sign contracts up to $150,000, in the
absence of the manager who had signature authority up to $150,000. The Assistant
Purchasing Director at that time (now retired) had given that authority to the Senior Utility
Buyers. The Department will ensure that appropriate written delegation is given to its Utility
Buyers.
CORPORATE PURCHASING SERVICES AWARDED CONTRACTS FOR GOODS AND
SERVICES WITHOUT OBTAINING REQUIRED APPROVALS
Corporate Services Response:
The first contracts discussed in this section were competitively bid according to City Charter
8
Section 372. However, because the same vendor was successful in each competitive
process, it may have been prudent to have the contract ratified by the Board. The auditors’
findings regarding the second contract discussed in paragraph 5 are attributed to the
difference in legal opinions.
THE DEPARTMENT’S INTERNAL AUDITOR IDENTIFIED SEVERAL ISSUES RELATED
TO ITS ADMINISTRATION OF A SERIES OF CONTRACTS
Corporate Services Response:
The Department is in the process of implementing many of the Internal Auditor’s
recommendations concerning these contracts. However, since there is the potential for
litigation concerning these contracts, the Department is working with the City Attorney’s
Office as to the appropriate manner in which to implement the Internal Auditor’s
recommendations.
At this time, further comments on this section by the Department are not appropriate.
LADWP Response 1-7-05 5
5566 California State Auditor Report 2004-130 California State Auditor Report 2004-130 5577
THE ACCOUNTS PAYABLE UNIT DOES NOT ENSURE THAT EXPENDITURES ARE
PROPERLY AUTHORIZED
Financial Services Response:
Accounts Payable is taking action to get an updated list of contract administrators and their
designees, for signature authority. This listing will be maintained and updated by Accounts
Payable.
CORPORATE PURCHASING SERVICES DOES NOT ADEQUATELY OVERSEE THE
PURCHASING CARD PROGRAM
Corporate Services Response:
3
The broad statement in paragraph 1 that CPS has not taken adequate steps to improve its
procedures and strengthen its internal controls is inaccurate.
CPS has been continually assessing compliance with the P-card program policy within the
staffing and resources available in the business unit. Changes have been implemented as
recognized by the auditors in their discussion in Chapter 2.
Any corrective actions taken in response to employee violations of P-card program
4
policies are the responsibility of the individual’s supervisor or manager. The Department is
reviewing its policies and procedures to ensure uniform enforcement of its P-card program.
DECENTRALIZED RESPONSIBILITY FOR MAINTAINING PERSONNEL FILES
REDUCES COMPREHENSIVE PERSONNEL RECORD KEEPING AND OVERSIGHT OF
POSITIONS
Employee Relations Response:
The information contained within this section is factual. The title Director of Human
9
Relations is interchanged with Director of Human Resources; however this does not change
the substance of the document.
LADWP Response 1-7-05 6
5588 California State Auditor Report 2004-130 California State Auditor Report 2004-130 5599
RECOMMENDATIONS
Contracts and Purchase Orders
Corporate Services Organization concurs with the recommendations contained herein
except as noted above.
Payments to Suppliers
Financial Services Organization concurs with the recommendation contained herein.
Accounts Payable is taking action to get an updated list of contract administrators and their
designees, for signature authority. This listing will be maintained and updated by Accounts
Payable.
Purchasing Card Program
Corporate Services Organization concurs with the recommendations contained herein
except as noted above.
Personnel Records
Employee Relations Organization concurs with the recommendations contained herein.
Personnel Folders for all exempt employees have been established and contain resumes as
well as other documents supporting appointments to the positions. The Assistant General
Manager of Employee Relations now has possession of and maintains folders for Charter
Section 1001 exempt employees. Additionally, centralization of all remaining Department
employee folders within the Human Resources Business Unit will begin in April 2005.
Charter Section 1001 exempt positions are being reviewed and when appropriate, the
Department will forward recommendations to the Mayor and City Council for approval.
LADWP Response 1-7-05 7
5588 California State Auditor Report 2004-130 California State Auditor Report 2004-130 5599
Blank page inserted for reproduction purposes only.
6600 California State Auditor Report 2004-130 California State Auditor Report 2004-130 6611
COMMENTS
California State Auditor’s Comments
on the Response From the
Los Angeles Department of Water
and Power
To provide clarity and prospective, we are commenting
on the response by the Los Angeles Department of Water
and Power (department) to our report. The numbers
below correspond to the numbers placed in the margins of the
department’s response.
1
Although the department asserts that there are instances where
bidding is not in the best interest of the department and does not
provide the lowest ultimate cost, it did not provide any evidence
that the two contracts we discuss on pages 27 and 30 represent
such instances.
2
We point out on page 29 the assertion made by Corporate
Purchasing Services (CPS) that this senior utility buyer received
verbal authorization to sign the contract from a former assistant
purchasing director. However, we also state on pages 29 and 30
that the department’s purchasing policies do not provide for
such verbal authorization.
3
The statement we made is accurate, however, the department
has mischaracterized what we said. On page 3 we state that CPS
has not implemented procedures to use available information on
violations of purchasing card (P-card) program policies, such as
the results of CPS audits of cardholders’ purchases and business
unit staff reports of P-card policy violations. The use of such
procedures would enable CPS to consistently assess compliance
with, or ensure uniform enforcement of, P-card program
policies. Further, beginning on page 36 and continuing through
page 43, we discuss several shortcomings in CPS’s oversight of
the P-card program. These included inadequate monitoring
of P-card activities, failing to ensure that P-card policies are
enforced consistently, and the inadequate response by CPS to
past audit findings relating to the P-card program.
4
We understand that disciplinary action in response to a P-card
violation is the responsibility of the cardholder’s supervisor or
manager. However, we believe that since CPS is responsible for
6600 California State Auditor Report 2004-130 California State Auditor Report 2004-130 6611
oversight of the P-card program, it should provide guidance to
business units on when it would be appropriate to recommend a
P-card be restricted, suspended, or canceled.
5
The department states that it does not concur with our finding,
but does not state why. As a result, we are unable to address its
concerns.
6
In the sentence cited, we were transitioning from one
paragraph to the next and did not intend to represent that
CPS is responsible for the accounts payable unit. To avoid any
confusion, we revised the sentence.
7
On page 3 we state that CPS has not implemented procedures
to use available information on violations of P-card program
policies, such as the results of CPS audits of cardholders’
purchases and business unit staff reports of P-card policy
violations. The use of such procedures would enable CPS
to consistently assess compliance with, or ensure uniform
enforcement of, P-card program policies. Further, beginning
on page 36 and continuing through page 43, we discuss several
shortcomings in CPS’s oversight of the P-card program. These
include inadequate monitoring of P-card activities, failing to
ensure that P-card policies are enforced consistently, and the
inadequate response by CPS to past audit findings relating to the
P-card program.
8
The response by CPS that “it may have been prudent to have
these contracts ratified by the board” implies it had discretion
in these instances. However, as stated on pages 30 through 32 of
our report, we believe that board approval of these contracts was
required under the board’s resolution.
9
We revised the report to consistently use the title “director of
human resources.”
6622 California State Auditor Report 2004-130 California State Auditor Report 2004-130 6633
cc: Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press
6622 California State Auditor Report 2004-130 California State Auditor Report 2004-130 6633