Summary

April 2015 Ross Valley Sanitary District The Board and Management Have Only Recently Begun to Address Significant Weaknesses in the District’s Financial and Administrative Functions Report 2014-122 COMMITMENT INTEGRITY LEADERSHIP The first five copies of each California State Auditor report are free. Additional copies are $3 each, payable by check or money order. You can obtain reports by contacting the California State Auditor’s Office at the following address: California State Auditor 621 Capitol Mall, Suite 1200 Sacramento, California 95814 916.445.0255 or TTY 916.445.0033 OR This report is also available on our website at www.auditor.ca.gov. The California State Auditor is pleased to announce the availability of an online subscription service. For information on how to subscribe, visit our website at www.auditor.ca.gov. Alternate format reports available upon request. Permission is granted to reproduce reports. For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255. For complaints of state employee misconduct, contact the California State Auditor’s Whistleblower Hotline: 1.800.952.5665. Elaine M. Howle State Auditor Doug Cordiner Chief Deputy April 16, 2015 2014‑122 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 California State Auditor (state auditor) presents this audit report concerning the Ross Valley Sanitary District (district). This report concludes that the board of directors (board) and management have failed to properly oversee the district’s financial and administrative functions until recently. Specifically, reviews by an external auditor in October 2013 and October 2014 identified several weak or missing internal controls and in April 2014 human resources consultants identified ineffective or nonexistent administrative systems and processes. We also reviewed the district’s controls over significant financial and administrative functions, including the controls implemented in response to the findings of the district’s external auditor, and found that new policies strengthen these controls but weaknesses still exist. As the governing body of the district, the board needs to ensure that management further develops existing controls and implements additional controls over key financial and administrative functions to ensure prudent management of the district and to protect against the potential for fraud, waste, abuse, and conflicts of interest. Potential causes of the board’s failure to adequately oversee the district are that board members receive inadequate training and their responsibilities are not adequately documented to ensure that board members, particularly those that are newly elected, fully understand their fiduciary responsibilities. The board’s oversight over employee compensation has been lax and resulted in high salaries for district employees relative to what employees in similar positions receive at comparable sanitation agencies. District practices of increasing salary ranges without adequate justification, paying excessive cost‑of‑living adjustments, and offering longevity pay without justifying the need for it have led to these high salaries. Further, the district does not ensure that it receives the best value for its ratepayers when contracting for professional services because it does not always use a competitive process or justify using sole‑source contracts. Finally, the district has not properly managed its human resources functions. For example, the district did not comply with state law by ensuring that its supervisory employees attend sexual harassment prevention training every two years, nor did it always complete annual performance evaluations of its employees as required by its policies. In addition, the district did not ensure that all required employees filed documentation to identify potential conflicts of interest. Respectfully submitted, ELAINE M. HOWLE, CPA State Auditor 621 Capitol Mall, Suite 1200 Sacramento, CA 95814 916.445.0255 916.327.0019 fax www.auditor.ca.gov Blank page inserted for reproduction purposes only. California State Auditor Report 2014-122 v April 2015 Contents Summary 1 Introduction 7 Audit Results Until Recently, the Board of Directors and Management Had Failed to Implement Important Controls Over the Ross Valley Sanitary District’s Financial and Administrative Functions 15 Compensation for District Employees Is High Relative to Salaries at Comparable Sanitation Agencies 22 Questionable Practices by the Board Led to High Employee Salaries 26 The Current General Manager’s Salary and the Benefits the District Provides Its Employees Are Generally in Line With Those of Comparable Agencies 28 The Board Did Not Consistently Follow the District’s Emergency Procurement Procedures and Thus Cannot Ensure That It Is Getting the Best Value 31 The District Did Not Ensure That It Received the Best Value When Procuring Professional Services Because It Did Not Always Use a Competitive Process 34 The District Appropriately Awarded Contracts for Capital Improvement Projects and for Construction‑Related Professional Services 37 The District Has Poorly Managed Some of Its Human Resources Functions 37 Recommendations 40 Appendix Significant Internal Control Deficiencies and Other Matters Identified by Ross Valley Sanitary District’s External Auditor 45 Response to the Audit Ross Valley Sanitary District 49 vi California State Auditor Report 2014-122 April 2015 Blank page inserted for reproduction purposes only. California State Auditor Report 2014-122 1 April 2015 Summary Results in Brief Audit Highlights . . . The Ross Valley Sanitary District (district) has only recently taken Our review of the Ross Valley Sanitary steps to correct weaknesses in its financial and administrative District’s (district) policies and practices policies and practices. Located in Marin County, the district over its financial and administrative provides wastewater collection services to residents and businesses operations highlighted the following: in the communities of Fairfax, Greenbrae, Kentfield, Larkspur, » The district’s management and board of Kent Woodlands, Ross, San Anselmo, and Sleepy Hollow. The directors (board) had failed to implement district’s revenue comes in large part from wastewater collection important controls over the district’s fees and property taxes. A five‑member board of directors (board) financial and administrative practices governs the district, and a general manager oversees the district’s until recently. day‑to‑day activities. The district’s former general manager resigned in July 2012 and has since been arrested on charges of » Weaknesses still exist in the district’s misappropriation of public funds, embezzlement, and money financial and administrative controls that laundering related to a $350,000 down payment assistance loan the could potentially allow fraud, waste, and district provided him as part of his employment contract. abuse of public funds to go undetected. » The board has failed to provide adequate Reviews of the district by an external auditor in October 2013 and oversight of the district’s activities. October 2014 found that the district had weak or missing internal controls. For example, the auditor found that one employee was • Board members lack an understanding responsible for entering invoices into the accounting system, of their role in ensuring the prudent preparing checks to pay those invoices, and reconciling bank management of the district and lack statements to the district’s records. Such an arrangement could adequate training. allow the employee to create and conceal fraudulent financial transactions. In addition, in April 2014 a team of human resources • Compensation for district employees is consultants found that the district had ineffective or nonexistent high relative to salaries at comparable organizational administrative systems and processes. The human sanitation agencies. resources consultants created a work plan that calls for the district • The board did not appropriately to revise and in some cases develop administrative and human review two of the district’s most costly resources policies and performance measurement metrics, among emergencies to determine if it should other tasks. continue the work without seeking competitive bids. The district is in the process of implementing the external auditor’s outstanding recommendations and the elements of the human » The district does not always use a resources consultants’ work plan. We also reviewed the district’s competitive process for procuring controls over significant financial and administrative functions, professional services and thus cannot including the controls implemented in response to the findings ensure that it receives the best value for of the district’s external auditor, and found that new policies its ratepayers. strengthen these controls but that weaknesses still exist. » The district adhered to state law As the governing body of the district, the board needs to ensure that when awarding contracts for capital management further develops existing controls and implements improvement projects. additional controls over key financial and administrative functions » The district has not properly managed its to ensure prudent management of the district and to protect against human resources functions. the potential for fraud, waste, abuse, and conflicts of interest. One potential cause of the board’s failure to adequately oversee the district is that board members receive inadequate training. Board 2 California State Auditor Report 2014-122 April 2015 members have demonstrated a lack of understanding of their roles in certain key district processes, including establishing appropriate compensation levels, reviewing and approving declarations for emergency procurements, and contracting for professional services. Further, the board’s responsibilities are not adequately documented to ensure that board members, particularly those that are newly elected, fully understand their fiduciary responsibilities. For example, the district has not documented in its policies the board’s responsibilities for establishing appropriate salary structures or reviewing district finances. In addition, the district’s management failed to begin implementing key controls over the district’s financial and administrative functions until fiscal year 2013–14. The board’s oversight over employee compensation has been lax and resulted in high salaries for district employees, relative to what employees in similar positions receive at comparable sanitation agencies. For example, the top salary ranges of some of the district’s key management positions are 12 percent to 18 percent higher than those for similar positions at larger sanitation agencies. Furthermore, the district has paid its employees excessive annual cost‑of‑living adjustments (COLAs) of between 3 percent and 5 percent that are not tied to changes in an actual cost‑of‑living index. For example, even though the consumer price index increased by only 0.7 percent in 2009, the district paid its employees a 5 percent COLA that same year. In addition, the district provides its employees longevity pay without justifying the need for this extra pay to retain or attract qualified employees. We do not believe that the district’s practice of offering excessive compensation to its employees is an appropriate use of revenue generated from fees and taxes paid by its ratepayers. In contrast, the salary for the district’s new general manager is in line with comparable agencies, ranking 11th out of the 13 sanitation agencies and comparison groups we reviewed. Furthermore, the district’s employment contract with its current general manager does not include the same excessive provisions found in the former general manager’s contract, such as a $350,000 down payment assistance loan, a one‑time $9,850 bonus, and student debt relief. However, the board still has not established in policy its approach for periodically evaluating the general manager’s performance and for determining any merit‑based compensation increases. Additionally, the board did not appropriately review two of the district’s most costly emergencies to determine if it should continue the work without seeking competitive bids. In an emergency—a sudden, unexpected occurrence that poses a clear and imminent danger, requiring immediate action to prevent or mitigate the loss or impairment of life, health, property, or essential public services— state law allows the board to vote to avoid competitively bidding the California State Auditor Report 2014-122 3 April 2015 work necessary to resolve the emergency. However, state law also requires the board to reassess and vote whether the situation is still an emergency at every subsequent monthly board meeting. The board did not follow this requirement at meetings during which the two emergencies were ongoing and thus may have unnecessarily allowed the district to continue to avoid competitive bidding. Although the district adhered to state law when awarding capital and construction‑related contracts, it does not ensure that it receives the best value for its ratepayers when contracting for professional services, because it does not always use a competitive process or justify using sole‑source contracts. For example, the district awarded a sole‑source contract not to exceed $84,000 for one year of marketing‑related services that the board approved without questioning why district staff did not solicit additional proposals. In addition, after the contract term expired, the district continued to pay for the marketing services for several months without having a written contract in place, until the district renewed the contract. Ultimately, the district terminated this contract as part of its efforts to reduce expenses. However, by that point the district had paid this contractor more than $175,000. Finally, the district has not properly managed its human resources functions. For most of the period from fiscal years 2009–10 through 2013–14, the district did not have staff with expertise in human resources management to whom district employees could turn for guidance in handling human resources issues. Also, the district did not have established processes for some essential human resources functions and/or did not ensure that those functions were performed. For example, the district did not comply with state law by ensuring that its supervisory employees attend sexual harassment prevention training every two years, nor did it always complete annual performance evaluations of its employees as required by its policies. In addition, the district did not ensure that all required employees filed documentation to identify potential conflicts of interest. Recommendations The board should ensure that management continues to develop and strengthen its controls over the district’s financial and administrative functions. For example, district management should fully implement all of the external auditor’s remaining recommendations by June 30, 2015. Management should also ensure that staff follow these policies and should create and implement a plan for monitoring its system of controls. 4 California State Auditor Report 2014-122 April 2015 The district should implement all of the remaining recommendations contained in its human resources consultants’ work plan. To clarify the roles and responsibilities of board members, the district should create a more comprehensive board member manual that describes all of the board’s roles and fiduciary responsibilities. The district should also provide for additional training for board members in the following areas over which they exercise important responsibilities: financial management, contracting, emergency procurement, and human resources. The board should reduce the salary ranges for all positions in the district’s salary schedules to better align with comparable positions at comparable sanitation agencies. While we are not suggesting that the board cut the current salaries of its employees, it is imperative that the board reduce the salary ranges in its salary schedules before more employees reach the top step of their respective salary ranges. The board should also ensure that COLAs are tied to an appropriate cost‑of‑living index and that any merit raises are based on satisfactory performance that is documented in an appraisal. Further, the board should either justify its need for longevity pay to attract and retain qualified employees or discontinue its practice of offering longevity pay to those employees who are not already receiving this extra pay. The board should make these changes for unrepresented employees immediately and should seek to make these changes for represented employees by negotiating with the American Federation of State, County, and Municipal Employees Local 2167 when the current memorandum of understanding expires in July 2015. To ensure that compensation for the general manager remains reasonable, and to prevent the excesses that existed in the former general manager’s contract, the district should develop a policy that establishes the criteria to be used when periodically evaluating the general manager’s performance and determining any merit‑based compensation increases. To ensure that it follows state law and its policies for emergency procurement, the board should review and reapprove all emergencies at each board meeting subsequent to the initial emergency declaration and should terminate emergency declarations as soon as possible to ensure that it competitively bids any work that is no longer an emergency. The district should ensure that it hires qualified vendors at a reasonable price by using a competitive process when contracting for professional services. When this is not possible California State Auditor Report 2014-122 5 April 2015 or appropriate given the nature of the services, the district should adequately justify its use of a noncompetitive process (sole‑source procurement). The district should ensure that it has access to qualified human resources professionals, whether contracted or in‑house, to assist staff when handling human resources issues. Agency Comments The board unanimously agrees with all of our recommendations and will make their implementation a top priority. 6 California State Auditor Report 2014-122 April 2015 Blank page inserted for reproduction purposes only. California State Auditor Report 2014-122 7 April 2015 Introduction Background Sanitary District No. 1 of Marin County, also known as the Ross Valley Sanitary District (district), is a special district located in Marin County and was established in 1899 under the Sanitary District Act of 1891. The district provides wastewater collection services for residents and businesses in the communities of Fairfax, Greenbrae, Kentfield, Larkspur, Kent Woodlands, Ross, San Anselmo, and Sleepy Hollow, as shown in Figure 1. The district serves a population of approximately 55,000. Figure 1 Ross Valley Sanitary District Map 101 SAN PABLO BAY SLEEPY HOLLOW FAIRFAX SAN RAFAEL SAN ANSELMO ROSS KENTFIELD SAN RAFAEL BAY GREENBRAE KENT WOODLANDS LARKSPUR Ross Valley Sanitary District boundary Community boundaries 101 SAN FRANCISCO BAY 0 2,000 4,000 6,000 8,000 CORTE MADERA Scale (feet) MILL VALLEY Source: Ross Valley Sanitary District’s fiscal year 2013–14 comprehensive annual financial report. 8 California State Auditor Report 2014-122 April 2015 The district maintains approximately 200 miles of sewer pipelines. Residents and businesses connect to the district’s sewer system through privately owned sewer lines. The district has an agreement with the Central Marin Sanitation Agency for the treatment of wastewater, and it operates 19 lift and pump stations that collect, pump, and transport wastewater to the Central Marin Sanitation Agency treatment plant. During dry weather, the district collects approximately 5 million gallons of wastewater per day; during wet weather, this number can increase to more than 50 million gallons per day. In order to operate, the district must adhere to regulations set by the State Water Resources Control Board. The district is funded primarily by wastewater collection fees from ratepayers and property taxes. It receives a historically proportionate share of the property tax revenue collected in the area it serves. The district also has the authority to issue bonds. As Table 1 shows, in fiscal year 2013–14, the district had total revenues of approximately $21.3 million. These revenues consisted mainly of about $14.9 million from wastewater collection fees and $5.8 million from property taxes. In the same fiscal year, the district’s expenses totaled approximately $18.3 million, including more than $6 million for operating and maintenance expenses; approximately $4 million for wastewater treatment charges; $2.7 million for administrative expenses; and $5.6 million for depreciation, debt service, and other expenses. At the end of fiscal year 2011–12, the district had significantly depleted its unrestricted balance, which includes funds used for general operating purposes and money not tied to any particular use, because it previously spent money on budgeted and unexpected sewer system repairs. In August 2013 the district issued $17.8 million in revenue bonds that it used to refinance existing debt and finance improvements to its wastewater system, such as pipe and equipment replacements and repairs, and to rebuild its cash balance. More recently, in November 2014, the district issued another $30.2 million in revenue bonds to finance additional improvements to its wastewater system. State law requires the district to file financial reports annually with the California State Controller’s Office. In addition, state law requires the county auditor to ensure that the district obtains regular financial audits of its accounts, prepared by either the county auditor or an independent public accounting firm. A five‑member board of directors (board) governs the district. Voters in the district elect the board at large, with two or three members elected in alternating, even‑numbered years. Board members are elected to serve four‑year terms with no term limits, and the current members come from a variety of different backgrounds, including nursing, consulting, and law. The board meets at least once a month and holds special meetings as necessary. Typical duties of a board, such as the California State Auditor Report 2014-122 9 April 2015 district board, include approving the annual budget, approving contracts, evaluating the performance of the general manager of the district, establishing job descriptions and salary ranges for all district positions, and reviewing district finances. As of April 2015 board members earn $299 per day of service and can be paid for a maximum of six days each month, or roughly $1,800. According to state law, a day of service can consist of attending monthly board meetings or attending conferences, among other things. Board members do not receive pension benefits or any other benefits (such as health or dental insurance) for their service to the district. Table 1 Condensed Statements of Net Position and Revenues, Expenses, and Changes in Net Position Fiscal Years 2009–10 Through 2013–14 (In Thousands) Condensed Statement of Net Position FISCAL YEAR ENDING JUNE 30, 2010 JUNE 30, 2011 JUNE 30, 2012 JUNE 30, 2013 JUNE 30, 2014 Total assets $67,984 $70,522 $73,944 72,913 $85,566 Total liabilities (16,521) (15,705) (15,259) (10,721) (20,362) Net investment in capital assets 38,920 49,341 57,483 56,485 54,552 Restricted 0 0 42 42 42 Unrestricted 12,543 5,476 1,160 5,665 10,610 Total net position $51,463 $54,817 $58,685 $62,192 $65,204 Condensed Statement of Revenues, Expenses, and Changes in Net Position FISCAL YEAR ENDING JUNE 30, 2010 JUNE 30, 2011 JUNE 30, 2012 JUNE 30, 2013 JUNE 30, 2014 Total revenues $20,584 $20,749 22,097 20,338 $21,322 Total expenses (17,246) (17,395) (18,229) (16,832) (18,310) Changes in net position 3,338 3,354 3,868 3,506 3,012 Beginning net position 48,125 51,463 54,817 58,686 62,192 Ending net position $51,463 $54,817 $58,685 $62,192 $65,204 Source: Ross Valley Sanitary District’s June 30, 2014, audited comprehensive annual financial report. As shown in Figure 2 on the following page, the general manager, under the direction and supervision of the board, oversees the district’s activities. The general manager is responsible for directing and supervising the district’s managers, including the district engineer, chief of operations, and business manager. The district engineer supervises all of the district’s engineering activities, including overseeing the bidding process for capital construction contracts and construction‑related contracts for engineering, design, and construction management services. The chief of 10 California State Auditor Report 2014-122 April 2015 operations directs all operations and maintenance and repairs of district facilities. The business manager’s responsibilities include financial planning, developing internal controls, and preparing the district’s annual budget. The assistant engineer, inspection and maintenance superintendents, and accounting manager are also management staff. The assistant engineer performs design work; administers contracts; conducts studies regarding capital projects; and provides engineering, planning, and technical support to the district engineer. The inspection superintendent is responsible for training, scheduling, and leading the inspection crew. The maintenance superintendent plans, directs, and evaluates the activities of the maintenance department. The accounting manager coordinates and performs the district’s accounting under the direction and supervision of the business manager. Figure 2 Ross Valley Sanitary District Organizational Chart FIVE-MEMBER BOARD OF DIRECTORS Unrepresented managers Unrepresented staff Represented staff* GENERAL MANAGER ADMINISTRATIVE ASSISTANT DISTRICT ENGINEER CHIEF OF OPERATIONS BUSINESS MANAGER ASSISTANT ENGINEER INSPECTION SUPERINTENDENT MAINTENANCE SUPERINTENDENT ACCOUNTING MANAGER ADMINISTRATIVE ASSISTANTS INSPECTION STAFF MAINTENANCE STAFF Source: Ross Valley Sanitary District fiscal year 2013–14 comprehensive annual financial report. * District staff are represented by the American Federation of State, County, and Municipal Employees Local 2167. The district has 38 authorized positions for fiscal year 2014–15. Employees at the district fall into three categories: unrepresented management employees, unrepresented administrative employees, and represented employees. The district has negotiated a memorandum of understanding (MOU) for its 25 represented positions that establishes their benefits and cost‑of‑living adjustments and has an MOU with similar terms with its California State Auditor Report 2014-122 11 April 2015 13 unrepresented management and administrative positions. The American Federation of State, County, and Municipal Employees Local 2167 negotiates labor issues for the district’s represented employees. The current MOUs are in effect from June 2009 to June 2015. The district has created job descriptions for all its positions. The board has established pay ranges for all district positions except the general manager, whose salary is established in an employment contract. In July 2012 the district’s former general manager—who had been in the position since November 2008—voluntarily resigned. The district attorney of the County of Marin (district attorney) has since filed a criminal complaint accusing the former general manager of misappropriation of public funds, embezzlement, and money laundering. Specifically, the district had previously provided $350,000 to the former general manager as part of his employment contract to use as a down payment assistance loan so that he could purchase housing in the Bay Area; however, he allegedly did not use the money for that purpose. The district attorney conducted an investigation, and a trial is scheduled to begin in August 2015. The district also filed a civil lawsuit to recover the $350,000 loan, which has been stayed until the criminal trial is decided. After the former general manager resigned, the district’s business manager served as interim general manager for roughly seven months until February 2013 when the district hired its current general manager from outside the district. Scope and Methodology The Joint Legislative Audit Committee (audit committee) directed the California State Auditor to evaluate the district’s policies and practices over its financial and administrative operations. Table 2 beginning on the following page lists the audit committee’s objectives and the methods we used to address them. 12 California State Auditor Report 2014-122 April 2015 Table 2 Audit Objectives and Methods Used to Address Them AUDIT OBJECTIVE METHOD 1 Review and evaluate the laws, rules, • Reviewed relevant laws and other background materials related to the Ross Valley Sanitary and regulations significant to the District (district). audit objectives. • Reviewed relevant district policies and procedures. 2 Determine what steps the district • Reviewed the audits of the district’s financial statements conducted by external auditors for fiscal has taken to identify weaknesses years 2009–10 through 2013–14. in its financial, operational, and • Reviewed internal control reports provided by the district’s external auditor for fiscal years 2012–13 administrative policies and practices and 2013–14. that were in place from 2009 through • Reviewed the needs assessment and work plan developed by the district’s human resources 2013, and determine the status management consultants. of the district’s corrective actions resulting from its own reviews or • Interviewed key district staff and members of the board of directors (board) about their efforts to from recommendations in past audits implement corrective actions identified in the reports previously mentioned. and reviews. 3 Determine whether the district’s • Reviewed the district’s governance structure, including board member responsibilities described in current governance structure relevant policies and procedures and the district’s orientation manual for new board members. promotes sound operational and • Compared board oversight of key district functions with best practices included in the California financial practices, and identify Special Districts Association’s Special District Board Member/Trustee Handbook. the extent to which the board • Reviewed board meeting minutes and interviewed board members to identify board and senior management exercise responsibilities and practices that the district has not formally documented. oversight of the district’s financial and administrative operations. • Reviewed the training that board members receive. 4 Examine the district’s operational Identified and evaluated controls over the district’s key financial and administrative functions. structure and asses its management Specifically, we determined whether the district’s internal controls were adequate by assessing controls and practices. Determine their design as documented in the district’s policies and determining whether they were operating whether the controls over significant effectively by performing testing in these functional areas. financial and administrative functions provide reasonable assurance that the practices are consistent with relevant laws, regulations, and accounting standards. 5 Determine whether the district’s • Reviewed the district’s audited financial statements to ensure that the district received an financial practices safeguard assets unqualified opinion for each of the last five fiscal years and to verify that the district properly and ensure proper accounting and accounts for and reports revenues, expenditures, bonds, and capital asset values. reporting of revenues, expenditures, • Interviewed district staff to obtain an understanding of the district’s financial practices. and capital asset values. • Reconciled district financial data to bank statements and to audited financial statements. a. Determine whether revenues Determined that the district’s financial data were complete for the purposes of selecting and capital asset valuations are transactions for review. appropriate and properly recorded. • Judgmentally selected and reviewed 10 transactions from each of the five fiscal years from b. Determine whether expenditures 2009–10 through 2013–14, including expenditures for capital projects, procurement of goods, (including bond proceeds) are professional and legal services, payroll, board compensation, and reimbursement for travel for allowable activities and expenses to verify that the expenditures were allowable and made in the ratepayers’ best interest. properly recorded. • Reviewed relevant documentation for revenue bonds the district issued in August 2013 and November 2014. In addition, we determined whether bond expenditures were for allowable activities by reviewing procurements for capital projects. California State Auditor Report 2014-122 13 April 2015 AUDIT OBJECTIVE METHOD 6 Determine whether the district’s • Reviewed the district’s most current salary and wage information. current compensation levels of • Compared the salary ranges of six key management positions and maintenance and inspection pay and benefits for its workforce, positions at the district with the salary ranges for equivalent positions at comparable wastewater including the general manager, are agencies using the 2014 salary and benefits survey conducted by the California Association of commensurate with the duties and Sanitation Agencies (sanitation association). responsibilities of comparable public • Reviewed the district’s practices of offering cost‑of‑living adjustments, longevity pay, and merit wastewater agencies. salary increases. • Compared the benefits that the district offers its employees with the benefits that comparable agencies reported in the sanitation association’s salary and benefits survey. • Reviewed changes the district made to salary ranges for key management positions in the last five fiscal years. • Compared employment contracts for the district’s former and current general managers. 7 Review a selection of the district’s • Reviewed relevant laws and policies and interviewed district staff to understand the processes for contracts for capital projects and awarding capital construction contracts, construction‑related professional services contracts, and determine whether it complied general professional services contracts. with laws, regulations, and best • Reviewed district records of capital contracts for fiscal years 2009–10 through 2013–14 to practices for awarding such contracts. determine the completeness of those records. Determined that the district records were complete Specifically, determine whether for the purposes of selecting contracts for review. the district used a competitive • Reviewed the following contracts that the district awarded between July 2009 and bidding process where appropriate September 2014 and assessed compliance with laws, district policy, and best practices: and obtained the best value for its contracted capital projects. – Six of the 22 capital construction contracts. – Three of the 16 construction‑related professional services contracts. – Six general professional services contracts for legal, audit, human resources management, and public relations services. • Reviewed the district’s seven emergency actions from fiscal year 2009–10 through 2013–14 to determine if its practices complied with relevant laws and district policies. 8 Assess whether the district’s financial • Reviewed the district’s ethics training requirements, fraud reporting policy, and and administrative policies, practices, conflict‑of‑interest code. and controls are adequate to prevent, • Determined whether board members and other designated employees filed annual conflict of identify, and address fraud, abuse, and interest forms (Form 700) during 2009 through 2013. conflicts of interest. • Evaluated the effectiveness of the district’s financial and administrative controls by testing the appropriateness of expenditures, compensation, and contracts as previously described. 9 Review and assess any other issues We did not identify any other significant issues. that are significant to the operations and financial practices of the district. Source: California State Auditor’s analysis of Joint Legislative Audit Committee audit request 2014‑122, and information and documentation identified in the table column titled Method. 14 California State Auditor Report 2014-122 April 2015 Blank page inserted for reproduction purposes only. California State Auditor Report 2014-122 15 April 2015 Audit Results Until Recently, the Board of Directors and Management Had Failed to Implement Important Controls Over the Ross Valley Sanitary District’s Financial and Administrative Functions The Ross Valley Sanitary District (district) has only recently taken steps to correct weaknesses that its external auditors and human resources consultants identified in its financial and administrative policies and practices—beginning those efforts in fiscal year 2013–14. These weaknesses include significant deficiencies in the district’s internal controls that could potentially allow fraud, waste, and abuse of public funds to go undetected. Further, an assessment of the district’s human resources management systems found numerous problems, including ineffective communication channels and a lack of clear performance expectations. Although the district has implemented new policies that strengthen its internal controls and address some of these concerns, weaknesses still exist. In addition, the district’s board of directors (board) has failed to provide adequate oversight of the district’s activities. Board members lack an understanding of their role in ensuring the prudent management of the district, and receive inadequate training in how to fulfill their responsibilities. External Auditors Identified Significant Concerns With the District’s Internal Controls In accordance with state law, the district hired an external auditor to conduct an annual audit of its financial statements for each of the last five fiscal years. As part of those audits, the external auditors determined that the district’s revenues, expenditures, and capital asset values were presented fairly in the district’s annual financial statements in accordance with applicable accounting principles. For some of the fiscal years we reviewed, the external auditors also raised concerns regarding the district’s internal controls. The auditors considered the district’s internal controls over financial reporting as a basis for designing their auditing procedures for the purpose of expressing their opinions on the financial statements. The objectives of the district’s internal controls are to provide management with reasonable assurance regarding the safeguarding of assets against loss from unauthorized acquisition, use, or disposition and to provide reliable financial records for maintaining accountability for assets and for preparing financial statements. For fiscal years 2009–10 through 2011–12, the external 16 California State Auditor Report 2014-122 April 2015 auditors that performed the audit during that time did not identify any deficiencies in internal controls that they considered material or significant.1 An external auditor that was hired However, the new external auditor that was hired in May 2013 in May 2013 to audit the district’s to audit the district’s fiscal years 2012–13 and 2013–14 financial fiscal years 2012–13 and 2013–14 statements identified several significant deficiencies in the district’s financial statements identified internal controls. For example, the auditor found during its fiscal several significant deficiencies in year 2012–13 audit that the accounting manager was responsible the district’s internal controls. for entering invoices into the accounting system, preparing checks to pay those invoices, and reconciling bank statements to the district’s records. Such an arrangement could allow an employee to issue a fraudulent check by altering accounting entries or preparing fictitious bank reconciliations. The external auditor appropriately concluded that this lack of segregation of duties could lead to errors or irregularities that might not be detected. During the fiscal year 2013–14 audit, the external auditor followed up on the status of the prior year’s recommendations and identified additional concerns. For example, the external auditor found that the district still did not have formal written policies governing travel, credit card use, or purchasing activities. Later in this section, we discuss our review of the controls the district has implemented in response to the concerns raised by the external auditor. The Appendix describes the problems noted by the external auditor in more detail, including the effect of each problem and the status of each recommendation. The external auditor engaged for the fiscal years 2012–13 and 2013–14 audits also tested the district’s compliance with certain provisions of laws, regulations, contracts, and grant agreements— noncompliance with which could have a direct and material effect on the district’s financial statements—and reported that these tests disclosed no instances of noncompliance that were required to be reported under government auditing standards. Consultants Found Serious Problems With the District’s Management of Human Resources In August 2013 the district contracted with a separate entity to provide human resources management consultants to help the district assess and develop its human resources management systems. The consultants interviewed district managers and staff and reviewed the district’s administrative policies, personnel policies, labor contracts, and payroll information. In addition, the 1 A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. California State Auditor Report 2014-122 17 April 2015 consultants provide weekly on‑site human resources services to the district. In April 2014 the human resources consultants reported In April 2014 the human resources that the district had ineffective or nonexistent organizational consultants reported that the communication channels, a lack of role clarity throughout the members of the management team organization, and a lack of clear performance expectations and did not have technical expertise accountability at the individual level. Moreover, the consultants in human resources management found that the members of the management team did not have and generally took a reactive rather technical expertise in human resources management and generally than a proactive approach to took a reactive rather than a proactive approach to human human resources issues. resources issues. The consultants also found that human resources data and pay and benefits data were not maintained in a system that allowed for easy access or analysis. Furthermore, the consultants reported that the district’s personnel administration system was not well matched to current employment law, best practices, or the present needs of the organization. The human resources consultants created a work plan to resolve these deficiencies that identified six major priorities that the consultants would work with the district to complete. These priorities are as follows: • Develop and use a performance management system that includes performance measurement metrics that can be used to clearly identify performance problems and/or the need for training. • Improve administrative policies to provide a clear set of workplace expectations and roles for managers and staff. • Develop a long‑range staffing plan and update job descriptions to align with current industry best practices. • Create and implement training plans to train all employees in respectful and effective workplace communication and behavior. • Develop a strategy for upcoming labor negotiations, and hire a professional labor negotiator to lead this complex process. Because district employees have enjoyed six years of salary growth under the current labor agreement, and because salaries and benefits represent a substantial portion of the district’s budget, as part of developing this strategy the district should perform a comprehensive review of present and projected personnel costs and carefully weigh such costs against the value received and the district’s overall financial condition. • Implement certain ideas presented by staff in an initial strategic planning workshop, such as developing a succession plan and identifying employee recognition methods. 18 California State Auditor Report 2014-122 April 2015 Table 3 summarizes the district’s progress in implementing the six elements of the work plan. Table 3 Progress Made and Target Completion Dates for the Elements of the Ross Valley Sanitary District’s Human Resources Work Plan ELEMENTS OF HUMAN TARGET RESOURCES WORK PLAN EXAMPLES OF PROGRESS MADE COMPLETION DATE Develop and use 1. Completed draft of new performance management tool for supervisors to use when September 1, 2015 a performance assessing employee performance. management system 2. Provided skills development coaching to supervisors and managers. Revise, update, or create 1. Drafted policies on numerous topics, including mandated leave and employee training. June 30, 2016 administrative policies 2. Improved district’s hiring systems by implementing an online application process, developing a and systems selection process, and providing additional training for supervisors overseeing new employees. Develop a long‑range 1. Developed three‑part exercise to assess future needs and plan for skills development. September 1, 2015 staffing plan 2. Met with general manager to redefine focus of the planning process. Create and implement 1. Developed and delivered initial training on respectful and effective workplace June 1, 2015 training plans communication and behavior. 2. Facilitated the development of job‑based training plans. Prepare a strategy for 2015 1. Assisted in obtaining services of a professional labor negotiator for the district. July 1, 2015 labor negotiations 2. Reviewed language in memorandum of understanding for administrative and employment law issues. Implement strategic 1. Facilitated management review of certain staffing and leadership needs, which resulted in July 1, 2015 planning workshop ideas clear staff assignments and workload parameters. 2. Facilitated the implementation of several official communication channels within the organization. Sources: November 2014 Human Resources work plan progress report and the Ross Valley Sanitary District’s target completion dates. Although the District Has Strengthened Its Controls and Policies, Weaknesses Still Exist We reviewed the district’s controls over significant financial and administrative functions, including controls it implemented in response to the findings of its external auditor. During our review, we evaluated the adequacy of 32 of the district’s key controls over financial, procurement, payroll, and human resources functions for preventing, identifying, and addressing the potential for fraud, abuse, and conflicts of interest. The results were mixed. Although we found 17 of the district’s key controls to be adequate, 15 were not. The district has recently implemented many new policies that strengthen its controls over its financial and administrative functions, as shown in Table 4 beginning on page 20, but weaknesses still exist. For example, in February 2015 the district implemented a new policy that strengthens controls over travel and other expense reimbursements claimed by board members and employees. However, the new policy is inadequate because it does not provide sufficient limitations on lodging costs. As another example, the district strengthened its controls over its inventory California State Auditor Report 2014-122 19 April 2015 by conducting a physical count of its inventory at the end of fiscal year 2013–14 and by implementing an inventory and valuation policy in September 2014. However, the district still does not record inventory in its accounting system and does not track inventory that comes in or goes out. According to the district’s business manager, the district is currently working on implementing an inventory tracking system. Moreover, as described in subsequent sections of this report, the district did not always follow the policies it had in place. The failure of the district’s management to establish adequate controls over the district’s financial and administrative functions until recently may have been the result of poor leadership. As mentioned in the Introduction, the former general manager, who was hired in November 2008, resigned in July 2012 amid allegations of civil and criminal misconduct. Nevertheless, good management practices and the job descriptions for the district’s management positions make it clear that management is responsible for developing and implementing these controls and ensuring that the district operates efficiently and effectively. The Board Failed to Adequately Oversee the District, and Board Members Receive Little Training The board is the governing body responsible for ensuring that the district fulfills its stated mission to deliver to its customers the highest‑quality and most cost‑effective wastewater collection system possible. However, the board has not adequately overseen the district’s financial and administrative functions over the past five fiscal years. Although the district has begun to strengthen its policies and procedures, the board needs to ensure that management continues to strengthen the controls over its key financial and administrative functions to protect against the potential for fraud, waste, abuse, and conflicts of interest. One potential cause for the board’s failure to adequately oversee the district may be that board members receive insufficient training. State law requires board members to attend biannual ethics training and training on the Brown Act, which governs public local government meetings. In addition, in September 2014, the district provided new board member training that covered board member roles, the board governance process, and board communications, among other topics. We believe that these are important concepts for board members to We believe board members understand, but they are not sufficient to guide board members should seek additional training in fulfilling all of their duties and responsibilities. As described in in establishing appropriate subsequent sections of this report, board members have demonstrated compensation levels, reviewing a lack of understanding of their role in certain key district processes, and approving declarations including establishing appropriate compensation levels, reviewing and for emergency procurement, approving declarations for emergency procurement, contracting for contracting for professional professional services, and ensuring that the district has established services, and ensuring appropriate appropriate processes for essential human resources functions. We processes for essential human believe that the board should seek additional training in these areas. resources functions are in place. 20 California State Auditor Report 2014-122 April 2015 4 elbaT snoitcnuF evitartsinimdA dna laicnaniF tnacfiingiS revO slortnoC s’tcirtsiD yratinaS yellaV ssoR eht fo dracerocS GNITNEMUCOD YCILOP HCIHW NI RAEY LACSIF ECALP NI SAW LORTNOC DNA LAICNANIF OT 4102 ,1 YLUJ EVITARTSINIMDA SLORTNOC FO YCAUQEDA 5102 ,82 YRAURBEF 41–3102 31–2102 21–1102 11–0102 01–9002 SLORTNOC YEK SNOITCNUF ti ekam ton od seicilop s’tcirtsid ehT .etauqedanI ssoR eht ni seciovni gnidrocer ,seciovni rodnev gnivorppa fo seitud ehT laicnaniF stnemetats knab selicnocer ohw nosrep eht taht raelc ,skcehc gniraperp ,metsys gnitnuocca )tcirtsid( s’tcirtsiD yratinaS yellaV .skcehc gniraperp ro seciovni gnidrocer eb ton dluohs eb dluohs sdrocer s’tcirtsid eht ot stnemetats knab gnilicnocer dna *.seeyolpme tnereffid yb demrofrep raelc ti ekam ton seod ycilop s’tcirtsid ehT .etauqedanI elbisnopser a yb devorppa dna deweiver eb dluohs snoitailicnocer knaB .snoitailicnocer knab gnivorppa dna gniweiver si ohw *.sisab ylhtnom a no laicffio esnepxe dna levart wen s’tcirtsid ehT .etauqedanI esnepxe rehto dna levart eeyolpme dna )draob( srotcerid fo draoB etauqeda edivorp ton seod ycilop tnemesrubmier eb dluohs dna ,stpiecer yb detroppus eb dluohs stnemesrubmier sesrubmier yletairporppani dna stsoc gnigdol no stimil ot reganam dna rosivrepus etairporppa na yb devorppa dna deweiver ot pu( tnempiuqe esicrexe fo esu eht rof seeyolpme *.ycilop tcirtsid htiw ylpmoc dna etairporppa era sesnepxe taht erusne .)yad a 51$ tcirtsid defiiceps ro srebmem draob( slaudividni dezirohtua owT .etauqedA .skcehc lla ngis dluohs )sreganam .etauqedA *.dedraugefas eb dluohs kcots kcehc knalB .etauqedA .deniatbo eb dluohs tidua laicnanfi launna nA siht detnemucod ton sah tcirtsid ehT .etauqedanI ot noitamrofni laicnanfi troper yllacidoirep dluohs tnemeganaM .ycilop ni lortnoc .draob eht gnibircsed ycilop tnemtsevni na evah dluohs tcirtsid ehT yllacidoirep dluohs tnemeganam dna ,sepyt tnemtsevni devorppa .etauqedA tekram ,dleh stnemtsevni fo sepyt( noitamrofni tnemtsevni troper .draob eht ot ).cte ,setad ytirutam ,seulav siht detnemucod ton sah tcirtsid ehT .etauqedanI era lennosrep etairporppa ylno taht erusne dluohs tnemeganaM .ycilop ni lortnoc *.stnuocca laicnanfi no srengis dezirohtua sa dedulcni edulcni ton seod ycilop s’tcirtsid ehT .etauqedanI gnikcart rof metsys etairporppa na taht erusne dluohs tnemeganaM .yrotnevni gniulav dna gnikcart rof serudecorp a mrofrep yllaunna dluohs dna ,ecalp ni si yrotnevni gniulav dna *.rof detnuocca si yrotnevni lla taht erusne ot tnuoc lacisyhp rewes dna ,seef ,stimrep rof ,elpmaxe rof( deviecer skcehc dna hsaC .etauqedA dna ,efas ro xobkcol a ni deruces yllacisyhp eb dluohs )segrahc ecivres *.sisab ylkeew a no knab s’tcirtsid eht htiw detisoped eb dluohs sremotsuc morf skcehc dna hsac gnitisoped dna gniviecer fo seitud ehT .etauqedA sdrocer s’tcirtsid eht ot stnemetats knab gnilicnocer fo seitud eht dna .seeyolpme tnereffid yb demrofrep eb dluohs dluohs sdeen s’tcirtsid eht teem taht sevreser dna secnalab dnuF .etauqedA .dehsilbatse eb eb dluohs slairetam dna sdoog gnisahcrup rof ssecorp evititepmoc A tnemerucorP .etauqedA *.dehsilbatse rof slevel noitazirohtua gnisahcrup hsilbatse dluohs draob ehT .etauqedA *.snoitisop tcirtsid etairporppa California State Auditor Report 2014-122 21 April 2015 noitcurtsnoc gnidrawa rof ssecorp evititepmoc a esu dluohs tcirtsid ehT .etauqedA tcejorp ,noitcurtsnoc rof( stcartnoc detaler‑noitcurtsnoc dna *.wal etats htiw seilpmoc taht ).cte ,secivres larutcetihcra ,tnemeganam dengised si ycilop wen eht hguohtlA .etauqedanI rof stcartnoc gnidrawa rof ssecorp evititepmoc a esu dluohs tcirtsid ehT siht wollof yltnetsisnoc ton did tcirtsid eht ,yletauqeda ton rof tem era airetirc etairporppa sselnu secivres lanoisseforp lareneg .noitpoda s’ycilop eht erofeb lortnoc *.)tnemerucorp ecruos‑elos( ssecorp evititepmoc a gnisu eht tub ,yletauqeda dengised si ycilop ehT .etauqedanI fo tnemerucorp s’tcirtsid eht eesrevo ylreporp dluohs draob ehT .ycilop eht ot erehda yltnetsisnoc ton did draob *.ycnegreme na gnirud tnempiuqe dna ,seilppus ,secivres ot srodnev lufsseccusnu rof dehsilbatse eb dluohs stnemeriuqeR .etauqedA *.tcartnoc a fo gnidrawa eht tsetorp .etauqedA .stcartnoc ot segnahc lairetam evorppa dna weiver dluohs draob ehT owt eriuqer ton seod tcirtsid ehT .etauqedanI emit kcart ot steehsemit etelpmoc ot deriuqer eb dluohs seeyolpme llA lloryaP .steehsemit etelpmoc ot seeyolpme tnemeganam *.ffo emit detasnepmoc yna dna dekrow hcae yb devorppa dna deweiver eb dluohs steehsemiT .etauqedA .rosivrepus s’eeyolpme ton seod ycilop emitrevo s’tcirtsid ehT .etauqedanI lavorppa s’rosivrepus rieht niatbo ot deriuqer eb dluohs seeyolpmE .tnemeriuqer siht niatnoc .emitrevo diap gnikrow erofeb dna ,seeyolpme tnereffid owt yb dezirohtua eb dluohs stisoped tceriD .etauqedA .seeyolpme tnereffid owt yb dengis eb dluohs skcehc lloryap eht otni setar egaw gniretne ,setar egaw gnivorppa fo seitud ehT .etauqedA yb demrofrep eb dluohs lloryap gnissecorp dna ,metsys gnitnuocca *.seeyolpme tnereffid htiw ylpmoc dluohs noitasnepmoc sti gnitsujda rof ssecorp s’draob ehT namuH .etauqedA .wal etats secruoser detnemucod ton sah tcirtsid ehT .etauqedanI ,gnirfi dna gnirih rof sessecorp hsilbatse dluohs draob ehT s’reganam lareneg eht gnitaulave rof ycilop a fo noitasnepmoc eht gnitsujda dna ,fo ecnamrofrep eht gnitaulave desab‑tirem yna gninimreted rof dna ecnamrofrep .reganam lareneg eht .sesaercni noitasnepmoc yltnetsisnoc ton sah tcirtsid ehT .etauqedanI ,seeyolpme gnirih rof sessecorp hsilbatse dluohs tnemeganaM .seeyolpme fo snoitaulave launna demrofrep gnitsujda ,enilpicsid evissergorp gnisopmi ,ecnamrofrep gnitaulave †.evael gnisu dna gniurcca dna ,noitasnepmoc siht detnemucod ton sah tcirtsid ehT .etauqedanI lauxes etelpmoc dluohs seeyolpme yrosivrepus dna srebmem draoB taht derusne ton sah dna ycilop ni tnemeriuqer .yllaunnaib gniniart noitneverp tnemssarah .gniniart siht dnetta srosivrepus siht detnemucod ton sah tcirtsid ehT .etauqedanI ni etapicitrap taht esoht( seeyolpme detangised dna srebmem draoB .ycilop ni lortnoc )stseretni laicnanfi rieht tceffa yllairetam yam taht snoisiced gnikam .yllaunnaib gniniart scihte etelpmoc dluohs rof ssecorp a evah ton seod tcirtsid ehT .etauqedanI )007 mroF( stseretni cimonoce fo stnemetats esu dluohs tcirtsid ehT stciflnoc laitnetop yfitnedi ot s007 mroF gniweiver ot deriuqer era seeyolpme detangised dna srebmem draob taht detangised lla taht erusne ton seod dna tseretni fo .tseretni fo stciflnoc laitnetop yfitnedi ot yllaunna etelpmoc .s007 mroF etelpmoc seeyolpme taht ycilop gnitroper duarf lamrof a hsilbatse dluohs tnemeganaM .etauqedA *.duarf detcepsus troper ot wollof ot seeyolpme rof serudecorp sedulcni .snoitcnuf evitartsinimda dna laicnanfi tnacfiingis revo slortnoc s’tcirtsid eht fo tnemssessa s’rotiduA etatS ainrofilaC :ecruoS .slortnoc eseht ot detaler smelborp dnuof rotidua lanretxe s’tcirtsid eht ,xidneppA eht ni debircsed sA * .slortnoc eseht ot detaler smelborp dnuof stnatlusnoc secruoser namuh s’tcirtsid eht ,81 egap no 3 elbaT ni debircsed sA † 22 California State Auditor Report 2014-122 April 2015 Further, the board’s roles and responsibilities are not adequately documented. We would expect the district to have a comprehensive manual that includes policies describing the various oversight roles and responsibilities of the board in a manner that would allow board members, particularly those newly elected, to fully understand their fiduciary responsibilities. Instead, the district provides new board members an orientation manual that includes the district’s mission statement and service area map, examples of district financial statements, budget information, copies of its memorandums of understanding (MOUs) with its employees, and various regulatory documents. This manual does not adequately describe the board’s responsibility Key Board Responsibilities That the Ross Valley for ensuring that management has appropriate Sanitary District Has Not Documented in Its controls in place over important financial and Board Policies and Procedures or Board Member Orientation Manual administrative functions. • Support and assess the performance of the general manager. Very few board responsibilities, such as signing contracts and declaring emergencies when • Approve personnel policies. the sewer system fails, are established in state • Establish salary structure and benefits packages. law. However, the California Special Districts • Approve job descriptions and organizational structure. Association identifies in its Special District Board Member/Trustee Handbook several board • Ensure that sound fiscal policy exists, and that controls are responsibilities over financial and administrative in place. functions that could serve as best practices for • Approve the annual budget. the district. Although the board does some of • Establish financial goals and review district finances. these things in practice, the board orientation manual and the board policies and procedures do • Develop capital improvement plans. not describe the board responsibilities shown in • Set rates and fees. the text box. It is important to document these responsibilities so that board members know all Source: Best practices from the California Special Districts Association’s Special District Board Member/Trustee Handbook. of the things they are required to do to adequately oversee the district. Compensation for District Employees Is High Relative to Salaries at Comparable Sanitation Agencies The board’s oversight over employee compensation has been lax and has resulted in high salaries for district employees relative to what employees in similar positions receive at comparable sanitation agencies. We do not believe that the district’s practice of offering excessive compensation to employees is an appropriate use of revenue generated from fees and taxes paid by its ratepayers. Personnel costs take up an increasing portion of the district’s total expenses—rising from 20 percent in fiscal year 2009–10 to 28 percent in fiscal year 2013–14. California State Auditor Report 2014-122 23 April 2015 Using the 2014 salary and benefits survey that the California Association of Sanitation Agencies (sanitation association) conducted, we compared the salaries of the district’s key management employees with salaries of a variety of local agencies that provide sanitation services in California. For the survey, participating agencies self‑report salary information to the sanitation association via a standard form, which includes a list of standardized positions and a description of each; agencies select which positions most closely match their own based on the qualifications and responsibilities included in the descriptions. Several of the agencies we selected were similar to the district in number of employees, annual budget, complexity of operation, and population served. However, we also included agencies that are larger and more complex than the district (for example, agencies that also operate their own wastewater treatment facility). In addition, the sanitation association survey categorizes agencies with similar numbers of employees into different groups and calculates an average salary range for each position in each group. We included two of these groups in our comparison. Except for the general manager, the top of the district’s salary Except for the general manager, the ranges for all of the positions we reviewed ranked fourth or higher top of the district’s salary ranges among the agencies we compared. For example, Table 5 beginning for all of the positions we reviewed on the following page shows that the salary range for the district’s ranked fourth or higher among the business manager is the highest of the comparable positions at all comparable agencies. nine agencies and agency groups (including the district). In fact, the high end of the business manager’s salary range is $2,613 higher per month, or 18 percent greater, than that of a comparable position at the Dublin San Ramon Services District (Dublin), which reported serving a population nearly three times larger than the district’s, having an annual operating and maintenance budget more than three times larger than the district’s, and employing nearly three times as many people. Similarly, at $12,754 per month, the top of the district’s assistant engineer salary range is the highest in our comparison of that position at 12 agencies and agency groups. It is 14 percent higher than the top monthly salaries of comparable positions at Dublin and Delta Diablo (Delta). Both Dublin and Delta serve populations that are significantly larger than the district and employ significantly more people. The top of the district’s accounting manager’s salary range is also high, ranking second out of the 12 agencies and agency groups in our comparison. At $12,754, it is nearly 12 percent higher than the top of the salary range for a similar position at Delta, which is a larger agency. 24 California State Auditor Report 2014-122 April 2015 Table 5 Monthly Salary Ranges for Key Management Employees at Comparable Sanitation Agencies AGENCY INFORMATION ASSISTANT GENERAL ANNUAL MANAGER/CHIEF OF DIRECTOR OF FINANCE/ ACCOUNTING SUPERVISOR/ SENIOR ENGINEER/ ASSOCIATE ENGINEER/ OPERATIONS AND GENERAL MANAGER OPERATIONS BUSINESS MANAGER ACCOUNTING MANAGER DISTRICT ENGINEER ASSISTANT ENGINEER MAINTENANCE POPULATION TOTAL AGENCY BUDGET SERVED EMPLOYEES MINIMUM MAXIMUM RANK MINIMUM MAXIMUM RANK MINIMUM MAXIMUM RANK MINIMUM MAXIMUM RANK MINIMUM MAXIMUM RANK MINIMUM MAXIMUM RANK Ross Valley Sanitary District (district)* $14,760,770 55,000 38 $14,978 $14,978 11 $11,610 $15,928 4 $12,502 $17,153 1 $9,296 $12,754 2 $10,518 $14,430 4 $9,296 $12,754 1 Central Marin Sanitation Agency 10,080,000 105,000 41 17,322 17,322 5 NA NA NA NA 7,193 8,743 9 11,160 13,565 5 7,977 9,696 8 Daly City, City of† 15,920,121 105,000 66 12,860 15,631 10 NA NA 12,990 15,790 3 7,640 9,287 7 NA NA 7,369 8,957 9 Delta Diablo 22,900,000 200,000 74 22,391 23,391 2 14,602 18,236 1 NA NA 9,128 11,400 3 12,965 16,192 1 8,932 11,155 2 Dublin San Ramon Services District 53,094,704 157,000 106 23,433 23,433 1 15,088 17,109 2 14,540 14,540 4 10,499 12,761 1 13,061 15,088 2 8,050 11,147 3 Novato Sanitary District 9,300,000 52,550 22 15,832 15,832 9 11,477 13,950 6 7,046 8,564 9 NA NA 8,564 10,410 11 6,547 7,957 11 South Tahoe Public Utility District 9,344,520 36,363 108 13,318 16,998 6 12,116 15,464 5 10,245 13,076 6 7,347 9,377 6 10,237 13,065 7 7,712 9,843 5/6 Tahoe‑Truckee Sanitation Agency 12,483,310 60,000 48 14,902 14,902 12 11,532 13,377 7 NA NA 7,094 8,233 12 10,538 12,225 9 6,818 7,917 12 Union Sanitary District 31,355,356 331,387 130 19,871 19,871 3 NA NA 13,061 17,143 2 6,820 8,951 8 NA NA 7,944 10,427 4 West County Wastewater District 13,040,000 97,296 57 16,584 16,584 8 NA NA NA NA 7,954 9,802 5 11,817 14,560 3 7,989 9,843 5/6 West Valley Sanitation District* 26,200,000 109,000 29 16,958 16,958 7 NA NA 10,589 12,457 7 8,528 10,033 4 11,157 13,126 6 NA NA Group 3 (30 to 55 employees)‡ This information was not 30–55 13,215 13,460 13 9,558 11,870 8 7,337 9,615 8 7,045 8,436 11 9,702 12,085 10 7,055 8,945 10 Group 4 (56 to 99 employees)‡ included in the survey 56–99 16,951 17,758 4 14,180 16,638 3 11,030 13,619 5 6,930 8,625 10 10,178 12,703 8 7,809 9,757 7 Sources: District operating and capital budget, fiscal year 2013–14; district employee salary chart, fiscal year 2014–15; and the California Association of Sanitation Agencies (sanitation association) 2014 salary and benefits survey. Note: Position titles include the generic position used by the sanitation association followed by the district’s comparable position. NA = This agency did not report information for this position. * These agencies do not operate their own wastewater treatment facility. † The City of Daly City provides wastewater treatment services. ‡ The minimum and maximum salaries for these groups represents an average for agencies that participated in the sanitation association’s salary and benefits survey whose number of employees falls within the specified range. California State Auditor Report 2014-122 25 April 2015 Table 5 Monthly Salary Ranges for Key Management Employees at Comparable Sanitation Agencies AGENCY INFORMATION ASSISTANT GENERAL ANNUAL MANAGER/CHIEF OF DIRECTOR OF FINANCE/ ACCOUNTING SUPERVISOR/ SENIOR ENGINEER/ ASSOCIATE ENGINEER/ OPERATIONS AND GENERAL MANAGER OPERATIONS BUSINESS MANAGER ACCOUNTING MANAGER DISTRICT ENGINEER ASSISTANT ENGINEER MAINTENANCE POPULATION TOTAL AGENCY BUDGET SERVED EMPLOYEES MINIMUM MAXIMUM RANK MINIMUM MAXIMUM RANK MINIMUM MAXIMUM RANK MINIMUM MAXIMUM RANK MINIMUM MAXIMUM RANK MINIMUM MAXIMUM RANK Ross Valley Sanitary District (district)* $14,760,770 55,000 38 $14,978 $14,978 11 $11,610 $15,928 4 $12,502 $17,153 1 $9,296 $12,754 2 $10,518 $14,430 4 $9,296 $12,754 1 Central Marin Sanitation Agency 10,080,000 105,000 41 17,322 17,322 5 NA NA NA NA 7,193 8,743 9 11,160 13,565 5 7,977 9,696 8 Daly City, City of† 15,920,121 105,000 66 12,860 15,631 10 NA NA 12,990 15,790 3 7,640 9,287 7 NA NA 7,369 8,957 9 Delta Diablo 22,900,000 200,000 74 22,391 23,391 2 14,602 18,236 1 NA NA 9,128 11,400 3 12,965 16,192 1 8,932 11,155 2 Dublin San Ramon Services District 53,094,704 157,000 106 23,433 23,433 1 15,088 17,109 2 14,540 14,540 4 10,499 12,761 1 13,061 15,088 2 8,050 11,147 3 Novato Sanitary District 9,300,000 52,550 22 15,832 15,832 9 11,477 13,950 6 7,046 8,564 9 NA NA 8,564 10,410 11 6,547 7,957 11 South Tahoe Public Utility District 9,344,520 36,363 108 13,318 16,998 6 12,116 15,464 5 10,245 13,076 6 7,347 9,377 6 10,237 13,065 7 7,712 9,843 5/6 Tahoe‑Truckee Sanitation Agency 12,483,310 60,000 48 14,902 14,902 12 11,532 13,377 7 NA NA 7,094 8,233 12 10,538 12,225 9 6,818 7,917 12 Union Sanitary District 31,355,356 331,387 130 19,871 19,871 3 NA NA 13,061 17,143 2 6,820 8,951 8 NA NA 7,944 10,427 4 West County Wastewater District 13,040,000 97,296 57 16,584 16,584 8 NA NA NA NA 7,954 9,802 5 11,817 14,560 3 7,989 9,843 5/6 West Valley Sanitation District* 26,200,000 109,000 29 16,958 16,958 7 NA NA 10,589 12,457 7 8,528 10,033 4 11,157 13,126 6 NA NA Group 3 (30 to 55 employees)‡ This information was not 30–55 13,215 13,460 13 9,558 11,870 8 7,337 9,615 8 7,045 8,436 11 9,702 12,085 10 7,055 8,945 10 Group 4 (56 to 99 employees)‡ included in the survey 56–99 16,951 17,758 4 14,180 16,638 3 11,030 13,619 5 6,930 8,625 10 10,178 12,703 8 7,809 9,757 7 Sources: District operating and capital budget, fiscal year 2013–14; district employee salary chart, fiscal year 2014–15; and the California Association of Sanitation Agencies (sanitation association) 2014 salary and benefits survey. Note: Position titles include the generic position used by the sanitation association followed by the district’s comparable position. NA = This agency did not report information for this position. * These agencies do not operate their own wastewater treatment facility. † The City of Daly City provides wastewater treatment services. ‡ The minimum and maximum salaries for these groups represents an average for agencies that participated in the sanitation association’s salary and benefits survey whose number of employees falls within the specified range. 26 California State Auditor Report 2014-122 April 2015 Finally, the top of the salary range for the district’s chief of operations is high relative to comparable agencies, ranking fourth out of the eight agencies and agency groups we used for comparison. The top of the district’s salary range for its chief of operations position is $15,928 per month, which is 34 percent higher than the high end of the salary range for the category of agencies with 30 to 55 employees (Group 3). Of the four key management staff just discussed, the chief of operations and the assistant engineer have advanced to the highest salary step; however, they have not yet qualified for longevity pay, which would put them at the top of their ranges. The business manager and accounting manager have not yet reached the top salary step, nor have they qualified for longevity pay. We discuss longevity pay in the next section. In addition to the key management employees shown in Table 5, we compared the salary ranges of the district’s maintenance workers, maintenance supervisors, and maintenance and inspection superintendents to the salary ranges of comparable positions at the same agencies shown in Table 5. We found that the salary ranges for each of these district positions were the highest among the comparable positions at all of the other agencies. For example, the top of the district’s salary range for its maintenance workers was 27 percent higher than for comparable positions at Dublin, which had the next highest salary range. Questionable Practices by the Board Led to High Employee Salaries The high salaries for district employees appear to be the result of questionable district practices sanctioned by its board. One of these is the district’s practice of paying excessive annual cost‑of‑living adjustments (COLAs). The district’s MOU with represented employees and its MOU with management employees, which are in effect for the period July 1, 2009, to June 30, 2015, include annual COLAs of between 3 percent and 5 percent that are not tied to changes in an actual cost‑of‑living index. During the period of the MOUs, the consumer price index for the San Francisco Bay Area increased annually by between 0.7 percent and 2.8 percent, which In 2009 the consumer price index is much lower than the range of COLAs that the district provided increased 0.7 percent, while the its employees. For example, in 2009 the consumer price index district paid its employees a increased 0.7 percent, while the district paid its employees a 5 percent COLA that same year. 5 percent COLA that same year, as shown in Table 6. California State Auditor Report 2014-122 27 April 2015 Table 6 Ross Valley Sanitary District Annual Cost‑of‑Living Adjustments Compared to Increases in the Consumer Price Index CHANGE IN DISTRICT YEAR CONSUMER PRICE INDEX COST‑OF‑LIVING ADJUSTMENT 2009 0.7% 5% 2010 1.4 4 2011 2.6 3 2012 2.7 3 2013 2.2 3 2014 2.8 4 Sources: Ross Valley Sanitary District’s memorandums of understanding with its employees, and the United States Department of Labor, Bureau of Labor Statistics, consumer price index for San Francisco, Oakland, and San José. In addition to the annual COLAs, the board authorized a salary increase for the business manager position in September 2009. The low end of the salary range for that position increased by 56 percent, from $6,459 monthly to $10,074 (as shown in Table 5 beginning on page 24, this amount has since increased). A former board member who voted to approve the higher salary range stated that he supported the increase in order to make it equitable for the then‑interim business manager to stay with the district. The former general manager provided the board with a comparison of the proposed salary with salaries at other agencies, five of which we included in our own comparison. Even though the top of the proposed salary range was higher than all but one of the agencies used in the comparison, including agencies that are larger and more complex than the district, such as Dublin and Delta, the board approved the increase. However, as we describe more fully later, the former business manager agreed to resign after not passing the probationary period in June 2010, approximately nine months after the board approved the new salary for the business manager position. The district then paid the former business manager a generous three‑month severance package of $37,000. In January 2011 the board also authorized a 28 percent salary increase for the accounting manager position, which increased the low end of the salary range from $6,390 monthly to $8,180 monthly (as shown in Table 5 beginning on page 24, this amount has since increased). The former general manager informed the board that the district had attempted to fill this position twice at the lower salary level but could not find a suitable candidate. He also told the board that the proposed salary was competitive with the sanitation association’s 2009 salary survey but did not offer any evidence to justify this claim; instead, he said he would bring the sanitation association’s survey to the next board meeting. However, he never did so. Two board members 28 California State Auditor Report 2014-122 April 2015 expressed reservations about approving this high salary without looking at comparisons and voted against it. However, the three remaining members of the board voted to approve the salary increase. Furthermore, in April 2010, the board approved two new positions at the district: chief of operations and assistant engineer. In his proposal to the board for the two new positions, the former general manager provided no comparative information demonstrating that the proposed salary ranges were in line with those for positions with commensurate responsibilities at other comparable agencies. The board did not request any additional information about the proposed salaries and voted to approve the salary ranges for the two positions. Because the board did not receive or request any salary comparisons, it had no way to adequately determine whether the salary ranges for these positions were reasonable given the assigned duties. As we mentioned previously, and as illustrated in Table 5 beginning on page 24, the top salary ranges for both of these positions are high relative to comparable positions at other sanitation agencies. Finally, the district’s MOUs with its represented and management employees include longevity pay, which inflates the high end of its salary ranges. This serves to exacerbate the already high salary ranges for positions at the district compared with those at other Employees who have worked for agencies. Employees who have worked for the district for more the district for more than 10 years than 10 years receive an additional 5 percent over their base salary, receive an additional 5 percent over and employees who have worked for more than 15 years receive an their base salary, and employees additional 7.5 percent. However, the district was unable to provide who have worked for more than us a rationale for offering this benefit; for example, the district could 15 years receive an additional not provide evidence that it needed longevity pay to retain or attract 7.5 percent. qualified employees. It also could not explain how it determined the two percentages. Currently, only six of the district’s employees— one management employee and five represented employees—are receiving longevity pay; none of its other employees have been with the district long enough to receive it. By eliminating the possibility of longevity pay for employees who are not already receiving it, the district could avoid annual future salary expenses that could reach $99,000 per year if all management and other unrepresented employees were to receive it and an additional $115,000 per year if all represented employees were to receive it. The Current General Manager’s Salary and the Benefits the District Provides Its Employees Are Generally in Line With Those of Comparable Agencies Unlike the salaries of other district managers, the current general manager’s salary in fiscal year 2013–14 was in line with the salaries paid by comparable agencies, ranking 11th out of the 13 agencies California State Auditor Report 2014-122 29 April 2015 and comparison groups we reviewed. Also, as shown in Table 7, the current general manager’s contract does not include the same excessive provisions as those in the former general manager’s contract. For example, the contract includes the same retirement benefits as other district employees receive, severance pay of four months’ salary if he is terminated without cause, rather than 18 months’ salary, no housing loan or student debt relief, and no one‑time bonus. The current general manager’s contract states that the board will annually evaluate his performance and may consider merit‑based increases and market‑based compensation adjustments. Table 7 Comparison of Key Provisions in the Former and Current General Manager’s Employment Contract CURRENT KEY CONTRACT PROVISIONS FORMER GENERAL MANAGER* GENERAL MANAGER Annual salary $197,000 $179,740† Deferred compensation contributions District matches 457(b) deferred compensation contributions None annually, not to exceed 50 percent of maximum allowable. Monthly automobile allowance $500 $400† Student loan repayment Loan balance up to $28,000 None Housing loan $350,000 None One‑time bonus $9,850 None Severance payment if terminated 18 months’ salary 4 months’ salary without cause Additional termination protections General manager shall not be terminated or asked to resign during None the three years after the effective date of the contract or 90 days prior to any board election, 180 days after such an election, or 90 days following any change in board membership, except upon unanimous vote by the board. Source: California State Auditor’s analysis of Ross Valley Sanitary District’s employment contracts with its former and current general managers. * Based on contract provisions in effect when the former general manager resigned in July 2012. † In January 2015 the board of directors increased the current general manager’s annual salary by 5 percent and increased his monthly automobile allowance by $100. In October 2014 the board performed an evaluation of the general manager and gave him a very positive overall rating for his efforts to improve the district. The board used a scoring sheet to rate his performance on several criteria, including his ability to assist the board with policy making, maintain proper external relationships, and administer the district internally, as well as his personal characteristics. Based on his performance, the board recently increased the general manager’s salary by 5 percent and increased his monthly automobile allowance by $100. However, to protect against the excesses it allowed in the former general manager’s contract, the board needs to formalize in policy its approach for periodically evaluating the general manager’s performance and for determining any merit‑based compensation increases. 30 California State Auditor Report 2014-122 April 2015 Finally, 12 of the district’s 38 authorized positions are not currently required to contribute anything to their pension; instead, the district is making the full contribution for employees hired before July 2010, as Table 8 shows. These employees were hired before July 2010, when the district finalized new MOUs with its employees. District employees hired after the MOUs were finalized but before January 1, 2013, are required to contribute 8 percent of their salaries to their pensions, which is in line with or even on the high end compared to other sanitation agencies. Effective January 1, 2013, the Public Employees’ Pension Reform Act (act) established a new retirement formula of 2 percent at age 62 for all miscellaneous members new to the California Public Employees’ Retirement System. Under the act, until June 30, 2015, the employee contribution rate is set at 6.25 percent for these members and will be subject to recalculation after that date. We believe the district should take necessary steps to begin requiring all of its employees to contribute an appropriate amount to their pensions. The district’s retirement formula of 2.7 percent at age 55 (which applies to the vast majority of its employees), is generally comparable to the formulas the other sanitation agencies use, as shown in Table 8. Other benefits that the district provides, including medical, vision, and dental benefits, all seem to generally fall within the range of other sanitation agencies; however, we believe that the district’s policy of reimbursing its represented employees up to $300 a year for gym memberships is an inappropriate use of ratepayer funds. Table 8 Retirement Benefits Among Comparable Sanitation Agencies EMPLOYEE CONTRIBUTIONS AS A AGENCY RETIREMENT FORMULA* PERCENTAGE OF EMPLOYEE SALARIES Ross Valley Sanitary District (district) 0% employees hired before July 1, 2010 2.7% at 55 District employees hired from 8 July 1, 2010, to December 31, 2012 District employees hired after January 1, 2013, and classified as 2% at 62 6.25 new members† Central Marin Sanitation Agency represented employees: 1 Tier 1 ‑ 2.7% at 55 unrepresented employees: 0 Daly City, City of not provided in survey 8 Delta Diablo Tier 1 ‑ 2.7% at 55 1 Tier 2 ‑ 2% at 55 7 Tier 3 ‑ 2% at 62 6.5 Dublin San Ramon Services District Tier 1 ‑ 2% at 62 6.25 Tier 2 ‑ 2.7% at 55 10 Novato Sanitary District Tier 1 ‑ 2% at 55 3.5/7 Tier 2 ‑ 2% at 62 6.25 California State Auditor Report 2014-122 31 April 2015 EMPLOYEE CONTRIBUTIONS AS A AGENCY RETIREMENT FORMULA* PERCENTAGE OF EMPLOYEE SALARIES South Tahoe Public Utility District Tier 1 ‑ 2.7% at 55 7% Tier 2 ‑ 2% at 62 Tahoe‑Truckee Sanitation Agency 2.7% at 55 0 Union Sanitary District Tier 1 ‑ 2% at 62 5 Tier 2 ‑ 2.5% at 55 West County Wastewater District 3% at 60 3‑8 West Valley Sanitation District 2.5% at 55 5 Sources: 2014 California Association of Sanitation Agencies salary and benefits survey and the district’s memorandums of understanding with its management and represented employees. Note: As of January 1, 2013, the Public Employees’ Pension Reform Act (act) established a new retirement formula of 2 percent at age 62 for all miscellaneous (non‑safety) members new to the California Public Employees’ Retirement System (CalPERS). Under the act, until June 30, 2015, the employee contribution rate is set at 6.25 percent for these members, and will be subject to recalculation by CalPERS after that date. * The retirement formula is used to calculate an employee’s retirement benefit by using the employee’s years of service, age at retirement, and final monthly compensation. For example, a district employee with 20 years of service and final monthly compensation of $10,000 who retires at age 55 would receive a monthly retirement benefit of $5,400 (20 x 2.7% = 0.54; 0.54 x $10,000 = $5,400). † A new hire who is brought into CalPERS membership for the first time on or after January 1, 2013, and who has no prior membership in any other California public retirement system, and who is not eligible for reciprocity with another California public retirement system, or a member who established CalPERS membership prior to January 1, 2013, and who is hired by a different CalPERS employer after January 1, 2013, after a break in service of greater than six months. The Board Did Not Consistently Follow the District’s Emergency Procurement Procedures and Thus Cannot Ensure That It Is Getting the Best Value The board failed to consistently follow procurement procedures for emergencies and, as a result, cannot be sure it received the best value for emergency work that was performed. The district defines an emergency as a sudden, unexpected occurrence that poses a clear and imminent danger, requiring immediate action to prevent or mitigate the loss or impairment of life, health, property, or essential public services. In the event of an emergency, state law requires the board to make a finding based on substantial evidence set forth in the minutes of a meeting that the urgency of the situation does not permit the competitive solicitation of bids. The board must then pass a resolution by a four‑fifths vote to take any action directly related to and immediately required by the emergency and may procure the necessary equipment, services, and supplies without undergoing a competitive process. The board’s resolution may delegate the authority to spend district funds to the general manager. Procurement criteria for emergencies allows the district to engage a contractor without receiving a bid proposal or cost schedule—documents that, when part of a competitive bidding process, help the district determine whether the contractor’s costs are reasonable. Once the district 32 California State Auditor Report 2014-122 April 2015 begins emergency work, state law requires the board to review and reapprove the emergency with a four‑fifths vote at every subsequent monthly board meeting until the district determines that the emergency has ended. Ending the declaration of an emergency in a timely manner allows the board to seek competitive bids for additional work and helps ensure that project costs are fair and reasonable. The district identified seven emergency construction projects that occurred from fiscal years 2009–10 through 2013–14. The district For five of the seven emergency complied with the emergency procurement criteria we tested for construction projects we tested, five of the seven emergency construction projects. However, the the district complied with the board did not appropriately review the two most costly of the emergency procurement criteria. district’s emergency projects. These two projects were associated with the district’s most expensive capital construction project— the Kentfield force main replacement project. The Kentfield force main replacement project began in 2010 and involved replacing a force main—a pressurized pipe—near the community of Kentfield. The district estimated it would cost $9 million for the project’s two segments: $5 million for the first segment starting in fiscal year 2010–11 and $4 million for the second segment starting in fiscal year 2011–12. In May 2010 the district awarded a $4.1 million contract—almost $1 million less than the estimated amount—for the first segment to a contractor through competitive bidding, as state law requires, and the contractor began the work of replacing the force main. By not competitively bidding the second segment of the project or following required procurement procedures for emergencies, the district may have missed an opportunity to achieve lower costs similar to those it achieved by competitively bidding the first segment. In December 2010, the former general manager reported to the board that the new pipe sections that the contractor had installed in the first segment increased stress on the older sections that were to be replaced in the second segment of the project, increasing the risk of sewer overflows into a local waterway. For this reason the board declared an emergency, which allowed the district to avoid competitively bidding the work and instead amend the existing contract with the current contractor through a time‑and‑materials change order. The former general manager estimated that the emergency work would cost $1.5 million of the original $4 million estimate for the second segment. The emergency essentially led the district to begin work on portions of the second segment of the project earlier than planned and without competitive bidding. However, although the board followed protocol when declaring this emergency, it did not review and reapprove the emergency at subsequent board meetings from January 2011 through March 2011 to make certain there was a need to continue the action. Thus, the district continued to spend funds without California State Auditor Report 2014-122 33 April 2015 considering whether it could discontinue the emergency declaration and complete the project by using competitive bidding. The district approved the $1.47 million total cost of this emergency work. In a May 2011 board meeting, district staff recommended that the board declare a second emergency in the Kentfield force main replacement project because there was an immediate risk that the settling of the dirt adjacent to an older section of pipe included in the second segment of the project could damage the pipe and cause a sewer overflow. Staff believed that a potential sewer overflow due to a ruptured pipe during the rainy season constituted an immediate threat to public health and safety. The board agreed and unanimously voted to declare an emergency. This second emergency declaration authorized the former general manager to complete the remaining portion of the second segment of the Kentfield force main replacement project by using a change order to the existing contract with the contractor instead of competitively bidding the project as originally planned. The board set a spending cap of $2.5 million of the original $4 million estimate to complete the second segment. Similar to the first emergency, the board did not review and reapprove this emergency at each subsequent board meeting as required by state law. The district never terminated the emergency and declared the project complete in June 2012, more than a year after declaring the second emergency. The December 2010 and May 2011 Kentfield force main emergency declarations contributed to the district paying just under the $4 million budgeted for the second segment without competitive bidding. Although the district originally estimated that the second segment would cost $4 million, by not following required procurement procedures for emergencies or competitively bidding the project, the district may have missed an opportunity to pay less than the original estimate, similar to the lower costs it achieved by competitively bidding the first segment. The board did not consistently fulfill its responsibility to review The board did not consistently fulfill and reapprove emergencies because the board’s legal counsel at the its responsibility to review and time did not ensure that the board followed the law. We reviewed reapprove emergencies because the minutes from each of the eight meetings in which the board should board’s legal counsel at the time did have reviewed and reapproved the two emergencies and found not ensure that the board followed that, although present at all but the first meeting, the minutes do the law. not reflect that the board’s legal counsel ensured that the board followed the required procurement procedures for emergencies. 34 California State Auditor Report 2014-122 April 2015 The District Did Not Ensure That It Received the Best Value When Procuring Professional Services Because It Did Not Always Use a Competitive Process The district did not always use a competitive process or justify using sole‑source contracts and thus cannot ensure that it received the best value for its ratepayers when contracting for professional services. State law does not establish procedures for how the district must award contracts for certain types of professional services, including legal services, public relations services, and administrative services. Nevertheless, the district approved a procurement policy requiring competitive bidding for such services whenever reasonably feasible in September 2014. Issuing When the district does not receive a request for proposals and soliciting proposals from prospective quotes or proposals from multiple professional service providers is a good business practice because bidders, it cannot compare the cost it allows the district to compare the cost and quality of services in and quality of services and may the proposals it receives. When the district does not receive quotes not be able to determine whether a or proposals from multiple bidders, it cannot make this comparison proposal from a single vendor is fair and may not be able to determine whether the costs in a proposal and reasonable. from a single vendor are fair and reasonable. In August 2013 the district entered into a one‑year agreement not to exceed $100,000 with a separate entity for human resources management services using a sole‑source contract. According to the general manager, he conducted phone interviews with two entities and checked their references. He stated that the entity the district ultimately hired was clearly the better fit for the district, as it had the capacity to provide weekly on‑site presence because it had staff in the Marin area, and it had outstanding references from local agencies that had also dealt with significant unaddressed human resources issues. However, the district did not develop a request for proposals and advertise the contract opportunity to other qualified entities that may have wanted to submit a proposal. The services described in this contract—for example, assessing the district’s human resources needs, developing or updating policies and procedures, and providing training—do not appear to be so specialized or unique that they would be available from only one provider and would therefore justify a sole‑source contract. Nevertheless, the board approved the contract unanimously. Another example of the district not competitively bidding a professional services contract occurred in July 2010, when the district awarded a sole‑source contract not to exceed $84,000 for one year of marketing‑related services. The services included publishing and distributing a quarterly newsletter, press releases, advertising, and community outreach materials. In the report district staff provided for the June 2010 board meeting regarding the one proposal, the former general manager justified using a sole‑source contract because the district had already been California State Auditor Report 2014-122 35 April 2015 working with that contractor for a year and the contractor’s work was effective. This is not sufficient justification for awarding a sole‑source contract. However, the minutes from the July 2010 meeting show that the board approved this contract without questioning why district staff did not solicit additional proposals. Although the contractor’s proposal included a breakdown of activities and the hourly rates the contractor planned to bill, the district had no other proposals against which to compare these activities and rates to determine if they were reasonable. After the contract term expired, the district continued to pay for the marketing services without having a written contract in place for another 10 months, until the district renewed the contract in May 2012. Ultimately the district terminated this contract in September 2012 as part of its efforts to reduce expenses. However, by that point the district had already paid this contractor more than $175,000. Additionally, on two occasions, the district did not receive a proposed engagement letter or cost estimate that could have allowed it to better ensure that it was getting a good value after it directed its former legal counsel to initiate litigation. According to the contract with the district’s former legal counsel, the legal counsel was required to provide a proposed engagement letter describing the scope of the engagement and estimated cost when the district requested any litigation or special project services. However, after the district directed its legal counsel to initiate litigation for two lawsuits in March 2011 and May 2012, it did not ensure that it received engagement letters or cost estimates. On both occasions, meeting minutes show that the board discussed the litigation services with its former legal counsel in closed sessions. However, according to the district’s business manager, the board never requested engagement letters. Because the district did not receive a written scope of services or cost estimate for the two lawsuits, it did not have enough information to determine whether this litigation would be cost‑effective. In addition, although the district provided estimated total costs, it did not separately track its expenditures for these litigation services so it could accurately monitor the total costs. Consequently, according to its accounting The district’s inability to accurately manager the district could not accurately determine how much it monitor and control litigation spent on these services. The district’s inability to accurately monitor costs may have contributed to it and control litigation costs may have contributed to it spending more spending more than $5.1 million than $5.1 million on legal services over the last five fiscal years, as on legal services over the last Figure 3 on the following page shows. five fiscal years. In addition, Figure 3 shows that over the last five fiscal years the district has spent approximately $6.7 million on fines and settlements related to legal matters. For example, in April 2011 the district agreed to pay more than $4.7 million over a three‑year period to settle a lawsuit resulting from the district allegedly failing 36 California State Auditor Report 2014-122 April 2015 to remove hazardous materials from a property it had agreed to sell. Additionally, according to the district’s external auditor, the district was required to pay a fine of more than $800,000 after it experienced sewer overflows in December 2010 that resulted in a large volume of sewage being discharged into local waterways via storm drains. In fiscal year 2013–14, the district’s data show that it spent significantly less on legal costs and fines and settlements. According to the general manager, the decrease is due, among other things, to resolving outstanding lawsuits and avoiding new litigation; implementing regular monitoring and cost controls for legal services, such as reporting monthly to the board on all legal activities; and improving operations and preventive maintenance, which has decreased the number and severity of sewer overflows. Figure 3 Ross Valley Sanitary District’s Expenditures for Legal Services, Fines, and Settlements Fiscal Years 2009–10 Through 2013–14 Fines and Settlements Legal Services 2009–10* 2010–11 2011–12 2012–13 2013–14 sdnasuohT ni sralloD $4,500 4,000 $3,235 3,500 3,000 2,500 $1,583 $2,385 $1,583 2,000 1,500 1,000 $914 $778 $266 500 $559 $493 0 Fiscal Year Sources: Ross Valley Sanitary District’s (district) unaudited financial data from fiscal years 2009–10 through 2013–14. * The district’s financial data for fiscal year 2009–10 did not identify separate amounts for fines and settlements. California State Auditor Report 2014-122 37 April 2015 The District Appropriately Awarded Contracts for Capital Improvement Projects and for Construction‑Related Professional Services We found that the district adhered to state law when awarding contracts for capital improvement projects. The district contracts with outside firms to perform important, often costly changes to the district’s wastewater system. Specifically, we reviewed six of the 22 capital improvement contracts identified by the district as being awarded from fiscal year 2009–10 through September 2014, and found that it properly advertised the contract opportunities with the required information, evaluated proposals submitted by bidders, and awarded the contract to the lowest responsible bidder. Capital improvement projects—the district’s single largest expenditure category in its fiscal year 2013–14 budget—totaled approximately $8.5 million, or 32 percent of total budgeted expenditures. State law requires the district to contract with the lowest responsible bidder for any project for the construction, reconstruction, alteration, enlargement, renewal, or replacement of sewer facilities when the cost exceeds $15,000. The law establishes requirements related to when and how the district must advertise notices inviting bids for projects and mandates that each contractor must submit a bid form and professional qualifications to the district. The district also adhered to state law when awarding contracts for construction‑related professional services. The district can enter into contracts to obtain professional services such as construction management, design, architecture, and engineering services. As with contracts for capital improvement projects, the district must comply with state law when awarding construction‑related contracts. Specifically, the district must select firms on the basis of demonstrated competence and professional qualifications for the services required. The district does this by preparing a request for proposals to which prospective firms respond with their bid We reviewed three of the proposals. Furthermore, the district documented these requirements 16 construction‑related professional in its procurement policy established in September 2014. We services contracts the district reviewed three of the 16 construction‑related professional services identified as being awarded contracts the district identified as being awarded during our audit during our audit period and found period and found that the district followed the required procedures that the district followed the we tested in awarding those contracts. required procedures. The District Has Poorly Managed Some of Its Human Resources Functions Although it has recently made improvements, the district has not properly managed its human resources functions. For most of the period from fiscal years 2009–10 through 2013–14, the district 38 California State Auditor Report 2014-122 April 2015 did not have staff with expertise in human resources management to whom district employees could turn for guidance in handling human resources issues. Also, the district did not have established processes for some essential human resources functions and/or did not ensure that those functions were performed. This lack of guidance and processes has resulted in costly mismanagement of some human resources issues. For example, the district had contracted with a staffing agency for a temporary business manager since December 2008 and decided to hire the individual in January 2010. However, in June 2010, the temporary business manager agreed to resign after the district determined that this individual had not successfully completed the probationary period and it paid a severance equal to three months’ salary, totaling about $37,000 less taxes and withholdings. The district had no discernible basis for paying this money, because not only did the employee fail to successfully complete the probationary period, but the district’s MOU with its management staff does not require severance payments. Qualified human resources staff would likely have handled this situation more appropriately and would have known that the severance payment was not required. We do not believe that this severance payment was in the ratepayers’ best interest. Although the district has had a Additionally, although it has had a policy prohibiting harassment policy prohibiting harassment since 2001, the district has not made sure employees participate since 2001, it has not ensured in harassment prevention training as required. State law requires that employees participate in the district to provide sexual harassment prevention training to harassment prevention training as supervisory employees every two years. Although the district has required by state law. provided annual harassment prevention training since 2012, it has not made attendance a formal requirement in policy. In fact, we found that the district’s supervisory employees have not always attended the training. For example, three district supervisory employees did not attend the training in either 2012 or 2013. Without training and qualified human resources staff to assist employees who may experience harassment issues in the workplace, the district violates state law and risks mishandling these sensitive and potentially costly issues. The general manager stated that the district will work toward full compliance with state law regarding harassment prevention training. Furthermore, the district did not always complete annual performance evaluations of its employees as required by district policy. We reviewed the district’s performance evaluations for key management staff from fiscal years 2009–10 through 2013–14. During this period, the district did not complete eight annual evaluations for three different employees: the chief of operations, district engineer, and business manager. According to the general manager, the district had not developed or documented a process for monitoring performance evaluations to ensure that they are completed in a timely manner. The general manager further California State Auditor Report 2014-122 39 April 2015 stated that he is currently completing the evaluations for senior management staff, and he believed that the district did not complete several of the evaluations in the earlier years because the former general manager abruptly resigned, leaving the district without clear leadership. By not performing timely performance evaluations, the district does not provide its employees with important formal feedback to help them improve and develop professionally. In addition, the district did not develop proper controls to reduce The district did not develop proper the risks that employees and board members would make decisions controls to reduce the risks that in matters for which they have a conflict of interest. As required employees and board members by state law, the district’s conflict‑of‑interest code identifies would make decisions in matters designated employees—positions that are involved in making or for which they have a conflict that participate in the making of decisions that may have a material of interest. effect on a financial interest. The district has identified its general manager, business manager, chief of operations, district engineer, maintenance superintendent, and inspection superintendent, as well as all board members and district counsel, as designated employees who must report their economic interests. State law requires these designated employees to annually file a Form 700— Statement of Economic Interests (Form 700). These individuals use this form to report for themselves and their spouses certain assets, sources of income, and loans in order to identify potential conflicts of interest. Because Form 700 is a public document, any interested person is able to review an official’s Form 700 at any time. According to the district’s business manager, who reviews the conflict‑of‑interest code along with the board and district counsel every two years, the district designated these employees to file because they have the ability to act autonomously in their positions and to make financial decisions. However, the district does not have a documented process for annually reviewing the forms to ensure that they are completed or to identify any potential conflicts of interest, and it did not always ensure that all of its designated employees filed one. For example, the district did not have a Form 700 on file for its inspection superintendent for 2010 and 2011. According to the general manager, the district experienced discipline issues with its former inspection superintendent for more than a year, and another employee filled in for the position temporarily. During this time, the district did not prioritize having its inspection superintendent file a Form 700. In addition, the district did not have a Form 700 for its chief of operations for 2011. The general manager stated that it is likely that the employee did not file one in that year. Although state law requires board members to complete ethics training biannually, the district has not adopted a policy with those requirements. However, the district provided records showing that all board members completed biannual ethics training in 2011 40 California State Auditor Report 2014-122 April 2015 and 2013. In addition, state law allows the board to require certain district employees to attend biannual ethics training. However, the board does not require any of the district employees to attend these trainings. We believe that the board should require the employees designated under its conflict‑of‑interest code to participate in ethics training because they are involved in making or participate in the making of decisions that may have a material effect on a financial interest. As discussed previously, the district recently contracted with a separate entity to provide human resources services, which may help resolve some of these concerns and decrease the likelihood that some of the problems previously mentioned, such as paying severance unnecessarily, will reoccur. Additionally, the consultants’ work plan focuses on improving the performance management system, which would help ensure that the district completes performance evaluations and helps its employees develop professionally. Further, the work plan includes an element to improve the district’s administrative policies and systems, which should include developing a documented process for annually reviewing and monitoring Form 700s that designated employees and board members file. Finally, training is one of the six priorities of the consultants’ work plan, and the plan specifically calls for providing training in respectful workplace communication and behavior. We believe developing a policy for and monitoring ethics training for board members and designated employees should be included in the work plan training efforts as well. Recommendations The board should ensure that management continues to develop and strengthen its controls over the district’s financial and administrative functions. For example, district management should fully implement all of the external auditor’s remaining recommendations by June 30, 2015. Management should also ensure that its staff follow these policies and should create and implement a plan for monitoring its system of controls. The board should also consider periodically contracting with qualified professionals to conduct a review of the effectiveness of the district’s system of internal controls. The district should strengthen its financial and administrative policies to do the following: • Make it clear that the activities of approving invoices, recording invoices, preparing checks, and reconciling bank statements to the district’s records should be performed by separate individuals. California State Auditor Report 2014-122 41 April 2015 • Make it clear who is responsible for reviewing and approving monthly bank reconciliations. • Limit California lodging costs to the rate set by the State for its employees, and limit any out‑of‑state lodging costs to rates set by the federal government for its employees. In addition, the district should remove from its travel policy the reimbursement for exercise equipment use. • Require periodic reporting of financial information to the board. • Require a periodic review to ensure that only appropriate personnel are included as authorized signers on financial accounts. • Establish an appropriate system for tracking and valuing inventory. • Require employees to obtain their supervisor’s approval before working paid overtime. • Require all employees, including managers, to complete timesheets to track time worked and any compensated time off. • Develop and document a process for reviewing and monitoring designated employees’ and board members’ filing of Form 700. • Develop and document a policy that requires board members and designated employees to attend ethics training biannually and a process for monitoring attendance. To clarify the roles and responsibilities of board members, the district should create a more comprehensive board member manual that describes all of the board’s roles and fiduciary responsibilities. This manual should address the best practices contained in the California Special Districts Association’s Special District Board Member/Trustee Handbook. The district should also provide for additional training for board members in the following areas over which they exercise important responsibilities: financial management, contracting, emergency procurement, and human resources. The board should reduce the salary ranges for all positions in the district’s salary schedules to better align with comparable positions at comparable sanitation agencies. While we are not suggesting that the board cut the current salaries of its employees, it is imperative that the board reduce the salary ranges in its salary schedules before more employees reach the top step of their respective salary ranges. The board should also ensure that COLAs are tied to an appropriate cost‑of‑living index and that any merit raises are based on satisfactory performance that is documented in an appraisal. Further, the board should either justify its need for longevity pay 42 California State Auditor Report 2014-122 April 2015 to attract and retain qualified employees or discontinue its practice of offering longevity pay to those employees who are not already receiving this extra pay. In addition, the district should revise its employee retirement contribution policy to require all employees to contribute an appropriate amount to their pensions and should discontinue its practice of reimbursing its represented employees up to $300 annually for gym memberships. The board should make these changes for unrepresented employees immediately and should seek to make these changes for represented employees by negotiating with the American Federation of State, County, and Municipal Employees Local 2167 when the current MOU expires in July 2015. To ensure that employee compensation remains appropriate after making the changes described in the previous recommendation, the board should develop robust policies that outline how it will establish future compensation for all district positions. This policy should require the district to conduct a salary survey of comparable sanitation agencies to determine what compensation levels are appropriate for the job duties of district positions and to present the results to the board. To ensure that compensation for the general manager remains reasonable, and to prevent the excesses that existed in the former general manager’s contract, the district should develop a policy that establishes the criteria to be used when periodically evaluating the general manager’s performance and for determining any merit‑based compensation increases. To ensure that it follows state law and its policies for emergency procurement, the board should review and reapprove all emergencies at each board meeting subsequent to the initial emergency declaration and should terminate emergency declarations as soon as possible to ensure that it competitively bids any work that is no longer an emergency. The district should ensure that it hires qualified vendors at a reasonable price by using a competitive process when contracting for professional services. When this is not possible or appropriate given the nature of the services, the district should adequately justify its use of a noncompetitive process (sole‑source procurement). In addition, the district should obtain a written description of services to be provided (scope of services) and a cost estimate from legal counsel before engaging in litigation. The district should ensure that it has access to qualified human resources professionals, whether contracted or in‑house, to assist staff when handling human resources issues. California State Auditor Report 2014-122 43 April 2015 The district should implement the remaining recommendations contained in its human resources consultants’ work plan by the targeted dates shown in Table 3 on page 18, including the following: • Improve its performance management system to ensure that staff receive required annual performance evaluations. • Develop and document a policy that requires board members and supervisors to attend harassment prevention training biannually and a process for monitoring their attendance. We conducted this audit 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. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the scope section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Respectfully submitted, ELAINE M. HOWLE, CPA State Auditor Date: April 16, 2015 Staff: Michael Tilden, CPA, Audit Principal Jordan Wright, CFE Reed Adam, MAcc Laurence Ardi Hunter Wang Legal Counsel: Richard B. Weisberg, Sr. Staff Counsel For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255. 44 California State Auditor Report 2014-122 April 2015 Blank page inserted for reproduction purposes only. California State Auditor Report 2014-122 45 April 2015 Appendix SIGNIFICANT INTERNAL CONTROL DEFICIENCIES AND OTHER MATTERS IDENTIFIED BY ROSS VALLEY SANITARY DISTRICT’S EXTERNAL AUDITOR As explained in the Introduction, state law requires the county auditor to ensure that the Ross Valley Sanitary District (district) obtains regular financial audits of its accounts prepared by either the county auditor or an independent public accounting firm. Table A beginning on the following page summarizes, for fiscal years 2012–13 and 2013–14, the significant deficiencies and other matters identified by the district’s external auditor as well as the current status of the fiscal year 2012–13 recommendations as determined by the external auditor and the current status of the fiscal year 2013–14 recommendations as determined by the California State Auditor. 46 California State Auditor Report 2014-122 April 2015 A elbaT rotiduA lanretxE s’tcirtsiD yratinaS yellaV ssoR yb defiitnedI srettaM rehtO dna seicneicfieD lortnoC lanretnI tnacfiingiS 41–3102 dna 31–2102 sraeY lacsiF DENIMRETED SA SUTATS TNERRUC *ROTIDUA ETATS AINROFILAC EHT YB NOITADNEMMOCER TCEFFE GNIDNIF 31–2102 RAEY LACSIF seicneicfieD tnacfiingiS .detnemelpmI draugefas dna seitud etagerges retteb oT dael nac seitud fo noitagerges fo kcal A egrahc ni ylelos si eeyolpme enO )a( lortnoc lanretnI tcirtsiD yratinaS yellaV ssoR eht ,stessa eht ni esira taht seitiralugerri ro srorre ot gnignahc/gniretne dna lloryap fo seicneicfied eno naht erom evah dluohs )tcirtsid( seitud s'eeyolpme na fo esruoc lamron .setar egaw eeyolpme snoitcnuf eht fo hcae mrofrep eeyolpme .detceted eb ton yam taht rof elbisnopser si eeyolpme enO )b( kcehc knalb ,noitidda nI .b dna a ni detsil dna snoitailicnocer knab gniraperp dna deruces a ni tpek eb dluohs kcots .skcehc seraperp dna seciovni sretne ohw eeyolpme na htiw ,noitacol dekcol .dedraugefas ton si kcots kcehc knalB )c( .yek eht gnipeek skcehc eraperp ton seod .deweiver ton era snoitailicnocer knaB )d( deweiver eb dluohs snoitailicnocer knaB etairporppa na yb devorppa dna .sisab ylhtnom a no laicffio elbisnopser .detnemelpmI hsac eht taht erusne dluohs tcirtsid ehT ssecorp stpiecer hsac eht ni seicneicfieD ,dekcol ton si tnorf eht ta xob hsac ehT seicneicfied tpiecer hsaC knab eht ot stisoped taht dna dekcol si xob ytilibissop eht ot tcirtsid eht esopxe nac na yb edam era knab eht ot stisoped dna tcirtsid ehT .sisab ylkeew a no edam era a ro skcehc ro hsac fo tfeht ro ssol fo .egareva no ,skeew owt yreve eeyolpme ot serudecorp tnemelpmi osla dluohs osla nac tI .sdnuf fo noitairporppasim neewteb seicnapercsid osla era erehT eht evorppa dna tnuoc rosivrepus a evah ot ytiliba s'tcirtsid eht tceffa ylesrevda tnemetats knab dna setad pils tisoped erusne ot dna ,detisoped si ti erofeb hsac erusne dna eunever sti kcart ylreporp ro tnuoc on si ereht ,noitidda nI .setad emas eht tuo dellfi si pils tisoped eht taht .detisoped era stpiecer hsac lla taht eeyolpme gnisivrepus a yb lavorppa tnemelpmi dna ,edam si tisoped eht yad ereht dna ,detisoped si hsac eht erofeb stimrep gnicnerefer rof metsys reporp a deussi stimrep eht no gnicnerefer on si .skcehc ro hsac fo tpiecer eht ot deussi .kcehc ro hsac fo tpiecer gnidrager lacsfi rof gnidnfi taeper eeS .detnemelpmi yllaitraP ycilop a tnemelpmi dluohs tcirtsid ehT yrotnevni ,sdraugefas reporp tuohtiW ,tnuoc yrotnevni launna on si erehT tneicffiusnI .41–3102 raey sedulcni taht yrotnevni gnidraugefas rof ot eruliaf A .detairporppasim eb yam eht ni dedrocer ton si yrotnevni dna slortnoc yrotnevni dna yrotnevni lla fo sdrocer gniniatniam gnitnuocca eht ni yrotnevni drocer si ereht ,noitidda nI .metsys gnitnuocca yrotnevni fo tnuoc lacisyhp a gnimrofrep tnemetatssim a ot dael osla dluoc metsys rof tnuocca ot metsys gnikcart lamrof on .raey lacsfi hcae fo dne eht ta .stnemetats laicnanfi eht fo .desrubsid ro deviecer yrotnevni California State Auditor Report 2014-122 47 April 2015 DENIMRETED SA SUTATS TNERRUC *ROTIDUA ETATS AINROFILAC EHT YB NOITADNEMMOCER TCEFFE GNIDNIF 31–2102 RAEY LACSIF srettaM rehtO .detnemelpmI rof ycilop a tnemelpmi dluohs tcirtsid ehT ,ycilop gnitroper duarf lamrof a tuohtiW duarf lamrof a evah ton seod tcirtsid ehT duarf fo kcaL dna duarf detcepsus troper ot seeyolpme troper ot ylekil ssel era seeyolpme .ycilop gnitroper ycilop gnitroper serudecorp detaler eht dna ycilop siht tsop .duarf detcepsus .seeyolpme lla ot elbisiv ecalp a ni lacsfi rof gnidnfi taeper eeS .detnemelpmi toN nettirw hsilbatse dluohs tcirtsid ehT ,seicilop gnitnuocca nettirw tuohtiW rof seicilop nettirw lamrof on era erehT nettirw fo kcaL .41–3102 raey .saera eseht ni seicilop gnitnuocca eb ton yam selpicnirp gnitnuocca yrevocer retsasid a ,esu drac tiderc ,levart seicilop gnitnuocca rof seeyolpme lla yb ylmrofinu deilppa eht ,noitidda nI .ycilop gnisahcrup a ro ,nalp .snoitcasnart laicnanfi lla eht sserdda ton seod ycilop tessa latipac .smeti latipac detubirtnoc fo tnemtaert raey lacsfi rof gnidnfi taeper eeS .detnemelpmi toN srebmem draob taert dluohs tcirtsid ehT htiw ecnailpmoc ni ton si tcirtsid ehT sa detaert ton era srebmem draob tcirtsiD draob eht fo srebmeM .41–3102 dna sesoprup lloryap rof seeyolpme sa )SRI( ecivreS euneveR lanretnI laredef .sesoprup lloryap rof seeyolpme )draob( srotcerid fo ta )2‑W( stnemetats xat dna egaw eussi .senilediug sa detaert ton era .raey eht fo dne eht seeyolpme .detnemelpmI evomer yletaidemmi dluohs tcirtsid ehT dna tfeht ot desopxe si tcirtsid ehT suoremun sah tnuocca FIAL ehT dezirohtua tcerrocnI detaicossa regnol on era taht srengis .snoitcasnart dezirohtuanu regnol on era taht srengis dezirohtua lacoL no srengis .tcirtsid eht htiw .tcirtsid eht htiw detaicossa tnemtsevnI ycnegA tnuocca )FIAL( dnuF .detnemelpmI lla taht erusne dluohs tcirtsid ehT dna noitatnemucod reporp tuohtiW dengis ton saw mrof tseuqer kcehc enO seicneicfieD yb dengis era smrof tseuqer kcehc ,stnemesrubmier eeyolpme fo lavorppa ,tnemesrubmier gnikees eeyolpme eht yb eeyolpme ni deweiver ylreporp era ,eeyolpme eht dna detairporppasim eb yam sdnuf ton saw mrof tseuqer kcehc rehtona stnemesrubmier rof deniater era dna ,devorppa dna .detcetednu og devorppa saw eno dna ,deniater/deniatbo .noitacfiirev erutuf gnikees saw ohw eeyolpme eht yb .tnemesrubmier .detnemelpmI lla taht erusne dluohs tcirtsid ehT gnitroppus reporp tuohtiW ton erew stpiecer gnippihs suoremuN rof stpiecer fo kcaL deniater si noitatnemucod gnitroppus si ereht ,sesahcrup rof noitatnemucod esahcrup eno dna ,deniater/deniatbo sesahcrup drac tiderc .stnemetats drac tiderc eht htiw edam sesahcrup taht erusne ot yaw on .tpiecer a dekcal .ssenisub tcirtsid rof erew .detnemelpmI noitisop eht etadpu dluohs tcirtsid ehT lloryap etelpmocni ro gnissiM eht rof etar egaw on si erehT )a( seicneicfied lloryaP devorppa‑draob eht edulcni ot eludehcs eht fi senfi ni tluser dluoc stnemucod no noitisop ecnanetniam yraropmet ecnanetniam yraropmet rof etar egaw tnemnrevog a yb detidua reve si tcirtsid .eludehcs noitisop eht rof eludehcs eht tsujda dna seeyolpme ot elbanu era srotidua ,oslA .ycnega noitacfiirev ytilibigile tnemyolpme neT )b( si etar egaw esohw eeyolpme eno eht gniwollof si tcirtsid eht fi enimreted ton dna etelpmocni erew smrof )9‑I( stnemucod lloryap llA .spets neewteb ni era seeyolpme nehw snoitcerid draob .reyolpme eht yb dengis ta ssenetelpmoc rof deweiver eb dluohs eht htiw ecnadrocca ni diap gnieb ton —smrof noitca lennosrep owT )c( deniater eb dna noitaraperp fo emit eht .eludehcs noitisop devorppa —noitacilppa boj eno dna mrof 9‑I eno .noitacfiirev erutuf rof .deniater/deniatbo ton erew etar egaw s'eeyolpme enO )d( eht no spets neewteb ni si .eludehcs noitisop . . . egap txen no deunitnoc 48 California State Auditor Report 2014-122 April 2015 YB DENIMRETED SA SUTATS TNERRUC *ROTIDUA ETATS AINROFILAC EHT NOITADNEMMOCER TCEFFE GNIDNIF 41–3102 RAEY LACSIF ycneicfieD tnacfiingiS tnemeganam yrotnevni nA .detnemelpmi yllaitraP fo sdrocer niatniam dluohs tcirtsid ehT ,sdraugefas reporp tuohtiW eht ni dedrocer ton si yrotnevnI tneicffiusnI ni draob eht yb devorppa saw ycilop noitaulav dna otni decalp dna deviecer yrotnevni lla .detairporppasim eb yam yrotnevni lamrof on si ereht dna ,metsys gnitnuocca slortnoc yrotnevni ,tnemeganam tcirtsid ot gnidroccA .4102 rebmetpeS yrotnevni drocer dluohs dna ,dlefi eht ni yrotnevni gnidrocer fo kcaL yrotnevni rof tnuocca ot metsys gnikcart )gnidnfi taeper( ytiruces dna dezinagro erew seilppus dna yrotnevni a no metsys gnitnuocca eht ni stnuoma osla dluoc metsys gnitnuocca eht .desrubsid ro deviecer .slairetam derots ot ssecca timil ot ecalp ni tup erew serusaem .sisab raluger eht fo tnemetatssim a ot dael dne eht ta detelpmoc saw smeti yrotnevni fo tnuoc lacisyhp A .stnemetats laicnanfi tub ,detsil erew smeti yrotnevni ehT .41–3102 raey lacsfi fo noitatnemelpmI .elbaliava ton erew smeti emos rof stsoc eht s'tcirtsid eht esuaceb deyaled saw metsys gnikcart a fo saw metsyS tnemeganaM ecnanetniaM deziretupmoC si tnemeganaM .noitcnuf siht gnimrofrep fo elbapac ton dna metsys gnikcart yrotnevni na no krow ot gniunitnoc yrotnevni na fo noitidda eht edulcni yam hcihw ,ssecorp .erawtfos gnitnuocca gnitsixe eht ot eludom srettaM rehtO a devorppa draob ehT .detnemelpmi yllaitraP nettirw hsilbatse dluohs tcirtsid ehT ,seicilop gnitnuocca nettirw tuohtiW rof seicilop nettirw lamrof on era erehT nettirw fo kcaL levart wen A .4102 rebmetpeS ni ycilop tnemerucorp .saera eseht ni seicilop gnitnuocca eb ton yam selpicnirp gnitnuocca yrevocer retsasid a ,esu drac tiderc ,levart seicilop gnitnuocca .5102 yraurbeF ni detnemelpmi saw ycilop tnemesrubmier rof seeyolpme lla yb ylmrofinu deilppa eht ,noitidda nI .ycilop gnisahcrup a ro ,nalp )gnidnfi taeper( seicilop lanoitidda eht ,tnemeganam tcirtsid ot gnidroccA .snoitcasnart laicnanfi lla eht sserdda ton seod ycilop tessa latipac dna seicilop hsilbatse ot troffe gniogno na fo trap era .smeti latipac detubirtnoc fo tnemtaert .tcirtsid eht rof serudecorp .detnemelpmI srebmem draob taert dluohs tcirtsid ehT htiw ecnailpmoc ni ton si tcirtsid ehT sa detaert ton era srebmem draob tcirtsiD ton era srebmem draoB dna sesoprup lloryap rof seeyolpme sa .senilediug SRI .sesoprup lloryap rof seeyolpme seeyolpme sa detaert .raey eht fo dne eht ta s2‑W eussi )gnidnfi taeper( .detnemelpmI serudecorp tnemelpmi dluohs tcirtsid ehT enimreted ot elbanu era srotiduA eht niatnoc ton od seirtne lanruoJ kcal seirtne lanruoJ era seirtne lanruoj lla taht erusne ot deweiver erew seirtne lanruoj fi .erutangis s'reweiver serutangis lavorppa yb decnedive sa ,devorppa dna deweiver on si ereht fi devorppa dna ohw eeyolpme etarapes a yb ,erutangis a .erutangis lavorppa .yrtne lanruoj eht tupni ro eraperp ton did .detnemelpmI tnemelpmi dluohs tcirtsid ehT .seef yrassecennu derrucni tcirtsid ehT etal deniatnoc tnemetats drac tiderc enO tseretni dna seef etaL drac tiderc lla taht erusne ot serudecorp .segrahc tseretni dna seef derrucni segrahc diova ot ,emit no diap era stnemetats .segrahc tseretni dna seef etal s'tcirtsid eht ot gnidroccA .detnemelpmi yllaitraP tnemelpmi dluohs tcirtsid ehT era smrof ffo emit rof tseuqer nehW ton era seeyolpme tnemeganam owT deriuqer ton steehsemiT cinortcele na detceles sah tcirtsid eht ,reganam ssenisub seeyolpme lla eriuqer ot serudecorp kcart ot deriuqer tnemucod ylno eht ,rehtar ;teehsemit a etelpmoc ot deriuqer seeyolpme lla rof .5102 hcraM ni ti gnillatsni eb lliw dna margorp teehsemit erom ot teehsemit a etelpmoc ot si ereht ,nekat emit detasnepmoc ffo emit gnitseuqer smrof etelpmoc yeht ot seeyolpme lla gniriuqer nigeb ot snalp tcirtsid ehT detasnepmoc kcart yletairporppa emit ekat ot seeyolpme rof laitnetop .evael detasnepmoc ekat yeht nehw .5102 lirpA yb steehsemit cinortcele timbus .secnalab evael .yletairporppa ti gnitroper tuohtiw ffo nehw kcart yletarucca erom steehsemiT .evael detasnepmoc esu seeyolpme .41–3102 dna 31–2102 sraey lacsfi rof stidua laicnanfi eht fo noisulcnoc eht ta rotidua lanretxe s’tcirtsid eht yb deraperp srettel noitacinummoc s’rotidua dna stroper tnemeganaM :secruoS .raey roirp eht morf snoitadnemmocer s’rotidua eht detnemelpmi yletauqeda dah tcirtsid eht rehtehw denimreted rotidua lanretxe eht ,tidua 41–3102 raey lacsfi eht gniruD * California State Auditor Report 2014-122 49 April 2015 50 California State Auditor Report 2014-122 April 2015 TROPER SROTIDUA ETATS AINROFILAC EHT OT ESNOPSER RETTEL ;TCIRTSID YRAITINAS YELLAV SSOR A TNEMHCATTA :ESNOPSER DSVR :YRAMMUS SNOITADNEMMOCER TIDUA ETATS snoitadnemmocer tidua laicnanif lanretxe eht fo lla evah lliw tcirtsiD gnidnatstuo s’rotidua lanretxe eht fo lla tnemelpmi ylluf dluohs tcirtsiD ehT .1 wen a ni deifidoc eb lliw esehT .5102 ht03 enuJ yb detnemelpmi ,seicilop detaler wollof ffats erusne ,5102 ht03 enuJ yb snoitadnemmocer eb lliw hcihw ,)yciloP CPF( yciloP slortnoC dna secitcarP laicnaniF slortnoc fo metsys sti gnirotinom rof nalp a tnemelpmi dna erutuF .61-5102 YF wen eht fo 1Q nihtiw devorppa dna depoleved htiw ecnailpmoc rotinom ot spets edulcni lliw sepocs tidua laicnanif .yciloP CPF wen eht :ot seicilop evitartsinimda dna laicnanif sti nehtgnerts dluohs tcirtsid ehT .2 dna secitcarP laicnaniF weN .detnemelpmi ecitcarp dradnatS .a gnidrocer ,seciovni gnivorppa fo seitivitca eht taht raelc ti ekaM .a .ecitcarp eht yfidoc ot depoleved eb lliw yciloP slortnoC eb dluohs stnemetats knab gnilicnocer dna ,skcehc gniraperp ,seciovni CPF( yciloP slortnoC dna secitcarP laicnaniF wen ni edulcni lliW .b .slaudividni etarapes yb demrofrep .)yciloP ylhtnom gnivorppa dna gniweiver rof elbisnopser si ohw raelc ti ekaM .b yfiralc ot ycilop tnemesrubmier detpoda yltnecer etadpu lliW .c .snoitailicnocer knab esicrexe rof tnemesrubmier evomer dna stimil gnigdol eht ainrofilaC fo etats eht yb tes etar eht ot stsoc gnigdol ainrofilaC timiL .c .esu tnempiuqe tes setar ot stsoc gnigdol etats-fo-tuo yna timil dna ,seeyolpme sti rof ,ylhtnom seviecer draoB .sraey owt tsap rof ecitcarp dradnatS .d tcirtsid eht ,noitidda nI .seeyolpme sti rof tnemnrevog laredef eht yb eht ni ecitcarp siht yfidoc lliW .stroper launna dna ,ylretrauq esicrexe rof tnemesrubmier eht ycilop levart sti morf evomer dluohs .yciloP CPF wen .esu tnempiuqe .yciloP CPF wen ni edulcni lliW .e .draob eht ot noitamrofni laicnanif fo gnitroper cidoirep eriuqeR .d slortnoc yrotnevni dednemmocer evah ot tcepxE .ssergorp nI .f lennosrep etairporppa ylno taht erusne ot weiver cidoirep a eriuqeR .e .61-5102 YF fo dne yb .stnuocca laicnanif no srengis dezirohtua sa dedulcni era .61-5102 YF yb ycilop lavorppa emitrevo wen tnemelpmi lliW .g .yrotnevni gniulav dna gnikcart rof metsys etairporppa na hsilbatsE .f lla rof metsys teehs emit cinortcele weN .ssergorp nI .h erofeb lavorppa s’rosivrepus rieht niatbo ot seeyolpme eriuqeR .g .)5102 yluJ( 61-5102 YF fo trats yb esu ni eb ot seeyolpme .emitrevo diap gnikrow 1Q yb ,ycilop tseretnI fo tcilfnoC desiver / wen ni edulcni lliW .i ot steehsemit etelpmoc ot ,sreganam gnidulcni ,seeyolpme lla eriuqeR .h .61-5102 YF fo .ffo emit detasnepmoc yna dna dekrow emit kcart .ycilop tseretnI fo tcilfnoC desiver/wen ni edulcni lliW .j gnirotinom dna gniweiver rof ssecorp a tnemucod dna poleveD .i .007 mroF fo gnilif ’srebmem draob dna ’seeyolpme detangised dna srebmem draob seriuqer taht ycilop a tnemucod dna poleveD .j a dna yllaunnaib gniniart scihte dnetta ot seeyolpme detangised .ecnadnetta gnirotinom rof ssecorp California State Auditor Report 2014-122 51 April 2015 TROPER SROTIDUA ETATS AINROFILAC EHT OT ESNOPSER RETTEL ;TCIRTSID YRAITINAS YELLAV SSOR A TNEMHCATTA :ESNOPSER DSVR :YRAMMUS SNOITADNEMMOCER TIDUA ETATS eht edulcni ot desiver eb lliw redniB noitatneirO rebmeM draoB .a tcirtsid eht ,srebmem draob fo seitilibisnopser dna selor eht yfiralc oT .3 .koobdnaH )ADSC( noitaicossA stcirtsiD laicepS ainrofilaC dluohs dna seitud rotceriD draoB a dda ot detadpu eb lliw seicilop draoB .b gnisserdda ,launam rebmem draob evisneherpmoc erom a etaerC .a .noitpircsed boj a ot ralimis ,seitilibisnopser eetsurT/rebmeM draoB tcirtsiD laicepS eht ni secitcarp tseb eb lliw gniniart deriuqer muminim dna tnempoleved lanoisseforP .c .koobdnaH laicnanif ni selor draoB sserdda ot ycilop draoB ni dedda dna selor draoB yfiralc dna srebmem draob rof gniniart edivorP .b yek rehto dna ,secruoser namuh ,gnitcartnoc cilbup ,tnemeganam .seitilibisnopser .saera ot secruoseR namuH dna reganaM lareneG eht tcerid lliw draoB ehT stifeneb dna noitasnepmoc gniwollof eht sserdda dluohs tcirtsiD ehT .4 -non lla dna detneserper EMCSFA htob rof slaog eseht redisnoc :seussi seripxe EMCSFA htiw tnemeerga gnitsixe ehT .seeyolpme detneserper dengila ylesolc erom eb ot snoitisop lla rof segnar yralas ecudeR .a .5102 enuJ fo dne eht ta .segareva yrtsudni htiw etairporppa na ot eit dluohs s )s’ALOC( stnemtsujdA gniviL fo tsoC .b .xedni gnivil-fo-tsoc .ecnamrofrep dna tirem ot deit eb dluohs segnahc noitasnepmoC .c rehto ro noitneter rof deifitsuj ylraelc dluohs yap ytivegnoL .d .dedne ro ,sesoprup etamitigel noitubirtnoc tnemeriter eeyolpme sti esiver dluohs tcirtsid ehT .e etairporppa na etubirtnoc ot seeyolpme lla eriuqer dna ,ycilop .snoisnep rieht ot tnuoma launna 003$ seeyolpme sti gniyap eunitnocsid dluohs tcirtsid ehT .f .spihsrebmem myg 52 California State Auditor Report 2014-122 April 2015 TROPER SROTIDUA ETATS AINROFILAC EHT OT ESNOPSER RETTEL ;TCIRTSID YRAITINAS YELLAV SSOR A TNEMHCATTA :ESNOPSER DSVR :YRAMMUS SNOITADNEMMOCER TIDUA ETATS eht gniniltuo ,yciloP noitasnepmoC a tpoda dna poleved lliw draoB ehT hsilbatse lliw ti woh eniltuo taht seicilop tsubor poleved dluohs draoB ehT .5 DSVR hsilbatse ot desu ygolodohtem dna ,sevitcejbo ,slaog rof syevrus yralas gnidulcni ,snoitisop tcirtsid lla rof noitasnepmoc erutuf YF fo 1Q yb detpoda eb lliw sihT .snoitisop lla rof slevel noitasnepmoc .seicnega cilbup elbarapmoc .61-5102 dna ,weiveR ecnamrofreP ,gnitcartnoC reganaM lareneG“ wen A desu eb ot airetirc eht sehsilbatse taht ycilop a poleved dluohs tcirtsid ehT .6 secitcarp tnecer eht yfidoc ot depoleved eb lliw ”yciloP noitasnepmoC gninimreted rof dna ecnamrofrep s’reganam lareneg eht gnitaulave nehw yb deweiver sa ,setadpu noitasnepmoc dna tcartnoc tsal eht ni desu .sesaercni noitasnepmoc desab-tirem yna .maet tidua etatS eht erusne ot snoitca yrassecen lla ekat lliw tnemeganam dna draoB ehT ,gniteem draob hcae ta seicnegreme lla evorppaer dluohs draob ehT .7 lla rof enod sah ti sa ,tnemeriuqer lagel etats siht htiw ecnailpmoc erusne ot ,elbissop sa noos sa snoitaralced ycnegreme etanimret .sraey lacsif owt tsap eht ni enod gnitcartnoc ycnegreme .krow ycnegreme-non rof gniddib evititepmoc ot detadpu eb lliw ycilop tnemerucorp devorppa yltnecer s’tcirtsiD ehT rof gnitcartnoc nehw ssecorp evititepmoc a esu dluohs tcirtsid ehT .8 dna gnitcartnoc secivres lanoisseforp rof senilediug raelc edulcni )ecruos elos( evititepmoc-non fo esu sti yfitsuj dna ,secivres lanoisseforp .secivres lanoisseforp ecruos elos gniyfitsuj ni deredisnoc srotcaf .desu nehw secivres lanoisseforp rof tnemerucorp si ti ,tsap eht ni siht enod syawla ton sah tcirtsiD eht hguohtlA lagel rof stsoc dna secivres fo etamitse nettirw a niatbo dluohs tcirtsiD ehT .9 .noitadnemmocer eht gniwollof yltnerruc .noitagitil ni gnigagne erofeb ,lesnuoc erus ekam ot 3102 etal ni nageb ti krow eht eunitnoc lliw tcirtsiD ehT secruoser namuh deifilauq ot ssecca sah ti taht erusne dluohs tcirtsid ehT .01 era secruoser tnemeganam secruoser namuh lanoisseforp taht eb dluohs )3 elbaT( snoitadnemmocer RH tnerruc ehT .slanoisseforp era snoitadnemmocer 3 elbaT ehT .ylevitceffe desu dna elbaliava gnidulcni ,detnemelpmi noitelpmoc dna ssergorp rehtruf htiw ,yltnerruc detnemelpmi gnieb eviecer ffats erusne ot metsys tnemeganam ecnamrofrep sti evorpmI .a .3 elbaT ni detsil senilemit eht no detcepxe .snoitaulave ecnamrofrep launna deriuqer dna srebmem draob seriuqer taht ycilop a tnemucod dna poleveD .b .gniniart noitneverp tnemssarah launna-ib dnetta ot srosivrepus