Marin County 07/11

MARIN COUNTY Audit Report ROAD FUND July 1, 2002, through June 30, 2008 J C OHN HIANG California State Controller July 2011 July 29, 2011 Susan L. Adams, President Board of Supervisors Marin County 3501 Civic Center Drive, Room 329 San Rafael, CA 94903 Dear Ms. Adams: The State Controller’s Office (SCO) audited Marin County’s Road Fund for the period of July 1, 2002, through June 30, 2008. The county accounted for and expended Road Fund moneys in compliance with Article XIX of the California Constitution, the Streets and Highways Code, and the SCO’s Accounting Standards and Procedures for Counties manual, except for our adjustment of $61,823. We made the adjustment because the county did not reimburse the Road Fund for outstanding non-road expenditures. In addition, we identified procedural findings affecting the Road Fund. The county accounted for and expended fiscal year (FY) 2002-03 through FY 2007-08 Transportation Equity Act of the 21st Century Matching and Exchange moneys in compliance with Article XIX of the California Constitution and Streets and Highways Code section 182.6. If you have any questions, please contact Steven Mar, Chief, Local Government Audits Bureau, at (916) 324-7226. Sincerely, Original signed by JEFFREY V. BROWNFIELD Chief, Division of Audits JVB/sk Susan L. Adams -2- July 29, 2011 cc: Gary L. Burroughs, Acting Director of Finance Marin County Farhad Mansourian, Director of Public Works Marin County Gilbert Petrissans, Chief Local Program Accounting Branch Department of Transportation Marin County Road Fund Contents Audit Report Summary ........................................................................................................................... 1 Background ....................................................................................................................... 1 Objectives, Scope, and Methodology .............................................................................. 1 Conclusion ......................................................................................................................... 3 Follow-Up on Prior Audit Findings ................................................................................ 3 Views of Responsible Official .......................................................................................... 3 Restricted Use ................................................................................................................... 3 Schedule 1—Reconciliation of Road Fund Balance ............................................................ 4 Schedule 2—Reconciliation of TEA-21 Balance ................................................................. 5 Findings and Recommendations ........................................................................................... 6 Attachment—County’s Response to Draft Audit Report Marin County Road Fund Audit Report Summary The State Controller’s Office (SCO) audited Marin County’s Road Fund for the period of July 1, 2002, through June 30, 2008 (fiscal year [FY] 2002-03 through FY 2007-08). Our audit disclosed that the county accounted for and expended Road Fund moneys in compliance with Article XIX of the California Constitution, the Streets and Highways Code, and the SCO’s Accounting Standards and Procedures for Counties manual, except for our adjustment of $61,823 and procedural findings identified in this report. In addition, we audited Transportation Equity Act of the 21st Century (TEA-21) Matching and Exchange moneys for FY 2002-03 through FY 2007-08 at the request of the California Department of Transportation (Caltrans). The TEA-21-funded projects have been verified to be for road-related purposes and are eligible expenditures. The TEA-21 moneys received by the county were accounted for and expended in compliance with Article XIX of the California Constitution. Background We conducted an audit of the county’s Road Fund in accordance with Government Code section 12410. The Road Fund was established by the county boards of supervisors in 1935, in accordance with Streets and Highways Code section 1622, for all amounts paid to the county out of moneys derived from the highway users tax fund. A portion of the Federal Forest Reserve revenue received by the county is also required to be deposited into the Road Fund (Government Code section 29484). In addition, the county board of supervisors may authorize the deposit of other sources of revenue into the Road Fund. Once moneys are deposited into the Road Fund, it is restricted to expenditures made in compliance with Article XIX of the California Constitution and Streets and Highways Code Sections 2101 and 2150. The Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991 created a federal program designed to increase flexibility in federal funding for transportation purposes by shifting the funding responsibility to state and local agencies. The TEA-21 is a continuation of this program. The funds are restricted to expenditures made in compliance with Article XIX of the California Constitution. Caltrans requested that we audit these expenditures to ensure the county’s compliance. Objectives, Scope, The objectives of our audit of the Road Fund and TEA-21 Matching and and Methodology Exchange moneys were to determine whether: Highway users tax apportionments and TEA-21 Matching and Exchange moneys received by the county were accounted for in the Road Fund, a special revenue fund; Expenditures were made exclusively for authorized purposes or safeguarded for future expenditure; -1- Marin County Road Fund Reimbursements of prior Road Fund expenditures were identified and properly credited to the Road Fund; Non-road-related expenditures were reimbursed in a timely manner; The Road Fund cost accounting is in conformance with the SCO’s Accounting Standards and Procedures for Counties manual, Chapter 9, Appendix A; and Expenditures for indirect overhead support service costs were within the limits formally approved in the Countywide Cost Allocation Plan. Our audit objectives were derived from the requirements of Article XIX of the California Constitution, the Streets and Highways Code, the Government Code, and the SCO’s Accounting Standards and Procedures for Counties manual. To meet the objectives, we: Gained a basic understanding of the management controls that would have an effect on the reliability of the accounting records of the Road Fund, by interviewing key personnel and testing the operating effectiveness of the controls; Verified whether all highway users tax apportionments and TEA-21 Matching and Exchange moneys received were properly accounted for in the Road Fund, by reconciling the county’s records to the State Controller’s and Caltrans’ payment records; Analyzed the system used to allocate interest and determined whether the interest revenue allocated to the Road Fund was fair and equitable, by interviewing key personnel and testing a sample of interest calculations; Verified that unauthorized borrowing of Road Fund cash had not occurred, by interviewing key personnel and examining the Road Fund cash account entries; and Determined, through testing, whether Road Fund expenditures were in compliance with Article XIX of the California Constitution and with the Streets and Highways Code, and whether indirect cost allocation plan charges to the Road Fund were within the limits approved by the SCO’s Division of Accounting and Reporting, County Cost Plan Unit. We conducted this performance audit in accordance with 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. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We did not audit the county’s financial statements. Our scope was limited to planning and performing audit procedures necessary to obtain reasonable assurance concerning the allowability of expenditures claimed for reimbursement. Accordingly, we examined transactions on a -2- Marin County Road Fund test basis to determine whether they complied with applicable laws and regulations and were properly supported by accounting records. We considered the county’s internal controls only to the extent necessary to plan the audit. Conclusion Our audit disclosed that the county accounted for and expended Road Fund moneys in compliance with Article XIX of the California Constitution, the Streets and Highways Code, and the SCO’s Accounting Standards and Procedures for Counties manual, except for the item shown in Schedule 1 and described in the Findings and Recommendations section of this report. The findings require an adjustment of $61,823 to the county’s accounting records. Additionally, we identified procedural findings affecting the Road Fund. These findings and recommendations are described in the Findings and Recommendations section of this report. We verified that the TEA-21-funded projects were for road-related purposes, and are eligible expenditures. The TEA-21 moneys received by the county were accounted for and expended in compliance with Article XIX of the California Constitution and the Streets and Highways Code. Follow-up on Prior Findings noted in our prior audit report, issued on October 29, 2003, Audit Findings have been satisfactorily resolved by the county except for the recommendation to establish written procedures for the physical count of sign shop inventory. Views of We issued a draft audit report on February 14, 2011. William H. Responsible Nelson, Jr., the county’s Administrative Services Manager, responded by letter dated May 6, 2011, agreeing with the audit results. The county’s Official response is included as an attachment in this final audit report. Restricted Use This report is solely for the information and use of Marin County management, the Marin County Board of Supervisors, and the SCO; it is not intended to be and should not be used by anyone other than these specified parties. This restriction is not intended to limit distribution of this report, which is a matter of public record. Original signed by JEFFREY V. BROWNFIELD Chief, Division of Audits July 29, 2011 -3- Marin County Road Fund Schedule 1— Reconciliation of Road Fund Balance July 1, 2007, through June 30, 2008 Amount Beginning fund balance per county $ 3,290,683 Revenues 12,005,630 Total funds available 15,296,313 Expenditures (9,136,909) Ending fund balance per county 6,159,404 SCO adjustment: Finding—Unreimbursed non-road expenditures 61,823 Ending fund balance per audit $ 6,221,227 -4- Marin County Road Fund Schedule 2— Reconciliation of TEA-21 Balance July 1, 2002, through June 30, 2008 Amount Beginning balance per county $ — Revenues: TEA-21 Matching and Exchange funds 1,256,320 Total funds available 1,256,320 Expenditures: Maintenance (1,256,320) Ending balance per county — SCO adjustment — Ending balance per audit $ — Note: The TEA-21 moneys have been accounted for and expended within the Road Fund. -5- Marin County Road Fund Findings and Recommendations FINDING 1— The county did not reimburse the Road Fund $94,673 for expenditures on non-road work for other county departments and outside parties for Unreimbursed non- fiscal year (FY) 2002-03 through FY 2007-08. In addition, the county road expenditures did not have follow-up procedures for the collection of non-road billings. This finding was reported in the prior SCO audit report. Road Fund moneys can be expended only for road or road-related purposes as outlined in Streets and Highways Code sections 2101 and 2150. The SCO has permitted expenditures of Road Fund money for non-road work as a convenience for counties, provided that the expenditures are billed and reimbursed in a timely manner (30 to 60 days after completion of the work). Recommendation The county should reimburse the Road Fund $94,673 for the expenditures incurred for the county departments and outside parties. In addition, the county should establish procedures to ensure that future outstanding non-road billings are collected and the Road Fund is reimbursed in a timely manner. County’s Response Of the $94,673 in outstanding Non-Road Reimbursable Expenditures, $44,634 is to be reimbursed by the General Fund, $16,407 was proven to be collected, $14,818 was cost that was subsequently adjusted to be Road maintenance cost, $9,256 is billable to other County funds, $7,933 is to be re-invoiced to Outsiders, a negative ($776.66) pertained to Prior Period Outsider billings, and $2,402 pertained to erroneous overhead amounts included in the labor rates in 2007-08. A more complete explanation of this error is offered in the attached “Analysis of Non-Road Reimbursable Expenditures. Please refer to “Notes” tab on the worksheet for a detailed explanation of each of the thirty-three exceptions. While some of the difficulties associated with this finding can be traced to other causes mentioned in my General Response, the primary cause is the incomplete follow through in the tracking of the receivables. The solution is a Receivable Again Report which will be maintained and monitored in compliance. Re-doubled efforts will follow through on all amounts due from Outsiders, and from other County funds. SCO’s Comment The SCO agrees with the county’s revised outstanding amount of $61,823. -6- Marin County Road Fund FINDING 2— During FY 2006-07 and FY 2007-08, expenditure differences existed between the Department of Public Works’ cost accounting system and Differences between the the Auditor-Controller’s financial accounting system. Differences of cost system and the $517,235 for FY 2006-07 and $452,006 for FY 2007-08 were not financial accounting reconciled during the current audit. system The SCO’s Accounting Standards and Procedures for Counties manual, Chapter 9, Appendix A, prescribes periodic expenditure reconciliations between the financial and the cost accounting systems. Recommendation The county should reconcile the expenditure differences for FY 2006-07 and FY 2007-08 and establish procedures to ensure that Road Fund expenditures recorded in the cost system agree with the expenditure recorded in the Auditor-Controller’s financial accounting system. County’s Response In response to the differences between the cost accounting system CAMS and the accounting system or SAP, there are a few reasons. The major reason was the County’s difficulties with closing the books. For example when Gus Castro left us after compiling the Road Report for us back in 2008, he reported to me a difference of $185,831 between CAMS and SAP. In the audit the difference had grown to $452,006 for FY 2007-08. This moving target accounts for the bulk of our difference. In addition, DPW Accounting encountered difficulties with the method of recovering overhead costs which caused a doubling of the overhead charged. This is explained in more detail again by referring to the attached “Analysis of Non-Road Reimbursable Expenditures” at note one. For an unknown period of time the overhead percentage in CAMS for the previous period was effective when we thought we had set it to zero also. Much of these could have been mitigated if a comprehensive cross-walk had been in place between the coding in CAMs and the G/L coding in SAP. Effective with 2011-12 we will have eliminated this deficiency by creating the necessary cross- walk, which both expands the G/L codes in SAP, and provides each with a unique cost center code in CAMs, and detailed description of the uses for each code. This will allow multiple CAMs Users to accurately input data, and provide a simple means of finding variances between our cost accounting and the books. -7- Marin County Road Fund FINDING 3— The Department of Public Works did not update the vehicle and equipment rental rates for FY 2007-08 and in previous years. Equipment rental rates not updated The SCO’s manual (Chapter 9, Appendix A, section 17) states that equipment rental rates should be established based on a three-year average of equipment and vehicle maintenance, repairs, and operating costs by categories divided by the estimated equipment usage hours for the upcoming year. Recommendation The department should analyze and update the equipment rental rates. County’s Response Effective with Fiscal Year 2009-10 we have migrated to using Cal- Trans Rates for our Equipment rental rates. This should eliminate the need to compute our own rates. FINDING 4— The department did not have written procedures for the year-end physical counts of Sign Shop inventories. The Sign Shop inventory totaled No written inventory $151,472 or 4.9899% of Road Fund total assets as of June 30, 2007. Due procedures to the lack of inventory procedures, a physical count was not conducted at June 30, 2008. This finding was reported in the prior SCO audit report. Proper internal control for determining the existence and valuation of inventory items includes written procedures for a year-end physical inventory count. The procedures should address proper segregation of duties in the physical counts of inventories and the proper recording of amounts. At a minimum, these procedures should identify the participants in the count, the timing of the counts, the counting method, supervisory approval, and the process for resolving discrepancies. Recommendation The county must establish written procedures for the year-end physical count of Sign Shop inventories. County’s Response Please refer to attachment for written Physical Inventory Collection procedures. -8- Marin County Road Fund FINDING 5— The 2007-08 Annual Road Report, Schedule 7 (Clearing Account Activity) presented high variances for labor (30.88%), equipment High clearing account (18.30%), general road overhead (21.77%), and inventory (67.87%). For variances labor clearing, we determined that the department used full weighted labor rates (including overhead) instead of weighted (applied) labor rates during FY 2007-08. The SCO’s manual (Chapter 9, Appendix A, sections 14-23) prescribe the method used in the development and operation of the labor, equipment, general overhead, and inventory clearing accounts. Per section 24, the acceptable range for the labor variance is +/-5% and +/-10% for the equipment, general road overhead, and inventory variances. Recommendation The department should analyze its clearing accounts and update the respective applied labor, equipment, and overhead rates for FY 2009-10. County’s Response The deficiencies pointed out related to variances between major category distributions and actual costs can be attributed to many of the same reasons discussed above. The Labor Clearing variance is primarily due to the inclusion of a flat $17.36 per hour of overhead cost in the labor rates. This caused the labor costs to be over distributed. For the Equipment Clearing accounts our under-allocation is due to the need for revising the rates, which has been corrected effective with Fiscal Year 2009-10 by our adoption of the higher Cal-Trans rates suggested to us by Gus Castro. The Variance for the Overhead Clearing, which was an under-allocation, was due to inexperience with the system, rates from previous periods remained in CAMs for a portion of the year, resulting in the under-allocation found. Effective with Fiscal 2010-11 overhead will be set in CAMs as a percentage of labor and not included in the labor rate, thereby correcting both the labor and the overhead variances. For the Inventory Clearing accounts a written procedures will help to eliminate the variance, as it was uncovered that improper cut-offs for both the physical count and the inclusion or exclusion of paid deliveries of inventory assets is the cause of this variance. -9- Marin County Road Fund Attachment— County’s Response to Draft Audit Report State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250-5874 http://www.sco.ca.gov S09-RFA-003