City of Compton April 2018

CITY OF COMPTON Audit Report SPECIAL GAS TAX STREET IMPROVEMENT FUND TRAFFIC CONGESTION RELIEF FUND ALLOCATIONS AND PROPOSITION 1B FUND ALLOCATIONS July 1, 2007, through June 30, 2016 BETTY T. YEE California State Controller April 2018 BETTY T. YEE California State Controller April 16, 2018 Cecil W. Rhambo, Jr., City Manager City of Compton 205 South Willowbrook Avenue Compton, CA 90220 Dear Mr. Rhambo: The State Controller’s Office audited the City of Compton’s Special Gas Tax Street Improvement Fund for the period of July 1, 2007, through June 30, 2016. We also audited the Traffic Congestion Relief Fund allocations recorded in its Transportation Investment Fund, and the Proposition 1B Fund allocations recorded in its Proposition 1B Fund for the period of July 1, 2007, through June 30, 2016. Our audit found that the city accounted for and expended its Proposition 1B Fund allocations in compliance with requirements. However, the City of Compton did not account for and expend its Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund allocations in compliance with requirements as follows:  For the Special Gas Tax Street Improvement Fund, the city borrowed from the fund, charged the fund with unsupported and ineligible expenditures, overstated gas tax revenue adjustments, and understated income; and  For the Traffic Congestion Relief Fund allocations, the city charged the fund with unsupported costs, and did not spend the funds within the required statutory period. We also identified one deficiency in internal control that is insignificant to the audit objective, but warrants the attention of management. This deficiency is described in the Observation and Recommendation section of this report. If you have any questions, please contact Efren Loste, Chief, Local Government Audits Bureau, by telephone at (916) 324-7226. Sincerely, Original signed by JEFFREY V. BROWNFIELD, CPA Chief, Division of Audits JVB/rg Cecil W. Rhambo, Jr., City Manager -2- April 16, 2018 cc: The Honorable Aja Brown, Mayor City of Compton Janna Zurita, Councilmember City of Compton Isaac Galvan, Councilmember City of Compton Tana McCoy, Councilmember City of Compton Emma Sharif, Councilmember City of Compton Rafaela King, City Controller City of Compton Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Contents Audit Report Summary ............................................................................................................................ 1 Background ........................................................................................................................ 1 Objective, Scope, and Methodology ................................................................................. 2 Conclusion .......................................................................................................................... 4 Follow-up on Prior Audit Findings .................................................................................. 4 Views of Responsible Officials .......................................................................................... 4 Restricted Use .................................................................................................................... 4 Schedule 1—Special Gas Tax Street Improvement Fund – Reconciliation of Fund Balances ............................................................. 5 Schedule 2—Traffic Congestion Relief Fund Allocations – Reconciliation of Fund Balances ............................................................. 6 Schedule 3—Proposition 1B Fund Allocations – Reconciliation of Fund Balances ............................................................ 7 Findings and Recommendations ........................................................................................... 8 Observation and Recommendation ...................................................................................... 17 Attachment—City of Compton’s Response to Draft Audit Report Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Audit Report Summary The State Controller’s Office (SCO) audited the City of Compton’s:  Special Gas Tax Street Improvement Fund for the period of July 1, 2007, through June 30, 2016;  Traffic Congestion Relief Fund allocations recorded in its Transportation Investment Fund for the period of July 1, 2007, through June 30, 2016; and  Proposition 1B Fund allocations recorded in its Proposition 1B Fund, for the period of July 1, 2007, through June 30, 2016. Our audit found that the city accounted for and expended its Proposition 1B Fund allocations in compliance with requirements. However, the City of Compton did not account for and expend its Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund allocations in compliance with requirements as follows:  For the Special Gas Tax Street Improvement Fund, the city borrowed from the fund, charged the fund with unsupported and ineligible expenditures, overstated gas tax revenue adjustments, and understated income; and  For the Traffic Congestion Relief Fund allocations, the city charged the fund with unsupported costs, and did not spend the funds within the required statutory period. We also identified one deficiency in internal control that is insignificant to the audit objective, but warrants the attention of management. This deficiency is described in the Observation and Recommendation section of this report. Background The State apportions funds monthly from the HUTA in the Transportation Tax Fund to cities and counties for the construction, maintenance, and operation of local streets and roads. The highway users taxes derive from state taxes on the sale of motor vehicle fuels. In accordance with Article XIX of the California Constitution and Streets and Highways Code, a city must deposit all apportionments of highway users taxes in its Special Gas Tax Street Improvement Fund. A city must expend gas tax funds only for street-related purposes. We conducted our audit of the city’s Special Gas Tax Street Improvement Fund under the authority of Government Code (GC) section 12410. Chapter 91, Statutes of 2000, (Assembly Bill 2928) as amended by Chapter 636, Statutes of 2000, (Senate Bill 1662) and GC section 14556.5, created a Traffic Congestion Relief Fund in the State Treasury for allocating funds quarterly to cities and counties for street or road maintenance, reconstruction, and storm damage repair. Cities must deposit funds received into the city account designated for the receipt of state funds allocated for transportation purposes. The city recorded its Traffic -1- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Congestion Relief Fund allocations in its Transportation Investment Fund. We conducted our audit of the city’s Traffic Congestion Relief Fund allocations under the authority of Revenue and Taxation Code section 7104. Senate Bill 1266, Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006, was introduced as Proposition 1B and approved by the voters on November 7, 2006, for a variety of transportation priorities, including the maintenance and improvement of local transportation facilities. Proposition 1B funds transferred to cities and counties must be deposited into an account that is designated for the receipt of State funds allocated for streets and roads. The city recorded its Proposition 1B Fund allocations in its Proposition 1B Fund. A city also must expend its allocations within four years following the end of the fiscal year in which the allocation was made, and must expend the funds in compliance with GC section 8879.23. We conducted our audit of the city’s Proposition 1B Fund allocations under the authority of GC section 12410. Objective, Scope, Our audit objective was to determine whether the city accounted for and and Methodology expended its Special Gas Tax Street Improvement Fund, Traffic Congestion Relief Fund allocations, and Proposition 1B Fund allocations in compliance with Article XIX of the California Constitution, the Streets and Highways Code, Revenue and Taxation Code section 7104, and GC section 8879.23. We audited the city’s Special Gas Tax Street Improvement Fund for the period of July 1, 2007, through June 30, 2016. We also audited the Traffic Congestion Relief Fund allocations and the Proposition 1B Fund allocations for the period of July 1, 2007, through June 30, 2016. To meet our objective, we:  Gained a limited understanding of internal controls that would have an effect on the reliability of the accounting records of the Special Gas Tax Street Improvement Fund, Traffic Congestion Relief Fund allocations, and Proposition 1B Fund allocations by interviewing key personnel, completing the internal control questionnaire, and reviewing the city’s organization chart;  Conducted a risk assessment to determine the nature, timing, and extent of substantive testing;  Performed analytical procedures to determine and explain the existence of unusual or unexpected account balances;  Verified the accuracy of the fund balances by recalculating the trial balances of the Special Gas Tax Street Improvement Fund, Traffic Congestion Relief Fund allocations, and Proposition 1B Fund allocations;  Verified whether the components of and changes to the fund balances were properly computed, described, classified, and disclosed by -2- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations scheduling and analyzing the Special Gas Tax Street Improvement Fund balances;  Reconciled the fund revenue recorded in the city ledger to the balance reported in the SCO’s apportionment schedule to determine whether HUTA apportionments, Traffic Congestion Relief Fund allocations, and Proposition 1B Fund allocations received by the city were completely accounted for;  Reviewed city accruals and adjustments for validity and eligibility;  Analyzed the system used to allocate interest and determined whether the interest revenue allocated to the Special Gas Tax Street Improvement Fund, Traffic Congestion Relief Fund allocations, and Proposition 1B Fund allocations was fair and equitable, by interviewing key personnel and recalculating interest allocations for the period of July 1, 2012, through June 30, 2016;  Reviewed the fund cash and liabilities accounts for unauthorized borrowing to determine whether unexpended HUTA funds were available for future street-related expenditures and protected from impairment; and  Verified whether the expenditures incurred during the audit period were supported by proper documentation and eligible in accordance with the applicable criteria by testing all of the expenditure transactions that were equal to or greater than the significant item amount (calculated based on materiality threshold); and judgmentally selecting samples of other transactions for the following categories (for the selected sample, errors found, if any, were not projected to the intended population): o Services and Supplies – We tested $4,797,816 of $6,879,713. o Labor – We tested $146,954 of $13,810,448. o Indirect – We tested $1,261,770 of $1,585,053. o Capital Outlay – We tested $1,478,640 of $1,677,297. We did not audit the city’s financial statements. We limited our audit scope to planning and performing audit procedures necessary to obtain reasonable assurance that the city accounted for and expended its Special Gas Tax Street Improvement Fund, Traffic Congestion Relief Fund allocations, and Proposition 1B Fund allocations in accordance with the criteria. We considered the city’s internal controls only to the extent necessary to plan the audit. 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 objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. -3- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Conclusion Our audit found that the City of Compton accounted for and expended its Proposition 1B Fund allocations recorded in its Proposition 1B Fund in compliance with GC section 8879.23 for the period of July 1, 2007, through June 30, 2016. However, our audit found that the City of Compton did not account for and expend its:  Special Gas Tax Street Improvement Fund in compliance with Article XIX of the California Constitution and the Streets and Highways Code for the period of July 1, 2007, through June 30, 2016. The instances of noncompliance are noted in Schedule 1 and described in the Findings and Recommendations section of this report. The findings require adjustments of $4,423,248 to the city’s accounting records (Schedule 1 and Finding 1); and  Traffic Congestion Relief Fund allocations recorded in its Transportation Investment Fund in compliance with Article XIX of the California Constitution, the Streets and Highways Code, and Revenue and Taxation Code section 7104 for the period of July 1, 2007, through June 30, 2016. The instances of noncompliance are noted in Schedule 2 and described in the Findings and Recommendations section of this report. The findings require adjustments of $783,787 to the city’s accounting records. We also identified one deficiency in internal control that is insignificant to the audit objective, but warrants the attention of management. This deficiency is described in the Observation and Recommendation section of this report. Follow-up on Prior The city satisfactorily resolved the findings noted in our prior audit report, Audit Findings issued on August 22, 2008. Views of We issued a draft audit report on March 9, 2018. Cecil W. Rhambo, Jr., City Manager, responded by letter dated March 26, 2018. The city’s Responsible response is included in this final audit report as an attachment. Officials Restricted Use This report is solely for the information and use of the City of Compton 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, CPA Chief, Division of Audits April 16, 2018 -4- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Schedule 1— Special Gas Tax Street Improvement Fund1 Reconciliation of Fund Balances July 1, 2007, through June 30, 2016 SCO Per City Per SCO Adjustment2 Comment Fund Balance at June 30, 2007 $ 230,633 $ 637,393 Prior SCO Audit Adjustment 406,760 FY 2007-08 Revenues 1,743,058 1,743,058 FY 2007-08 Expenditures (1,627,583) (1,627,583) Fund Balance at June 30, 2008 752,868 752,868 FY 2008-09 Revenues 1,588,945 1,588,945 FY 2008-09 Expenditures (2,145,531) (1,798,930) 346,601 Finding 3 Fund Balance at June 30, 2009 196,282 542,883 FY 2009-10 Revenues 1,719,965 1,719,965 FY 2009-10 Expenditures (2,242,197) (1,726,071) 516,126 Finding 3, 5 Fund Balance at June 30, 2010 (325,950) 536,777 FY 2010-11 Revenues 2,550,830 2,550,830 FY 2010-11 Expenditures (1,935,721) (1,910,290) 25,431 Finding 3 Fund Balance at June 30, 2011 289,159 1,177,317 FY 2011-12 Revenues 2,765,723 2,765,723 FY 2011-12 Expenditures (2,045,347) (2,045,347) FY 2011-12 City Adjustment (321,434) (321,434) Fund Balance at June 30, 2012 688,101 1,576,259 FY 2012-13 Revenues 2,307,701 2,307,914 213 Finding 8 FY 2012-13 Expenditures (1,024,286) (1,024,286) Fund Balance at June 30, 2013 1,971,516 2,859,887 FY 2013-14 Revenues 3,207,053 3,235,414 28,361 Finding 7, 8 FY 2013-14 Expenditures (1,797,503) (1,723,137) 74,366 Finding 4 Fund Balance at June 30, 2014 3,381,066 4,372,164 FY 2014-15 Revenues 2,545,999 2,550,060 4,061 Finding 8 FY 2014-15 Expenditures (2,671,635) (2,612,644) 58,991 Finding 4 Fund Balance at June 30, 2015 3,255,430 4,309,580 FY 2015-16 Revenues 2,115,887 2,061,047 (54,840) Finding 7, 8 FY 2015-16 Expenditures (3,160,255) (2,761,072) 399,183 Finding 4 Fund Balance at June 30, 2016 $ 2,211,062 $ 3,609,555 Total Adjustments $ 1,398,493 ___________________________ 1The city receives apportionments from the State HUTA, pursuant to Streets and Highways Code sections 2103, 2105, 2106, 2107, and 2107.5. The basis of the apportionments varies, but the money may be used for any street-related purpose. Streets and Highways Code section 2107.5 restricts apportionments to administration and engineering expenditures, except for cities with populations of fewer than 10,000 inhabitants. Those cities may use the funds for rights-of-way and for the construction of street systems. The city deposits its HUTA apportionment pursuant to Streets and Highways Code section 2103 in its Transportation Investment Fund; the city deposits its HUTA apportionments pursuant to Streets and Highways Code sections 2105, 2106, 2107, and 2107.5 in its Special Gas Tax Street Improvement Fund. The two funds are presented together in this schedule. 2 See the Findings and Recommendations section. -5- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Schedule 2— Traffic Congestion Relief Fund Allocations1 Reconciliation of Fund Balances July 1, 2007, through June 30, 2016 SCO Per City Per SCO Adjustment2 Comment Fund Balance at June 30, 2007 $ 297,787 $ 382,861 Prior SCO Audit Adjustment 85,074 FY 2007-08 Revenues - - FY 2007-08 Expenditures (382,861) (85,074) 297,787 Finding 2, 6 Fund Balance at June 30, 2008 - 297,787 FY 2008-09 Revenues 840,461 840,461 FY 2008-09 Expenditures (355,330) (355,330) Fund Balance at June 30, 2009 485,131 782,918 FY 2009-10 Revenues 900,097 900,097 FY 2009-10 Expenditures (936,177) (450,177) 486,000 Finding 2 Fund Balance at June 30, 2010 449,051 1,232,838 FY 2010-11 Revenues - - FY 2010-11 Expenditures (449,051) (449,051) Fund Balance at June 30, 2011 - 783,787 FY 2011-12 Revenues - - FY 2011-12 Expenditures - (783,787) (783,787) Fund Balance at June 30, 2012 - - FY 2012-13 Revenues - - FY 2012-13 Expenditures - - Fund Balance at June 30, 2013 - - FY 2013-14 Revenues - - FY 2013-14 Expenditures - - Fund Balance at June 30, 2014 - - FY 2014-15 Revenues - - FY 2014-15 Expenditures - - Fund Balance at June 30, 2015 - - FY 2015-16 Revenues - - FY 2015-16 Expenditures - - Fund Balance at June 30, 2016 $ - $ - Total Adjustments $ - ___________________________ 1 GC section 14556.5 created a Traffic Congestion Relief Fund in the State Treasury for allocating funds quarterly to cities and counties for street and road maintenance, reconstruction, and storm damage repair. The city records its Traffic Congestion Relief Fund allocations in its Transportation Investment Fund. 2 See the Findings and Recommendations section. -6- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Schedule 3— Proposition 1B Fund Allocations1 Reconciliation of Fund Balances July 1, 2007, through June 30, 2016 Per City Per SCO Fund Balance at June 30, 2007 $ - $ - FY 2007-08 Revenues 1,599,602 1,599,602 FY 2007-08 Expenditures (29,510) (29,510) Fund Balance at June 30, 2008 1,570,092 1,570,092 FY 2008-09 Revenues 517 517 FY 2008-09 Expenditures (983,697) (983,697) Fund Balance at June 30, 2009 586,912 586,912 FY 2009-10 Revenues 1,478,646 1,478,646 FY 2009-10 Expenditures (436,680) (436,680) Fund Balance at June 30, 2010 1,628,878 1,628,878 FY 2010-11 Revenues 51 51 FY 2010-11 Expenditures (1,094,933) (1,094,933) Fund Balance at June 30, 2011 533,996 533,996 FY 2011-12 Revenues 16 16 FY 2011-12 Expenditures (57,382) (57,382) Fund Balance at June 30, 2012 476,630 476,630 FY 2012-13 Revenues 2,266 2,266 FY 2012-13 Expenditures (122,565) (122,565) Fund Balance at June 30, 2013 356,331 356,331 FY 2013-14 Revenues 2,278 2,278 FY 2013-14 Expenditures (358,609) (358,609) Fund Balance at June 30, 2014 - - FY 2014-15 Revenues - - FY 2014-15 Expenditures - - Fund Balance at June 30, 2015 - - FY 2015-16 Revenues - - FY 2015-16 Expenditures - - Fund Balance at June 30, 2016 $ - $ - ___________________________ 1 Senate Bill 1266, Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006, introduced as Proposition 1B, provided funds for a variety of transportation priorities. The city records its Proposition 1B Fund allocations in its Proposition 1B Fund. -7- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Findings and Recommendations FINDING 1— As of June 30, 2016, the city borrowed $3,024,755 from its HUTA Unallowable borrowing apportionments; this amount was comprised of $2,260,802 Due from Other Funds and $763,953 from Advances to the General Fund. HUTA from Highway Users apportionments are restricted to street-related expenditures only; Tax Account borrowing is an unallowable activity. The unallowable borrowing is apportionments summarized below: Fiscal Year Description Amount 2013-14 Due from Other Funds $ 2,260,802 2012-13 Advances to the General Fund 763,953 Total Unallowable Borrowing $ 3,024,755 On July 1, 2012, the city advanced $756,446 to the General Fund from its Transportation Investment Fund, in which the city deposits its Section 2103 HUTA apportionments. As of June 30, 2016, the outstanding advance to the General Fund from the HUTA apportionments, including accrued interest of $7,507, is $763,953. On June 30, 2014, the city borrowed HUTA apportionments totaling $2,260,802 from its Transportation Investment Fund and its Special Gas Tax Street Improvement Fund to cover the negative cash balances of various special revenue funds. The city used Due From Other Funds/Due To Other Funds accounts to track the amounts borrowed, as follows: Description Amount Martin Luther Ki ng Transit Center Expansion Fund $ 9 52,326 Rosecrans Traffi c Signal Upgrade Fund 734,714 Metropolitan Tra nsportation Authority Fund 319,948 Department of T ransportation Community Improvement Projects Fund 140,598 Proposition 1B F und 68,325 Sobriety Checkpo int Program Fund 28,718 Used Oil Paymen t Program Fund 6,525 Click it or Ticket Program Fund 4,294 Used Oil Block G rant Fund 4,061 Compton Creek Biketrail Fund 1,293 Total Due from Other Funds $ 2,260,802 Streets and Highways Code section 2101 states, in part: …all moneys in the Highway Users Tax Account in the Transportation Tax Fund and hereafter received in the account are appropriated for… (a) The research, planning, construction, improvement, maintenance, and operation of public streets and highways…. Recommendation We recommend that the city transfer $3,024,755 to the Special Gas Tax Street Improvement Fund to replenish the fund for the unallowable -8- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations borrowing. In addition, we recommend that the city adopt policies and procedures to prevent any future borrowing of HUTA apportionments. City’s Response …the City will comply with the Controller’s direction to…reimburse the indicated funds as recommended by the State Controller’s audit. Finally, the city is in agreement with the State Controller’s recommendation to follow internal control policies and procedures…. SCO Comment The city will comply with our recommendations to reimburse the Special Gas Tax Street Improvement Fund for the unallowable borrowing, and to adopt internal control policies and procedures. FINDING 2— The city charged $652,982 of unsupported costs to its Traffic Congestion Relief Fund allocations for FY 2007-08 and FY 2009-10. Therefore, the Unsupported Traffic costs are unallowable. Congestion Relief Fund allocations costs The city charged $166,982 of unsupported contract service costs in FY 2007-08 and allocated $486,000 of equipment rental shortfall in FY 2009-10 to the Transportation Investment Fund. The city did not support these costs with proper documentation. The unsupported Traffic Congestion Relief Fund costs charged to the Transportation Investment Fund are as follows: Fiscal Year Amount 2007-08 $ 166,982 2009-10 486,000 Total $ 652,982 Revenue and Taxation Code section 7104(e) states, in part: Funds allocated to a city, county, or city and county under paragraph (4) or (5) of subdivision (c) shall be used only for street and highway maintenance, rehabilitation, reconstruction, and storm damage repair... Revenue and Taxation Code section 7104(f)(7) requires a city to expend its Traffic Congestion Relief Fund allocations within the fiscal year following the fiscal year in which the allocations were made. In addition, the code indicates that funds not expended within that period shall be returned to the SCO. Recommendation We recommend that the city return $652,982 to the SCO, Attention: Departmental Accounting Office – A/R, P.O. Box 942850, Sacramento, California 94250. -9- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations City’s Response …the City will comply with the Controller’s direction to…return requested funds to the State Controller’s Office…. SCO Comment The city will comply with our recommendation to return the Traffic Congestion Relief Funds to SCO. FINDING 3— The city charged $562,208 of unsupported equipment rental charges to its Special Gas Tax Street Improvement Fund for FY 2008-09 through Unsupported FY 2010-11. Therefore, the costs are unallowable. equipment rental charges The city allocated equipment rental charges at an hourly rate based on usage for each month. The city did not identify how it determined the rates charged for equipment usage, or substantiate that the equipment was used for street-related purposes. The city did not substantiate the allocations made to cover its equipment rental shortage. Streets and Highways Code section 2101 states, in part: …all moneys in the Highway Users Tax Account in the Transportation Tax Fund and hereafter received in the account are appropriated for… (a) The research, planning, construction, improvement, maintenance, and operation of public streets and highways…. The unsupported costs charged to the Special Gas Tax Street Improvement Fund are as follows: Fiscal Year Description Amount 2008-09 Automotive Equipment Rental Cost $ 346,601 2009-10 Automotive Equipment Rental Cost 190,176 2010-11 Equipment Rental Shortage 2 5,431 Total $ 562,208 Therefore, the $562,208 of unsupported costs charged to the Special Gas Tax Street Improvement Fund are unallowable. Recommendation We recommend that the city:  Reimburse the Special Gas Tax Street Improvement Fund $562,208 for the unsupported costs; and  Establish procedures to ensure that expenditures charged to the Special Gas Tax Street Improvement Fund are adequately supported. -10- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations City’s Response …the City will comply with the Controller’s direction to…reimburse the indicated funds as recommended by the State Controller’s audit. Finally, the city is in agreement with the State Controller’s recommendation to follow internal control policies and procedures…. SCO Comment The city will comply with our recommendations to reimburse the Special Gas Tax Street Improvement Fund for the unsupported equipment rental charges, and to adopt internal control policies and procedures to ensure that expenditures are adequately supported. FINDING 4— The city charged $532,540 for non-street-related services and supplies to the Special Gas Tax Street Improvement Fund and Transportation Ineligible gas tax Investment Fund (for which the city deposits Section 2103 HUTA expenditures apportionments) for FY 2013-14 through FY 2015-16. Therefore, the expenditures are ineligible. The city charged $6,879,713 of services and supplies. We tested $4,797,816 and identified $532,540 of ineligible expenditures. The ineligible expenditures are as follows: Fiscal Year Description Amount 2013-14 Transportation Assessments/Reports $ 36,686 Water/Waste Fees 1 8,883 Memberships/Certifications 9,820 Sewer Assessment 8,977 FY 2013-14 Total $ 74,366 2014-15 Transportation Reports $ 25,000 Water/Waste Fees 1 1,195 Paint, Motor Oil, and Chemical Removal 9,350 July 1 ̶ July 7 ̶ Five Towable Light Towers 5,189 Home Depot Center Landscaping 4,900 Compton Monetary Fair Share Analysis 2,115 Interpreting services ̶ Town Hall Meeting 750 Memberships/Certifications 492 FY 2014-15 Total $ 58,991 2015-16 Interest $ 243,485 Graffiti Abatement/Clean-up 7 4,935 National Pollutant Discharge Elimination System 6 9,234 Compton Christmas Parade ̶ Barricades 6,760 Ditch Gates ̶ Trucks 3,996 Memberships/Certifications 773 FY 2015-16 Total $ 399,183 Total Ineligible Expenditures $ 532,540 -11- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Streets and Highways Code section 2101 states, in part: …all moneys in the Highway Users Tax Account in the Transportation Tax Fund and hereafter received in the account are appropriated for… (a) The research, planning, construction, improvement, maintenance, and operation of public streets and highways…. As a result, the ineligible expenditures totaling $532,540 are unallowable. Recommendation We recommend that the city:  Reimburse the Special Gas Tax Street Improvement Fund $532,540; and  Establish adequate procedures to ensure that all costs charged to the Special Gas Tax Street Improvement Fund are for street-related purposes. City’s Response …the City will comply with the Controller’s direction to…reimburse the indicated funds as recommended by the State Controller’s audit. Finally, the city is in agreement with the State Controller’s recommendation to follow internal control policies and procedures…. SCO Comment The city will comply with our recommendations to reimburse the Special Gas Tax Street Improvement Fund for the ineligible gas tax expenditures, and to adopt internal control policies and procedures to ensure that all costs charged to the Special Gas Tax Street Improvement Fund are for street- related purposes. FINDING 5— The city charged expenditures in excess of available funds to the Special Gas Tax Street Improvement Fund by $325,950 during FY 2009-10. Over-expended gas tax Therefore, the excess expenditures are unallowable. funds The practice of funding one fiscal year’s activities with revenues from the following fiscal year is contrary to established municipal budgetary and accounting practice; and is in violation of Article 16, section 18, of the California Constitution, which states, in part: (a) No county, city, town, township, board of education, or school district, shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year. Therefore, the over-expended fund balance of $325,950 in the Special Gas Tax Street Improvement Fund is unallowable. -12- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Recommendation We recommend that the city:  Transfer $325,950 to the Special Gas Tax Street Improvement Fund to replenish the fund; and  Establish procedures to verify the existence of available funds prior to charging expenditures to the fund. City’s Response …the City will comply with the Controller’s direction to…reimburse the indicated funds as recommended by the State Controller’s audit. Finally, the city is in agreement with the State Controller’s recommendation to follow internal control policies and procedures…. SCO Comment The city will comply with our recommendations to reimburse the Special Gas Tax Street Improvement Fund for the over-expended fund balance, and to adopt internal control policies and procedures to verify the existence of available funds prior to charging expenditures to the fund. FINDING 6— The city did not spend $130,805 of its FY 2006-07 Traffic Congestion Traffic Congestion Relief Fund allocations by June 30, 2008. Therefore, the city is required to return the amount to the SCO. Relief Fund expenditure The city received $721,672 in Traffic Congestion Relief Fund allocations requirement not met in FY 2006-07; it expended $423,885 in FY 2006-07 and $166,982 in FY 2007-08. Therefore, as of June 30, 2008, the unexpended balance was $130,805. Revenue and Taxation Code section 7104(f)(7) states that Traffic Congestion Relief Fund allocations are to be spent within the fiscal year following the fiscal year in which the allocations were made. It further states that funds not spent within that period are to be returned to the SCO. Recommendation We recommend that the city return $130,805 to the SCO, Attention: Departmental Accounting Office – A/R, P.O. Box 942850, Sacramento, California 94250. City’s Response …the City will comply with the Controller’s direction to…return requested funds to the State Controller’s Office…. -13- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations SCO Comment The city will comply with our recommendation to return the Traffic Congestion Relief Funds to SCO. FINDING 7— The city understated gas tax revenues in FY 2013-14 by $26,758 and overstated gas tax revenues by $58,930, for a net overstatement of Unsupported gas tax $32,172. revenue adjustments The city records Streets and Highways Code Section 2103 apportionments (Section 2103 HUTA) in the Transportation Investment Fund. For the Special Gas Tax Street Improvement Fund, the city reversed the July 2013 Section 2103 HUTA apportionment of $85,362 and accrued $35,180 in unsupported revenues in June 2016, totaling $58,930 in understated revenues. The city did not support these adjustments. For the Transportation Investment Fund, the city accrued $58,604 in unsupported Section 2103 HUTA apportionments in June 2013, and $23,750 in unsupported Section 2103 HUTA apportionments in June 2016, totaling $82,354 in overstated revenues. The city did not support these adjustments. Recommendation We recommend that the city:  Reimburse the Special Gas Tax Street Improvement Fund $50,182 and reduce the Transportation Investment Fund balance by $82,354 for the unsupported revenue adjustments; and  Establish procedures to ensure that adjustments to the Special Gas Tax Street Improvement Fund are adequately supported. City’s Response …the City will comply with the Controller’s direction to…reimburse the indicated funds as recommended by the State Controller’s audit. Finally, the city is in agreement with the State Controller’s recommendation to follow internal control policies and procedures…. SCO Comment The city will comply with our recommendations to reimburse the Special Gas Tax Street Improvement Fund for the unsupported gas tax revenue adjustments, and to adopt internal control policies and procedures to ensure that adjustments to the fund are adequately supported. -14- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations FINDING 8— The city did not allocate $9,967 of interest income earned between FY 2012-13 and FY 2015-16, to the Special Gas Tax Street Improvement Unallocated interest Fund. This amount consisted of $7,582 interest earned on advanced funds income and $2,385 from investment of money in the fund. As noted in Finding 1, on July 1, 2012, the city advanced $756,446 to the General Fund from its HUTA apportionments. Per City Resolution No. 23,970, the city accrued interest income at 0.495%, yielding interest income as shown in the following table. The city credited interest income it earned during FY 2012-13 and FY 2013-14 to the advanced funds; however, it did not credit the interest earnings for FY 2014-15 and FY 2015-16, totaling $7,582, to the advanced funds. Annual Fiscal Beginning Interest Interest Year Balance Rate Accrued 2012-13 $ 756,446 0.495% $ 3 ,744 2013-14 $ 760,190 0.495% $ 3 ,763 2014-15 $ 763,953 0.495% $ 3 ,782 2015-16 $ 767,735 0.495% $ 3 ,800 In addition, the city did not allocate to the Special Gas Tax Street Improvement Fund its share of interest income from the investment of money, from FY 2012-13 through FY 2015-16, totaling $2,385. Streets and Highways Code section 2113 states, in part, “Interest received by a city from the investment of money in its special gas tax street improvement fund shall be deposited in the fund and shall be used for street purposes.” We scheduled the investment interest earned and concluded that the Special Gas Tax Street Improvement Fund should have been allocated $2,385, as shown in the table below. Interest not allocated to the Special Gas Tax Street Improvement Fund from investment earnings and from the advance to the General Fund is as follows: Unallocated Unallocated Fiscal Investment Interest from Year Interest Advance Total 2012-13 $ 213 $ - $ 2 13 2013-14 1,603 - 1,603 2014-15 279 3,782 4,061 2015-16 290 3,800 4,090 Total $ 2 ,385 $ 7 ,582 $ 9,967 Recommendation We recommend that the city:  Transfer $9,967 to the Special Gas Tax Street Improvement Fund for the unallocated interest income; and -15- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations  Establish procedures to ensure that interest income is correctly allocated to the Fund. City’s Response …the City will comply with the Controller’s direction to…reimburse the indicated funds as recommended by the State Controller’s audit. Finally, the city is in agreement with the State Controller’s recommendation to follow internal control policies and procedures…. SCO Comment The city will comply with our recommendations to reimburse the Special Gas Tax Street Improvement Fund for the unallocated interest income, and to adopt internal control policies and procedures to ensure that interest income is correctly allocated to the fund. -16- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Observation and Recommendation OBSERVATION— The city made payments to vendors on invoices that do not agree with the Payment on invoices terms of contracts. that do not agree with Service contracts between the city and vendors indicate that the vendor terms of contracts shall be reimbursed by city upon the receipt of itemized receipts, and that invoices shall detail the work performed on each task, as applicable. However, invoices received by the city lacked itemized, detailed descriptions of work performed. In addition, while reviewing a catch basin cleaning contract, we noted that the unit price charged and the frequency of services did not agree with the terms stated in the contract. Although the expenditures for these service contracts were in compliance with applicable code sections, we noted that the invoices for eligible work were not in agreement with the terms of the contracts. Following invoice procedures as indicated in the service contracts will help ensure that the city is paying for services stated in its contracts. Recommendation We recommend that the city follow invoice procedures as indicated in service contracts. City’s Response …the city is in agreement with the State Controller’s recommendation to follow internal control policies and procedures…. SCO Comment The city agreed with our recommendation to follow its own procedures relating to service contracts. -17- Special Gas Tax Street Improvement Fund, Traffic Congestion City of Compton Relief Fund Allocations, and Proposition 1B Allocations Attachment— City of Compton’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 S18-GTA-0002