City of Calexico January 2019

CITY OF CALEXICO Audit Report SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2014, through June 30, 2017 BETTY T. YEE California State Controller January 2019 BETTY T. YEE California State Controller January 24, 2019 David B. Dale, City Manager City of Calexico 608 Heber Avenue Calexico, CA 92231 Dear Mr. Dale: The State Controller’s Office audited the City of Calexico’s Special Gas Tax Street Improvement Fund to determine whether the city accounted for and expended its Special Gas Tax Street Improvement Fund in compliance with requirements for the period of July 1, 2014, through June 30, 2017. Our audit found that the city understated the fund balance by $61,277 as of June 30, 2017, because it charged ineligible expenditures to the fund. We also identified a deficiency in internal control that warrants the attention of management. This deficiency is described in the Observation and Recommendation section of this audit 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 JIM L. SPANO, CPA Chief, Division of Audits JLS/ls David B. Dale, City Manager -2- January 24, 2019 cc: The Honorable Lewis Pacheco, Mayor City of Calexico Miguel Figueroa, Assistant City Manager City of Calexico Karla Lobatos, Finance Director City of Calexico Jesus Eduardo Escobar, Mayor Pro Tem City of Calexico Bill Hodge, Council Member City of Calexico David Romero, Council Member City of Calexico Rosie Arreola-Fernandez, Council Member City of Calexico City of Calexico Special Gas Tax Street Improvement Fund Contents Audit Report Summary ............................................................................................................................ 1 Background ........................................................................................................................ 1 Objective, Scope, and Methodology ................................................................................. 1 Conclusion .......................................................................................................................... 3 Follow-up on Prior Audit Findings .................................................................................. 3 Views of Responsible Officials .......................................................................................... 3 Restricted Use .................................................................................................................... 3 Schedule—Reconciliation of Fund Balance ......................................................................... 4 Finding and Recommendation .............................................................................................. 5 Observation and Recommendation ...................................................................................... 6 City of Calexico Special Gas Tax Street Improvement Fund Audit Report Summary The State Controller’s Office (SCO) audited the City of Calexico’s Special Gas Tax Street Improvement Fund to determine whether the city accounted for and expended its Special Gas Tax Street Improvement Fund in compliance with requirements for the period of July 1, 2014, through June 30, 2017. Our audit found that the city understated the fund balance by $61,277 as of June 30, 2017, because it charged ineligible expenditures to the fund. We also identified a deficiency in internal control that warrants the attention of management. This deficiency is described in the Observation and Recommendation section of this audit report. Background The State apportions funds monthly from the Highway Users Tax Account (HUTA) in the Transportation Tax Fund to cities1 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 Streets and Highways Code, cities must establish individual Special Gas Tax Street Improvement Funds for the deposit of their HUTA fund apportionments. Additionally, cities must expend their HUTA fund apportionments only for street-related purposes in accordance with Article XIX of the California Constitution and Streets and Highways Code. We conducted our audit of the city’s Special Gas Tax Street Improvement Fund under the authority of Government Code 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 in compliance with Article XIX of the California Constitution and Streets and Highways Code. We audited the city’s Special Gas Tax Street Improvement Fund for the period of July 1, 2014, through June 30, 2017. To achieve 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 by interviewing key personnel, completing an 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; 1Includes towns. -1- City of Calexico Special Gas Tax Street Improvement Fund  Verified the accuracy of fund balances by performing a fund balance reconciliation and by recalculating the trial balance for the period of July 1, 2014, through June 30, 2017;  Verified that the components of and changes to fund balances were properly computed, described, classified, and disclosed by scheduling and analyzing the Special Gas Tax Street Improvement Fund account 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 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 was fair and equitable, by interviewing key personnel and recalculating all interest allocations for the audit period;  Reviewed the fund cash and receivables accounts for unauthorized borrowing to determine whether unexpended HUTA funds were available for future street-related expenditures and protected from impairment; and  Verified that the expenditures incurred during the audit period were supported by proper documentation and eligible in accordance with the applicable criteria, by testing all expenditure transactions that were equal to or greater than the significant item amount (calculated based on materiality threshold), and judgmentally (non-statistically) selecting samples of other transactions for the following categories: o Services and Supplies – We tested $1,072,867 of $1,628,918. o Labor – We tested $263,767 of $758,301. o Acquisitions – We tested $34,337 of $37,155. For the selected samples, errors found, if any, were not projected to the intended (total) population. 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 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. -2- City of Calexico Special Gas Tax Street Improvement Fund Conclusion Our audit found an instance of non-compliance for the period of July 1, 2014, through June 30, 2017, as quantified in the Schedule and described in the Finding and Recommendation section of this report. The finding requires an adjustment of $61,277 to the city’s accounting records. We also identified a deficiency in internal control that warrants the attention of management. This deficiency is described in the Observation and Recommendation section of this audit report. Follow-up on Prior The city satisfactorily resolved the findings noted in our prior audit report Audit Findings for the period of July 1, 2004, through June 30, 2014, issued on September 30, 2016. Views of We issued a draft report on December 10, 2018. Karla Lobatos, Finance Director, responded by telephone on January 16, 2019, agreeing with the Responsible audit results. Officials Restricted Use This audit report is solely for the information and use of the City of Calexico 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 audit report, which is a matter of public record. Original signed by JIM L. SPANO, CPA Chief, Division of Audits January 24, 2019 -3- City of Calexico Special Gas Tax Street Improvement Fund Schedule— Reconciliation of Fund Balance July 1, 2014, through June 30, 2017 Special Gas Tax Street Improvement Fund1 Fund balance at June 30, 2014, per prior SCO audit $ 1,246,919 FY 2014-15 Revenues2 1,193,298 FY 2014-15 Expenditures ( 796,137) Fund Balance at June 30, 2015 1,644,080 FY 2015-16 Revenues 870,582 FY 2015-16 Expenditures ( 950,665) Fund Balance at June 30, 2016 1,563,997 FY 2016-17 Revenues 756,374 FY 2016-17 Expenditures ( 677,572) Fund Balance at June 30, 2017 $ 1,642,799 SCO adjustment:3 Finding—Ineligible expenditures 61,277 Ending fund balance per audit $ 1,704,076 ___________________________ 1Cities receive 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. Cities must establish individual Special Gas Tax Street Improvement Funds for the deposit of their HUTA fund apportionments. 2Includes the city’s prior period adjustment to the July 1, 2014 beginning balance that increased grants receivable by $194,091, and reconciling difference of $5 to SCO’s prior audit adjustment. 3See the Finding and Recommendation section. -4- City of Calexico Special Gas Tax Street Improvement Fund Finding and Recommendation FINDING— During testing of expenditures for eligibility, we found that the city charged $61,277 in non-street-related services and supplies to the Special Ineligible expenditures Gas Tax Street Improvement Fund for fiscal year (FY) 2014-15 through FY 2016-17. Therefore, the expenditures are ineligible. The city charged $1,628,918 in services and supplies. We tested $1,072,867 and identified $61,277 in ineligible expenditures. The ineligible expenditures consisted of:  Membership dues to the Imperial County Transportation Commission and the California City-County Street Light Association; and  Fees for professional services rendered for the city’s municipal separate storm sewer systems (MS4) to be brought into compliance with its National Pollutant Discharge Elimination System permit requirements. The ineligible expenditures are as follows: Fiscal Year Description Amount 2014-15 Memberships $ 10,938 2014-15 MS4 Compliance Assistance 12,831 2015-16 MS4 Compliance Assistance 37,508 Total Ineligible Expenditures $ 61,277 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 ineligible expenditures were made because the city does not have adequate procedures to ensure that all costs charged to the Special Gas Tax Street Improvement Fund are for street-related purposes. Recommendation We recommend that the city:  Reimburse the Special Gas Tax Street Improvement Fund $61,277; 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 agreed with our finding. -5- City of Calexico Special Gas Tax Street Improvement Fund Observation and Recommendation OBSERVATION— The city’s General Fund cash account reported negative balances for the Lack of adequate months of July 2015 through May 2016, and July 2016 through May 2017. The negative balances resulted from the city paying out of its General control over General Fund cash account more than the General Fund’s actual available cash. Fund cash The city pools its cash from all of its funds; when the General Fund cash management balances are negative, that is an indication that cash from restricted funds is being used to pay for General Fund-related expenditures. As a result, the General Fund may be affecting the integrity of the Special Gas Tax Street Improvement Fund. We noted this condition while reviewing the General Fund’s cash balances to ensure that the Special Gas Tax Street Improvement Fund cash balances are not potentially impaired and used for non-street-related purposes. This conditioned occurred because the city lacked adequate cash management procedures. Recommendation We recommend that the city establish cash management procedures and ensure that sufficient cash is available within each individual fund to ensure the integrity of all of the city’s funds. City’s Response The city agreed with our observation. -6- State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S18-GTA-0005