Santa Clara Valley Water District

SANTA CLARA VALLEY WATER DISTRICT Audit Report FLOOD CONTROL SUBVENTIONS PROGRAM Upper Guadalupe River and Upper Llagas Creek Watershed Projects July 1, 2014, through December 31, 2019 BETTY T. YEE California State Controller August 2022 BETTY T. YEE California State Controller August 31, 2022 Eric Nichol, Assistant Division Chief Division of Flood Management Department of Water Resources 3310 El Camino Avenue, Suite 120 Sacramento, CA 95821 Dear Mr. Nichol: The State Controller’s Office audited Flood Control Subventions Program claims submitted by the Santa Clara Valley Water District to the Department of Water Resources (DWR). Our audit pertained to DWR Claim Numbers UGR 52 through 55 and ULCW 164 through 286, for the period of July 1, 2014, through December 31, 2019. The district claimed $47,335,299 for the Upper Guadalupe River and Upper Llagas Creek Watershed projects during the audit period. Our audit found that $43,202,026 is allowable and $4,133,273 is unallowable. The costs are unallowable because the district lacked required DWR preapproval or supporting documentation, or the costs were unrelated to the projects. The State’s share of allowable costs is $35,062,825. DWR reimbursed the district $33,296,010 during the audit period; therefore, the district is owed the remaining balance of $1,766,815. DWR retained $3,699,557, which was to be released to the district pending the results of this audit. DWR should reduce the retention balance by $1,932,742 to $1,766,815, the amount still owed to the district, based on our audit. If you have any questions, please contact Efren Loste, Chief, Local Government Audits Bureau, by telephone at (916) 324-7226. Sincerely, Original signed by KIMBERLY TARVIN, CPA Chief, Division of Audits KT/as Eric Nichol, Assistant Division Chief -2- August 31, 2022 cc: Sami Nall, Manager, Flood Control Subventions Program Department of Water Resources Rick Callender, Chief Executive Officer Santa Clara Valley Water District Darin Taylor, Chief Financial Officer Santa Clara Valley Water District John L. Varela, Chair Pro Tem Santa Clara Valley Water District Santa Clara Valley Water District Flood Control Subventions Program Contents Audit Report Summary ............................................................................................................................ 1 Background ........................................................................................................................ 1 Audit Authority.................................................................................................................. 1 Objective, Scope, and Methodology ................................................................................. 1 Conclusion .......................................................................................................................... 3 Follow-up on Prior Audit Findings .................................................................................. 3 Views of Responsible Officials .......................................................................................... 3 Restricted Use .................................................................................................................... 3 Schedule—Summary of Project Costs ................................................................................. 4 Findings and Recommendations ........................................................................................... 6 Attachment— Santa Clara Valley Water District’s Response to Draft Audit Report Santa Clara Valley Water District Flood Control Subventions Program Audit Report Summary The State Controller’s Office (SCO) audited Flood Control Subventions Program claims submitted by the Santa Clara Valley Water District to the Department of Water Resources (DWR). Our audit pertained to DWR Claim Numbers UGR 52 through 55 and ULCW 164 through 286, for the Upper Guadalupe River and Upper Llagas Creek Watershed projects, for the period of July 1, 2014, through December 31, 2019. The district claimed $47,335,299 for the Upper Guadalupe River and Upper Llagas Creek Watershed projects during the audit period. Our audit found that $43,202,026 is allowable and $4,133,273 is unallowable. The costs are unallowable because the district lacked required DWR preapproval or supporting documentation, or the costs were unrelated to the projects. Pursuant to California Water Code section 12832, the DWR reimbursed the district 90% of eligible costs claimed, with the remaining 10% to be released subject to the completion of this audit.1 Based on our audit, the State’s share of allowable project costs is $35,062,825. DWR reimbursed the district $33,296,010 during the audit period; therefore, the district is owed the remaining balance of $1,766,815. The State of California provides financial assistance to local agencies Background participating in the construction of federal flood control projects. Under the Flood Control Subventions Program (California Water Code, Division 6, Part 6, Chapters 1 through 4), the DWR pays a portion of the local agency’s share of flood control project costs, including the costs of rights of way, relocation, and recreation and fish and wildlife enhancements. The DWR’s Guidelines for Reimbursement on Flood Control Projects (Guidelines) describe the compliance requirements for local agencies seeking reimbursement for the State’s share of federal flood control projects. We conducted this performance audit under the general authority of Audit Authority Government Code section 12410 and the specific authority of California Water Code section 12832, which requires the State Controller to perform audits of flood control projects. Objective, Scope, Our audit objective was to determine whether the costs claimed, as presented in the Schedule were allowable and in compliance with the and Methodology DWR Guidelines, and adequately supported and documented. Our audit pertained to DWR Claim Numbers UGR 52 through 55 and ULCW 164 through 286 for the Upper Guadalupe River and Upper Llagas Creek Watershed projects, for the period of July 1, 2014, through December 31, 2019. 1 California Water Code stipulates the percentage of state funding by project cost category. -1- Santa Clara Valley Water District Flood Control Subventions Program To achieve our objective, we performed the following procedures:  We gained an understanding of the district’s internal controls that are significant to the audit objective by interviewing key personnel, completing an internal control questionnaire, and reviewing the district’s organization chart.  We evaluated and assessed control activities over the claim preparation process by inspecting documents and records, and by inquiring with key personnel.  We assessed the reliability of computer-processed data by reviewing existing information about the data and the system that produced it; by interviewing district officials knowledgeable about the data; and by tracing data to source documents, based on auditor judgment and non- statistical sampling. We determined that the data was sufficiently reliable for the purposes of achieving our audit objective.  We conducted a risk assessment to determine the nature, timing, and extent of substantive testing.  We reviewed the district’s prior SCO and single audits.  We reviewed the DWR’s engineering reports and/or claim evaluations pertaining to the district’s claims.  We determined whether the district received revenues that should have been offset against the flood program expenditures.  We reviewed the district’s claim detail for any condemnation interest, and inquired of the district whether it had received interest on condemnation deposits.  We determined whether the district received from DWR advances on its flood control project expenditures.  We verified through sampling that the costs claimed were supported by proper documentation and eligible in accordance with the applicable criteria. Based on our risk assessment, we tested all items that were equal to or greater than the significant item amount (calculated based on materiality threshold). We also tested additional items that were valued less than the individual significant item amount, based on auditor judgment and non-statistical sampling. Based on errors identified in the selected sample, we expanded our testing. We tested the following expenditures: o Land – We tested all $39,390,921 in total land, easement, and right-of-way acquisition costs claimed. o Relocation – We tested $242,257 of $300,257 in total relocation costs claimed. o Labor – We tested $67,965 of $4,519,305 in total labor costs. o Services and supplies – We tested $939,046 of $3,124,816 in total services and supplies costs claimed. For the selected sample, errors found were not projected to the intended (total) population. -2- Santa Clara Valley Water District Flood Control Subventions Program We did not audit the district’s financial statements. We limited our audit scope to planning and performing audit procedures necessary to obtain reasonable assurance that costs claimed are allowable for reimbursement. We conducted the 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. The district claimed $47,335,299 in project costs for the period of July 1, Conclusion 2014, through December 31, 2019. Our audit found instances of noncompliance with the requirements described in the Objective, Scope, and Methodology section. These instances are quantified in the Schedule and described in the Findings and Recommendations section. Based on our audit, the State’s share of allowable project costs is $35,062,825. DWR reimbursed the district $33,296,010 during the audit period; therefore, the district is owed the remaining balance of $1,766,815. Follow-up on The finding noted in our prior audit report, issued on June 29, 2020, has been satisfactorily resolved by the district. Prior Audit Findings Views of We issued a draft audit report on June 24, 2022. The district’s representative responded by letter dated July 5, 2022 agreeing with the Responsible audit results. This final audit report includes the district’s response as an Officials attachment. Restricted Use This audit report is solely for the information and use of the Santa Clara Valley Water District, the DWR, 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, and is available on the SCO website at www.sco.ca.gov. Original signed by KIMBERLY TARVIN, CPA Chief, Division of Audits August 31, 2022 -3- Santa Clara Valley Water District Flood Control Subventions Program Schedule— Summary of Project Costs July 1, 2014, through December 31, 2019 Audit State State State Adjustments Share of Share of Adjustments Share of Reimbursement Reimbursement Costs to Claimed Allowable Eligibility Claimed to State Allowable Received by the Due to District Project / Claim # Claimed Costs1 per Audit Percentage2 Costs Share Costs District3 Pending Audit Upper Guadalupe River Project UGR 2018-01 (52) $ 20,275,000 $ - $ 20,275,000 70% $ 14,192,500 $ - $ 14,192,500 $ 1 2,773,250 $ 1 ,419,250 UGR 2019-01 (53) 2 83,848 - 2 83,848 70% 1 98,694 - 1 98,694 178,824 19,870 UGR 2019-01 (54) 6 46,822 - 6 46,822 70% 4 52,775 - 4 52,775 407,498 45,277 UGR 2019-02 (55) 8 25,000 - 8 25,000 70% 5 77,500 - 5 77,500 519,750 57,750 $ 22,030,670 $ - $ 22,030,670 $ 15,421,469 $ - $ 15,421,469 $ 13,879,322 $ 1,542,147 Upper Llagas Creek Watershed Project ULCW 2015-01 (164, 165) $ 9 19,750 $ ( 44,450) $ 8 75,300 100% $ 9 19,750 $ ( 44,450) $ 8 75,300 $ 827,775 $ 47,525 ULCW 2015-02 (166) 6 4,600 - 6 4,600 100% 6 4,600 - 6 4,600 58,140 6,460 ULCW 2015-02 (167) 4 08,369 - 4 08,369 100% 4 08,369 - 4 08,369 367,532 40,837 ULCW 2015-03 (168) 4 2,817 ( 37,500) 5 ,317 100% 4 2,817 ( 37,500) 5 ,317 38,535 ( 33,218) ULCW 2015-03 (169) 2 4,428 - 2 4,428 100% 2 4,428 - 2 4,428 21,985 2,443 ULCW 2015-03 (170, 171 Revised) 8 68,169 - 8 68,169 100% 8 68,169 - 8 68,169 1 ,178,481 ( 310,312) ULCW 2016-01 (174, 177 Revised) 9 25,269 - 9 25,269 100% 9 25,269 - 9 25,269 1 ,332,988 ( 407,719) ULCW 2016-02 (172, 175) 9 82,313 ( 4,605) 9 77,708 100% 9 82,313 ( 4,605) 9 77,708 879,937 97,771 ULCW 2016-03 (173, 176) 1 87,093 ( 2,754) 1 84,339 100% 1 87,093 ( 2,754) 1 84,339 165,905 18,434 ULCW 2017-01 (178-192) 1,653,650 ( 218,800) 1,434,850 100% 1,653,650 ( 218,800) 1,434,850 1 ,488,285 ( 53,435) ULCW 2017-02 (193-208) 1,452,375 ( 239,561) 1,212,814 100% 1,452,375 ( 239,561) 1,212,814 1 ,302,792 ( 89,978) ULCW 2017-03 (209-226) 1,794,800 ( 366,575) 1,428,225 100% 1,794,800 ( 366,575) 1,428,225 1 ,615,320 ( 187,095) ULCW 2018-01 (229, 232, 235 Revised) 1,081,016 - 1,081,016 100% 1,081,016 - 1,081,016 972,914 108,102 ULCW 2018-02 (227, 230, 233) 9 00,282 (36) 9 00,246 100% 9 00,282 (36) 9 00,246 810,222 90,024 ULCW 2018-03 (228, 231, 234 Revised) 5 13,458 - 5 13,458 100% 5 13,458 - 5 13,458 462,112 51,346 ULCW 2018-03 (231 Partial) 1,000,000 - 1,000,000 55% 5 50,000 - 5 50,000 495,000 55,000 ULCW 2019-01 (237, 241, 242, 244) 4 33,400 - 4 33,400 100% 4 33,400 - 4 33,400 390,060 43,340 ULCW 2019-02 (236) 4 4,000 ( 16,800) 2 7,200 100% 4 4,000 ( 16,800) 2 7,200 24,480 2,720 ULCW 2019-03 (238) 8 0,100 ( 31,200) 4 8,900 100% 8 0,100 ( 31,200) 4 8,900 44,010 4,890 ULCW 2019-04 (239) 1 16,900 ( 17,400) 9 9,500 100% 1 16,900 ( 17,400) 9 9,500 105,210 ( 5,710) ULCW 2019-05 (240) 1 69,000 ( 5,200) 1 63,800 100% 1 69,000 ( 5,200) 1 63,800 152,100 11,700 ULCW 2019-06 (243) 2 02,800 ( 51,700) 1 51,100 100% 2 02,800 ( 51,700) 1 51,100 135,990 15,110 ULCW 2019-07 (245) 9 0,000 ( 9,326) 8 0,674 100% 9 0,000 ( 9,326) 8 0,674 72,607 8,067 ULCW 2019-08 (246) 8 3,900 ( 11,200) 7 2,700 100% 8 3,900 ( 11,200) 7 2,700 65,430 7,270 -4- Santa Clara Valley Water District Flood Control Subventions Program Schedule (continued) Audit State State State Adjustments Share of Share of Adjustments Share of Reimbursement Reimbursement Costs to Claimed Allowable Eligibility Claimed to State Allowable Received by the Due to District Project / Claim # Claimed Costs1 per Audit Percentage2 Costs Share Costs District3 Pending Audit Upper Llagas Creek Watershed Project (continued) ULCW 2019-09 (247, 248, 250, 253) 5 96,200 ( 11,000) 5 85,200 100% 5 96,200 ( 11,000) 5 85,200 536,580 48,620 ULCW 2019-10 (254, 255, 256, 257) 1 18,900 - 1 18,900 100% 1 18,900 - 1 18,900 107,010 11,890 ULCW 2019-11 (249) 1 50,800 ( 76,438) 7 4,362 100% 1 50,800 ( 76,438) 7 4,362 66,926 7,436 ULCW 2019-12 (251) 1 61,800 ( 54,200) 1 07,600 100% 1 61,800 ( 54,200) 1 07,600 96,840 10,760 ULCW 2019-13 (252) 6 0,500 ( 12,244) 4 8,256 100% 6 0,500 ( 12,244) 4 8,256 43,431 4,825 ULCW 2020-01 (258-268) 5 30,575 - 5 30,575 100% 5 30,575 - 5 30,575 477,518 53,057 ULCW 2020-02 (269) 5,313,439 (2,913,439) 2,400,000 55% 2,922,391 (1,602,391) 1,320,000 1 ,188,000 132,000 ULCW 2020-03 (278, 281, 284) 8 4,772 ( 8,845) 7 5,927 100% 8 4,772 ( 8,845) 7 5,927 68,334 7,593 ULCW 2020-03 (279, 282, 285) 2 19,245 - 2 19,245 100% 2 19,245 - 2 19,245 197,321 21,924 ULCW 2020-03 (280, 283, 286) 9 98,029 - 9 98,029 100% 9 98,029 - 9 98,029 898,226 99,803 ULCW 2020-04 (270-272) 1,136,000 - 1,136,000 100% 1,136,000 - 1,136,000 1 ,022,400 113,600 ULCW 2020-05 (273-277) 1,895,880 - 1,895,880 100% 1,895,880 - 1,895,880 1 ,706,292 189,588 $ 25,304,629 $ (4,133,273) $ 21,171,356 $ 22,463,581 $ (2,822,225) $ 19,641,356 $ 19,416,688 $ 224,668 $ 47,335,299 $ (4,133,273) $ 43,202,026 $ 37,885,050 $ (2,822,225) $ 35,062,825 $ 33,296,010 $ 1,766,815 _____________________________ 1 See the Findings and Recommendations section. The audit adjustment of $4,133,273 is comprised of $3,197,615 (Finding 1); and $935,658 (Finding 2). 2 The State’s share of allowable project costs represents the percentage of state funding, as stipulated in the California Water Code, for each project cost category. 3 See the Findings and Recommendations section. The district submitted revised claims for ULCW Claim Numbers 170, 171, 174, and 177 subsequent to receiving reimbursement from DWR (Finding 3). -5- Santa Clara Valley Water District Flood Control Subventions Program Findings and Recommendations FINDING 1— The district claimed $47,335,299 for costs related to the Upper Guadalupe DWR adjustments River Project and Upper Llagas Creek Watershed Project. During its review of the claims, the DWR identified $3,197,615 as ineligible for reimbursement. The DWR reimburses the district for 70% of eligible costs for the Upper Guadalupe River Project and 100% of eligible costs for the Upper Llagas Creek Watershed Project, except for the Nature Quality property. For this property acquisition, the DWR and the district mutually agreed on a 55% reimbursement rate for eligible costs. At the time of DWR review and approval, the State’s share of the reimbursable claimed costs was $36,995,567. The DWR reimbursed the district $33,296,010 (90% of eligible project costs) and withheld $3,699,557 (10% of eligible project costs) as a retention balance pending our audit. After corresponding with the DWR, the district submitted revised claims for ULCW Claim Numbers 170, 171, 174, and 177, reducing claimed costs by $997,084 to $47,335,299. The State’s share of reimbursable claimed costs thus decreased to $35,998,483. Of the $3,197,615 in ineligible costs identified by the DWR, $3,181,375 was for negotiated settlements to acquire land, rights-of-way, and easements. The negotiated settlements exceeded the appraised fair market value, and the district did not request the necessary preapproval from the DWR. The remaining $16,240 of ineligible costs was for associated land costs (services and supplies). Of this amount, $13,450 was related to the Nature Quality property, and $2,790 was for items that lacked supporting documentation. The following table shows the DWR’s adjustment to the district’s claimed costs: DWR Audit Adjustment Adjustments Amount Negotiated settlements $ (3,181,375) Nature Quality property (13,450) Services and supplies costs (2,790) Total DWR adjustments $ (3,197,615) Paragraph 1 of Section IV.D, “Settlements,” of the DWR Guidelines states: Negotiated settlements and stipulated judgments may not exceed the local agency’s high appraised value unless the advance approval of the Department [of Water Resources] has been obtained. . . . -6- Santa Clara Valley Water District Flood Control Subventions Program Section VI.D., “State Review,” (page 39) of the DWR Guidelines states, . . . The Department [of Water Resources] will deduct “without prejudice” any item which cannot be verified. The local agency will have 90 days from the date of notification of the deductions to submit additional supporting information. If such information is not received within 90 days, the Department will presume that the local agency accepted the deduction. The district was unaware that the DWR Guidelines require local agencies to obtain advance approval from the DWR for negotiated settlements and stipulated court judgements that exceed the district’s high appraised value. The DWR informed the district, via email, of this requirement during its review process, and the district has since implemented a DWR preapproval process. Recommendation We recommend that the district follow applicable policies and procedures to ensure that all costs claimed for reimbursement are allowable. The district claimed $39,390,921 for land costs related to the Upper FINDING 2— Guadalupe River Project and Upper Llagas Creek Watershed Project. We Unallowable land tested $36,787,894 of these claimed costs, and identified $683,250 in costs unallowable costs. We tested the remaining $2,603,027 in land costs to determine whether additional claimed costs were unallowable. We identified an additional $252,408 in unallowable costs, for a total of $935,658 in unallowable land costs. Of the $935,658 in unallowable land costs, $898,158 was for negotiated settlements to acquire land, rights-of-way, and easements; and $37,500 was for costs that were unrelated to the flood control subvention projects. The $898,158 was unallowable because the negotiated settlements exceeded the appraised fair market value, and the district did not request the necessary preapproval from the DWR. The $37,500 was unallowable because the costs were for preventive maintenance work performed on bridges within the flood control project areas; however, the work was not for right-of-way or relocation costs. Therefore, the costs were unrelated to the Flood Control Subventions Program. As a result, the State’s share of allowable costs should be reduced by $935,658, as shown in the following table: Reduction in SCO Audit Adjustment State Reimbursement Adjustments Amount Share Due to District Negotiated settlements $ 898,158 100% $ 898,158 Unrelated costs 37,500 100% 3 7,500 SCO Audit Adjustments $ 935,658 $ 935,658 -7- Santa Clara Valley Water District Flood Control Subventions Program Paragraph 1 of Section IV.D, “Settlements,” of the DWR Guidelines states, in part: Negotiated settlements and stipulated judgments may not exceed the local agency’s high appraised value unless the advance approval of the Department [of Water Resources] has been obtained. . . . The Introduction of the DWR Guidelines states: State assistance is limited to reimbursement of all or a portion of the costs of rights-of-way and relocations which are necessary for construction of the flood control features. . . . The district was unaware that the DWR Guidelines require local agencies to obtain advance approval from the DWR for negotiated settlements and stipulated court judgements that exceed the district’s high appraised value. The DWR informed the district, via email, of this requirement during its review process, and the district has since implemented a DWR preapproval process. Recommendation We recommend that the DWR reduce the retention balance for reimbursement due the district by $935,658. We also recommend that the district ensure that all costs claimed for reimbursement are allowable. The district claimed a total of $47,335,299 for costs related to the Upper FINDING 3— Guadalupe River Project and Upper Llagas Creek Watershed Project. Reimbursement in During its review of the district’s claims, the DWR identified ineligible excess of revised overhead costs in claims with ULCW Claim Numbers 229, 232, and 235. claimed costs After corresponding with the DWR, the district submitted revised claims for ULCW Claim Numbers 229, 232, and 235, removing the ineligible overhead costs from the claims. The district also submitted revised claims to remove $997,084 in overhead costs for ULCW Claim Numbers 170, 171, 174, and 177. The DWR, however, had already reimbursed the district, based on the initial claim submission, resulting in excess reimbursements of $718,031, for these claim numbers. Recommendation We recommend that the DWR reduce its retention balance for ULCW Claim Numbers 170, 171, 174, and 177 to zero, and reduce the reimbursements due the district by $718,031. -8- Santa Clara Valley Water District Flood Control Subventions Program Attachment— Santa Clara Valley Water District’s Response to Draft Audit Report -9- -10- State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S22-FLC-0001