Public Health, California Department of Safe Drinking Water State Revolving Fund 01/10

CALIFORNIA DEPARTMENT OF PUBLIC HEALTH Independent Auditor’s Report FINANCIAL AND COMPLIANCE AUDIT OF THE SAFE DRINKING WATER STATE REVOLVING FUND For the Fiscal Year Ended June 30, 2009 J C OHN HIANG California State Controller January 2010 January 28, 2010 Mark B. Horton, M.D., M.S.P.H., Director California Department of Public Health 1615 Capitol Avenue, MS 0500 P.O. Box 997377 Sacramento, CA 95899-7377 Dear Dr. Horton: The following is the report on the financial and compliance audit for the California Department of Public Health’s Safe Drinking Water State Revolving Fund for the fiscal year ended June 30, 2009. Our audit disclosed that the fund’s financial statements conform to accounting principles generally accepted in the United States of America, and we found no instances of material noncompliance with applicable laws, regulations, contracts, or grant agreements. If you have any questions, please call Andrew Finlayson, Chief, State Agency Audits Bureau, at (916) 324-6310. Sincerely, Original signed by JEFFREY V. BROWNFIELD, CPA Chief, Division of Audits JVB/wm Mark B. Horton, M.D., M.S.P.H., Director -2- January 28, 2010 cc: Kevin Reilly, DVM, MPVM, Chief Deputy Director of Policy and Programs California Department of Public Health (via e-mail) Jose Ortiz, Acting Chief Deputy Director of Operations California Department of Public Health (via e-mail) Alan Lum, Acting Deputy Director–Administration California Department of Public Health (via e-mail) Merrianne McDonald, Chief of Accounting California Department of Public Health (via e-mail) Rufus Howell, Deputy Director, Center for Environmental Health California Department of Public Health (via e-mail) Gary Yamamoto, Division Chief, Drinking Water & Environmental Management California Department of Public Health (via e-mail) Leah Walker, Chief, Technical Programs Branch California Department of Public Health (via e-mail) Addie Aguirre, Chief, Infrastructure Funding Administration Section California Department of Public Health (via e-mail) David Whitsell, Chief, Internal Audits California Department of Public Health (via e-mail) Karen Petruzzi, CDPH Audit Coordinator California Department of Public Health (via e-mail) Julianne Talbot, CPA, Division of Accounting and Reporting, State Controller’s Office (via e-mail) California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund Contents Page FINANCIAL SECTION ...................................................................................................... 1 Independent Auditor’s Report ........................................................................................... 2 Statement of Net Assets .................................................................................................... 4 Statement of Revenues, Expenses, and Changes in Fund Net Assets ............................... 5 Statement of Cash Flows ................................................................................................... 6 Notes to the Financial Statements ..................................................................................... 7 SUPPLEMENTAL INFORMATION SECTION ............................................................. 14 Schedule of Expenditures of Federal Awards ................................................................... 15 Notes to Schedule of Expenditures of Federal Awards ..................................................... 16 OTHER INDEPENDENT AUDITOR’S REPORT SECTION ....................................... 17 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards ................................. 18 FINDINGS AND RECOMMENDATIONS SECTION ................................................... 20 Schedule of Findings and Questioned Costs ................................................................... 21 Schedule of Prior Year Findings ....................................................................................... 22 California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund FINANCIAL SECTION -1- Mark B. Horton, M.D., M.S.P.H., Director California Department of Public Health 1615 Capitol Avenue, MS 0500 P.O. Box 997377 Sacramento, CA 95899-7377 INDEPENDENT AUDITOR’S REPORT We have audited the accompanying Statement of Net Assets, Statement of Revenue, Expenses, and Changes in Net Assets, and Statement of Cash Flows of the Safe Drinking Water State Revolving Fund (Fund) as of and for the year ended June 30, 2009. These financial statements are the responsibility of the California Department of Public Health’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to provide reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note 1, Definition of Reporting Entity, the financial statements of the Fund are intended to present the financial position, and the changes in financial position and cash flows, where applicable, of only that portion of the financial reporting entity of the department that is attributable to the transactions of the Fund. They do not purport to, and do not present the financial position of the State of California as of June 30, 2009, or the changes in its financial position of its cash flows. The department has not presented the Management Discussion and Analysis (MD&A) that accounting principles generally accepted in the United States have determined are necessary to supplement, although not required to be part of, the basic financial statements. Our audit was conducted for the purpose of forming an opinion on the Safe Drinking Water State Revolving Fund’s basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of State and Local Governments and Non-Profit Organizations, and is also not a required part of the basic financial statements of the Fund. The schedule of expenditures of federal awards has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. -2- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Fund as of June 30, 2009, and the changes in financial position and cash flows thereof for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Internal Control Over Financial Reporting In planning and performing our audit, we considered the department’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing our opinion on the effectiveness of the department’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the department’s internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the department’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles, such that there is more than a remote likelihood that a misstatement of the department’s financial statements that is more than inconsequential will not be prevented or detected by the department’s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the department’s internal control. Our consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in the internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether the department’s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, and contracts, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of department management, those charged with governance, and state control agencies, and is not intended to be used by anymore other than these specified parties. However, this report is a matter of public record and its distribution is not limited. Original signed by JEFFREY V. BROWNFIELD, CPA Chief, Division of Audits January 28, 2010 -3- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund California Department of Public Health Safe Drinking Water State Revolving Fund Statement of Net Assets June 30, 2009 ASSETS Current assets: Cash and pooled investments $ 146,783,179 Receivables: Loan interest 1,991,612 Investment interest 348,002 Due from federal trust fund 39,957,551 Due from local agencies 152,156 Current portion of loans receivable 18,795,246 Total current assets 208,027,746 Noncurrent assets: Noncurrent loans receivable 498,429,980 Total noncurrent assets 498,429,980 Total assets $ 706,457,726 LIABILITIES Current liabilities: Accounts payable $ 894,896 Due to other funds 566,229 Due to other governments 195,263 Total current liabilities 1,656,388 Noncurrent liabilities: Compensated absences payable 565,433 Total noncurrent liabilities 565,433 Total liabilities $ 2,221,821 NET ASSETS Restricted 704,235,905 Total net assets $ 704,235,905 The notes to the financial statements are an integral part of this statement. -4- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund California Department of Public Health Safe Drinking Water State Revolving Fund Statement of Revenues, Expenses, and Changes in Fund Net Assets Year Ended June 30, 2009 Operating revenues: Charges for loan interest $ 9,636,551 EPA administrative reimbursements 11,105,286 Total operating revenues 20,741,837 Operating expenses: Salaries and benefits 5,106,067 Other expenses 4,372,667 Grant awards 2,727,181 Total operating expenses 12,205,915 Income (loss) from operations 8,535,922 Nonoperating revenues (expenses): Investment earnings 1,902,950 EPA capitalization grant 80,232,486 State match 5,688,852 Total nonoperating revenues (expenses) 87,824,288 Change in net assets 96,360,210 Total net assets–beginning 607,875,695 Total net assets–ending $ 704,235,905 The notes to the financial statements are an integral part of this statement. -5- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund California Department of Public Health Safe Drinking Water State Revolving Fund Statement of Cash Flows Year Ended June 30, 2009 CASH FLOW FROM OPERATING ACTIVITIES Cash received from interest on loans $ 11,443,994 Cash paid for loans and grants disbursed (42,956,363) Principal received on loans receivable 15,662,376 Cash paid to employees and vendors (11,217,850) EPA grants for administrative and set-aside costs 11,105,286 Net cash flows from operating activities (15,962,557) CASH FLOW FROM INVESTING ACTIVITIES Interest received from investments 2,157,774 Net cash flows from investing activities 2,157,774 CASH FLOW FROM NONCAPITAL FINANCING ACTIVITIES Transfers from the Environmental Protection Agency 58,655,681 Transfers from the State of California 6,485,615 Net cash flows from noncapital financing activities 65,141,296 Net increase in cash and cash equivalents 51,336,513 Cash and cash equivalents–July 1, 2008 95,446,666 Cash and cash equivalents–June 30, 2009 $ 146,783,179 Reconciliation of operating income (loss) to net cash flows provided by (used in) operating activities: Operating income $ 8,535,922 Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activity: Decrease in interest receivable 345,658 (Increase) in loans receivable (18,508,639) (Decrease) in accounts payable (2,297,962) (Decrease) in due to other funds (766,555) (Decrease) in due to other governments (3,260,717) (Decrease) in compensated absences payable (10,264) Total adjustments (24,498,479) Net cash flows from operating activities $ (15,962,557) The notes to the financial statements are an integral part of this statement. -6- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund Notes to the Financial Statements Year Ended June 30, 2009 NOTE 1— DEFINITION OF REPORTING ENTITY Effective July 1, 2007, the California Department of Health Services was divided into two separate departments: the California Department of Health Care Services and the California Department of Public Health. Pursuant to Chapter 241, Statutes of 2006 (SB 162), specific programs and public health responsibilities were transferred from the former California Department of Health Services to the newly established California Department of Public Health. The Safe Drinking Water State Revolving Fund (Fund) is now administered by the California Department of Public Health. The Fund was created pursuant to Health and Safety Code (HSC) section 116760.30, and is continuously appropriated without regard to fiscal year. The Fund is capitalized by the U.S. Environmental Protection Agency (EPA) by a series of federal grants. As a condition for receiving the federal grant, the department is required to provide an additional 20% of matching funds. The department uses the Fund primarily to make loans to public water systems for financing the cost of infrastructure needed to achieve or to maintain compliance with the Safe Drinking Water Act requirements and to protect public health. The activities of the Fund are included in the State of California’s Comprehensive Annual Financial Report. The Fund includes the federal loan fund, two state match loan funds, and five set-aside funds. The set-aside funds are the: (1) Administration Account, (2) Water System Reliability Account, (3) Source Protection Account, (4) Small System Technical Assistance Account, and (5) Public Water System, Safe Drinking Water Revolving Fund. The Public Water System, Safe Drinking Water State Revolving Fund is a set-aside fund that was created during fiscal year (FY) 2006-07 to pay for expenses to provide public water system oversight activities to support the Fund’s loan and grant program. The establishment of the separate set-aside funds to account for the costs related to the administration of the Fund is consistent with federal guidelines. The loan and set-aside funds are combined to form the Fund’s financial statements. NOTE 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fund Accounting The Fund is classified as an enterprise fund. Enterprise funds account for goods or services provided to the general public on a continuing basis when: (1) the department intends that all or most of the cost involved is to be financed by user charges, or (2) periodic measurement of the results of operations is appropriate for management control, accountability, capital maintenance, public policy, or other purposes. The Fund applies all applicable Governmental Accounting Standards Board (GASB) pronouncements, pursuant to GASB Statement No. 20, as well as all applicable Financial Accounting Standards Board (FASB) Statements and Interpretations issued on or before November 30, 1989, unless the pronouncements conflict with or contradict GASB pronouncements. For purposes of the Statement of Cash Flows, all cash and pooled investments, as discussed in Note 4, are considered to be cash equivalents. -7- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund Measurement Focus and Basis of Accounting The Fund is accounted for on the flow of economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded at the time the liabilities are incurred. Principal Forgiveness Recognition The department may authorize principal forgiveness on loans disbursed to disadvantaged communities. Principal forgiveness is recognized as an expense as loan disbursements are made. As of June 30, 2009, the department did not report principal forgiveness on any Fund loans. Compensated Absences State employees are eligible to accrue annual leave, vacation, and sick leave. Annual leave accrues at a rate of 11 to 20 hours per month. Vacation accrues at a rate of 7 to 16 hours per month. Accrued annual leave and vacation are paid out upon termination while sick leave is not. As of June 30, 2009, the Fund’s compensated absences totaled $565,433. Restricted Net Assets Net assets are restricted due to specific provisions of the program. Restatement of Beginning Net Assets According to GASB 33, federal revenue for a nonexchange transactions should be recognized when all applicable eligibility requirements have been met. In the prior year, eligibility requirements were met; however, no revenue was recognized. An increase to beginning net asset balance in the amount of $16,139,942 was made to recognize revenue in the prior period. NOTE 3— CAPITALIZATION GRANTS The Fund is financed by annual grants from the U.S. Environmental Protection Agency (EPA) and a state match equal to 20% of the federal award. Of the amount awarded by EPA, the Department has designated $93.6 million for administrative expenses, program management, small system technical assistance, loan assistance, and other state program expenses (collectively known as set-asides), and $520.1 million for loans. Set-asides are accounted for in other funds. -8- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund The grants awarded, amounts drawn on each grant, and the loan balances available for active grants, as of June 30, 2009, are presented below: Award Award Available for Grant Capitalization Available for Available for Award Drawn Loans as of Year Grant Amount Set-Aside Loans for Loans June 30, 2009 1998 $ 75,682,600 $ 10,048,176 $ 65,634,424 $ 65,634,424 $ — 1999 77,108,200 4,934,925 72,173,275 72,173,275 — 2000 80,816,700 5,172,269 75,644,431 75,644,431 — 2001 83,993,100 2,000,000 81,993,100 81,993,100 — 2002 84,340,000 7,060,400 77,279,600 77,279,600 — 2003 82,392,347 6,879,101 75,513,246 75,513,246 — 2004 81,966,200 11,016,282 70,949,917 69,612,944 1,336,974 2005 84,957,600 16,601,008 68,356,592 2,263,333 66,093,259 2006 84,847,500 12,248,614 72,598,886 — 72,598,886 2007 67,123,678 8,700,249 58,423,429 — 58,423,429 2008 67,105,000 8,960,700 58,144,300 — 58,144,300 In the past, the State’s matching contributions were provided through General Fund appropriations. Under federal guidelines, the state is not required to provide the match until the date it receives federal funds for a particular grant year. NOTE 4— CASH AND POOLED INVESTMENTS Cash in excess of current needs is deposited in the State’s centralized treasury system, which combines the balances of state agencies into a single bank account to simplify cash management. The Surplus Money Investment Fund (SMIF) is managed by the Pooled Money Investment Board (PMIB). State statutes, bond resolutions, and investment policy resolutions allow the PMIB to invest in government securities, certificates of deposit, banker’s acceptances, commercial paper, corporate bonds, mortgage loans and notes, other debt securities, repurchase agreements, equity securities, real estate, investment agreements, mutual funds, and other investments. The reported amount represents an equity share in the balance of the investment pool. Since there are no individually owned investments, the deposit in SMIF is not reported by type of investment. NOTE 5— LOANS RECEIVABLE The Fund makes loans to qualified local and private entities at interest rates ranging between 0% and 50% of the average rate paid by the State on general obligation bonds. Loans must be repaid within 20 years after completion of the project (30 years for financially disadvantaged communities). Recipients make semiannual or, in some cases, annual payments, generally starting 12 months after project completion. The department disburses the loan proceeds on a cost reimbursement basis. As entities spend money on projects financed by the Fund and request reimbursement, the department releases the loan proceeds. Interest accrues on all loan disbursements as of the date each disbursement is made. There is no allowance for uncollectible accounts, as all repayments are current, and management believes all loans will be repaid according to the loan terms. There have been no loan defaults in the program since its inception. -9- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund The following schedule of loans receivable activity for the year ended June 30, 2009, lists each water system’s outstanding loan balance. Included in the ―Active Loans‖ category are water systems that have both fully disbursed and active loans outstanding. Loans Issued Principal Outstanding Authorized as of Payments as of Loan Balances Entity Loan Amounts June 30, 2009 June 30, 2009 June 30, 2009 Fully Disbursed Loans Anaheim, City of $ 18,062,849 $ 18,062,849 $ 5,633,092 $ 12,429,757 Angels, City of 1,489,361 1,489,361 446,808 1,042,553 Asoleado Mutual Water Company 59,200 59,200 36,589 22,611 Bella Vista Water District 10,171,641 10,171,641 200,869 9,970,772 Benicia, City of 11,716,747 11,716,747 937,361 10,779,386 Biola Community Services District 177,000 177,000 22,125 154,875 Blythe, City of 9,807,160 9,807,160 784,573 9,022,587 Brawley, City of (102) 15,823,475 15,823,475 6,329,390 9,494,085 Brawley, City of (103) 4,127,516 4,127,516 1,444,631 2,682,885 California Water Service Company 494,276 494,276 15,681 478,595 Capell Valley Estates, Inc. 648,000 648,000 51,226 596,774 Carpinteria Valley Water District (125) 8,140,452 8,140,452 643,529 7,496,923 Colusa County 171,720 171,720 4,293 167,427 Contra Costa Water District (106) 15,137,776 15,137,776 4,118,143 11,019,633 Contra Costa Water District (118) 5,942,427 5,942,427 1,102,325 4,840,102 Contra Costa Water District 101 (SWAP) 2,000,000 2,000,000 502,643 1,497,357 Crescent City 7,000,000 7,000,000 1,925,000 5,075,000 Del Rey Community Services District 172,380 172,380 17,238 155,142 Dunsmuir, City of 55,800 55,800 8,370 47,430 Dutch Flat Mutual Water Company 201,530 201,530 32,679 168,851 East Bay Municipal Utility District 2,188,000 2,188,000 497,253 1,690,747 East Valley Water District 169,052 169,052 23,667 145,385 Eastern Municipal Water District 42,098,388 42,098,388 2,104,919 39,993,469 El Dorado Irrigation District (102) 806,954 806,954 186,209 620,745 El Dorado Irrigation District (103) 639,925 639,925 147,666 492,259 El Dorado Irrigation District (104) 754,130 754,130 174,020 580,110 El Dorado Irrigation District (105) 1,022,963 1,022,963 236,054 786,909 El Dorado Irrigation District (130) 959,041 959,041 154,344 804,697 El Dorado Irrigation District (131) 1,928,791 1,928,791 310,411 1,618,380 El Dorado Irrigation District (140) 5,749,808 5,749,808 225,843 5,523,965 El Dorado Irrigation District (141) 3,387,107 3,387,107 269,362 3,117,745 El Dorado Irrigation District (142) 1,732,745 1,732,745 137,798 1,594,947 El Dorado Irrigation District (143) 5,873,746 5,873,746 114,653 5,759,093 Escondido, City of 2,048,125 2,048,125 420,458 1,627,667 Fort Bragg, City of 2,141,532 2,141,532 267,692 1,873,840 Fruitridge Vista Water Co. 3,272,505 3,247,959 323,013 2,924,946 Garberville Sanitary District 100,000 100,000 2,695 97,305 Grenada Water Company 590,000 590,000 88,500 501,500 Grizzly Flats Community District 253,336 253,336 45,419 207,917 Hillview Water Company (302-02) 3,709,392 3,709,392 63,474 3,645,918 Humboldt Bay Municipal Water District 10,946,739 10,946,739 2,736,685 8,210,054 Imperial County–West Lake County Campground 83,374 83,374 17,367 66,007 Imperial County–Red Hill Marina Campground 146,789 146,789 18,349 128,440 Indian Valley Community Services District 113,557 113,557 13,627 99,930 Ivanhoe Public Utility District 1,494,247 1,494,247 224,137 1,270,110 Kerman, City of 3,300,000 3,299,999 82,500 3,217,499 Kings, County of 991,251 991,251 66,083 925,168 Konocti–Ford's Acres Mobile Home Park 183,336 183,336 45,745 137,591 -10- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund Loans Issued Principal Outstanding Authorized as of Payments as of Loan Balances Entity Loan Amounts June 30, 2009 June 30, 2009 June 30, 2009 Fully Disbursed Loans (continued) Lake Alpine Water Company 2,537,554 2,413,362 49,852 2,363,510 Lake Combie Mobile Home Village 54,951 54,951 11,281 43,670 Los Angeles, City of (101) 17,751,425 17,751,425 3,702,007 14,049,418 Meadow Vista County Water District (102) 73,305 73,305 42,880 30,425 Metropolitan Water District of Southern California 20,000,000 20,000,000 3,710,018 16,289,982 Redlands, City of 6,100,844 6,100,844 616,659 5,484,185 Richardson Beardsley Park, Inc. 57,093 57,093 11,907 45,186 River Pines Public Utility District 190,000 190,000 19,000 171,000 Rural North Vacaville Water District 8,838,365 8,838,365 2,238,308 6,600,057 San Buenaventura, City of 20,000,000 20,000,000 1,192,872 18,807,128 San Diego, City of 21,525,249 21,525,249 3,490,436 18,034,813 San Jose Water Company (301) 2,006,782 2,006,782 286,062 1,720,720 San Jose Water Company (303) 1,069,265 1,069,265 41,368 1,027,897 San Luis Obispo County Flood Control and Water Conservation District 325,430 325,430 66,807 258,623 Santa Barbara, City of (123) 19,997,928 19,997,928 1,936,463 18,061,465 Santa Barbara, City of (111) 17,900,849 17,900,849 2,902,720 14,998,129 Santa Clara Valley Water District 6,350,000 6,349,999 250,989 6,099,010 Santiago County Water District 1,300,000 1,300,000 186,470 1,113,530 Sequoia Crest Water Company 120,949 120,949 0 120,949 Sereno del Mar Water Company 250,000 250,000 73,714 176,286 Serrano Water District 3,460,882 3,460,882 1,579,560 1,881,322 Shady Glen Enterprises 136,878 136,878 11,004 125,874 Sierra Lakes County Water District 1,307,195 1,307,195 211,969 1,095,226 Sierra Mobile Home Park 59,110 59,110 14,223 44,887 Solano Irrigation District–Gibson Ranch 2,124,896 2,124,896 490,331 1,634,565 Solano Irrigation District–Blue Ridge Oaks 865,675 865,675 123,951 741,724 Solano Irrigation District–Peabody Improvement District 386,000 386,000 55,269 330,731 Sonoma County Water Agency 15,857,115 15,857,295 598,896 15,258,399 Southern Humboldt–Whitehorn Unified School District 28,616 28,616 7,869 20,747 Spanish Flat Water District (419) 176,867 176,867 8,662 168,205 Spanish Flat Water District (112) 95,646 95,646 1,879 93,767 Stinson Beach County Water District 411,500 411,500 67,444 344,056 Strathmore Public Utility District (413) 451,500 451,500 30,100 421,400 Redwood Mobile Home Park 78,441 78,441 78,441 — Terra Bella Irrigation District (105) 1,218,820 1,218,820 457,058 761,762 Terra Bella Irrigation District (404) 102,000 102,000 30,600 71,400 Tracy, City of 20,000,000 20,000,000 1,198,797 18,801,203 Truckee Donner Public Utility District 12,732,965 12,732,965 1,553,527 11,179,438 Tuolumne Utilities District–Railbed Road 49,015 49,015 9,803 39,212 Union Public Utility District 2,296,452 2,296,451 88,847 2,207,604 Vallejo Water System (101) 6,675,000 6,675,000 2,507,936 4,167,064 Vallejo Water System (414) 68,080 68,080 13,616 54,464 Westmorland, City of 670,632 670,632 150,892 519,740 Willow Creek Community Services District 470,884 470,884 23,544 447,340 Yolo County Airport 249,333 249,333 30,421 218,912 Yuba, City of 732,726 732,726 164,863 567,863 Total fully disbursed loans 425,240,360 425,091,799 63,593,823 361,497,976 -11- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund Loans Issued Principal Outstanding Authorized as of Payments as of Loan Balances Entity Loan Amounts June 30, 2009 June 30, 2009 June 30, 2009 Active Loans Carpinteria Valley Water District (121) 9,950,000 9,192,068 — 9,192,068 Montecito (121) 9,950,000 9,192,068 — 9,192,068 Dinuba, City of 7,462,450 6,920,200 — 6,920,200 Fresno, City of 2,210,000 37,585 — 37,585 Grass Valley, City of 3,203,750 36,843 — 36,843 Hillview Water Company (300) 23,672 23,672 — 23,672 Hillview Water Company (302) 75,382 75,382 — 75,382 Kern, County of 2,825,780 1,489,840 — 1,489,840 Los Angeles, City of (139) 25,335,671 20,548,922 — 20,548,922 Los Angeles, City of (144) 36,432,000 34,828,694 — 34,828,694 Los Angeles, City of (147) 38,684,250 ¤ — — — Meadow Vista County Water District (115) 21,546,100 4,792,286 — 4,792,286 North Marin Water District 16,528,850 16,528,853 — 16,528,853 Placer County Water Agency 20,000,000 20,000,000 — 20,000,000 Plainview Mutual Water District 294,075 294,075 — 294,075 Rio Dell, City of 2,720,000 2,720,000 — 2,720,000 San Luis Obispo County Flood Control and Water Conservation District 26,000,000 24,694,034 — 24,694,034 Santiago Association 788,354 788,354 — 788,354 Shasta Community Services District 2,031,111 1,000,222 — 1,000,222 Spring Valley Heights Homeowners Association 1,907,000 1,714,252 — 1,714,252 Strathmore Public Utility District (420) 151,903 151,903 — 151,903 Terra Bella Irrigation District (146) 480,000 369,210 — 369,210 Tuolumne Utilities District (405) 115,619 115,619 — 115,619 Villa del Monte Mutual Water Company 1,056,328 213,165 — 213,165 Total active loans 229,772,295 155,727,247 — 155,727,247 Total $ 655,012,655 $ 580,819,046 $ 63,593,823 $ 517,225,223 Loans mature at various intervals through July 1, 2038. The scheduled principal and interest payments on loans for fully disbursed projects maturing in the next four years and every five years thereafter are as follows: Year Ending Total Debt June 30 Principal Interest Service 2010 $ 18,795,246 $ 6,666,947 $ 25,462,193 2011 19,130,815 6,331,248 25,462,063 2012 19,459,042 5,987,199 25,446,241 2013 19,807,911 5,634,789 25,442,700 2014 20,165,510 5,273,651 25,439,161 2015-2019 105,655,847 20,653,803 126,309,650 2020-2024 106,584,498 10,483,942 117,068,440 2025-2029 53,526,804 2,016,817 55,543,621 2030-2034 2,395,603 — 2,395,603 2035-2039 636,273 — 636,273 Total $ 366,157,549 $ 63,048,396 $ 429,205,945 The amortization schedules for the active projects may change upon completion of the project when the final loan balance will be determined. Of the $18.8 million in principal payments due in 2010, the fund received $4.6 million in loan principal before June 30, 2009. The outstanding loans receivable balance was reduced accordingly. -12- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund NOTE 6— PENALITIES AND FEES The Fund assesses a penalty of one-tenth of 1% per day from the repayment due date on the amount due on loan repayments past due. However, for the fiscal year ended June 30, 2009, the department elected not to impose late payment penalties. Changes to workload priorities associated with the department’s reorganization delayed the preparation of loan recipient invoices, and late payment penalties were waived as a result. In prior years, late payment penalties were insignificant. NOTE 7— RETIREMENT PLAN Plan Description The State is a member of the California Public Employees’ Retirement System (CalPERS), which provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. CalPERS is a defined benefit contributory retirement plan. Retirement contributions by employees are set by statute as a percentage of payroll (Tier I employees), or are zero (Tier II employees). Retirement contributions are actuarially determined under a program where total contributions plus CalPERS’ investment earnings will provide the necessary funds to pay retirement benefits when incurred. The employer contributions are included in the cost of personal services. The Fund is included in the State Miscellaneous Category within CalPERS. CalPERS functions as an investment and administrative agent for participating public agencies with the State of California, including the Fund. All risks and costs are shared proportionately by participating state agencies. For further information, refer to the State of California Comprehensive Annual Financial Report, and to the CalPERS Comprehensive Annual Financial Report. NOTE 8— SUBSEQUENT EVENTS On September 29, 2009, the EPA awarded the department a $132.8 million capitalization grant for the period of July 1, 2009, through June 30, 2016. The grant consists of $115.1 million to the loan fund and $17.7 million to the set-aside funds. In addition, the State’s 20% match of $36.3 million will be added to the loan fund. Allowable project costs under this capitalization grant total $169.2 million. -13- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund SUPPLEMENTAL INFORMATION SECTION -14- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund Schedule of Expenditures of Federal Awards Year Ended June 30, 2009 Federal Catalog Federal Federal Agency/Program Title Number Expenditures U.S. Environmental Protection Agency: Capitalization Grants for Safe Drinking Water State Revolving Fund 66.468 $ 51,105,083 The accompanying notes are an integral part of this schedule. -15- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund Notes to the Schedule of Expenditures of Federal Awards Year Ended June 30, 2009 NOTE 1— BASIS OF PRESENTATION The accompanying Schedule of Expenditures of Federal Awards includes the federal Capitalization Grants for the Safe Drinking Water State Revolving Fund grant activity of the California Department of Public Health. The schedule is presented on the accrual basis of accounting. The information presented in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Accordingly, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of the financial statements. NOTE 2— LOANS TO SUBRECIPIENTS Of the federal expenditures presented in the schedule, the department disbursed $41,627,778 in loan proceeds to subrecipients in the current year. -16- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund OTHER INDEPENDENT AUDITOR’S REPORT SECTION -17- Mark B. Horton, M.D., M.S.P.H., Director California Department of Public Health 1615 Capitol Avenue, MS 0500 P.O. Box 997377 Sacramento, CA 95899-7377 AUDITOR’S REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO THE FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 Compliance We have audited the compliance of the California Department of Public Health’s Safe Drinking Water State Revolving Fund with the types of compliance requirements described in the U.S. Office of Management and Budget’s (OMB) Circular A-133 Compliance Supplement that are applicable to the capitalization grants for the Safe Drinking Water State Revolving Fund program for the year ended June 30, 2009. Compliance with the requirements of laws, regulations, contracts, and grants applicable to its major federal program is the responsibility of the department’s management. Our responsibility is to express an opinion on the Safe Drinking Water State Revolving Fund’s compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on the capitalization grants for the Safe Drinking Water State Revolving Fund program occurred. An audit includes examining, on a test basis, evidence about Safe Drinking Water State Revolving Fund’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the Safe Drinking Water State Revolving Fund’s compliance with those requirements. In our opinion, the department complied, in all material respects, with the requirements referred to above that are applicable to each of its capitalization grants for the Safe Drinking Water State Revolving Fund for the year ended June 30, 2009. -18- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund Internal Control Over Compliance The management of the department is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the department’s internal control over compliance with the requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the department’s internal control over compliance. A control deficiency in an entity’s internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect noncompliance with a type of compliance requirement of a federal program on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity’s ability to administer a federal program such that there is more than a remote likelihood that noncompliance with a type of compliance requirement of a federal program that is more than inconsequential will not be prevented or detected by the entity’s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected by the entity’s internal control. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. This report is intended solely for the information and use of department management, others within the entity, federal awarding agencies, and pass-through entities and 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 January 28, 2010 -19- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund FINDINGS AND RECOMMENDATION SECTION -20- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund Schedule of Findings and Questioned Costs Year Ended June 30, 2009 SECTION I—Summary of Auditor’s Results Financial Statements Type of auditor’s report issued: Unqualified Internal control over financial reporting: Material weaknesses identified? No Significant deficiencies identified that are not considered to be material weaknesses? No Noncompliance material to financial statements noted? No Federal Awards Internal control over the program: Material weaknesses identified? No Significant deficiencies identified not considered to be material weaknesses? No Type of auditor’s report issued on compliance for major programs: Unqualified Any audit findings disclosed that are required to be reported in accordance with section 510(a) of OMB Circular A-133? No Auditee qualified as low-risk auditee? No Identification of the program: CFDA Number Name of Federal Program 66.468 Capitalization Grants for the Safe Drinking Water State Resolving Fund SECTION II—Financial Statement Findings No findings were noted. SECTION III—Federal Award Findings and Questioned Costs No findings were noted. -21- California Department of Public Health Financial and Compliance Audit of the Safe Drinking Water State Revolving Fund Schedule of Prior Year Findings Year Ended June 30, 2009 FINDING 08-01: Cash Managment Condition The department did not always minimize the time of the drawdown of federal funds and their disbursements. A federal loan disbursement of $15,228,694 to the Los Angeles Department of Water was pending as of June 30, 2007. Subsequent to the state’s fiscal year-end, the State Controller’s Office (SCO) denied payment on July 11, 2007, due to insufficient information to evaluate the allowability of the claim. The claim was eventually paid on August 27, 2007, which resulted in the federal funds being held in the state account for 55 days. As this disbursement was accrued in the fiscal year (FY) 2006-07, it does not affect FY 2007-08 expenditures. Recommendation To minimize returned claims, the department should reassess its claim scheduling policies and procedures to ensure all required documentation is properly authorized and provided to the SCO and, in the event claims are denied, to resolve the matter timely. Current Status The department has reviewed its invoice processing procedures in November 2008 and has worked with payables staff to ensure that claims are processed in a timely manner. The department has minimized the time between the drawdowns of federal funds and their disbursements to subrecipients during FY 2008-09. No similar findings were noted in the FY 2008-09 audit. FINDING 08-02: Reporting Condition The department does not have adequate processes and procedures in place to ensure that all Safe Drinking Water State Revolving Fund federal financial reports are accurate. There were eight federal capitalization grants that required a Federal Financial Status Report (SF-269) to be submitted as of June 30, 2008. Of the eight, three Financial Status Reports contained state match amounts based on estimations instead of the actual match provided. The Federal Cash Transactions Reports (SF-272 and SF-272A) for the period of January 1, 2007, through December 31, 2007, contained an incorrect net disbursements total due to a mathematical error. This error resulted in the underreporting of current period net disbursements by $7,084,150. Recommendation The department should enhance its policies and procedures to ensure the Federal Financial Status Reports and Cash Transactions Reports are accurately prepared and reviewed. Current Status The department has improved its procedures to ensure that Federal Financial Status Reports and Cash Transactions Reports are accurately prepared and reviewed. No similar findings were noted in the FY 2008-09 audit. -22- State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250-5874 http://www.sco.ca.gov S10-SAA-002