Chief Administration Office Committee

The Los Angeles County Chief Administrative Officer (CAO) as chief executive of one of the nations largest local governments is among the most powerful public administrators in America. Accountable to an elected Board of Supervisors, he exercises unique powers within the County to define the rules of its manage- ment system, administer a $13.133 billion budget and judge the performance of and reward or penalize key County managers. The CAO is appointed by and accountable to a five member elected full time Board of Supervisors. He manages County government on a day to day basis, helping to provide a wide variety of public services to a County population of nearly 9 million, one larger than that of 42 states. He has significant powers delegated by the Board to manage the County's $13.133 billion budget (1991-92). He supervises expenditures for all departments and offices. As ex officio personnel director of the County, he plays a crucial role in the careers of nearly 85,000 employees, developing personnel policies and implementing employee relations programs, salaries and benefits, administration and risk management services. He helps the Board recruit and select non-elected department heads, helps establish performance objectives, evaluates top managers and recommends compensation to the Board. The CAO's department consists of over 400 authorized full time employees. In 1991-92, the departments annual budget is approximately $46.6 million. In addition, he has direct responsibility for as much as $308 million appropriated by the Board in the Nondepartmental Special Accounts (NSA) budget for items of countywide benefit.1 For an overview of the mission, powers and duties of the CAO, please see Appendix A. It includes information on his budget, organization, staffing and major accomplishments during fiscal 1991-92. (The auditors did not attempt to independently verify the accomplishments of the CAO, since it was not within the scope of this audit to evaluate his overall performance.) ^{\rm 1} It should be noted that actual expenditures from NSA are historically much smaller than the Board’s appropriation. For example, the latest available published budget data shows that the Board's appropriation in 1990-91 was about $324 million while actual expenditures were about $122 million. Similar variation occurred in 1989-90. The primary reason for such variances is that this budget unit accommodates contingent appropriations for programs that may be significantly modified midyear by Federal, State, or local actions, e.g., due to revenue shortfalls from recession or changing policies. Management Audit Department of CAO—Chief Administration Office Committee The focus of this audit is on controls; the structure and processes to help ensure the CAO meets departmental objectives and complies with applicable laws, policies and procedures. In the following pages, we review the control environment, assess several specific areas of his responsibility and arrive at conclusions and recommendations regarding management of the department.

The County has a well established system of controls, laws and policies to protect its assets from mismanagement and abuse, but Board policies delegating budgetary control to the CAO and department managers have weakened some traditional controls of the Board, such as detailed line item budgetary reporting and approval. Appendix B summarizes key elements in the County's system of internal controls, including the general management philosophy of the Board and CAO. In 1978, after voter approval of the statewide property tax limitation measure, Proposition 13, the Board adopted a number of new policies changing the Board's approach to budget management. These policies allowed department managers greater autonomy, delegated much countywide budget management authority to the CAO and streamlined the budget process. The Board no longer required departments to submit extensive detail on the individual components of major budget items, i.e., salaries, services and supplies. It began to focus on departmental objectives, programs and results, i.e., moving away from a line item format for budget control to a program budget format. During an interview with the CAO, we gained some further insight regarding his approach to management and budgeting, which reflects these Board policies. Essentially, the CAO views County government much as if it were a large business enterprise that is a diverse conglomerate. He told us that he views the County's 32 operating departments as wholly owned subsidiaries of the County that exercise a good deal of autonomy to achieve their missions, within reasonable parameters set by the Board of Supervisors. The CAO monitors departments to see if they stay within the Board's policies and applicable laws. He has the bulk of the authority to define the rules of the system and evaluate the performance of each department. He evaluates performance based upon objectives established at the start of the fiscal year and makes the recommendation to the Board of Supervisors for final approval. One objective applied to all departments is to stay within budget. Management Audit Department of CAO—Chief Administration Office Committee 9

There has been no recent comprehensive independent performance audit of the CAO's department and no such audit is presently planned. Management Audit Department of CAO—Chief Administration Office Committee 11 We were unable to find evidence of any recent comprehensive management or performance audit of the CAO's department.2 Unless requested by the Board of Supervisors or the CAO, it is unlikely that the CAO's department will receive a comprehensive audit in the near future. The CAO's department is on the schedule of the Auditor-Controller's five- year internal audit program, 1991-1996. Tentatively, these audits will be limited to ad hoc contract compliance reviews and testing selected functions of the CAO for compliance with fiscal management guidelines of the Auditor-Controller. Without regular performance reviews of the CAO's department by personnel with the appropriate expertise, the Board cannot be assured it will have adequate and complete information needed for it to adequately evaluate the CAO's budget, performance and compliance with policies and procedures.

There is no formal mechanism to monitor the CAO's department regularly for compliance with some important countywide budget instructions and guidelines. Internal control reviews conducted by the Auditor-Controller's staff test departmental management for compliance with financial policies and guidelines of the Auditor-Controller. These reviews do not test the CAO's compliance with guidelines that are the sole responsibility of the CAO. For example: a. The CAO monitors all departments (including his own) for compliance with Budget Instructions. For example, the last two years of Departmental Budget Instructions issued by the CAO define capital projects as any physical improvement to an existing structure or any construction which results in an increase in the value of an asset by $5,000 or more. The CAO's office refurbishment program cost several millions over several years. One project in the CAO's office refurbishment program was reported by him to cost $2.7 million, i.e., for demolition/construction, ^{2} The auditors found one limited audit by an external agency. "The Role Of The CAO and Asset Management in Los Angeles County," by the Los Angeles County Citizens Economy and Efficiency (E & E) Commission. This report was completed in December 1988 as a result of a May 10, 1988 request of the Board of Supervisors "to evaluate the current status of its reorganization programs, with attention to its recent actions affecting the role of the Chief Administrative Officer, current vacancies in department head positions and the status of system development." The E & E Commission consists of 21 members, four appointed by each County Supervisor and the retiring Foreman of the previous year's Grand Jury. In addition, the Auditor-Controller conducted several ad hoc audits of risk management and, prior to 1987, an audit of the CAO's Revolving Fund. Management Audit Department of CAO—Chief Administration Office Committee 12

The Auditor-Controller is the County's primary source of internal audits and such audits are an important element of the County's internal controls. The independence of the Auditor-Controller is not clearly communicated and reinforced. He could do more himself to reinforce his independence, but his options are limited without Board action clarifying the Auditor's reporting relationship to the Board. One of the basic standards for government auditing is that in all matters relating to audit work, the audit organization and the individual auditors, whether government or public, should be organizationally independent and should maintain an independent attitude and appearance.5 The reporting relationship of the Auditor-Controller to the CAO mitigates to some degree the independence of the Auditor-Controller and his audit program. We note that the Auditor-Controller does occasionally report directly to the Board. Other evidence indicates some ambiguity in the reporting relationship to the Board. The budget of the Auditor-Controller is subject to review by the CAO. Also, the level of services and programs of the Auditor-Controller are subject to the influence, if not direct control 4 This authority granted by the Board in an action adopted July 16, 1986 states that the CAO can approve contracts for financial, economic, accounting, engineering and administrative services pursuant to specified sections of the Government Code and within budgeted appropriation authority. County Counsel has similar authority to approve contracts for legal services. It is our understanding that others, such as the Auditor-Controller and the County's Purchasing Agent are generally limited to entering into contracts of $25,000 or less and in some circumstances, such as architectural and engineering and related services the limit is $75,000. The Board can and does occasionally modify this. For example, the Board has approved Master Agreements and budgeted funds giving some department heads the authority to approve contracts (task orders) under the Master Agreements that might involve millions of dollars of work over the period of a year. On the other hand, in some cases, e.g. Master Contract for internal audits under the Auditor-Controller, the Board requires that each proposed task order over $50,000 be returned to the Board for approval. United States General Accounting Office, Government Auditing Standards, Office of Comptroller General, Chapter 6, pages 3-4 and 3-5, 1988 revision. Management Audit Department of CAO—Chief Administration Office Committee of the CAO. This is because the Board has delegated broad authority to the CAO to manage the budget process. We did note as a positive sign, the CAO's stated support for the independence of the Auditor-Controller. The CAO has demonstrated his support in a number of ways. For example, we received a copy of a communication from the CAO to department heads advising them not to propose to reduce their budgets for auditing, unless approved by the Auditor-Controller. This may help to bolster the independence of the Auditor-Controller. Another indication occurred in 1991 when the CAO transferred to the Auditor-Controller the CAO's entire Special Investigations Unit, five internal auditors of the CAO to the Auditor-Controller. Also, the CAO has consistently supported substantial appropriations for the Auditor- Controller's internal audits, despite pressure on the County's resources, due to reductions in State funds and the impact of the recession. The 1991-92 budget for internal audits was $9,925,000. The budget recommended by the CAO in 1992-93 increases the appropriation for audits to $11,372,000. Though this will not fund the Auditor-Controller's total request, it does represent significant support for the audit function. The Auditor-Controller has asked for an additional $4,057,000, including funds for 13 additional positions. Based on his statements in the 1992- 93 proposed budget document, if the Board adopts the CAO's

The Nondepartmental Special Accounts (NSA) funds contain substantial amounts controlled directly by the CAO and have not been audited in recent years. The NSA is a separate budget unit that is not formally a part of the CAO department. It is controlled by the CAO and its expenditures are items of benefit to the entire County government (rather than for a specific department). The bulk of expenses charged to this account (approximately $75 million annually) are for payment of interest expense associated with the County's Treasury Management Program.6 In addition, this budget unit provides contingent appropriations for programs which may be significantly modified mid-year by Federal, State, or local actions. Remaining appropriations are for such items as memberships of countywide benefit, legislative expenses, and Professional and Specialized services which cover countywide programs (e.g., the cost of the County's independent external audit, about $400,000). An analysis of Budget notes on NSA appropriations and expenditures for Professional and Specialized Services reflects the following: 6 This program involves the issuance of short term notes (debt) issued annually to cover cash flow shortages until anticipated revenues are received from the state or other sources. Management Audit Department of CAO—Chief Administration Office Committee 1989-90 1990-91 1991-92 APPROPRIATION APPROPRIATION APPROPRIATION (Adjusted Year-End) (Adjusted Year-End) (Adjusted Year-End) $51,515,000 $57,730,000 $50,698,000 EXPENDITURES EXPENDITURES EXPENDITURES (Estimated at Year-End) (Estimated at Year-End) (Estimated at Year-End) $47,749,609 $58,451,000 $48,859,000 Thus, over the last three years, an average of $53.3 million has been available for services of countywide benefit, much at the discretion of the CAO. The budget, though containing more line item information on this budget unit than for many other budget units, does not report actual costs from previous years. This makes it necessary to look into the detailed accounts of the budget unit to fully analyze expenditures. For example, a limited review of accounts in 1990-91 revealed that one of the items budgeted in the Nondepartmental Special Account was: Ceremonies and Special Services for the Board of Supervisors—$781,000. Also in our review of CAO departmental service orders and invoices, we learned that the CAO charges Nondepartmental Special Accounts for the total cost of salaries and benefits of several of the activities of his staff which he considers to be of countywide benefit. In fiscal year 1990-91, we identified over $4 million reserved for such uses. It was not within the scope of this audit to review a statistically valid sample of specific transactions within the NSA account, but it appears that this would be in order for the following reasons: a. Lack of clearly defined standards and controls for authorized expenditures. The CAO has the authority to determine whether an appropriation is of countywide benefit (rather than requiring a specific budget unit to include the item in their budget) and the Auditor- Controller has no direction to independently review this determination. In addition, during the course of our audit we learned that the CAO delegates his authority to determine when an expenditure is of countywide benefit to his staff. It is our impression that the CAO provides little guidance or definition regarding what constitutes matters of countywide benefit eligible for funds from this account. Management Audit Department of CAO—Chief Administration Office Committee 17 b. No previous audits of the NSA. We were unable to find evidence that there has been an internal audit of NSA. According to the Auditor- Controller there are no present plans to do so. Because this budget unit is under the direct supervision and control of the Board and CAO, it is unlikely the Auditor-Controller would audit NSA unless requested by the Board or the CAO. The County's independent financial auditors (external auditors) have never found it necessary to conduct a separate scope audit of this account. This is because it is not necessary to do so in order to render an opinion on the County's accounts as a whole, according to the County's current external auditors. Also, nothing has ever come to the attention of the auditors that would lead them to focus on NSA. The next three findings of our audit report focus upon the Chief Administrative Office refurbishment program. This program illustrates several management and control weaknesses we found in the Chief Administrative Office. Information concerning the background of this audit and our approach can be found in Appendix C. The Chief Administrative Office has discarded virtually all its program management files for the office refurbishment program. This situation made it impossible to conduct a comprehensive review of this program during this study. At several points during this project we requested (both orally and in writing) copies of all program management files of the CAO pertaining to the refurbishment program. We hoped to receive documents such as an initial statement of program scope and objectives, program budgets, work schedules, high level management memos and other corre- spondence that would normally be generated during the course of a $6 million program. Other examples of the type of information we were seeking were supporting documents detailing the composition and timing of the $6.18 million total program cost reported to the Board of Supervisors in September, 1991. This information would have helped us ascertain how the program was managed relative to the criteria set out in Appendix C. In response to our requests, we received a total of three documents. The first was a September 20,1991 Board letter from Mr. Dixon (see Appendix C for a discussion of this letter). The other two were an April, 1991 program schedule document and a single work order status report covering only two months (July and August 1991) of the program. The Assistant Chief Administrative Officer was the program manager for the office refurbishment program. She reported that her office had discarded all program management files pertaining to the office 18 Management Audit Department of CAO—Chief Administration Office Committee

The office refurbishment program was not budgeted for and planned as a capital project as required by County policy. The consequence of this omission was that the refurbishment program did not achieve a degree of visibility at the level of the Board of Supervisors equal to that of similar-sized capital projects. Budgetary procedures applicable to the County are prescribed by the Budget and Tax Levy Act, California Government Code Sections 29000

The Chief Administrative Officer understated the cost of furniture for the office refurbishment program by over $713,000 in his September 20, 1991 letter to the Board of Supervisors. Such a material discrepancy raises unanswered questions concerning overall management of the refurbishment program. As noted above, the Chief Administrative Officers letter dated September 20, 1991 stated that furniture (modular furniture, free standing furniture, open space office furniture, and conference room furniture) costs were $750,000. This total included costs billed to date for the three years and projected future costs. As noted above, the Chief Administrative Officers staff could provide very little supporting information regarding the costs reported to the Board of Supervisors in the September 20, 1991 letter. In light of this situation and the limited time and resources the Grand Jury had available for this study, we attempted to further research just one portion of the refurbishment program. We did so to better understand the program, its costs and the management control system that applied to the overall 22 Management Audit Department of CAO-Chief Administration Office Committee