Imperial Beach Finances a City Under Stress

Recommendations 21

• R10
  Examination of financial data provided by the City Manager in response to follow-up questions
• R11
  Independent financial statement and audit for Imperial Beach and Successor Agency. As a result of the preliminary investigation, the Grand Jury decided that some aspects of the complaint had merit; i.e., involving nontransparent and/or administrative or ethically suspect dealings in certain budget areas. The Grand Jury then conducted a more thorough investigation. The Grand Jury asked OAAS to conduct a formal audit to investigate the accounting procedures for the City’s General Fund and RDA. The audit focused on the City’s finances in the “Non-departmental category” of general fund expenses involving redevelopment labor and professional service charges. The object of the audit was to determine if the RDA’s labor and legal expenses were adequately supported and properly budgeted, recorded, and allocated. The scope of the audit included a review of the RDA’s and City’s labor and legal financial records for Fiscal Year (FY) 2010-11 and FY 2012-13 to date. OAAS conducted the audit in conformance with the International Standards for the Professional Practice of Internal Auditing prescribed by the Institute of Internal Auditors as required by California Government Code, Section 1236. They performed the audit using the following methods:
• R12
  Evaluated City controls over processing labor expenses
• R13
  Reviewed and analyzed the process of allocating City shared labor cost to the RDA and Successor Agency
• R14
  Examined financial records for labor 3
• R15
  Investigated significant variances through inquiries to key City personnel, and review of supporting documentation
• R16
  Selected and reviewed supporting documentation for a judgmental sample of recorded labor and legal transactions to determine whether transactions were properly supported, approved, and recorded.
• R17
  Make an adjusting journal entry to reclassify legal costs related to the RDA dissolution and the Successor Agency operations from the Professional Services Account to the Attorney Services Account
• R18
  Make an adjusting journal entry to reclassify legal costs related to City operations from the RDA and Successor Agency’s accounts to City accounts
• R19
  Develop a process to ensure that legal services are recorded consistently and correctly
• R20
  Implement two accounts for recording legal services, one for legal services related to litigation and another for legal services related to general legal representation. Transfer of RDA Expenses in FY 2010-11 In FY 2010-11, the City transferred a total of $1.7 million of RDA expenses, including $916,518 in labor cost, and $20,234 in miscellaneous cost, from the RDA non-housing funds to the City’s General Fund. According to City management, the transfer of expenses was done in accordance with the City Services Reimbursement Agreement (CSRA). The CSRA is a loan agreement between the City and the Agency and does not 10 justify the transfer of expenses from the RDA to the City. As a result, the City understated the RDA’s expenses in FY 2010-11 by $1.7 million. In March 2013, the DOF questioned the $1.7 million transfer in its review of the RDA’s cash balances available for distribution to the taxing entities. The DOF concluded that the City did not provide sufficient documentation to validate the transfer and the RDA’s cash balances should be adjusted by $1.7 million. However, after the “Meet and Confer”13 process, the DOF reversed its determination. The DOF indicated that the date of the transfer was not within the scope of the DOF review. Further, the DOF stated that the California State Controller’s Office has the authority to clawback assets that were inappropriately transferred to the City. Since these transfers are still in question, the City should consider restating its financial statements for FY 2010-11. City Shared Labor Cost Was Not Allocated to the Successor Agency OAAS found that the City did not allocate shared labor costs of the administrative employees to the Successor Agency for the period of February 1 through June 30, 2012. The City comingled labor costs related to the redevelopment activities with City records. As a result, the Successor Agency’s labor expenses reported in FY 2011-12 were understated. According to City management, the legislation was not clear on how expenses should be reported after the RDA’s dissolution. Based on the audit results, the Grand Jury concluded:
• R21
  In order to properly track costs, City expenses related to the redevelopment activities should be allocated to the Successor Agency.
• R22
  The City should identify labor costs related to the redevelopment activities for the period of February 1 through June 30, 2012 and make an adjusting journal entry to transfer this cost from the City’s General Fund to the Successor Agency fund. Lack of Controls Over the Time Sheet Approval Process City employees complete electronic time sheets in a commercial time accounting system. Supervisors approve time sheets by sending an approval email to the payroll administrator. OAAS noted that employees might make unauthorized adjustments to time, after supervisors have approved, but prior to payroll processing the approved time sheets. As a result, an employee’s labor expenses may be in error. The current application cannot electronically approve time sheets. Electronic approval of time sheet records and automated controls that prevent time adjustments after supervisor’s approval is an integral part of a strong system of internal controls. The City should implement an employee timekeeping system that provides for electronic approval of time sheets. 13 “Meet and Confer” refers to the administrative procedure for adjudicating disputes between the RDA and the DOF. Other Audit Findings City Shared Labor Cost Was Allocated Based on the Estimated Records Prior to July 1, 2012, the City based the allocation of shared labor cost of administrative employees to the RDA and Successor Agency on the budgeted allocation percentages for each position. Every year, City management determined budgeted allocation percentages based on estimating the prior year’s time spent by the administrative employees on RDA activities. As a result, actual time spent on RDA activities could vary from the estimated time. The City shared labor cost would be incorrectly allocated to the RDA or the Successor Agency. Based on the audit, the Grand Jury believes that the City should instead allocate actual time spent on RDA activities and conduct a periodic study of time allocated for shared cost employees. The Grand Jury believes that use of estimated labor costs rather than actual time allocated labor costs for shared labor is not a proper accounting procedure. The City should update its time charging system and approval procedure to allow required segregation of labor costs to the Successor Agency. ROPS I and ROPS II Include Unqualified Enforceable Obligations The OAAS audit found that ROPS I and ROPS II include unqualified Enforceable Obligations related to labor cost. Specifically, ROPS I includes $75,000 in the Housing Agreement and $200,000 in the CSRA. ROPS II includes $90,000 in the Housing Agreement and $240,000 in the CSRA. The Housing Agreement is a contract between the Imperial Beach Housing Authority and the City. Since the Successor Agency is not a party to this agreement, the claimed amount does not constitute an Enforceable Obligation. Further, the CSRA is a loan agreement between the Successor Agency and the City. Therefore, the claimed amount does not constitute an Enforceable Obligation. The DOF mistakenly approved some Enforceable Obligations in ROPS I and ROPS II. They were subsequently funded by the County Auditor and Controller. The DOF later denied these obligations in ROPS III. Inaccurate Data Were Reported on the ROPS I and ROPS II Reconciliation Schedules After each ROPS reporting period, the Successor Agency is required to reconcile actually paid obligations with the estimated obligations reported on a previous ROPS. As listed in Table 6 below, the audit found that actual payments reported on ROPS I and ROPS II reconciliation schedules do not agree with the actual financial records. Table 6. Reconciliation of Enforceable Obligations Expense Financial ROPS I Financial ROPS II Description Records (02/12- Reconciliation Records Reconciliation 06/12) (01/12-06/12) (07/12-12/12) (07/12-12/12) Labor $88,17214 $1,337,496 $217,510 $436,826 Litigation $26,01615 $76,510 $354,61215 $70,343 14 Amount is misstated. Amount is an estimate determined by OAAS through review of payments made to the City Legal Counsel and RDA Special Counsel. According to City management, the Successor Agency reported obligations that were approved by DOF and funded by the CAC as actual payments on ROPS I and ROPS II reconciliation schedules. City management stated that it was their understanding that legislation at that time did not require reporting actual amounts from their financial records on the reconciliation schedule. FACTS AND FINDINGS Fact: The City pays just over 10% of its personnel labor costs from redevelopment funds. Fact: The City’s redevelopment budget is equivalent to slightly more than 50% of its General Fund.
• R23
  Make an adjusting journal entry to reclassify legal cost related to the RDA dissolution and the Successor Agency operations from the Professional Services Account to the Attorney Services Account.
• R24
  Make an adjusting journal entry to reclassify legal costs related to City operations from the RDA and Successor Agency’s accounts to City accounts.
• R25
  Implement two accounts for recording legal services, one for legal services related to litigation and another for legal services related to general legal representation.
• R26
  Develop a process to ensure that legal services are recorded correctly. 13-87: By the end of CY 2013, restate financial statements for FY 2010-11. 13-88: By the end of CY 2013, identify labor costs related to RDA activities for the period of February 1 through June 30, 2012 and make an adjusting journal entry to transfer this cost from the City’s General Fund to the Successor Agency fund. 13-89: Develop a timekeeping system or work with their current vendor’s system support to automate the time sheet approval process and to implement automated controls that prevent employees from adjusting time sheets after supervisor’s approval. 13-90: Begin immediately to increase the accuracy of their ROPS submission procedures to comply with DOF requirements. 13-91: Consider getting help from their State representatives or County resources in the ROPS submission and settlement process. REQUIREMENTS AND INSTRUCTIONS The California Penal Code §933(c) requires any public agency which the Grand Jury has reviewed, and about which it has issued a final report, to comment to the Presiding Judge of the Superior Court on the findings and recommendations pertaining to matters under 15 the control of the agency. Such comment shall be made no later than 90 days after the Grand Jury publishes its report (filed with the Clerk of the Court); except that in the case of a report containing findings and recommendations pertaining to a department or agency headed by an elected County official (e.g. District Attorney, Sheriff, etc.), such comment shall be made to the Presiding Judge with an information copy sent to the Board of Supervisors. Furthermore, California Penal Code §933.05(a), (b), (c), details, as follows, the manner in which such comment(s) are to be made: (a) As to each grand jury finding, the responding person or entity shall indicate one of the following: (1) The respondent agrees with the finding (2) The respondent disagrees wholly or partially with the finding, in which case the response shall specify the portion of the
• R27
  Make an adjusting journal entry to reclassify legal cost related to the RDA dissolution and the Successor Agency operations from the Professional Services Account to the Attorney Services Account.
• R28
  Make an adjusting journal entry to reclassify legal costs related to City operations from the RDA and Successor Agency’s accounts to City accounts.
• R29
  Implement two accounts for recording legal services, one for legal services related to litigation and another for legal services related to general legal representation.
• R30
  Develop a process to ensure that legal services are recorded correctly. 13-87: By the end of CY 2013, restate financial statements for FY 2010-11. 13-88: By the end of CY 2013, identify labor costs related to RDA activities for the period of February 1 through June 30, 2012 and make an adjusting journal entry to transfer this cost from the City’s General Fund to the Successor Agency fund. 13-89: Develop a timekeeping system or work with their current vendor’s system support to automate the time sheet approval process and to implement automated controls that prevent employees from adjusting time sheets after supervisor’s approval. 13-90: Begin immediately to increase the accuracy of their ROPS submission procedures to comply with DOF requirements. 13-91: Consider getting help from their State representatives or County resources in the ROPS submission and settlement process. REQUIREMENTS AND INSTRUCTIONS The California Penal Code §933(c) requires any public agency which the Grand Jury has reviewed, and about which it has issued a final report, to comment to the Presiding Judge of the Superior Court on the findings and recommendations pertaining to matters under 15 the control of the agency. Such comment shall be made no later than 90 days after the Grand Jury publishes its report (filed with the Clerk of the Court); except that in the case of a report containing findings and recommendations pertaining to a department or agency headed by an elected County official (e.g. District Attorney, Sheriff, etc.), such comment shall be made to the Presiding Judge with an information copy sent to the Board of Supervisors. Furthermore, California Penal Code §933.05(a), (b), (c), details, as follows, the manner in which such comment(s) are to be made: (a) As to each grand jury finding, the responding person or entity shall indicate one of the following: (1) The respondent agrees with the finding (2) The respondent disagrees wholly or partially with the finding, in which case the response shall specify the portion of the