AUG 2 2004 City of South Lake Tahoe*

management of the Park Avenue project. This was due to the same people serving on the city council and on the STRDA. Also, there was high turnover of these elected official and their supporting city staff. Response to Finding Disagree partially with this finding. The problems with financial management were not caused at the policy level nor did they occur because the same people serve as both the City Council and the Redevelopment Agency Board. The Redevelopment Agency has had for years a very sophisticated and complex financing program that relied heavily on outside consultants with no built in internal redevelopment financial capacity. The City had a weak internal financial accounting and reporting system in place. City Council members were not fully advised of ongoing cost increases in the project. Accounting of public costs by the component parts of a project was not well done. There were no financial policies in place requiring staff to report increases in project costs and draw down of General Fund reserves to pay for cost overruns in RDA projects. The City's outside auditors did not fully and openly report to the City Council on the cost overrun issues and draw down of reserves and highlight the significance of this occurrence to the policy makers. A strong and centralized finance function was not in place. The City Council fully supported changes in the structure and operation of finance, the re- creation of the position of Director of Finance and its reporting directly to the City Manager, the adoption of policies to prevent draw down of reserves except with their consent, the hiring of new auditors, and the requirement for full reporting by staff to them on financial issues on a regular basis. Grand Jury Finding

The financial reporting system in use in the City of South Lake Tahoe during the years in question (1999-2002) was difficult to understand. There was a lack of notification and/or control in certain situations when overspending occurred. The City Council did not receive cogent, on-going spending updates as each year progressed. Response to Finding This statement is generally correct. The accounting and reporting system were not clear cut as to the status of problems. For example, part of the deficit occurred in the fund that is used to service bond debt. The fund carries a substantial cash reserve that can only be used if there is insufficient revenue to meet bond debt service. While there was always enough revenue to meet bond payments, the Agency ran short of funding for other costs (primarily administrative costs). The point is that the bond reserves masked the true deficit picture in this fund. Funding for the Park came from ten different revenue sources. A Avenue capital projects number of these sources were grants. The funds from these grants were received on a reimbursement basis and staff assumed incorrectly that some of the deficits that were showing up in the fund were due to grants that had not yet been received. This process added another layer of tracking and in the case of the Transit Center some of the expenditures were not grant eligible. This was not determined until staff and the City's financial consultant, Mr. Fraser prepared the comprehensive review of the financing of the Project. Grand Jury Finding The financial documents that the City Council received were difficult

to understand and were not presented on regular basis. These non- user friendly financial documents contributed to a lack of financial control over the project by the city council. Response to Finding Agree, and the appropriate changes have been made. Grand Jury Finding The same auditor was used by the city for several years.

Response to Finding Agree. The City/Agency changed auditing firms effective Fiscal Year 2003- 2004. Grand Jury Finding The STRDA audit report dated 9/30/01 clearly identified a large deficit

in the fund. Nevertheless, no action was taken by staff or elected officials to memorialize the deficit in a loan agreement as required by the Cooperation Agreement. Response to Finding Partially Agree: This in part goes back to the discussion on grant funding as discussed in F2. The timing of the grant money that was spent and reimbursed should have been tracked differently in the accounting process. City staff and the City's auditors should have highlighted for elected officials the deficit and the implications of the situation. Grand Jury Recommendation Future STRDA Boards must be independent of the City Council, with