REPORT:

Audit Report of AB 2766 Fee Revenue Recipients for
FYs Ending June 30, 1994 and 1995, and
Set Public Hearing July 11, 1997 Regarding Final Resolution of
Unresolved Audit Findings and Recommendations

SYNOPSIS:

Health and Safety Code 44244.1 requires any agency that receives fee revenues subvened from the Department of Motor Vehicles to be audited once every two years. This audit of AQMD’s share, MSRC’s share, and local governments’ share of such subvened funds, performed by independent Certified Public Accountants, has been completed and makes certain recommendations for improvement in some areas.

COMMITTEE:

Administrative, May 23, 1997, Recommended for Approval

RECOMMENDED ACTION:

1. Receive and file report

2. Set Public Hearing July 11, 1997 regarding final resolution of unresolved audit findings and recommendations.

James M. Lents, Ph.D.
Executive Officer

Background

AB 2766 was chaptered into law as Health and Safety Code Sections 44220-44247 which were enacted to authorize air pollution control districts to impose fees on motor vehicles. These fees are to be expended specifically for the purpose of mobile source air pollution reduction measures pursuant to the California Clean Air Act of 1988 or the AQMD's AQMP pursuant to Article 5 of Chapter 5.5 of Part 3 of the Health and Safety Code.

The fee revenue is collected by the Department of Motor Vehicles and subvened to the AQMD for distribution as follows: from every one dollar, thirty cents (30%) goes to support AQMD-approved programs for the reduction of emissions from mobile sources; forty cents (40%) is placed in the Air Quality Improvement Trust Fund for quarterly disbursement to local governments; and thirty cents (30%) is placed in the Mobile Source Air Pollution Reduction Trust Fund for projects awarded by the Mobile Source Air Pollution Reduction Review Committee (MSRC) under a work program approved by the AQMD's Board.

Motor vehicle registration revenues received by the AQMD are classified as general fund revenue and are utilized to fund the mobile-related components of AQMD programs. Fees subvened to local governments are utilized to fund mobile source emission reduction programs. Fees allocated to the MSRC are used to fund projects pursuant to a work program developed and adopted by the MSRC and approved by the AQMD Board. The funding mechanism for MSRC projects is a contractual agreement between the AQMD and the entity implementing the project and includes the audit requirements stated under AB 2766.

AB 2766 Audit Requirement

Health and Safety Code Section 44244.1 states that any agency receiving fee revenues shall, at least once every two years, be subject to an audit of each program or project funded. The audit is to be conducted by an independent auditor selected by the AQMD through a competitive bid process. Based on an opinion issued by the Attorney General of the State of California the audit is to report on the propriety of expenditures made under AB 2766--not their efficacy in reducing air pollution.

This is the second biennial audit of AB 2766 revenues. The audit covered the AQMD's use of the money, projects funded by the MSRC, and the use of fee revenues by selected local governments based on the audit guidelines described below.

To assist local government compliance with the audit requirements of the law the AQMD developed audit program guidelines for local government fee recipients in December 1992. The guidelines were prepared in consultation with the Technical Advisory Committee (TAC) Audit Subcommittee of the AQMD’s Interagency AQMP Implementation Committee (IAIC). The elements of the audit program were reviewed with representatives of the Finance Committee of the California League of Cities and with Certified Public Accountants whose clients include local governments. The final audit program guidelines were approved by the AQMD Board on December 4, 1992 and updated with additional clarifications on January 13, 1995.

In accordance with the audit program guidelines, local governments are to submit an annual financial report and progress report to the AQMD. The financial reporting requirements are stratified based upon the annual dollar amount of revenues received. Large recipients (annual receipts more than $100,000) may elect to meet the financial reporting requirement by:

• Separately disclosing the financial results of AB 2766 revenue receipts and submitting an audited general purpose financial statement, a report on internal controls, and a report on compliance with AB 2766 laws and regulations. or

• Submit an audited Grants Receipts and Expenditures Statement along with a Report on Internal Controls and Report on Compliance with AB 2766 laws and regulations, or

• Submit to an audit of grant receipts and expenditures by a firm selected by the AQMD.

For small recipients (annual receipts of less than $100,000) the financial report shall consist of their audited general purpose financial statement. Small recipients that submit annual audited financial statements shall form a pool from which, once every two years, a random sample of 10% of participants will be selected for an audit by an independent auditor selected by the AQMD.

In June 1996, the AQMD Board approved an RFP to conduct the biennial audit of motor vehicle registration revenue fee recipients for FYs 1993-94 and 1994-95. In September 1996, the AQMD Board approved an award for the performance of the audit to the CPA firm of Thompson, Cobb, Bazilio, and Associates. The final audit reports for all three audit segments (AQMD, Local Government, MSRC) is attached as Attachment B. A summary description of the results of the audit of each segment is given in Attachment A.

In accordance with Section 44244.1 of the Health and Safety Code if, after reviewing the audit, the AQMD determines that the moneys were not expended for the reduction of emissions from mobile sources, it shall do all of the following:

1. Notify the agency of its determination.

2. Hold a public hearing within 45 days of the notification to allow the affected agency to present information related to the expenditure of the revenues from fees.

3. After the public hearing if it is determined that the agency has expended the moneys contrary to AB 2766 or the expenditure will not result in reduction of air pollution from motor vehicles pursuant to the California Clean Air Act or the AQMP, the AQMD shall withhold these revenues from the agency in an amount equal to the amount which was inappropriately expended. Revenues withheld shall be redistributed to the other agencies or with approval of the AQMD Board to entities specified in the work program developed by the MSRC.

Findings

AQMD’s Use of AB 2766 Fee Revenues - Segment 1

The audit of the AQMD's use of the motor vehicle registration revenues resulted in two findings. The findings relate to the allocation of interest in FY 1993-94 and weakness in timecard handling and payroll processing procedures. A summary description of the findings is included in Attachment A, Segment 1. Staff has instituted corrective measures to resolve the findings to the satisfaction of the auditors. The audit report is included as Attachment B. The cost of auditing the AQMD’s use of AB 2766 revenues was $5,610 and has been paid from the AQMD’s portion of the fee revenues.

Local Government Use of AB 2766 Fee Revenues - Segment 2

There are a total of 153 cities and 4 counties receiving subvention funds from motor vehicle registration fees. There were a total of 34 local governments receiving more than $100,000 annually (large recipients) in FY 1993-94. The number of large recipients increased to 35 in FY 1994-95. Of these, 27 local governments submitted audited financial statements to the AQMD for FY 1993-94 and 28 local governments did the same for FY 1994-95. Seven large local government recipients opted to be audited by the AQMD selected auditor for each of the two years. There were 123 small recipients in FY 1993-94 and 122 in FY 1994-95, i.e., cities that receive less than $100,000 each year. Of these, for FY 1993-94, 120 cities were in compliance with the audit guidelines established by the Board and 117 cities were in compliance for FY 1994-95. From this compliant pool 24 cities (10% of the cities for each year) were audited. Three noncompliant cities from FY 1993-94 and five noncompliant cities from FY 1994-95 were also audited. A total of 39 local governments were audited for the two-year period.

In addition, local governments are permitted to pool their resources for implementing the requirements for the use of AB 2766 funds through joint powers agreements (JPAs). The following six JPAs were in existence during FYs 1993-94 and 1994-95 and were included in the audit:

• I-5 Consortium Cities Joint Powers Authority (includes cities of Buena Park, Downey, Norwalk, Commerce, La Mirada, and Santa Fe Springs)

• East San Gabriel Valley Integrated Waste Management Joint Powers Authority Air Quality Group (includes 16 cities in the Eastern San Gabriel Valley)

• San Gabriel Valley Council of Governments (includes 28 cities in the San Gabriel Valley)

• Coachella Valley Association of Governments. (includes the County of Riverside and the cities of Cathedral City, Coachella, Desert Hot Springs, Indian Wells, Indio, La Quinta, Palm Desert, Palm Springs, and Rancho Mirage.)

• SELAC Teleconferencing Project (includes 26 cities in south East Los Angeles)

• Southeast Community Development Corporation (includes the cities of Bell, Bell Gardens, Commerce, Huntington Park, South Gate, Maywood, and Vernon)

Over $31.4 million dollars were distributed to local jurisdictions in FYs 1993-94 and 1994-95. Of this sum, instances of noncompliance total $1,244,556. Of the total, over $1 million results from the purchase of diesel buses by the County of Los Angeles. Noncompliance items include administrative cost expenditures in excess of 5%, absence of or unreasonable allocation of interest, insufficient documentation of costs, unallowable costs, and noncompliance with reporting requirements. A summary list of findings is included in Attachment A, Segment 2. A total of 47 detailed reports on the audit of this segment are included in Attachment B. They consist of one overall segment report, one review report summarizing the audit findings in the financial and compliance reports submitted by large recipients, and an individual report for 39 individual cities and counties and 6 JPAs.

Local governments were provided with draft audit reports by the audit firm with a request to respond with clarifications and additional information. Several cities disagreed with the findings. Their responses are included in the report. Staff has forwarded a copy of the final report to the audited local governments and is currently working with cities and counties to provide further resolution of issues. Unresolved issues and a summation of the audit findings and recommendations will be brought to the Board at its July 11, 1997 meeting. At that time, the AQMD Board will conduct a hearing on whether the moneys were properly spent and determine whether to withhold the funds. The total cost to audit the Local Government recipients was $44,060. The cost of the audit of the pool cities will be prorated among all the cities in the compliant pool. The cost of the balance of the audits will be borne by the agency being audited.

MSRC’s Use of AB 2766 Fee Revenues - Segment 3

As part of the annual work program, the MSRC awarded funding for 50 projects in FY 1993-94 and 28 projects in FY 1994-95. Additional moneys in a total amount of $4,250,000 were allocated to the four south coast transportation commissions primarily for use as matching dollars for projects funded through the ISTEA Surface Transportation Program (STP). For the Discretionary portion of the funds, the scope of the audit included 16 projects randomly selected from the Work Program awarded by the MSRC in the FYs 1993-94 and 1994-95 and the four transportation commission recipients in FY 1993-94. A total of six reports have been issued by the auditors. They consist of one summary report for the entire program funded by the MSRC, one detailed report for each of the four Transportation Commissions and one report covering the audit of all sixteen projects. A copy of each of these reports is enclosed in Attachment B. A summary description of the findings is included in Attachment A, Segment 3.

The audits of the randomly selected projects from the MSRC work program resulted in no findings. The audits of the Transportation Commissions resulted in five findings. The responsible agencies in the first three findings have agreed to corrective measures. Staff recommendation for the resolution of the balance of findings is listed in Attachment A, Segment 3. The MSRC reviewed the audit findings and staff recommendations at its meeting on April 24, 1997 and concurs. The cost of auditing MSRC recipients in the amount of $20,700 will be deducted from the fee revenues subvened to the MSRC in FY 1996-97.

In addition to audit reports prepared for each recipient or recipients of AB 2766 moneys the auditors have prepared a management letter communicating their observations and recommendations for improvements in operations and control mechanisms that are applicable to the overall operation of each of the three segments of the fee revenues. In addition to a summation of the recommended actions included in each audit report they state that for Segment 2, Local Government Use of AB 2766 revenues, the instances of noncompliance with AB 2766 provisions are a result of program requirements being unclear to local government officials. Areas of concern include (1) the 5% limit on administrative cost, (2) the allocation of interest to AB 2766 funds, (3) supporting documentation for direct program costs, (4) allowable uses for AB 2766 funds, and (5) the pooling of AB 2766 funds in consortiums created by joint powers agreement. The audit recommends that centralized, detailed program guidance in the form of a handbook or guidelines is necessary to improve consistency in the administration and use of AB 2766 funds by local government recipients. They conclude that such guidance would also enhance consistency in the AQMD’s oversight of the program.

Attachments

A - Summary of audit findings
B - Audit reports (Due to the large number of audit reports, Attachment B is provided to Board members only. A copy of this attachment is available for review at the AQMD’s Library).

AQMD’s Use of AB 2766 Fee Revenues - Segment 1

The audit report on the AQMD’s use of the fee revenues is included as Attachment B. A summary description of the findings is given below:

1. AQMD did not allocate interest to AB 2766 funds during FY 1993-94.

Response: AQMD began allocating interest to the AB 2766 revenue account in the General Fund beginning July 1, 1994. This was the result of an audit recommendation from the first biennial audit that interest earnings be allocated to AB 2766 fee revenues by all recipients. No action is required to retroactively reimburse the account for FY 1993-94 interest due to the fact that for FYs 1994-95 and 1995-96 program expenditures exceeded revenues and accumulated interest in an amount greater than the accumulated interest for FY 1993-94. The excess of expenditures over revenue was paid by unrestricted General Fund moneys. Therefore, the recognition of FY 1993-94 AB 2766 interest during the current year as a prior year adjustment would have no effect on the amount of available AB 2766 funding.

2. Weakness in the timekeeping and payroll processing functions.

Response: Staff has instituted corrective measures to address the weakness noted regarding payroll processing procedures not being detailed in one comprehensive manual; second level supervisory approval of timesheets was not consistently received prior to payroll processing; and rotation of payroll processing functions were not based on a formal schedule.

Local Government’s use of AB 2766 Fee Revenues - Segment 2

The following is a list of findings for Segment 2 grouped by categories:

In addition to the above, 28 local governments opted to submit an annual financial statement audited by the city/county’s own independent auditor. The various reports were reviewed by the AQMD-selected auditor and the findings summarized in a separate report. A summary list is included below:

MSRC’S Use of AB 2766 Fee Revenues - Segment 3 -
The audits of the randomly selected projects from the MSRC work program resulted in no findings. The audits of the Transportation Commissions resulted in the following findings.

Transportation Commissions

    * RCTC (Riverside County Transportation Commission)
  ** OCTA (Orange County Transportation Commission)
*** LAMTA (Los Angeles County Metropolitan Transportation Authority)

The responsible agencies in the first finding have agreed to corrective measures. Item 2 relates to the recording of receipts and expenditures by LAMTA. The auditors recommend that AQMD ensure that LAMTA adjust accounting records to address the problem. LAMTA officials responded that the proposed accounting entry in the current fiscal year would not retroactively accomplish the desired effect of a clear segregation of revenues and expenditures.

Staff recommendation: Since the auditors were able to verify expenditures in the amount of revenues received by the LAMTA, staff recommends that no further action be taken on the finding. Staff also recommends that future disbursements of this nature clearly stipulate a segregation of receipts and expenditures for audit verification.

Item 3 relates to the allocation of $40,000 by RCTC to Sunline Transit to purchase four CNG-powered shuttle vehicles to replace gasoline-powered shuttle vehicles used in the agency’s Dial-A-Ride service. Sunline Transit substituted gasoline vehicles for the CNG-powered vehicles specified in the contract and is in the process of converting these gasoline vehicles to CNG-powered vehicles. The auditors recommend the AQMD determine if the deviation from contract provisions is deemed acceptable.

Staff recommendation: RCTC officials have stated that CNG-powered shuttle vehicles were not available at the time of contract implementation. RCTC has provided documentation showing that Sunline Transit is in the process of converting the gasoline vehicles to CNG-powered vehicles. Since CNG vehicles were not available at the time of contract inception, and since the subsequent conversion satisfies the intent of the contract in terms of reducing emissions from motor vehicles, staff recommends that no further action be taken on this finding.

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