BOARD MEETING DATE: August 1, 2003
AGENDA NO. 17

Audit Report of AB 2766 Fee Revenue Recipients for FYs Ending June 30, 2000 and 2001, and Set Public Hearing September 5, 2003 Regarding Final Resolution of Unresolved Audit Findings and Recommendations

SYNOPSIS:

Health and Safety Code Section 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.

COMMITTEE:

Administrative, July 18, 2003, Recommended for Approval

RECOMMENDED ACTIONS:

1. Receive and file report.
    
2. Approved Revised Audit Program Guidelines.
    
3. Set Public Hearing September 5, 2003 regarding final resolution of unresolved audit findings and recommendations.

Barry R. Wallerstein, D.Env.
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 the Health and Safety Code Part 3, Chapter 5.5, Article 5.

The fee revenue is collected by the Department of Motor Vehicles as a registration surcharge of $4 per vehicle, and subvened to the AQMD for distribution as follows: from every one dollar, thirty cents (30 percent) goes to support AQMD-approved programs for the reduction of emissions from mobile sources; forty cents (40 percent) is placed in the Air Quality Improvement Trust Fund for quarterly disbursement to local governments; and thirty cents (30 percent) 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.

AQMD’s portion of the revenue subvened from the Department of Motor Vehicles is classified as general fund revenue and 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 fifth biennial audit of AB 2766 revenues. The audit covered the AQMD’s use of the money, projects funded by the MSRC, and the use by selected local governments of the fee revenues. The audits were based on the audit guidelines described below.

To assist local government compliance with the audit requirements of the law, in December 1992, the AQMD developed audit program guidelines for local government fee recipients. 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 provided to the local governments for their 30% share, 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
   
• Submitting 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
   
• Submitting to an audit of grants 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 sample of 10% of participants will be selected for an audit by an independent auditor selected by the AQMD. In September 2002, the AQMD Board approved an award for the performance of the audit to the firm of Simpson & Simpson, Certified Public Accountants.

In accordance with Section 44244.1 of the Health and Safety Code if, after reviewing the audit, the AQMD determines that the revenues from the fees have been expended in a manner which is contrary to the Health and Safety Code or which will not result in the reduction of air pollution from motor vehicles, 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 revenues from the fees in a manner contrary to the Health and Safety Code or which will not result in reduction of air pollution from motor vehicles, 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 upon approval of the AQMD Board, to entities specified in the work programs developed by the MSRC.

Audit Summary

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 no findings. The audit report is included in Attachment I. The cost of auditing the AQMD’s use of the AB 2766 revenues was $2,500, paid from the AQMD’s portion of the fee revenues.

Local Government Use of AB 2766 Fee Revenues – Segment 2
Over $33 million was distributed to local jurisdictions during the two-year audit period (FYs 1999-00 and 2000-01). There were a total of 153 cities and 4 counties receiving subvention funds from motor vehicle registration fees.

• Of these, 37 local governments in FY 1999-00 and 38 in FY 2000-01 received over $100,000 annually (large recipients). Thirty-three (33) large recipients were in compliance with audit guidelines in FY 1999-00 and thirty-two (32) in FY 2000-01. Simpson & Simpson performed a desk review of all compliant large recipients. A full audit was conducted for all large recipients not in compliance with the audit guidelines. Please note that one compliant recipient elected to meet their financial reporting requirements by agreeing to have the independent audit firm selected by the AQMD conduct an audit of their AB 2766 grants receipts and expenditures for both FYs.
   
• There were 120 small recipients in FY 1999-00 and 119 in FY 2000-01. Of these, 105 were in compliance in FY 1999-00 and 100 were in compliance in FY 2000-01. From this compliant pool, 20 cities were selected to be audited. There were 15 noncompliant small local governments in FY 1999-00 and 19 in 2000-01. These were audited in addition to the pool cities.

Audits were performed on a total of 57 local government recipients; 16 cities had no audit findings. Of the 41 cities with findings, there were a total of 87 findings noted. A desk review was completed for 32 large recipients in FY 1999-00 and 31 large recipients in FY 2000-01, which resulted in 3 findings. The summary report of audit findings resulting from the desk review of large recipients is included in Attachment II. A summary of audit findings for all local governments is provided in Attachment III.

Of the total 90 findings, to date, 62 are resolved, and 28 are pending resolution. Noncompliance items include: administrative costs in excess of the five percent cap (7 findings - $80,197); unallowable expenditures (3 findings - $12,442); unsupported expenditures (3 findings - $22,434); annual audited financial statements not submitted or submitted untimely (35 findings - $0); late submission of progress reports (28 findings - $0); salary allocation not supported by timecards (6 findings - $51,399); interest earnings not allocated (2 findings - $5,903); inappropriate use of fund (1 finding - $2,481); improper allocation of indirect costs (1 finding - $3,360); and did not maintain schedule of fixed assets (4 findings - $0).

Local governments are permitted to pool their resources for implementing the requirements for the use of AB 2766 funds. The following three entities were in existence during FYs 1999-00 and 2000-01 and were also audited:

• San Gabriel Valley Council of Governments (includes 27 cities in the San Gabriel Valley)
   
• Coachella Valley Association of Governments (CVAG) (includes the cities of Cathedral City, Coachella, Desert Hot Springs, Indian Wells, Indio, La Quinta, Palm Desert, Palm Springs, and Rancho Mirage)
   
• Southeast Los Angeles County (SELAC) also known as Gateway Cities (includes 26 cities in South East Los Angeles)

All of the entities audited were found to be in full compliance with all AB 2766 requirements.

Local governments were provided with draft audit reports by the audit firm with a request to respond with clarifications and additional information. Their responses are included in the reports. Staff has forwarded a copy of the final report to the affected local governments and is currently working with cities and counties to provide resolution of issues.

Unresolved issues, if any, and a summation of the audit findings and recommendations will be brought to the Board at its September 5, 2003 meeting. At that time, the AQMD Board will conduct a public hearing for unresolved issues on whether the moneys were properly spent and determine whether to withhold the funds.

The total cost to audit the local government recipients was $55,800. The cost of the audit of the pool cities was prorated among all the cities in the compliant pool. In addition, the cost of the non-compliant local governments 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 to 36 projects in FY 1999-00 and 26 projects in FY 2000-01, for a total amount of $32,429,403.

For the discretionary portion of the funds, the scope of the audit included projects randomly selected from the Work Program awarded by the MSRC in FYs 1999-00 and 2000-01. The auditors have issued two summary reports (Attachment IV).

The audits of the randomly selected projects from the MSRC work program resulted in one finding, which has been resolved. The non-compliance item was for insufficient documentation of costs. The MSRC reviewed the summary audit report at its meeting on July 24, 2003. The $6,000 cost of auditing MSRC recipients will be deducted from the fee revenues subvened to the MSRC in FY 2002-2003.

Audit Program

The audit program has been revised to clarify program requirements that are included in the Resource Guide but were not addressed in the previous version of the audit program guidance. These include the requirements that 1) interest earned on cash balances of AB 2766 funds must be deposited in the local governments Air Quality Improvement Trust Fund (AQITF); 2) administrative costs are limited to 5% of fees subvened to the local government during a fiscal year (July-June) and documentation of hourly charges must be supported by either time sheets or any other generally accepted mechanism to allocate/document staff time; 3) direct program costs must be supported by source documentation and direct labor hours must be documented on timesheets; and 4) progress and financial reporting requirements were changed from December 1^st to the first Friday in February. In addition, based on responses from local governments, the audited financial reports due date has been extended to April 1^st.

Attachments

1. AQMD’s Use of AB 2766 Fee Revenues – Segment 1
2. Local Government Use of AB 2766 Fee Revenues Summary Audit Reports – Segment 2 -Subgroup 1 (Desk Review of Large Recipients)
3. Summary of Audit Findings for Local Governments
4. MSRC’s Use of AB 2766 Fee Revenues Summary Audit Report – Segment 3 and Segment 3 – Projects
5. Revised Audit Program Guidelines

Due to the large number of audit reports, Attachment III is a summary report. The detailed audit reports for each local government recipient and MSRC audited contracts are available for review at the AQMD’s library.

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