BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1035 HEARING: 6/12/13
AUTHOR: Muratsuchi FISCAL: Yes
VERSION: 5/16/13 TAX LEVY: No
CONSULTANT: Ewing
LOCAL FINANCIAL TRANSACTIONS REPORTS
Increases financial penalties for local agencies that fail
to submit annual financial reports to the State
Controller's Office.
Background and Existing Law
Since the 1940s, local agencies have been required to file
annual financial transaction reports with the State
Controller's Office (SB 1138, Fletcher, 1945). These
reports document local agencies' revenues, expenditures,
long-term indebtedness, appropriation limits, and total
annual appropriations subject to those limits. The
Controller is required to prepare and publish annual
reports on the financial transactions of cities, counties
and special districts.
Cities, counties, and special districts face financial
forfeitures if they fail to provide required reports.
Forfeiture provisions were imposed in 1949, and initially
were set at $1,000 for all local agencies (SB 1213, Hulse,
1949). Under current law, forfeitures are as follows (SB
1822, Bergeson, 1990):
Agency Annual Revenues Forfeitures
$100,000 or less $1,000
$100,000 - $250,000 $2,500
$500,000 or more $5,000
Local agencies established under the Joint Exercise of
Powers Act and which issue conduit revenue bonds, are
subject to the same reporting and forfeiture rules.
However, forfeiture levels double for these agencies if
they fail to file annual reports for two consecutive years.
A third or more consecutive year of missed filings results
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in triple forfeiture levels and triggers a mandatory
independent financial audit, overseen by the State
Controller, with the costs paid for by the local agency.
If a city, county, or special district fails to file a
report, or if the State Controller has reasons to believe
that a report is false, incomplete or incorrect, the
Controller is authorized to appoint a qualified accountant
to investigate and obtain the information required under
the law (SB 1138, Fletcher, 1945). The costs incurred in
compiling that information shall be paid by the local
agency, and can offset any required financial forfeiture
(AB 2530, Levine, 2004).
State law authorizes the Attorney General, on behalf of the
State Controller, to prosecute an action for a forfeiture.
State law authorizes the State Controller to waive
forfeiture requirements upon showing of good cause for
failure to file reports (AB 867, Nakano, 2003).
State law also authorizes the State Controller to appoint
an advisory committee, consisting of seven local
governmental officers, to provide assistance in developing
complete and adequate records (SB 1213, Hulse, 1949).
Some public officials are concerned that the forfeiture
structure for local agencies that fail to file financial
reports is inadequate to secure compliance.
Proposed Law
Assembly Bill 1035 would increase forfeiture rates for
cities, counties, special districts, and specified Joint
Powers Agencies that fail to file mandatory annual
financial transaction reports, as follows:
Agency Annual Revenues Forfeitures
$100,000 or less $2,500
$100,000 - $250,000 $5,500
$500,000 or more $10,000
For cities, counties and special districts, AB 1035 would
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double forfeitures for agencies that fail to file reports
for two consecutive years, and triple penalties and trigger
an audit, for failure to file for three or more consecutive
years.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Assembly Bill 1035 would increase
financial incentives for local agencies to submit required
financial transaction reports to the State Controller's
Office. Existing penalties have not been increased since
1990. Enhancing local agency reporting on financial
transactions will improve the ability of the state, and the
public, to understand the fiscal conditions of local
agencies and improve public accountability.
2. Right tool for the job . The State Controller's Office
reports that in recent years compliance rates for local
agency reporting have improved. Better communication and
outreach to local agencies has reduced the number of
agencies that fail to file. For the 2010-11 fiscal year,
98 percent of cities, 99 percent of special districts, and
100 percent of counties submitted required financial
transaction reports. Failure to file reports can be linked
to various challenges, including bankruptcies, staffing
limitations and technical challenges. In some instances,
particularly for the smallest special districts, staff may
lack technical expertise to comply with reporting
requirements. Considering why local agencies fail to file
suggests that increasing financial penalties is unlikely to
improve reporting and may further hinder the functioning of
local agencies facing financial constraints.
3. Discretion . AB 1035 requires an independent audit of
local agencies that fail to file financial reports for
three or more consecutive years. The bill restates current
law authorizing the Controller to waive forfeiture
requirements where there is good cause for failure to file.
The Controller was granted discretion in 2003 (AB 867,
Nakano) in recognition that there may be justifiable
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reasons for failure to file. The Committee may wish to
consider amendments that would extend the Controller's
discretion to the audit requirement as well as the
forfeiture requirement.
4. Related legislation . AB 1035 is not the only bill that
would address local agencies' financial transaction
reporting:
AB 941 (Rendon), among other provisions, increases
forfeiture levels for local agencies that fail to file
required financial transaction reports. The bill is in
Assembly Appropriations.
AB 1237 (Garcia) establishes the Committee on City
Accounting Procedures and requires the State
Controller, in consultation with the Committee, to
prescribe uniform accounting and reporting procedures
for cities. The bill is in Assembly Local Government.
SB 449 (Pavley, 2011) authorizes the Controller to
review the finances of cities, counties, special
districts, and redevelopment agencies, and convene a
local agency financial review committee to provide
assistance to local agencies that seek help in averting
or managing a financial problem. SB 449 died in the
Assembly Local Government Committee.
AB 253 (Smyth, 2011) requires the Controller, in
collaboration with the Committee on City Accounting
Procedures, to prescribe for cities, uniform accounting
and reporting procedures conforming to Generally
Accepted Accounting Principles. AB 253 died in Senate
Governance and Finance.
SB 186 (Kehoe, 2011) authorized the Controller to
conduct an audit or investigation of local agencies
that do not complying with the financial requirements
of state law, state grant agreements, local charters or
local ordinances. The bill died in Assembly Local
Government.
Assembly Actions
Assembly Local Government 8-0
Assembly Appropriations 16-1
AB 1035 -- 5/16/13 -- Page 5
Assembly Floor 69-5
Support and Opposition (6/6/13)
Support : California Professional Firefighters.
Opposition : Unknown.