BILL ANALYSIS
Bill No: SB
503
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2009-2010 Regular Session
Staff Analysis
SB 503 Author: Kehoe
As Amended: April 20, 2009
Hearing Date: April 28, 2009
Consultant: Art Terzakis
SUBJECT
State General Obligation Bond Law: audits
DESCRIPTION
SB 503 requires the State Controller, annually, on or
before April 30 to audit certain bond projects and examine
any record that relates to the use of bond proceeds.
Specifically, this measure:
1. Requires the Controller, on or before April 30, 2010,
and on or before April 30, annually thereafter, to choose
one or more projects funded from certain bond acts to be
the subject of an audit.
2. Stipulates that, when conducting an audit, the
Controller shall audit the bond project in order to
ensure that the project is implemented in an efficient,
cost-effective, and timely way and that bond proceeds are
spent in a manner that is legal and consistent with the
provisions of the authorizing measures.
3. Provides that, based on these audits, the Controller
shall make recommendations to the Legislature and
responsible departments and agencies about how to improve
implementation of bond projects.
4. Provides that the Controller shall be given access to,
and is authorized to examine, any record of any agency,
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contractor, subcontractor, vendor, or other individual or
entity receiving, directly or indirectly, bond proceeds
if the record is related to the use of those proceeds.
5. Provides that the department or agency responsible for
the project being audited shall reimburse the Controller
for the actual cost of conducting the audit from the
proceeds of bonds allocated for administrative purposes
for that project . Also, makes it explicit that the
Controller may only use those funds allocated for the
particular project being audited and not funds allocated
for any other project.
6. Requires the Controller, by April 30 of each year, to
prepare an audit plan for the following fiscal year
specifying projects that will be subject to an audit, the
agencies to be audited and an estimated completion date
of the audits. Also, requires the Controller to assign
10 auditors to conduct these audits and permits the
Controller to hire additional auditors if necessary and
request funding for those additional positions through
the annual Budget Bill.
7. Contains a provision that addresses redundancy with
respect to existing audit functions of the Controller
(that pertain to specified provisions of the Public
Resources Code) in order to eliminate duplication and
streamline the audit process.
8. States Legislative intent that the savings to the
state, as a result of implementing recommendations from
the audits, will fully offset the costs of conducting the
audits.
EXISTING LAW
The State General Obligation Bond Law sets forth the
procedures for the issuance and sale of bonds governed by
its provisions and for the disbursal of the proceeds of the
sale of those bonds. Existing law provides for various
oversight and reporting requirements for the expenditure of
state funds, including the proceeds of bonds.
Existing law, Government Code Section 12410, states in
pertinent part, "The Controller shall audit all claims
against the state, and may audit the disbursement of any
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state money [including bond proceeds], for correctness,
legality, and for sufficient provisions of law for
payment."
The State Controller is the voter-elected chief fiscal
officer for California. Under professional government
auditing standards, the State Controller's Office (SCO) is
organizationally independent from all state agencies.
BACKGROUND
On November 7, 2006, California voters approved the five
bond measures below totaling $42.6 billion. Four of the
bond measures (Propositions 1B, 1C, 1D, and 1E) were placed
on the ballot by Governor Schwarzenegger and the
Legislature. The fifth measure, Proposition 84, qualified
for the ballot through a separate signature gathering
campaign.
Proposition Summary/Results:
1B, $19.9 billion - 61.4% in favor, 38.6% opposed
Repairs/upgrades state highways, local streets and roads
Improves seismic safety of bridges
Expands public transit
Reduces air pollution
Builds car pool lanes
Improves anti-terrorism security at shipping ports
1C, $2.85 billion - 57.8% in favor, 42.2% opposed
Provides shelters for battered women and children
Provides low-income housing for seniors
Provides homeownership assistance for the disabled,
military veterans, and working
families.
Provides accessibility improvements to apartments for
families and the disabled.
1D, $10.4 billion - 56.9% in favor, 43.1% opposed
Relieves public school overcrowding and repairs older
schools.
Improves earthquake safety and funds vocational
educational facilities in public schools.
Repairs/upgrades public college and university buildings
1E, $4.09 billion - 64.2% in favor, 35.8% opposed
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Rebuilds vulnerable flood control structures.
Protects drinking water supply system by rebuilding Delta
levees.
84, $5.39 billion - 53.8% in favor, 46.2% opposed
Provides for safe drinking water, flood control, waterway
and natural resource protection, state and local park
improvements, and water conservation efforts.
In January 2007, the Governor issued Executive Order
S-02-07 which directs government agencies that spend bond
funds to institute a three part accountability structure
that includes:
Front-End Accountability - creating a strategic
plan with performance standards for projects prior
to the expenditure of funds.
In-Progress Accountability - Documenting
ongoing actions to ensure that the projects or other
activities funded from bond proceeds remain within
the identified scope and cost. Additionally, each
department must make semi-annual reports to the
Department of Finance (DOF) to ensure that
bond-funded projects and activities are being
executed in a timely fashion and achieving their
intended purposes.
Follow-up Accountability - Auditing completed
projects to determine whether the expenditures are
in line with the goals laid out in the strategic
plan.
To enforce these requirements, the Executive Order requires
each department to submit this three-part accountability
structure to the DOF for review, which in turn is required
to approve the accountability structure prior to the
expenditure of bond proceeds. The Executive Order requires
DOF to establish a website to provide the public with
readily accessible information on how the proceeds of state
general obligation bonds and lease-revenue bonds are being
utilized.
State Treasurer Bill Lockyer and State Controller John
Chiang responded to the Governor's Executive Order on Bond
Accountability by stating, "The Governor has taken an
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important first step toward providing the accountability we
must have to keep faith with the people's trust. To finish
the job, we need independent oversight and robust citizen
participation for Californians to be certain their money is
spent with maximum efficiency and effectiveness." The
Treasurer and Controller proposed the creation of an
11-member Citizens' Bond Oversight Commission, with a
minimum of eight qualified public citizens to review and
report on all aspects of the bond expenditures and provide
independent oversight. However, no such bill was
introduced during the 2007-08 legislative Session.
The Governor's Strategic Growth Plan also has a section on
accountability which notes:
"To assure that public funds are utilized as efficiently as
possible and in a manner consistent with the stated intent
of already authorized and proposed future bond measures,
firm accountability requirements will govern the
expenditure of funds. Prior to any funding being expended
from existing or future bonds, the responsible state
agencies must develop performance and outcome measures for
each program and project that would be funded from the
bonds. Regular audits will be conducted to ensure that
funds are being allocated according to those outcome
criteria and that the implemented programs and projects did
in fact achieve the intended outcomes. It is imperative
that the public be able to access this information. The
voters have an absolute right to know how the bonds they
authorized are being spent. Therefore, outcome and
performance criteria, as well as audit results, will be
made readily available to the public."
Purpose of SB 503: As noted above, in 2006, California
voters approved five bond measurers authorizing the
issuance of $42.6 billion in bonds for various improvement
projects.
This measure is a carry-over of SB 784 (Torlakson) of last
session which was held up in the Assembly Appropriations
Committee because of cost issues. With respect to SB 784,
the Department of Finance (DOF) reported that it "would
result in substantive costs that would reduce the amount of
funds for projects supported by general obligation (GO)
bonds. Since the auditing and administrative activities
would be charged to the GO bonds supporting those projects,
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each project will need to have revised cost estimates. As
a result, projects already authorized using these GO bond
funds would need to have revised estimates and possibly
re-prioritized for future bond money."
SB 503 would authorize the Controller to assign ten
auditors to the 1B-1E bond acts of 2006 and authorize the
audit costs to be paid from the bond fund being audited.
Specifically, this measure provides that the department or
agency responsible for the project being audited shall
reimburse the SCO for the actual cost of conducting the
audit from the proceeds of bonds allocated for
administrative purposes for that project. The author's
office emphasizes that the fiscal impact would be no
additional costs, but rather an expansion of the purposes
for which administrative funds could be expended.
The SCO indicates the cost of the audit would be
predetermined with the administering agency, akin to an
interagency agreement. Disagreements with the
administering agency would be rare, as the SCO and the
administering agency would pre-agree on the amount and
ensure it was within the administration budget. The
central focus of the audit will be on the local agency
where the project occurs, not the state agency.
Writing in support of SB 503, the Controller indicates that
"the cost associated with this measure is relatively
insignificant when compared to the amount of bond
expenditures to be disbursed. Over the last four fiscal
years, the State Controller's Office has had an average
13:1 audit exception to audit cost ratio. Given the
enormous scope of funding overseen by the ten auditors,
savings are expected to yield an even higher average
exception rate."
Additionally, the author's office contends that this
proposal has an inherent sunset in that when all the bond
funds are expended, the audits will end. For some of the
bonds, 1D for example, the funds are allocated rapidly and
will be exhausted soon. In comparison, it may take some
bond funds much longer to be appropriated or allocated
though those amounts would likely be smaller.
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Also writing in support of SB 503, the California
Taxpayers' Association (Cal-Tax) indicates that "this
legislation will provide greater accountability in the use
of taxpayer money for bond projects." Additionally,
Cal-Tax states "this bill would provide necessary
oversight, giving Californians more confidence that the
bond money they have authorized is indeed going to its
intended use."
Staff Comments: SB 784 (Torlakson) of last year, grew out
of work by the Controller and the State Treasurer to
provide greater oversight over the 1B-1E infrastructure
bonds.
SB 784 proposed funding ten new auditors for the
Controller. The estimated General Fund impact was $1
million and the bill died on the Assembly Suspense File.
This new proposal (SB 503 - Kehoe) would authorize the
Controller to assign ten auditors to the 1B-1E bond acts of
2006 and authorize the audit costs to be paid from the bond
fund being audited. The fiscal impact would be no
additional costs, but rather an expansion of the purposes
for which administrative funds could be expended. In fact,
this measure contains language stating it is the intent of
the Legislature that savings to the state from implementing
recommendations made as a result of audits required by this
measure fully offset the costs of conducting the audits.
Should the auditing of bond spending fall within the aegis
of the SCO or DOF? The Director of Finance is the
Governor's chief fiscal officer. Under professional
government auditing standards, it could be argued that the
DOF is not organizationally independent from the state
agencies that are responsible for the allocation of the
bond moneys. This raises questions, at least in appearance,
as to the DOF's ability to objectively audit the work of
other state agencies also under the aegis of the Governor.
The SCO conducts audits of disbursements from the State
Treasury to ensure that State expenditures are proper,
legal, and in compliance with funding requirements. Toward
this objective, the SCO has accumulated vast experience in
conducting post-payment field audits. The State Controller
is the voter-elected chief fiscal officer for California.
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Under professional government auditing standards, the SCO
is organizationally independent from all state agencies.
Are There True Savings? Regarding the calculation of
savings, the SCO has extensive experience auditing bond
expenditures. Examples include:
Auditing Los Angeles Unified School District's $2.4
billion in Proposition BB Bonds. SCO auditors
reported that the bond projects incurred a $1.8
million deficit because of poor fiscal oversight and
excessive administrative expenses.
San Jose Unified School District Measure C Bonds.
SCO auditors found that expenditures were not
processed in accordance with the district's policy and
that some bond expenditures were found to be
inconsistent with the intent of the voters.
California Pollution Control Financing Authority's
Dairy Farm Solid Waste Disposal Pollution Control
Projects. SCO auditors found that trustee banks could
not document that project funds were used for expenses
necessary for the pollution-control projects, which
could jeopardize the tax-exempt status of private
activity bonds.
The California Conservation Corps (June 2007)
administration of Proposition 40 funds. SCO auditors
found significant control deficiencies and oversight
lapses that could easily result in misspent funds
without the CCC's knowledge.
SCO's auditors crank out more than a dozen major audits
(requiring nearly a full-year to complete) and dozens of
other audits (like those envisioned in this proposal) each
year. Based on that experience, it is generally expected
that the audit savings will more than offset the audit
costs.
PRIOR/RELATED LEGISLATION
SB 826 (Senate Committee on Governmental Organization)
2009-10 Session. Would make numerous technical changes to
the General Obligation Bond Law to clarify the way the law
applies to negotiated sales of bonds. (Pending in this
Committee)
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SB 784 (Torlakson) 2007-08 Session. Would have established
new reporting and audit provisions applicable to general
obligation bonds authorized on or after November 7, 2006,
in order to ensure maximum transparency and accountability
regarding the expenditure of bond funds. (Died on Assembly
Appropriations Suspense File)
SB 28 (Brulte) Chapter 97, Statutes of 2001. Made numerous
substantive changes to the State General
Obligation Bond Law to modernize and update the General
Obligation Bond Law.
SUPPORT: As of April 24, 2009:
California Teachers Association
State Controller's Office
OPPOSE: None on file as of April 24, 2009.
FISCAL COMMITTEE: Senate Appropriations Committee
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