BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
503 (Kehoe)
Hearing Date: 1/21/2010 Amended: 1/12/2010
Consultant: Bob Franzoia Policy Vote: G O 8-4
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BILL SUMMARY: SB 503 would require the State Controller's Office
(SCO) select one or more projects funded from any state general
obligation bond act approved after January 1, 2010 to be the
subject of an audit. This bill would require any entity that is
to be audited, prior to contracting with the SCO for an audit,
to determine it is able to pay the estimated cost of the audit
from bond proceeds. The SCO would be prohibited from conducting
the audit if those proceeds are not available. The SCO shall
assign up to five auditor positions to conduct the audits.
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Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
General obligation bond $0 $0
Up to $350 Bond*
audits
* From bonds approved after January 1, 2010.
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STAFF COMMENTS: SUSPENSE FILE.
This bill 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 SCO
indicates the cost of the audit would be predetermined with the
administering agency, similar to an interagency agreement.
Disagreements with the administering agency should be unusual,
as the SCO and the administering agency would pre-agree on the
audit scope and amount, ensuring the audit is within the
administration budget. The central focus of the audit would be
on the local agency where the project occurs, not the state
agency.
The SCO's role in bond oversight was the subject of recent
Little Hoover Commission report. In a June 2009 report
entitled, Bond Spending: Expanding and Enhancing Oversight, the
Commission, in commenting on the cost of bond audits, noted
that, "in the current fiscal climate, a more prudent
recommendation is to expand the auditing staff in the State
Controller's Office and pay for this expansion with the portion
of the bond money set aside for administration" (page 29).
The fiscal impact of this bill on bond funds depends in part on
the manner in which the SCO initiates an audit. When a
department or agency uses all of its allocation of funds for
administration, no audit would be arranged.
When a department or agency would not otherwise expend all five
percent of its administrative set aside, this bill would result
in a potential reduction of funds, the
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SB 503 (Kehoe)
amount of the audit, for purposes set forth in the bond
programs. This is because all unused administrative funds are
directed to those programs. All savings identified by an audit
would result in a potential increase of funds for those
programs.
When an audit of an ongoing project identifies misspent funds
and disallowable costs, other projects should benefit from those
public findings.
There is significant variance in how audit costs are calculated.
An "upper end" estimate of time and cost for one audit of the
type proposed by the bill would be 600 hours (4 months) and
$50,000 (including expenses). At the lower end, audit costs
will likely range from $20,000 to $25,000. In general, an audit
costing $50,000 would likely show more savings as the auditor is
on the project longer and identifying more savings or cost
avoidance. Using an average of the range, or $35,000, the SCO
has estimated a full year cost of up to $350,000. This would
fund four Associate Management Auditor positions at an average
cost of $252,000, one Senior Management Auditor at an average
cost of $76,000 and support and equipment costs of $22,000.
An estimate of the SCO completing 10 to 15 audits annually is
based on local agency, project-level audits, not at the state
administrator level. For comparison, Caltrans has an
interagency agreement with the SCO for 12 full-time auditors
annually to work on Proposition 1B (2006) bond oversight.
Historically, for each audit dollar, also referred to as the
audit exception rate, the SCO has identified $12 of savings or
avoided costs. Thus, five auditors, at an annual cost of up to
$350,000 should identify savings or avoided costs of $4,200,000
decreasing annually as bond funds are encumbered. If ten
percent of this estimated savings is realized, all costs would
be offset by savings or avoided costs.