BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 186 HEARING: 3/16/11
AUTHOR: Kehoe & DeSaulnier FISCAL: Yes
VERSION: 3/10/11 TAX LEVY: No
CONSULTANT: Weinberger
STATE CONTROLLER'S AUDITS OF LOCAL AGENCIES
Expands the State Controller's authority to perform audits
or investigations of counties, cities, special districts,
joint powers agencies, and redevelopment agencies.
Background and Existing Law
The State Controller oversees the fiscal concerns of the
state and may audit the disbursement of any state money for
correctness, legality, and for sufficient provisions of law
for payment. The Controller can audit state expenditures
made to local governments, including counties, cities,
special districts, joint powers authorities, and
redevelopment agencies. The Controller may audit federal
funds allocated to local governments by the state.
The State Controller must compile and publish reports of
the financial transactions of local governments, including
counties, cities, special districts, joint powers
authorities, and redevelopment agencies. If the reports
are not made in the time, form, and manner required, or if
there is reason to believe that a report is false,
incomplete, or incorrect, the Controller must appoint a
qualified accountant to make an investigation and to obtain
the information required. The accountant must report the
results of the investigation to the Controller and file a
copy of the report with the legislative body of the county,
city, or district in which the accountant conducted the
investigation. The local government must pay for the
Controller's costs, which are a charge against any
unencumbered funds of the local government.
The Bureau of State Audits, under the direction of the
State Auditor, performs financial, compliance, performance,
and contract audits of local governments, either as
required by statute or as requested by the Joint
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Legislative Audit Committee (JLAC). JLAC is composed of
seven Assemblymembers and seven Senators and requires the
votes of four members from each house to approve audit
requests.
The effects of the recent recession and revelations about
fiscal malfeasance in the City of Bell are generating
demands for greater scrutiny of local governments'
financial practices. In response, the State Controller
wants broader authority to audit those aspects of local
government finances which are beyond those related to state
expenditures or to annual financial transactions reports.
Proposed Law
Senate Bill 186 authorizes the Controller, at his or her
discretion, to perform an
audit or investigation of any county, city, special
district, joint powers authority, or redevelopment agency,
if there is reason to believe that the local government is
not complying with financial requirements in state law,
grant agreements, or local ordinances.
SB 186 requires the Controller to prepare a report of the
results of the audit or investigation and file a copy of
the report with the legislative body of the county, city,
special district, joint powers authority, or redevelopment
agency, the accounts of which were audited or investigated.
The Controller must communicate any indication of illegal
acts, or fraud to appropriate authorities, including the
county grand jury.
The county, city, special district, joint powers authority,
or redevelopment agency must bear the costs of the
Controller's audit or investigation. The reimbursements
collected must, upon appropriation to the Controller, be
available to offset the Controller's enforcement costs.
State Revenue Impact
No estimate.
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Comments
1. Purpose of the bill . In the wake of last year's
revelations about extensive misconduct by public officials
in the City of Bell, the State Controller's Office received
numerous complaints of fiscal mismanagement and financial
distress in other local governments. However, the
Controller's statutory authority to conduct local
government audits extends only to state expenditures or to
information compiled in local governments' financial
transactions reports. In conducting audits that identified
millions of dollars in illegally levied taxes, fees, and
assessments, excessive employee compensation, unlawful
contracting practices, and other abusive expenditures of
taxpayer dollars in the City of Bell, the Controller relied
on the cooperation of city officials and staff. Without
that cooperation, current law would have severely limited
the Controller's ability to produce such comprehensive and
detailed audit findings. Audits provide government
officials and the public with objective assessments of the
cost, management, and performance of government policies,
programs, and operations. By expanding the State
Controller's independent authority to audit local
governments' finances and internal controls, SB 186 will
help restore the public's trust in government by making
government officials more accountable for how they use
public resources.
2. Too broad ? SB 186 gives the Controller broad
discretion to conduct audits if there is "reason to
believe" that a local government is violating financial
requirements in state law, grant agreements, or local
ordinances. The bill provides no criteria by which to
judge whether there is reason to believe that violations
are occurring. Under current law, if there is reason to
believe that a local government's financial transactions
report is false, incomplete, or incorrect, the Controller
can investigate to obtain the necessary information.
However, because SB 186's audit authority is more
extensive, there is more potential for it to be misused by
an unscrupulous Controller. For example, an anonymous
phone call or unsubstantiated allegation published in a
newspaper might be enough to justify a local government
audit that targets a political rival. The Committee may
wish to consider amending SB 186 to require that the
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Controller possess documentation that results in a reason
to believe that a local government is violating specified
financial requirements.
3. Unnecessary ? The Bureau of State Audits (BSA) can
audit state and local entities as required by statute or as
requested by the Joint Legislative Audit Committee (JLAC).
At JLACs' request, BSA has conducted a number of local
government audits in recent years, including audits of:
Local government grants from the Indian Gaming
Special Distribution Fund.
A community facilities district created by the San
Dieguito Union High School District.
Local governments' use of temporary workers.
The Santa Clara Valley Transportation Authority.
JLAC members discuss and vote on proposed audit requests in
public hearings. Audit requests need approval by at least
four members of both the Assembly and Senate who are
members of JLAC. By contrast, SB 186 allows a single
elected state officer to decide to audit a local government
without any advance notice or public deliberation. Because
state law already empowers BSA to conduct financial,
performance, or contract audits of local governments after
JLAC completes a transparent audit request process, the
Committee may wish to consider whether granting similar
discretionary audit authority to the State Controller is
necessary.
4. Picking up the tab . SB 186 makes a local government
that is subject to a Controller's audit responsible for
reimbursing the Controller's costs. The Committee may wish
to consider whether it makes sense to impose audit costs on
local governments that may, depending upon an audit's
findings, be confronting significant fiscal problems. The
Committee may also wish to consider whether amending SB 186
to require that the Controller bear the costs of
discretionary local government audits would create an
incentive for such audits to be judiciously targeted and
efficiently conducted.
5. Charters too . SB 186 lets the Controller audit local
governments' compliance with financial requirements in
state law, grant agreements, and local ordinances. In some
counties and cities, voter-approved charters contain
provisions that control contracting, officials'
compensation, and other matters related to a local
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government's finances. The Committee may wish to consider
amending SB 186 to clarify that a local government's
failure to comply with the financial requirements of a
local charter can trigger a Controller's audit.
6. Related legislation . The scandals in the City of Bell
have inspired numerous legislative proposals to improve
state fiscal monitoring and auditing of local governments,
including AB 187 (Lara), AB 229 (Lara), AB 253 (Smyth), and
AB 276 (Alejo). At its April 6 hearing, the Governance &
Finance Committee plans to hear SB 449 (Pavley), which
authorizes the State Controller to conduct preliminary
financial reviews and audits of local governments that may
be experiencing specified serious financial problems.
Support and Opposition (3/10/11)
Support : State Controller John Chiang, American Federation
of State, County and Municipal Employees, David Ross.
Opposition : Unknown.