BILL ANALYSIS �
SB 186
Page 1
Date of Hearing: June 27, 2012
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cameron Smyth, Chair
SB 186 (Kehoe) - As Amended: June 19, 2012
SENATE VOTE : 27-11
SUBJECT : The Controller.
SUMMARY : Expands, until January 1, 2017, the State Controller's
authority to perform audits or investigations of counties,
cities, special districts, and joint powers authorities (JPAs)
if the Controller has reason to believe that a local government
is violating specified financial requirements, and also provides
for voluntary local agency financial review and increased
penalties for failure to file required financial reports.
Specifically, this bill :
1)Includes JPAs among the local government agencies for which
the State Controller (Controller) must compile and publish
reports of financial transactions, as specified.
2)Includes JPAs among the local government agencies for which
the Controller may appoint a qualified accountant to
investigate reports that are not made in the time, form, and
manner required, or where the Controller has reason to believe
that a report is false, incomplete or incorrect.
3)Authorizes the Controller, after making findings as specified,
to perform an audit or investigation if any county, city,
special district or JPA is not complying with the financial
requirements of state law, state grant agreements, local
charters or local ordinances, if sufficient funds exist for
the Controller to conduct the audit or investigation.
4)Requires the Controller to prepare a report of the results of
the audit or investigation, including documentation used as
the material basis for the findings included in the audit or
investigation, and further requires that a copy of the report
be filed with the legislative body and any finding or evidence
of illegal acts or fraud be reported to the appropriate
authorities.
5)Requires the Controller, after consultation with the local
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agency but prior to an audit or investigation, to make written
findings explaining the legal and factual basis supporting the
decision to conduct the audit or investigation, and gives the
local agency a reasonable opportunity to respond.
6)Requires the Controller, in cases where he or she seeks to
audit or investigate compliance with the financial
requirements in local charters or local ordinances, to first
share with the local agency the evidence used to determine the
need for the audit or investigation and provide the local
agency the opportunity to conduct its own audit or
investigation of the matter in a reasonable period of time.
7)Requires the local agency, if it elects to conduct an audit or
investigation, to provide the results to the Controller
promptly upon completion, and if the Controller subsequently
proceeds with his or her own audit or investigation, he or she
must make specific written findings concerning the evidence
relied upon in determining the need for the audit or
investigation and that each issue to be audited or
investigated has not been or is not likely to be addressed by
local means.
8)Prohibits the Controller from auditing or investigating
compliance with the financial requirements in local charters
or local ordinances if the matter is the subject of actual or
completed litigation.
9)Prohibits the Controller from auditing or investigating a
matter involving a pending policy or administrative decision
until after a final decision has been adopted by the local
agency.
10)Defines "documentation", for purposes of the restriction of
audits and investigations during litigation or pending
decisions, as "any handwriting, typewriting, printing,
photostating, photographing, photocopying, transmitting by
electronic mail or facsimile, and every other means of
recording upon any tangible thing any form of communication or
representation, including letters, words, pictures, sounds, or
symbols, or combinations thereof, and any record thereby
created, regardless of the manner in which the record has been
stored."
11)Prohibits the Controller from initiating or conducting an
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audit or investigation regarding the financial requirements of
state law, state grant agreements, local charters or local
ordinances of any local agency, that falls within the date the
local agency has initiated the neutral evaluation process,
pursuant to the state's municipal bankruptcy law (Government
Code Section 53760, et seq.), and the date that process has
been completed.
12)Requires any costs incurred by the Controller regarding an
investigation into financial reports not made in the time,
form or manner required, or believed to be false, incomplete,
or incorrect, in compiling certain financial reports related
to redevelopment project areas, as specified, to be borne by
the county, city, special district, or JPAs and to be a charge
against any unencumbered funds of the county, city, special
district, or JPA.
13)Requires the Controller to waive the costs of an
investigation if an investigation into financial reports not
being made in the time, form or manner required, or believed
to be false, incomplete, or incorrect, determines that the
financial report filed by the county, city, special district,
or JPA did not contain materially false, incomplete, or
incorrect information.
14)Authorizes the Controller to establish a payment program,
with interest, for up to five years to assist a local agency
to pay for the costs that cannot be waived.
15)Sunsets specified provisions related to the Controller's
authority to audit or investigate suspected noncompliance with
specified financial requirements, the making and sharing of
findings and evidence, and provisions for the waiver of costs
(#s 3-11, 13-14 above), as of January 1, 2017, unless a
statute enacted before January 1, 2017, deletes or extends
that date.
16)Re-enacts provisions similar to existing law after the bill's
provisions sunset on January 1, 2017.
17)Authorizes the Controller, at the written request of the
governing body, chief administrative officer, or chief
executive of a local agency, to convene a local agency
financial review committee (Committee) to provide assistance
to the local agency in reviewing and assessing its financial
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condition and related internal controls to avert or manage a
serious financial problem.
18)Requires any request for local agency financial review to
include a description of the factors that warrant the need for
review and assessment.
19)Requires the local agency to reimburse the Controller for any
costs incurred by the Controller in conducting the requested
review, and authorizes the Controller to establish a payment
program for up to five years, with interest, for that purpose.
20)Requires the Committee to be chaired by the Controller, and
must include both state and local government representatives
selected by the Controller.
21)Requires the Controller to allow at least two local
government representatives to serve on the committee, selected
as follows:
a) If the local agency is a city, representatives shall be
selected by the League of California Cities;
b) If the local agency is a county, representatives shall
be selected by the California State Association of
Counties; or,
c) If the local agency is a special district,
representatives shall be selected by the California Special
Districts Association.
22)Requires the Controller to utilize the services of a
consultant that has extensive financial management and
accounting experience with local agencies in the state to
assist the Committee in evaluating and assisting the local
agency.
23)Requires the Committee, in consultation with the local
agency, to provide a written report to the local agency that
may include its recommendations, assessment of the local
agency's financial practices and condition, and internal
controls related to its financial condition.
24)Prohibits local agency financial review assistance from
including direct financial payments or loans to local agencies
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that are not otherwise authorized by statute.
25)Requires the Controller to suspend all local agency financial
review activities if the local agency notifies the Controller
that it has initiated the neutral evaluation process pursuant
to the state's municipal bankruptcy law, unless the local
agency requests that the activities be continued.
26)Requires that a local agency remain liable for costs, as
specified, if local agency financial review activities are
suspended.
27)Defines "local agency", for purposes of local agency
financial review only, as "a city, county, city and county,
joint powers agency, or special district."
28)Increases the following penalties for an officer of a local
agency who fails or refuses to make and file his or her report
within 20 days after receipt of a written notice from the
Controller:
a) From $1,000 to $2,500 for local agencies with annual
revenues under $100,000;
b) From $2,500 to $5,500 for local agencies with annual
revenues between $100,000 and $250,000; and,
c) From $5,000 to $10,000 for local agencies with annual
revenues over $250,000.
29)Requires the Attorney General to prosecute an action for
forfeiture upon the request of the Controller.
30)Authorizes the Controller to waive the penalties for late
filing upon a satisfactory showing of good cause.
31)Provides that the penalty for an officer or local agency
failing or refusing to make and file his or her report within
20 days after receipt of written notice for two consecutive
years shall be doubled in the second year.
32)Provides that the penalty for an officer or local agency
failing or refusing to make and file his or her report within
20 days after receipt of written notice for three consecutive
years shall be trebled in the third year, requires that the
Controller initiate an independent financial audit report, as
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specified, and further requires the local agency to reimburse
the Controller for the cost of penalty enforcement.
33)Requires that an agency making a forfeiture or other payment
pursuant to this bill must still file the required report.
34)Repeals outdated provisions relating to penalties.
EXISTING LAW :
1)Requires the officer of each local agency who has charge of
the financial records of the agency to furnish the Controller
with a report of all the financial transactions of the local
agency during the next fiscal year within 90 days of the close
of each fiscal year, as specified, and further defines 'local
agency', for purposes of these financial reports, to mean any
city, county, district, and specified community redevelopment
agencies.
2)Requires the Controller to annually compile and publish
reports of the financial transactions of each county, city,
and school district within the state, together with other
matters he or she deems of public interest.
3)Provides that if the county, city, or district reports are not
made in a specified manner, or there is reason to believe that
the report is false, the Controller is required to appoint a
qualified accountant to make an investigation and to obtain
the information required for the annual report of financial
transactions.
4)Provides that if an investigation is made of any county, city,
or district for two successive years, then a copy of the
results of those investigations shall be transmitted to the
grand jury of the county investigated or in which the local
agency investigated is situated.
5)Provides that an officer of a local agency who fails or
refuses to make and file his or her financial report within 20
days after receipt of a written notice of the failure from the
Controller forfeits to the state a specified amount depending
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on the amount of total revenue of that local agency, and
raises those amounts in the case of a community redevelopment
agency and a JPA that issues conduit revenue bonds in the 2nd
and 3rd consecutive year.
FISCAL EFFECT : According to the Senate Appropriations Committee
as of May 26, 2011, the State Controller's office anticipates a
staffing increase of 17 auditor positions as a result of the
expanded authority provided by the bill, at a total cost of
approximately $2.33 million in 2012-13 and $2.25 million in
2013-14 and ongoing.
COMMENTS :
1)This bill, sponsored by State Controller John Chiang, builds
upon existing law by expanding the Controller's authority to
investigate or audit the finances and internal controls of
counties, cities, special districts and JPAs if the Controller
has reason to believe that a local agency is not complying
with the financial requirements of state law, state grant
agreements, local charters or local ordinances. This new
authority sunsets on January 1, 2017. The measure also
creates a process for voluntary local agency financial review,
which is designed to help local agencies draw upon the
Controller's financial expertise to avert or manage a serious
financial problem. Finally, this bill increases the penalties
for local agencies who fail to file financial reports as
required by existing law.
2)The sponsor states that "�s]ince uncovering the financial
problems of the City of Bell and Modoc County, my office has
been flooded with complaints that indicate the problems
associated with these two municipalities are not isolated.
Unhinged by the economic recession or victimized by
self-inflicted fiscal management, a growing number of local
governments in California are facing severe financial
distress."
Furthermore, "�t]he City of Bell audit exposed millions of
dollars in illegally levied taxes, fees, and assessments. The
lack of internal controls was found to have enabled excessive
employee compensation, unlawful contracting practices,
self-dealing, and other abusive expenditures of taxpayer
dollars. Note that most of these findings might never have
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seen the light of day if the City of Bell had not voluntarily
opened its books and made staff available to answer our
questions and aid in our inquiry."
The Controller contends that "SB 186 will give the
Controller's Office the authority to quickly respond to
concerns about mismanagement or violations of state law
affecting local, state and federal funding. I strongly believe
this legislation will help restore the public's trust in
government activities?"
3)A prior version of this bill (May 31, 2011) failed passage in
this Committee on June 29, 2011, and was granted
reconsideration. The bill was subsequently amended twice to
expand its provisions while attempting to address the concerns
of opponents.
The current version of this bill differs from the
previously-heard version in three major respects: first, it
places limits on the Controller's new audit and investigation
powers (i.e., a requirement to provide a factual basis and
opportunity to respond in order to initiate the audit or
investigation; prohibitions of audits or investigations where
litigation, negotiations, or neutral evaluation are involved;
and a provision to waive cost recovery). Second, it now
establishes a process for voluntary local agency financial
review to aid local agencies in financial distress. Third, it
increases penalties for failing to file required financial
reports. The major provisions of the current bill are
discussed in greater detail below.
This bill was originally part of a larger package sponsored by
the Controller in 2011 in response to the scandals in the City
of Bell. Two bills from that package - AB 276 (Alejo) and SB
449 (Pavley) contained elements that have been incorporated
into this bill and further modified (see related legislation
in comment #7 below).
4)Under the June 19, 2012, version of the bill, in order to
begin an audit or investigation into suspected problems with
the reports, the Controller must make written findings
explaining the basis for the decision to begin an
investigation or audit, and provide the local agency an
opportunity to respond. In cases involving local charters and
ordinances, the Controller must also provide an opportunity to
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the local agency to conduct its own audit or investigation.
After making written findings as to the need and justification
for an audit or investigation, an investigation or audit may
proceed, concluding with a written report of findings to be
shared with the interested parties.
This bill prohibits the Controller from using this
investigation or audit power in cases where local charters or
ordinances are involved in two situations: where litigation on
the matter is ongoing or completed, or where the matter
involves a pending policy or administrative decision, such as
adoption of a budget or labor contract negotiations.
Additionally, the Controller may not initiate or conduct an
audit or investigation of any local agency undergoing a
neutral evaluation process under the state's municipal
bankruptcy law (Government Code Section 53760, et seq.).
In an investigation dealing with certain problems with a
mandated financial report, if the Controller finds no evidence
that a financial report contained materially false, incomplete
or incorrect information, then the Controller must waive
reimbursement of costs by the local agency.
5)The voluntary review process created by this bill provides for
the formation of a local agency financial review committee
(Committee) to provide assistance to a local agency in
assessing its financial condition and related internal
controls. The Committee would be chaired by the Controller
with state and local representatives selected by him or her,
and must also include representatives from the League of
California Cities, the California State Association of
Counties, or the California Special Districts Association,
depending on whether the local agency is a city, county, or
special district, respectively.
The Controller must utilize a consultant with financial
management and accounting experience to assist the Committee.
The Committee will ultimately produce a written report that
may include recommendations and an assessment of a local
agency's condition, financial practices, and internal
controls. As a safeguard, the review process must be
suspended in the event that the local agency initiates the
neutral evaluation process under the state's municipal
bankruptcy law.
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The local agency must reimburse the Controller for any costs it
incurs during the review.
6)This measure also increases the penalties for failing to file
a required financial report within 20 days of receiving
written notice from the Controller. The penalty for local
agencies with total revenues under $100,000 rises from $1,000
to $2,500. For local agencies with revenues between $100,000
and $250,000, the penalty rises from $2,500 to $5,500. And
for those local agencies with revenues over $250,000, the
penalty increases from $5,000 to $10,000.
Furthermore, penalties may also double after failing to file for
two consecutive years, and triple after three such years. A
triple penalty also triggers an independent financial audit
report. Local agencies are required to reimburse the
Controller for the costs of penalty enforcement.
7)A number of related measures from 2011 constituted the
Controller's local government financial reform package:
a) AB 187 (Lara), Chapter 451, Statutes of 2011, authorizes
the State Auditor to establish a high-risk local government
agency audit program to identify, audit, and issue reports
on any local government agency that the State Auditor
identifies as being at high risk for the potential of
waste, fraud, abuse, or mismanagement or that has major
challenges associated with its economy, efficiency, or
effectiveness;
b) AB 276 (Alejo) would have increased penalties for local
agencies, including specified JPAs, that fail to file their
annual financial transaction reports with the Controller's
Office in a timely manner, and makes other specified
changes to local agency financial reporting requirements.
That measure was amended into an unrelated bill in the
Senate Governance and Finance Committee in August 2011.
Portions of that bill have been incorporated into SB 186;
c) SB 449 (Pavley) would have authorized the Controller, if
sufficient funds are available, to review the finances of
cities, counties, special districts, and redevelopment
agencies, and allow the Controller to convene a local
agency financial review committee to provide assistance to
local agencies that seek help in averting or managing a
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financial problem. That measure failed passage in the
Assembly Local Government Committee in 2011. Portions of
that bill have been incorporated into SB 186;
d) AB 229 (Lara) would have expanded the Controller's
regulatory power over local government auditing practices.
The measure was amended into an unrelated bill; and,
e) AB 253 (Smyth) would have required 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. The measure was referred to the
Senate Committee on Governance and Finance in 2011, but was
never heard.
8)Certain provisions of this bill technically conflict with
those contained in SB 1090 (Senate Governance and Finance).
The author may wish to consider 'chaptering-out' amendments to
resolve the conflict as the bill moves forward.
9)Support arguments : The California Labor Federation contends
that "�t]he State Controller possesses tremendous expertise in
municipal finance that should be made available to struggling
local governments?This bill clarifies that the State
Controller, if requested by a local entity, can assist that
entity in reviewing its finances and in convening a financial
review committee to make recommendations?.�T]his bill will
�also] allow the Controller to protect taxpayers from
mismanagement and fraud by a local entity?This could help
communities address systemic financial problems before they
escalate to fiscal emergency or bankruptcy."
Opposition arguments : None on file.
REGISTERED SUPPORT / OPPOSITION :
Support
State Controller John Chiang �SPONSOR] (6/1/12)
American Federation of State, County and Municipal Employees
(AFSCME) (6/6/12)
California Labor Federation (6/11/12)
California Professional Firefighters (5/23/12)
Glendale City Employees Association (6/8/12)
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Organization of SMUD Employees (6/8/12)
Peace Officers Research Association of California (5/23/12)
San Bernardino Public Employees Association (6/8/12)
San Luis Obispo County Employees Association (6/8/12)
Santa Rosa City Employees Association (6/8/12)
Water Replenishment District of Southern California (5/22/12)
Opposition
None on file
Analysis Prepared by : Hank Dempsey / L. GOV. / (916) 319-3958