BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 449 HEARING: 4/6/11
AUTHOR: Pavley FISCAL: Yes
VERSION: 3/30/11 TAX LEVY: No
CONSULTANT: Weinberger
STATE CONTROLLER'S AUDITS OF LOCAL AGENCIES
Authorizes the State Controller to review and audit local
governments' finances and assist local governments with
financial problems.
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
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required by statute or as requested by the Joint
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.
Revelations about fiscal malfeasance in the City of Bell,
and the dire fiscal conditions confronting some local
governments, like Modoc County, trigger worries concerns
about some local governments' ability to provide core
public services and remain solvent. In response, the State
Controller wants broader authority to identify local
governments that may be in fiscal distress, audit those
aspects of local government finances which are beyond those
related to state expenditures or to annual financial
transactions reports, and assist local government with
financial problems.
Proposed Law
Senate Bill 449 authorizes the State Controller to:
Conduct preliminary reviews of local agencies'
finances.
Audit local agencies' records to identify serious
financial problems.
Convene a financial review committee to assist
local governments with financial problems.
I. Preliminary review . Senate Bill 449 allows the
Controller to conduct a preliminary review to determine the
existence of a local agency financial problem if one or
more of the following occur:
The governing body, the chief administrative
officer, or chief executive of a local agency makes a
written request and identifies the existing fiscal
conditions that make the request necessary.
The Controller receives a written request from a
creditor with an undisputed claim against the local
agency that exceeds $10,000 or 1% of the annual
general fund budget of the local agency that remains
unpaid six months after its due date, provided that at
least 30 days before the request, the creditor
notifies the local agency in writing of his or her
intention to submit the request.
The Controller receives notification from the
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trustee, actuary, or at least 10% of the beneficiaries
of a local agency pension fund alleging that the local
agency failed to deposit its minimum obligation
payment to the pension fund.
The Controller receives notification that employees
of the local agency have not been paid and it has been
at least seven days after the scheduled date of
payment.
The Controller receives notification from a
trustee, paying agent, or bondholder of a local
agency's default in a bond payment or violation of one
or more bond covenants.
The Controller receives notification that the local
agency is delinquent in the distribution of tax
revenues as required by law.
The local agency fails to provide an annual
financial report or audit that conforms with the
minimum procedures and standards of the Controller as
required by law.
SB 449 defines a "local agency" as a city, county, city and
county, special district, or redevelopment agency.
The bill requires a local agency to pay the Controller's
costs for conducting a preliminary review at the agency's
request.
SB 449 specifies that a creditor's claim against a local
agency is undisputed unless the agency makes one of the
following five determinations:
There is a discrepancy between the invoice or
claimed amount and the provisions of the contract or
grant.
There is a discrepancy between the invoice or
claimed amount and either the claimant's actual
delivery of property or services to the local agency
or the agency's acceptance of those deliveries.
The local agency requires the claimant to provide
additional evidence supporting the validity of the
invoice or the claimed amount.
The invoice has been improperly executed or needs
to be corrected by the claimant.
There is a discrepancy between the refund or other
payment due as calculated by the person to whom the
money is owed and by the local agency.
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When conducting a preliminary review, the Controller must
provide a local agency with written notification of the
review and to meet with local officials to receive,
discuss, and consider information provided by the local
agency.
The bill requires the Controller to notify the Governor and
the Legislature, in writing, within 120 days after
beginning a preliminary review, when the review has
determined that one or more conditions indicative of a
serious financial problem may exist within the local
agency.
II. Audit . Senate Bill 449 authorizes the Controller to
audit a local agency that was the subject of the
preliminary review and requires a local agency to make its
books and records available to the Controller for that
purpose.
The audit must determine if one or more of six conditions
indicative of a serious financial problem have occurred, or
are likely to occur, if remedial action is not taken:
A default in the payment of principal or interest
upon bonded indebtedness for which no funds, or
insufficient funds, are on hand and segregated in a
special trust fund.
Failure for a period of 30 days or more beyond the
due date to transfer one or more of the following to
the appropriate agency:
o Taxes withheld on the income of employees.
o Taxes collected by the local agency as agent
for another governmental entity or taxing authority.
o Any contribution required by a pension,
retirement, or benefit plan.
Failure for 30 or more days to pay wages and
salaries or other compensation or benefits owed to
local agency employees or retirees.
The total amount of accounts payable for the
current fiscal year, as determined by the financial
records of the local agency, is more than 10% of the
agency's total expenditures in that fiscal year.
Failure to eliminate an existing deficit in any
fund of the local agency within the two-year period
before the end of the local agency's fiscal year for
which the Controller conducted a preliminary review.
Projection of a deficit in the general fund of the
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local agency for the current fiscal year in excess of
10% of the budgeted revenues for the general fund.
III. Local agency financial review committee . Senate Bill
449 requires the Controller to convene a local agency
financial review committee, which must be chaired by the
Controller and include representatives of the office of the
Treasurer and the Department of Finance, to provide
assistance to local agencies who seek help in averting or
managing a financial problem. The committee must meet at
least annually.
A local agency may request assistance from the committee in
meeting the ordinary needs of government operations. SB
449 requires that a local agency's request must identify
the existing financial conditions that make the request
necessary. The committee must recommend a financial
recovery plan for the local agency requesting assistance,
in consultation with the local agency, and using any
applicable data from a preliminary review or audit
conducted by the Controller. The financial recovery plan
must consider both of the following:
Conducting the operations of the local agency
within the resources available according to the data
provided by the local agency.
The payment in full of the scheduled debt service
requirements on all bonded and other indebtedness and
other uncontested legal obligations of the local
agency.
SB 449 requires the Controller to use the services of a
consultant having extensive financial management and
accounting experience with local agencies, to assist in
evaluating and assisting local agencies who are undergoing
or facing a financial problem.
SB 449 requires the Controller to report to the
Legislature, no later than June 30, 2012, and annually
thereafter, on the actions of the local agency financial
review committee and the status of all of the committee's
engagements with local agencies.
SB 449's provisions are automatically repealed on January
1, 2017, unless the Legislature deletes or extends that
sunset date.
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State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . The City of Bell's fiscal
mismanagement, Modoc County's near-insolvency, and a recent
$30 million judgment against the Town of Mammoth Lakes,
provide clear examples of California local governments that
are facing severe fiscal challenges. These challenges
raise concerns that the City of Vallejo's 2008 bankruptcy
filing may not be an isolated incident. The state has a
direct interest in the fiscal health of its local
governments. Local government insolvency can have
statewide repercussions, producing cuts in vital public
services and resulting in higher borrowing costs for other
local entities and the state. SB 449 helps cities,
counties, special districts, and redevelopment agencies by
identifying local fiscal problems before those conditions
reach a crisis point and by offering local governments
well-informed, expert advice on avoiding and recovering
from serious fiscal problems.
2. Is there a problem ? Fiscal crises are rare among the
more than 4,000 counties, cities, special districts and
redevelopment agencies in California. In the 70 years that
federal bankruptcy protection has been available to local
public entities in California, only three general purpose
governments have sought bankruptcy protection: Orange
County (1994), the City of Desert Hot Springs (2001), and
the City of Vallejo (2008). Since 1999, 19 local public
entities have filed for bankruptcy; more than half were
small health care districts. Despite the recent recession
and additional state-imposed burdens on local finances, the
Sierra Kings Health Care District is the only California
local government that has filed for bankruptcy protection
in the nearly three years since Vallejo entered bankruptcy.
The Committee may wish to consider whether the frequency
and risks of local government insolvency justify expanding
the State Controller's authority to review and audit local
governments' finances.
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3. Picking indicators . SB 449 lists six indicators of
potential fiscal problems, which can trigger a preliminary
review of a local agency's finances by the Controller.
Some of these indicators, like bond defaults, failure to
meet payroll, or failure distribute tax revenues, are
exceedingly rare and may occur only when insolvency is
inevitable. Other indicators may not necessarily indicate
fiscal distress when they do happen. For example, a local
agency's failure to file a required audit or annual report
may simply reflect lax administration or overworked staff.
The Committee may wish to consider amending SB 449's list
of indicators to include a broader set of indicators that
will provide earlier and more accurate signals of potential
financial problems. For example, legislators may wish to
consider modeling a list of indicators on the scorecard
used by the state's Fiscal Crisis Management and Assistance
Team (FCMAT), which provides financial management advice
and assistance to the state's school districts. A
scorecard of fiscal health for non-school governments could
include the following indicators:
Large decreases in assessed value.
Low general fund revenue, measured per capita.
Low cash reserves.
A high proportion of expenditures used for debt
service.
A high proportion of revenues dedicated to
restricted uses.
Decreasing population, employment, or per capita
income.
Deficits in major funds.
4. Too little, too late ? During a preliminary review of
local finances that may take up to 120 days, and a
subsequent audit process, a local agency's financial
condition might worsen significantly before it can get any
assistance from the Controller's financial review
committee. A non-binding financial recovery plan, prepared
at a local agency's request, only after the completion of a
preliminary review and audit, may not help local
governments confronting the imminent threat of insolvency.
To provide earlier, and more substantial, assistance to
local governments, the Committee may wish to consider
amending SB 449 to require the financial review committee
to make its financial recovery expertise immediately
available to any local government that requests assistance
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and that scores among the top 20% of state's local
governments on a scorecard of financial distress
indicators.
5. Who pays ? The prospects for a successful state
intervention to avoid a local fiscal crisis are likely
highest when a local government wants state help and seeks
it early. Yet, the prospect of paying the Controller's
costs for conducting a preliminary review may discourage
local governments that are already short on funds from
seeking assistance with their financial problems. The
Committee may wish to consider amending SB 449 to require
some cost sharing by the Controller to reduce a local
government's expected costs for requesting help from the
state.
Support and Opposition (3/31/11)
Support : State Controller John Chiang, American Federation
of State, County and Municipal Employees, California
Professional Firefighters
Opposition : Unknown.