BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 449 (Pavley)
Hearing Date: 05/02/2011 Amended: 04/26/2011
Consultant: Mark McKenzie Policy Vote: G&F 6-3
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BILL SUMMARY: SB 449 would authorize the State Controller (SCO)
to review the finances of cities, counties, special districts,
and redevelopment agencies, and provide financial consultant
expertise until January 1, 2017. Specifically, this bill would:
Authorize the SCO to conduct a preliminary review of local
agency finances and prioritize those reviews based on the
identification of more serious considerations, as specified.
Authorize the SCO to audit local agency records to identify
serious financial problems, as specified.
Authorize a local agency to request an SCO preliminary review
or audit, and require the local agency to pay for any costs
incurred in conducting a review or audit that it requests.
Requires the SCO to provide written notice of the review or
audit to the affected local agency, and require written
notification to the Governor and Legislature if a review or
audit results in identification of conditions indicative of
serious financial problems.
Require the SCO to convene a local agency financial review
committee at least annually to assist local agencies with
addressing financial problems. The committee would be chaired
by the SCO and include representatives from the State
Treasurer's Office (STO) and the Department of Finance (DOF).
Require the SCO to utilize consultants with local government
financial management and accounting experience to assist local
agencies with financial problems and recommend a financial
recovery plan, as specified.
Require the SCO to provide annual reports to the Legislature
on the activities of the committee.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
SCO audit staff up to $125 up to $250 up to $250General/
Local*
Financial review committee
-SCO, STO, DOF participation likely minor costs to staff
committee General
-Financial consultants contract costs of up to $250 per
yearGeneral
SCO annual report minor costs to report on
activitiesGeneral
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* SCO costs to conduct preliminary reviews and audits may be
covered by local agencies that request a review or audit, as
specified.
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
Existing law requires cities, counties, special districts, joint
powers authorities, and redevelopment agencies to report
specified fiscal information to the SCO each year, which is
subsequently compiled in an Annual Financial Transactions
Report. If local agencies' 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 SCO is required
to 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 investigation is conducted.
Existing law requires the local government to pay any costs
incurred by the SCO associated with these investigations,
including contracts with accountants. The SCO does not have
discretion to audit local governments' financial affairs outside
the scope of information connected to the Annual Financial
Transactions Report, unless the investigation is concerned
specifically with disbursements of state or federal funds.
This bill is intended to allow the SCO to perform reviews of
local agency finances, identify financial management problems,
and provide sound professional advice and recommendations to
correct deficiencies and avoid serious fiscal problems. The
worldwide economic downturn has presented significant challenges
to the financial integrity of local governments in California,
which has been compounded in some cases by poor decision making
and illegal activities by local officials. Fiscal mismanagement
in the City of Bell, the near-insolvency of Modoc County, a
recent $30 million judgment against the Town of Mammoth Lakes,
and the City of Vallejo bankruptcy case provide clear examples
of local agencies that are facing severe fiscal challenges. In
addition, the SCO has recently launched an audit of the City of
Montebello's finances, citing evidence of false information in
financial reports and audits. SB 449 would provide the SCO with
authority to proactively identify local fiscal concerns, and
SB 449 (Pavley)
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develop a plan to address serious financial problems before they
reach a crisis point.
Staff notes that the provisions of this bill are substantially
similar to a Budget Change Proposal (BCP) that was submitted by
the SCO, but was not included in the Governor's proposed budget.
That BCP identified projected costs of approximately $500,000
annually, comprised of 2 PY of audit staff, and $250,000 in
annual contracting costs for financial advisor services
associated with the local agency financial review committee.
Any costs incurred by the SCO for preliminary reviews and audits
requested by a local agency would be covered by the requesting
agency. Since the bill provides discretionary authority, rather
than a requirement, for the SCO to conduct preliminary reviews
and audits, the staffing costs should be characterized as a cost
pressure rather than a hard cost. It appears likely, however,
that the SCO would seek additional resources through the budget
process for these activities.
The local agency financial review committee created by this bill
seems to mirror the existing Fiscal Crisis Management and
Assistance Team (FCMAT), which provides financial management
advice and assistance to school districts. The FCMAT uses a
scorecard approach, which is similar to the indicators specified
in this bill under the preliminary review, to determine the
seriousness of financial problems and to develop strategies for
recovery from those issues. Staff notes that the assistance
provided by the FCMAT has on some occasions included loans from
the General Fund. SB 449 does not explicitly provide this
authority, but does include language that requires the local
agency financial review committee to provide "assistance" to
local agencies, and authorizes a local agency to "request
assistance from the committee in meeting the ordinary needs of
government operations." Staff suggests an amendment to clarify
that "assistance" does not include direct financial payments or
loans to local agencies that are not authorized by statute.