BILL ANALYSIS �
SB 449
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Date of Hearing: June 29, 2011
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cameron Smyth, Chair
SB 449 (Pavley) - As Amended: June 20, 2011
SENATE VOTE : 30-9
SUBJECT : Controller: local agency financial review.
SUMMARY : Authorizes the State Controller, if sufficient funds
are available, to review the finances of cities, counties,
special districts, and redevelopment agencies, and allows the
Controller to convene a local agency financial review committee
to provide assistance to local agencies that seek help in
averting or managing a financial problem. Specifically, this
bill :
1)Allows the State Controller to conduct a preliminary review to
determine the existence of a local agency financial problem if
the Controller determines that sufficient funds are made
available to conduct the preliminary review and one of the
following occurs:
a) The governing body, chief administrative officer, or
chief executive of a local agency requests a preliminary
review in writing and identifies the existing fiscal
conditions that make the request necessary, and provides
that if the local agency requests a review, the costs shall
be borne by the local agency;
b) The Controller receives a written request from a
creditor with an undisputed claim against the local agency
that exceeds the greater of $10,000 or 1% of the annual
general fund budget of the local agency, and that remains
unpaid six months after its due date, provided that no less
than 30 days prior to submitting the request, the creditor
notifies the local agency in writing of his or her
intention to submit the request;
i) Provides that a claim shall be deemed undisputed
unless the local agency has made a determination that any
of the following conditions are present:
(1) There is a discrepancy between the invoice or
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claimed amount and the provisions of the contract or
grant;
(2) 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 local agency's acceptance of that delivery or
deliveries;
(3) Additional evidence supporting the validity of
the invoice or claimed amount is required to be
provided to the local agency by the claimant;
(4) The invoice has been improperly executed or
needs to be corrected by the claimant; or,
(5) 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.
c) The Controller receives notification from the trustee,
actuary, or at least 10% of the beneficiaries of a local
agency pension fund alleging that the local agency has not
timely deposited its minimum obligation payment to the
pension fund as required by law; or,
d) The Controller receives notification from a trustee,
paying agent, or bondholder of a default in a bond payment,
or a violation of one or more bond covenants by a local
agency.
2)Allows the Controller to conduct a preliminary review to
determine the existence of a local agency financial problem if
the Controller determines that sufficient funds are made
available to conduct the preliminary review and two or more of
the following:
a) 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;
b) The Controller receives notification that the local
agency is delinquent in the distribution of tax revenues as
required by law;
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c) The Controller receives notification that a local agency
has implemented retirements and layoffs constituting
greater than 20% of the local agency's workforce, relative
to the prior budget year; or,
d) The Controller receives notification that a local agency
has reduced its public safety or fire services funding by
more than 50% relative to the prior budget year.
3)Allows the Controller to conduct a preliminary review to
determine the existence of a local agency financial problem if
the Controller determines that sufficient funds are made
available to conduct the preliminary review and three or more
of the following occur:
a) The Controller receives notification that the local
agency has a critical cashflow situation, evidenced by a
midyear borrowing not anticipated in the most recently
enacted budget;
b) The Controller receives notification that a local agency
has enacted a midyear budget correction exceeding 20% of
the enacted budget;
c) The Controller receives notification that a local agency
has had a decline in year-over-year general fund
collections of greater than 15%;
d) The Controller receives notification that a local agency
has had deficits in one or more major restricted funds,
defined as providing greater than 10% of the local agency's
annual total budget, for a period exceeding one fiscal
year; or,
e) 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.
4)Requires, in conducting a preliminary review, the Controller
to provide the local agency with written notification of the
review, and to meet with the local agency officials to
receive, discuss, and consider information provided by the
local agency concerning the agency's financial condition.
5)Requires the Controller to provide written notification to the
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Governor and the Legislature within 120 days after beginning a
preliminary review if the review has determined that one or
more conditions indicative of a serious financial problem, as
defined in the bill, exist within the local agency.
6)Requires the Controller, when conducting a preliminary review,
to give priority consideration to preliminary reviews
conducted as specified in 1) above, over both 2) and 3) above.
7)Requires the Controller to give priority consideration to
preliminary reviews conducted as specified in 2) above, over
3) above.
8)Allows the Controller to conduct an audit of the local agency
if the Controller determines that sufficient funds are made
available to conduct the preliminary review and one or more of
the following conditions indicative of a serious financial
problem have occurred, or are likely to occur, if remedial
action is not taken:
a) 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 special trust fund;
b) 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:
i) Taxes withheld on the income of employees;
ii) Taxes collected by the local agency as agent for
another governmental entity or taxing authority; and,
iii) Any contribution required by a pension, retirement,
or benefit plan.
c) Failure for a period of 30 days or more to pay wages and
salaries or other compensation or benefits owed to local
agency employees or retirees;
d) The total amount of accounts payable for the current
fiscal year, as determined by the financial records of the
local agency, is in excess of 10% of the total expenditures
of the local agency in that fiscal year;
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e) Failure to eliminate an existing deficit in any fund of
the local agency within the two-year period preceding the
end of the local agency's fiscal year for which a
preliminary review was conducted pursuant to the provisions
of this bill; and,
f) Projection of a deficit in the general fund of the local
agency for the current fiscal year in excess of 10% of the
budgeted revenues for the general fund.
9)Allows the governing body, chief administrative officer, or
chief executive of a local agency to request an audit under
the requirements of 8) above, in writing and requires the
request to identify the existing fiscal conditions that make
the request necessary.
10)Requires, if the local agency requests a review as specified
in 9) above, that any costs incurred shall be borne by the
local agency.
11)Requires the local agency to make its books and records
available to the Controller for audit purposes pursuant to
provisions specified in 9) above.
12)Requires, in conducting an audit pursuant to 8) above, the
Controller to provide the local agency with written
notification of the audit, and to meet with the local agency
officials to receive, discuss, and consider information
provided by the local agency concerning the agency's financial
condition.
13)Requires the Controller to give priority consideration to
conducting an audit of local agencies pursuant to 8) above,
over local agencies that only meet the conditions for a
preliminary review, as specified in the provisions of the
bill.
14)Provides that if an audit conducted pursuant to 8) above
finds that one or more conditions indicative of a serious
financial problem may exist, the Controller shall make written
notification to the Governor and the Legislature within 120
days after beginning that audit.
15)Allows, if the Controller determines that sufficient funds
are made available, the Controller to convene a local agency
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financial review committee (committee) to provide assistance
to local agencies that seek help in averting or managing a
financial problem.
16)Provides that the committee shall meet no less than annually,
and provides that the committee be chaired by the Controller
and include representatives of the State Treasurer's Office
and the Department of Finance.
17)Allows the Controller to utilize the services of a consultant
having extensive financial management and accounting
experience with local agencies in the state, to assist in
evaluating and assisting local agencies that are undergoing or
facing a financial problem.
18)Allows a local agency to request assistance from the
committee in meeting the ordinary needs of government
operations, and provides that the request identify the
existing financial conditions that make the request necessary.
19)States that a local agency subject to a preliminary review or
an audit pursuant to the provisions of the bill shall receive
priority consideration by the committee.
20)Provides that the committee shall recommend a financial
recovery plan for the local agency, in consultation with the
local agency requesting assistance, and using any applicable
data from a preliminary review or audit.
21)Provides that the financial recovery plan shall consider both
of the following:
a) Conducting the operations of the local agency within the
resources available according to the data provided by the
local agency; and,
b) 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.
22)Requires the Controller to report to the Legislature, no
later than June 30, 2012, and annually thereafter, on the
actions of the committee and status of all engagements with
local agencies pursuant to the bill's provisions.
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23)Defines "local agency" to mean a city, county, city and
county, special district, or redevelopment agency.
24)Provides that the bill's provisions shall remain in effect
only until January 1, 2017, and as of that date is repealed,
unless a later enacted statute deletes or extends that date.
25)Makes findings and declarations that it is a valid public
purpose for the state to assist a local agency in a fiscal
emergency to avert or manage financial problems, and that the
authority and powers conferred by the bill's provisions
constitute a necessary program and serve a valid public
purpose.
EXISTING LAW :
1)Requires cities, counties, special districts, joint powers
authorities, and redevelopment agencies to report specified
fiscal information to the State Controller each year, which is
subsequently compiled in an Annual Financial Transactions
Report.
2)Requires, 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 State
Controller to appoint a qualified accountant to make an
investigation and to obtain the information required.
3)Requires the accountant to report the results of the
investigation to the State Controller and file a copy of the
report with the legislative body of the county, city, or
district in which the investigation is conducted.
4)Requires the local government to pay any costs incurred by the
State Controller associated with these investigations,
including contracts with accountants.
5)Provides that the State Controller 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.
FISCAL EFFECT : According to the Senate Appropriations
Committee, this bill contains general fund costs of about
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$125,000 in 2011-12 and up to $250,000 in the 2012-13 and
2013-14 fiscal years for State Controller audit staff, and minor
costs related to staff the financial review committee by the
State Controller's Office, State Treasurer's Office and the
Department of Finance. The bill also contains contract costs
for financial consultants of up to $250,000 per year from the
General Fund.
COMMENTS :
1)According to the author and the sponsor, State Controller John
Chiang, the infamous scandal in the City of Bell is only the
most recent example of how the failure of some local officials
to conduct the public's business with honesty and efficiency
can lead to financial mismanagement that negatively affects
the delivery of essential local services to taxpayers.
Additionally, the author and sponsor believe that this type of
fiscal negligence affects the expenditure of state and federal
funds that are provided to local governments, and by
extension, affects all taxpayers in the state of California.
The author believes that the City of Bell is not alone, and
that not all fiscal crises are caused by outright fraud and
mismanagement. Near insolvency in Modoc County, as well as
bankruptcies in Orange County and the City of Vallejo, are all
recent examples of how, sometimes in addition to
mismanagement, the legitimate pressures of economic downturns
coupled with budget shortfalls can lead to insolvency.
2)Under current law, the State Controller has limited oversight
capacity of local agencies, and can only audit local agencies
in their handling of state and federal funds, or when there
are problems seen in the regularly filed financial reports
that local governments submit to the Controller yearly.
This bill authorizes the State Controller, until January 1,
2017, to review the finances of cities, counties, special
districts, and redevelopment agencies, and provide financial
consultant expertise. There are several different levels of
review contained in the bill - first, the State Controller
would be authorized to conduct a "preliminary review" of a
local agency facing financial stress, and this preliminary
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review could be initiated at the request of the local agency
or by the Controller, based on specified conditions. The bill
also authorizes the Controller to conduct an audit of a local
agency based on conditions that suggest that the agency has a
serious financial problem. The bill would require the
Controller to report to the Legislature whenever the SCO
conducts either a preliminary review or an audit.
Provisions of the bill would create a "local agency financial
review committee" comprised of staff and existing resources
from the Department of Finance, the State Treasurer's Office
and the State Controller's office. The local agency financial
review committee would be tasked with preparing a financial
recovery plan, providing advice on how to bring local spending
in line with revenues, and guidance on how best to pay off
debt service on bonded indebtedness. The bill requires the
Controller to report to the Legislature on activities of the
local agency financial review committee.
3)The author notes that state law currently provides a resource
to school districts that find themselves in financial
troubles. The Fiscal Crisis & Management Assistance Team
(FCMAT) was established in 1992 to help school districts
achieve financial stability. The bill's provisions are
modeled, in part, after the FCMAT format.
4)This bill authorizes the Controller to conduct reviews or
audits, as specified, "if the Controller determines that
sufficient funds are made available" to conduct the review or
audit. The Committee may wish to consider, first, how the
Controller will determine whether funding is sufficient, and
second, what will happen if sufficient funds are not
available.
5)The League of California Cities has concerns about the listed
conditions for triggering an audit as specified in the bill's
provisions. The League believes that the triggers are placed
in an inappropriate "tier" and serve to complicate how the
provisions of the bill would be implemented. Additionally,
the League notes that some of the trigger conditions, in
combination, are so common that they may prompt a review where
none may be needed. The Committee may wish to consider
whether these triggers are indicative of serious problems, or
indicative of the serious economic downturn that many local
governments currently face.
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6)This bill is part of the Controller's package of bills in
response to the scandals in the City of Bell, and includes AB
187 (Lara), AB 229 (Lara), AB 253 (Smyth), and AB 276 (Alejo),
several of which were heard by this Committee on April 27,
2011. SB 186 (Kehoe), another bill sponsored by the
Controller, will be heard on the same date as this bill, and
expands, until January 1, 2017, the State Controller's
authority to perform audits or investigations of counties,
cities, special district, joint powers authorities, and
redevelopment agencies, if the State Controller has reason to
believe, supported by documentation, that a local government
is violating specified financial requirements.
The Committee may wish to consider how this bill, along with
SB 186 (Kehoe), and AB 187 (Lara), which allows the State
Auditor the discretionary authority to audit "high risk" local
agencies, can be implemented together. Is there a duplication
of state resources between the three bills?
7)Support arguments: Supporters argue that the state should not
wait until a local entity is at risk of complete financial
failure before lending assistance and they believe this bill
will help prevent problems at the local level in a
collaborative manner.
Opposition arguments: The League of California Cities notes
that the state already has substantial authority to examine
local governmental financial practices, and believes that any
new authority must contain clear criteria and should only be
granted when there are documented insufficiencies in its
existing authority.
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REGISTERED SUPPORT / OPPOSITION :
Support
State Controller John Chiang �SPONSOR]
American Federation of State, County and Municipal Employees
(AFSCME)
California Professional Firefighters
Glendale City Employees Association
Laborers' Locals 777 and 792
Organization of SMUD Employees
San Bernardino Public Employees Association
San Luis Obispo County Employees Association
Santa Rosa City Employees Association
Opposition
League of California Cities �unless amended]
State Association of County Auditors �unless amended]
Analysis Prepared by : Debbie Michel / L. GOV. / (916)
319-3958