THE DISTRICT COULD HAVE MORE EFFECTIVELY MONITORED ITS SPENDING OF BOND PROCEEDS
The district’s oversight structure for monitoring its spending of $85 million in bond proceeds has included requiring approval of invoices by construction and executive staff, appointing a committee, and initiating external auditor reviews of the bond expenditures. However, we noted weaknesses with each of the components that reduced the effectiveness of the district’s monitoring. The district can increase the effectiveness of its monitoring by formalizing its processes for approving expenditures from bond proceeds, establishing policies for periodic committee review of bond expenditures, and establishing a process to verify that it addresses all audit findings from bond audits.
The District Did Not Always Spend Bond Proceeds for Allowable and Reasonable Activities
The 2005 board resolution that ordered the ballot measure for issuing $85 million in bonds specified that the district would use the proceeds for costs of construction, acquisition, and expansion of the district’s medical facilities and specifically prohibited paying for costs unrelated to construction activities, including staff and administrator salaries and other operating expenses. However, our review of 30 expenditures totaling approximately $3.8 million from bond proceeds in 2007 through 2014 found that the district and HCCA spent more than $61,000 on four expenditures that did not meet the stated criteria or were an unreasonable use of bond proceeds.
The district used bond proceeds to pay for a software maintenance agreement for existing medical equipment totaling $48,000. The software was not related to construction or expansion of the medical center and therefore was not an allowable use of bond proceeds. Further, the district used roughly $450 in bond proceeds to reimburse the project management consultant for the medical center’s expansion project for meal costs. However, the district’s contract with the consultant did not include meals as reimbursable expenses. Although the dollar amount is small, because the district was not contractually required to pay for meals, this expense was an improper use of bond proceeds. Further, for another bond expenditure we selected for review totaling $45,000, the district was unable to provide the invoice and supporting documentation. According to the interim controller, the invoice was likely misfiled.
HCCA began managing the medical center in January 2014, and according to the financial report presented to the committee, the bond proceeds remaining at the end of January 2014 were approximately $3.8 million. Under the management of HCCA, the district used bond proceeds to pay for expenditures totaling $13,000 that we also determined to be unreasonable. In March 2014, HCCA used bond proceeds to pay for a $12,500 severance payment to the district’s director of construction. Although the salaries of district employees hired to work in the district’s construction management department, such as the director of construction, were an allowable use of bond proceeds, it is unreasonable to use proceeds for a severance payment because it does not directly contribute to the construction and improvement of the medical center. Further, we expected HCCA to have documented its justification for why a severance payment was necessary; however, the district was unable to provide any justification for this payment. HCCA also used more than $500 in bond proceeds to reimburse its project management consultant for meal costs, despite meals not being included as reimbursable expenses in its contract.
Former staff who were involved in the spending of the bond proceeds are no longer employed at the district, and current district staff could not explain why previous staff had used bond proceeds for inappropriate purposes. According to accounting staff, the district did not have a formal written policy or procedure for approving expenditures from bond proceeds. Instead, according to the former district controller, the director of construction would review the construction invoices and indicate whether the invoice was for the expansion project. After approving invoices, the construction department sent the invoices to the CEO or CFO for approval. Although the district was not always consistent as to which executives approved invoices, all invoices reviewed had, at a minimum, approval from the CEO, the CFO, or the board chair. However, for the unallowable expenditure for the software maintenance agreement, the district did not follow its informal process for approving bond expenditures because the invoice did not have the director of construction’s approval.
The district’s external audits, which reviewed all bond expenditures, also found that the district spent bond proceeds on some expenditures that it should not have and that it did not consistently follow its invoice approval process. The district obtained four external audits completed in 2010, 2011, 2013, and 2015 to review its spending of bond proceeds, and three of the audits identified some unallowable expenditures as well as inconsistencies in complying with the district’s approval process, which we discuss further in the next section. Given the significant amount of the bond proceeds, we expected the district to have a written process for staff to follow, but it did not, thus weakening its ability to ensure that it spent all bond proceeds exclusively for the purposes it had pledged to the voters.
The district could also benefit from a contract retention policy. As part of our invoice testing, we reviewed the district’s vendor contracts to ensure that the district had contracted for the billed services. In addition to the 30 expenditures, we also reviewed five that were included in offset expenditures after HCCA cancelled an equipment contract paid with bond proceeds. We did not identify issues with those transactions. In our selection of 35 expenditures for review, the district could not locate five contracts and two contract amendments for invoices we reviewed. Although we were able to determine that the purchases made with each of these invoices were allowable, the district could not provide a copy of the contracts to demonstrate that it had actually contracted for those services. According to the facilities coordinator, who was the former construction department’s administrative assistant, the district does not have a retention policy for its contracts. Further, the district’s contract management policy does not indicate how long it is required to maintain copies of its contracts. However, it is important that the district include as part of its contract management policy a retention period to ensure that it is maintaining contracts for an appropriate amount of time. For example, the State Contracting Manual requires state departments to maintain such documents for seven years after the last payment.
The District’s Monitoring of Its Spending of Bond Proceeds Could Have Been More Effective
Other components of the district’s efforts to monitor its spending of bond proceeds included appointing the committee and obtaining independent external reviews of its bond expenditures. We found concerns with each of these components of its monitoring.
The district did not require its committee to perform certain duties that would have improved its effectiveness in monitoring the district’s use of the bond proceeds. The committee’s roles and responsibilities (charter) required that it review the projects with construction and building staff to assure that the district was meeting the intent of the voters in every aspect of the actual use of the proceeds. The charter also required the committee to report quarterly to the district’s board on the progress in the use of the proceeds and the consistency between the bond spending and the assertions made to voters. Committee meeting minutes show that it received frequent reports from staff on construction progress and milestones, and some updates on the construction schedule and budget changes and the remaining balance of bond proceeds. However, these reports from staff failed to provide an overview of how the district was spending the bond proceeds, as they did not include any expenditure details. It is unclear how the committee could adequately monitor the district’s use of the bond proceeds and inform the board about compliance with the voter-approved purposes without having reviewed expenditure details in addition to the information it was reviewing.
The committee did not begin to review expenditure details regularly until mid-2013, by which time the district had already spent approximately $73 million of the $85 million in bond proceeds. Although it is unclear exactly what prompted the district to begin providing this information to the committee, board meeting minutes from September and October 2012 show that a member of the committee twice expressed that it was not receiving the financial information it had requested from the district. According to the minutes for the committee’s July 2013 meeting, the CEO asked the committee what information it would like to have presented at each meeting. The committee requested expenditure reports, among other items, and the CEO directed the director of construction to provide the information for each meeting going forward. Subsequent to this meeting, the committee began reviewing summaries of expenditure information categorized by month and by vendor. These monthly expenditure summaries were beneficial because they improved the committee’s understanding of how much was spent per vendor. However, the district should also have required the committee to review expenditure details or a staff analysis of those expenditures to allow it to verify them and thus increase its ability to report quarterly to the board about whether expenditures were allowable.
Further, the committee did not consistently report to the board quarterly. Board meeting minutes show that the committee did report quarterly to the board in 2007 and 2013, but the minutes do not reflect any reports from it in 2008 through 2011 and reflect reports that are less frequent than quarterly in 2012 and 2014. Current district staff could not explain why the committee did not report quarterly to the board as required. Although we question whether the committee could have provided insightful reports to the board without consistently reviewing expenditure details, nonetheless the district should have ensured that the committee was reporting as frequently as was required. In failing to do so, the district was not maximizing its efforts to ensure that it was spending bond proceeds exclusively on allowable activities.
Finally, the district did not ensure that it consistently implemented all recommendations made by the external auditors reviewing the district’s use of bond proceeds. The district obtained four independent reviews of the bond expenditures over several years, as shown in Table 4. The first audit report, which covered the district’s spending of the first $16 million in bond proceeds, did not identify any findings, but in each of the other three reports, covering the remaining $70 million, the external auditors identified concerns related to compliance with obtaining appropriate approvals. The reports also identified that the district had spent some bond proceeds on items that it should not have, although the amount represented a small percentage of the total bond proceeds. Nonetheless, the district did not always ensure that it addressed the findings and recommendations in the reports.
The District’s Bond Expenditures Were Independently Reviewed
|REPORT ISSUED||DATE OF EXPENDITURES REVIEWED||
|February 2010||October 2005–November 2009||$15.6|
|June 2011||November 2009–March 2011||19.3|
|June 2013||April 2011–December 2012||35.7|
|December 2015||January 2013–December 2014||†|
Source: Independent Accountants’ Report on Compliance reports.
* Amounts reviewed include interest earned on bond proceeds.
† This report does not specify the total expenditures reviewed; it specifies review of expenditures for January 2013 through December 2014 and notes that bond proceeds were fully exhausted in September 2014. However, in a January 2013 board meeting, the district’s controller stated that the remaining bond proceeds totaled $15.8 million.
Specifically, the second report identified invoices totaling $350,000 for items such as medical center refurbishments that the district should not have paid for with bond proceeds. Although the audit report recommended that the district reimburse the bond fund account for these expenditures, our review of related board and committee meeting minutes did not uncover any discussion regarding addressing that recommendation. Also, for the fourth report, the auditors identified expenditures totaling $31,500 that were unrelated to the bonds or did not have support. When we spoke to the district’s former controller, he confirmed that the district had not reimbursed its bond proceeds for the unrelated expenditures identified in the second audit report but did not indicate a reason for not doing so. For the fourth report, he stated that the district did not reimburse the bond proceeds because there were other construction expenditures eligible for bond proceeds that had been paid with other funds. We also expected the district to have a written process to address audit findings and recommendations and to document its actions. However, we did not identify any procedures. When the district does not take steps to ensure that it has addressed audit findings, the problems identified in the reports can go uncorrected and bond proceeds may be spent for unallowable purposes.
To ensure that it uses bond proceeds for allowable purposes and improves its consistency and accountability in processing payments from bond proceeds, by April 2019 the district should formalize and document policies and procedures for verifying that it uses bond proceeds for allowable purposes and for approving expenditures paid from general obligation bond proceeds.
To ensure that it maintains adequate oversight of expenditures from any future bond proceeds, by April 2019 the district should establish a formal policy to include, as part of the charter for any future bond oversight committee, a requirement that the committee review bond expenditures quarterly at a minimum. The policy should also require the committee to report the results of its reviews to the board quarterly.
To ensure that any future bond oversight committee meets specified reporting requirements, by April 2019 the district should establish a written process to periodically monitor committee compliance with reporting requirements.
To increase the effectiveness of its monitoring to ensure that bond proceeds are used only for the purposes that the voters intended, by April 2019 the district should establish and follow a written process to document the steps it will take to address findings and recommendations identified in any future external audits of the bond proceeds.
To ensure that it can demonstrate that invoices it pays are for contracted services, by April 2019 the district should update its contract management policy to include a requirement to retain a copy of all contracts similar to the State’s requirement of seven years.
We conducted this audit under the authority vested in the California State Auditor by section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
ELAINE M. HOWLE, CPA
October 9, 2018
Tammy Lozano, CPA, CGFM, Audit Principal
Richard D. Power, MBA, MPP
Gabrielle Gilmore, CPA, CIA
Richard B. Weisberg, Sr. Staff Counsel
For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.