San Diego Audit Committee Meeting - November 18, 2015

The Audit Committee of the City of San Diego met on November 18, 2015, at 5:00 p.m. The meeting included a tribute to departing committee member Carly Schreiner, a monthly activity report from the City Auditor, a follow-up report on contract oversight from Purchasing and Contracting, a presentation on GASB 68 pension accounting changes from the City Controller, an overview of the city's budget development process from the Independent Budget Analyst (IBA), and a discussion of the City Auditor's FY2017 budget recommendations. All items were approved or received without opposition.

Opening Remarks and Tribute

• Committee Chair Sherman thanked Councilmember Carly Schreiner for her years of service on the committee, highlighting her preparation and dedication. Other members echoed the appreciation. A small token of appreciation (flowers) was presented.

Consent Calendar

• Minutes from the previous meeting were approved by unanimous consent.
• No non-agenda public comments were submitted, so that item was skipped.

Public Comments & Testimony

• No public speakers were present.

Discussion Items

1. Monthly Activity Report from the City Auditor (Eduardo Luna)

• Nine audits are in progress: public utilities overhead rates, contracting follow-up, streets trenching and paving, library department (interim report due early next week), housing commission, two IT audits (Excel implementation, treasurer's R tax and B tax systems), and pedestrian safety. Seven additional audits are approved but not yet commenced.
• A budget memorandum for FY2017 was issued on November 12, 2015.
• Code enforcement follow-up: Changes included reducing priority one response time from two days to one business day, adding complaint types to PTS, and implementing a manual tracking spreadsheet. Over the past two weeks, 46 cases were tracked (11 priority one, 35 priority two). Voicemail intake was eliminated to improve accuracy; hours were expanded for live phone intake. All complaints are now opened and assigned the same day.
• A new auditor, Danielle Novikowski, was introduced (former California Bureau of State Audits, UCLA economics graduate).

2. Purchasing and Contracting Follow-Up Report on Citywide Contract Oversight Audit (Christina Peralta)

• Christina Peralta was announced as the permanent Purchasing and Contracting Director.
• The report addressed three findings with nine recommendations: five focused on policies/processes, two on technology.
• Finding 1 (insufficient controls on contract deliverables): Mandatory vendor performance language added to terms and conditions; a fillable PDF vendor evaluation tool created; process narrative being drafted.
• Finding 2 (contract modification and closeout): Working with City Attorney to simplify templates; long-term goal to create a contract compliance unit; updating and memorializing business processes; conceptualizing a digital manual.
• Finding 3 (vendor debarment process): Working with City Attorney to draft an administrative regulation to clarify the Muni Code process.
• A procurement-to-pay (P2P) overhaul project is underway, divided into three phases over 18 months. First release in December 2015 includes labor relations in requisition approvals; second release in May 2016 improves contract controls; third release in June 2017 includes catalog technology. Over 700 end users will be trained beginning December 2015.

3. City Controller Report on GASB 68 Pension Accounting Changes (Rolando Charvale)

• GASB 68 requires reporting the full net pension liability (NPL) on the balance sheet, replacing the previous method of only reporting unpaid ARC amounts.
• For FY2015, the NPL is $1.5 billion (using a 2014 measurement date). The difference between the accounting liability and the actuarial liability (~$2 billion) is $464 million due to smoothing of asset values.
• Pension expense will now be based on changes in NPL rather than contributions. The implementation will restate retained earnings (beginning balance restatement of ~$1.8 billion).
• The change does not affect funding policy, bond ratings, or budget; it is purely a presentation change. The city continues to pay the actuarially determined contribution (ADC), which was $255 million in FY2016, with 13 years remaining on the amortization of the unfunded liability.
• Sensitivity to discount rate: A 1% decrease in the assumed rate of return (from 7.25% to 6.25%) would increase NPL to $2.4 billion. SDCERS recently voted to lower the assumed rate from 7.25% to 7.125% (with a target of 7% over two years and a glide path to 6.75% over five years).
• The proprietary funds (water, sewer, etc.) and government-wide statements will show the liability; governmental funds will not.

4. Independent Budget Analyst Report on Budget Development Process (Lisa Byrne)

• The budget cycle begins in November with the mayor's five-year outlook (released November 13, 2015). The IBA will release its review in early December.
• Key milestones: Department submissions (Dec–Jan), council budget priority memos (Jan–Feb), council budget priorities resolution (Feb), mayor's proposed budget by April 15, IBA review (April 15–29), budget review committee hearings in May (including an evening hearing on May 16, 2016), mayor's May revision (third week of May), council adoption in June, appropriations ordinance in July.
• The mayor's priorities for FY2017 include infrastructure, public safety, technology, and customer service.
• Mid-year budget monitoring and potential surplus allocation were discussed (e.g., excess equity from FY2015 being considered for a pension reserve or general reserves).

5. City Auditor's FY2017 Budget Recommendations (Eduardo Luna)

• The Office of the City Auditor requests no additional positions and no significant changes to its current budget of 22 FTEs and $3.7 million.
• A surplus in the contracts line item is being tracked due to a reduction in the allocation of the MGO CAFR audit contract from 75% to 40%. The office will submit a decrease in the FY2017 budget for that line.
• The proposed budget will be submitted to Financial Management by January 8, 2016, with final amounts pending fringe benefit rates.
• Committee members asked for side-by-side comparisons of prior years' budgets and encouraged the office to consider training opportunities for managers.

Key Outcomes

• The minutes were approved, and the monthly activity report, purchasing and contracting follow-up, controller's report, IBA report, and auditor's budget memo were all received and discussed without dissent.
• The committee expressed appreciation for the work of the departments and of outgoing member Carly Schreiner.
• The next meeting is scheduled for January 11, 2016, at 2:00 p.m. in the same location.