San Diego City Council Audit Committee Meeting - January 25, 2017

The January 25, 2017 meeting of the City Council's Audit Committee convened at 17:00 UTC with a quorum consisting of Councilmember Sherman (Chair Gomez presiding), Audit Committee Members Tom Hebrik, Ricardo Valdivia, and Alan Spencer. Also present were Deputy City Attorney Priscilla Dugart, City Auditor Eduardo Luna, Director of Council Affairs Marshall Anderson, Lisa Byrne from the Independent Budget Analysis Office, and others. The meeting covered approval of prior meeting minutes, public comment, the auditor's monthly activity report, a performance audit of the San Diego Convention Center Corporation, the city's FY16 Comprehensive Annual Financial Report (CAFR), and the quarterly fraud hotline report. All major votes were unanimous.

Consent Calendar

• The committee record of action from the December 7, 2016 meeting was approved by unanimous consent; Chair Gomez abstained from voting, noting it was her first meeting.

Public Comments & Testimony

• Catherine Rhodes (Point Loma) spoke during public comment on item 2 (Convention Center) and again on item 3 (CAFR). She expressed strong concerns that the city is not performing required annual audits of the successor agency (former redevelopment agency) and the Low/Moderate Income Housing Fund. She cited a San Diego Reader article and a 2008 city attorney letter, alleging that the CAFR and Civic San Diego's audits do not reflect the totality of successor agency expenditures, including $1.5 billion in debt. She also criticized the omission of certain housing revenues from the Affordable Housing Performance Audit and claimed missing 10,000 affordable housing units. She urged the committee to direct the auditor to investigate.
• Job Nelson (Port of San Diego, Assistant Vice President of External Relations) provided comments on the convention center audit. He emphasized the port's historical investment ($165 million originally, ~$350 million today, plus over $250 million including expansions), noted the unique governance structure with the port owning the building and the city leasing, and stressed that any renegotiation of the management agreement must be comprehensive and consider the port's fiduciary duties to the State of California and all five member cities.
• Robert Matinamar (District 3) thanked the auditor for the performance audit and recommended a white paper outlining responsibilities of all four agencies (city, port, convention center, Tourism Authority) given the complexity. He also noted the corporation's $6.5 million loss from the aborted expansion and argued the city's $3.4 million annual contribution should be more flexible and based on need.

Discussion Items

Item 1 – Monthly Activity Report (City Auditor Eduardo Luna)

• The auditor reported issuing four products since December: the San Diego Convention Center Corporation audit, Q2 FY17 fraud hotline report, and two hotline investigations (improper discretionary leave, personal use of city vehicles). Audits in report writing include SAP user access and citywide privileged user management. Five audits are in fieldwork, including a utility billing audit expanded citywide (report now due March). Several audits are in preliminary review. The report was accepted without question.

Item 2 – Performance Audit of San Diego Convention Center Corporation

• Presented by Supervising Senior Performance Auditor Shine Pickney. The audit, requested by Councilmember Sherman and spurred by a 2015 grand jury report, focused on three areas: financial obligations, oversight division, and the sales/marketing contract with the San Diego Tourism Authority. Key findings:
  • The Center hosted 473 events from FY13-15 generating ~$61 million in TOT revenue and $3 billion regional impact.
  • The city spends ~$17 million annually ($13.6M debt service/dewatering/insurance, $3.4M to convention center for marketing/promotions/capital; $1.9M of that to Tourism Authority for marketing; $1.5M for capital).
  • Finding 1: The Tourism Authority contract lacks measurable targets, clear evaluation tools, and robust corrective action provisions. Booking guidelines used discretionarily.
  • Finding 2: A $53 million capital need over 10 years (FY17-26) with a $12.6 million funding gap after accounting for a $25.5M loan and city contributions.
  • Finding 3: Internal payment authorization procedures not followed; in FY15, $421,000 in remaining city funds were used for rental credits rather than prioritized capital (auditor recommended prioritizing capital).
• Six recommendations were made; management agreed to implement all.
• Discussion: Committee members (Hebrank, Sherman, Valdivia) questioned the port's responsibility for capital, the counting of room nights (short vs. long-term planning), oversight mechanisms, and the convention center's responses to recommendations. Chair Gomez asked about dewatering costs (city pays) vs. parking revenue (port receives). The port noted ongoing discussions about naming rights and comprehensive renegotiation.
• Outcome: Motion by Councilmember Sherman, seconded by Committee Member Hebrank, to forward the report to City Council with: (1) convention center to clarify responses on recommendations 1, 2, 3, and 5 (to be addressed in the new Tourism Authority agreement), and (2) the auditor to supplement the report with governance structures and practices of the ten largest competing convention centers. Motion passed unanimously.

Item 3 – FY16 Comprehensive Annual Financial Report (CAFR)

• Presented by CFO Mary Lewis, Comptroller Rolando Charvel, Deputy Director Scott Clark, and external auditor Kevin Starkey (MGO). The CAFR reports government-wide total assets/deferred outflows of $14.6 billion, total liabilities/deferred inflows of $5.86 billion, net position $8.74 billion. FY16 revenues $3.19 billion, expenses $2.57 billion, increase in net position $621 million. Major policy reserves established/updated: Pension payment stabilization reserve ($20.5M); General fund emergency and stability reserve goals increased to 16.7% of average revenues (to be phased in by 2021). MGO issued an unmodified (clean) opinion with no material weaknesses or significant deficiencies. Key future impacts: GASB 75 (recording full OPEB liability) will require a large liability increase in FY18; SDCERS experience study increased the annual pension payment by ~$64 million (due to mortality assumption changes), with pension stabilization reserve to partially offset the first year. The CAFR includes successor agency and low/moderate income housing fund disclosures (pp. 66, 227, 175). Management and auditors affirmed full GAAP compliance and transparency.
• Discussion: Spencer asked about internal controls; Starkey explained the five-component framework. Hebrank questioned the pension stabilization reserve, significant expense increases (litigation, land, elections, positions), new GASB standards, pension funded ratio (75.6% in 2014 shows on p. 191 as plan fiduciary net position % of total pension liability), Point Loma wastewater liability unchanged, reinstatement of Naval Training Center loan per new legislation, and the subsequent event on SDCERS. Chair Gomez asked if financial statements deviated from GAAP (no) and if more transparency needed (no).
• Outcome: Motion to accept, by Spencer with friendly amendment that future auditor reports on internal controls explicitly identify any significant deficiencies and material weaknesses. Motion seconded by Hebrank, passed unanimously.

Item 4 – Quarterly Fraud Hotline Report (Q2 FY17)

• Presented by Fraud Investigator Andy Horita. In Q2 (October-December 2016), 44 complaints received: 14 assigned to City Auditor, 30 to departments, 15 outside purview. 28 cases closed; 45 remained open (highest inventory ever). Two substantiated cases: (1) a department director's inappropriate use of discretionary leave – two recommendations made; (2) personal use of city vehicles by six Public Utilities employees including two managers – three recommendations made (fact-finding, cost recovery, strengthened controls). Also four corrective actions (workers' comp abuse, harassment, inappropriate behavior, unequal treatment). The hotline has seen increased usage due to marketing, online reporting ease, and media coverage.
• Discussion: Hebrank noted the large increase and asked about category