San Diego City Council Audit Committee Meeting - April 12, 2017

The Audit Committee met on April 12, 2017, to review the City Auditor's monthly activity report, a performance audit of gas and electric utility accounts, the external quality control review of the Office of the City Auditor, and the Q3 FY2017 fraud hotline report. The committee approved minutes, accepted all reports, forwarded the utility audit to City Council, and requested a six-month progress update.

Consent Calendar

• Approved the revised February 15, 2017 meeting minutes unanimously.
• Approved the March 15, 2017 meeting minutes with Council Member Sherman abstaining due to his absence; the record of action for item two (cost of living at annuity audit) was revised to remove the reference to the audit going to City Council.

Public Comments & Testimony

• Catherine Rhodes: Expressed ongoing concerns about the successor agency to the former redevelopment agency, including $1.6 billion in debt not shown in CAFR reports, $63 million in housing bonds, and $43 million in the low/moderate income housing fund; stated that 50% of the latter is supposed to go to homeless but 100% goes to staff/administration. Recommended an audit of SDCERS pension payments and pensionable/non-pensionable pay raises.
• Todd Cahill (SDG&E Director of Business Services): Committed to partnership with the city on rate issues, including biweekly meetings, training, data analytics, and improved streetlight inventory procedures.
• J. Powell (Community Energy Action Network): Supported the utility audit recommendations; noted it took four years to address streetlight billing issues; raised concerns about flat-rate streetlight tariffs; mentioned the Sustainable Energy Advisory Board letter; suggested future audits of utility fees and city-owned power generation.
• Catherine Rhodes (during peer review): Criticized the audit office for excluding the successor agency and low/moderate income housing fund from reviews; suggested the Comptroller's office sign CAFR reports.
• Catherine Rhodes (during fraud hotline): Complained that hotline complainants never receive status updates; cited discrepancies in SDCERS actuarial valuation reports from 2013, 2015, and 2016; stated she would call the hotline again.

Monthly Activity Report (Item 1)

City Auditor Eduardo Luna presented the monthly activity report:

• Three audit-related products issued: gas and electric utility billing audit (heard later), Q3 FY2017 fraud hotline report, and a P-Card abuse investigation report.
• Two audits in report-writing phase: Office of Special Events; Boards and Commissions.
• Five audits in fieldwork: Capital Improvement Program quality assurance; IT audit of Excel implementation; Economic Development Department business and industry incentive program; Capital Improvement Program lifeguard tower construction; Park and Recreation Department citywide activities and programs.
• Four audits in preliminary review: Transportation Stormwater Division; Office of the City Controller Grant Management; Planning Department Development Impact Fees; IT security audit of public utilities PCS/SCADA systems.
• Audits not started: Communications Department charges for services enterprise funds; IT audit of data security controls for the Police Department; two annual audits.
• External peer review conducted the week of March 20; OCA received the ALGA 2016 Distinguished Knight Award for best performance audit for the pedestrian safety audit; hosted a visiting council member from Lima, Peru.

This item was informational only; no questions were raised.

Gas and Electric Utility Accounts Audit (Item 2)

Presented by auditors Nick Ketter and Arlis Erickson. The audit assessed the city's utility billing control framework after scope expanded from streetlights to all city accounts. Key findings:

• City has ~3,500 SDG&E accounts covering ~30 rate types, with $51 million budgeted for utilities in FY2017 and $46 million in FY2018.
• No formal internal control framework for reviewing invoice accuracy or ensuring lowest applicable rates.
• Monthly invoice reports distributed to nine departments, but no procedures require their review.
• In 2015, an incorrect invoice caused ~$1.7 million in overpayments after meters were swapped/moved at a sewer pump station.
• Review of 48 accounts recommended by SDG&E identified potential bill reductions in 19 accounts totaling $17,000 (ranging from $15 to $4,315 annually).
• Approximately 3,712 streetlights in SDG&E's billing inventory were nonexistent or duplicates.
• No formal process exists for assigning new streetlights to appropriate lighting district accounts.

Three recommendations were made: 1) Implement an internal control framework for utility rate analysis and billing review, led by ESD and CFO; 2) Coordinate with SDG&E to formalize roles, responsibilities, and information exchange; 3) Develop citywide procedures for energizing streetlights and billing them to correct accounts.

Public comments and ESD response: SDG&E representative Todd Cahill described planned collaborations. ESD Director Mario Sierra agreed with all recommendations, noting the audit focused on one component of a larger energy program. ESD described using 1.5 FTEs for initial invoice review and an EDI billing system; a new EDI software system is expected by March 2018.

On streetlight inventory, ESD began an inventory in 2013, identified 3,700 nonexistent lights, but also added ~2,500 new lights; reconciliation took four years. SDG&E confirmed refunds can go back three years per tariff. Public Utilities Department was praised for thorough reviews leading to $1.7 million one-time and $1.1 million recurring savings.

The committee asked for a six-month update on implementation. Council Member Sherman moved to accept the report and forward to City Council with a six-month progress report; motion seconded and passed unanimously.

External Quality Control Review (Item 3)

Tara Van Andler presented results of the peer review conducted by the Association of Local Government Auditors (ALGA) covering July 1, 2013 through June 30, 2016. The Office of the City Auditor received a full compliance opinion—the highest possible rating. Areas of excellence: staff competence, commitment to standards, and dedication to the public interest. No management letter comments were issued.

Committee members congratulated the office. Council Member Sherman moved to accept the report; motion seconded and passed unanimously. City Auditor Luna acknowledged the team's work and noted OCA will provide future peer reviews for other jurisdictions.

Quarterly Fraud Hotline Report (Item 4)

Andy Horita, City Fraud Investigator, reported on Q3 FY2017:

• 47 complaints received: 7 assigned to OCA, 24 to departments, 16 not in purview.
• Total 150 cases through the third quarter—the highest annual total since the hotline's inception (prior yearly counts: 120–140).
• Active inventory: 76 cases; 38 closed, 38 remained open.
• Two substantiated complaints resulted in one public report concerning P-Card abuse; three Department of IT managers were found to have violated internal controls; management agreed to take corrective action.
• Six corrective actions from closed cases included reminders about professional conduct, overtime policies, voluntary participation in social events, and theft of time.

Discussion: The increase in complaints was attributed to marketing efforts, online reporting, and new employee orientation presentations. The hotline is nearing its 1,000th complaint. Horita explained that investigations are confidential and complainants are not provided with status updates, but he does refer out-of-scope complaints to appropriate agencies.

Council Member Sherman moved to accept the report; motion seconded and passed unanimously.

Key Outcomes

• Approved revised February 15, 2017 meeting minutes (unanimous).
• Approved March 15, 2017 meeting minutes with one abstention.
• Accepted the monthly activity report (information only).
• Accepted the gas and electric utility accounts audit report and forwarded it to the full City Council, with a request for a progress update to the Audit Committee in six months.
• Accepted the ALGA external quality control review report.
• Accepted the Q3 FY2017 quarterly fraud hotline report.
• The next Audit Committee meeting is scheduled for May 17, 2017.