San Diego City Audit Committee Meeting - January 8, 2018

The Audit Committee met on January 8, 2018, at 17:15 UTC with a quorum present. Members included Council Member Scott Sherman, Thomas Hebrink, and Alan Spencer; Ricardo Valdivia was absent. Also present were City Auditor Eduardo Luna, Deputy City Attorney Priscilla Dugard, Interim City Comptroller Scott Clark, and IBA representative Lisa Byrne. The committee approved prior meeting minutes, heard the City Auditor's monthly activity report, discussed the FY2019 budget, received the FY2017 Comprehensive Annual Financial Report (CAFR), and considered a proposed ballot measure on audit committee appointments.

Consent Calendar

• Approved the November 8, 2017, Audit Committee meeting minutes by unanimous consent.

Public Comments & Testimony

• None.

Discussion Items

Monthly Activity Report (Informational)

City Auditor Eduardo Luna reported that since the last meeting, his office issued two audit products: a hotline investigation report on an IT contract and a hotline investigation report on waste in the transportation alternatives program. Two audits are in report writing: the economic development department business and industry incentive program (with a response deadline extended to January 12, 2018) and the stormwater division audit. Four audits are in fieldwork: IT audit of the Excel implementation, development impact fees, data security controls for sensitive police data, and the city's fiscal sustainability and financial condition report (near completion). Eight audits are in planning. No committee questions were raised.

FY2019 Budget Proposal and Required 2% Cut

The City Charter requires the Audit Committee to recommend the Office of the City Auditor's budget and the City Auditor's compensation to the City Council. Eduardo Luna explained that his FY2019 budget submission was initially identical to the FY2018 adopted budget, with no new positions. However, after the November meeting, the Chief Operating Officer requested all general fund departments submit 2% budget reduction proposals. The Financial Management Department asked the Auditor's Office to cut $79,781 (2% of its FY2018 budget). Luna stated that such a cut would have a significant negative impact, potentially requiring termination of a staff member, ending the electronic workpaper system, or cutting training. He proposed a $14,000 reduction from the contracts budget (earmarked for technical services). Council Member Sherman noted the department is small and already took a 3% cut last year; he argued the discretionary budget is largely for mandatory continuing education and fixed costs, making a $79,000 cut unrealistic. He moved to recommend the budget with no cuts, seconded by Hebrink. The motion passed unanimously.

Comprehensive Annual Financial Report (CAFR) for FY2017

Interim City Comptroller Scott Clark and MGO engagement partner Kevin Starkey presented the FY2017 CAFR. Key points included:

• The city received a clean (unmodified) audit opinion, with an emphasis of matter on the implementation of GASB 80, which reclassified the San Diego Convention Center as a blended component unit (no change to financial results).
• New GASB standards 73 and 82 affected pension reporting. The city's net pension liability increased by $937 million as of the June 30, 2016 measurement date, primarily due to revised actuarial mortality tables and a lower discount rate.
• Notes cover pensions (Note 12), other post-employment benefits (Note 13), commitments and contingencies (Notes 17 and 18), and subsequent events (Note 24).
• No material weaknesses or significant deficiencies were reported in the separate report on internal controls.
• Committee members questioned franchise fee revenue decreases due to Public Utility Commission methodology changes, water utility commitments for the Pure Water initiative, credit rating outlook changes, and the DeAnsha Cove cleanup (not a recorded liability because it is a discretionary city project).
• The motion to recommend the council receive and file the CAFR was made by Sherman, seconded by Hebrink, and passed unanimously.

Proposed Ballot Measure on Audit Committee Appointments (Information Only)

Lisa Byrne (IBA) presented a proposed ballot measure to amend Charter Section 39.1 to allow the waiver of the two-candidate pool requirement for reappointment of an incumbent audit committee public member, provided the City Council approves the reappointment. The measure aims to avoid lengthy recruitment processes when incumbents are reappointed. The measure will be heard as an action item at the Rules Committee on January 10, 2018. Committee members Sherman and Spencer expressed support, but noted concerns about ensuring a process if the council is not keen on an incumbent. No formal action was taken.

Key Outcomes

• Approved the November 8, 2017, meeting minutes by unanimous consent.
• Unanimously recommended that the City Council adopt the Office of the City Auditor's FY2019 budget with no cuts (no reduction from FY2018 adopted budget).
• Unanimously recommended that the City Council receive and file the FY2017 Comprehensive Annual Financial Report.
• Provided feedback on the proposed Charter amendment (no formal vote).