San Diego Audit Committee Meeting – June 27, 2018

The Audit Committee of the City of San Diego met on June 27, 2018, with members Councilmember Scott Sherman, Thomas Hebrink, Ricardo Valdivia, and Alan Spencer present. City Auditor Eduardo Luna, Deputy City Attorney Priscilla Dugard, and other staff were also in attendance. The committee reviewed several audit reports, including a performance audit of the city's financial condition, a development impact fee audit, and a major audit of the Transportation Stormwater Department. The committee also approved a draft request for proposal (RFP) for outside audit services. All actions were unanimous.

Monthly Activity Report (Item 5)

• City Auditor Eduardo Luna reported that seven audit-related reports were issued in the past month, including investigations into disabled person placard fraud and theft of water and cleaning supplies, as well as performance audits of development impact fees, the stormwater division, and the city's financial condition. A confidential IT audit of the Police Department's network security was also issued. Upcoming audits target human capital, real estate assets, public utilities billing, and IT security. The committee expressed appreciation for the team's productivity.

Discussion Items

Performance Audit of the City's Financial Condition (Item 1)

• Chris Kime (Principal Performance Auditor) presented an update of the 10-point financial condition assessment covering fiscal years 2007–2016. The city's overall score has been consistently positive since 2012, ranking first or second among benchmark cities (Philadelphia, Phoenix, San Antonio, Dallas, San Jose, Austin). Key ratios showed strong revenues and debt coverage, but liquidity ranked fourth and net change in capital assets ranked fifth. The solvency ratio rose due to pension liability inclusion. The report noted a $2.6 billion (corrected from $2.6 million) impact from a 1% decrease in investment return. Councilmember Sherman observed that the city outperforms others and questioned why the city would emulate them. The committee voted unanimously to accept the report and forward it to the full City Council.

Draft RFP for Outside Audit Services (Item 2)

• Kyle Elster (Assistant City Auditor) presented the draft RFP for a new five-year audit contract, as the current agreement with Moss, Adams, and O'Connell is ending. The evaluation criteria include price (30 points), qualifications, experience, and past performance. Purchasing Deputy Director Matthew Helm confirmed that interviews would be conducted for top bidders. The committee approved the draft RFP unanimously (no council referral needed).

Performance Audit of Development Impact Fees (Item 3)

• Chris Kime presented the audit, which found that Facilities Financing has effective controls over assessment, collection, and tracking of development impact fees. A random sample of 80 projects (totaling $17 million in assessments and $13 million in payments) revealed only minor errors. The report made no recommendations. A separate confidential report addressed two risk areas. The committee accepted the report unanimously.

Performance Audit of the Transportation Stormwater Department (Item 4)

• Andy Hanow, Danielle Novikolski, and Megan Garth presented the audit. The stormwater division manages a $4.8 billion infrastructure network with a $563 million deferred capital backlog, the largest of any city asset. The gap between revenues and needed expenses over five years is $459 million ($891 million needed vs. $433 million identified funding). The stormwater fee of $0.95 per month for single-family homes has not been increased since 1996. Key findings: the division's in-house pipe repair crew (6 members, expanding to 15) can complete repairs at 20–35% of the cost of contracting out, but at current pace it would take 95 years to replace failing corrugated metal pipes. The division lacks a strategic communications plan or long-term funding strategy. Recommendations included conducting a crew size analysis, entering a pipelining contract, developing a public education plan, and establishing reinspection fees. The division agreed with the findings and noted ongoing efficiency efforts (e.g., street sweeping improvements, negotiations with the Regional Water Quality Control Board).
• Public comment: Matt O'Malley (San Diego Coastkeeper) expressed support for the audit but urged faster action on funding, criticizing the proposed timeline of 2022 for public surveys. He called for a 2020 voter initiative.
• Committee discussion: Councilmember Sherman emphasized the challenge of state mandates and the need for funding, but cautioned against debt. Mr. Valdivia and Mr. Hebrink questioned the cost comparison between in-house and contractor work, asking for more rigorous analysis. Mr. Spencer noted the structural deficit and asked about the potential for increased revenue. The committee stressed the importance of public education and a top-down approach. The stormwater division responded that they are working with Caltrans, exploring commercial paper, and seeking state revolving fund loans. The committee voted unanimously to accept the report and forward it to the City Council.

Key Outcomes

• Financial Condition Audit: Accepted and forwarded to City Council (unanimous).
• Draft RFP for Outside Audit Services: Approved (unanimous).
• Development Impact Fee Audit: Accepted (unanimous).
• Stormwater Division Audit: Accepted and forwarded to City Council (unanimous).
• The committee also noted that a confidential recommendation follow-up process will track the stormwater audit's confidential issues.

Adjournment

The meeting adjourned at approximately 12:00 PM.