San Diego Audit Committee Meeting - December 11, 2019

The Audit Committee of the City of San Diego met on December 11, 2019, at 9:00 AM (rescheduled from 17:00 UTC) with a full quorum present: Chair Sherman, Councilmember Campbell, Mr. Spencer, Mr. Halpern, and Mr. Olivia. Also in attendance were staff from the Independent Budget Analyst (IBA), Finance Department, City Attorney's Office, and Office of the City Auditor. The committee approved the minutes from the October 30, 2019 meeting unanimously.

Consent Calendar

• Approval of committee actions from October 30, 2019: motion by Councilmember Campbell, second by Mr. Halpern, passed unanimously.

Public Comments & Testimony

• Non-agenda public comment: One speaker, Ms. Welch, voiced complaints about the city's audit practices, alleging that the city takes money from parks for the general fund, that performance audits are insufficient, and that the city should conduct financial audits. She also made unsubstantiated claims about bribery and mismanagement. No other public comments were made on non-agenda items.
• Public comment on stormwater funding strategy: Matt O'Malley (San Diego Coastkeeper) expressed support for the stormwater funding strategy but raised concerns about the timeline, noting that a public vote (possibly in 2022) would require faster groundwork. He commended the stormwater division for engaging consultants who helped pass Measure W in Los Angeles and urged the committee to hold the division accountable.

Discussion Items

City Auditor's Monthly Activity Report and Scope Limitation Issue

• Report: Interim City Auditor Kyle Elser presented the monthly activity report, noting two audit products issued since the last meeting: an IT audit of network perimeter controls (confidential) and the fiscal sustainability and financial condition audit (presented later). Four audits are in the report writing stage, including risk management public liability, development services charges, strategic human capital management, and neighborhood services homelessness. One audit is in fieldwork (police crime data), and one in planning (IT encryption). The office has issued four reports and two hotline investigation reports in FY2020, containing 29 recommendations. A peer review by the Association of Local Government Auditors is scheduled to begin December 16, 2019.
• Scope Limitation: Andy Hanell (Interim Assistant City Auditor) reported that the public liability audit encountered a scope limitation due to the City Attorney's Office (CAO) refusing to provide certain documents, citing attorney-client privilege and work product protection. Despite eight months of negotiation, the CAO would not share a tracking spreadsheet of corrective measures compiled by Risk Management. The audit team reviewed 362 closed claims files but could not answer one audit objective: whether Risk Management adequately coordinates with departments to implement corrective actions. The CAO offered alternatives (e.g., hiring a retired employee paid by the auditor, redacting documents), but these were not mutually agreeable. The auditors will issue a recommendation to create a more transparent tracking system.
• Discussion: City Attorney Mara Elliott explained that the CAO has an ethical duty to protect privileged information, and that releasing it could waive privilege and harm the city in litigation. She noted that the state bar advised against disclosure. Committee members Mr. Spencer, Councilmember Campbell, and Mr. Halpern questioned the scope of the privilege and suggested seeking independent legal counsel for the auditor. The committee discussed the possibility of separating Risk Management's tracking from privileged legal files. The city attorney noted that the spreadsheet is of limited value since it starts in 2019, while the audit covers 2016-2018. The auditors confirmed they could not resolve the dispute without a second opinion, and the committee agreed that the scope limitation, while justified, should be reported.

Stormwater Division Funding Strategy Update

• Deputy Director Drew Kleiss and Strategic Program Manager Alejandra Gavaldone presented an update on Audit Recommendation #5 (long-term stormwater funding strategy). The division provides water quality, flood risk management, habitat restoration, and education services, managing over 950 miles of storm drain, 40,000 structures, 62 miles of channels, and 14 pump stations. The city is addressing 72 polluted water bodies. The funding strategy, to be completed by summer 2020, will update the asset management plan, evaluate funding options, and incorporate operational efficiencies. A public survey was completed in fall 2019, and a second survey is planned for winter 2019-2020. The strategy will be presented to City Council in January 2021.
• Discussion: Councilmember Campbell noted that San Diego residents pay only $0.95 per month for stormwater, compared to $11.35 in Sacramento, and that the city has a $700 million backlog. She emphasized the need to capture stormwater for reuse. Mr. Halpern asked about litigation risk if remediation is delayed; Kleiss confirmed regulatory compliance risk. The committee acknowledged the challenge of regulatory permits and costs.

Performance Audit of City's Financial Condition (FY2017-2018)

• Principal Performance Auditor Chris Kime and Performance Auditor Rod Greek presented an audit of the city's financial condition covering 2009-2018, updating previous reports. The audit uses 10 financial ratios compared to six benchmark cities (Los Angeles, Seattle, San Jose, Phoenix, Austin, San Antonio). San Diego has ranked among the best for seven years, with a score of 12 in FY2018 (down from 16 due to one-point drops in four ratios). Key concerns: financial performance ratio (revenues fell short of expenses by $97 million in FY2018, primarily due to OPEB restatement), governmental activities revenues ratio (reliance on tax support increased from 59% in FY2015 to 69% in FY2018), and net change in capital assets (San Diego ranked fourth in FY2018, but historically underperforms). The report also includes pension/OPEB data and contingent liabilities (e.g., Pure Water program, litigation). The committee accepted the report and forwarded it to City Council unanimously.

Office of the City Auditor FY2021 Proposed Budget

• Deputy City Auditor Daniel Knighton presented the proposed budget, which does not request new positions or increases. The FY2020 adopted budget is $4 million (22 FTEs). Due to a projected $83.7 million general fund shortfall, the administration may request budget reductions. The auditor’s office offered a voluntary reduction of $10,000 from its contracts budget for specialized consultants, but recommends no cuts to the FY2020 approved budget, as further reductions would impact operations (e.g., training, consultant support). The committee unanimously voted to recommend to City Council that the auditor’s budget remain unchanged from FY2020.

Key Outcomes

• Motion to accept and forward the financial condition audit to City Council: Passed unanimously (motion by Mr. Valdivia, second by Mr. Halpern).
• Motion to recommend no change to the FY2021 City Auditor budget: Passed unanimously (motion by Chair Sherman, second by Councilmember Campbell).
• Scope limitation noted: The committee acknowledged the dispute between the auditor and city attorney, but no formal resolution was reached. The matter will be addressed in the final audit report.
• Next meeting: Scheduled for January 22, 2020, at 9:00 AM.