HomeMy WebLinkAboutStaff Report 7013
City of Palo Alto (ID # 7013)
City Council Staff Report
Report Type: Informational Report Meeting Date: 6/27/2016
City of Palo Alto Page 1
Summary Title: State Gas Tax Audit
Title: State Gas Tax Audit and Response
From: City Manager
Lead Department: Administrative Services
This is an informational report and no City Council action is required.
Discussion
On April 18, 2016 the California State Controller issued an audit report on the City of Palo Alto
Special Gas Tax Street Improvement Fund (Attachment A). The audit report was distributed to
the Mayor and staff is now forwarding it to Council. The audit found that the City had
accounted for and expended its gas tax allocations in compliance with State requirements.
However, the report notes that the fund balance in the Special Gas Tax and Street
Improvement Fund was understated by $994,217 as of June 30, 2013 and a procedure is
needed to appropriately reference project transfers in the future.
The reason for the understatement was due to the City transferring the funds to another fund,
Stanford Research Park Fund, for street-related expenditures without an appropriate transfer
cross reference. The City, however, never expended the funds and the funds were
subsequently returned to the Special Gas Tax and Street Improvement Fund. The return of the
funds is identified on page 114 of the 2015 City of Palo Alto Comprehensive Annual Financial
Report (CAFR). These funds were used in the FY2016 capital improvement budget to fund
street maintenance and safe routes to school projects as transfers from the Gas Tax Fund,
which is appropriate and addresses the audit issue.
To address the second part of the recommendation in the audit, staff has created a procedure
that clearly identifies the project to which transfers are made. Transfers continue to be
documented in the City’s SAP financial system. Staff will send a letter to the State Controller
making them aware of the need procedure in response to the audit.
Attachments:
Attachment A - Gas Tax Audit from State Controller (PDF)
CITY OF PALO ALTO
Audit Report
SPECIAL GAS TAX STREET IMPROVEMENT FUND
July 1, 2007, through June 30, 2013
TRAFFIC CONGESTION RELIEF FUND ALLOCATIONS
July 1, 2005, through June 30, 2011
PROPOSITION 1B FUND ALLOCATIONS
July 1, 2007, through June 30, 2013
BETTY T. YEE
California State Controller
April 2016
BETTY T. YEE
California State Controller
April 18, 2016
The Honorable Patrick Burt
Mayor of the City of Palo Alto
250 Hamilton Avenue
Palo Alto, CA 94301
Dear Mayor Burt:
The State Controller’s Office audited the City of Palo Alto’s Special Gas Tax Street
Improvement Fund for the period of July 1, 2007, through June 30, 2013. The audit should have
included all years subsequent to the prior audit, which covered through June 30, 2003; however,
we were unable to review the records for the period of July 1, 2003, through June 30, 2007,
because these records were not available due to the City’s seven-year record retention policy. We
also audited the Traffic Congestion Relief Fund (TCRF) allocations, recorded in the Capital
Improvement Fund, for the period of July 1, 2005, through June 30, 2011, and the Proposition
1B Fund allocations, recorded in the Capital Improvement Fund, for the period of July 1, 2007,
through June 30, 2013.
Our audit found that although the city accounted for and expended its Special Gas Tax Street
Improvement Fund, TCRF allocations, and Proposition 1B Fund allocations in compliance with
requirements, the city understated the fund balance in the Special Gas Tax Street Improvement
Fund by $994,217 as of June 30, 2013, because it transferred the amount to another fund with the
intent of using it for street-related expenditures, but the funds were never spent.
If you have any questions, please contact Christopher Lek, Interim Chief, Local Government
Audits Bureau, at (916) 284-0120.
Sincerely,
Original signed by
JEFFREY V. BROWNFIELD, CPA
Chief, Division of Audits
JVB/rg
cc: Lalo Perez, Chief Financial Officer
City of Palo Alto
Special Gas Tax Street Improvement Fund, Traffic Congestion
City of Palo Alto Relief Fund Allocations, and Proposition 1B Fund Allocations
Contents
Audit Report
Summary ............................................................................................................................ 1
Background ........................................................................................................................ 1
Objective, Scope, and Methodology ................................................................................. 2
Conclusion .......................................................................................................................... 3
Follow-Up on Prior Audit Findings ................................................................................. 4
Views of Responsible Officials .......................................................................................... 4
Restricted Use .................................................................................................................... 4
Schedule 1—Reconciliation of Fund Balance ...................................................................... 5
Finding and Recommendation .............................................................................................. 6
Attachment–City’s Response to Draft Audit Report
Special Gas Tax Street Improvement Fund, Traffic Congestion
City of Palo Alto Relief Fund Allocations, and Proposition 1B Fund Allocations
-1-
Audit Report
The State Controller’s Office (SCO) audited the City of Palo Alto’s:
Special Gas Tax Street Improvement Fund for the period of July 1,
2007, through June 30, 2013. The audit should have included all years
subsequent to the prior audit, which covered through June 30, 2003;
however, we were unable to review the records for the period of
July 1, 2003, through June 30, 2007, because these records were not
available due to the City’s seven-year record retention policy.
Traffic Congestion Relief Fund (TCRF) allocations recorded in the
Capital Improvement Fund, for the period of July 1, 2005, through
June 30, 2011.
Proposition 1B Fund allocations recorded in the Capital Improvement
Fund, for the period of July 1, 2007, through June 30, 2013.
Our audit found that although the city accounted for and expended its
Special Gas Tax Street Improvement Fund, TCRF allocations, and
Proposition 1B Fund allocations in compliance with requirements, the city
understated the fund balance in the Special Gas Tax Street Improvement
Fund by $994,217 as of June 30, 2013, because it transferred the amount
to another fund with the intent of using it for street-related expenditures,
but the funds were never spent.
The State apportions funds monthly from the Highway Users Tax Account
in the Transportation Tax Fund to cities and counties for the construction,
maintenance, and operation of local streets and roads. The highway users
taxes derive from state taxes on the sale of motor vehicle fuels. In
accordance with Article XIX of the California Constitution and Streets and
Highways Code section 2101, a city must deposit all apportionments of
highway users taxes in its Special Gas Tax Street Improvement Fund. A
city must expend gas tax funds only for street-related purposes. We
conducted our audit of the city’s Special Gas Tax Street Improvement
Fund under the authority of Government Code section 12410.
Chapter 91, Statutes of 2000, (Assembly Bill 2928) as amended by
Chapter 636, Statutes of 2000, (Senate Bill 1662) and Government Code
section 14556.5, created a Traffic Congestion Relief Fund in the State
Treasury for allocating funds quarterly to cities and counties for street or
road maintenance, reconstruction, and storm damage repair. Cities must
deposit funds received into the city account designated for the receipt of
State funds allocated for transportation purposes. The city recorded its
TCRF allocations in the Capital Improvement Fund. We conducted our
audit of the city’s TCRF allocations under the authority of Revenue and
Taxation Code section 7104.
Summary
Background
Special Gas Tax Street Improvement Fund, Traffic Congestion
City of Palo Alto Relief Fund Allocations, and Proposition 1B Fund Allocations
-2-
Senate Bill 1266, Highway Safety, Traffic Reduction, Air Quality, and
Port Security Bond Act of 2006, was introduced as Proposition 1B and
approved by the voters on November 7, 2006, for a variety of
transportation priorities, including the maintenance and improvement of
local transportation facilities. Proposition 1B funds transferred to cities
and counties shall be deposited into an account that is designated for the
receipt of State funds allocated for streets and roads. The city recorded its
Proposition 1B Fund allocations in the Capital Improvement Fund. A city
also is required to expend its allocations within four years following the
end of the fiscal year in which the allocation was made and to expend the
funds in compliance with Government Code section 8879.23. We
conducted our audit of the city’s Proposition 1B allocations under the
authority of Government Code section 12410.
Our audit objective was to determine whether the city accounted for and
expended its Special Gas Tax Street Improvement Fund, TCRF
allocations, and Proposition 1B Fund allocations in compliance with
Article XIX of the California Constitution, the Streets and Highways
Code, Revenue and Taxation Code section 7104, and Government Code
section 8879.23.
To meet the audit objective, we performed the following procedures:
Special Gas Tax Street Improvement Fund
Reconciled the fund revenue recorded in the city ledger to the balance
reported in the SCO’s apportionment schedule to determine whether
Highway Users Tax Account (HUTA) funds received by the city were
completely accounted for in the Gas Tax Fund.
Judgmentally selected sample expenditure transactions and verified
proper documentation and eligibility to determine whether HUTA
funds were expended in accordance with the criteria above.
Analyzed and tested sample transactions to determine whether
recoveries of prior HUTA fund expenditures were identified and
credited to the Special Gas Tax Street Improvement Fund.
Reviewed the fund cash and liabilities accounts for unauthorized
borrowing to determine whether unexpended HUTA funds were
available for future street-related expenditures.
Interviewed city employees and reviewed policies and procedures to
gain an understanding of the city’s internal controls and accounting
systems related to this engagement.
Traffic Congestion Relief Fund (TCRF) Allocations
Reconciled the TCRF revenue recorded in the city ledger to confirm
that the TCRF allocations received by the city agreed with the SCO’s
apportionment schedule.
Objective, Scope,
and Methodology
Special Gas Tax Street Improvement Fund, Traffic Congestion
City of Palo Alto Relief Fund Allocations, and Proposition 1B Fund Allocations
-3-
Judgmentally selected sample expenditure transactions and verified
proper documentation and eligibility to determine the city’s
compliance with the criteria above.
Reconciled the City’s “Schedule of Expenditures as Reported in the
Streets and Roads Annual Report” with the SCO’s “Average Annual
Expenditures Computation of Discretionary Funds” to determine
compliance with the maintenance-of-effort (MOE) requirement.
Proposition 1B Fund Allocations
Reconciled the Proposition 1B revenue recorded in the city ledger to
confirm that the Proposition 1B allocations received by the city agreed
with the SCO’s apportionment schedule.
Judgmentally selected sample expenditure transactions and verified
proper documentation and eligibility to determine the city’s
compliance with the criteria above.
We conducted this performance audit in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
We did not audit the city’s financial statements. We limited our audit scope
to planning and performing the audit procedures necessary to obtain
reasonable assurance that the city accounted for and expended its Special
Gas Tax Street Improvement Fund, TCRF allocations, and Proposition 1B
Fund allocations in accordance with the requirements of the Streets and
Highways Code, Revenue and Taxation Code section 7104, and
Government Code section 8879.23. Accordingly, we examined
transactions, on a test basis, to determine whether the city expended funds
for street purposes. We considered the city’s internal controls only to the
extent necessary to plan the audit.
Our audit found that the City of Palo Alto accounted for and expended its:
Special Gas Tax Street Improvement Fund in compliance with
Article XIX of the California Constitution and the Streets and
Highways Code for the period of July 1, 2007, through June 30, 2013,
except as noted in Schedule 1 and described in the Finding and
Recommendation section of this report. The finding required an
adjustment of $994,217 to the city’s accounting records.
TCRF allocations recorded in the Capital Improvement Fund in
compliance with Article XIX of the California Constitution, the
Streets and Highways Code, and Revenue and Taxation Code section
7104 for the period of July 1, 2005, through June 30, 2011.
Conclusion
Special Gas Tax Street Improvement Fund, Traffic Congestion
City of Palo Alto Relief Fund Allocations, and Proposition 1B Fund Allocations
-4-
Proposition 1B Fund allocations recorded in the Capital Improvement
Fund in compliance with Government Code section 8879.23 for the
period of July 1, 2007, through June 30, 2013.
Our prior audit report, issued on April 21, 2004, disclosed no findings.
We issued a draft audit report on November 24, 2015. David Ramberg,
Assistant Director, Administrative Services Department, responded by
letter dated January 7, 2016, requesting language clarification. The SCO
has clarified the report accordingly. The city’s response is included in this
final audit report as an attachment.
This report is intended for the information and use of the City of Palo
Alto’s management and the SCO; it is not intended to be and should not
be used by anyone other than these specified parties. This restriction is not
intended to limit distribution of this report, which is a matter of public
record.
Original signed by
JEFFREY V. BROWNFIELD, CPA
Chief, Division of Audits
April 18, 2016
Restricted Use
Views of
Responsible
Officials
Follow-Up on Prior Audit Findings
Special Gas Tax Street Improvement Fund, Traffic Congestion
City of Palo Alto Relief Fund Allocations, and Proposition 1B Fund Allocations
-5-
Schedule 1—
Reconciliation of Fund Balance
July 1, 2012, through June 30, 2013
Special Gas
Tax Street
Improvement
Fund
Highway
Users Tax
Allocations 1,2,3
Beginning fund balance per city $1,060,734
Revenues 1,465,896
Total funds available 2,526,630
Expenditures ( 1,942,490)
Ending fund balance per city 584,140
SCO adjustment: 4
Finding—Ineligible expenditures 994,217
Ending fund balance per audit $1,578,357
___________________________
1 The city receives apportionments from the State Highway Users Tax Account, pursuant to Streets and Highways
Code sections 2103, 2105, 2106, 2107, and 2107.5. The basis of the apportionments varies, but the money may be
used for any street-related purpose. Streets and Highways Code section 2107.5 restricts apportionments to
administration and engineering expenditures, except for cities with populations of fewer than 10,000 inhabitants.
Those cities may use the funds for rights-of-way and for the construction of street systems. The audit period was
July 1, 2007, through June 30, 2013; however, this schedule includes only the period of July 1, 2012, through June
30, 2013.
2 Government Code section 14556.5 created a Traffic Congestion Relief Fund (TCRF) in the State Treasury for
allocating funds quarterly to cities and counties for street and road maintenance, reconstruction, and storm damage
repair. The TCRF allocations were recorded in the Capital Improvement Fund. The audit period was July 1, 2005,
through June 30, 2011. The city did not receive any TCRF revenues and did not incur any TCRF expenditures
during FY 2012-13; therefore, it is not included in this schedule.
3 Senate Bill 1266, Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006, introduced
as Proposition 1B, provided funds for a variety of transportation priorities. The audit period was July 1, 2007,
through June 30, 2013. The city did not receive any Proposition 1B revenues and did not incur any Proposition 1B
expenditures during FY 2012-13; therefore, it is not included in this schedule.
4 See the Finding and Recommendation section.
Special Gas Tax Street Improvement Fund, Traffic Congestion
City of Palo Alto Relief Fund Allocations, and Proposition 1B Fund Allocations
-6-
Finding and Recommendation
During fiscal year 2008-09, the city transferred out $994,217 from the
Special Gas Tax Street Improvement Fund to the Stanford Research Park
Fund, with the intent of using the funds for street-related expenditures.
However, the funds were never spent.
Streets and Highways Code section 2101 specifies that the Highway Users
Tax apportionments are to be expended only for the construction,
maintenance, and operation of public streets and roads and related
administrative costs.
As a result, the transfer of $994,217 is unallowable.
Recommendation
The city should return $994,217 into the Special Gas Tax Street
Improvement Fund. In addition, the city should establish procedures to
ensure that all costs charged to the Special Gas Tax Street Improvement
Fund are for street-related projects and are properly documented.
FINDING—
Ineligible expenditures
Special Gas Tax Street Improvement Fund, Traffic Congestion
City of Palo Alto Relief Fund Allocations, and Proposition 1B Fund Allocations
Attachment—
City’s Response to
Draft Audit Report
State Controller’s Office
Division of Audits
Post Office Box 942850
Sacramento, CA 94250-5874
http://www.sco.ca.gov
S15-GTA-0006