CITY OF COACHELLA - California State Controller · Mayor of the City of Coachella 1515 Sixth Street...

CITY OF COACHELLA

Audit Report

SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2011, through June 30, 2013

PROPOSITION 1B FUND July 1, 2007, through June 30, 2013

JOHN CHIANG California State Controller

April 2014

JOHN CHIANG

California State Controller

April 22, 2014

The Honorable Eduardo Garcia

Mayor of the City of Coachella

1515 Sixth Street

Coachella, CA 92236

Dear Mr. Garcia:

The State Controller’s Office audited the City of Coachella’s Special Gas Tax Street

Improvement Fund for the period of July 1, 2011, through June 30, 2013. We also audited the

Proposition 1B Fund for the period of July 1, 2007, through June 30, 2013.

Our audit disclosed that the city accounted for and expended its Special Gas Tax Street

Improvement Fund and Proposition 1B Fund in compliance with requirements, except that the

city understated the fund balance in the Special Gas Tax Street Improvement Fund by $392,785

as of June 30, 2013, because it charged ineligible debt service payments of $39,324 to holders of

the Gas Tax Revenue Certificates of Participation in fiscal year (FY) 2011-12, and transferred

money from the Special Gas Tax Street Improvement Fund to the General Fund to reimburse

general street maintenance expenditures based on budgeted amounts. The budgeted amounts

exceeded the actual amount by $271,252 in FY 2011-12 and by $82,209 in FY 2012-13, totaling

$353,461. In addition, we identified a procedural finding.

If you have any questions, please contact Steven Mar, Chief, Local Government Audits Bureau,

at (916) 324-7226.

Sincerely,

Original signed by

JEFFREY V. BROWNFIELD, CPA

Chief, Division of Audits

JVB/sk

cc: David Garcia, City Manager

City of Coachella

William Pattison, Finance Director

City of Coachella

City of Coachella Special Gas Tax Street Improvement Fund and Proposition 1B Fund

Contents

Audit Report

Summary ............................................................................................................................ 1

Background ........................................................................................................................ 1

Objective, Scope, and Methodology ................................................................................. 2

Conclusion .......................................................................................................................... 2

Follow-Up on Prior Audit Findings ................................................................................. 3

Views of Responsible Official ........................................................................................... 3

Restricted Use .................................................................................................................... 3

Schedule 1—Reconciliation of Fund Balance ...................................................................... 4

Findings and Recommendations ........................................................................................... 5

Attachment—City’s Response to Draft Audit Report


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Audit Report

The State Controller’s Office audited the City of Coachella’s Special Gas

Tax Street Improvement Fund for the period of July 1, 2011, through

June 30, 2013. We also audited the Proposition 1B Fund for the period of

July 1, 2007, through June 30, 2013.

Our audit disclosed that the city accounted for and expended its Special

Gas Tax Street Improvement Fund and Proposition 1B Fund in

compliance with requirements, except that the city understated the fund

balance in the Special Gas Tax Street Improvement Fund by $392,785 as

of June 30, 2013, because it charged ineligible debt service payments of

$39,324 to holders of the Gas Tax Revenue Certificates of Participation

in fiscal year (FY) 2011-12, and transferred money from the Special Gas

Tax Street Improvement Fund to the General Fund to reimburse general

street maintenance expenditures based on budgeted amounts. The

budgeted amounts exceeded the actual amount by $271,252 in FY 2011-

12 and by $82,209 in FY 2012-13, totaling $353,461. In addition, we

identified a procedural finding.

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.

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 street and roads. The city recorded its

Proposition 1B allocations in the Proposition 1B Fund. A city is also

required to expend its allocations within three years following the end of

the fiscal year which the allocation was made and to be expended 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.

Summary

Background


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Our audit objective was to determine whether the city accounted for and

expended the Special Gas Tax Street Improvement Fund and the

Proposition 1B Fund in compliance with Article XIX of the California

Constitution and the Streets and Highways Code. To meet the audit

objective, we determined whether the city:

Properly deposited highway users tax apportionments and other

appropriate revenues in the Special Gas Tax Street Improvement

Fund;

Properly deposited Prop 1B allocations into an account designated for

the receipt of state funds allocated for transportation purposes;

Expended funds exclusively for authorized street-related purposes;

and

Made available unexpended funds for future expenditures.

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 the

Special Gas Tax Street Improvement Fund and the Proposition 1B Fund

in accordance with the requirements of the Streets and Highways Code

and Government Code 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 disclosed that the City of Coachella 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, 2011, through June 30, 2013,

except as noted in Schedule 1 and described in the Findings and

Recommendations section of this report. The findings required an

adjustment of $392,785 to the city’s accounting records.

Furthermore, the audit also disclosed that the city accounted for and

expended its Proposition 1B allocations recorded in the Proposition 1B

Fund in compliance with Government Code section 8879.23 for the

period of July 1, 2007, through June 30, 2013.

Objective, Scope,

and Methodology

Conclusion


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Our prior audit report, issued on March 28, 2013, disclosed no findings.

We issued a draft audit report on January 31, 2014. William B. Pattison,

Finance Director, responded by letter dated February 19, 2014, agreeing

with the audit results with the exception of Finding 1. 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

Coachella’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 22, 2014

Restricted Use

Views of

Responsible

Official

Follow-Up on Prior Audit Findings


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Schedule 1—

Reconciliation of Fund Balance

July 1, 2012, through June 30, 2013

Special Gas Tax Street Improvement Fund

Highway Users Tax

Allocation 1

Proposition 1B

Fund 2

Beginning fund balance per city $ 1,516,789 $ 483,035

Revenues 994,727 749

Total funds available 2,511,516 483,784

Expenditures (1,121,562) (483,784)

Ending fund balance per city 1,389,954 —

Timing adjustment:

Accrual of June 2013 highway users tax apportionment

(Governmental Accounting Standards Board Statement

No. 34) (35,316) —

SCO adjustments: 3

Finding 1—Ineligible charges for debt service payments 39,324 —

Finding 2—Transfer in excess of actual expenditures 353,461 —

Ending fund balance per audit $ 1,747,423 $ —

___________________________ 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 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, 2011,

through June 30, 2013; however, this schedule includes only the period of July 1, 2012, through June 30, 2013. 2 Senate Bill 1266, Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond of 2006, introduced as

Proposition 1B, provided funds for a variety of transportation priorities. The audit period was July 1, 2007,

through June 30, 2012. 3 See the Findings and Recommendations section.


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Findings and Recommendations In fiscal year (FY) 2011-12, the city charged the Special Gas Tax Street

Improvement Fund $39,324 ($12,190 in principal and $27,134 in

interest) for debt service payments. The principal and interest relates to

the $7,205,000 in Certificates of Participation (COPS) with a 30-year

term in a joint issue with the City of Indio, which simultaneously issued

$7,450,000, for a total issue of $14,655,000, on April 15, 2008. The

proceeds from the sale of these COPS were used to finance the design,

acquisition, and construction of various street projects. The COPS are

solely secured by future gas tax revenues to be received from the State of

California.

There is no provision in the Streets and Highways Code for the payment

of principal and interest of COPS. The Streets and Highways Code

allows for gas tax funding of principal and interest on bonds that are

voter-approved, when the terms of the bonds do not exceed 25 years, and

when the principal and interest are limited to 25% of the annual gas tax

allocation.

Streets and Highway Code section 2107.4 states:

No more than one-quarter of the funds allocated to a city or county

from the Highway Users Tax Account in the Transportation Tax Fund

for the construction of the streets therein may be used to make principal

and interest payments on bonds issued for such construction, if the

issuance of such bonds is authorized by a proposition approved by a

majority of the votes cast thereon. The term of any such bonds shall not

exceed 25 years.

Recommendation

The city should reimburse the Special Gas Tax Street Improvement Fund

for the ineligible debt service payments, totaling $39,324, for FY 2011-

12. In the future, the city should ensure that all debt service payments

charged to the Special Gas tax Street Improvement Fund are voter-

approved bonds and not COPs. Additionally, the city should ensure that

the proceeds from the bonds are used for street work and debt service

payments and do not exceed one-quarter of the annual gas tax

allocations, and that the terms of the bonds do not exceed 25 years.

City’s Response

City of Coachella does not concur with this finding based upon

information provided by the Bond Underwriter. City of Coachella will

consult with its Bond Counsel.

SCO’s Comment

The city’s response does not provide any new information; therefore, our

finding and recommendation stand.

FINDING 1—

Ineligible charges for

debt service payments


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The city transferred money from the Special Gas Tax Street

Improvement Fund to the General Fund to reimburse general street

maintenance expenditures based on budgeted amounts. The budgeted

amounts exceeded the actual amount by $271,252 in FY 2011-12 and by

$82,209 in FY 2012-13, totaling $353,461.

Streets and Highways Code section 2101 requires that gas tax money be

spent on allowable and verifiable expenditures.

The city should transfer back to the Special Gas Tax Street Improvement

Fund $353,461 for expenditures that the city did not incur.

Recommendation

We recommend that the city ensure that funds being transferred out of

the Special Gas Tax Street Improvement Fund are for actual costs

incurred in accordance with the Street and Highways Code section 2101.

City’s Response

The city agreed with the finding and recommendation.

SCO’s Comment


During our audit, we found that the city’s General Fund cash account

reported month-end negative balances in August 2012 through

September 2013. A negative General Fund cash balance may be an

indication that cash from other funds in the investment pool—including

restricted funds such as cash in the Special Gas Tax Street Improvement

Fund—is being used to pay for General Fund-related expenditures. Thus,

any of these other funds that have a positive cash balance are potentially

impaired and may be unable to make timely payments of required

expenditures. The city has not demonstrated that it has restored the

financial health of the General Fund and, thus, it is inadvertently

affecting the integrity of the Gas Tax Fund.

Streets and Highways Code section 2118 states:

When the State Controller determines it to be necessary, he may require

a county or city to deposit money received from the Highway Users

Tax Fund in a separate bank account.

Recommendation

The city should establish a separate bank account for the state gas tax

fund money. This account should be used to record all deposits and

expenditures against the money. The city has 30 days to provide the State

Controller’s Office with proof that it has established a separate bank

account. The bank account shall remain open until the city provides

FINDING 2—

Transfer in excess of

actual expenditures

FINDING 3—

General Fund cash

impairment


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evidence that, over a reasonable period of time, it has restored the

financial health of the General Fund.

City’s Response


SCO’s Comment



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

C14-GTA-014

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