MINUTES OF THE ADMINISTRATIVE AND FINANCE COMMITTEE MEETING
AUGUST 19, 2005
1. CALL TO ORDER
Chair Dixon called the Administrative and Finance Committee special meeting to order at 9:36 a.m.
2. ROLL CALL
Committee members present were Chair Dixon, Vice Chairs Dailey and Tu, Directors Brammell, Johnson, Knutson, Muir, Steiner and Williams. Committee members absent were Directors Bowersox, Parker, Price, Watton and Representative Slater-Price. Also present was Director Lewinger. There was a quorum of the Committee. Staff present was General Counsel Hentschke, Deputy General Manager Lanspery, Director of Finance/Treasurer Brust and Controller Wade. Also present was Mr. Ken Al-Imam, Conrad & Associates, LLP.
3. CHAIR’S COMMENTS
There were no Chair’s comments.
4. DISCUSSION OF FISCAL YEAR ENDED JUNE 30, 2005 AUDIT PLAN AND AUDITORS' SCOPE OF WORK
Ms. Wade introduced Ken Al-Imam from Conrad & Associates, LLP. Mr. Al-Imam made a PowerPoint presentation to the Committee on the audit plan and scope of work. He explained the objective, methodology, scope and limitations of the annual audit. He stated the Water Authority must implement GASB 45 in Fiscal Year ending June 2008.
Director Johnson asked if an audit would be conducted every year or every two years due to the multi-year budget. Mr. Al-Imam responded that an audit would be conducted every year.
Director Johnson asked if it was possible for the Water Authority to make misstatements that would cause it to get a lower bond rating. Mr. Al-Imam stated that there was always a risk, and that the Water Authority had to eliminate the risk to a reasonable level. He stated that the Water Authority had a very high quality system, and that it had always cooperated and implemented all recommended controls.
Director Williams asked if the auditor kept detailed records for each recommendation made to the Board showing why a recommendation was made. Mr.
Al-Imam stated that State Law required that they retain the records for seven years; however, they did not retain Water Authority accounting records. He explained it was the Water Authority’s responsibility to retain accounting records. He further stated that he had reviewed the Water Authority’s records retention policy and had not identified any concerns.
Vice-Chair Tu asked how a determination was made as to what percentage of items would be tested during an annual audit and what the general percentage was. Mr. Al-Imam responded that they did a 100% confirmation of a certain amount of large dollars. They wanted to see an error rate less than 7%.
Director Muir asked if the Water Authority was implementing GASB 45 now. Mr. Al-Imam responded that it was not being implemented at this time. Ms. Brust stated that the Water Authority would budget the actuarial valuation to occur in Fiscal Year 2006-2007.
Director Muir inquired about the make-up of the audit team. He had heard there was a high turnover at auditing firms at the lower end. Mr. Al-Imam responded that the audit team was managed by Jennifer Christian who had been with Conrad & Associates for ten years and specialized in water districts. She supervised Scott Martin who had been with the firm for three years and had extensive experience. He stated he was confident in the team they had auditing the Water Authority.
Director Muir stated that he understood that CALPERS conducted their own audit, but he wondered if Conrad & Associates conducted any checks and balances. Mr. Al-Imam stated that CALPERS had their own independent audit and that he did not conduct any checks and balances; it would not be practical.
Vice-Chair Dailey asked if postemployment benefits would go directly into PERS or whether the Water Authority would be responsible for setting that up. Mr. Al-Imam responded that the Water Authority would need to set up for postemployment benefits. Ms. Brust stated that to give the Committee a sense of the impact, the Water Authority provides for a portion of retiree medical insurance costs to the age of 65.
Director Johnson asked Mr. Al-Imam how many years Conrad & Associates had been the auditor for the Water Authority. Mr. Al-Imam responded six years. Ms. Brust indicated that the Water Authority had been changing every five years; however, the contract with Conrad & Associates was extended to add some consistency with the retirement of the Controller. She further added that a Request for Proposals would be done this spring.
Chair Dixon asked what might trigger a special audit. Mr. Al-Imam responded that whenever there was a concern, a special audit could be conducted. Chair Dixon stated that he believed there was a public perception when someone was being audited that there was a problem. He asked when special audits might be discouraged. Mr. Al-Imam stated that audits were proactive and they never discourage special audits unless for some reason it was felt the request was insignificant.
Director Steiner asked for clarification on what GASB 45 covered. She believed GASB 45 covered payments for health insurance for retirees and not pension benefits, which goes through PERS. Mr. Al-Imam stated that she was correct.
Chair Dixon asked if there were any further questions. There were no further questions at this time.
5. CONSIDERATION OF CITY OF SAN DIEGO FISCAL YEAR 2005-2006 IN-LIEU CHARGE
Ms. Brust introduced the item and stated that the purpose was for staff to have a discussion with the Committee. She introduced Charles Yackly from the City of San Diego (City) Water Department.
Mr. Yackly spoke on the City’s perspective of the in-lieu charge.
Ms. Brust stated the question at hand was the interpretation of the in-lieu charge formula which lists property taxes received. She said staff interpreted that as taxes received in the Water Authority name and the point of clarification was whether the formula was based upon staff’s understanding or the City’s perspective that received means in the Water Authority’s treasury. This matter had resulted due to the State’s takeback of a portion of the Water Authority’s property tax revenues based upon Fiscal Year 2001-2002. Ms. Brust stated that her understanding was the State went back to Fiscal Year 2001-2002 and looked at how much the Water Authority received in terms of property taxes and then came up with a dollar amount that it used to take back property taxes for both Fiscal Years 2005 and 2006. She indicated that the State originally was going to take 40% from special districts and then because of some trailer bills and exemptions it went back to everyone and took additional money. Everyone’s percentage was probably a little bit different because the State was trying to balance the need to shift $350 million. She further stated that if the City’s in lieu charge is based upon property taxes received “in-hand,” the in lieu would be approximately $178,000, as compared to $1.5 million, which results from the formula calculation with the interpretation that received means in the name of the Water Authority. She explained that she asked Mr. Yackly if the City was still receiving the 1% and he basically said yes; however, he indicated it did not all go to the City because it went to other agencies within the City (schools, county, etc.). She explained that at this time staff’s objective was to have a discussion with the Committee and get a better understanding of the issues.
Vice-Chair Tu confirmed with Mr. Yackly that he was not present to request any action and that he was just there to discuss the issue.
Director Brammell asked if the in-lieu charge had been characterized the way the rest of the member agencies pay, would the arrangement with the City not have been unique and they would have paid the 1% just like the other member cities. He further questioned if the City had been paying the property tax the same way as the rest of the cities, would the Water Authority number that the State looked at have been higher, and therefore, those agencies that had money taken would have had less money taken. He wondered if his agency, which paid $2.3 million in each year, may not have paid that much because more money would have been taken from the Water Authority.
Ms. Brust responded that the State Controller’s Office actually used our State Controller’s report which rolls up the in-lieu charge into taxes. Therefore, the State took our in-lieu charge from Fiscal Year 2001-2002. She stated that the Water Authority was filing a claim with the State for return of that money.
Director Brammell asked if the money the Water Authority lost from ERAF included the in-lieu charge from the City. Ms. Brust responded that it did for 2005 and 2006.
Director Muir asked Mr. Yackly if he thought this was a legal issue. Mr. Yackly responded that he was not an attorney; however, there was a settlement in 1987 and if he was asked to sign anything that made representations other than that settlement, he would find it a legal issue. Director Muir asked Mr. Hentschke if he had looked at the legal element. Mr. Hentschke stated that he had looked at the issue. Director Muir responded that he believed the Committee needed to receive a fact-finding report before having further discussion.
Vice Chair Dailey asked Mr. Yackly what would happen in the future if the City deviated this year from the settlement -- would they expect to go back to the in-lieu in the future. Mr. Yackly stated that the City was prepared to continue to pay the in-lieu charge under the 1987 formula.
Director Brammell stated that he would like the report to frame the question of what was being asked. Did the basis of the calculation for the ERAF shift include consideration of the amount paid by the City?
Ms. Brust stated the formula read “amount received by the San Diego County Water Authority.” Staff felt that since the allocation was in the Water Authority’s name at the County Auditor’s Office that it was received by the Water Authority, although not physically, because it was then shifted to the State.
Director Steiner said she understood part of the question to be do we continue on the formula and not a request to change the settlement agreement. She believes the question was what was the amount to which the formula is applied. She stated that we need to get the numbers Director Brammell is asking for as well as a historical history of what has been paid. She did not believe anyone was asking for a waiver of the settlement agreement.
Vice-Chair Dailey asked if any of the other cities ran into this same issue. Ms. Brust stated that they did not because they pay the 1% property tax. The City of San Diego is the only member agency that pays the in-lieu charge.
Director Williams asked if there were any past Board reports that could help clarify this issue. Mr. Hentschke stated that every year the Board sets the in-lieu charge.
Mr. Hentschke gave a brief history of the in-lieu charge. He stated that the Water Authority Act always had a provision in it that allowed any member agency, on behalf of the taxpayers within that member agency, to pay the property tax that the taxpayers otherwise would have paid. The only agency that took advantage of that provision was the City. In 1978, the voters of the State of California adopted Proposition 13. Proposition 13 set the property tax at 1% of the value of the property as opposed to a higher percentage that was in existence before that date. What happened then was the legislature had to roll back the property tax and to roll back the allocation of the 1% among all of the taxing agencies that were getting property taxes before 1978. They took a window of three years. During those three years, the taxpayers within the City did not pay property tax to the Water Authority because the City was paying the in-lieu charge. Because there was no property tax attributed to the Water Authority for taxpayers within the City, the Water Authority’s share of the 1% which was calculated on a countywide basis, was smaller than it otherwise would have been. The in-lieu charge was continued to make up that shortfall. Everyone paid the same 1% property tax, but the 1% went to different places depending on where you live. In the City, about 15% of the 1% probably went to the City general fund. In the 1980s, there was a dispute related to the amount of the in-lieu charge and whether or not there had been an overpayment. The Water Authority Board of Directors and City Council signed a settlement agreement settling up all of the past alleged overpayments on the in-lieu charge up to the date of the settlement agreement. The Water Authority paid approximately $4 million back to the City. The Settlement Agreement settled all past disputes. Concurrently, the Water Authority adopted Resolution 87-1 which established a formula for the collection of the in-lieu charge under the Water Authority Act. Since 1987, the same formula has been used to calculate the in-lieu charge. The current issue is whether the Special District ERAF results in a change in the tax allocation for purposes of the formula for determining the in-lieu charge. Resolution 87-1, it says that the formula applies unless there is a change in the allocation method by the legislature. The City believes the ERAF shift is the equivalent to a temporary change in the allocation formula.
Chair Dixon asked that a report be prepared for the Committee and that the Committee meet again before this is brought back to the full Board.
6. OTHER ITEMS
There was no further discussion.
7. ADJOURNMENT
There being no further business to come before the Administrative and Finance Committee, Chair Dixon adjourned the meeting at 10:44 am.
_______________________________
Jesse Dixon
Chair
| 
