REPORT ON SPECIAL MEETING OF DECEMBER 19th, 2011
DRAFT AUDIT REPORT PRESENTATION
The Auditor’s report (postponed from the November meeting) was presented by Michelle Gallagher from Clendenin Bird & Company, PC, Modesto California. Accompanying Michelle were Kathy Gatewood (also a partner of the firm) and Sara Geer who is a member of their staff. All three participated in the audit last August which took approximately three days of performing various tests and a number of interviews.
[NOTE: Most of the audit information below is paraphrased from Ms. Gallagher’s report unless verbatim, when it will be contained within “quotes”.]
“Overall the audit itself in terms of the financial records, ahm, was really clean, the only adjustment that we had, and it was due to lack of information, was the postretirement benefits adjustment that had to be made. Unfortunately we didn’t have the information in time when the audit started for Charise to have made that journal entry so that was the only journal entry that had to be made to record the mutual liability for the postretirement benefits. But besides that, all of the records that we have tested ahm, came out clean, and documentation is ah, sufficient.” Michelle Gallagher, Partner Clendenin Bird & Company.
The report was an “unqualified opinion” (which is the best you can get) and there were no adjustments, problems or non-reporting of things that would have caused the LDPCSD to receive a “qualified opinion”.
Pages 3-6 were Management’s discussion and analysis, where Charise had put together a “recap” of the events for the year in terms of financial information. Essentially a CSD narrative of how things were going throughout the year. 84% of our Net Assets is due to Capital Assets which is all our of CSD’s infrastructure. Regarding Governmental Activities we had another expenditure over revenue but the majority of that is due to depreciation – we don’t have to spend money for that to be a deduction or an expenditure so in terms of cash flow and how much money we’re spending, our operating is still doing OK.
Page 6 explained some of the capital items that were placed in service. Long Term Debt: two loans with one payment left on the AMR to be finished this year which will help since it’s about $69,000.
INFORMATION FROM THE BOARD PACKET: “The Water District also had a loan with Municipal Finance Corporation for the Treatment Plant Upgrades with a balance of $1,277,463.51. Payments of principal for 2011 and 2010 totaled $53,767.39 and $51,201.55, respectively. Interest paid for 2011 and 2010 totaled $65,238.69 and $67,804.53, respectively.”
Pages 7 – 10 are the Financial Statements. Cash has increased from year before, accounts Receiveable quite high but is due to the Account Receivable from the Waste Water Treatment Plant from Mariposa County that was discovered this last year at approximately $45,000.
Liabilities are pretty much the same as last year but slightly up which is not unusual.
Page 8: Statements of revenues, expenditures, and changes in net assets. Most significant changes are that out operating revenue did go up and expenditures for that did go down, so the net loss was only $51,000 from operations, so it was significantly better than last year’s which was about $300,000.
Page 9-10 Cash flow statement: Basically where money came from and where it went. We paid off $117,000 worth of debt and we netted out of operations from cash $274,000 which was significantly higher than the year before due to the increase in rates.
Pages 11-21 “Are the notes to the financial statements, they’re basically describing various items in the financial statements, they describe the accounting policies of the organization, what kind of funds you have obviously since you’re just a small district it’s just your water and sewer (inaudible).”
Page 14: Cash note: Describes where our money is held, LAIF (Local Agency Investment Fund), banks other financial institutions.
Page 18: Describes our Long Term Debt, how much longer we have on the note from the Government Capital Corporation, $69,000 finished next year (above); the other one will not be done until 2026, about $1.2 million dollars left on that one.
Postretirement benefits this year; Charise had a firm calculate that, huge liability last year due to Government Auditing Standards so this year the increase was only $124,000 because the actual cost was about $168,000 but we’ve already paid in about $42,000 of it so the net increase for the year was only about $124,000 and the year before it was, again, $208,000, so it was a pretty good decrease.
The most significant letter because after the third year of this audit we decided we needed to make sure the items we talked about were significant enough to warrant a comment in the letter.
“Typically ah, we would be giving you a management letter which is a separate letter that would be recommendations for items that we thought could be worked on, and since this is the third year in a row that we’ve had some of the items still open we feel it is important to put it in the letter along with the Grand Jury Report, ahm, we felt really strongly that we need to put it in the letter, so now it’s stated, and now we can talk about it, and now we can move forward on comments that were derived as a response we’re encouraging because now it seems that, you know, with a mediator coming in, (inaudible) reviewing policies that hopefully will get approved for this next year and maybe some significant ah, ahm, improvements on those policies.”
Vice President Bill Kinsella: “How much impact did the Grand Jury report have?”
Michelle: “Quite a bit”.
VP Kinsella: “Significant?”
Michelle: “Significant (inaudible) for us absolutely.”
A comment was also made by Ms. Gatewood we would have still been “hit” on the other items (below) , despite the Grand Jury Report.
Michelle: “Ah, no, I spoke with Bill and I tried to get a hold of the previous director ahm, that had resigned, but she did not respond at all to me, at all, so.”
Michelle felt the Grand Jury report just meant that there were other people looking at us in terms of making recommendations that needed to be in place for us to be successful.
There were 5 important points the auditors wanted to make clear and needed addressing:
1) Updating policies and procedures
2) Job descriptions for specific employees need to be clarified
3) Unapproved Board Minutes should be approved [Issue of verbatim transcriptions]
4) Waste Water Treatment Plant Under Billing [$45,000]
5) Hierarchical structure of the organization [Currently the GM is responsible for everything, but if so, the Finance Person is not responsible for employees and therefore that position may not be an exempt (salaried) unless it falls under the category of administrative exempt (supervisory positions) otherwise the position is technically hourly.]
Significant Deficiencies:
1) Lack of Performance Reviews of employees
2) Recommendation that a director assume the role of Treasurer because the Financial Administrator should not hold both positions.
Director Emery Ross then made a comment about this recommendation: “61050 A, ah, General Manager could be Treasurer, ah Board…”
Michelle: “As long as it’s not the Finance person”
Emery Ross: “…a board member can’t be”.
Michelle: “Is that right?”
Emery Ross: “Yeah, you look at 61050 A, B, C, D, E, F of the Government Code and it will tell you very clearly that a board member cannot be the Treasurer”,
Michelle: “OK”
Emery Ross: “but….”
Michelle: “but”
Emery Ross: “… in the past way back in 92 he was, they did that one page that says Treasurer’s Report he use to read, that’s all he did.”
Michelle: “OK”
Ross: “Ah, an, an, but under the, and, (inaudible) nah, in 2005 the Community Service District Code changed and then this new thing is in here, so Dan could be the Treasurer, which basically would be reading the report I guess.”
[NOTE: I have found it extremely illuminating to double check code sections that Director Ross offers in meetings, and once again, I do not believe his interpretation of this section is supported by the language of the code. Does the below code “very clearly” state a board member cannot be Treasurer? What do you think? Why would professional auditors suggest such a thing if it is not a viable option?
Government Code 61050.
(a) The board of directors shall appoint a general manager.
(b) The county treasurer of the principal county shall serve as
the treasurer of the district. If the board of directors designates
an alternative depositary pursuant to Section 61053, the board of
directors shall appoint a district treasurer who shall serve in place
of the county treasurer.
(c) The board of directors may appoint the same person to be the
general manager and the district treasurer.
(d) The general manager and the district treasurer, if any, shall
serve at the pleasure of the board of directors.
(e) The board of directors shall set the compensation, if any, for
the general manager and the district treasurer, if any.
(f) The board of directors may require the general manager to be
bonded. The board of directors shall require the district treasurer,
if any, to be bonded. The district shall pay the cost of the bonds.
Since Director Ross has repeatedly done this (stating incorrect code sections and/or misinterpreting them) I must seriously question: does he actually read the material he offers in support of his arguments? Although it is entirely possible there are other regulations which would support this unequivocal statement, Director Ross when interrupting a presentation by the Auditor and making such a bold corrective statement, should at the very least confirm that his stated information is correct.]
Director Emery Ross: “But anyway, going back to this (laughter from previous comments) recommendation and that would not be factually correct because you cannot do that.”
The auditor agreed the recommendation could be changed based on the information provided by Director Ross since the report was only a draft. Michelle advised there was a lack of segregation of duties regarding financial matters and the Financial Administrator should not also be the Treasurer for the Board. Essentially a check and balance process with another person involved as Treasurer.
Director Victor Afanasiev questioned whether the report would go to other State Government Agencies to which Charise Reeves replied it would be sent to the State Controller’s Office and to the people that do our loans, and the county.
Director Ross also asked questions regarding pages 16-19 and PERS (Public Employees’ Retirement System) and the district’s contribution but disagreed and argued with the provided answers. He also questioned who the retired employees were and stated the information was factually incorrect.
Ross stated that on page 20/23 (audit report page number and Board packet page number) it said:
“Full time employees are eligible for PERS, [NOTE: actually stated “All District full-time employees participate in the California Public Employees’ Retirement System (CALPERS)”] we’ve got, the board directed the staff to have, have all part-timers get no benefits or retirement or anything and some of them are working 32 hours or more and getting benefits, and that’s under this section of PERS in here.….”. It was explained to Director Ross that PERS policy required such participation. Charise advised to avoid that contribution the part time employees could only work 19 hours a week.
Interim General Manager Dan Tynan stated he believed having only two licensed operators in this big of a district was putting the district at risk. He advised CSD was legally way behind in flushing fire hydrants which should be done once a year but many haven’t been flushed in years.
Michelle Gallagher advised she would make some of the revisions and answer the questions from Director Ross and submit the report to the board for final approval prior until publishing.
Wes Barton furnished some information to the auditor and board regarding his perspective regarding CSD’s financial situation. Wes stated the comments regarding CSD’s failures as noted in the material weaknesses were devastating and did not believe the district had ever received that before in several years. Wes felt discussions about job descriptions and policies pointed out some major discriminatory issues between employee positions. He said many issues need to be addressed before the job descriptions can be accepted for policy. He spoke of the necessity of the board having a common view and purpose of how to run the CSD before job descriptions and processes could be formulated. He felt the current procedure was working backwards and the job descriptions and policies were going to be discriminatory. Barton stated that considering the suggestion that the auditing company might drop our business it was imperative to have focus. He felt mediation was not going to resolve the underlying problems. He referenced TUD’s (Tuolumne Utility District) recent abandonment of their rate increase due to the public uproar yet LDPCSD has a higher rate for comparable water. He reiterated a number of points and suggestions he made back in 2008 that were rejected then and are still being ignored.
<Meeting Break>
Reconvene meeting: 1124hrs, going into Closed Session for Conference with Legal Counsel regarding Existing Litigation Government Code Section 54956.9(a): Kent/Topie v. LDPCSD (2 cases)
Close open portion of meeting.
Reconvene Open Portion of meeting at 1137hrs. Report out of Closed Session: Vice President Bill Kinsella stated the Board had taken no action on the matter. Wes Barton questioned, and confirmed, each of the two cases actually contain two lawsuits and the Board took no action on any of them.
AGENDA ITEM B: JOB DESCRIPTIONS AND SALARY PLAN – Review and approve policies regarding job descriptions; prior policy numbers were 2300 – 2410 replaced by new policy numbers 2300 – 2440. Review and approve retroactive salary plan for 2012 fiscal year.
Director Ross questioned what the salary plan represented in an increase compared to today.
Charise Reeves: “These are ah approximately 2% over for our full time employees in the plant and myself, this is less, this is exactly what was in the budget, we had used these numbers when the budget was presented in August and it’s about a 2% increase for the three employees and then the one that got the promotion it’s about 12%, because that caught her up to where it, it basically evened things out to what has occurred.”
Director Ross discussed the over lapping duties of Board Secretary, Treasurer and Financial Administrator and how the job descriptions would be established further stating he felt they should be separate positions. Director Mark Skoien mentioned earlier discussions about previous salary plans and tables compared to now. Reeves advised the salary plan would be retroactive to August when the budget was approved and the numbers have not changed from what was included in that August budget. IGM Tynan expressed his concerns that running a water district this large with only two licensed operators in the field was risky. Mark Skoien stated he had much experience with such operations and our CSD was not over-staffed. Tynan advised one of the licensed operators had been out for two weeks and it placed a considerable amount of stress on the remaining employees. Currently the part time employees contribute 7% and the District 8.6% to PERS which works out to about $50 a paycheck which was included in the budget.
Director Lew Richardson stated while looking over the proposed salary plan he researched some other material and found we had Policy 2020 where it outlines that such a process should contain prevailing rates for comparable work and other similar public and private employment in the immediate or similar geographic area, internal pay differences between different job classes, the current change in the cost of living and the district financial condition, funding sources and financial policies, and other such information the plant operations manager and office manager deem necessary. He felt looking at the furnished information with charts A, B, C and all that, without this other information one could not see where the increase occurs, just that all steps were going forward which was fine and dandy, but where does that person pick up in that step? He thought if there was some background information of other organizations that are comparable to our size, staffing, and the like it should be included and would make it far easier to see what the actual financial cost is while sticking with current policy.
Director Mark Skoien requested Richardson re-read the policy.
Director Richardson: “This is a Policy, titled Preparation of a Salary Plan, Policy number 2020.10: The plant operation manager and the office manager shall prepare a salary plan covering all job classes under their supervision at the Lake Don Pedro Community Services District. The plan shall depict minimum, intermediate and maximum rates of pay for each job class.”
Charise Reeves: “Which it does”
Director Richardson: “Yeah, 2020.11 the plan shall contain job descriptions, grade number and classification, which it also does. 2020.20, in establishing salary ranges and arriving at specific rates of pay the plant operation manager and office manager shall consider 2020.21, prevailing rates of pay for comparable work and other similar public and private employment in the immediate or similar geographic area and 2020.22 appropriate internal pay differences between the district job classes. So, then, that would then, by looking at something like that we would have something to compare to….”
Director Skoien: “But there’s something after that too right?”
Director Richardson: “Ah, current changes in cost of living, the district’s financial condition –“
Director Skoien: “The district’s financial condition”
Director Richardson: “Right, which is a big thing – do we have the money to-“
Director Skoien: “Yeah, what can it over-ride because of our condition, it sounds like it could over-ride any of that—“
Charise Reeves advised there was officially one increase in three years.
Richardson acknowledged he understood that the salary plan started with a Step One but questioned how that first step was established based on what was paid several years ago. Charise Reeves advised if we go back to the 2008 Resolution that had the last salary tables, she had taken those and added a CPI, this is less than that CPI would have been from the 2008 ones that were there.
Director Skoien commented on the past Prop 218 controversy and how questions were asked if the money was going to be used for salaries. Charise confirmed only the first year of the Prop 218 5 year plan officially on paper promised no salary increases but the 5 year plan included increases for each year.
Wes Barton stated he believed CSD employees for the most part have done better than the economy but felt there should be four full time employees capable of running the plant which would eliminate the part time. Barton said if we look at our costs we’d find labor and benefits is 48% of our revenue and the next big number is 18% depreciation and the rest of the numbers were much smaller. He stated labor was not the problem but the retirement benefits were approximately $171,000 by itself. Barton also commented that availability fees have not been increased since 1994 or 1995. Those two items were the most important, retirement benefit costs and insufficient availability fees.
Reeves advised the salary increases for the three employees were minimal, right at 50 cents/hour and less than what was included in the Prop 218 and less than the cost of living increase from the previous tables. The vacant full time position in the office was not filled and part time help was utilized for that in order to provide two part time employees in the field.
Motion by Ross to revisit the matter in a Special Meeting with the information Director Richardson requested regarding previous 5 year salary increases and Policy 2020, the Treasurer issue with clarification as to whom Charise Reeves actually reports. Second by Mark Skoien.
Wes Barton confirmed that everything was essentially being postponed to the future and seemed particularly concerned with the job descriptions.
Board vote was unanimous.
The Special Meeting was then adjourned with the Regular Meeting to start in approximately 20 minutes.
*X*X*X*
14 HOURS – 15 MINUTES AND COUNTING BEFORE THE NEW YEAR
Wishing you all a SAFE and HAPPY NEW YEAR!
My best to you and yours, Lew
