Report 2004-130 Summary - January 2005
Los Angeles Department of Water and Power:
Its Transfers of Funds to the City Comply With the City Charter; However, It Needs to Improve Its Controls Over Contracts, Expenditures, and Personnel Records
Our review of certain aspects of the operations of the Los Angeles Department of Water and Power (department) revealed the following:
- The department followed the requirements of the City Charter of the city of Los Angeles (city) and the terms and conditions of its bond debt when it transferred more than $82 million from its water fund and almost $575 million from its power fund to the city's reserve fund since fiscal year 2001-02.
- The department did not always award contracts in compliance with city and department competitive bidding requirements, ensure that staff signed contracts only when authorized, and did not always seek required approvals from the Board of Water and Power Commissioners.
- In a November 2004 report, the department's internal auditor reported that the department's administration of a series of contracts and purchase orders for the implementation of an automated supply chain management project, valued at more than $9.7 million, was materially flawed.
- The department did not ensure that only authorized employees approved invoices for payment.
- The department did not use available information to consistently assess compliance with, or ensure uniform enforcement of, policies regarding the city's purchasing card program—a program that uses credit cards issued by a commercial bank to provide a cost-efficient procurement process.
- The lack of central control over the department's personnel files has reduced its ability to ensure that it adequately maintains personnel files that contain the records necessary to support and explain hiring and promotion decisions.
- The individuals who occupy seven of the exempt positions we reviewed carry job titles and perform duties that are different from those approved by the mayor and city council.
RESULTS IN BRIEF
The Los Angeles Department of Water and Power (department) was established by the city of Los Angeles (city) in 1925. The department has sole responsibility for meeting the electric and water needs of its service area—an area almost entirely within the city's boundaries. The Los Angeles City Charter (city charter) grants to the department's governing board, the Board of Water and Power Commissioners (board), the city's rights and property associated with providing water and power to the city's inhabitants and customers. It establishes separate funds for the water and power systems to accumulate and account for the revenues and expenditures of the water and power operations, respectively. The city charter grants the board the authority to appropriate and spend those funds.
The city charter further authorizes the department to transfer surplus money from the Water Revenue Fund (water fund) and the Power Revenue Fund (power fund) to the city's reserve fund. Although board resolutions currently identify the targeted annual transfers as 5 percent of the gross revenue from the water fund and 7 percent of the gross revenue from the power fund, these transfers are potentially limited by provisions in the department's bonds. Under the bonds' provisions, transfers may not exceed the prior year's net income and remaining equity must meet specified equity-to-debt ratios. Our review found that the department followed the requirements of the city charter and the terms and conditions of its bond debt when it transferred a total of $82.4 million from the water fund and $574.7 million from the power fund to the city's reserve fund since fiscal year 2001-02.
The department is not unique in transferring money from its water fund and power fund to the city each year. According to a June 2003 presentation of financial information for 38 electric power utilities compiled by Fitch Ratings, a financial research and debt rating company, 32 (84 percent) of the utilities studied transfer an average of 5.82 percent of their annual revenues to city general funds. The department's annual transfers are close to this average.
As part of this audit, we were asked to review the department's policies and procedures for expenditures, contracts, and personnel. We found the department needs some improvement in its oversight of its business units' activities in these areas. The department's Corporate Purchasing Services (CPS) is responsible for processing contracts and purchase orders in compliance with city and department rules. CPS did not award contracts in compliance with city and department competitive bidding requirements for two of the 12 contracts we reviewed. According to an assistant city attorney, for one of these contracts, the department has broadly construed the city's administrative code to exempt from competitive bidding all personal services contracts valued at less than $2 million. Moreover, for the larger of the two contracts, valued at $149,500, the CPS employee who signed the contract obligating the department was only authorized to sign contracts with a value of $50,000 or less. In addition, for this contract and five others valued at $150,000 each, CPS violated board policy because these contracts extended the value of the original contracts beyond the threshold set by board resolution without receiving approval from the board. By not following the department and city policies for competitively bidding contracts and seeking board approval for contracts when required, CPS cannot ensure that it procures high-quality goods and services at the best available prices and adheres to the board's control over the department's contracts. Additionally, although we did not find any significant issues in the department's administration of the 12 contracts we reviewed, a November 2004 report prepared by the department's internal auditor contained a finding that the department's administration of a series of contracts and purchase orders for the implementation of an automated supply chain management project, valued at more than $9.7 million, was materially flawed.
The department's accounts payable unit (accounts payable) is responsible for overseeing payments to suppliers. However, for 16 of the 45 payments we reviewed (36 percent), although proper, we found that accounts payable's audit clerks did not ensure that only authorized employees approved invoices for payment. Rather, accounts payable relied on business unit managers to enforce the department's policies with respect to expenditures. As a result, accounts payable cannot ensure that it paid only valid claims for authorized goods and services.
CPS is also responsible for administering the department's participation in the city's purchasing card (P-card) program. The city initiated the P-card program—a program that uses credit cards issued by a commercial bank—to provide a cost-efficient procurement process for city employees. However, CPS has not implemented procedures to use available information on violations of P-card program policies, such as the results of CPS audits of cardholders' purchases and business unit staff reports of P-card policy violations. Use of such procedures would enable CPS to consistently assess compliance with, or ensure uniform enforcement of, P-card program policies. These policies restrict the uses for the P-cards, including prohibiting the purchase of certain types of items. They also set daily and monthly dollar limits on purchases and require business unit staff to review purchases to ensure they are authorized and approved. In addition, CPS has not provided clear guidance to the department's business unit managers for determining the appropriate corrective action business units should take against P-cards in response to P-card policy violations and clear criteria for determining when it would be appropriate to restrict, suspend, cancel, or deactivate P-cards.
Further, the department's lack of central control over personnel files has reduced its ability to ensure that it adequately maintains personnel files that contain the records required by department policy. For example, department policy requires that documents that support and explain civil service hiring and promotion decisions be kept in these files. These documents are an important element of resolving discrimination complaints that may arise against the department over its hiring or promotion practices. Each business unit, which may be located away from the department's headquarters, maintains personnel files for its employees. However, the business units do not always ensure that these files are complete. As a result, the department could not produce the documents necessary to support and explain its hiring and promotion decisions for four of the 12 civil service appointments we reviewed. In addition, the department's personnel files did not contain evidence that the employees who occupied nine of the department's exempt positions possess the qualifications the department used to gain approval for the exemption of the positions from the civil service rules by the mayor and the city council. Further, according to research conducted by the department's human resources director for seven of the exempt positions we reviewed, the individuals who occupy them carry job titles and perform duties that are different from the job titles and duties approved by the mayor and the city council for these positions. By not using these positions as approved, the department reduces the city's control over the department's exempt positions and reduces the transparency to the public of its hiring decisions for exempt employees.
To ensure that the department receives high-quality services and materials at the best available prices, CPS should comply with department and city competitive bidding policies when awarding contracts for goods or services. In addition, CPS should recognize when the contracts it awards are extensions of existing contracts and seek board approval when the amended amount exceeds the threshold contained in the department's policy for obtaining such approval.
Further, to improve its controls over the contracts awarded for goods and services, CPS should promptly implement the recommendations presented in the department's internal auditor's November 2004 report on a series of contracts and purchase orders for the department's implementation of a supply chain management system. CPS also should ensure that its staff members sign contracts that obligate the department only when they are authorized to do so.
In order to ensure that the department processes payments correctly and to ensure that payments are made only for authorized purposes, accounts payable should strengthen its internal control procedures to include a process for verifying that contract administrators at the business unit level review and authorize invoices before approving them for payment.
To strengthen the oversight over the P-card program and to obtain the information needed to evaluate the costs and benefits of the program and minimize abuses, CPS should:
- Collect and use the information that results from CPS audits of cardholders' purchases and business unit staff reports of P-card policy violations to track violations on an ongoing basis, including repeat violations of P-card policy.
- Track and follow up business unit managers' responses to reports of suspected P-card policy violations that result from CPS audits of cardholders' purchases to ensure that the corrective actions business unit managers take against P-cards are effective and that policies are enforced consistently.
- Provide clear guidance for determining the appropriate corrective action business units should take against P-cards in response to violations and clear criteria for determining when it would be appropriate to restrict, suspend, cancel, or deactivate a P-card. Further, CPS should ensure the uniform enforcement of such policies through its improved monitoring efforts.
To ensure that it adheres to its policies for a single comprehensive record for employees' work history and uniform filing and file retention of employee personnel records, the department should consider changing the decentralized nature of its personnel record keeping and establish a centralized system, administered and maintained under the supervision of the department's director of human resources. In addition, the department should seek approval from the mayor and city council when it uses its exempt positions for duties other than those previously approved by the city.
The department generally agrees with our recommendations, except for those related to our findings on its contracting procedures and its administration of the city's P-card program. Our comments follow its response.