California State Auditor

Report 2007-108 Summary - November 2007

Department of Water Resources:

Its Administration of Grants Under the Flood Protection Corridor Program Needs Improvement

HIGHLIGHTS

Our review of the Department of Water Resources' (Water Resources) administration of the Flood Protection Corridor Program revealed that:

  • When Water Resources awarded $28 million for grants in 2001, it based the decisions on a weak selection process with poorly defined selection criteria.
  • It is unclear whether the highest priced grant, the acquisition of Staten Island, will result in a tangible flood protection project in return for the $17.6 million in funds awarded.
  • Water Resources awarded an additional $29.1 million for grants in 2003 without the aid of key information called for in its regulations to evaluate potential projects' flood protection benefits.
  • Water Resources has not enforced many of the monitoring procedures it established.
  • Water Resources has not contacted the city of Santee since March 2004, when it disbursed the final $3.65 million remaining on a $4.75 million project, despite the city's failure to submit required reports.
  • Water Resources neither resolved its appraisal staff's concerns nor those of the Department of General Services that the appraised value of Staten Island was too high, and as a result, the State potentially paid more than fair market value for the property.

RESULTS IN BRIEF

Decisions made by the Department of Water Resources (Water Resources) to award first $28 million and then $29.1 million more in local grants were based on poorly defined selection criteria and incomplete information. Water Resources, which administers the Flood Protection Corridor Program (flood protection program), awarded the initial $28 million to five projects without a scoring process to consistently compare the benefits in flood protection, agricultural land conservation, and wildlife habitat protection specified in each project proposal. Although Water Resources had developed a scoring tool for this purpose, it chose not to use the tool based on the advice of its legal counsel. Instead, Water Resources' selection process started with its providing a series of workshops to potential applicants in 2000, following the approval of the Safe Drinking Water, Clean Water, Watershed Protection and Flood Protection Bond Act (Proposition 13).

After considering the merits of 11 project proposals from various government and nonprofit organizations, the Water Resources' project selection committee (selection committee) recommended that the director of Water Resources approve funding for only five projects. However, the selection committee provided only a general sense of why it felt those projects were preferable over the six it rejected. Missing from the selection committee's recommendations were comparisons of the strengths and weaknesses of projects the committee recommended for funding and those it did not. As a result, it is unclear why the five projects Water Resources chose to fund were better investments of funds from the flood protection program than the six projects it rejected.

Most notably, the flood protection program's highest priced grant, the purchase of Staten Island at a cost of $17.6 million, has yet to result in a tangible flood protection project. In the grant agreement for the project, Water Resources provided The Nature Conservancy (Nature Conservancy) with funds from the flood protection program to acquire Staten Island in 2001. In return the grant agreement allowed Water Resources to obtain the property rights it needed to begin a flood protection project on the island. However, during the six-year period following Nature Conservancy's acquisition of Staten Island, Water Resources has yet to implement a worthwhile flood protection project on the property. Although Water Resources contends that Staten Island has already achieved significant flood protection benefits from the standpoint of preventing future development in an area prone to flooding, its contention is questionable considering the current legal restrictions prohibiting such development.

California's voters created the flood protection program by approving Proposition 13 in March 2000. Initially funded with $70 million, of which $57 million was available for projects, the program aims to increase flood protection, agricultural land preservation, and wildlife habitat protection throughout the State by taking various actions, such as acquiring real property interests and setting back and strengthening existing levees. In November 2006 California's voters approved the Safe Drinking Water, Water Quality and Supply, Flood Control, River and Coastal Protection Bond Act of 2006 (Proposition 84) and the Disaster Preparedness and Flood Prevention Bond Act of 2006 (Proposition 1E). Together these two propositions provided Water Resources with an additional $330 million for similar flood protection projects.

When awarding $29.1 million in a second round of grants, Water Resources did not require applicants to submit two key types of information mandated in the flood protection program's regulations for Water Resources to evaluate the relative merits of potential projects. For example, obtaining hydrologic studies from applicants would have given Water Resources the opportunity, before approving a grant, to determine the reliability of the project's proposed flood protection benefits based on the assessment of a civil engineer. Water Resources frequently required these studies only after it had already awarded flood protection program funds.

According to the manager of the flood protection program (program manager), the regulations requiring hydrologic studies imposes a burden on grant applicants that, if enforced by Water Resources, would have limited the number of applications it considered for funding. Further, the program manager asserted that Water Resources' staff of civil engineers, who were familiar with the flood risks addressed by each proposal, evaluated the flood protection benefits of each application. Despite the program manager's assertions, however, Water Resources' project selection records do not provide a comparable quantitative analysis of a project's flood protection benefits similar to that found in a hydrologic study. Further, the program manager's assertion that Water Resources believes hydrologic studies are burdensome is inconsistent with the funding guidelines Water Resources developed under Proposition 84, which reiterate this requirement. However, Water Resources has since clarified its requirements and in the future will only require each applicant to provide an assertion letter from a civil engineer describing the flood protection benefits of the project at the time of application. Nevertheless, program regulations have the effect of law and cannot be waived by Water Resources when it is expedient. Water Resources could also improve its project selection methodology by obtaining documentation, such as letters, as evidence of property owners' willingness to sell their property for fair market prices.

The deficiencies we noted in Water Resources' project selection process calls into question the benefits the State will realize from the $47.1 million already spent on flood protection projects. Correcting these problems will give Water Resources the detailed information it needs to select the most beneficial projects and properly distribute the more than $3 million of flood protection program funds that remain and the $330 million in funding from propositions 84 and 1E.

We also found that Water Resources has not adequately monitored projects, despite flood protection program regulations and grant agreements that establish a framework for its oversight of grantees. In one particularly serious case, Water Resources has not contacted the city of Santee since March 2004, when it disbursed the final $3.65 million of a $4.75 million project. Even though Water Resources' agreement with Santee required the city to submit semiannual progress reports detailing the project's progress and expenditures, we noted that Santee had submitted only two progress reports to Water Resources since November 2000, when a letter of agreement between them was executed. Water Resources issued a letter in March 2004 asking the city to provide an accounting of its spending, but Water Resources did not follow up or take any further action when it did not receive the requested information. Our own inquiry of Santee resulted in our obtaining expenditure records that were not always consistent with the invoices the city had previously submitted to Water Resources for payment. Because the city may be owed another $250,000 in grant funds, Water Resources should ensure that Santee has properly spent the money it already received.

For many other projects funded by the flood protection program, Water Resources did not obtain complete progress reports. Specifically, the progress reports for nine projects we reviewed did not meet the flood protection program's regulations. These deficient reports did not discuss the status of the projects in terms of schedules and budgets, and many of the reports failed to provide records of project expenditures that went beyond the grantee's assertion of incurred costs and did not report on any key issues affecting timely project completion. This lack of critical information has compromised Water Resources' ability to effectively monitor projects funded by the flood protection program.

Further undermining its knowledge of project status was Water Resources' inability to meet its goal of regularly visiting project sites to monitor progress. It also did not consistently maintain project activity logs to satisfactorily describe both the occurrence and the results of staff visits to project sites and to document important communications with grantees. Water Resources claims that staff turnover, staff redirection, vacancies caused by the hiring freeze, and travel restrictions due to budget restrictions contribute to these monitoring weaknesses, but its lack of formal procedures to guide staff also likely contributed to its inconsistent monitoring approach.

Another factor hampering Water Resources' ability to effectively monitor projects and ensure project completion is its practice of not withholding a percentage of each progress payment to grantees. Water Resources contends that such a withholding would not be effective because other factors have delayed projects. However, in the case of the $4.75 million project with the city of Santee, Water Resources may have lost its leverage to obtain progress reports and effectively monitor the project after disbursing almost the entire amount allocated. In response to its March 2004 request that the city provide an accounting of expenditures, Water Resources never received the information, did no further follow up, and did not obtain an audit report on the project as required under the letter of agreement.

Water Resources lacks an adequate internal reporting process on project status for the flood protection program. Because the flood protection program will administer additional grants and projects with funds from propositions 84 and 1E, Water Resources will need to develop processes to report to the Legislature and the Department of Finance to comply with the State General Obligation Bond Law and a January 2007 executive order from the governor that directs agencies to exhibit greater accountability over expenditures financed by bonds.

RECOMMENDATIONS

To provide consistency in its project selection process and to better justify its decisions on selecting future projects, Water Resources should do the following:

  • When awarding grants, use a process, such as a consistent scoring system, that enables it to justify the rankings of projects it selects.
  • Adhere to the regulations of the flood protection program requiring a hydrologic study as part of the grant application. If Water Resources believes hydrologic studies are too costly for some grant applicants, it should consider establishing a process to obtain this information or substantial other evidence supporting its decisions before awarding grants. For example, Water Resources could use funds from the flood protection program to pay for a study after preliminary selection, before deciding whether to fund the entire project.
  • For proposed projects involving land acquisitions, adhere to the regulations of the flood protection program requiring grant applicants to submit evidence of willing sellers.

Water Resources should follow up with Santee to determine how the city spent its allocated funds. Additionally, Water Resources should release the unspent portion of allocated funds to the city only after Santee demonstrates it can use the funds for flood protection purposes, provides an audit report with an accounting of how the city used the $4.75 million previously disbursed, and submits a final inspection report by a registered civil engineer as the letter of agreement with Santee requires.

To effectively monitor projects, Water Resources should develop policies and procedures to ensure that it does the following:

  • Receives sufficiently detailed and complete progress reports from grantees with supporting records of expenditures.
  • Communicates to staff its expectations for conducting and documenting site visits and for documenting important communications with grantees.
  • Withholds a percentage of payments to a grantee when appropriate and releases those funds only after it is satisfied that the project is reasonably complete.

To comply with reporting requirements for projects it funds with propositions 84 and 1E, and to ensure that its management is kept apprised of key issues, Water Resources should develop a process for reporting project status. This process should include regular reporting of each project's budget and costs, progress in meeting the goals and time schedules of the grant agreement, and any key events affecting the project.

AGENCY COMMENTS

Water Resources agrees with the need for our recommendations and indicates it is working towards their implementation. However, in its response, Water Resources disputes some of the conclusions presented in the audit report.















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