Report 2010-117 Summary - May 2011
General Obligation Bonds:
The Departments of Water Resources and Finance Should Do More to Improve Their Oversight of Bond Expenditures
Our review of the Department of Water Resources' (Water Resources) administration of bond funds revealed the following:
- It generally made appropriate decisions when awarding the general obligation bond funds and when paying recipients.
- Although it generally demonstrated effective oversight of projects, we noted some weaknesses for two of the 10 projects we reviewed.
- It did not always obtain quarterly progress reports or the progress reports received were late or incomplete for one project.
- It could not demonstrate that it performed an adequate site visit for one project or that it had obtained a civil engineer's certification that the project was built as planned, and for another project no site visits were conducted.
- It could improve its transparency and accountability requirements—Water Resources has posted inaccurate or incomplete information on the Bond Accountability Web site for some of the projects we reviewed, and would benefit from developing a formal review process.
In assessing the Department of Finance's oversight, we found that:
- It has not required state agencies—such as Water Resources—to post the amount of bond funds actually spent for specific projects, and doing so would enhance public transparency.
- It lacks procedures to ensure agencies update their information on the Bond Accountability Web site.
- It has completed relatively few audits of state agencies that administer Strategic Growth Plan general obligation bonds and none of Water Resources.
RESULTS IN BRIEF
Because it will spend significant amounts of funds from general obligation bonds in the coming years, the Department of Water Resources (Water Resources) must position itself to administer this spending effectively. We reviewed its management of a sample of 10 projects that received funding from various general obligation bonds issued by the State, and found that Water Resources generally demonstrated effective oversight of these projects. Nonetheless, Water Resources could take steps to better ensure that its spending achieves expected outcomes and to comply with certain public transparency and accountability requirements.
With a proposed budget of $3.96 billion for fiscal year 2011-12 and more than 3,000 employees, Water Resources' activities include evaluating existing water supplies; forecasting future water needs; and exploring potential solutions to meet the needs of the State's citizens, industry, and wildlife. Water Resources also works to prevent and minimize flood damage, ensure the safety of dams, and educate the public about the importance of water and its efficient use.
A portion of Water Resources' annual budget is supported by general obligation bonds—funds obtained by the State through long-term borrowing authorized by the voters—which accounted for $345 million, or roughly 9 percent, of the $3.96 billion in proposed spending outlined in the 2011-12 Governor's Budget. From July 2005 through June 2010, Water Resources spent $2.3 billion from 13 different general obligation bonds. Water Resources will likely continue to spend significant amounts from general obligation bonds in the future. With the passage of propositions 84 and 1E by voters in November 2006, the State's electorate authorized nearly $9.5 billion in general obligation bonds, of which the two bond acts allocated more than $5.9 billion to Water Resources for various flood control and water management efforts. Through fiscal year 2009-10, Water Resources had spent $1.6 billion from these two propositions.
In evaluating whether Water Resources effectively managed the 10 projects under review, we found that Water Resources made appropriate decisions when awarding general obligation bond funds and when paying grant recipients for projects. Specifically, for projects selected on a competitive basis, Water Resources developed thorough guidelines and procedures for selecting projects, and it documented its rationale for its funding decisions. In cases in which Water Resources awarded projects by using its discretion to determine whether the project was eligible for bond funding, the projects selected were consistent with the requirements established in the general obligation bond acts. Water Resources has also implemented various procedures to ensure that payments were consistent with relevant grant agreements. In all of the projects we reviewed, Water Resources required grant recipients to submit reasonably detailed and itemized invoices for the work performed. Moreover, Water Resources frequently limited the amounts of funds that it advanced or reimbursed grant recipients to ensure that not all of the funds were disbursed until the project was complete.
Water Resources also generally demonstrated effective oversight of projects by implementing procedures to monitor the projects' progress and to ensure that the State ultimately obtains required deliverables—tangible structures, or other outcomes that Water Resources expects the grantee to produce in exchange for the bond funds received—such as project completion reports from grant recipients and certifications from civil engineers verifying the adequacy of construction activities. However, we did note some weaknesses in this area for two of the 10 projects we reviewed. We attempted to evaluate a sample of 10 quarterly progress reports on the $16.2 million Pajaro Valley Groundwater Storage Project, but found that Water Resources did not obtain two of these reports while others were submitted by the grant recipient late or lacked important information, such as indicating whether there were obstacles to the timely completion of the project or discussing the status of the budget. By not obtaining these reports, Water Resources was not always in a position to know whether this project was on track to achieve its intended results.
Water Resources also could not demonstrate that it performed an adequate site visit for this same project. Although Water Resources asserted that it performed multiple visits, it could not demonstrate what aspects of the project it reviewed during these visits and what conclusions, if any, were reached. We had expected Water Resources to be able to provide documentation of its visits, such as a checklist or report demonstrating that important aspects of the project were reviewed during each visit. The lack of adequately documented site visits for this project was particularly problematic since Water Resources also could not demonstrate that it had obtained final deliverables, such as a final construction report from the grant recipient and certification from an independent civil engineer indicating that the project was built correctly. By not enforcing its requirements for project deliverables, Water Resources cannot be certain that the project was completed in accordance with the grant agreement and that water users are receiving the intended benefits of the project. For another project, Water Resources did not perform any site visits of the $15.2 million canal expansion related to its Water Quality Exchange Program project, stating it lacked funding to do so.
Although Water Resources generally demonstrated effective oversight for the projects we reviewed, it could improve its practices for complying with the public transparency and accountability requirements associated with certain general obligation bonds. The former governor's executive order issued in January 2007 required that the public have readily accessible information on the projects being funded by general obligation bonds supporting the State's Strategic Growth Plan1 and the amount spent for each project. Water Resources was to provide this information on a public Web site. However, our review found that Water Resources has posted inaccurate or incomplete information for some of the projects we reviewed, such as reporting incorrect amounts awarded for certain projects. The lack of a formalized process to review and report information to the public seems to be a contributing factor to Water Resources' difficulties in this area.
Water Resources has been trying to address some of these issues with its new Bond Management System; however, we found that the key functionality that would allow it to report project status to the public has not been implemented, even though the contractor, who committed to providing this functionality at a cost of $1.5 million, has completed its work. According to the deputy assistant of its Bond Accountability Division (deputy), Water Resources did not obtain the reporting functionality expected because the contractor had difficulty understanding Water Resources' accounting system and there was not enough collaboration between the contractor and Water Resources' Division of Technology Services. The deputy further explained that Water Resources plans to develop this reporting capability with its own staff and has established a goal of having this functionality operational by August 2011.
In addition to Water Resources' administration of general obligation bonds, we assessed the role of the Department of Finance (Finance) to determine whether it was providing adequate guidance to and oversight of Water Resources regarding an executive order issued by the former governor in 2007. Our review found that Finance should do more to ensure accountability and transparency for bond spending, as required by the executive order. Specifically, we found that Finance has not required state agencies—such as Water Resources—to post the amount of bond funds actually spent for specific projects. Instead, it has allowed agencies to report the amounts committed to projects, or the amounts that are expected to be spent in the future. Although Finance asserted that this approach meets the requirements of the executive order, we believe the information on the Web site would be more beneficial to the public if Finance required administering agencies to also report the actual amounts of bond funds spent. Doing so would provide the public with a way to measure the progress of the projects in their communities, such as by comparing the amounts awarded to the amounts spent.
Our review also found that Finance lacks procedures to ensure that agencies update their information on the Bond Accountability Web site.2 We noted that Water Resources was not posting all project information, and was omitting projects under certain bond programs. We also found that Finance has completed relatively few audits of state agencies that administer general obligation bonds. The 2007 executive order requires state agencies to either contract with Finance for these audits or make alternate arrangements for audits with Finance's approval. However, as of late April 2011, Finance had issued audit reports on only three state entities administering the general obligation bonds approved by voters in November 2006 to support the State's Strategic Growth Plan, and none were of Water Resources.
To ensure that its expenditures of bond funds achieve the intended purposes, Water Resources needs to strengthen its monitoring of project deliverables. For example, it should review the policies and practices of its various divisions, ensuring that periodic progress reports are obtained from grant recipients and that final site visits document the results of the reviews performed.
To provide the public with accurate and complete information on the bond-funded projects it administers, Water Resources should develop and consistently use a formalized, documented review process that will provide greater assurance that project information posted to the Bond Accountability Web site is regularly updated and contains accurate information.
To enhance transparency and accountability regarding the State's use of general obligation bond funds, the governor should require administering agencies to report actual amounts spent on bond-funded projects and update the expenditure information at least semiannually.
To enhance the value of the Bond Accountability Web site, Finance should do the following:
- Require administering agencies to provide information about the actual amounts of bond funds spent on posted projects at least semiannually.
- Develop a tracking and review process to periodically assess the completeness of the project information posted to the Bond Accountability Web site.
To ensure that expenditures were consistent with bond laws and that projects achieve the intended benefits or outcomes agreed to when the projects were originally awarded, Finance should conduct audits of, or approve and assure that Water Resources and other agencies obtain audits of, Strategic Growth Plan bond expenditures.
Water Resources agreed with our recommendations. However, Finance disagreed with our conclusions and recommendations, stating that providing amounts spent on the Bond Accountability Web site would not enhance transparency and accountability. It also disagreed with our conclusion that it has performed few audits of Strategic Growth Plan bonds.
1 In 2006 the State initiated the first phase of its comprehensive Strategic Growth Plan to address the State's critical infrastructure needs over the next 20 years. During the November 2006 General Election, 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), which provided funding to partially address the requirements outlined in the State's Strategic Growth Plan.
2 In this audit report we refer to the Web site created by Finance in response to the January 2007 executive order as the Bond Accountability Web site. This Web site links to other Web sites administered by various state agencies for specific project information.