EDMUND l3. JR. - EUVERNDR

915 STREET I SABRAMENTD CA I 95814-37EI6 I 

Transmitted via e-mail

 

August 5, 2016

Ms. Lisa Silverman, Executive Officer
Department of General Services
Office of Public School Construction
707 Third Street

West Sacramento, CA 95605

Dear Ms. Silverman:

Final Report?Department of General Services, Office of Public School Construction?s
Proposition 10 Bond Fund Audit

The Department of Finance, Office of State Audits and Evaluations (Finance), has completed its
audit of the Office of Public School Construction?s (OPSC) Proposition 1D bond funds.

The enclosed report is for your information and use. response to the report findings
and our evaluation of the response are incorporated into this final report. This report will be
placed on our website.

A detailed Corrective Action Plan (CAP) addressing the findings and recommendations are due
within 60 days from receipt of this letter. The CAP should include milestones and target dates
to correct all deficiencies. Please e-mail the CAP to OSAEReports@dof.ca.gov.

We appreciate the assistance and cooperation of OPSC. if you have any questions regarding
this report, please contact Diana Antony, Manager, or Mindy Patterson, Supervisor, at
(916) 322-2985.

Sincerely,

  

Enclosure

cc: Mr. Daniel C. Kim, Director, Department of General Services
Mr. Rick Asbell, Chief, Fiscal Services, Department of General Services
Mr. Rick Gillam, Chief, Office of Audit Services, Department of General Services
Ms. Eraina Ortega, Chair, State Allocation Board

AUDIT REPORT
Office of Public School Construction
Proposition 1D

Prepared By:
Office of State Audits and Evaluations
Department of Finance

151760135

June 2016

 MEMBERS OF THE TEAM
Diana Antony, CPA
Manager
Jon G. Chapple, JD, CPA
Mindy Patterson, MBA
Supervisors
Staff
Terrance McDowell, CFE
Andrew Kortes
Lakhwinder Deol, MBA
Laura Reyes

Final reports are available on our website at http://www.dof.ca.gov
You can contact our office at:
Department of Finance
Office of State Audits and Evaluations
915 L Street, 6th Floor
Sacramento, CA 95814
(916) 322-2985

ii

 TABLE OF CONTENTS
Executive Summary ................................................................................................................

iv

Background, Scope and Methodology .....................................................................................

1

Results ....................................................................................................................................

5

Appendix A—OPSC Corrective Action Plan Summary ........................................................... 17
Appendix B—Summary of Projects Reviewed ......................................................................... 20
Appendix C—Criteria for Evaluating School Facility Program Projects .................................... 21
Evaluation of Response .......................................................................................................... 29

iii

 EXECUTIVE SUMMARY
In accordance with the Department of Finance’s (Finance) bond oversight responsibilities, the
Office of State Audits and Evaluations audited the Department of General Services, Office of
Public School Construction’s (OPSC) Proposition 1D bond funds expended under the School
Facility Program (SFP).
In November 2006, California voters passed Proposition 1D, the Kindergarten-University Public
Education Facilities Bond Act of 2006, providing $7.3 billion for SFP projects. As of September
2015, approximately 2,900 projects representing over $6.7 billion have been funded.
The State Allocation Board (SAB) is responsible for authorizing the allocation of bond funds for
SFP projects and establishing program policies and regulations. As staff to the SAB, OPSC
implements and administers the SFP. OPSC’s primary responsibilities include reviewing and
processing funding applications, proposing and drafting regulatory and policy changes, and
performing expenditure and compliance audits. As such, the SAB and OPSC are jointly
responsible for establishing and implementing effective program accountability and oversight.
Our audit focused on reviewing the corrective actions reported to address our June 2011 audit
report findings and recommendations. The June 2011 audit objectives included determining if
1) bond funds were awarded and expended in compliance with applicable legal requirements
and established criteria, and 2) adequate project monitoring processes are in place to ensure
projects are within scope and cost, and achieved the intended outcomes.
We acknowledge OPSC’s efforts to implement oversight and accountability measures for
Proposition 1D funds, including establishing key bond accountability measures such as
comprehensive program guidelines, an audit risk assessment plan, and detailed audit guides
and procedures. However, corrective actions for three of the six prior audit findings have not
been implemented despite repeat recommendations. The three uncorrected audit findings are
as follows:


Statutorily required expenditure audits have not been performed since the
passage of Proposition 1D in 2006. As of September 2015, 1,533 projects
representing over $3 billion in Proposition 1D funds have been closed without an
expenditure audit to determine program compliance, expenditure eligibility or
total project savings. Although OPSC has performed 102 comprehensive project
desk reviews, their efforts to conduct on-site expenditure audits have been
unsuccessful.



Regulatory changes to the Financial Hardship program have not been
implemented. Since 2006, various state entities have recommended regulatory
changes to ensure funds are awarded to only those school districts (districts) that
demonstrate extreme financial hardship conditions. However, despite OPSC’s
multiple efforts to bring forth policy and regulatory changes, the recommended
changes have not been approved by the SAB and therefore have not been
implemented.
iv

 

Project savings (unused bond funds) data continues to be inadequately tracked.
As of January 2016, OPSC reported over $197 million (state and district share) in
unused project savings; however, because OPSC does not audit or adequately
monitor usage, the data is inaccurate and unreliable.

To assess the impact of not conducting expenditure audits, we performed a limited review of
19 Proposition 1D funded projects at 10 districts. Based on our reviews, we noted the following:


Ineligible program costs totaling approximately $3 million were identified in 5 of
10 districts reviewed. We found instances where districts inappropriately used
bond funds to purchase a Chevrolet truck, two tractors, four golf carts, iPads,
athletic uniforms, band uniforms, a mascot uniform, and custodial/cleaning
supplies.



Although statutorily required, districts are not required to repay ineligible costs
identified during an expenditure audit or desk review. Instead, the current
practice allows districts to retain ineligible costs as “project savings” for use on
future capital projects.



As a result of the practice above, state bond funds used for ineligible
expenditures are included in the current non-financial hardship project savings
balance totaling an estimated $192 million (state and district share). The
$192 million resides with districts with no timetable for usage. Additionally,
project savings retained by a district is not offset against new project funding.

In summary, the audit findings in this report illustrate a lack of fiduciary responsibility over bond
funds. SAB and OPSC are jointly responsible for establishing and implementing effective
program accountability and oversight, including ensuring corrective actions to address audit
findings are timely developed and implemented. Consequently, this SFP governance structure
has hindered the efficient and effective implementation of fiscal and accountability controls
necessary for bond accountability and oversight. As indicated in the Governor’s 2016-17
Budget, the state has noted significant concerns with the current school facility program and has
proposed developing a new program in collaboration with the Legislature and education
stakeholders. In doing so, we strongly recommend the audit findings raised in this report be
considered during the development of a new school facility program.
However, with approximately $4 billion in Proposition 1D funds subject to audit and over
$197 million in unused savings/ bond funds (state and district share), it is imperative that the
required statutory audits and oversight activities be performed. Further, because the
recommended changes to the financial hardship program have not been made, OPSC should
propose the SAB suspend future financial hardship funding until such regulatory changes are
approved and implemented.
OPSC must develop a corrective action plan to address the findings and recommendations
noted in this report.

v

 BACKGROUND SCOPE
AND METHODOLOGY
,

BACKGROUND
In November 2006, California voters passed Proposition 1D, the Kindergarten-University Public
Education Facilities Bond Act of 2006, providing $10.4 billion in general obligation bonds for
construction and renovation of educational facilities. Of the $10.4 billion, $7.3 billion was
earmarked for kindergarten through twelfth grade (K-12) projects.
The School Facilities Program (SFP) provides state funding for local education agencies’ (LEA)1
K-12 school facility construction and modernization. The SFP also contains provisions for
charter schools, career technical education facilities, overcrowding relief, joint-use, and seismic
mitigation. Since 1998, several general obligation bonds have provided over $35 billion for
school facilities, including $7.3 billion in Proposition 1D. As of September 2015, Proposition 1D
has funded more than 2,900 projects representing over $6.7 billion as shown in Figure 1.
Currently, no bond authority remains in the state’s primary school facility programs: new
construction and modernization.
Figure 1: Fund Expenditures by Program
as of September 2015
(Dollars in Billions)

1

LEAs include all school districts, county offices of education, and charter schools.

1

 State Allocation Board
The State Allocation Board (SAB) is responsible for authorizing the allocation of bond funds for
K-12 new construction, modernization, and various other SFP projects. It is also responsible for
establishing policies and regulations for the programs authorized under each bond act and
administered by the Office of Public School Construction (OPSC). The SAB is comprised of the
Director of the Department of Finance, the Director of the Department of General Services, the
Superintendent of Public Instruction, three members of the Senate, three members of the
Assembly, and one Governor appointee.
Office of Public School Construction
As staff to the SAB, and under the authority of the Department of General Services, OPSC
implements and administers the SFP. Some of its primary responsibilities include reviewing and
processing funding applications, proposing and drafting regulatory and policy changes, and
performing SFP compliance and expenditure audits.
Executive Order S-02-072 was signed to establish guidelines and procedures for spending
strategic growth plan bond funds efficiently, effectively, and in the best interests of Californians.
The executive order directs government agencies administering bond funds to institute a threepart accountability structure that includes front-end, in-progress, and follow-up accountability. In
response to the executive order, OPSC developed a three-part accountability plan outlining their
audit and oversight policies and procedures.
SCOPE
In accordance with the Department of Finance’s (Finance) bond oversight responsibilities, the
Office of State Audits and Evaluations audited OPSC’s Proposition 1D bond funds expended
under the SFP. Our audit focused on reviewing the status of OPSC’s corrective actions
reported to address our June 2011 audit report findings and recommendations.3 The June 2011
audit objectives included determining if 1) bond funds were awarded and expended in
compliance with applicable legal requirements and established criteria, and 2) adequate project
monitoring processes are in place to ensure projects are within scope and cost, and achieved
the intended outcomes.

METHODOLOGY
To meet the audit objectives described above, we performed the following procedures:

2
3



Reviewed the applicable Education Code provisions, Proposition 1D bond act,
SFP regulations, policies, procedures, and guidelines.



Interviewed OPSC management and key staff responsible for administering bond
funds to obtain an understanding of how OPSC oversees the various project
stages and how reported corrective actions have been implemented.

Source: http://gov.ca.gov/news.php?id=5248
An Audit of Bond Funds, Office of Public School Construction Proposition 1D, June 14, 2011, #10-1760-073 can be
located at www.dof.ca.gov.

2

 

Selected and reviewed 19 SFP projects4 at 10 school districts totaling over
$300 million in Proposition 1D funding. The projects were selected from the new
construction and modernization programs because the two programs accounted
for over 71 percent of the K-12 Proposition 1D funding. The reviews were
performed to determine if project expenditures were allowable and supported.
We did not review information maintained at the contractor/subcontractor level.
See Appendix B for a summary of projects reviewed and Appendix C for program
criteria used during the project reviews.



Interviewed school district staff responsible for administering bond funds to gain
an understanding of district oversight practices and procedures of the various
school construction stages.



Reviewed OPSC’s process to determine project outcomes. OPSC relies on final
inspection reports from the Division of the State Architect (DSA) to determine if
the project’s intended outcome was achieved. We reviewed DSA’s signed final
inspection reports, notice of completions filed by the school districts, and
contractor’s final verified reports. In addition, we performed site visits of the
19 projects to verify existence.



Reviewed the information reported on the Strategic Growth Plan Bond
Accountability website and verified the website is regularly reconciled to internal
accounting records.

In conducting our audit, we obtained an understanding of OPSC’s internal controls, including
any information systems controls that we considered significant within the context of our audit
objectives. We assessed whether those controls were properly designed and implemented.
Any deficiencies in internal control that were identified during our audit and determined to be
significant within the context of our audit objectives are included in this report.
In performing this audit, we relied upon reports generated from the SFP project closeout
database, eligibility database, substantial progress and expenditure reporting database,
CalSTARS, and the financial hardship savings tracking spreadsheet. Government Auditing
Standards require us to assess the sufficiency and appropriateness of computer processed
information that is used to support our findings, conclusions, or recommendations.
To assess the reliability of the reports generated from the various databases and the financial
hardship savings tracking spreadsheet, we interviewed OPSC management and staff
responsible for maintaining the databases and observed the use and maintenance of the
financial hardship savings spreadsheet. Further, we reviewed a selection of site development
applications and projects in various stages of review. We also reviewed spreadsheet and report
data for missing data and obvious errors and traced a sample of data elements to source
documents. When we found discrepancies (such as data entry errors), we brought them to
OPSC management’s attention and worked with OPSC management to correct the
discrepancies before conducting our analyses. With the exception of project savings data, we
determined the reports and spreadsheets were sufficiently reliable for the purposes of our
report.

4

The selected projects had not yet been closed by OPSC.

3

 The results of our project savings data testing identified data accuracy errors. Therefore, the
savings data was not sufficiently reliable. As a result, we have included the inaccuracy of the
data as an audit finding in this report.
Except as discussed in the following paragraph, we conducted this performance audit in
accordance with generally accepted government auditing standards. Those standards require
that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings and conclusions based
on our audit objectives.
Finance and OPSC are both part of the State of California’s Executive Branch. As required by
various statutes within the California Government Code, Finance performs certain management
and accounting functions. Under generally accepted government auditing standards,
performance of these activities creates an organizational impairment with respect to
independence. However, Finance has developed and implemented sufficient safeguards to
mitigate the organizational impairment so reliance can be placed on the work performed.

4

 RESULTS
The Department of Finance, Office of State Audits and Evaluations (Finance), reviewed the
corrective actions reported by the Office of Public School Construction (OPSC) to address the six
findings and related recommendations identified in Finance’s June 2011 audit report.1 See
Appendix A for corrective action detail. Table 1 below summarizes the status of the corrective
actions.
The State Allocation Board (SAB) and OPSC have not implemented corrective actions for three of
the six prior audit findings despite repeat recommendations from various entities since 2006. The
failure to implement corrective actions impedes the SAB’s and OPSC’s ability to ensure bond
proceeds are expended in accordance with statutory and regulatory requirements. The three
uncorrected audit findings are considered materially significant because they represent key bond
accountability and oversight responsibilities.
We acknowledge OPSC’s efforts to implement certain bond oversight and accountability
measures. For example, OPSC established several key bond accountability measures, such as a
bond accountability plan, comprehensive program guidelines, audit risk assessment plan, audit
guide and procedures, Advisory Action newsletters to alert school districts (districts) of any new
laws and regulations, and conducted statewide workshops and outreach meetings to assist
districts. Additionally, OPSC requested and received additional audit positions in fiscal year
2008-09 to address increased audit workload and since then has maintained an average of 36
audit positions through June 2015.
However, as described in Finance’s January 2009 report,2 SAB and OPSC are jointly responsible
for establishing and implementing effective program accountability and oversight, including
ensuring corrective actions to address audit findings are timely developed and implemented.
Consequently, this SFP governance structure has hindered the efficient and effective
implementation of fiscal and accountability controls necessary for bond accountability and
oversight.
Table 1: Summary of Corrective Action Status
Corrective Action
Implemented

Reference

Funding Approval Process Needs Improvement

Yes

n/a

Additional Project Closeout Audits Should be Performed

No

Findings 1, 2, 3, 4

Insufficient Tracking and Collection of Accounts Receivable

Yes

n/a

Expenditure Reporting Not Enforced and Project Savings Are
Inadequately Tracked

Partial

Finding 4

Improvements Needed to Meet Executive Order Accountability
Requirements

Yes

n/a

Prior Follow-Up on Financial Hardship Equity Issue and Need
For Regulatory Change

No

Finding 5

June 2011 Audit Finding

1
2

An Audit of Bond Funds, Office of Public School Construction Proposition 1D, June 14, 2011, #10-1760-073.
Interagency Agreement Closeout, Office of Public School Construction Training and Interim Project-Monitoring
Program, January 16, 2009, #09-1760-004

5

 To assess the impact of not conducting expenditure audits during the project closeout process,
we performed a limited review of 19 district projects funded by Proposition 1D. Based on our
review, we identified approximately $3 million in ineligible program costs, inadequate
accountability of project savings data and several instances of non-compliance with statutory and
regulatory requirements as described in Findings 1 through 4 below. Results of the school district
reviews are summarized in Appendix B.
Finding 1: No Expenditure Audits for Over $3 Billion Proposition 1D Funding
OPSC has not performed statutorily required expenditure audits since the passage of
Proposition 1D in 2006. Despite repeat recommendations to conduct audits by several state
entities, as of September 2015, 1,533 projects representing over $3 billion in Proposition 1D
funds have been closed without an expenditure audit. Although OPSC has performed 102
comprehensive project desk reviews, their efforts to conduct on-site expenditure audits have
been unsuccessful.
Education Code section 17076.10(a) and SFP regulation section 1859.106 require audits to
determine program compliance, expenditure eligibility, and total project savings. Specifically, SFP
regulation section 1859.106 states, “The projects will be audited to assure that the expenditures
incurred by the district were made in accordance with the provisions of Education Code…” In
addition, the Governor’s Executive Order S-02-07 (bond executive order) requires all departments
administering bond proceeds to ensure all bond expenditures are subject to audit.
In 2008, OPSC developed an audit
risk assessment plan to efficiently
allocate audit resources to areas
deemed as high risk. As noted in
the text box, projects identified as
high risk require an on-site
expenditure audit, medium-risk
projects require a desk review,
and low-risk projects are closed
and accepted as reported by the
district.

OPSC Audit Risk Assessment Plan
High = Expenditure audit
On-site audit to verify expenditure compliance with
applicable laws and regulations and determine project
intended outcome was achieved.
Medium = Desk review
In-office review of requested documents including contracts
and invoices. No auditing standards followed.
Low = Management Survey Review (MSR)
Project expenditures accepted as reported by the districts.
Project is closed without expenditure verification.

However, as shown in Figure 2,
regardless of the assessed risk
level, the majority of projects were
closed without an expenditure
audit or desk review. Per OPSC’s
audit risk assessment plan, 581 of the 1,533 closed projects were rated as high-risk; however, the
required expenditure audits were not performed. Although OPSC’s desk reviews are
comprehensive and are a valid form of oversight, the reviews should be performed in accordance
with the established risk assessment plan and in addition to expenditure audits. In addition, in
accordance with industry best practices, audits should be conducted in accordance with auditing
standards which provides a framework for high quality audits.

6

 Figure 2: Proposition 1D Project Closeouts
As of September 2015
Expenditure
Audits
0

Desk
Reviews
95

Medium Risk

0

1

187

188

Low Risk

0

6

758

764

0

102

1,431

1,533

High Risk

Total

MSRs
486

Subtotal
581

Source: OPSC Fiscal Services Unit.

The failure to perform statutory audits demonstrates a
significant lack of accountability over bond funds and is
contrary to the assurances provided in the 2006
Proposition 1D ballot literature, as noted in the text box.3
Additionally, the bond executive order specifically
requires all agencies administering bond funds to ensure
all bond proceeds are spent efficiently, effectively and in
the best interests of the people of the State of California.

VOTE YES ON 1D: STRICT
ACCOUNTABILITY PROVISIONS
Every dollar must be strictly
accounted for on a project-byproject basis with independent
state and local audits. Misuse of
funds is a crime, punishable by
imprisonment.

Source: Proposition 1D, Official Ballot Measure
Further, several state entities have repeatedly
Summary
recommended OPSC conduct audits in accordance with
Government Auditing Standards as noted in Table 2.
Yet after nine years, on-site expenditure audits following applicable audit standards have not
been performed.
Table 2: Repeat Recommendations to Conduct Audits

Date

State Entity

January 2009

Finance

August 2009

California State Auditor

January 2010

Attorney General’s Office

Confirms OPSC audit authority and concludes OPSC may contract for
auditing services. Letter dated January 25, 2010.

Finance

Concludes no audit “redundancies” exist between the proposed SFP
expenditure audits and other required district audits. Recommends
audits in accordance with Government Auditing Standards. Report
dated June 18, 2010.

June

20104

Conclusion and Recommendation
OPSC’s desk reviews lack sufficient oversight. Recommends OPSC to
acknowledge the impediments and make suggestions for improvement.
Audit Report dated January 16, 2009.
Confirms audits should follow Government Auditing Standards. SAB
Hearing August 11, 2009.

September 2010

Department of General
Services

Directs OPSC to implement an independent audit program in accordance
with Government Auditing Standards. Letter dated September 1, 2010.

October 2010

SAB
(Audit Sub-Committee)

Recommends audits in accordance with Government Auditing
Standards. SAB hearing November 3, 2010.

June 2011

Finance

Recommends audits in accordance with Government Auditing
Standards. Audit report dated June 14, 2011.

3

4

Although audits of local bond funds were performed, expenditures for capital projects funded through State funding
sources were specifically excluded in the local bond audit’s scope of work.
Management Letter, Department of General Services, Office of Public School Construction School Facilities
Program, Review of Potential Audit Duplication, June 18, 2010.

7

 When asked why on-site expenditure audits have not been performed, OPSC stated there were
various reasons, including redirection of staffing resources to other program priorities and
unavailable external state auditing resources. However, with audit staffing levels averaging 36
staff between 2007-08 and 2014-15, it remains unclear why SAB and OPSC have been unable to
conduct on-site expenditure audits. SAB and OPSC have the fiduciary responsibility to comply
with program statutes and regulations by developing and implementing effective internal controls
including bond accountability and oversight measures.
Auditing provides critical oversight and monitoring, and is essential in providing accountability and
transparency over government programs. Audits also provide objective analysis to assist
management and those charged with governance in using the information to improve program
performance and operations, facilitate decision making, reduce costs, and contribute to public
accountability. As of September 2015, approximately $4 billion in Proposition 1D projects remain
subject to audit.
Recommendations:
To meet the executive order and statutory requirements, expenditure audits in accordance with
Government Auditing Standards should be performed. OPSC should work with SAB and Finance
to assess and develop a comprehensive plan to audit the remaining bond funds including
reevaluating the risk assessment plan to focus on high risk program issues, and clearly define
and designate the audit or review activity to be performed for each assessed level of risk.
If OPSC is unable to conduct the statutorily required expenditure audits, auditing services should
be contracted with an external auditing entity (state or non-state).
To assess the effectiveness of OPSC’s audit activities and ensure program transparency, OPSC
should submit an annual report to the SAB, starting with the period July 1, 2016, detailing the
following:




Total SFP Proposition 1D project workload subject to audit, including assigned
projects, unassigned projects, and active projects.
Total on-site expenditure audits and desk reviews performed, the current status
(in-progress or complete), and the final resolution and disposition of findings
including any questioned (ineligible or unsupported) costs identified.
If no on-site expenditure audits have been performed, a detailed description of
why audits have not been performed including the efforts made to perform the
audits and the number of staff positions redirected from performing audits to
other program areas.

To promote SFP transparency, all audits and desk review reports issued should be posted to the
OPSC website.
Finding 2: Expenditure Reviews Identified $3 Million in Questioned Costs
To assess the impact from the lack of expenditure audits, we performed a limited review of 19
projects at 10 districts using SFP’s established program criteria (see Appendix C). See Appendix
B for a summary of projects reviewed.
Our review identified 5 of 10 districts reported ineligible and unsupported (questioned) project
costs totaling approximately $3 million, as summarized in Table 3.
Although statutorily required, OPSC’s current practice will not require the districts referenced
below to repay the questioned costs identified. See Finding 3 for further details.
8

 Table 3: Summary of School District’s Questioned Costs

School District5

Total Questioned
Costs

Cost Description

School District A

$ 1,093,414

Furniture and equipment, including a Chevrolet truck, 2
tractors, 4 golf carts, 23 cameras, athletic team apparel &
supplies, mascot and band uniforms, student desktops,
teacher laptops, custodial/operational supplies, and
maintenance equipment (vacuums, carpet cleaners, blowers)

School District B

$

870,618

District labor, materials, vendor costs, and furniture and
equipment (iPads, Apple TV devices)

School District C

$

405,593

Reporting errors including costs for a different school site and
contractor costs claimed twice

School District D

$

397,308

District labor, materials, vendor costs, furniture and
equipment including an industrial floor cleaner and other
unsupported items

School District E

$

213,415

Furniture and equipment, including textbooks, school training
fees, and landscaping equipment and supplies

Total

$2,980,348

The following is a detailed description of the questioned costs.
Furniture and Equipment
Districts claimed ineligible furniture and equipment costs totaling over $1.5 million. In some
instances, the districts could not provide supporting documentation such as vendor invoices and
warrants to verify costs were project related and paid. However, for the majority of instances,
districts claimed ineligible furniture and equipment.
Education Code sections 17072.35 and 17074.25 outline eligible project costs as those costs that
can be reasonably attributed to the construction
project. Further, as noted in the text box, specific
Furniture and Equipment Criteria:
criteria for furniture and equipment is included in
 Lasts more than one year
the SFP Audit Guide and the California State
 Typically repaired rather than
Accounting Manual (CSAM) Procedure 770,
replaced
Distinguishing Between Supplies and Equipment.
 Independent unit
Lastly, OPSC also periodically provided guidance in
 Exceeds the minimum dollar value
their Advisory Actions district newsletters. The
of capitalization threshold
May/June 2006 Advisory Action outlined the same
established by the district
criteria noted in the text box, provided examples of
(minimum $5,000)
eligible and ineligible furniture and equipment, and
specifically advised districts to use CSAM as their
Capitalized equipment is an allowable
guide to determine if an expenditure is capital
expenditure; supplies are not allowable
outlay.
expenditures.
Source: SFP Audit Guide & CSAM Procedure 770

5

District names are not included in this report as the scope of this audit is focused on OPSC’s administration and
oversight of bond funds.

9

 Based on the guidelines, motorized vehicles such as a Chevrolet truck, tractors, and golf carts
are not reasonably attributed to the construction of a school project. Operational expenses such
as athletic uniforms, teacher and student textbooks, and various custodial and maintenance items
are supplies, which are ineligible. In some instances, we found that districts recorded the
operational costs as supplies in their accounting records; however, the districts reported these
same costs as “capitalized items” for SFP purposes.
Lastly, the unit cost of an iPad and/or laptop falls below the $5,000 capitalization threshold, thus
making it ineligible. Although districts may choose to capitalize large groups when furnishing a
newly constructed library or computer room, the questioned costs noted in Table 3 were not
related to the construction or modernization of a computer room. Specifically CSAM 770 states:
LEAs may choose to capitalize groups of items acquired at the same time that
do not meet the threshold for capitalization individually. Examples might include
major acquisitions of library books for a new library or large quantities of
computers for an entire computer laboratory. However, unless the group of
items would represent a very significant asset for the LEA, it is not
recommended that groups of items whose unit cost does not meet the
capitalization threshold be capitalized.
In summary, if the per unit cost is below the
capitalization threshold, it is considered
materials and supplies, not capital outlay.
Moreover, using long-term financing to
purchase short life cycle items is not fiscally
prudent given that taxpayers will be paying for
debt financing for over 30 years, which is long
after the 3- to 5-year useful life of electronics
such as iPads and laptops.
As noted in the text box, the state’s current
economic condition warrants the establishment
and implementation of prudent fiscal policies by
all state agencies administering bond funds.

$50 Billion Owed on K-12 Facility Bonds
As of 2015, the state still owes more than
$50 billion in principal and interest on K-12
school facility bonds dating back to 1988.
According to the state Treasurer, the state will
pay an average $1.7 billion in General Fund
revenue annually until the outstanding debt is
paid off (expected to occur in 2044).
Source: The 2015-16 Budget: Rethinking
How the State Funds School Facilities,
Legislative Analyst Office, February 2015

District Costs
Districts claimed various unsupported costs totaling over $1 million. For example, one district
claimed estimated maintenance costs rather than using actual costs incurred. According to the
district, they have historically used the quoted and/or estimated costs, specifically stating that this
was their standard practice. In another case, the district stated the expenditure records were
destroyed in accordance with their record retention policies. Additionally, one district claimed
labor costs but could not support the costs with timesheets or other personnel activity reports.
SFP regulation 1859.106 requires districts to maintain all appropriate records that support all
district expenditures associated with SFP projects for a period of not less than four years from the
date the notice of completion is filed for the project in order to allow other agencies, including,
without limitation, the California State Auditor and the California State Controller to perform their
audit responsibilities.

10

 CSAM Procedure 905, Documenting Salaries and Wages Charged to Restricted Programs,
requires specific documentation to support charges to specific funding sources (resources),
instructional settings (goals), and activities (functions). Specifically, it requires some level of
formalized time documentation and reminds districts that written policies and procedures are
essential to implementing an effective labor distribution system. Districts must develop a time
documentation process that meets their particular needs (e.g. employee training forms,
timekeeping internal controls, and compliance checks).
The lack of on-site expenditure audits increases the risk of fraud, waste, and abuse and greatly
compromises the SAB and OPSC’s ability to ensure state bond funds are spent in accordance
with statutory and regulatory requirements.
Recommendations:
We reiterate the necessity of conducting expenditure audits and implementing effective oversight
activities as denoted in Finding 1. Further, the districts should be required to repay the $3 million
in questioned costs identified during our reviews, unless statutorily prohibited due to passage of
time.
Finding 3: Questioned Costs Identified Are Not Required to be Repaid
Although statutorily required, OPSC does not recommend school districts repay questioned costs
found during an expenditure audit or desk review. As reported in Finding 2, we identified
approximately $3 million in ineligible costs at five districts; however, OPSC will not recommend
repayment of the ineligible costs. Moreover, under certain circumstances, OPSC may determine
the state owes a district additional bond funding instead of offsetting against identified questioned
costs.
Districts are required to submit a final expenditure report detailing final project costs. In some
instances, when expenditures exceed the project budget, districts report an “overspent amount.”
Conversely, when expenditures are less than the project budget, districts report “project savings.”
In either circumstance, if an audit or desk review identifies questioned costs, the district will not
be required to repay the questioned costs. Instead, OPSC will subtract the questioned costs from
the reported project expenditures thus creating either a greater amount of savings or reducing the
overspent amount.6
For example, in 2013, School District A reported total project savings of $14.8 million for the
projects we reviewed (see Table 4); however, the school district will not be required to repay the
$1.1 million questioned costs identified in Finding 2. Instead, following its current practice, OPSC
will reduce total reported project expenditures by the questioned amount (called “audit adjustment”),
thus increasing the amount of project savings. School District A’s total project savings will increase
from $14.8 to $15.9 million. As a result, despite having used SFP funding for ineligible
expenditures, the district will be allowed to retain the $15.9 million for future capital needs.

6

The audit adjustments do not include any site-related adjustments.

11

 Table 4: Disposition of Questioned Costs for School District A

Savings
C=(A-B)

Audit
Adjustment
(Questioned Costs)
D

Revised
Expenditures
E=(B-D)

Increased
Net
Savings
F=(A-E)

$ 93,953,349

$ 12,926,175

($1,001,284)

$92,952,065

$13,927,459

5,673,616

4,113,429

1,560,187

( 92,130)

4,021,299

1,652,317

4,634,265

4,338,864

295,401

0

4,338,864

295,401

TOTAL: $117,187,405
$102,405,642
$ 14,781,763
*Amount includes interest earned on state funds.

($1,093,414)

$101,312,228

$15,875,177

School
Site

Project
Funding*
A

Reported
Expenditures
B

Project A.1

$106,879,524

Project A.2
Project A.3

We question OPSC’s practice and the lack of compliance with SFP statutory requirements.
Education codes and SFP regulations require repayment of questioned costs identified during a
desk review or expenditure audit.
Education Code section 17076.10(c)(1) states, “If the board, after the review of expenditures or
audit has been conducted pursuant to subdivision (a), determines that a school district failed to
expend funds in accordance with this chapter, the department shall notify the school district of the
amount that must be repaid…”
Additionally, the SFP Application for Funding form (SAB 50-04) specifically states, “The district
understands that some or all of the State funding for the project must be returned to the State as
a result of an audit pursuant to sections 1859.105, 1859.105.1, 1859.106…”
SFP regulation 1859.106.1 states, “Upon adoption of the audit findings by the Board and in lieu of
the collection procedures outlined in Education Code section 17076.10(c)(1), a school district,
county office of education, or Charter School may request a repayment schedule of up to five
years, in equal annual installments, if the total repayment of State funds within 60 days of the
Board action would cause the school district, county office of education, or Charter School to fall
into fiscal distress. School districts (et al) requesting a repayment schedule must be in a severe
hardship condition…. The repayment schedule shall include interest at the same rate as that
earned on the State’s Pooled Money Investment Account on the date a repayment schedule is
approved by the Board.”
Further, project savings is intended to be an incentive for those districts that implemented cost
efficiencies. Specifically, Education Code section 17070.63(c) states, “Any savings achieved by
the district’s efficient and prudent expenditure of these funds shall be retained by the district in the
county fund for expenditure by the district for other high priority capital outlay purposes.” Allowing
districts to retain questioned costs is not an efficient or prudent use of bond funds and is in direct
conflict with statutory requirements.
When asked how the statutes above are implemented, OPSC stated that their practice is to focus
on the “eligible expenditures.” According to OPSC, repayment of questioned costs would come in
the form of additional savings to be used by the districts on future projects. This practice conflicts
with SFP statutes and regulations and decreases districts’ incentive to ensure all bond funds are
spent only on eligible and allowable program costs.
Moreover, as described below, under certain circumstances, a district that used bond funds on
ineligible items may receive additional state funding for the same project.
12

 Districts May Be Eligible for Additional Funding Despite Having Used Funds for Ineligible
Items
Under OPSC’s current practice, a district who is found to have used bond funds on ineligible items
may receive additional state funding based on a review of the district’s site-related costs. Although
SFP regulation 1859.106 allows for adjustments for any differences between the budgeted and
actual site-related costs, OPSC does not offset questioned costs with additional site-related
funding identified during the same project expenditure review.
In School District A’s example, the district reported additional site-related costs that could
potentially increase their funding by $720,336. However, instead of offsetting the additional siterelated costs with the district’s accrued project savings of over $15 million,7 OPSC will recommend
the state provide additional funding of $720,336.
OPSC’s practice of not collecting or offsetting questioned costs identified during a review of
expenditures conflicts with statutory and regulatory requirements and is not a fiscally prudent
practice. Further, no financial consequences exist for districts that spend bond funds on ineligible
or unallowable program costs.
Recommendations:
OPSC should ensure compliance with the existing Education Code and SFP regulations that
require identified questioned costs be repaid to the state.
Additionally, to determine the impact of not complying with statutes and regulations, OPSC should
submit a report to SAB and Finance no later than August 1, 2016, detailing the total questioned
costs identified during its desk reviews and the final disposition.
OPSC should offset questioned costs identified during an expenditure desk review or audit with a
project’s site-related adjustments.
Finding 4: Inadequate Accountability and Oversight of Project Savings
Project savings data (unused bond funds) continues to be inadequately tracked. As of
January 2016, OPSC reported over $197 million (state and district share) in unused project
savings. We found the savings data maintained by OPSC to be unreliable and inaccurate.
Specifically, the project savings data maintained by OPSC is based on districts’ self-reported
information that is not always verified at the completion of a project. Additionally, after project
completion, districts are required to annually report expenditures until all state and district funding,
including savings, are expended. Again, OPSC relies on districts’ self-reported information and
does not routinely verify, as noted in Finding 1, if districts are using savings in compliance with
program statutes. We also observed numerous data entry errors including errors in recording the
districts’ usage of project savings.
The lack of accountability and oversight of project savings increases the risk that unused bond
funds may be inappropriately used. For example, in 2010 OPSC performed a review of one
district’s outstanding project savings. The district reported project savings totaling $57 million for
103 completed projects. Based on a sample review of 19 projects, OPSC found the district
inappropriately transferred $6.5 million in Proposition 1D funds to pay for local debt service. When
asked, the district stated the funds were temporarily used and had planned to reimburse the
originating fund.
7

Accrued project savings includes questioned costs as noted in Table 4.

13

 Additionally, under current program statutes, districts are allowed to retain non-financial hardship
project savings indefinitely. For example, of the estimated $197 million in project savings noted
above, $5 million is related to financial hardship projects, which have a three-year time period for
usage. The remaining $192 million has no timetable.
Education Code section 17070.63(c) allows any savings achieved by the district’s efficient and
prudent expenditure to be retained for use on the district’s other high priority capital outlay needs;
however, there is no timetable to use or declare savings. OPSC records indicate instances
where project savings have been outstanding since 2009. In contrast, for financial hardship
projects, SFP regulation 1859.103 stipulates a three-year period to use or remit to the state.
Further, a district’s unused project savings are not offset against new project funding. OPSC’s
current practice allows districts to apply and obtain bond funding for new projects without
offsetting against the district’s unused project savings.
The lack of accountability and oversight of unused project savings, lack of a timetable to declare
savings, and not offsetting unused savings against new project funding increases the risk of bond
fund misuse and decreases funding opportunities for other districts that have immediate capital
project needs.
Recommendations:
To improve accountability and safeguarding of bond funds, OPSC should review and confirm all
outstanding project savings for the closed Proposition 1D projects. In addition, for the remaining
projects subject to audit or desk review, OPSC should perform procedures to 1) determine the
accuracy of self-reported project savings, and 2) verify use of project savings complies with
statutes.
To maximize the availability of bond funds for districts with immediate high priority capital needs,
OPSC should propose changes to the SFP statutes and regulations. At a minimum, regulatory
changes should include a strict timetable for usage of non-financial hardship project savings
similar to the financial hardship program.
OPSC should offset new funding requests with a district’s unused project savings.
Finding 5: Financial Hardship Equity Issue Not Resolved
The financial hardship program equity issues and regulatory changes have not been resolved or
implemented.
The financial hardship program is intended to provide funding to those districts determined unable
to provide their matching share of project costs. The program is specifically intended to assist
cases of extraordinary circumstances and must meet certain criteria as noted in the text box on
the following page.
For example, in 2007, the Macias Consulting Group (Macias) reviewed the overall efficiency and
effectiveness of the financial hardship program. The report highlighted the following four areas of
concern:


Lack of equity and fairness in the distribution of state facility construction funds.
Specifically noting that the current condition was more beneficial to larger
districts than smaller districts.

14

 



Indebtedness requirements that caused
applicants to unnecessarily take on more
debt to qualify for state construction funding.
Inability to determine the accuracy of
financial data submitted by applicants.
Outdated review process administered by
the OPSC reviewers.

The Macias report recommended revamping the
financial hardship framework, training applicants,
implementing program policies, revamping
worksheets and instructions, and implementing
process improvements. To date, the
recommendations have not been implemented.

Financial Hardship
Education Code 17075.10 states that a school district
may apply for hardship assistance in cases of
extraordinary circumstances. A school district
applying for hardship state funding under this article
shall comply with either paragraph (1) or (2).
(1) Demonstrate both of the following: (A) due to
extreme financial, disaster-related, or other hardship
the school district has unmet need for pupil housing,
(B) the school district is not financially capable of
providing the matching funds otherwise required for
state participation, that the district has made all
reasonable efforts to impose all levels of local debt
capacity and development fees, and that the school
district is, therefore, unable to participate in the
program pursuant to this chapter except as set forth in
this article.

Additionally, the SAB also recognized the need for
policy and regulatory changes and requested
OPSC to gather information, develop
(2) Demonstrate that due to unusual circumstances
that are beyond the control of the district, excessive
recommendations, and provide solutions to address
costs need to be incurred in the construction of school
the financial hardship inequity issues. Between
facilities
February 2005 and August 2010, following the
guidance from the SAB, OPSC testified on 15
separate occasions to the SAB and Implementation Committee proposing policy and regulation
changes. However, despite OPSC’s multiple efforts to bring forth policy and regulatory changes,
the recommended changes have not been approved by the SAB and therefore, have not been
implemented.
Several entities identified the need for regulatory changes; however, to date no significant policy
or regulatory changes have occurred, as shown in Table 5.
Table 5: History of Financial Hardship Program Recommendations
Year

Entity

2005

OPSC

2007

Macias Consulting Group

2008

Legislative Analyst Office

2008

OPSC

2009

Finance

2011

Finance

Comments
Between February 2005 and October 2005, SAB and OPSC
meet multiple times to discuss the financial hardship program
inequities.
Audit report recommends revamping the financial hardship
framework, training applicants, implementing program
policies, revamping worksheets and instructions, and
implementing process improvements.
The Legislative Analyst Office’s "Analysis of the 2008-2009
Budget Bill" dated February 20, 2008 notes a different
approach is needed for the financial hardship program.
Between April 2008 and December 2008, OPSC meets with
various stakeholders including county offices of education,
and school districts to discuss financial hardship program
changes needed.
Finance report dated January 16, 2009 identifies the
existence of system control overrides within the financial
hardship program.
Finance audit report dated June 14, 2011 notes no changes
have been made to the financial hardship program.

15

 Inequitable distribution of financial-hardship funding decreases available funding for those
districts with an immediate capital funding need.
Recommendations:
Implement the proposed regulatory and policy changes to the financial hardship program. OPSC
should propose the SAB suspend future program funding until the recommended regulatory
changes are approved and implemented.
Conclusion
We acknowledge OPSC’s efforts to implement oversight and accountability measures for
Proposition 1D funds, including addressing three of the six prior audit findings. However, the
failure to implement corrective actions for three significant prior audit findings, instances of noncompliance with statutory and regulatory requirements, and weaknesses in fiscal practices
illustrate a significant lack of fiduciary responsibility over Proposition 1D funds.
SAB and OPSC are jointly responsible for establishing and implementing effective program
accountability and oversight, including ensuring corrective actions to address audit findings are
timely developed and implemented. Consequently, this SFP governance structure has hindered
the efficient and effective implementation of fiscal and accountability controls necessary for bond
accountability and oversight. As indicated in the Governor’s 2016-17 Budget, the state has noted
significant concerns with the current school facility program and has proposed developing a new
program in collaboration with the Legislature and education stakeholders. In doing so, we
strongly recommend the audit findings raised in this report be considered during the development
of a new school facility program.
With more than $4 billion in Proposition 1D funds subject to audit and over $197 million in unused
project savings/bond funds (state and district share), accountability and oversight must be
strengthened to mitigate the risk of fraud, waste, and abuse. It is imperative that required
statutory audits and oversight activities be implemented. Additionally, because the recommended
changes to the financial hardship program have not been made, OPSC should propose the SAB
suspend future financial hardship funding until the regulatory changes are approved and
implemented.

16

 APPENDIX A
Office of Public School Construction (OPSC)
Corrective Action Plan Summary For June 14, 2011 Audit
Audit Observation
Reference
1. Funding Approval
Process Needs
Improvement

Audit Recommendation
A. Follow the established appeals
process for all funding
applications.

B. Develop additional fiscal and
programmatic controls to reduce
non-compliance.

C. Expand outreach to promote a
better understanding of the SFP
regulations, application review
process, required documents, and
allowable costs.

OPSC Corrective Action Response and Status1
OPSC has developed additional operating policies and practices
which include requirements for thoroughly documenting decisions in
OPSC’s files. Additionally, the State Allocation Board (SAB) has
adopted a formalized appeal process that includes specific
benchmarks within the appeals process timeline. OPSC has
implemented the appeal process timeline for processing appeals to
the SAB. Part of the appeal process is the implementation of a
published 90-day workload accessible to stakeholders.
Status: Complete
OPSC has formed a team to reevaluate its existing processes to
determine if additional intake activities can be implemented to quickly
identify inaccurate, missing and/or incomplete data on an LEA’s
application submittal prior to forwarding the funding request to
professional staff within OPSC’s Plan Verification Team. This will
allow applications to be corrected and/or rejected in a timely manner.
Status: Complete
OPSC expanded its outreach efforts through the use of Town Hall
meetings and webinars in addition to continuing to provide
publications and reference materials through its website. OPSC has
formed an outreach team whose purpose is to provide assistance to
LEA’s in submitting accurate funding applications.

Corrective
Action
Implemented2

Comments

Y

Y

Y

Status: Complete

1
2

Information reported in OPSC Corrective Action Plans from August 20, 2011 through May 1, 2013.
Legend: Y = Yes, N = No, P = Partially.

17

 Audit Observation
Reference
2. Additional Project
Close-Out Audits
Should be
Performed

3. Insufficient
Tracking and
Collection of
Accounts
Receivable

Audit Recommendation
A. OPSC should perform more
audits as required under SFP
regulations and established
criteria.

A. Confirm accounts receivable
balances for all bond programs
and perform timely reconciliations.
B. Collect delinquent receivables
and/or offset the LEA’s next
apportionment.
C. Maintain supporting
documentation for all receivable
collections, adjustments, and
postings.

4. Expenditure
Reporting Is Not
Enforced and
Project Savings Are
Inadequately
Tracked

A. Enforce LEA annual
expenditure reporting.

B. Review and confirm all
outstanding project savings and
ensure data is periodically
reconciled to the accounting
records.
C. Timely collect financial
hardship (FH) project savings
outstanding for more than three
years.

OPSC Corrective Action Response and Status1
OPSC met with OSAE to seek additional guidance on the number of
annual audits that would be considered reasonable based on OPSC’s
current operating environment. As a result of feedback from the
meeting, OPSC revised its risk assessment model and audit program
to focus existing audit resources to the highest risk projects. Also,
OPSC has identified additional staff resources that can assist audit
staff in conducting more audits.
Status: Incomplete
OPSC has established policies and procedures to ensure the
maintenance of up-to-date accounts receivable information.
Status: Complete
OPSC continues to verify and pursue receivables that are over 60
days.
Status: Complete
OPSC has implemented procedures which ensure the maintenance of
documentation for all receivable collections, adjustments, and
postings. In 2013, OPSC was actively working on the transition to
CALSTARS as the replacement for the accounting system.
Status: Complete
A team is evaluating current report oversight processes to identify
areas for improvement that can be adopted administratively and to
pursue statutory and regulatory changes. Additionally, a
communication plan to stakeholders concerning reporting
requirements will be developed and implemented. Some methods for
communication to stakeholders will include e-mail notifications,
content on OPSC website, and articles in various OPSC publications.
Status: Complete
OPSC has implemented additional policies and procedures to ensure
staff monitors outstanding financial hardship project savings. This
process includes audit and accounting staff working closely to ensure
that applicable records accurately reflect outstanding balances.
Status: Partial
OPSC has contacted all districts with FH savings over 3 years for the
recoupment of funds due back to the State. OPSC is actively
monitoring and enforcing the collection of FH savings that have been
retained for over 3 years.

Corrective
Action
Implemented2

N

Comments
No expenditure
audits have been
performed. See
Finding 1 in Results
Section of this
report.

Y

Y

Y

Y

P

Projects savings
continues to be
inaccurate. See
Finding 4 in Results
Section of this
report.

Y

Status: Complete

18

 Audit Observation
Reference
5. Improvements
Needed to Meet
Executive Order
Accountability
Requirements

6. Follow Up on
Previously Reported
Financial Hardship
Equity Issue and
Need for Regulatory
Change

Audit Recommendation
A. Develop additional performance
measures that focus on program
outcomes related to the
beneficiaries of the SFP in order
to assess how effective programs
are meeting their goals.
Performance measures, such as
the number of classrooms built or
modernized, should be included in
the metrics to realize desired
results of the SFP.
B. Timely post complete project
status data on the bond
accountability website and
reconcile data to internal fiscal
and accounting records to ensure
accuracy.

The report recommended the SAB
resolve the financial hardship
equity funding issues to minimize
the risk of inequitable funding.

OPSC Corrective Action Response and Status1
OPSC has established a team that will review and update the OPSC
Strategic Bond Plan to include program goals and developing
program metrics.

Corrective
Action
Implemented2

Comments

Status: Complete
Y

OPSC, in conjunction with DOF’s Capital Outlay Unit, has linked
internal fiscal and accounting data to the bond accountability website.
OPSC is taking action to ensure that project specific status
information is accessible on the bond accountability website.
Programming, testing, and implementation to be complete by
June 30, 2013.

Y

Status: Complete
No changes have been made to the financial hardship program.
Status: Incomplete

N

See Finding 5 in
Results Section of
this report.

19

 APPENDIX B
Summary of Projects Reviewed
SFP Project by School District

State
Share1

Project Funding2

Reported
Expenditures3

Questioned
Amount

School District A
Project A.1 (NC)

$ 52,946,661

$105,893,322

$ 93,953,349

$ 1,001,284

Project A.2 (NC)

2,814,000

5,628,000

4,113,429

92,130

Project A.3 (NC)

2,286,900

4,573,800

4,338,864

0

Subtotal, School District A

$ 1,093,414

School District B
Project B.1 (M) (FH)

$ 6,131,277

$ 6,178,047

$ 6,205,168

Project B.2 (M) (FH)

5,184,318

5,300,275

5,375,761

Project B.3 (M) (FH)

25,815,760

25,815,760

25,811,599

Subtotal, School District B

$

185,183
347,335
338,100

$

870,618

School District C
Project C.1 (NC)

$ 23,938,043

$ 47,876,086

$ 61,302,449

$

405,593

Project D.1 (M)

$ 15,115,792

$ 25,192,987

$ 22,156,797

$

9,058

Project D.2 (M)

14,864,719

24,774,532

24,792,645

375,400

Project D.3 (M)

10,046,260

16,743,767

13,916,742

12,850

Project D.4 (M)

1,627,180

2,711,967

3,649,276

School District D

Subtotal, School District D

0
$

397,308

20,177,180

$

213,415

$

0

School District E
Project E.1 (NC)

$ 7,957,039

$

15,914,078

$

School District F
Project F.1 (NC) (FH)

$ 54,956,418

$ 70,382,028

$ 76,918,757

Project G.1 (NC) (FH)

$ 31,394,077

$ 32,099,762

$ 33,092,663

0

Project G.2 (NC) (FH)

15,506,604

15,511,604

15,862,577

0

School District G

Subtotal, School District G

$

0

$

0

School District H
Project H.1 (M) (FH)
Project H.2 (NC) (FH)

$ 1,097,553

$ 1,689,005

21,296,018

21,296,018

$

2,226,523
21,524,142

0

Subtotal, School District H

0

School District I
Project I.1 (NC) (FH)

$ 20,246,903

$

20,394,236

$ 19,790,892

$

0

0

School District J
Project J.1 (NC) (FH)

$ 17,105,636

$ 18,229,628

$ 18,485,732

$

Total

$330,331,158

$466,204,902

$473,694,545

$2,980,348

1
2
3

FH = Financial Hardship, NC = New Construction, M = Modernization, N/A = Not applicable
State share includes Financial Hardship grant provided by Proposition 1D funds.
Project funding amount includes state and district share. It does not include interest earned on SFP funds.
Source: District 50-06 expenditure reports submitted to OPSC.

20

 APPENDIX C
Criteria for Evaluating School Facility Program Projects
Category

Criteria

Passing Criteria

Education Code 17072.35,
17074.25, 17076.10
School Facility Program (SFP)
Regulation 1859.79.2, 1859.106,
1859.106.1
California State Accounting Manual
Procedures 770 and 905

Expenditures are project-related and
comply with SFP regulations and other
applicable laws.

Education Code 17076.10;
SFP 1859.2, 1859.104
Department of General Services,
State Contracting Manual Chapter
5: Competitive Bidding Methods

School districts submitted all
expenditures reports.
Selection of contractor(s) was/were in
compliance with SCM and other
applicable laws and regulations.

Construction
Contracts in Place

Education Codes 17070.50,
17072.30, 17074.15, 17074.15
SFP 1859.2 (Form 50-05)

Binding construction contracts are in
place prior to funding release for at
least 50 percent of the construction.

Records and
Supporting
Documents

SFP 1859.106

Financial Hardship

Education Code 17075.10,
17075.15
SFP 1859.81

Project Savings

Education Code 17070.63
SFP 1859.103
SFP 1859.2 (Form 50-06)

School districts maintained adequate
accounting records and supporting
documents for the project expenditures
and matching contributions.
Encumbrances reported in financial
hardship approval review were
liquidated and fund balances were
accurately reported.
District reported project savings usage.

Expenditures
Funding of Project
Expenditures

Compliance
Reporting
Requirement
Competitive
Bidding
Requirement

Interest Earned

Deliverables/Intended Outcome
Construction and
State Allocation Board (SAB)
modernization of
agenda and California Department
school facilities
of Education (CDE) approval letter

Matching contributions are projectrelated and comply with applicable laws
and regulations.

District reported interest earned on
SFP bond funds. Interest earned
agreed to district’s accounting records.
Intended outcomes listed in SAB
agenda and CDE approval letter were
consistent with DSA final inspection
reports, notice of completions filed by
school district, and contractor
verification reports.

21

 RESPONSE

 

 

22

DES MEMORANDUM

E- l? Al lrv' in; r? a

 

Date: July 6, 2016

To: Cheryl L. McCormick, CPA, Assistant Chief
Office of State Audits and Evaluations
Department of Finance
915 Street
Sacramento, CA 95814

From: Department of General Services
Office of Public School Construction

Subject: RESPONSE TO AUDIT OF PROPOSITION 1D BOND FUNDS

Thank you for the opportunity to respond to the Office of State Audits and Evaluations?
(Finance) audit of the Office of Public School Construction's (OPSC) Proposition 1D bond
funding program. The following response addresses each of the recommendations.

OVERVIEW OF THE REPORT

OPSC appreciates Finance?s in-depth and professional audit of its accountability processes and
controls established for state bond funding provided to local education agencies for K-12 school
construction and modernization. As noted in the report, the State Allocation Board (SAB) and
OPSC are jointly responsible for establishing and implementing effective program accountability
and oversight, including ensuring corrective actions to address audit findings are timely
developed and implemented. As part of its continuing efforts to improve operations, OPSC will
take appropriate actions to address the areas for improvement presented in the report. As staff
to SAB, OPSC is committed to efficiently and effectively implementing and administering the
School Facilities Program (SFP), including Preposition 1D bond funds. Since the inception of
the SFP in 1998, SAB has apportioned and/or provided unfunded approvals of almost $34
billion to more than 11,000 projects.

In summary, Finance acknowledges efforts to implement certain bond oversight and
accountability measures related to previous audit findings. However, Finance concluded that
additional actions should be taken to ensure the implementation of fiscal and accountability
controls necessary for bond accountability and oversight.

Based on the results of its fieldwork, Finance developed the following recommendations to
further improve bond oversight process. Over the last few years, there have been
significant reductions in OPSC's budget to align resources with projected workload. Overall, to

Cheryl L. McCormick -2- July 6, 2016

ensure the efficient and effective use of state resources, OPSC believes it is prudent to defer
any action that may be taken on most of Finance?s recommendations pending the results of the
November 2016 vote on the K-12 bond initiative.

RECOMMENDATIONS

Findinq 1: No Expenditure Audits for Over $3 Billion Proposition 10 Funding

RECOMMENDATION 1: To meet the executive order and statutory requirements,
expenditure audits in accordance with Government
Auditing Standards should be performed. OPSC should
work with SAB and Finance to assess and develop a
comprehensive plan to audit the remaining bond funds
including reevaluating the risk assessment plan to focus
on high risk program issues, and clearly define and
designate the audit or review activity to be performed for
each assessed level of risk.

RESPONSE 1:

If the 2 bond initiative is approved in November, OPSC will initiate discussions with Finance
to reevaluate the current Risk Assessment Model to ensure a focus on high risk program issues.
Regarding the issue of including audits in this model, as Finance is aware, OPSC has on a
number of occasions pursued the implementation of an on-site expenditure audit activity within

the SFP.

RECOMMENDA 2: If OPSC is unable to conduct the statutorily required
expenditure audits, auditing services should be contracted

with an external auditing entity (state or non-state).

RESPONSE 2:

If the K-12 bond initiative is approved in November, OPSC will explore the various methods for
auditing/reviewing the proper use of bond funds based on the resources available for this
activity. in the past, OPSC has been unsuccessful in contracting with Finance and the State
Controller?s Office to perform on-site expenditure audits.

3: To assess the effectiveness of audit activities and
ensure program transparency, OPSC should submit an
annual report to the SAB, starting with the period July 1,
2016, detailing the following:

Total SFP Proposition 1 project workload subject to
audit, including assigned projects, unassigned
projects, and active projects.

a Total on-site expenditure audits and desk reviews
performed, the currentstatus (in-progress or
complete), and the final resolution and disposition of

Cheryl L. McCormick -3- July 6, 2016

findings including any questioned (ineligible or
unsupported) costs identified.

- If no on-site expenditure audits have been performed,
a detailed description of why audits have not been
performed including the efforts made to perform the
audits and the number of staff positions redirected
from performing audits to other program areas.

RESPONSE 3:

If the K-12 bond initiative is approved in November, OPSC will initiate discussions with SAB on
its interest in the recommended annual report on OPSC audit/review activities. If SAB decides
that the report would add programmatic value, OPSC will begin collecting data and submit a
report to SAB based on a to be determined timeline.

RECOMMENDATION 4: To promote SFP transparency, all audits and desk review
reports issued should be posted to the OPSC website.

RESPONSE 4:

In the near future, OPSC will begin posting all desk reports to its website.

Findinq 2: Expenditure Reviews Identified $3 Million in Questioned Costs

RECOMMENDATION: We reiterate the necessity of conducting expenditure
audits and implementing effective oversight activities as
denoted in Finding 1. Further, the districts should be
required to repay the $3 million in questioned costs
identified during our reviews, unless statutorily prohibited
due to passage of time.

RESPONSE:

OPSC will follow-up with the districts audited by Finance to resolve any outstanding issues and
close the projects. OPSC will also conduct an analysis to identify questioned costs that may be
statutorily prohibited from recovery due to the passage of time.

It should be noted that the current statutory construct of the SFP does not provide the authority
to require repayment of questioned costs (districts are required to use the funds on another
capital outlay project, but are not required to return the funds to the state). However, for
Financial Hardship projects, in some cases, questioned costs may have an impact on the
amount of savings that is returned to the state.

Findinq 3: Questioned Costs Identified Are Not Required to be Repaid

RECOMMENDATION 1: OPSC should ensure compliance with the existing

Cheryl L. McCormick -4- July 6, 2016

Education Code and SFP regulations that require identified
questioned costs be repaid to the state.

RESPONSE 1:

As part of its oversight responsibilities, OPSC has been diligent in its review activity to ensure
that the expenditures listed in the projects are in compliance with existing Education Code and
SFP regulations. This process is well established and includes detailed supervisory review of
staff work. In some cases, within the construct of the statute related to savings, districts that are
non-financial hardship have the ability to retain savings and the corresponding costs are
reduced from the project expenditures and increases the savings reported with no monetary

effect to the grant.

RECOMMENDA TION 2: Additionally, to determine the impact of not complying
with statutes and regulations, OPSC should submit a
report to SAB and Finance no later than August 1, 2016,
detailing the total questioned costs identified during its
desk reviews and the final disposition.

RESPONSE 2:

OPSC strongly believes that it has been complying with applicable statutes and regulations and,
therefore, believes the requested report is unnecessary. However, if the K-12 bond initiative is
approved in November, OPSC will initiate discussions with Finance to further discuss this issue.

HECOMMENDA TION 3: OPSC should offset questioned costs identified during an
expenditure desk review or audit with a project?s site-
related adjustments.

RESPONSE 3:

OPSC strongly believes that statute does not provide it the authority to offset questioned costs
against a project's site-related adjustments. However, if the K-12 bond initiative is approved in
November, OPSC will initiate discussions with Finance to further discuss this issue.

Findinq 4: Inadequate Accountability and Oversiqht of Project Savinqs

RECOMMENDATION 1: To improve accountability and safeguarding of bond
funds, OPSC should review and confirm all outstanding
project savings for the closed Proposition 1 projects. in
addition, for the remaining projects subject to audit or
desk review, OPSC should perform procedures to 1)
determine the accuracy of self-reported project savings,
and 2) verify use of project savings complies with statutes.

Cheryl L. McCormick -5- July 6, 2016

RESPONSE 1:

OPSC will establish a work plan to determine the accuracy of self-reported project savings and
to verify that the use of project savings complies with statutes. The work plan will take into
account the OPSC's available resources and the level of risk that exists from not directly
reviewing and confirming all outstanding project savings.

RECOMMENDATION 2: To maximize the availability of bond funds for districts
with immediate high priority capital needs, OPSC should
propose changes to the SFP statutes and regulations. At a
minimum, regulatory changes should include a strict
timetable for usage of non-financial hardship project
savings similar to the financial hardship program.

RESPONSE 2:

If the 2 bond initiative is approved in November, OPSC will initiate discussions with Finance
to further discuss this issue. 

RECOMMENDATION 3: OPSC should offset new funding requests with a district?s
unused project savings.

RESPONSE 3:

As discussed during the audit, existing statutes do not provide the authority to allow an offset of
new funding requests with a district?s unused project savings. However, as noted in response to
the previous recommendation, if the K-12 bond initiative is approved in November, OPSC will
initiate discussions with Finance to further discuss this issue.

Findinq 5: Financial Hardship Equity Issue Not Resolved

RECOMMENDATION: Implement the proposed regulatory and policy changes to
the financial hardship program. OPSC should propose the
SAB suspend future program funding until the
recommended regulatory changes are approved and
implemented.

RESPONSE:

As noted in the report, the SAB is fully aware of the various proposals for regulatory and policy
changes to the financial hardship program. If the K-12 bond initiative is approved in November,
OPSC will seek direction from SAB regarding future program funding.

Cheryl L. McCormick -6- July 6, 2016

Appendix B: Summary of Proiects Reviewed
OPSC will follow-up with the districts audited by Finance to resolve any outstanding issues and
close the projects.

CONCLUSION
OPSC is firmly committed to ensuring that bond funds are expended in accordance with
applicable laws and regulations. As part of its continuing efforts to improve operations, OPSC

will take appropriate actions to address the issues presented in the report.

If you need further information or assistance on this report, please contact me at (916) 375?
5959.

 

cc: Daniel Kim, Director, DGS
Eraina Ortega, Chair, SAB
Brent Jamison, Deputy Director, lnteragency Support Division, DGS

EVALUATION OF RESPONSE
The Office of Public School Construction’s (OPSC) response to the draft report has been
reviewed and incorporated into the final report. The audit recommendations are intended to
improve accountability and oversight of bond funds. We acknowledge OPSC agreed to post all
desk review reports to its website and establish a work plan to determine the accuracy and
compliance of all project savings.
However, for a majority of our recommendations, OPSC is proposing to defer corrective actions
pending the results of the November 2016 K-12 bond initiative. If passed in November 2016,
the proposed K-12 bond measure will authorize $9 billion in general obligation bonds for school
construction. Specifically, the bond measure will allocate an additional $7 billion in bond
proceeds to the current School Facility Program with no programmatic changes.
With $4 billion in Proposition 1D bond funds currently subject to audit and over $197 million in
unused savings/bond funds (state and district share), it is imperative that the required statutory
audits and oversight activities be performed. Deferring corrective actions, as proposed by
OPSC, will subject an additional $7 billion in new bond proceeds to the lack of accountability
and oversight outlined in this report. We continue to recommend OPSC take immediate
corrective actions to remedy the significant deficiencies identified and improve its accountability
and oversight of bond funds.

29