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California State Auditor Logo COMMITMENT • INTEGRITY • LEADERSHIP

South Orange County Wastewater Authority
It Should Continue to Improve Its Accounting of Member Agencies’ Funds and Determine Whether Members Are Responsible for Its Unfunded Liabilities

Report Number: 2017-113



Summary

WSouth Orange County Wastewater Authority (SOCWA) is a joint powers authority (JPA) composed of 10 member agencies (members) consisting of local water and service districts and cities. SOCWA facilitates and manages the collection, transmission, treatment, and disposal of wastewater, as well as the production of recycled water for irrigation and commercial usage, for approximately 500,000 homes and businesses across the southern portion of Orange County. SOCWA has no taxing authority, and nearly all funding for its operation comes directly from the contributions of its members. This audit report concludes the following:


SOCWA’s Practices to Track Available Cash by Member Were Inadequate

In the past, SOCWA did not adequately account for members’ individual shares of its available cash or reconcile the amount of available cash derived from its audited financial statements with the amount of cash that it recorded in its accounting records. In July 2017, SOCWA took steps to reconcile its available cash and found that the balance derived from its fiscal year 2015–16 audited financial statements was approximately $354,000 higher than the amount supported by its accounting records. SOCWA is still investigating this discrepancy and plans to present the final results of its reconciliation of members’ available cash to its board of directors (board).Subsequently, SOCWA will establish new beginning available cash balances and begin reporting cash balances to members each month.


Responsibility for SOCWA’s Unfunded Retirement Benefits Is Unclear

SOCWA’s JPA agreement specifies that it is a separate entity established under Government Code section 6500 et seq. and is distinct from its 10 members. In addition, SOCWA’s JPA agreement does not expressly hold its members liable for its unfunded obligations for retirement benefits for its employees, specifically pensions and other postemployment benefits totaling approximately $18 million as of June 2017. We asked SOCWA officials whether the members would be liable for these amounts if SOCWA were to dissolve and did not have sufficient assets to pay these obligations, and they believed the members would be liable. However, the JPA agreement is unclear and the officials did not have a firm legal opinion or an express guarantee from the members to support this belief. If members did not act to pay SOCWA’s outstanding retirement debts, the courts might have to resolve the matter. Alternatively, the California Public Employees’ Retirement System (CalPERS) might have to reduce the retirement benefits provided to SOCWA’s retirees.

In addition, according to a quarterly report prepared by CalPERS staff and presented to CalPERS’ Finance and Administration Committee in December 2017, only 10 of 149 JPAs with CalPERS plans contained provisions in their JPA agreements that would make agency members liable for the JPA’s financial liabilities, including unfunded pension obligations. Consequently, the employees of the 139 JPAs whose members are not expressly liable could be at risk of having their pension benefits reduced if their respective JPAs were to dissolve with outstanding unfunded pension obligations.


SOCWA Has Taken Steps to Remedy Historical Financial Reporting Issues

Until recently, SOCWA’s financial statements were missing certain land, building, and infrastructure assets. In addition, for four of the last five fiscal years, SOCWA did not meet its JPA agreement requirement to file its audited financial statements with the State Controller’s Office, Orange County Auditor‑Controller, and each member within six months of its fiscal year‑end. SOCWA has recently developed a plan and related procedures to ensure that future fiscal year‑end financial statements are prepared in a timely manner. SOCWA has also been slow to correct deficiencies in internal controls that were identified by its external auditors during their audits of SOCWA’s financial statements for fiscal years 2012–13 through 2015–16. SOCWA’s internal control deficiencies likely occurred because it did not have sufficient documented policies and procedures for its accounting functions until recently. Finally, SOCWA’s current policy for selecting an external auditor does not reduce audit costs by requiring multiyear contracts with its external audit firm, nor does it comply with a new state law that requires it to rotate its external auditor every six years.


SOCWA’s Governance Structure Is Generally Similar to That of Other Wastewater and Water JPAs

Elements of SOCWA’s governance structure are generally similar to that of other wastewater and water JPAs in California that we reviewed. In addition, the board’s method of distributing voting rights to members, with each member having one vote regardless of the member’s contribution level, is generally similar to that of the majority of the nine other wastewater and water JPAs we reviewed.



Other Areas We Reviewed

We found that SOCWA’s policy and procedures do not comply with certain requirements of the California Public Records Act (Public Records Act). In addition, SOCWA has not updated its policy since 2007 to account for changes in the Public Records Act.

Summary of Recommendations

Legislature

The Legislature should require new JPA agreements to hold the members responsible for the JPA’s unfunded pension and other postemployment benefits obligations and to specify the manner of apportioning these liabilities.

In addition, the Legislature should require all existing JPAs to disclose annually as part of any regularly scheduled communication to their pension and other postemployment benefits plan participants, whether the JPA’s members are liable for the JPA’s unfunded retirement obligations.

SOCWA

SOCWA should finish investigating the difference in available cash balances per its audited financial statements and its accounting records, and then develop a methodology that is agreeable to its members for allocating any additional cash it identifies to the credit of its members.

To prevent future discrepancies in available cash balances, SOCWA should implement its improved procedures to better account for members’ cash contributions and provide monthly reports of available cash balances to members.

SOCWA and its members should amend the current JPA agreement to expressly state whether members will be responsible for SOCWA’s retirement benefits liabilities in the event it is not able to meet those obligations and then it should inform plan participants of that provision.

To better ensure the timely release of future financial statements, SOCWA should enhance its new procedures for preparing its financial statements by developing and following a timeline with specific deadlines for completing each of its planned year‑end tasks.

To better ensure the reliability of its financial reporting, the effectiveness and efficiency of its operations, and its compliance with laws and regulations, SOCWA should establish a policy requiring it to correct within six months any future internal control deficiencies that its external auditor may identify.

To reduce future audit costs, SOCWA should amend its policy on professional service procurements to specify that it should enter into agreements of at least five years with its competitively procured external audit firms. It should also develop a policy to rotate its external auditor when state law requires.

To ensure that it fully complies with the Public Records Act, SOCWA should do the following:

Agency Comments

SOCWA agrees with the findings and recommendations in our report.



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