State of California California State Transportation Agency D~:l'A.RTMENT OF TRANSPORTATION

Memorandum Serious 1/ro11ghl

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To: RIHUI ZHANG, Chief DIVISION OF LOCALASSISTANCE

Date:

File:

June 12, 201

P1560-0009

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From: MARSUE MORRILL, CPA~ Chief, External Audits - Local Governments Audits and Investigations

Subject PREAWARD AUDIT-LOS ANGELES RIVER REVITALIZATION CORPORATION

Caltrans Audits and Investigations performed a preaward audit of the Los Angeles River

Revitalization Corporation (RRC) to determine whether RRC's financial management system is

adequate to accumulate and segregate reasonable, allowable and allocable project costs. The

audit period covered expenditures from July 1, 2013 through February 17, 2015.

Based on our audit, we determined RRC's financial management system is capable of adequately

accumulating and segregating reasonable, allowable, and allocable project costs. RRC does not,

however, adequately account for project labor costs. In addition, RRC did not always follow

state and federal requirements when procuring contracts.

This report is intended for the infonnation of RRC, Cal trans management, Caltrans District 7, the California Transportation Commission, and the Federal Highway Administration. This repo11 is a matter of public record, however, and its distribution is not limited. In addition, this report will be placed on the Caltrans website.

If you have any questions, please contact Yung Jo Ryoo, Auditor, at (9 16) 323-7950 or Alice Lee,

Audit Manager, at (916) 323-7953.

Enclosure

"Provide a safe, suslainable, integrated and efficient transpol'falion system 10 enhance California ·s economy and livability '"

RJHUI ZHANG June 12, 2015 Page 2

c: Jennifer Samson, Director, Real Estate Development, Los Angeles River Revitalization Corporation

Janice Richard, Director, Financial Services, Federal Highway Administration Jermaine Hannon, Director, Financial Serv ices, Federal Highway Administration Kara Magdaleno, Administrative Program Assistant Planning and Finance, Federal

Highway Administration Carol Farris, Deputy Secretary, Policy Coordination, Cal ifornia State Transportation

Agency Winton Emmett, Chief, Project Implementation North, Caltrans Division of Local

Assistance Steve Novotny, Supervising Transportation Engineer, Division of Project Management,

Caltrans District 7 Marilyn Mack, Transportation Engineer, Division of Project Management, Cal trans

District 7 Lai Huynh, Audits and Federal Performance Measures Analyst, Caltrans Division of

Local Assistance David Saia, LAPM/LAPG Coordinator, Cal trans Division of Local Assistance

"Prowde a saf e, sustainable, m1egrated a/IC/ efficient transportalio11 sys1e111 10 enhance California ·s economy and limbility ··

AuoIT REPORT

Los Angeles River Revitalization Corporation

Preaward Audit

Pl560-0009

June 2015

Prepared By:

Audits and Investigations

California Department of Transportation

"Provide a safe. sustainable, integrated and efficient transporwtion ~yste111

to enhance California 's economy and livability"

BACKGROUND, ScorE,

M ETHODOLOGY AND CoNcLus10N

EXECUTIVE SUMMARY

The California Department of Transportation (Caltrans), Audits and Investigations (A&I) performed a preaward audit on the Los Angeles River Revitalization Corporation (RRC), a nonprofit corporation, and found RRC's financial management system is capable of adequately accumulating and segregating reasonable, allowable, and allocable project costs, however, RRC currently does not adequately account for project labor costs. In addition RRC did not always follow state and federal requirements when procuring contracts.

UACKGROUND

Caltrans A&I conducts preaward audits on non-profit entities receiving state and federal funds to determine if non-profit entities are complying with state and federal requirements, and to determine if financial management systems are adequate to accumulate and segregate reasonable, allocable, and allowable project costs.

Callrans requires preaward audits to be performed by A&I prior to establishing a Master Agreement with non-profit entities for state and federal funded projects.

SCOPE

The scope of the audit was limited to reviewing and testing RRC's financial management system, including internal controls, and its ability to accumulate and segregate reasonable, allocable, and allowable project costs. The audit also covered the review of RRC's contract

procurement practices. The audit consisted of inquires of RRC's personnel and a review of the independent auditor's Audit Report for the fiscal year ended June 30, 20 14. The audit also included tests of individual accounts traced to the generaJ ledger and supporting documentation to assess allowability, allocability and reasonableness of costs based on a risk assessment and an assessment of the internal control system. The audit period covered expenditures from of July 1, 2013 through February 17, 2015. Financial management system changes subsequent to February 17, 2015 were not tested and, accordingly, our conclusion does not pertain to changes arising after this date.

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RRC is responsible for ensuring compliance with state and federal regulations and that the financial management system maintained by RRC is adequate to accumulate and segregate reasonable, allowable and allocable project costs. Our responsibility, based on our audit, is to conclude on RRC's compliance with state and federal regulations and the adequacy of its financial management system.

Because of inherent limitations in any financial management system, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of the financial management system to future periods are subject to the risk that the financial management system may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

METHODOLOGY

We conducted this performance audit in accordance with generally accepted government auditing standards. These 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. The audit was less in scope than an audit performed for the purpose of expressing an opinion on the financial statements of RRC. Therefore, we did not audit and are not expressing an opinion on RRC's financial statements.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the data and the records selected. An audit also includes assessing the accounting principles used and significant estimates made by the auditee, as well as evaluating the overall presentation.

CONCLUSION

Based on our audit RRC 's financial management system is capable of adequately accumulating and segregating reasonable, allowable, and allocable project costs, however, RRC currently does F _ 1 _ not adequately account for project labor costs. In addition RRC did not always follow state and federal requirements when procuring contracts.

The results of the audit were communicated to Omar Brownson, Executive Director of RRC, on May 26, 2015. Our findings and recommendations take into consideration RRC's response dated June 4, 2015. RRC's response and our analysis of the response are set forth in the Findings and Recommendation section of this report. A complete copy of RRC's response is included in Attachment I.

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MARSUE MORRILL, CPA

Chief, External Audits - Local Governments

Audits and Investigations

June 12, 2015

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FINDINGS AND RECOMMENDATIONS

FINDING l

Los Angeles River Revitalization Corporation (RRC) does not have a financial management system that adequately accumulates and segregates reasonable, allowable, and allocable project labor costs.

RRC is a "Results-Only Work Environment" where employees are paid a fixed salary each week to complete projects and assignments regardless of actual hours worked. RRC does not require employees to record and segregate, by activity code, all iabor hours worked or not worked, and does not charge labor costs to the program/project level.

In addition during our testing of $30,956 in labor costs billed by RRC to the State of California Natural Resources Agency (NRA), we noted RRC included a timesheet per NRA's request. We found the timesheet was not in compliance with federal standards for documenting personnel expenses. Specifically, the timesheet was not signed by the employee or approved by management and therefore did not represent an official record.

We also found labor costs billed exceeded 100 percent of total compensated wages. RRC billed for one employee who worked overtime but did not receive additional compensation for ovt:rlimt: hours workt:d. RRC billed NRA based on the total number of hours worked, not the total amount compensated to the employee.

RRC did not develop labor costs allocation procedures since there was no need for RRC to previously track project labor costs. The absence of a financial management system that accumulates and segregates reasonable, allowable, and allocable project labor costs may result in the cli sallowance of future project labor costs from state and federal grantors.

Per 2 Code of Federal Regulations (CFR) Part 200 Section 430 (i) (1), "charges lo Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must: (ii) be incorporated in the official records of the non-Federal entity, and (iii) reasonably reflect the total activity for which the employee is compensated by the non-federal entity, not exceeding 100% of compensated activities."

RECOMMENDATION

We recommend RRC develop and implement a job cost system that accumulates, segregates, and bills reasonable and allowable project labor costs based on actual hours worked using hourly rates calculated from each employee' s annual salary and 2080 standard annual hours, or another method that would allow labor costs to be billed equitably across employees and projects. We also recommend actual labor hours worked by employees be verified by the employee and

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approved by management, and hours billed not exceed total compensation paid.

AUDITEE'S RESPONSE

RRC agreed with the finding.

FINDING 2

RRC' s current contracting policy does not meet the state and federal procurement standards.

Specifically, RRC's policy does not:

Have a procedure for a competitive bid process involving sealed bids. • Include procedures for contracting with small and minority businesses, women's business

enterprises, and labor surplus area firms. • Have detailed procedures on Request for Proposals (RFP) or Request for Qualifications

(RFQ) defining the publication requirements, evaluation factors and its relative importance, solicitation information that should be included in the RFP or RFQ, and method for conducting technical evaluations of the proposal. Have procedures requiring RRC to make independent cost estimates, analysis, and negotiations for procurements that are not considered small purchases.

• Have procurement procedures for noncompetitive proposals .

RRC had not previously received state or federal funding for projects and therefore did not need to incorporate policies and procedures that were in compliance with state and federal regulations. For future state and federal projects, however, non-compliance with state and federal regulations could result in the disallowance of project costs.

Per 2 CFR Part 200 Section 320 (c), "bids are publicly solicited and a firm fixed price contract is awarded to the responsible bidder whose bid, conforming with all the material terms and conditions of the invitation for bids, is the lowest in price. The sealed bid method is the preferred method for procuring construction."

Per 2 CFR Part 200 Section 321 (a), "the non-Federal entity must take all necessary affirmative steps to assure that minority businesses, women's business enterprises, and labor surplus area firms are used when possible."

Per 2 CFR Part 200 Section 320 ( d) (I), "requests for proposals must be publicized and identify all evaluation factors and their relative importance."

Per 2 CFR Part 200 Section 320 (d) (3), " the non-Federal entity must have a written method for conducting technical evaluation of the proposals received and for selecting recipients."

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Per 2 CFR Part 200 Section 323 (a), " the non-Federal entity must perform a cost or price analysis in connection with every procurement action in excess of the Simplified Acquisition Threshold including contract modifications. "

Per 2 CFR Part 200 Section 320(f), "procurement by noncompetitive proposals may be used only when one or more of the following circumstances apply: (1) The item is available only from a single source; (2) The public exigency or emergency for the requirement will not permit a delay resulting from competitive solicitation; (3) The Federal awarding agency or pass-through entity expressly authorize noncompetitive proposals in response lo a written request from the non­Federal entity; or (4) After solicitation of a number of sources, competition is determined inadequate."

Per Public Contract Code (PCC) 10326.2.(c), "ln addition to disclosure of the minimum requirements for qualification, the solicitation document shall specify what business performance measures in addition to price shall be given a weighted value. The department shall use a scoring method based on those factors and price in determining the successful bid. Any evaluation and scoring method shall ensure substantial weight is given to the contract price."

RECOMMENDATION

We recommend RRC revise its procurement policies and procedures to meet federal procurement criteria as specified in 2 CFR Part 200 and state procurement standards specified in PCC.

AUDITEE'S RESPONSE

RRC agreed with the finding.

FINDING3

RRC did not follow its own contracting procurement policy.

Based on our testing of three of RRC' s procurement transactions over $25,000, we found the following:

• Two of three contracts tested were missing required procurement documents. • None of the contracts tested had conflict of interest statements.

RRC's management did not enforce the application of its procurement policies and procedures. If effective internal controls are not established RRC may not be able to assure that it is managing future federal awards in compliance with federal statues, regulations and the terms and conditions of federal awards.

Per 2 CFR Part 200 Section 302(b), "The financial management system of each non-Federal entity must provide for the effective control over, and accountability for, all funds, property, and

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other assets. The non-Federal entity must adequately safeguard all assets and assure that they are used for authorized pu1voses."

RRC's Contract Policy states in Section 5.1, "vendor solicitations for amounts in excess of $25,000 will be conducted via a competitive bidding process." Section 5.2 states, "a minimum of three firms shall be solicited and a written solicitation and response shall be required for solicitations for goods and services," and Section 6.1 states, "key RRC personnel and Board members are required to file appropriate conflict of interest statements".

RECOMMENDATION

We recommend RRC revise its procurement policies and procedures to meet federal procurement criteria as specified in 2 CFR Part 200.

AUDITEE'S RESPONSE

With regards to the Roving Rio Projects, 3 firms were solicited as evidenced in Exhibit 6. Of the 3 firms, th ree responses were received. Two firms provided proposals (Exhibit 7 and 8). One firm, Utopiad, LLC (Daveed Kapor), declined verbally.

With regards to HUD NELA project, RRC partnered with DakeLuna in order to compete for funding. Funding to RRC was contingent on a strategic partnership with DakeLuna.

Revisions to RRC Administrative Procedures Manual will clarify and differentiate "Strategic Partnership" and its relationship to contracts.

AUDITOR'S ANALYSIS OF AUDITEE'S RESPONSE

RRC agreed with the second bullet of the finding. RCC did not, however, provide any additional required procurement documentation. Therefore the finding remains.

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Au01TTEAM

MarSue Morrill , Chief, External Audits-Local Governments

Alice Lee, Audit Manager

Yung Jo Ryoo, Auditor/Specialist

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Attachment I COURSE ~

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June 4, 2015

Marsue Morrill, Chief External Audits-Local Government Audits & Investigations Department of Transportation

RE: Los Angeles River Revitalization Corporation Pre award Audit P1560-0009 June 2015

Dear Ms. Morrill:

This is in response to the above referenced pre-award audit report of Los Angeles River Revitalization Corporation for the period from July 1, 2013 to February 15, 2015.

"'-lian Abshe~

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. During the period audited, RRC did not have any contracts that required compliance with 2 CFR Part 200. RRC books and records were kept in

;!c:.vard Kat1 conformity with U.S. GAAP. RRC is knowledgeable of the regulations in 2 CFA Part 200 and is capable of complying with its requirements.

The following is Los Angeles River Revitalization's response to the findings and recommendations stated in the pre-award audit report

Finding 1 - Recommendation t)'lv1d O'Connor

gruce Sairo

Richard Weiqt:oub

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We recommend RRC develop and implement a job cost system that accumulates, segregates, and bills reasonable and allowable project labor costs based on actual hours worked using hourly rates calculated from each employee's annual salary and 2080 standard annual hoiirs, or another method that would allow labor costs to be billed equitably across employees and projects. We also recommend actual labor hours worked by employees be verified by the employee and approved by management, and hours billed not exceed total compensation paid.

Response to Recommendation:

Los Angeles River Revitalization Corporation is knowledgeable of the regulations in 2 CFR Part 200. RRC understands the importance of adhering to these regulations when receiving Federal awards. In preparation for future

Ms. Marsue Morrill Response to Pre-Award Audit Report June 4, 2015 Page 2

Federal awards, RRC has revamped it<> timekeeping system to comply with CFR Part 200 Section 430(i) (1). Effective May 1, 2015, employees are required to record and segregate (by projects) hours worked or not worked. Timesheets are signed by the employee and approved by management.

These tirnesheet will provide the basis for charges to the financia l management system. Attached (Exhibit 1) is an employee's completed timesbeets for the pay period ended May 15, 2015. This new system will ensure that labor costs billed to contracts are accurate, allowable, and adequately supported.

Finding 2 - Recommendation

We recommend RRC revise its procurement policies and procedures to meet federal procurement criteria as specified in 2 CFR Part 200 and state procurement standards specified in PCC.

Response to Recommendation:

Los Angeles River Revitalization Corporation is aware of the procurement criteria as specified in 2 CFR Part 200. As noted, to date, RRC has not received any funding for projects that were required to adhere to these regulations. RRC is in the process of revising its Administrative Procedures and Policies to include specific policies and procedures that comply with the regulations in 2 CFR Part 200 fo r federal awarded projects.

Finding 3 - Recommendation

We recommend RRC revise its procurement policies and procedures to meet federal procurement criteria as specified in 2 CFR Part 200.

Response to Recommendation:

Los Angeles River Revitalization does fo llow its own contracting procurement policy. RRC Administrative Procedure Manual, Section 5.1 states "vendor SOLICITATION in excess of $25,000 will be conducted ....". In Section 5.2, it states "RRC Staff will SOLICIT firms for interest A minimum of three firms shall be SOLICITED. For SOLICITATIONS for goods and services a written SOLICITATION and response shall be required."

Although RRC may not have received a proposal from al l SOLICITED firms, it did SOLICTwritten proposals from more tha n 3 firms. In the Urban Greening Grant request, more than 3 firms were solicited as evidenced in Exhibit 2. In Exhibits 3, 4, 5, responses to the Urban Greening Grant proposals (interested and non-interested) are shown. With regards to the Roving Rio Project, 4 firms were solicited as

Ms. Marsue Morrill Response to Pre-Award Audit Report June 4, 2015 Page 3

evidenced in Exhibit 6. Of the 4 firm s, three responses were received·. Two.firms provided proposa ls (Exh ibit 7 and 8). One firm, DakeLuna, declined verbally.

With regards to HUD NELA project, RRC partnered with DakeLuna in order to compete for funding. Funding to RRC was contingent on a strategic partnership with DakeLuna.

Revisions to RRC Administrative Procedures Manual will clarify and differentiate "Strategic Pa rtnership" and its relationship to contracts.

If you have any furth er questions or comments, please contact Teri Aranguren at teri@tacpa.info and/or Jason Foster at jfoster@larivercorlJ_,com.

Sincerely, /"\

" i

\.___/ "'­

Omar Brownson Executive Director

Cc: Teri Aranguren, Financial Consultant Jason Foster, Administration and Operations Jennifer Samson, Director of Real Estate