State ofCali lornia California State Transportation Agency OEJ>J\RTMENTOFTRANSJ>ORTATION

Memorandum Serious dro11gflt.

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To: MARK SAMUELSON Acting Chief Division of Local Assistance

Date:

File:

May 18, 2017

Pl594-0014

~J-From: MARSUE MORRILL, CPA~~

Chief External Audits - Local Governments Audits & Investigations

Subject: INDIRECT COST RATE PROPOSAL AUDIT - CITY OF TURLOCK, DEPARTMENT OF DEVELOPMENT SERVICES ENGINEERING DIVISION

At the request of the California Depa1tment ofTransportation (Cal trans), Audits and Investigations (A&l), the State Controller's Office (SCO) performed an audit of the City ofTurlock, Department of Development Services, Engineering Division (City) Indirect Cost Rate Proposal (ICRP) for fiscal year 2014115.

The purpose of the audit was to determine whether the ICRP was presented in accordance with Title 2 Code of Federal Regulations Part 225 (2 CFR 225), and Caltrans Local Assistance Procedures Manual (LAPM) Chapter 5.

SCO has adjusted the City's proposed indirect cost rates. The audited rate is as follows:

Rate Type*

Fixed w/Carry forward

Proposed

114.61 %

Audited

117.42%

Applicable To

Engineering Division

*Base: Total direct salaries and wages

There is no corrective action plan required.

If you have any questions, please contact Tami Gill, Audit Manager, at (916) 323-7899.

Attachment

c: Marie Lorenzi, Senior Accountant, Department ofDevelopment Services, City ofTurlock Aimee Kratovil, Acting Director, Financial Services, Federal Highway Administration Tashia Clemons, Director, Program Development, Federal Highway Administration Kara Magdaleno, Administrative Program Assistant Planning and Finance,

Federal Highway Administration Veneshia Smith, Financial Program Manager, Federal Highway Administration Roberto Rodrigues, F.I.R.E & Program Review Coordinator, Federal Highway

Administration

"Provide a safr!, sustainable. integrated and efficient 11w1spor1alio11 system

to enhance California seconomy and livability"

Mark Samuelson May 18, 2017 Page 2

John Hoole, Chief, Project Implementation South, Division of Local Assistance, Caltrans Winton Emmett, Chief, Project Implementation North, Division of Local Assistance,

Cal trans · Parminder Singh, Chief, Office of Local Assistance, District 10, Cal trans Lisa Gore, Associate Accounting Analyst, Division ofAccounting, Caltrans Phyllis Nahale, Audits and Federal Performance Measures Analyst, Division ofLocal

Assistance, Caltrans Tami Gill, Audit Manager, External Audits - Local Governments,

Audits & Investigations, Caltrans Office Chron Pl594-0014

CITY OF TURLOCK DEPARTMENT OF DEVELOPMENT

SERVICES ENGINEERING DIVISION

AuditRepon

INDIRECT COST RATE PROPOSAL AUDIT OF CALTRANS CONTRACT NO. 77A044

(Audit Request No. P1594-0020)

July 1, 2014, through June 30, 2015

BETIYT. YEE California State Controller

May 2017

BETIYT. YEE California State Controller

May 1, 2017

MarSue Morrill, Chief External Audits-Local Governments Audits and Investigations California Department ofTransportation 1304 0 Street, Suite 200, MS 2 Sacramento, CA 95814

Dear Ms. Morrill:

The State Controller's Office audited the indirect cost rate proposal (ICRP) of the City of Turlock, Department of Development Services, Engineering Division. The audit period included the ICRP for fiscal year (FY) 2014-15. The audit was performed at the request of the California Department ofTransportation (Cal trans) Audits and Investigations.

The purpose of the audit was to determine whether the ICRP was presented in accordance with Title 2, Code ofFederal Regulations, Patt 200, and Caltrans' Local Assistance Procedures Manual, Chapter 5. The city's management is responsible for fair presentation of the ICRP.

We noted that certain indirect/supervisory hours performed by Engineering Division's management staff were recorded as direct staff time. As a result, for FY 2014-15 the indirect cost rate was adjusted from 114.61 % to 117.42%.

Ifyou have any questions, please contact Andrew Finlayson, Chief, State Agency Audits Bureau, by telephone at (916) 324-63 10.

J FF EY V. BROWNFIELD, CPA Chief, Division of Audits

JVB/as

cc: Tami Gill, Audit Manager External Audits-Local Governments Audits and Investigations (via email)

City ofTurlock Indirect Cost Rate Proposal

Contents

Audit Report

Summary. .............. ..... .... ... ................................ .......... ....... ......... ................... .... ...... ..... ... .. 1

Background

And Indirect Cost Rate

....................................................... ....... .................. ..... ............... .................. .. 1

Objectives, Scope, and Methodology............................................................. .................. 2

Conclusion.. ........................... ................... .......... ...... ............... ..... ..... .. .......... ........ .... ......... 3

Views of Responsible Officials..... .................. ..... ... .............................................. ............. 3

Restricted Use .................... .................... ............... .................. ...... .. .............. ..................... 3

Schedule 1-Summary of Proposed and Audited Direct Costs, Indirect Costs, ............. . 4

Finding and Recommendation ............... .................. .. ........... ................ ......... .......... .. ......... .. 6

City ofTurlock Indirect Cost Rate Proposal

Audit Report Summary

Background

The State Controller's Office (SCO) audited the indirect cost rate proposal (ICRP) of the City of Turlock, Department of Development Services, Engineering Division. The audit period included ICRP for fiscal year (FY) 2014-15.

The purpose ofthe audit was to determine whether the ICRP was presented in accordance with Title 2, Code of Federal Regulations, Part 200 (2 CFR 200), and the California Department of Transportation's (Caltrans) Local Assistance Procedure Manual (LAPM), Chapter 5. The city's management is responsible for fair presentation of the ICRP.

We determined that the city's ICRP was prepared in accordance with 2 CFR 200, and that the city's financial management system appears to be able to accumulate and segregate allowable and allocable direct and indirect costs, except that the city misrepo1ted certain indirect labor costs as direct labor costs in the ICRP computations. As a result, for FY 2014-15 the indirect cost rate was adjusted from 114.61 % to 117.42%.

We also determined that the city is in compliance with applicable state and/or federal procurement policies and procedures, and that the project billings are generally in compliance with Caltrans' LAPM, Chapter 5, except for certain classifications ofdirect and indirect staff time caused by the above-mentioned misreporting.

The City of Turlock, Department of Development Services consists of eight divisions responsible for a variety of activities, ranging from the construction and maintenance of roads and highways to the provision of housing services, transportation infrastructure development, and land use. The Engineering Division was established to provide planning, engineering, and construction management for street, sanitary sewer, storm drain, water, water wells, the sewer treatment plants, and public building projects. It also implements, maintains, and supports the city's Geographic Information System.

The audit was performed by the SCO on behalfofCaltrans (Audit Request No. Pl594-0020). The authority to conduct this audit is given by:

• lnteragency Agreement No. 77A0044, dated June 1, 2014, between the SCO and Caltrans, which provides that the SCO will perform audits of proposed ICRPs submitted to Caltrans from local government agencies to ensure compliance with 2 CFR 200 (formerly Office ofManagement and Budget Circular A-87) and LLP 04-10.

• Government Code section 12410, which states, "The Controller shall superintend the fiscal concerns of the state. The Controller shall audit all claims against the state and may audit the disbursement of any money, for correctness, legality, and for sufficient provisions of law for payment."

City ofTurlock Indirect Cost Rate Proposal

Objectives, Scope, We conducted this performance audit in accordance with the generally accepted government auditing standards. Those standards require that we and Methodology 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.

We conducted the audit to determine whether (1) The city's ICRP is in compliance with the cost principles prescribed in 2 CFR 200; (2) the city's ICRP is in compliance with the requirements for ICRP preparation and application identified in the Caltrans' LAPM, Chapter 5; (3) the city has a sufficient financial management system to properly manage federal- and state-funded projects; and ( 4) the city has procurement policies and procedures that are in compliance with 2 CFR 200.

The scope of the audit was limited to select financial and compliance activities. The audit consisted of recalculating the ICRP and making inquiries of department personnel. The audit also included tests of individual accounts in the general ledger and supporting documentation to assess allowability, allocability, and reasonableness of costs, and an assessment of the internal control system related to the ICRP for FY 2014-15. Changes to the financial management system subsequent to FY 2014-15 were not tested and, accordingly, our conclusion does not pertain to changes arising after that fiscal year.

To achieve our audit objectives, we performed the following audit procedures:

• Reviewed the city's prior audit reports;

• Reviewed the city's written policies and procedures relating to accounting systems, procurement, and project/contract management;

• Interviewed employees, completed an internal control questionnaire, and performed a system walk-through in order to gain an understanding of the city's internal controls, accounting systems, timekeeping and payroll systems, procurement and billing process;

• Performed limited tests ofcontrols on a judgmentally selected sample oftransactions to confum and validate existing documented processes and procedures;

• Tested project costs accounting systems;

• Tested indirect costs and direct costs bases by validating amounts claimed to supporting evidential matter; and

• Tested the ICRP calculation by ensuring that only allowable costs were included within the rate.

City ofTurlock indirect Cost Rate Proposal

Conclusion

Views of Responsible Officials

Restricted Use

We did not audit city's financial statements. We limited our audit scope to planning and performing audit procedures necessary to obtain reasonable assurance that the proposed ICRP was in accordance with the 2 CFR 200 and Caltrans' LAPM, Chapter 5. In addition to developing appropriate auditing procedures, our review of internal control was limited to gaining an understanding of the transaction flow, accounting system, and applicable controls to determine the city's ability to accumulate and segregate reasonable, allowable, and allocable indirect and direct costs.

We determined that the city's ICRP was prepared in accordance with 2 CFR 200, and that the city's financial management system appears to be able to accumulate and segregate allowable and allocable direct and indirect costs, except that the city misreported certain indirect labor costs as direct labor costs in the ICRP computations. As a result, for FY 2014-15 the indirect cost rate was adjusted from 114.61 % to 117.42%.

We also determined that the city is in compliance with applicable state and/or federal procurement policies and procedures, and that the project billings are generally in compliance with Caltrans' LAPM, Chapter 5, except for certain classifications ofdirect and indirect staff time caused by the above-mentioned misreporting.

We conducted telephone exit conferences with the city's representative. We emailed a copy of the audit finding and recommendation to Marie Lorenzi, Senior Accountant, Department of Development Services. Ms . Lorenzi responded by email agreeing with the audit results. Ms. Lorenzi declined a draft audit report and agreed that we could issue the audit repo1t as final.

This report is solely for the information and use of City of Turlock, the California Department ofTransportation, and the SCO. It is not intended to be and should not be used by anyone other than these specified parties. This restriction is not intended to limit distribution of this report, which is a matter of public record.

JEFFREYV. BROWNFIELD, CPA Chief, Division of Audits

May 1, 2017

City ofTurlock !11direct Cost Rate Proposal

Schedule 1­Summary of Proposed and Audited Direct Costs, Indirect

Costs, and Indirect Cost Rate July 1, 2014, through June 30, 2015

Proposed Audited

DescriEtion Costs Costs Unallowable Dire ct costs:

Full-time salaries $ 1,044,379 $ 1,030,272 $ (14,107)

Bilingual pay 3,643 3,643

Educational incentive 2,100 2,100

Sick leave conversion pay 12,153 12,153

Vacation conversion pay 12,477 12,477

Part-time general 12,454 12,454

Overtime standard 4,256 4~56 Total direct salaries and wages 1,091,462 1,077,355

Indirect cos ts:

Salaries and wages 40,603 54,710 14,107

Medical dental plan 254,441 254,441

Vision insurance 3,386 3,386

Long term disability insw·ance 6,129 6,129

Life insurance 2,797 2,797

Workers compensation insurance 15,687 15,687

City liability insurance 17,312 17,312

PERS 302,214 302,214

Medicare tax 16,340 16,340

Retiree health insurance 23,270 23,270

Deferred compensation 15,186 15,186

DefetTed compensation in lieu 18,436 18,436

Employee contribution to PERS (100,119) (100,119)

Services and Supplies:

Copier maintenance/lease 4,250 4,250

Printer maintenance 2,500 2,500

Insurance prope1ty 6,346 6,346

Physicals, shol'>, and psychological 300 300

Supplies general 6,126 6,1.26

Computer sotnvare maintenance 11 ,458 11 ,458

Photocopies 4,236 4,236

Postage general 2,577 2,577

Survey equipment and software 915 915

Telephone general 4,196 4,196

Auto allowance 1,800 1,800

Fleet ma intenance labor 3,124 3,124

Outside contractor labor 198 198

CNG genera l 3,641 3,641

Gas and oil 2,895 2,895

l

City ofTurlock Indirect Cost Rate Proposal

Schedule 1 (continued)

Proposed Audited

Descri12tion Costs Costs Unallowable Services and Supplies (continued):

Vehicle and small equipment 1,932 1,932

Vehicle insurance 265 265 Books and subscriptions 161 161

Dues miscellaneous 460 460 Professional development 1,800 1,800

Shoe allowance 1,200 1,200 Training general 504 504 NWTSP fee program update 7,500 7,500 WISP fee program update 7,500 7,500

Transfers out to fund 116-800 mhz 648 648 Transfers out to fund 501 info tech-GIS 7,125 7,125 Transfers out to 110-40-400 CIP report 1,000 1,000

Transfers out to fund for audit reimb 2,125 2,125 Transfers out to fund 501 for IT services 33,390 33,390 Transfers out to fund 242 network 44,285 44,285

Subtotal $ 780,138 l

$ 794,245 Central services costs--A-87 458,138 458,138 Carry forward adjustment (FY 12/13) 12,675 12,675

Total indirect costs $1,250,952 $1,265,059

Total indirect cost $1,250,952 $1,265,059 Total direct salaries and wages $1,091,462 $1,077,355

Inidrect cost rate 114.61 % 117.42% 2 .81%

1 Difference due to rounding.

City o/Turlock /11direc1Cost Rate Proposal

Finding and Recommendation FINDING-­Understated indirect labor costs

The city understated the indirect labor costs by $14,107 and overstated the direct labor costs by the same amount. The labor costs are comprised of the hours worked by each employee multiplied by the employee's billable hourly rate. This rate is derived by dividing the annual salaries by 1,752 hours.

The indirect/supervisory hours perfom1ed by the Engineering Division's management staff were captured by the division's timekeeping system. Our audit revealed that some indirect hours were misreported as direct hours with project codes, thereby understating the indirect hours and overstating the direct hours. The proposed indirect cost rate is affected because the base used in the calculation included some identifiable indirect hours worked by the division's management staff. The city proposed 114.61 % for FY 2014-15, which is a fixed rate based on actual costs from FY 2012-13. Our audit determined the rate of 11 7.42%, a difference of 2.81%.

2 CFR 200, Subpa1t E-Cost principles, section 200.413 (c) states, in part, that the salaries of administrative and clerical staff should normally be treated as indirect costs. Direct charging of these costs may be appropriate only if all of the conditions described in this section are met.

2 CFR 200, Subpart E, section 200.405 (a) states, in part, that a cost is allocable to a particular Federal award or other cost objective if the goods or services involved are chargeable or assignable to that federal award or cost objective or in accordance with relative benefits received.

Because the indirect hours worked by the Engineering Division's management staff were misreported, the indirect labor cost was understated by $14, I 07 and the direct labor cost was overstated by the same amount.

Recommendation

The city should adhere to all applicable provisions of 2 CFR 200 when preparing future ICRPs. Correction of the issue will likely require reprogramming of the time-accounting system. We also recommend that Caltrans request the city to revise and resubmit the ICRP for the affected fiscal year.