Misappropriated Bond Funds

SENATOR'S STAFF REPORT REGARDING THE SMMC/MRCA FINAL 2111 AUDIT

Updated August 2, 2011

Before specific concerns regarding this audit report are discussed, a few important general points need to be made:

Buried in an obscure State budget compromise package’s trailer bill in 20xx, the State Legislature abdicated its responsibility for fiscal oversight of the Santa Monica Mountains Conservancy. The bill passed authority to the State Attorney General for making all final rulings regarding the appropriateness of transactions conducted between the Conservancy and the Mountains Recreation and Conservation Authority (the JPA to which the SMMC historically awards 95% of all its grants and with which it shares the same individuals acting as senior-most Staff).

Every DOF audit of the financial transactions between the SMMC and the MRCA since has identified increased amounts of misappropriated funds. The latest audit brings into question transactions that total hundreds of millions of dollars.  (this version of the audit report can be found in our DOCUMENTS section for downloading.)

The most egregious of these transactions may be the case where, with the Attorney General’s, the SMMC’s and the MRCA’s approval, the MRCA and SMMC executed a legal document called an Irrevocable Offer to Dedicate (real property ownership to taxpayers) in lieu of repaying misappropriated funds. The real property identified in this document, formerly a part of Ahmanson Ranch, was already owned by the taxpayers.

The audit clearly states that it “did not include an assessment or an examination of the efficiency or effectiveness of program operations.” Further, “..no assessment was performed on the reasonableness of the land acquisition costs or the conservation value of the land acquired or projects completed.” Despite these general limits to their undertaken responsibilities, however, one conclusion drawn by this audit is that, in the case of the former Ahmanson Ranch property, “it is unclear what additional tangible value the state received in exchange for the relief of public debt, (given) the property was already public open space.” This dramatizes just how important the facts surrounding this particular instance of misappropriated funds truly are.

Although the report states, “This audit was conducted during the period October 2009 through May 2011”, which is already an unprecedentedly extensive amount of time to conduct such audits, it adds that this audit also served to act as, “ …a follow-up on Department of Finance’s prior audit reports issued May 4, 2004 and May 24, 2006.” Inasmuch as this audit’s finding that the SMMC/MRCA did not act in compliance with applicable legal requirements and established criteria actually relates to transactions first identified in those 2004 and 2006 audits, it would be more accurate to say that this audit actually has now taken more than seven years and the even the most serious problems first identified in 2004 have still not been corrected.

The report further states: “Multiple discussions were held with the Conservancy and Authority throughout our audit to discuss and provide specific project review details. Recommendations were developed based on review of documentation made available to us and interviews with Conservancy and Authority management and key staff directly responsible for administering bond funds” To gain a better perspective on the logic leading to the conclusions included in this audit, it would probably be a good idea to request copies of the individual auditors’ associated working papers and any related correspondence exchanged between the DOF and the Resources Agency/SMMC/MRCA and/or other government agencies and/or departments.

Finally, the report also states: “The Department of Finance is not independent of the Conservancy, as both are part of the State of California's Executive Branch……. However, sufficient safeguards exist for readers of this report to rely on the information contained herein.” Those “safeguards” are not revealed and should be better identified; especially given the fact that the Resources Agency essentially pays the DOF to conduct these audits and that the Resources Agency has recently demonstrated a certain level of contempt for any audit findings that reflect negatively upon those agencies under its organizational control. (e.g., Resources’ Deputy Cash instructed the RMC to respond by simply stating its disagreement with the auditors’ finding in which they concluded that the RMC had misappropriated over $2 Million.) In this case it would be of particular interest to learn how the absence of influence by the Resources Agency over the audit process, findings and conclusions had been ensured.

Given the recent recurrent calls for a constricted State Legislature, either through making it a part-time or unicameral body, it is important to document this example of what happens when the full effects of checks and balances designed into governments with three branches are removed, disregarded or altered to a point of unequal importance.

Daily acknowledgement of the importance of the Legislature’s responsibility to oversee the Executive Branch’s activities may not be a common occurrence, but it should be common sense. Just like questioning the wisdom of shortening one leg on a three-legged stool in the name of increasing the stool’s stability, it should be common sense to know that any unilateral reduction of responsibility, be it via constitutional limits on work hours or voluntary abdication of responsibilities, can produce dramatic negative consequences not always easily corrected.

The State Legislature’s voluntary abdication of its responsibility for fiscal oversight of the Santa Monica Mountains Conservancy is a perfect example of that fact.

As to the specific disconcerting points regarding this audit:

RE: OBSERVATION #1

It is important to note that the originally reported misappropriation of funds was for a total dollar amount of almost $7 Million. This audit pares that dollar amount with a single sentence that states, “Pursuant to legislative directive, the Office of Attorney General (AG) reviewed the grants and concluded that $2.1 million in bond funds should be recovered.”

Given the additional $2.37 Million of misappropriated funds identified for the first time in Observation #2, those two totals AT THIS POINT approach $9 and $4.5 Million.

RE: OBSERVATION #2

A primary point would be that, given the Resources Agency’s above mentioned demonstrated contempt for findings contained in past DOF Audit Reports, this audit’s recommendation that, “The Natural Resources Agency should, with the assistance of legal counsel, determine the appropriate disposition (recovery or refund) of all expended bond funds used for these purposes.” would seem to be nothing short of permission to steal. The Conservancy’s stated opinion that “no recovery or refund is warranted” validates the reason for this concern.

This point speaks to the need for SB 633. Once an audit has determined and reported that there has been a misappropriation of funds, in order to protect the interests of the taxpayers’, there not only needs to be a truly independent third party that acts to insure and have the final word on whether the appropriate final disposition occurs, but there also needs to be some kind of penalty for the misappropriation having occurred in the first place

.

Some possibilities for the independent third party could include the Little Hoover Commission, the LAO, a joint legislative sub-committee, or some derivative body of the Judicial Branch. The Attorney General’s office would not be considered an objective third party in such matters due to the fact that the AG would be the Conservancy’s legal council in any litigation related to misappropriated funds. (As stated earlier, legislation previously passed as a trailer bill to a state budget compromise package that assigned final approval responsibility for all grants awarded to the MRCA by the SMMC to the Attorney General’s office. As a result, it has been the same individual Deputy Attorney General that serves as SMMC Board’s official legal counsel that has also been providing the requested AG approvals.)

In determining the appropriate punishment for the act of misappropriating funds, in order to be an effective deterrent, the penalty should reach beyond the agency level to the individual in charge of that agency, similar to those cases in which a city manager can be held liable for certain inappropriate acts taken by a municipal government.

A second point under Observation #2 would be that, although the audit indicates that it covers transactions relative to five state bonds (Props 12, 13, 40, 50 and 84 totaling $153.4 Million), some of the stated results are not all encompassing.

For instance, in describing the total amount of funds expended (or committed) by the Conservancy it only includes those reported through two years ago (June 29, 2009). As a result, 12% of the total funds allotted to the SMMC from the five state bonds in question are not accounted for.

In another instance, in itemizing the total dollar capital outlay and local assistance expenditures that the MRCA received from the Conservancy as well as the percentage of the SMMC’s available 5-bond total that was awarded to the MRCA, this audit only reported a portion of those funds associated to Propositions 40, 50, and 84 (64% of the 5-bond total of $153.4 Million.)

As a result, whereas the report accurately states that: In terms of bond grants awarded, the Mountains Recreation and Conservation Authority (Authority) is the major JPA the Conservancy has partnered with” and that, “The Conservancy’s executive director, deputy director, and chief counsel have dual roles as both the Conservancy’s and Authority’s executive team.” It seriously understates the financial linkage between the two agencies by stating that the Conservancy had awarded only 88% of its available bond grants to the MRCA. All told that figure has historically been closer to 95%.

Further, inasmuch as this audit does not fully account for 100% of the bond funds allotted to the SMMC from all five bond measures, it further begs the questions as to whether this audit is actually complete some seven years, now, after it began.

RE: OBSERVATIONS #3 THRU #7:

Findings identified in Observation #3 through #7 dealing with a lack of cost and real property accountability provide reason to believe the total amount of misappropriated funds could jump from the earlier mentioned $9/$4.5 Million to in excess of hundreds of millions of dollars.

RE: MRCA RESPONSE TO AUDIT:

The MRCA attempts to make the point that it is adequately organizationally separated from the SMMC by stating that its revenue from the SMMC during FY 09-10 represented just 23% of its total revenue. Included in the revenue totals that didn’t come from the SMMC, (although not independently identified in this audit or the MRCA’s response as such), is the $2.1 Million of misappropriated funds identified in the DOF’s audit of the RMC.

Also, in calculating MRCA revenue sources, it is safe to say NONE of their revenue would be possible without past actions taken by the SMMC or their shared Executive Director. In the latter case, those would be actions that would have transpired solely to the benefit of the SMMC (The State) had the two agencies not shared an Executive Director.