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HomeMy WebLinkAbout2007-10 ADM i MINUTES OF THE REGULAR MEETING OF THE ADMINISTRATION COMMITTEE Orange County Sanitation District Wednesday, October 10, 2007, at 5:00 P.M. A meeting of the Administration Committee of the Orange County Sanitation District was held on October 10, 2007, at 5:00 p.m., in the Sanitation District's Administrative Office. (2) Following the Pledge of Allegiance, a quorum was declared present, as follows: ADMINISTRATION COMMITTEE STAFF PRESENT: MEMBERS: Jim Ruth, General Manager DIRECTORS PRESENT: Bob Ghirelli,Assistant General Manager Mark Waldman, Chair Lorenzo Tyner, Director of Finance and Phil Luebben, Vice Chair Administrative Services Steven Choi Mike White, Controller Bill Dalton Lilis Kovac, Committee Secretary Jon Dumitru Norbert Gala Rich Freschi Bob Gaggle Darryl Miller Randy Kleinman Joy Neugebauer Jeff Reed Chris Norby Ken Parker OTHERS PRESENT: Sal Tinajero Bred Hogin, General Counsel Jim Winder Shirish Patel, Lance, Soll & Lunghard Jim Ferryman, Board Chair Bryan Gruber, Lance, Soil & Lunghard Doug Davert, Board Vice Chair DIRECTORS ABSENT: H{�EL��CQppL� ppKK EEp� (3) APPOINTMENT OF CHAIR PRO TEM 04ENI NTAFI STFNU'ACT No appointment was necessary. OCT 2 4 2007 (4) PUBLIC COMMENTS BY.- There were no public comments. (5) REPORT OF THE COMMITTEE CHAIR Chair Waldman did not give a report. (6) REPORT OF THE GENERAL MANAGER General Manager, Jim Ruth, did not give a report. 'Minutes of the Administration Committee October 10, 2007 Page 2 (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES Lorenzo Tyner, Director of Finance and Administrative Services, did not give a report. (8) REPORT OF GENERAL COUNSEL Brad Hogin, General Counsel, did not give a report. (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. MOVED, SECONDED AND DULY CARRIED: Approve minutes of the September 12, 2007 meeting of the Administration Committee. END OF CONSENT CALENDAR (10) ACTION ITEMS a. ADM07-49 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to approve a Professional Services Agreement with Aon Risk Services Inc., for an Owner Controlled Insurance Program Broker/Administrator(OCIP), Specification No. CS-2007-347BD, in an amount not to exceed 0.3955% of total construction value (minimum of $150,000/yr.), for a one-year period, with four additional one-year renewal options. (11) INFORMATIONAL ITEMS a. ADM07-50 Internal Audit Report—Groundwater Replenishment System Construction Agreement with the Orange County Water District. Mr. Shirish Patel and Mr. Bryan Gruber of Lance, Soil and Longhard, reported the results of their audit as directed by Subcommittee Directors Waldman, Parker and Luebben. Documentation was found to be in an overall reasonable order indicating OCSD had paid its agreed-upon share of costs. Expenses included within the audited billings were found to have been substantiated by supporting documentation. One proposed recommendation directed at the Sanitation District was included in the auditors report to minimize inaccuracies. Unutes of the Administration Committee October 10, 2007 Page 3 b. ADM07-51 Additional Retiree Benefit Account(ARBA) Update Human Resources and Employee Relations Manager,Jeff Reed, informed the Administration Committee members that AB 1124 had just been signed by the governor, and may be considered in how the Sanitation District chooses to administer its retiree health insurance benefit. It was noted that the agreement with OCERS to administer ARBA will be expiring in December 2007. A detailed report will be provided at the November Administration Committee meeting. (12) CONVENE INCLOSED SESSION PURSUANT TO GOVERNMENT CODE SECTION 54957(b)(1). There was no closed session. (13) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS. IF ANY There were none. (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT There were none. (15) FUTURE MEETING DATES The next regular Administration Committee meeting is scheduled for November 14, 2007, at 5 p.m. (16)ADJOURNMENT The Chair declared the meeting adjourned at 5:30 p.m. Submitted by: L y�_a� Lilia Covac Committee Secretary KWepNgendMAdmin Committee\1007\101007 Admin Minutes.doc STATE OF CALIFORNIA) ) SS. COUNTY OF ORANGE ) Pursuant to California Government Code Section 54954.2, 1 hereby certify that the Notice and Agenda for the Administration Committee Meeting of Orange County Sanitation District to be held on October 10, 2007, was duly posted for public inspection in the main lobby of the Districts' offices on October 3, 2007. IN WITNESS WHEREOF, I have hereunto set my hand this 3rd day of October 2007. Life Kovac, Committee Secretary Orange County Sanitation District HADEMAGENMADMIN COMMITTEEWGENDA CERTIFICATION.DOC ORANGE COUNTY SANITATION DISTRICT (714)2B224111 NOTICE OF MEETING m I71.118tl2ICi58 ..atand.emn ADMINISTRATION COMMITTEE ,1 rIhvart,eet Finance, Human Resources and Information Technology pa Bm B 127 Wunta n val" M B2r28 B121 rBattanft" '.rca ORANGE COUNTY SANITATION DISTRICT 927M 7018 Apaoiat WEDNESDAY, OCTOBER 10, 2007 - 5:00 P.M. Md.. DISTRICT'S ADMINISTRATIVE OFFICES aavwrm 10844 ELLIS AVENUE s'. FOUNTAIN VALLEY, CALIFORNIA 92708 Buena r'xrk (gnnea W W W.00SD.COM h tvmlan Vallxy ruNrnlnn CBnJeri (iriw• lmnunywr 9enM Wnn to "at, i, A regular meeting of the Administration Committee of the Orange In '•'l. Count Sanitation District will be held at the above location, date Ir"41ilat on Y Newoty[serve, and time. Yvnpe weennUn Bede 4ni, Seer dearhrh Snmm� hartin slln Wrtvr I,nriia W Co.," sl Grenys awti..y Dlstrioes Gurcn W. Water Blau I,nr pnrv-h To mein[ein woridciass leadership in was[ewn[er and weer resource meneyemen[. a C� Y� 1 H♦ ADMINISTRATION COMMITTEE MEETING DATES Meeting Date Board Meeting Dates October 10, 2007 October 24, 2007 November 14, 2007 November 28, 2007 December 12, 2007 'December 19, 2007 January 2008 — Dark January 23, 2008 February 13, 2008 February 27, 2008 March 12, 2008 March 26, 2008 April 9, 2008 April 23, 2008 May 14, 2008 May 28, 2008 June 11, 2008 June 25, 2008 July 9, 2008 July 23, 2008 AUGUST DARK August 27, 2008 September 10, 2008 September24, 2008 October 1, 2008 October 22, 2008 -Meetings being held the third Wednesday of the month. ROLL CALL ADMINISTRATION COMMITTEE Finance, Human Resources and Information Technology Meeting Date: October 10, 2007 Time: 5:00 o.m. Adjourn- COMMITTEE MEMBERS 1141 Mark Waldman Chair Phil Luebben ice Chair Steven Choi Bill Dalton Jon Dumitru Rich Freschi Darryl Miller Joy Neu ebauer Chris Norb Ken Parker Sal Tina'ero Jim Winder James M. Ferryman Board Chair Doug Davert Board Vice Chair OTHERS Brad H in, General Counsel STAFF Jim Ruth, General Manager Bob Ghirelli, Assistant General Manager Nick Arhontes, Director of Operations& Maint. Jim Herberg, Director of Engineering Ed Torres, Director of Technical Services Lorenzo Tyner, Director of Finance and Administrative Services Lilia Kovac, Committee Secretary Jeff Reed, Human Resources and Employee Relations Mana er Mike White, Controller Wdeptage�aW in Gommitice11007%G2.Roll GalLdoc AGENDA REGULAR MEETING OF THE ADMINISTRATION COMMITTEE ORANGE COUNTY SANITATION DISTRICT WEDNESDAY, OCTOBER 10, 2007, AT 5:00 P.M. ADMINISTRATIVE OFFICE 10844 Ellis Avenue Fountain Valley, California 92708 www.ocsd.com (1) PLEDGE OF ALLEGIANCE (2) DECLARATION OF QUORUM (3) APPOINTMENT OF CHAIR PRO TEM, IF NECESSARY (4) PUBLIC COMMENTS (5) REPORT OF COMMITTEE CHAIR (6) REPORT OF GENERAL MANAGER (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES (6) REPORT OF GENERAL COUNSEL (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. Approve minutes of the September 12, 2007 meeting of the Administration Committee. END OF CONSENT CALENDAR b. Consideration of items deleted from Consent Calendar, if any. Book Page I October 10, 2007 Page 2 (10) ACTION ITEMS a. ADM0749 Recommend to the Board of Directors to approve a Professional Services Agreement with Aon Risk Services Inc.,for an Owner Controlled Insurance Program Broker/Administrator(OCIP), Specification No. CS-2007-347BD, in an amount not to exceed 0.3955% of total construction value (minimum of $150,0001yr.), for a one-year period, with four additional one-year renewal options. (Book Page 9) (11) INFORMATIONAL ITEMS a. ADM07-50 Internal Audit Report—Groundwater Replenishment System Construction Agreement with the Orange County Water District. (Book Page 12) b. ADM07-51 Additional Retiree Benefit Account (ARBA) Update (Book Page 22) (12) CLOSED SESSION i During the crourse of conducting the business set forth on Ihis agentla as a regular meeting of the Committee, I the Chair may convene the Committee in closed session to consider matters of pending real estate negotiations, pending or potential litigation,or personnel matters, pursuant to Government Code sections 54956.8, 54966.9, 54957 or 54957.6,as rated. i Reports relating to (a) purchase and sale of real property; (b) matters of Pending or potential litigation; (c) ! i employee actions cr negotiations with employee representatives; or which are exempt from public disclosure i under the California Public Records Act,may be reviewed by the Committee during a permitted dosed session i and are not available for public inspection. At such time as final actions are taken by the Committee on any of these subtecls,the minutes will reflect all required disclosures of information. _---_.-.-_-_-- a. Convene in closed session. b. Reconvene in regular session. c. Consideration of action, if any, on matters considered in closed session. (13) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR ACTION AND STAFF REPORT (15) FUTURE MEETING DATES The next regular Administration Committee meeting is scheduled for November 14, 2007, at 5 p.m. (16) ADJOURNMENT Book Page 2 October 10, 2007 Page 3 Agenda Posting: In accordance with the requirements of CalKomia Government Code Section 64954.2, this agenda has been posted in the main lobby of the District's Administrative offices not less than 72 hours prior to the meeting date and time above. All written materials relating to each agenda item are available for public inspection in the office of the Clerk of the Board. Items Not Posted: In the event any matter not listed on this agenda is proposed to be submitted to the Committee for discussion and/or action, it will be done in compliance with Section 54954.2(b) as an emergency Rem or because there is a need to take immediate action, which need came to the attention of the Committee subsequent to the posting of agenda, or as set forth on a supplemental agenda posted in the manner as above, not less than 72 hours prior to the meeting date. Public Comments: Any member of the public may address the Administration Committee on specific agenda items or matters of general interest. As determined by the Chair, speakers may be defamed until the specific Rem is taken for discussion and remarks may be limited to three minutes. Matters of interest addressed by a member of the public and not listed on this agenda cannot have action taken by the Committee except as authorized by Section 54954.2(b). Consent Calendar: All matters placed on the consent calendar are considered as not requiring discussion or further explanation, and unless a particular Rem is requested to be removed from the consent calendar by a Director of staff member, there will be no separate discussion of these items. All items on the consent calendar will be enacted by one action approving all motions, and casting a unanimous ballot for resolutions included on the consent calendar. All items removed from the consent calendar shall be considered in the regular order of business. The Committee Chair will determine if any items are to be deleted from the consent calendar. Items Continued: Items may be continued from this meeting without further notice to a Committee meeting held within five(5)days of this meeting per Government Code Section 54954.2(b)(3). Meeting Adioumment: This meeting may be adjourned to a later time and items of business from this agenda may be considered at the later meeting by Order of Adjournment and Notice in accordance with Government Code Section 54955(posted within 24 hours). Accommodations for the Disabled: The Board of Directors Meeting Room is wheelchair accessible. If you require any special disability related accommodations, please contact the Orange County Sanitation District Clerk of the Board's office at(714) 593-7130 at least 72 hours prior to the scheduled meeting. Requests must specify the nature of the disability and the type of accommodation requested. Notice to Committee Members' For any questions on the agenda or to place any items on the agenda, Committee members should contact the Committee Chair or Clerk of the Board ten days in advance of the Committee meeting. Committee Chair: Mark Waldman (714)827-1959 Committee Secretary: Lilia Kcvac (714)593-7124 IkovacQocsd.com General Manager Jim Ruth (714)593-7110 iruth0ccsd.com Assistant General Manager Bob Ghirelli (714)593-7400 rehirelli(cDocsd.com Director of Finance and Lorenzo Tyner (714)593-7550 ItvnerQocsd.com Administrative Services Human Resources and Employee Jeff Reed (714)593-7144 ireedC&ocsd.com Relations Manager H:ldephagendaAdmin CommitteeF1007103.101007 Adminisealton Agenda dm Book Page 3 October 10, 2007 ADMINISTRATION COMMITTEE AGENDA CALENDAR Item Action November Receive and File Comprehensive Annual Financial Action Report CAFR November Labor Program Status Informational November Series 2006 COPs Liquidity Substitution Action November Series 2007E COPS Financing Documents Action Boric Page 4 MINUTES OF THE REGULAR MEETING OF THE ADMINISTRATION COMMITTEE Orange County Sanitation District Wednesday, September 12, 2007, at 5:00 P.M. A meeting of the Administration Committee of the Orange County Sanitation District was held on September 12, 2007, at 5:00 p.m., in the Sanitation Districts Administrative Office. (2) Following the Pledge of Allegiance, a quorum was declared present, as follows: ADMINISTRATION COMMITTEE STAFF PRESENT: MEMBERS: Jim Ruth, General Manager DIRECTORS PRESENT: Bob Ghirelli,Assistant General Manager Mark Waldman, Chair Lorenzo Tyner, Director of Finance and Phil Luebben, Vice Chair Administrative Services Steven Choi Mike White, Controller Bill Dalton Lille Kovac, Committee Secretary Jon Dumitru Norbert Gaia Joy Neugebauer Laurie Klinger Chris Norby Jeff Reed Ken Parker Juanita Skillman Sal Tinajero Rich Spencer Jim Winder Rich Freschi OTHERS PRESENT: Doug Davert, Board Vice Chair Brad Hogin, General Counsel Jim Ferryman, Board Chair Ed Soong, PRAG Victor Hsu, Fulbright& Jaworski, LLP DIRECTORS ABSENT: Darryl Miller (3) APPOINTMENT OF CHAIR PRO TEM No appointment was necessary. (4) PUBLIC COMMENTS There were no public comments. (5) REPORT OF THE COMMITTEE CHAIR Chair Waldman did not give a report. (6) REPORT OF THE GENERAL MANAGER General Manager,Jim Ruth, did not give a report. Book Page 5 Minutes of the Administration Committee September 12, 2007 Page 2 (7) REPORT OF DIRECTOR OF FINANCE AND ADMINISTRATIVE SERVICES Lorenzo Tyner, Director of Finance and Administration, provided a brief summary of various department activities; i.e., Owner Controlled Insurance Program (OCIP); Treasury management; investments, Comprehensive Annual Financial Report; staffing; Workers' Compensation program; and Proposition 218 notices. (8) REPORT OF GENERAL COUNSEL Brad Hogin, General Counsel, reported on the current negotiations with the Department of Education for the recovery of fair share of sewer fees for the last four years and future years. (9) CONSENT CALENDAR ITEMS Consideration of motion to approve all agenda items appearing on the Consent Calendar not specifically removed from same, as follows: a. MOVED, SECONDED AND DULY CARRIED: Approve minutes of the June 13, 2007 meeting of the Administration Committee. b. ADM0741 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to adopt Resolution No. OCSD 07-_,Appointing Representatives for the District to Act as Agents on its Behalf in the Small Claims Courts of Orange County Judicial Districts, and Repealing Resolution No. OCSD 04-12. C. Item pulled for discussion. d. Item pulled for discussion. e. ADM0744 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to adopt Resolution No. OCSD 07- ,Terminating the California Public Entity Insurance Authority Joint Powers Agreement. END OF CONSENT CALENDAR I. ADM0742 Director Davert requested clarification of methods available to ensure payment of permit fees. It was then, MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to approve the discharge of uncolleclible debt owed by Expo- Dyeing & Finishing in the amount of$151,370.36. g. ADM0743 Director Davert inquired about the possibility of securing debts for accounts that have defaulted, and directed General Counsel to investigate legal avenues. Book Page 6 Minutes of the Administration Committee September 12, 2007 Page 3 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to approve a Deferred Payment Agreement with Pacific Ocean Dyeing & Finishing in the amount of$224,981.99, for the collection of all charges and fees owed for sewer service charges and industrial discharge permit fees, for a two-year period, plus interest of 10% per annum. (10) ACTION ITEMS a. ADM07-45 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to authorize issuance of up to$300 million in new fixed-rate Certificates of Participation debt. b. ADM07-46 MOVED, SECONDED AND DULY CARRIED: (1)Approve a Consultant Services Agreement with Fulbright&Jaworski, L.L.P., to provide bond counsel services for a one-year period effective September 12, 2007, in a form approved by General Counsel, with option to renew for four one-year periods for an amount not to exceed $200,000 per year; and, (2)Approve a 10% contingency per year($20,000). C. ADM0747 MOVED, SECONDED AND DULY CARRIED: Recommend to the Board of Directors to authorize the General Manager to procure bids for the replacement of the Certificates of Participation Series 2006 Standby Purchase Agreement. (11) INFORMATIONAL ITEMS a. AOM07-48 Succession Management Program Update Human Resources and Employee Relations Manager, Jeff Reed, briefly reviewed the background and the history of the Succession Management Program. Employee Relations Supervisor, Rich Spencer, and Laurie Klinger, Human Resources Specialist, presented details of the program and its projected timetable. (12) CONVENE INCLOSED SESSION PURSUANT TO GOVERNMENT CODE SECTION 54957(b)(11. There was no closed session. (13) OTHER BUSINESS, COMMUNICATIONS OR SUPPLEMENTAL AGENDA ITEMS, IF ANY There were none. (14) MATTERS WHICH A DIRECTOR MAY WISH TO PLACE ON A FUTURE AGENDA FOR Book Page 7 Minutes of the Administration Committee September 12,2007 Page 4 ACTION AND STAFF REPORT There were none. (15) FUTURE MEETING DATES The next regular Administration Committee meeting is scheduled for October 10, 2007, at 5 p.m. (16)ADJOURNMENT The Chair declared the meeting adjourned at 5:35 p.m. Submitted by: Lilia Kovac Committee Secretary wdepmgendawmin Commideel100M5.09120r Mmin Minulea.doc Book Page 8 ADMINISTRATION COMMITTEE Ma tD/t9o�e o/o7 rc 1eO12 7aaoo-. AGENDA REPORT Item Nurr a rM WOW ADM0749 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: SELECTION OF AN OWNER CONTROLLED INSURANCE PROGRAM BROKER/ADMINISTRATOR GENERAL MANAGER'S RECOMMENDATION Approve a Professional Services Agreement with Aon Risk Services Inc., for an Owner Controlled Insurance Program Broker/Administrator (OCIP), Specification No. CS-2007-34713D, in an amount not to exceed 0.3955%of total construction value (minimum of$150,000/yr.), for a one-year period, with four additional one-year renewal options. SUMMARY A consultant was previously hired to assess the feasibility of an owner controlled Insurance program (OCIP). The consultant found that an OCIP would be feasible and likely save the District considerable money. The District Board of Directors then approved the release of an RFP to solicit proposals from qualified OCIP broker/ administrators. The following four firms submitted a proposal in response to the District's RFP: Proposer Cost as a % of Total Estimated Construction Value $500 mil. • Alliant Insurance Sendoes Inc. • 0.3700% • Aon Risk Services, Inc. • 0.3955% • Arthur J. Gallah er&Co. • 0.2700% • Kaercher Cam bell &Associates • 0.3001% After review of the competing proposals and interviews of these four experienced OCIP broker/administrators, a panel of seven evaluators (representing District departments such as Finance, Risk Management, Safety, Engineering, and Purchasing) chose Aon Risk Services, Inc. (Aon). Aon was able to demonstrate that they were the leader in the field of OCIP brokerage/administration with far more experience than any other proposer. Although Aon's proposal is slightly more costly than the other proposers, staff believes that the additional cost will be more than offset through savings in the actual insurance premiums resulting from Aon's superior brokerage services and through Aon's claims management and safety and loss control programs. Form N. motor= nwNee.mm,m> Page 1 Book Page 9 An owner controlled insurance program (OCIP) provides insurance coverage for job site construction projects. This would eliminate the burden of the construction contractor from having to provide workers' compensation and general liability insurance as part of their bid proposal. This also allows for possible centralized purchase of other types of insurance such as builder's risk and pollution liability, if appropriate. An OCIP centralizes and coordinates construction project insurance and coordinates loss control and loss prevention. An OCIP would virtually eliminate multiple insurers, cost duplication, stacked markups, potential cross litigation, gaps in coverage, inadequate limits, and uninsured contractors. An OCIP generally will produce noticeable savings compared to the overall project bids submitted by the individual contractors due to economies of scale. Also, the OCIP manages the overall capital improvement safety program to ensure that all contractor employees are properly trained in safety. Advantages of an OCIP include: • Better control over claims, litigation and settlement negotiations • Competitive advantage for minority, small and specialty contractors • Volume purchase equates to lower insurance rates • Elimination of hidden subcontractor mark-ups • Cash flow earnings on deferred premium and loss payment • Dividends or returned premiums based on favorable claims reporting Aon, as the broker/administrator, will assist OCSD in procuring appropriate insurance policies from one or more major insurance carriers who insure OCIP's, such as: • ACE • AIG • Arch Insurance • Liberty Mutual • Lloyds of London and London Companies • St. Paul • Zurich Insurance The cost described above for Aon's services involves features which may not become relevant, and therefore the cost may be less. It includes extra cost for another ''% FTE safety person as well as the maximum possible incentive award to Aon if losses are extremely low. It also includes the purchase of certain insurance policies that OCSD may decide against, depending on the premium and terms that insurers may offer. If any of these items do not become relevant, the actual cost would decrease. In addition, the minimum of$150,000/yr. only becomes relevant if construction drops to an unexpectedly low level. Aon has indicated a willingness to instead reduce the availability of personnel dedicated to the OCIP, which would reduce that minimum. FOM No.0 IOZ3 pgvM:=107 Page 2 Book Page 10 PRIOR COMMITTEE/BOARD ACTIONS On June 13, 2007, the Administration Committee approved the release of a request for proposal for the administration of an Owner Controlled Insurance Program, CS-2007- 346BD, covering the Sanitation District's $2.5 billion capital improvement program. ADDITIONAL INFORMATION This complies with authority levels of the Sanitation District's Delegation of Authority. Insurance is budgeted as part of each project's overall cost and this program is intended to reduce that cost. Fom No.O 10 3 P.ersel.ow1Nl Page 3 Book Page I I ADMINISTRATION COMMITTEE MOOR,Date To ad.or Dlr. 10/10/07 AGENDA REPORT Item Number Item Nu- AGENDA Orange County sanitwon District FROM: James D. Ruth, General Manager Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: INTERNAL AUDIT REPORT— GROUNDWATER REPLENISHMENT SYSTEM CONSTRUCTION AGREEMENT WITH THE ORANGE COUNTY WATER DISTRICT GENERAL MANAGER'S RECOMMENDATION Informational item. SUMMARY At the direction of the Administration Committee's Audit Oversight Subcommittee, Lance, Soll & Lunghard, LLP (LSL), Certified Public Accountants was engaged to audit for proper application of agreed-upon procedures on the $500 million Groundwater Replenishment System construction project (GWRS); a joint 50:50 cost-sharing agreement between the Orange County Sanitation District (OCSD) and the Orange County Water District (OCWD). In essence, OCWD staff manages the projects, including the solicitation of bids, the procurement of services, and the payment of bills. In turn, OCWD bills OCSD its 50 percent of the net direct costs. Each agency is responsible for paying the full costs of its own staff members working on the project, and the related overhead. As of the beginning of the audit, $333.54 million has been incurred in total, and $166.77 million has been reimbursed by OCSD. The agreed-upon procedures performed by LSL included: • Obtaining and reviewing applicable agreements entered into between OCSD and OCWD related to the GWRS Project; • Obtaining an understanding of the controls in place for capturing costs related to the project and the controls over preparation and review of the Cost-Sharing Invoices to OCSD. • Reviewing the detail of expenditures incurred for the GWRS Project as of Cost- Sharing Invoice#96 covering periods February 28, 2007, and selected a sample of 20 vendors for review. • Randomly selected a sample of 25 Cost-Sharing Invoices prepared by the OCWD for review. Fo,m No.D 102.3 Pev1eM:0Y01M Page 1 Book Page 12 Based on LSL's review of the GWRS project Cost-Sharing Invoices prepared by OCWD, it is their judgment that the overall processes, controls, and substantiation of the Cost-Sharing Invoices was reasonable. However, they did find areas which could be improved upon. LSL will provide a more detailed explanation of the audit scope, methodology, and their findings at the October Administration Committee meeting. PRIOR COMMITTEE/BOARD ACTIONS At the February 14, 2007 Administration Committee Meeting, the Committee members approved the selection of LSL,to perform internal auditing services as directed by the Committee for the period of March 1, 2007 through February 29, 2008, in an amount not to exceed $58,670. The Committee also at this time established an audit oversight subcommittee consisting of Directors Waldman, Luebben, and Parker assigned to meet with auditors and staff, to give direction on the scope of audit areas, and to report back to the Administration Committee on the results of audits undertaken. ADDITIONAL INFORMATION N/A ATTACHMENT 1. Independent Accountants' Report from Lance Soll & Lunghard, LLP JDR:LT:MW Fom,No.DWio,o Route WN,/JI Page 2 Book Page 13 Lance Bm0dd0 W.Burro., Sop R DOdardL Perker Lunghard DeAdXK Chu M h E. c le LLP Donald G.ehrar Certifier!Public Accountants Rmmrd K.RlkneW Rrend Robert C.Lenee Rithoa W rd C.Shc Pred J.Luughvrd,Jr. August 27,2007 Administration Committee Orange County Sanitation District Fountain Valley,California INDEPENDENT ACCOUNTANTS'REPORT We have performed the procedures enumerated below, which were agreed to by the management of the Orange County Sanitation District, Fountain Valley, California (Sanitation District), solely to assist the Sanitation District in evaluating key provisions of the agreements between the Orange County Sanitation District and the Orange County Water District(Water District)related to the Ground Water Replenishment System (GWRS) project. This engagement to apply agreed-upon procedures was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the Orange County Sanitation District. Consequently,we make no representation regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose. The procedures performed and the results obtained from the performance thereof were as follows: 1. Procedures Performed: Obtained and reviewed applicable agreements entered into between the Sanitation District and the Water District for the GWRS Project. We reviewed the original agreement entered into February 1997 and the four related amendments which relate to the project planning phase. We also reviewed the agreement entered into November 2002 and the related two amendments which relate to the continued development (planning, design, and construction), operation, and maintenance of the GWRS project. As of the start of our review, the project was in the later stages of development; therefore, our review does not encompass the operation and maintenance of the system. Rather, our review focuses on the development of the system and the Cost Sharing Invoices between the Sanitation District and the Water District for these development costs. Per the agreements,the Water District acts as the lead agency in the project and performs the day-to-day project management for the GWRS project and submits regular Cost Sharing Invoices to the Sanitation District for 50%of the costs incurred less 50%GWRS grant revenue received. Findings: Not applicable. Water District Response: Not applicable. 2. Procedures Performed: We obtained an understanding of the controls in place for capturing costs related to the project and the controls over preparation and review of the Cost Sharing Invoices to the Sanitation District. We met with various Sanitation District and Water District personnel, reviewed Cost Sharing Invoices and observed controls. Findings: Based on our review,we feel the existing controls are good,but can be improved upon. 75 PEARS 1929 f2004 01 Exiib ea 203 N.Bree Blvd.,Suite 203 a B.ii,CA 92621-4056 a(714)672-0022 n Fax(714)672-0331 •www Islrndcwm rases 6 LM Ohm ¢m�w�cwm�^Mfi Administration Committee Orange County Sanitation District August 27.2007 Page 2 Recommendation: We recommend existing controls be strengthened by the Sanitation District in their review of grant revenues and payroll costs. Currently, the Sanitation District personnel perforrn a review during the preparation of the Cost Sharing Invoices consisting of an examination of the check register and any unusual or infrequent invoices. Our recommendation would be that the review be expanded to include: a) Tracing grant cash receipts from general ledger records to Cost Sharing Invoices to ensure all grant revenue is property reflected in the current Cost Sharing Invoice. b) Agreeing payroll costs reported on Cost Sharing Invoices to payroll journals. Water District Response: Not applicable. Sanitation District Response: The Sanitation District believes that the auditors recommendations in a)and b)above are excellent tools to ensure that the Sanitation District is credited with its share of all related GWRS grant revenue and that only applicable payroll costs are inducted on the Cost Sharing Invoices. However, as these tools, or auditing procedures, are primarily used by auditors examining financial records, these tools may not be effectively used by engineers evaluating Invoices. As stated within the agreement, the Sanitation District was granted the right to audit these Invoices following the completion of the GWRS construction. It is that process that staff believes is the most beneficial means of ensuring accuracy. The applicable auditing procedures were idenfified and included within the "agreed upon (audifing) procedures" established between the auditors and the Sanitation District's management. 3. Procedures Performed: We reviewed the detail of expenditures incurred for the GWRS Project as of Cost Sharing Invoice#96 covering periods through February 28,2007, and selected the following sample of 20 vendors to review. Cumulative Venda,Name Description Payments 1 J.F.Shea Construction,Inc. Construction GWR Advanced Water Treatment $ 262,350,459.00 2 Camp Dresser s McKee Inc. Consulting Services 33.510.990.00 3 Layne Christensen Construction of GWR Berner Facilities 12,537,3DD.80 4 Southern California Edison Design s Construction 66kv/12kv substation 2,396,000.00 Changes bike detour schedule and Compensation 5 River View Golf Structure 350,000.00 6 Montgomery Watson Hama Consulting Services 12.478,272-85 7 Separation Processes Consulting Services 2,113,575.28 8 Ken Thompson,Inc Construction Services for Unit I Pipeline 27,653,546.00 9 Rutsn 8 Tucker Legal Services 118239.93 10 Southern California Edison UBlities Services 53,640.72 11 Colich Construction Groundwater Replenishment System Unit II Pipeline 18,762,433.30 12 Utility Technology B Associates Gram Assistance 97,449.09 13 Townsend Public ABairs Consulting Services 250,389.14 14 Porter Novell!(formerly NCG P.N.) Public Relations-Phase III 3,365,863.94 15 Applied Computer Mobile Office(Computer Equipment) 38,95229 16 Thomas Dawas Project Management 675,354.14 17 Laura Thomas Consulting Services 805,199.58 18 Blacks Veatch Consulting Services 503,428.32 19 County of Orange Permit Fees 165,291.01) 20 LH Woods Theolacy Construction 1,431,840.45 Book Page 15 .SOa 6 lFn 1 Administration Committee Orange County Sanitation District August 27, 2007 Page 3 Findings: Not applicable. Water District Response: Not applicable. 4. Procedures Performed: From the vendors selected in procedure 3 above, we reviewed for the following: a) From the Water District's check register,we obtained all project invoices and check copies for selected vendor and examined to ensure propriety. b) We traced disbursements from the Water District's check register to Cost Sharing Invoices to ensure completeness. c) We reconciled the payments made to the cumulative payments reported in Cost Sharing Invoice#96 to the Sanitation District. d) We examined evidential matter to verify that appropriate procurement methods were employed and approved purchase orders or contracts were in place. e) We verified approval per the delegation of authority as set in the Agreement between the Sanitation District and the Water District. f) If applicable, for payroll costs we obtained the approved employment contracts, recalculated wages,verified all hours were recorded, and determined eligibility and approval. Findings: Based on our procedures performed,we noted the following: a) The Water District provided support for payments made to Porter Novell!(formerly NCG P.N.) totaling $3,353,618.31. Cumulative payments reported through Cost Sharing Invoice #96 totaled $3,365,863.84. The difference of$12,245.53 was unexplained. Water District Response: The Water District has created a spreadsheet tracking all of the Cost Sharing Invoices and the Porter Novell! invoices represented on each Cost Sharing Invoice and found that due to an error on the part of the Water District in posting the cumulative balance forward amount in 2002 the Water District failed to include a Porter Novelli invoice for$8,800. This invoice was not provided to the auditors and therefore is not reflected in their total. The Water District will review this analysis with the Sanitation District prior to adjustment of any Cost Sharing Invoice. b) The Water District provided support for payroll costs related to Thomas Dawes totaling $730,417.83. The total excludes payrolls 25-26 in 1997, payrolls M in 1999 and workers compensation charges for the period April 1998 through December 1998 and January 2002 through May 2002 because the Water District was unable to locate these items. Cumulative payments reported through Cost Sharing Invoice#96 totaled$675,354.14. The difference of $55,063.69 was unexplained. Water District Response: The auditors point out that payroll periods were excluded. The Water District believes this to be a record storage and retrieval problem more than a cost control issue. The Water District has in excess of 3000 cases of records in storage at Iron Mountain which were labeled by as many as 20 different employees during the nine year period covered by the audit. The 1997 payroll records date beyond the statute of limitations Book Page 16 fa0�6 IacMy' YIv2 Administration Committee Orange County Sanitation District August 27,2007 Page 4 and record retention requirements of the IRS. The auditors do point out that "overall, the processes, controls, and substantiation of Cost Sharing Invoices was reasonable". The $55,063.69 difference of Thomas Dawes payroll costs that were not included in Cost Sharing invoices will be reviewed with the Sanitation District prior to adjustment of any Cost Sharing Invoice. c) The Water District provided support for payroll costs related to Laura Thomas totaling $809,950.64. The total excludes payrolls 23-25 in 2002 and workers compensation charges for the period January 2002 through March 2003 because the Water District was unable to locate these items. Cumulative payments reported through Cost Sharing Invoice#96 totaled $805,199.58. The difference of$4,751.06 was unexplained. Water District Response: The auditors point out that payroll periods were excluded. The Water District believes this to be a record storage and retrieval problem more than a cost control issue. The Water District has in excess of 3000 cases of records in storage at Iron Mountain which were labeled by as many as 20 different employees during the nine year period covered by the audit. The 1997 payroll records date beyond the statute of limitations and record retention requirements of the IRS. The auditors do point out that "overall, the processes, controls, and substantiation of Cost Sharing Invoices was reasonable". The $4,751.06 difference of Laura Thomas payroll costs that were not included in Cost Sharing Invoices will be reviewed with the Sanitation District prior to adjustment of any Cost Sharing Invoice. d) The Water District provided support for payments made to Utility Technology and Associates totaling$88,990.88. Cumulative payments reported through Cost Sharing Invoice#96 totaled $97,449.09. The difference of$8,458.21 was unexplained. Water District Response: The difference of$8,458.21 will be deducted from a future Cost Sharing Invoice. e) The Water District was unable to locate three invoices to Utility Technology and Associates totaling$21,324.28 of the$88,990.88 in finding 4(d)above. Water District Response: The inability to locate these invoices is conditioned by the same issues discussed in 4. b)and 4.c)Water District responses described above. f) During our review of invoices for Utility Technology and Associates we noted that the majority of costs pertained to grant assistance for a grant with the California Energy Commission(CEC)which we found during our review of grants to be a grant which was not cost shared. Water District Response: The Sanitation District did not receive any grant credit for the CEC grant because the expenditures which were reimbursed by the grant were not shared with the Sanitation District. The Water District did include in the Cost Sharing Invoices to the Sanitation District, costs pertaining to grant writing expenses for the CEC grant. The reason for this is that the entire grant was to be used to analyze,test and select the best processing technologies that would be used in the GWRS plant and to ensure that they were the most energy efficient methods. Otherwise, the Water District and the Sanitation District would have had to conduct this testing and analysis as a cost shared expense. Book Page 17 � � L Administration Committee Orange County Sanitafion District August 27, 2007 Page 5 Recommendation: We recommend controls be strengthened through a timely and thorough review of support. 5) Procedures Performed: We randomly selected a sample of 25 Cost Sharing Invoices prepared by the Water District and reviewed for the following: a) We traced 100% of Cost Sharing Invoice to support including check register, invoice, check copy,grant cash receipts, payroll journals, etc. b) We reviewed and verified items related to GWRS and were properly coded and approved. c) We reviewed calculations and footing of the invoices. Findings: Based on our procedures performed,we noted the following: a) On various Cost Sharing Invoices, we experienced difficulty recalculating payroll costs reported in the Cost Sharing Invoices for Laura Thomas and Thomas Dawes. The differences appeared to relate to timing and the calculations added to payroll for taxes and workers compensation. The Water District was unable to explain the differences. Water District Response: Since 2005, the Water District has used a standard method for calculating these shared payroll costs and include in the monthly cost share hardcopy file a documented audit trail of the payroll registers and tax and workers compensation insurance costs used in the Cost Share Invoice. b) On Cost Sharing Invoice #21, payroll charges for Tama Snow totaled $1,122.65 however, the Water District was only able to support costs of$508.64. The difference of$614.01 was unexplained. Water District Response: The inability to locate these invoices is conditioned by the same issues discussed in 4. b)and 4. c)Water District responses described above. c) On Cost Sharing Invoice #29, expenditures reported for Gary Vogt and Associates totaled $8,000; however,the Water District was not able to provide the supporting invoice. Water District Response: The inability to locate these invoices is conditioned by the same issues discussed in 4. b)and 4. c)Water District responses described above. d) On Cost Sharing Invoice #64, expenditures reported for Ross Gaza totaled $825; however, the Water District was not able to provide the supporting invoice. Water District Response: The inability to locate these invoices is conditioned by the same issues discussed in 4. b)and 4. c)Water District responses described above. e) On Cost Sharing Invoice #72 (228/05) the Water District invoiced the Sanitation District $1,708,419.15 too much due to an error in expenditures reported related to JF Shea Construction; however, the Water District corrected this on Cost Sharing Invoice 993 (11/3010%). Water District Response: The Water District acknowledges the error and that the error was subsequently corrected by the Water District Since the time that this problem was M--. D— 12 I�L� Administration Committee Orange County Sanitation District August 27, 2DO7 Page 8 Conclusion We were not engaged to and did not perform an audit, the objective of which would be the expression of an opinion on key provisions of the agreements between the Orange County Sanitation District and the Orange County Water District related to the Ground Water Replenishment System project. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to the District This report is intended solely for the information and use of the specified users listed above and is not intended to be, and should ldd not be,,-used by anyone other than those specified parties. Tw�yblesa�, . '� Book Page 21 Mhibfic nce araad°°w.a° l & Donald L Parker M1ch.el K.Cho nghard D.Hd L Hare LLP a a.,..wm c-.. Donald G Motor ccountants mena.a rc Klkaehl Ifedred Robes C.U.. it."C."it."C.sou August 27,2007 P^ Id J.m°ogherd Jr. Administration Committee Orange County Sanitation District Fountain Valley,California INDEPENDENTACCOUNTANTS'REPORT We have performed the procedures enumerated below, which were agreed to by the management of the Orange County Sanitation District, Fountain Valley, California (Sanitation District), solely to assist the Sanitation District in evaluating key provisions of the agreements between the Orange County Sanitation District and the Orange County Water District(Water District)related to the Ground Water Replenishment System (GWRS) project. This engagement to apply agreed-upon procedures was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the Orange County Sanitation District. Consequently,we make no representation regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested or for any other purpose. The procedures performed and the results obtained from the performance thereof were as follows: 1. Procedures Performed: Obtained and reviewed applicable agreements entered into between the Sanitation District and the Water District for the GWRS Project. We reviewed the original agreement entered into February 1997 and the four related amendments which relate to the project planning phase. We also reviewed the agreement entered into November 2002 and the related two amendments which relate to the continued development (planning, design, and construction), operation, and maintenance of the GWRS project. As of the start of our review, the project was in the later stages of development; therefore, our review does not encompass the operation and maintenance of the system. Rather, our review focuses on the development of the system and the Cost Sharing Invoices between the Sanitation District and the Water District for these development costs. Per the agreements, the Water District acts as the lead agency in the project and performs the day-to-day project management for the GWRS project and submits regular Cast Sharing Invoices to the Sanitation District for 50%of the costs incurred less 50%GWRS grant revenue received. Findings: Not applicable. Water District Response: Not applicable. 2. Procedures Performed: We obtained an understanding of the controls in place for capturing costs related to the project and the controls over preparation and review of the Cost Sharing Invoices to the Sanitation District. We met with various Sanitation District and Water District personnel, reviewed Cost Sharing Invoices and observed controls. Findings: Based on our review,we feel the existing controls are good, but can be improved upon. 75 )'EARS --a"ies 19219 V2004 0J Exh&wca 203 N.Brea Blvd.,Suite 203 a Brea,CA 92821-0056 0(714)672-0022 o F.(714)672-0331 a www W as c-ru Administration Committee Orange County Sanitation District August27,2007 Page 2 Recommendation: We recommend existing controls be strengthened by the Sanitation District in their review of grant revenues and payroll costs. Currently, the Sanitation District personnel perform a review during the preparation of the Cost Sharing Invoices consisting of an examination of the check register and any unusual or infrequent invoices. Our recommendation would be that the review be expanded to include: a) Tracing grant cash receipts from general ledger records to Cost Sharing Invoices to ensure all grant revenue is properly reflected in the current Cost Sharing Invoice. b) Agreeing payroll costs reported on Cost Sharing Invoices to payroll journals. Water District Response: Not applicable. Sanitation District Response: The Sanitation District believes that the auditors recommendations in a)and b)above are excellent tools to ensure that the Sanitation District is credited with its share of all related GWRS grant revenue and that only applicable payroll costs are included on the Cost Sharing Invoices. However, as these tools, or auditing procedures, are primarily used by auditors examining financial records, these tools may not be effectively used by engineers evaluating Invoices. As stated within the agreement, the Sanitation District was granted the right to audit these Invoices following the completion of the GWRS construction. It is that process that staff believes is the most beneficial means of ensuring accuracy. The applicable auditing procedures were identified and included within the "agreed upon (auditing) procedures" established between the auditors and the Sanitation District's management. 3. Procedures Performed: We reviewed the detail of expenditures incurred for the GWRS Project as of Cost Sharing Invoice X96 covering periods through February 28, 2007, and selected the following sample of 20 vendors to review. Cumulative Vendor Name Description Payments 1 J.F.Shea Conssuction,Inc. Construction GWR Advanced Water Treatment $ 282,350,459.00 2 Camp Dresser&McKee Inc. Consulting Services 33,510,990.00 3 Layne Chnstersen Construction of GWR Banker Faciti air 12,537,300.80 4 Southern California Edison Design 8 Construction 88kv112kv substation 2,399,000.00 Changes bike detour schedule and Compensation 5 RHer View Golf Structure 350,000.00 8 Montgomery Watson Harza Consulting Services 12.478.272.85 7 Separation Processes Consulting Services 2,113,575.28 8 Ken Thompson,Inc. Construction Services for Unit I Pipeline 27,e83,548.o0 9 Rutan&Tucker Legal Services 118.239.93 10 Southern California Edison Utilities Services 53,840.72 11 Coach Construction Groundwater Replenishment System Unit It Pipeline 16,762,433.30 12 Utility Technology&Associates Grent Asssmnre 07,449.09 13 Townsend Public Affairs Consulting Services 250,38$.114 14 Porter Novell](formerly NCG P.N.) Public RelaBons-Phase In 3,365,863.84 15 Applied Complaer Mobile Dike(Computer Equipment) 38,952.29 18 Thomas Dawes Project management 9e 675.354.14 17 Leure Thomas Consulting Services 905.199189 58 S9 18 Black&Veatch Consulting Services 503,428.32 19 County of Orange Permit Fees 16529100 20 LH Woods Theolacy Construction 1,431,840.45 Book Page IS E6 Administration Committee Orange County Sanitation District August 27,2007 Page 3 Findings: Not applicable. Water District Response: Not applicable. 4. Procedures Performed: From the vendors selected in procedure 3 above, we reviewed for the following: a) From the Water District's check register,we obtained all project invoices and check copies for selected vendor and examined to ensure propriety. b) We traced disbursements from the Water District's check register to Cost Sharing Invoices to ensure completeness. c) We reconciled the payments made to the cumulative payments reported in Cost Sharing Invoice#96 to the Sanitation District. d) We examined evidential matter to verity that appropriate procurement methods were employed and approved purchase orders or contracts were in place. e) We verified approval per the delegation of authority as set in the Agreement between the Sanitation District and the Water District. f) If applicable, for payroll costs we obtained the approved employment contracts, recalculated wages,verified all hours were recorded, and determined eligibility and approval. Findings: Based on our procedures performed,we noted the following: a) The Water District provided support for payments made to Porter Novelli(formerly NCG P.N.) totaling $3,353,618.31. Cumulative payments reported through Cost Sharing Invoice #96 totaled$3,365,863.94. The difference of$12,245.53 was unexplained. Water District Response: The Water District has created a spreadsheet tracking all of the Cost Sharing Invoices and the Porter Novelli invoices represented on each Cost Sharing Invoice and found that due to an error on the part of the Water District in posting the cumulative balance forward amount in 2002 the Water District failed to include a Porter Novelli invoice for$8,800. This invoice was not provided to the auditors and therefore is not reflected in their total. The Water District will review this analysis with the Sanitation District prior to adjustment of any Cost Sharing Invoice. b) The Water District provided support for payroll costs related to Thomas Dawes totaling $730,417.83. The total excludes payrolls 25-26 in 1997, payrolls 5-6 In 1999 and workers compensation charges for the period April 1998 through December 1998 and January 2002 through May 2002 because the Water District was unable to locale these Items. Cumulative payments reported through Cost Sharing Invoice#96 totaled $675,364.14. The difference of $55.063.69 was unexplained. Water District Response: The auditors point out that payroll periods were excluded. The Water District believes this to be a record storage and retrieval problem more than a cost control issue. The Water District has in excess of 3000 cases of records In storage at Iron Mountain which were labeled by as many as 20 different employees during the nine year period covered by the audit. The 1997 payroll records date beyond the statute of limitations Book Page 16 r�r.s �6 �Md Administration Committee Orange County Sanitation District August 27,2007 Page 4 and record retention requirements of the IRS. The auditors do point out that "overall, the processes, controls, and substantiation of Cost Sharing Invoices was reasonable". The $55,063.69 difference of Thomas Dawes payroll costs that were not included in Cost Sharing invoices will be reviewed with the Sanitation District prior to adjustment of any Cost Sharing Invoice. c) The Water District provided support for payroll costs related to Laura Thomas totaling $809.950.64. The total excludes payrolls 23-25 in 2002 and workers compensation charges for the period January 2002 through March 2003 because the Water District was unable to locale these items. Cumulative payments reported through Cost Sharing Invoice#96 totaled $805,199.58. The difference of$4,751.06 was unexplained. Water District Response: The auditors point out that payroll periods were excluded. The Water District believes this to be a record storage and retrieval problem more than a cost control issue. The Water District has in excess of 3000 cases of records in storage at Iron Mountain which were labeled by as many as 20 different employees during the nine year period covered by the audit. The 1997 payroll records date beyond the statute of limitations and record retention requirements of the IRS. The auditors do point out that "overall, the processes, controls, and substantiation of Cost Sharing Invoices was reasonable". The $4,751.06 difference of Laura Thomas payroll costs that were not included in Cost Sharing Invoices will be reviewed with the Sanitation District prior to adjustment of any Cost Sharing Invoice. d) The Water District provided support for payments made to Utility Technology and Associates totaling$88,990.88. Cumulative payments reported through Cost Sharing Invoice#96 totaled $97,449.09. The difference of$8,458.21 was unexplained. Water District Response: The difference of$8,458.21 will be deducted from a future Cost Sharing Invoice. e) The Water District was unable to locate three invoices to U61ily Technology and Associates totaling$21,324.28 of the$88,990.88 in finding 4(d)above. Water District Response: The inability to locale these invoices is conditioned by the same issues discussed in 4. b)and 4.c)Water District responses described above. f) During our review of invoices for Utility Technology and Associates we noted that the majority of costs pertained to grant assistance for a grant with the California Energy Commission (CEC)which we found during our review of grants to be a grant which was not cost shared. Water District Response: The Sanitation District did not receive any grant credit for the CEC grant bemuse the expenditures which were reimbursed by the grant were not shared with the Sanitation District. The Water District did include in the Cost Sharing Invoices to the Sanitation District, costs pertaining to grant writing expenses for the CEC grant. The reason for this is that the entire grant was to be used to analyze,test and select the best processing technologies that would be used in the GWRS plant and to ensure that they were the most energy efficient methods. Otherwise, the Water District and the Sanitation District would have had to conduct this testing and analysis as a cost shared expense. Book Page 17 M on Committee Orange County Sanitation District August 27, 2007 Page 5 Recommendation: We recommend controls be strengthened through a timely and thorough review of support. 5) Procedures Performed: We randomly selected a sample of 25 Cost Sharing Invoices prepared by the Water District and reviewed for the following: a) We traced 100% of Cost Sharing Invoice to support including check register, invoice, check COPY, grant cash receipts,payroll journals,etc. b) We reviewed and verified hems related to GWRS and were properly coded and approved. c) We reviewed calculations and footing of the invoices. Findings: Based on our procedures performed,we noted the following: a) On various Cost Shanng Invoices, we experienced difficulty recalculating payroll costs reported in the Cost Sharing Invoices for Laura Thomas and Thomas Dawes. The workers compensation. The Water District was unable to explain the differences. differences appeared to relate to timing and the calculations added to payroll for taxes and Water District Response: Since 2005, the Water District has used a standard method for calculating these shared payroll Costs and include in the monthly cost share hardcopy file a documented audit trail of the payroll registers and tax and workers compensation insurance 1 costs used in the Cost Share Invoice. b) On Cost Sharing Invoice #21, payroll charges for Tama Snow totaled $1.122.66 however, the Water District was only able to support Costs of$508.64. The difference of$614.01 was unexplained. Water District Response: The inability to locate these invoices is conditioned by the same issues discussed in 4. b)and 4. c)Water District responses described above. c) On Cost Sharing Invoice #29, expenditures reported for Gary Vogt and Associates totaled $8,000; however, the Water District was not able to provide the supporting invoice. Water District Response: The inability to locate these invoices is Conditioned by the same issues discussed in 4.b)and 4. c)Water District responses described above. d) On Cost Sharing Invoice#64, expenditures reported for Ross Gaza totaled $825; however, the Water District was not able to provide the supporting invoice. Water District Response: The inability to locate these invoices is conditioned by the same issues discussed in 4. b)and 4. c)Water District responses described above. e) On Cost Sharing Invoice #72 (228105) the Water District invoiced the Sanitation District $1,708,419.15 too much due to an error in expenditures reported related to JF Shea Construction; however, the Water District corrected this on Cost Sharing Invoice #93 (11130/06). Water District Response: The Water District acknowledges the error and that the error was subsequently corrected by the Water District. Since the time that this problem was Book Page 18 �6 r r.r�+an _i ®cse�C Administration Committee Orange County Sanitation District August 27, 2007 Page 8 Conclusion We were not engaged to and did not perform an audit, the objective of which would be the expression of an opinion on key provisions of the agreements between the Orange County Sanitation District and the Orange County Water District related to the Ground Water Replenishment System project Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to the District. This report is intended solely for the information and use of the specified users listed above and is not intended to be,and should not be, used by anyone other than those specified parties. Book Page 21 Book Page 19 tY�6 all ,ac+®vpw2 Administration Committee Orange County Sanitation District August 27,2007 Page 5 Recommendation: We recommend controls be strengthened through a timely and thorough review of support 5) Procedures Performed: We randomly selected a sample of 25 Cost Sharing Invoices prepared by the Water District and reviewed for the following: a) We traced 100% of Cost Sharing Invoice to support including check register, invoice, check copy,grant cash receipts, payroll journals,etc. b) We reviewed and verged items related to GWRS and were property coded and approved. c) We reviewed calculations and footing of the invoices. Findings: Based on our procedures performed,we noted the following: a) On various Cost Sharing Invoices, we experienced difficulty recalculating payroll costs reported in the Cost Sharing Invoices for Laura Thomas and Thomas Dawes. The differences appeared to relate to timing and the calculations added to payroll for taxes and workers compensation. The Water District was unable to explain the differences. Water District Response: Since 2005, the Water District has used a standard method for calculating these shared payroll costs and include in the monthly cost share hardoopy file a documented audit trail of the payroll registers and tax and workers compensation insurance costs used in the Cost Share Invoice. b) On Cost Sharing Invoice #21, payroll charges for Tama Snow totaled $1,122.65 however, the Water District was only able to support costs of$508.64. The difference of$614.01 was unexplained. Water District Response: The inability to locate these invoices is conditioned by the same issues discussed in 4. b)and 4. c)Water District responses described above. c) On Cost Sharing Invoice#29, expenditures reported for Gary Vogt and Associates totaled $8,000; however,the Water District was not able to provide the supporting invoice. Water District Response: The inability to locate these invoices is conditioned by the same issues discussed in 4. b)and 4.c)Water District responses described above. d) On Cost Sharing Invoice#64, expenditures reported for Ross Gaza totaled $825; however, the Water District was not able to provide the supporting invoice. Water District Response: The inability to locate these invoices is conditioned by the same issues dismissed in 4. b)and 4.c)Water District responses described above. e) On Cost Sharing Invoice #72 (2128/05) the Water District invoiced the Sanitation District $1,708,419.15 too much due to an error in expenditures reported related to JF Shea Construction; however, the Water District corrected this on Cost Sharing Invoice #93 (11/30/06). Water District Response: The Water District acknowledges the error and that the error was subsequently corrected by the Water District Since the time that this problem was Book Page 18 Lxm6 r r�eyrad wmc+'xsnv4 Administration Committee Orange County Sanitation District August 27,2007 Page 6 discovered the Water District immediately created a control formula in the Microsoft Excel spreadsheet that is then used to reconcile and qualify the grant total of shared costs. The Water District can have these available for inspection upon Sanitation District request. f) We noted several instances where credit for grant revenues received were not given to the Sanitation District in the proper Cost Sharing Invoice and rather were reflected in a subsequent month's invoice. From our discussions with the Water District, this related to timing and proper notification of receipted cash prior to invoice preparation. Water District Response: Since the receipt of the last grant funding,the Water District has instituted a communication network between the Accounts Receivable/Cash Applications function and the Cost Share Billing stag that will provide for simultaneous credit of the grant funds and immediate reflection in subsequent Cost Sharing Invoice. g) We noted as a general practice of the Water District, that if grant cash receipts exceeded disbursements for the period of a Cost Sharing Invoice then the surplus was applied to future Cost Sharing Invoices until the surplus was eliminated. Water District Response: No response. h) We noted that the Sanitation District was given $2,777,375 too much credit for grant revenues during the period June 2004 through March 2005 due to an error in how revenues were being applied to the invoices during that period. However, this was corrected by the Water District in the December 2005 invoice. Water District Response: No response. i) On Cost Sharing Invoice#50 there was a credit adjustment for$250 for credit received from plan sales for which the Water District did not provide support. Water District Response: In the future, the Water District will make photocopies of the payment checks that are submitted by contractors for additional copies of blue prints and file these with the monthly Cost Sharing Invoice file. j) On Cost Sharing Invoice #52 there was a credit adjustment for $7,185.73 for a credit adjustment from Cost Sharing Invoice #51 for which the Water District did not provide support. Water District Response: No response. Recommendation: We recommend controls be strengthened through a timely and thorough review of support. 6) Procedures Performed: We obtained grant agreements entered into by the Water District for the GWRS project, the applicable reimbursement requests, and the Water District general ledger tracking and agreed with amounts reported in the Cost Sharing Invoices to ensure completeness and accuracy of grant amounts reported in the Cost Sharing Invoices and ensured proper credit was given to the Sanitation District. Findings: No findings were noted as a result of our procedures. Book Page 19 �6 Administration Committee Orange County Sanitation District August 27,2007 Page 7 Water District Response: Not applicable. 7) Procedures Performed: We reviewed the Sanitation District's support and approval for payments made to the Water District as pan of the Cost Sharing Invoices for the GWRS Project and agreed with amounts reported by the Water District on the invoices as of Cost Sharing Invoice #96 through February 28,2007, Findings: No findings were noted as a result of our procedures. Water District Response: Not applicable. 8) Procedures Performed: We reviewed the minutes of the Joint Cooperative Committee from March 1997 through March 2007. Findings: Not applicable. Water District Response: Not applicable. Summary of Results Based on our review of the Ground Water Replenishment System project Cost Sharing Invoices prepared by the Orange County Water District, we feel that, overall, the processes, controls, and substantiation of the Cost Sharing Invoices was reasonable. As noted in the previous sections, we performed tests of expenditures, invoices, and grants and performed a review of the controls in place. We found that there were areas which could be improved upon as mentioned above. Our key recommendations would be: 1) Item 1,page 1 —no recommendations 2) Item 2, page 1 —we recommend existing controls be strengthened by the Sanitation District in their review of grant revenues and payroll costs. Through a more thorough review in these two areas some of the issues encountered during our tests of grants and expenditures would be reduced. 3) Item 3,page 2—no recommendations 4) Item 4, page 3—we recommend existing controls be strengthened by the Sanitation District through a timely and thorough review. 5) Item 5,page 5—we recommend existing controls be strengthened by the Sanitation District through a timely and thorough review. 6) Item 6, page 6—no recommendations 7) Item 7, page 7—no recommendations 8) Item 8, page 7—no recommendations Book Page 20 �6 �yt6 Administration Committee Orange County Sanitation District August 27,2007 Page 8 Conclusion We were not engaged to and did not perform an audit, the objective of which would be the expression of an opinion on key provisions of the agreements between the Orange County Sanitation District and the Orange County Water District related to the Ground Water Replenishment System project. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to the District. This report is intended solely for the information and use of the specfied users listed above and is not intended to be,and should not be, used by anyone other than those specified parties. Book Page 21 ADMINISTRATION COMMITTEE Meeting Date To ad.or Dir. 10/10/07 AGENDA REPORT aem Number Item Number ADM07-51 Orange County Sanitation District FROM: James D. Ruth, General Manager Originator: Lorenzo Tyner, Director of Finance and Administrative Services SUBJECT: ADDITIONAL RETIREE BENEFIT ACCOUNT (ARBA) UPDATE GENERAL MANAGER'S RECOMMENDATION For information only SUMMARY On December 31, 2007, the agreement between OCERS and OCSD pertaining to the Additional Retiree Benefit Account (ARBA) will expire. OCERS has provided notice that they will no longer administer the ARBA benefit currently provided to OCSD retirees. Beginning January 1, 2008, OCSD will administer the ARBA benefit to eligible retirees by mailing monthly checks directly to each retiree, and providing a 1099R form at the end of the calendar year. PRIOR COMMITTEEIBOARD ACTIONS • May 24, 2006: The second amended ARBA agreement was approved by OCSD's Board of Directors. • May 10, 2006: An amended agreement for the ARBA benefit was presented to the FAHR Committee to address depleting ARBA benefit funds. In addition, a timeline for addressing intermediate and long-term issues with retiree plan benefits was discussed. ADDITIONAL INFORMATION Background Information ARBA benefits are a retiree medical premium offset plan. Retirees who have a vested right in this benefit are provided with $10 per month for every year of service up to a maximum of 25 years or$250 per month to offset the costs associated with health insurance premiums. Unlike the retiree paid medical premium plan, ARBA benefits are sent directly to the retiree in the retirement benefits payment from OCERS. As such, ARBA benefits are taxable to the retiree. Fmm No.Dt 1=1 RwIwE;DLDt,Dt Page 1 Book Page 22 The Retiree Medical Benefit Reserve (RMBR) account that funds ARBA benefits was depleted in September 2006. The RMBR account was established in December 2002, and was funded using excess earnings from OCERS investments. Until September 2006, ARBA benefits were funded entirely by excess earnings from OCERS pension investments. Due to poor market conditions, there are no excess earnings to replenish depleting ARBA benefit funds. Since OCSD has a legal obligation to continue funding retiree medical benefits to those retirees and employees who have a vested right in the benefit, OCSD will begin self-administering this benefit. The current ARBA agreement terminates on December 31, 2007. Other agencies' ARBA agreements with OCERS also expire on December 31, 2007, as well. Although OCERS has indicated that it does not intend to continue the RMBR account past the 2007 termination date, it reviewed ideas to continue administering ARBA benefits through employer contributions. OCERS indicated that they will charge an administrative fee and will not administer any variation of the benefit if retiree medical benefits change in the future. For example, if OCSD transitions from a defined benefit plan to a defined contribution plan, such as Health Saving Accounts (HSA), OCERS would not administer that benefit. Future Issues In considering the future funding of retiree medical benefits, OCSD intends on developing a funding strategy that will reduce costs over the long term and will help secure benefits expected by retirees and employees. In addition, the funding strategy should identify a low risk investment plan, consistent with'OCSD's Board-approved investment policy, to ensure a market rate of return on the funds subsidizing retiree medical benefits. ATTACHMENTS 1. Letter regarding OCERS/OCSD Agreement Termination, dated August 6, 2007 JDR:LT:RS:Ic Fg1 No,DW1023 gMaoJ.0TOW Page 2 Book Page 23 T RETIREMENT �� SYSTEM August 6, 2007 5e.vugrhrArtixmd RrtitedAlnnber+xf Kim Erickson CnNoi RANcNnSANtA Senior Human Resources Analyst MAR FFFA Orange County Sanitation District P.O. Box 8127 Crrc of SAN JUAN Fountain Valley, Ca 92728 CAe„xANo CoU of Oa GF Dear Ms. Erickson: OP. GF C.N Ctmenmv Di.r cr This is to confirm the termination date of the ARBA/RMBR agreement between The Sanitation District and the Orange County Employees OONOE000N Retirement System (OCERS). CNlulatN&FAMIUU COMMIZION The Second Amended and Restated Memorandum of Understanding O.Gl CtwNrc Regarding ARBA/RMBR was signed by the Sanitation District and OCERS Ea"n,m on June 19, 2006. That agreement called for a termination date of REn"M.Sham" December 31, 2006, with an optional one year extension. In a letter dated O;,NGr COUNry Flu December 11, 2006, Lorenzo Turner, Director of Finance and AU Noe Administrative Services for the Sanitation District exercised the one year option. Ow ct Co Loaf. Fo".unON C.MmisAON Based on these facts, it is OCERS' position that the ARBA/RMBR OMMIS agreement between the Sanitation District and OCERS will terminate on OPANGE CWMY PUBLIC December 31, 2007. Uw La" OxANCE OwNIv If you have any questions regarding this matter, you may reach me at S...Dcr (714) 558-6201. OMI'ICE Caum TnANrom.moN Sincerely, AFrmoarnv ON ECg VECM1M CovrlmEDmxlcr l !/� S(t ephen Cadena su'N..F,C.Oum OF Assistant CEO, Internal Operations CWFORFIG,COUNIT OF On cr. TM SFOKFMON ComwRAGFNc,ti ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM 2223 Wellington Avenue,Santa Am, CA 92701 Telephone(714)558-6200 Fm(714)558-6236 Book Page 24 ORANGE COUNTY SANITATION DISTRICT (714) 962-2411 www.ocsd.com Mailing Address: P.O. Box 8127 Fountain Valley, California 92728-8127 Street Address: 10844 Ellis Avenue Fountain Valley, California 92708-7018