Restore public trust, audit the sanitation district

December 9, 2014

OPINION  By DEBBIE PETERSON

San Luis Obispo County Grand Jury said, “Board and district exposed to financial, legal, and public trust issues.” Reason enough for an operations audit.

In 2010, a major sewage spill in Oceano originated at the Arroyo Grande, Grover Beach, Oceano and Pismo Beach sewer plant, the South San Luis Obispo County Sanitation District (SSLOCSD). This was just one of a decade of problems at the district. The spill was the culmination of what the grand jury in 2011 called “bad management.” The district board at the time said the grand jury report was “offensive.”

The first sign of problems at the district was in 2005, when the 16-year trend of funding reserves every year stopped. Thereafter the plant lost $500,000 to $2,000,000 a year until 2013 when the board restructured the management team, taking the finances back to a positive balance.

Not only did the finances drift from 2005 onward, but around 2008 lawsuits started appearing, associated with equipment failures, high employee turnover, the spill, and insurance.

Following the spill, from 2010 through 2011 there were many investigations. The first, considered “inept” by the grand jury was followed by a modified county audit and a peer review. These investigations made several recommendations to the board. Some were implemented, most were disputed.

The losses of 2005 through 2012 gobbled up reserves that some say were $12 million or more. Obscure financial reports make it difficult to determine the amount. If the district had remained on course, annually contributing to reserves, it would now have around $16 million available to upgrade the plant. Instead, it barely survived and must now seek grants, rate increases or bonds for needed improvements.

A good chunk of the reserves went to bungled capital projects. The major recipients of those funds were John Wallace, the Wallace Group and the district’s legal advisers, who all benefited financially by managing the ongoing mechanical and legal problems.

When the board restructured the district in 2013 it included an operational audit in the request for proposal (RFP) for management. It is standard practice in well run organizations to carry out an operational or ‘forensic’ audits during a restructuring, or sale or as procedural best practices. The district board sought efficiencies from a top to bottom, in-depth review of current and historic finances, systems and procedures, but subsequently refused to implement the audit. Without the audit the restructure is incomplete.

A truly independent audit by an outside expert is the only responsible action the board can take as a steward of ratepayer resources. A thorough audit will turn up any further improvements the district can make. It will bring financial responsibility and closure to the cycle of the past 10 years. It will allow the district to go forward to upgrade the plant and reassure the public of the district’s commitment to fiduciary responsibility. It would include an engineering review for single point vulnerabilities to guard against future spills.

The excerpted RFP below illustrates the scope of the operational audit requested. At the time it was presented I had researched several consultants, working out a viable proposal in which the consultant would work in $5,000 two-week increments, thus allaying the board’s assertions that it would be too expensive.

Independent of the influence or involvement of the Board/the District Administrator and/or the Wallace Group the consultant shall:

• Complete an in-depth review of the District finances, including income and expenses within all accounts such as, but not limited to operations, maintenance, capital projects, reserve and revolving funds.

• Review of policies, practices, procedures, equipment and plant to rule out and/or prevent fraud, waste or abuse.

• Evaluate current and a minimum of five years of purchasing practices and procedures, including invoicing by district administrator, engineering service providers, legal counsel and other service providers and contractors.

• Evaluate plant, staff, operations and materials costs as compared to other waste water plants and advise as to working conditions, work load and typical costs.

• Suggest operational efficiencies, cost saving opportunities, best practices and appropriate controls.

• Advise on setting up systems, practices and procedures that provide financial and operational information that the Board needs for responsible oversight, accounting comparison of budgets versus expenses for the last five fiscal years and relevant analysis of all district accounts for board and management use.

Team: Investigative Accountant with equivalent knowledge and experience as a CPA or forensic accountant, a seasoned accountant with experience in or with “Big Five” accounting firms, investigative experience, experience in government auditing and familiarity with current industry technologies.

In 2014, the plant is under excellent management and functioning effectively. Recent elections have brought changes to the board. Now is the time to complete the turnaround. Management cannot succeed merely by compliance with a system of internal controls. The turnaround happens from the top, addressing any matters that may be unsound.

A good forensic or operational audit will establish clear lines of accountability for controls, reduce the risk of fraud and create a more reliable, effective organization. If truly independent, it will put to rest or address lingering public concerns and allegations of malfeasance. For the sanitation district it would also help to re-establish credibility and public confidence, allowing the board to move forward with critical health and safety improvements.

A forensic audit will be considered at the next district board meeting on Dec. 17 at 6 p.m. Members of the public may attend and speak during public comment on the first and third Wednesdays of the month at the Arroyo Grande City Hall.

Debbie Peterson was the mayor of Grover Beach from 2012 through 2014 and a sanitation district board member.