5/26/26
Irella Blackwood
Audit Director
1 Quarterly Audit and Performance Review Report
FY2025-26, Q3
FY 2025-26 Audit Plan Status
Audits and Assessments to Date
Status Count
Completed 17
In Progress 9
Upcoming 9
Total 35
2 Completed In Progress Upcoming
Audits Completed and Reports Issued
Audit / Assessment Oversight Body Report Date
Critical Infrastructure Protection and
Operations and Planning Reliability Standards
Audit
Western Electricity
Coordinating Council 3/2/2026
FY 2024-25 Single Audit Controller’s Office 3/5/2026
Revenue Bond Audit, Phase 3 Controller’s Office,
City Services Auditor 3/19/2026
3 Tracking Summary: Audit Recommendations
4 # Audit Title
Report
Issued
Date
Open
Rec
Total
Rec
Months
Open
%
Complete
Close
Date
(or Target)
Public Integrity Assessment: Procurement
1 Criminal Conduct by Former San Francisco Public
Utilities Commission General Manager Harlan Kelly
Undermined the Integrity of City Procurements Despite
Existing Rules Governing Gifts, Disclosures, and Sole
Source Waivers
3/27/2024 2 2 24 0% 5/31/2026
Mission Valley Rock Revenue Lease Audit
2 Mission Valley Rock Co., LLC, Generally Complied With Financial Contract Provisions but Underpaid at Least
$18,628 in Rent for Fiscal Years 2021-22 Through 2023-
24, and SFPUC Needs to Bolster Its Financial Practices
12/18/2025 4 8 3 50% 7/31/2026
Total 6 10 40%
5 FY 2025-26, Q3 Outlook
Completing
• Citywide Payroll Audit
• COVID-19 Emergency Procurement Audit
• FY 2024-25 Construction Close-Out Audit: Sunol Long Term Improvements - Corporation Yard
• Cybersecurity Network Penetration and Vulnerability Assessment • FY 2024-25 Wholesale Revenue Requirement: Statement of Changes in Balancing Account
6 FY 2025-26, Q4 Outlook (Cont.)
Upcoming
• CY 2025 Post Audit
• FY 2025-26 Annual Physical Inventory Counts
• FY 2025-26 Interim Financial Statements
THANK YOU
Feedback & Questions?
7 OUR MISSION: To provide our customers with high-quality, efficient and reliable water, power and sewer services in a manner that values environmental and community interests and sustains the resources entrusted to our care.
BUSINESS SERVICES BUREAU
525 Golden Gate Avenue, 13th Floor
San Francisco, CA 94102
T 415.934.5707
F 415.554.1877
Date: May 26, 2026
To: Commissioner Joshua Arce, President
Commissioner Stephen E. Leveroni, Vice President
Commissioner Avni Jamdar
Commissioner Kate H. Stacy
Commissioner Meghan Thurlow
Through: Dennis J. Herrera, General Manager
From: Nancy L. Hom, Chief Financial Officer and Assistant General Manager, Business Services
Subject: FY 2025-26 Q3 Audit and Performance Review Report This memorandum summarizes the San Francisco Public Utilities Commission (SFPUC) Quarterly Audit and Performance Review (QAPR) report for the third quarter of FY 2025-26, ending March 31, 2026.
I. Completed Audits
There are three completed audits to report since the last QAPR:
1. North American Electric Reliability Corporation (NERC) Reliability Standards Audit | March 2, 2026
Report Summary: The Western Electricity Coordinating Council (WECC) Compliance Audit team evaluated Hetch Hetchy Water and Power for compliance with 3 NERC Reliability Standard Requirements for the 2025 Electric Reliability Organization Enterprise Compliance Monitoring and Enforcement Program. The team assessed compliance with the requirements for the period of February 22, 2023, to February 14, 2025.
Audit Findings Summary: Based on the evidence provided, the audit team noted no instances of Potential Non-Compliance for the applicable Reliability Standard Requirements in scope for the engagement and additionally noted two Positive Observations.
4. FY 2025 Single Audit | March 5, 2026
Report Link: https://tinyurl.com/3w7svt8j
Report Summary: Third-party auditor Macias Gini & O’Connell LLP (MGO) audited the City and County of San Francisco’s (City) financial statements for FY 2024-25. SFPUC is included as a department of the City.
Audit Findings Summary: MGO did not identify any material deficiencies in internal control or instances of noncompliance, and concluded that the financial statements accurately presented the City’s financial position.
5. Revenue Bond Audit, Phase 3 | March 19, 2026
Report Summary: Third-party auditor HKA Global, Inc. conducted a performance audit of bond-funded expenditures to determine whether expenditures were allowable under bond resolutions, properly supported, and assigned or allocated to the correct project(s) within bond series, and to evaluate the effectiveness of internal control over the allowability, and assignment of expenditures.
Audit Findings Summary: The auditors identified two findings relating to the preparation of reports for the former Revenue Bond Oversight Committee, with three associated recommendations. SFPUC partially concurred.
II. Audit Recommendation Status
As of 3/31/26, 2 audit recommendations were open for the Procurements Public Integrity Assessment, and 4 for the Mission Valley Rock Revenue Lease Audit.
If you have questions, please contact me at [email protected] or Irella Blackwood at [email protected].
cc: Irella Blackwood, Audit Director
att: FY 2025-26 QAPR Audit Plan as of Q3, By Status
# Quarter
Status Audit Type Enterprise / Bureau Audit Name Oversight Body
1-5
Completed Financial Water
Annual Physical Inventory Count, FY 2024-25 SFPUC,
Finance
Completed Financial Wastewater
Completed Financial Hetch Hetchy Water
& Power
6 Completed Financial Business Services,
Finance Post Audit, CY 2024 Controller
7 Completed Financial Water
Audited Financial Statements, FY 2024-25 Controller
8 Completed Financial Wastewater
9 Completed Financial
Hetch Hetchy Water
& Power
& CleanPowerSF
10 Completed Financial Business Services,
Finance Annual Comprehensive Financial Report, FY 2024-25 SFPUC
11 Completed Financial Business Services,
Finance Popular Annual Financial Report, FY 2024-25 SFPUC
12 [Updated] Financial Business Services,
Finance Single Audit, FY 2024-25 Controller
Completed
13 [Updated]
Financial Business Services,
Finance
Wholesale Revenue Requirement: Statement of Changes
in Balancing Account, FY 2024-25 BAWSCA
In Progress
14 [Updated]
Financial Power Franchise Fee Audit: Energy Center SF LLC Controller
In Progress
15 [Updated]
Financial Power Franchise Fee Audit: Pacific Gas & Electric Company Controller
In Progress
16 [Updated] Financial Business Services,
Finance Post Audit, CY 2025 Controller
In Progress
17-21
[Updated] Financial Water
Annual Physical Inventory Count, FY 2025-26 SFPUC,
Finance
Upcoming
[Updated] Financial Wastewater
Upcoming
[Updated] Financial Hetch Hetchy Water
& Power
Upcoming
Quarterly Audit & Performance Review Report
FY 2025-26 Audit Plan, By Status
As of March 31, 2026
Status
Completed: 17
In Progress: 9
Upcoming: 9
Total: 35
# Quarter
Status Audit Type Enterprise / Bureau Audit Name Oversight Body
22 [Updated] Financial Water
Audited Financial Statements, FY 2025-26 Controller
Upcoming
23 [Updated]
Financial Wastewater
Upcoming
24 [Updated]
Financial
Hetch Hetchy Water
& Power
& CleanPowerSF
Upcoming
25 Completed Performance Hetch Hetchy Water
& Power Cybersecurity Maturity Assessment, FY 2024-25 SFPUC
26 Completed Performance
Contracts
Administration
Bureau
14B LBE Compliance Audit CSA,
Controller
27 [Updated]
Performance Hetch Hetchy Water
& Power
Critical Infrastructure Protection and Operations and
Planning Reliability Standards Audit
WECC /
NERC
Completed
28 In Progress Performance Human Resources
Services Citywide Payroll Audit CSA,
Controller
29 In Progress Performance Human Resources
Services COVID-19 Emergency Procurement Audit CSA,
Controller
30 In Progress Performance Infrastructure FY 2024-25 Construction Close-Out Audit: Sunol Long Term Improvements - Corporation Yard
CSA,
Controller
31 In Progress Performance Customer Services
Bureau Customer Assistance Program Post-Enrollment Verification SFPUC
32 In Progress Performance All SFPUC Network Penetration and Vulnerability Assessment SFPUC
33 Upcoming Performance All SFPUC Digital Accessibility and Inclusion Standard Assessment CSA, Controller
34 Completed
Concessions,
Real Estate Services Revenue Lease Audit: Mission Valley Rock CSA, Controller
Lease
Revenue
35 [Updated] Revenue
Bond Business Services,
Finance SFPUC Revenue Bond Programs Audit: Phase III CSA, Controller
Completed Oversight
Confidential Information (including Privileged and Critical Energy Infrastructure Information) Has Been Removed.
Date of Compliance Audit: 6/16/25 - 6/27/25
<Public>
NERC ID(s): NCR05182
Registered Entity
Name: Hetch Hetchy Water and Power
Functions in Scope
Per Registration: GO, GOP , TO, TOP , TP
Compliance
Monitoring Process: Compliance Audit
Monitoring Scope: Both
Distribution: Public Version. Confidential Information Has Been Removed, Including Privileged and Critical Energy Infrastructure Information.
Regional Entity: Western Electricity Coordinating Council (WECC) Date of Opening
Presentation: 6/16/25
Date of Closing
Presentation: 6/27/25
Monitoring Period
Start Date: 2/22/23
Monitoring Period
End Date: 2/14/25
Date of Report: 9/25/25 IP Year: 2025
Potential
Noncompliance(s): None (zero)
Jurisdiction: United States
I. Executive Summary
WECC conducted a 2025 Compliance Audit of Hetch Hetchy Water and Power (NCR05182) from June 16, 2025 to June 27, 2025.
At the time of the Compliance Audit, Hetch Hetchy Water and Power was registered for the function(s) of GO, GOP , TO, TOP , TP.
The Compliance Audit team evaluated Hetch Hetchy Water and Power for compliance with 3 NERC Reliability Standard Requirement(s) for the 2025 Electric Reliability Organization (ERO) Enterprise Compliance Monitoring and Enforcement Program (CMEP). The team assessed compliance with the requirements for the period of February 22, 2023 to February 14, 2025.
Hetch Hetchy Water and Power submitted evidence for the team's evaluation of compliance. The team reviewed and evaluated all evidence provided to assess compliance with selected requirements applicable to Hetch Hetchy Water and Power at this time.
Based on the evidence provided, the audit team noted 0 Potential Non-Compliance(s) for the applicable Reliability Standard Requirements in scope for this engagement.
Confidential Information (including Privileged and Critical Energy Infrastructure Information) Has Been Removed.
Date of Compliance Audit: 6/16/25 - 6/27/25
<Public>
The Team notified Hetch Hetchy Water and Power of:
• 0 Potential Non-Compliance(s)
• 0 Area(s) of Concern
• 0 Recommendation(s)
• 2 Positive Observation(s)
The findings included in this report are the same as the findings presented to Hetch Hetchy Water and Power during the exit briefing.
The mitigation plans and Technical Feasibility Exceptions (TFEs) were reviewed as applicable. The compliance team used that review in determining the audit scope.
The WECC Compliance Audit team lead certifies that the compliance audit team adhered to all applicable requirements of the NERC Rules of Procedure (RoP) and the CMEP .
II. Compliance Audit Process
The Compliance Audit process steps are detailed in the NERC ROP . The CMEP generally conforms to the United States Government Auditing Standards and other generally accepted audit practices.
Objectives
All registered entities are subject to compliance assessments with all Reliability Standards applicable to the functions for which the registered entity is registered in the Region(s) performing the assessment. The Compliance Audit objectives are designed to:
• Provide reasonable assurance of compliance to the identified applicable requirements • Review Hetch Hetchy Water and Power's internal compliance program and controls Scope
The scope of this Compliance Audit considered the NERC Reliability Standards from 2025 ERO Enterprise CMEP Implementation Plan, Inherent Risk Assessment (IRA), and Compliance Oversight Plan (COP) for Hetch Hetchy Water and Power completed by WECC. In addition, the scope of the Compliance Audit included a review of Mitigation Plans or Remedial Action directives that were open during the Compliance Audit.
The Reliability Standards and Requirements in scope for this Compliance Audit are illustrated in Table 1:
Compliance Audit Scope.
Table 1: Compliance Audit Scope
Standards Requirement(s)
EOP-011-4 R1.
VAR-001-5 R1.
VAR-002-4.1 R1.
The compliance team did not expand the scope of the Compliance Audit beyond what was stated in the notification letter.
Confidential Information (including Privileged and Critical Energy Infrastructure Information) Has Been Removed.
Date of Compliance Audit: 6/16/25 - 6/27/25
<Public>
Internal Compliance Program
Within the scope of the Compliance Audit, Hetch Hetchy Water and Power's compliance program was not reviewed.
Controls
The team reviewed Hetch Hetchy Water and Power's related internal controls associated with requirements in scope.
Confidentiality and Conflict of Interest
Confidentiality and conflict of interest of the team are governed under the Regional Delegation Agreements with NERC, and Section 1500 of the NERC ROP . Hetch Hetchy Water and Power was informed of WECC’s obligations and responsibilities under the agreement and procedures. The work history for each team member was provided to Hetch Hetchy Water and Power, which was given an opportunity to object to a team member’s participation on the basis of a possible conflict of interest or the existence of other circumstances that could interfere with a team member’s impartial performance of duties. Hetch Hetchy Water and Power had not submitted any objections by the stated objection due date based on the ROP and accepted the team member participants without objection. There were no denials or access limitations placed upon this team by Hetch Hetchy Water and Power.
Methodology
The ERO Compliance Monitoring and Enforcement Manual (i.e. the Manual) documents the ERO Enterprise's current approaches used to assess a registered entity's compliance with the NERC Reliability Standards. The Enterprise uses, to the extent possible, the Generally Accepted Auditing Standards (GAAS), and standards sanctioned by the Institute of Internal Auditors, as guidance for performing activities under the Compliance Monitoring and Enforcement Program (CMEP). While the ERO Enterprise does not necessarily perform compliance monitoring activities that must be in accordance with these standards recognized in the United States, the ERO Enterprise uses these standards as framework to conduct compliance monitoring activities under the CMEP , and recognizes that these standards provide information used in oversight, accountability, transparency, and improvements in ERO Enterprise operations.
WECC provided Hetch Hetchy Water and Power with a Compliance Audit notification package to commence the Compliance Audit. Hetch Hetchy Water and Power provided evidence at the time requested, or as agreed upon, by WECC. The team reviewed the evidence submitted by Hetch Hetchy Water and Power and assessed compliance with the applicable Requirements. Additional evidence could be submitted until the agreed-upon deadline prior to the exit briefing. After that date, only data or information that was relevant to the content of the report or its finding could be submitted with the agreement of the team lead.
The team reviewed documentation provided by Hetch Hetchy Water and Power and requested additional evidence and sought clarification from subject matter experts during the Compliance Audit. The evidence submitted in the form of policies, procedures, emails, logs, studies, data sheets, etc. were validated, substantiated, and cross-checked for accuracy as appropriate. Where sampling is applicable to a Requirement, the sample set was determined by a statistical methodology, along with professional judgment as mentioned in the Manual.
The findings were based on the facts and documentation reviewed, the team’s knowledge of the Bulk Electric System (BES), the NERC Reliability Standards, and professional judgment. All findings were developed based upon the consensus of the team.
Confidential Information (including Privileged and Critical Energy Infrastructure Information) Has Been Removed. <Public>
Date of Compliance Audit: 6/16/25 - 6/27/25
III. Potential Non-Compliances
Based on the results of this Compliance Audit, no findings were noted for the Reliability Standards and applicable Requirements in scope for this engagement.
IV. Areas of Concern
This information has been redacted.
V. Recommendations
This information has been redacted.
VI. Positive Observations
This information has been redacted.
8. Compliance Culture
Hetch Hetchy Water and Power's compliance culture was not formally reviewed by the team as part of the compliance audit. Assessment of Hetch Hetchy Water and Power the internal compliance program will be reviewed by WECC Enforcement on an as-needed basis.
Confidential Information (including Privileged and Critical Energy Infrastructure Information) Has Been Removed. <Public>
Date of Compliance Audit: 6/16/25 - 6/27/25
WECC Contact Information
Any questions regarding this Compliance Audit report can be directed to [email protected].
On behalf of WECC, this report was prepared and reviewed by:
Compliance Audit Team Lead - CIP Date
Compliance Audit Team Lead
9/25/25
Compliance Audit Team Lead - O&P Date
Compliance Audit Team Lead
9/25/25
Management Representative Date
Entity Monitoring Manager
9/25/25
Appendix 1
Compliance Audit Participants
Following is a list of all personnel from the WECC Compliance Audit team directly involved during the meetings and interviews:
Compliance Audit Team
Role Name Entity
Audit Team Lead - CIP Audit Team Lead WECC
Audit Team Lead - OP Audit Team Lead WECC
Member - CIP
Team Members
WECC
Member - OP
Team Members
WECC
Observers Observers WECC
Primary - CIP Audit Team Lead WECC
Confidential Information (including Privileged and Critical Energy Infrastructure Information) Has Been Removed. <Public>
Date of Compliance Audit: 6/16/25 - 6/27/25
Primary - OP Audit Team Lead WECC
The San Francisco Public Utilities
Commission Must Strengthen Its
Controls to Ensure Accurate Reporting
of Bond Expenditures
San Francisco Public Utilities Commission (SFPUC)
Why It Matters
SFPUC has deficiencies in its controls in the assignment and reporting of bond expenditures, resulting in inaccurate and incomplete reporting of millions of dollars in revenue bond spending. SFPUC partially concurs with the report’s 3
recommendations, stating that its processes for completely and accurately reporting bond proceeds and related expenditures and for assigning bond expenditures are adequate and that the reporting issue identified by the audit was corrected through existing controls.
Prepared by
OFFICE OF THE CONTROLLER
CITY SERVICES AUDITOR
March 19, 2026
About the Controller’s Office
The Controller is the chief financial officer and auditor of the City and County of San Francisco (City).
We produce regular reports on the City's financial condition, economic condition, and the performance of city government. We strive to be a model for good government and to make the City a better place to live and work.
About the Audits Division
The City Services Auditor (CSA) was created in the Controller’s Office through an amendment to the San Francisco Charter that voters approved in 2003. Within CSA, the Audits Division ensures the City’s financial integrity and promotes efficient, effective, and accountable government by:
Conducting performance audits of city departments, contractors, and functions to assess efficiency and effectiveness of service delivery and business processes. Investigating reports received through its whistleblower hotline of fraud, waste, and abuse of city resources.
Providing actionable recommendations to city leaders to promote and enhance accountability and improve the overall performance and efficiency of city government.
Team:
Massanda D'Johns, Lead Audit Manager
Hunter Wang, Audit Manager
Audit Consultant:
HKA Global, Inc.
Yano Accountancy Corporation
For more information, please contact:
Mark de la Rosa
Director of Audits
Office of the Controller
City and County of San Francisco
(628) 652-9924
Media inquiries:
[email protected]
sf.gov/controller
@sfcontroller
Controller’s Office LinkedIn
AUDIT AUTHORITY
This audit was conducted under the authority of the San Francisco Charter, Section 3.105 and Appendix F, which requires that CSA conduct periodic, comprehensive financial and performance audits of city departments, services, and activities.
STATEMENT OF AUDITING STANDARDS
We conducted this performance audit in accordance with generally accepted government auditing standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for the findings and conclusions based on our audit objectives. The Audits Division is independent per GAGAS requirements for internal auditors.
OFFICE OF THE CONTROLLER
CITY AND COUNTY OF SAN FRANCISCO
Greg Wagner
Controller
ChiaYu Ma
Deputy Controller
CITY HALL • 1 DR. CARLTON B. GOODLETT PLACE • ROOM 316 • SAN FRANCISCO, CA 94102-4694 (415) 554-7500 • [email protected] • sf.gov/controller March 19, 2026
San Francisco Public Utilities Commission Dennis Herrera 525 Golden Gate Avenue, 2nd Floor General Manager
San Francisco, CA 94102 San Francisco Public Utilities Commission 525 Golden Gate Avenue, 13th Floor
San Francisco, CA 94102
Dear Commissioners and General Manager Herrera:
The Office of the Controller, City Services Auditor (CSA), Audits Division, presents its report of the revenue bond program administered by the San Francisco Public Utilities Commission (SFPUC). The Public Utilities Revenue Bond Oversight Committee (RBOC) engaged CSA, which, in turn, engaged HKA Global, Inc. (HKA) and, as its subcontractor, Yano Accountancy Corporation (YAC), to conduct the audit.
1 The audit had as its objectives to determine whether revenue bond funds were spent in accordance with the stated purposes and permissible use of such bonds.
The audit concluded that SFPUC did not accurately assign $106.5 million in expenditures related to wastewater revenue bonds and did not accurately report some bond expenditures.
The report includes 3 recommendations for SFPUC to strengthen its controls over assigning expenditures to bond series and reporting bond expenditures. The department’s response is attached as an appendix. Although SFPUC partially concurred with the objectives of the recommendations, the department indicated that no revisions or corrective actions were necessary.
The auditor’s comments on SFPUC’s response are provided in Appendix B.
CSA, HKA, and YAC appreciate the assistance and cooperation of all staff involved in this audit. For questions about the report, please contact me at [email protected] or 628-652-9924.
Respectfully,
Mark de la Rosa
Director of Audits
cc: Board of Supervisors
Budget Analyst
Citizens Audit Review Board
City Attorney
Civil Grand Jury
Mayor
Public Library
1 RBOC dissolved on January 1, 2025, pursuant to the San Francisco Administrative Code, Section 5A.36.
REVENUE BOND OVERSIGHT COMMITTEE
San Francisco Public Utilities Commission
PERFORMANCE AUDIT OF SELECTED REVENUE
BOND EXPENDITURES
PHASE III
JANUARY 28, 2026
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Table of Contents
EXECUTIVE SUMMARY ............................................................................................................................................3 Introduction ..........................................................................................................................................................4 Overall Conclusion, and Summary of Findings and Recommendations .......................................................5 Restriction on Use ...............................................................................................................................................5 PARTIES INVOLVED WITH THE PERFORMANCE AUDIT .....................................................................................5 Revenue Bond Oversight Committee ..............................................................................................................5 City Services Auditor .........................................................................................................................................5 The Audit Team ..................................................................................................................................................5 THE PERFORMANCE AUDIT ...................................................................................................................................6 Scope and Objectives ........................................................................................................................................6 Statement of Compliance With Generally Accepted Government Auditing Standards ...................6 Information Not Subject to Any Performance Audit Procedures .........................................................6 This Report Does Not Extend to Other Bond Series Under RBOC Oversight ....................................6 Overall Methodology ..........................................................................................................................................6 Stage 1 – Audit Planning and Survey Phase ..........................................................................................7 Stage 2 – Audit Fieldwork ........................................................................................................................7 Stage 3 - Reporting ...................................................................................................................................7 Risk Assessment ...............................................................................................................................................8 Bond Series Selected for the Performance Audit ...........................................................................................9 Available Proceeds, Expenditures and Unexpended Bond Proceeds ............................................. 10 Project Expenditures by Bond Series .................................................................................................. 12 Bond Expenditure Categories and Assignment to Bonds ................................................................ 14 Bond-Funded Expenditures .................................................................................................................. 14 Identification and Evaluation of Internal Control Significant to the Audit Objectives .................... 18 Consideration of Findings in Prior Audit Reports .............................................................................. 19 FINDINGS ................................................................................................................................................................ 21 Finding No. 1: SFPUC Restated Reports Did Not Assign $106.5 Million of Expenditures to the correct Funding Sources, Including $81.1 Million of Expenditures Not Subject to RBOC Oversight ......................................................................................................................................................... 21 Finding No. 2: Original Reports Did Not Include $98.9 Millon of Proceeds and Expenditures ............... 23 CONCLUSION ......................................................................................................................................................... 26 APPENDIX A: DEPARTMENT RESPONSE ......................................................................................................... 27 APPENDIX B: AUDITOR COMMENTS TO SFPUC RESPONSE ........................................................................ 31
1. EXECUTIVE SUMMARY
1.1 Introduction
The San Francisco Public Utilities Commission (“SFPUC”), a department of the City and County of San Francisco (“City”), has embarked on multiple construction programs in its Water, Wastewater, and Power enterprises. The San Francisco voters approved Propositions A and E in November 2002. Proposition A, among other things, authorized SFPUC to issue revenue bonds and/or other forms of revenue financing in a principal amount not to exceed $1.628 billion to finance the acquisition and construction of improvements to SFPUC’s water system, without any further approvals. Proposition E, among other things, enabled SFPUC to issue additional revenue bonds to finance water and clean water facilities and services when authorized by a two- thirds vote of the Board of Supervisors.
In June 2018 San Francisco voters also approved Proposition A to authorize SFPUC to, among other things, issue revenue bonds to build or improve clean energy facilities, when authorized by a two- thirds vote of the Board of Supervisors. Proposition A also prohibits SFPUC from using such proceeds to finance power plants that generate electricity from fossil fuels or nuclear power. Power bonds issued before June 5, 2018, required voter approval.
SFPUC’s enterprises have forecasted expenditures of approximately $17 billion. Actual program expenditures through June 30, 2022, are $9 .6 billion. SFPUC’s reported funding of these expenditures through June 30, 2023, includes $8.2 billion in bond proceeds from bond issuances authorized by voter-approved Proposition A in 2018 and propositions A and E in 2002. The remaining $1.4 billion is funded by a combination of investment earnings on unexpended proceeds, federal and state loans and grants, commercial paper, and SFPUC revenues.
In November 2002 San Francisco voters also passed Proposition P, which created Section 5A.30-5A.36 of the San Francisco Administrative Code (Administrative Code), authorizing the establishment of the Public Utilities Revenue Bond Oversight Committee (“RBOC”). RBOC's authorities under the Administrative Code, Section 5A.31(b)(6), include the “…independent review and evaluation of the disbursement and expenditure of the proceeds of such revenue bonds by accessing any funds set aside for this purpose…to retain outside auditors, inspectors and necessary experts to conduct such independent review….” RBOC had oversight over the use of all proceeds from bonds issued under the provisions of voter -approved Propositions A and E in 2002 and voter-approved Proposition A in 2018. RBOC retained the Office of the Controller’s (Controller’s”) City Services Auditor (“CSA”) to conduct a performance audit of bond- funded expenditures to determine whether expenditures were allowable under bond resolutions, properly supported, and assigned or allocated to the correct project(s) within bond series, and to evaluate the effectiveness of internal control over the allowability, and assignment of expenditures.
RBOC dissolved on January 1, 2025, in accordance with the sunset provisions of the Administrative Code, Section 5A.36. In October 2024 SFPUC reported that its Audit Bureau would assume RBOC’s mission and objectives for oversight of the use of bond proceeds upon RBOC’s dissolution.
CSA engaged HKA Global, Inc. (“HKA”) and Yano Accountancy Corporation (“YAC” ) collectively referred to as the “Audit Team”) to conduct a performance audit of eighteen SFPUC bond series subject to RBOC oversight over three phases. This report includes the results of our procedures for the third of the three phases.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
1.2 Overall Conclusion, and Summary of Findings and Recommendations We concluded that SFPUC’s restated reporting of expenditures Wastewater 2018 Series B bond proceeds by project has misstatements of $106.5 million expenditures, or 53% of total expenditures of $201 million, should have been assigned to proceeds from other funding sources and therefore questioned as unallowable uses of bond proceeds. These questioned costs include $81.1 million of expenditures not subject to RBOC oversight.
The original reported totals to RBOC of Wastewater proceeds and related expenditures by project for each bond series had a minimum of $98.9 million of misstatements. SFPUC prepared restated reports of Wastewater proceeds and related expenditures by project for each bond series . These restated reports include the $106.5 million of misstatements identified above.
Professional standards promulgate that misstatements may result from error or fraud and that misstatements need not be present for deficiencies in internal control significant to the audit objectives to exist. Because of the amounts questioned as not assigned to the correct bond series, we concluded that deficiencies in internal control significant to the audit objectives exist over the reliability of reporting Wastewater proceeds and related expenditures by project for each bond series.
We also concluded that the reports of Wastewater proceeds and related expenditures by bond series should not be relied on until SFPUC re-evaluates the assignment of expenditures to bond series.
Summary of Our Findings and Recommendations
The following summarizes quantifiable questioned expenditures for the bond series in which we questioned costs as unallowable uses of bond proceeds:
Wastewater 2018
Series B
Expenditures Not Assigned
to the Correct Funding Source $ (106.5)
Expenditures of
$106.5 Million
Were Not
Assigned to the
Correct Funding
Sources
SFPUC’s restated reports of proceeds available and related expenditures by project for each bond series include a total of $106.5 million funded by other funding sources, including $81.1 million of expenditures not subject to RBOC oversight. Accordingly, these expenditures were questioned for lack of adequate support.
Original Reports
Included a
Minimum of
$98.9 Million of
Misstatements
SFPUC’s original reporting of Wastewater proceeds available for expenditure, expenditures of bond proceeds and unexpended bond proceeds were improperly stated by $98.9 million, which represented 55.0% of Wastewater 2023 Series B expenditures, and 94.6% of Wastewater 2010 Series A and B expenditures.
SFPUC submitted restated reports, which include the $ 106.5 million of total questioned expenditures, including $81.1 million of expenditures not subject to RBOC oversight, identified above.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
1.3 Restriction on Use
The purpose of this performance audit is solely to evaluate SFPUC’s compliance with and internal control over the allowability of expenditures under bond provisions, support for expenditures, assignment, or allocation of expenditures to correct bond series and projects within bond series. Accordingly, this performance audit is not suitable for any other purpose.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
2. PARTIES INVOLVED WITH THE PERFORMANCE AUDIT
In addition to SFPUC as auditee, RBOC, CSA, and the team of HKA and YAC (referred to as the “Audit Team”) all have significant roles and responsibilities in the performance audit.
2.1 Revenue Bond Oversight Committee
In November 2002 San Francisco voters passed Proposition P, which created Section 5A.30- 5A.36 of the Administrative Code, authorizing the establishment of RBOC. Under the Administrative Code, Section 5A.31(b)(6), RBOC's authorities include the “…independent review and evaluation of the disbursement and expenditure of the proceeds of such revenue bonds by accessing any funds set aside for this purpose…to retain outside auditors, inspectors and necessary experts to conduct such independent review… .” RBOC had oversight over the use of all proceeds from bonds issued under the provisions of voter -approved Proposition A of June 2018 and propositions A and E of November 2002. RBOC’s work was funded by 1/20th of 1% of the gross bond proceeds of new money revenue bond issuances or sales to the extent permitted by law. RBOC used a portion of its funding to engage CSA to oversee the performance audit to determine whether SFPUC expenditures of bond proceeds were i n accordance with bond provisions, adequately supported, and properly assigned or allocated to project(s) within a bond series and evaluate internal control over these expenditures.
RBOC dissolved on January 1, 2025, in accordance with the sunset provisions of the Administrative Code, Section 5A.36. In October 2024 SFPUC reported that its Audit Bureau would assume RBOC’s mission and objectives for oversight of the use of bond proceeds upon RBOC’s dissolution.
2.2 City Services Auditor
CSA is the City's internal auditor, providing performance, financial, and compliance auditing and managing the City's Whistleblower Program. CSA produces a wide range of audit reports and performance reports relating to the City's revenue, spending, service delivery, and outcomes. RBOC has contracted CSA to oversee this performance audit, and CSA , in turn, has contracted HKA , with YAC as a subcontractor , to conduct the Revenue Bond Performance Audit.
2.3 The Audit Team
HKA is a global consultancy company with over 40 years of experience and has completed numerous performance audits on some of the largest and most complex programs/projects in the world. YAC is a regional CPA and consulting firm and has worked directly wit h the City and County of San Francisco and the San Francisco Public Utilities Commission for over 28 years, performing audits per GAGAS and other relevant auditing and assurance standards. The principals from HKA and YAC, ultimately responsible for the quality of the performance audit, worked together for several years at one of the “Big Four” audit and consulting firms.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
3. THE PERFORMANCE AUDIT
3.1 Scope and Objectives
The Audit Team conducted a performance audit of capital expenditures funded by proceeds from public utility revenue bonds. Forty revenue bonds subject to RBOC oversight have funded expenditures through June 30, 2023.
The objectives of this performance audit were to determine whether expenditures from project funds were:
• Allowable under the bond resolutions, laws, and regulations, • Properly supported,
• Assigned or allocated to the correct bond series and project(s) within a bond series, and • Subjected to appropriate cost control measures.
Statement of Compliance With Generally Accepted Government Auditing Standards
We conducted this performance audit under generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe we have obtained sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions.
Information Not Subject to Any Performance Audit Procedures We were not engaged to perform, and did not perform, any performance audit procedures on any budgeted or forecasted information in this report. Such information is identified as unaudited. Accordingly, our audit conclusions do not extend to such information. This is not a scope limitation of the performance audit of the six bond series identified in this report.
This Report Does Not Extend to Other Bond Series Under RBOC Oversight This report includes our findings, recommendations and conclusions on six bond series subjected to performance audit procedures, and to any other bond series that are affected directly by our audit procedures . We were not engaged to conduct performance audit procedures on all bond series subject to RBOC oversight. Accordingly, our findings, recommendations and conclusions do not extend to all bond series. This is not a scope limitation of the performance audit of the six bond series identified in this report.
3.2 Overall Methodology
The Audit Team approached the audit in three separate stages, enabling us to develop our findings and recommendations to RBOC. These three stages encompass a high- level evaluation of each of the audit planning and survey, fieldwork, and reporting stages.
Stage 1 – Audit Planning and Survey Phase
Upon receiving notice to proceed for Phase 3, the Audit Team conducted an entrance meeting with RBOC and CSA to initiate the audit engagement. From this meeting, we established the audit objectives, methodology, information needs, and engagement timeline.
Next, the Audit Team performed a preliminary assessment on all revenue bonds subject to RBOC oversight. This assessment included an analysis of capital project expenditures funded by the various bond proceeds for the Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Wastewater, Water, and Power enterprises. The Audit Team used this information to identify six bonds to include within the Phase 3 audit scope.
The Audit Team presented the preliminary bond assessment to CSA, including the six bonds selected that address the performance audit's scope and objectives.
Stage 2 – Audit Fieldwork
The Audit Team developed an audit plan using information obtained during the audit planning and survey stage.
This plan served as our framework and approach for completing the audit fieldwork. The Audit Team engaged multiple SFPUC Infrastructure and SFPUC Financial Services departments to request bond documentation, capital project files, and other related documentation. Additionally, we held discussions with SFPUC department relevant to our scope and objectives.
The Audit Team's fieldwork yielded the audit evidence used to formulate our findings, conclusions, and ultimately our recommendations to RBOC.
The following summarizes the audit procedures performed to accomplish the objectives of the performance audit.
Reporting of Expenditures by Project and Bond Series
The Audit Team:
• Obtained and evaluated relevant commission resolutions, and city and SFPUC policies, procedures and practices on the assignment of project expenditures to bond series; • Tested the mathematical accuracy of reporting expenditures by project and bond series; • Compared total expenditures by enterprise and project as reported in SFPUC’s book s and records to total reported expenditures by project and bond series; and • Compared total expenditures by project assigned to the six bond series as recorded in SFPUC’s general ledger by fiscal year to reported expenditures by project by bond series.
Compliance With Procurement Policies and Procedures
The Audit Team, for selected contracts, obtained and evaluated the following:
• Relevant procurement-related policies and procedures; • Relevant documents to communicate contract scope and timing; • Bids and/or proposals, as applicable, submitted by contractors and/or consultants; and • SFPUC’s documentation of bid and/or proposal evaluation.
Non-Labor Expenditures
The Audit Team selected construction, consultant and other non-labor project and overhead expenditures recorded in SFPUC’s general ledger and:
• Obtained payment application packages and/or other invoices supporting the expenditure recorded in the general ledger.
• Tested the mathematical accuracy of the support for the expenditure. • Evaluated the appropriateness of the approvals for the expenditure.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Labor Expenditures
The Audit Team, for selected labor expenditures:
• Obtained the labor detail report in electronic format, which includes hours and dollars charged to projects and overhead by pay period, person, project and account; • Summarized the labor detail report information and compared the totals to amounts recorded in the general ledger;
• Tested labor rates for selected job classifications to the applicable Salary Ordinance provisions; and • Analyzed labor hours and dollars by job classification, project, fiscal year and person.
Reasonableness of Overhead Rates
The Audit Team:
• Summarized overhead dollars charged to selected projects by year and city department, including SFPUC, SFPW, SFMTA and all other departments; and
• Evaluated the overall reasonableness of the overhead rates charged to projects by each department.
Stage 3 - Reporting
Based on the information collected during our fieldwork, the Audit Team developed a preliminary list of observations and distributed this information for SFPUC comment. We revised our initial observations and held follow -up meetings with each department to confirm our understanding of the information further provided to us.
The Audit Team's periodically met with CSA to provide progress updates and coordinate audit fieldwork. Also, the Audit Team provided updates to RBOC during their monthly public meetings. The culmination of our audit fieldwork is represented throughout this performance audit report, including the Audit Team's findings and recommendations to RBOC.
3.3 Risk Assessment
SFPUC Finance provided the Audit Team with schedules for the Water, Wastewater, and Power enterprises, showing expenditures by bond series. The Audit Team used these schedules, along with SFPUC's general ledger, to summarize all debt -funded expenditures by project for Water and Wastewater. The Audit Team then analyzed this information to identify bonds that fit within RBOC's scope and objectives.
Attributes
Revenue
Bonds
• Large net proceeds available for capital expenditures • Funds used to defease commercial paper
• Bonds associated with historically high-risk projects • Large spend across many projects
• Significant spend on two or three projects
Capital Programs
and Projects
• Inherent project complexities (for example, heavy civil construction and non-typical projects)
• Projects with forecasted costs exceeding baseline budgets • Projects with numerous construction schedule delays
• Projects managed by other city agencies
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
3.4 Bond Series Selected for the Performance Audit
The Audit Team selected six bond series for our performance audit from the 40 bond series subject to RBOC oversight as of June 30, 2023: three from the Wastewater Enterprise, two from the Water Enterprise, and one from the Power Enterprise.
Table 3.1
Bonds Selected for Phase II of the Performance Audit
Wastewater Power Water
2018 Series B 2021 Series A 2017 Series A
2023 Series A 2021 Series B
2023 Series B
We originally expected to perform audit procedures on commercial paper defeasances of Wastewater 2023 Series A and B bonds. However, since substantially all proceeds from these two bond series were expended as of June 30, 2023, our performance audit procedures were extended to include all applicable bond proceeds.
The Official Statement for each bond series identifies the amounts deposited to SFPUC’s capital projects fund and the refunding of commercial paper issued to fund capital expenditures until such time that such temporary financing is replaced with long -term bonds. Amounts in the Official Statement are adjusted for investment earnings on unexpended proceeds and other adjustments (typically adjustments to bond issuance and underwriter's fees, commercial paper interest paid directly from the commercial paper debt service fund, and transfers to RBOC) to determine total available proceeds.
Available Proceeds, Expenditures and Unexpended Bond Proceeds The Controller’s Accounting Policies & Procedures (“AP&P”), which apply to all city departments, state that “…issuing department periodically generates reports for the Oversight Committee…” 2 They also require departments receiving debt funding “…to track, in PeopleSoft or off -line, project sources and uses against actuals by fund and by project…”3 Reports required by the AP&P are prepared under the implicit assumption that all relevant AP&P policies and procedures are followed in the generation of information for these reports. We note that SFPUC prepared these required reports for RBOC only after implementing a recommendation from Phase 1 of our performance audit.
2 City and County of San Francisco – Office of the City Controller, Accounting Policies and Procedures, September 2017, §11.7.5.2.1
3Ibid, §11.7.6
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
The following table summarizes the total available proceeds, expenditures, and unexpended proceeds by bond series for the Wastewater bond series subject to the performance audit.
Table 3.2
Available Proceeds, Expenditures
and Unexpended Proceeds by Wastewater Bond Series
($000)
Wastewater 2018
Series B 2023 Series A* 2023 Series B* Total
Proceeds from Official Statements
Capital projects fund $ 201,047 $ 164,374 $ 52,781 $ 418,202 Commercial paper defeased - 400,918 156,927 557,845 Subtotal proceeds from Official Statements 201,047 565,292 209,708 976,047 Post-issuance adjustments
Investment earnings -
Other adjustments 335 364 (20,620) (19,921) Subtotal post-issuance adjustments 335 364 (20,620) (19,921) TOTAL AVAILABLE PROCEEDS 201,382 565,656 189,088 956,126 EXPENDITURES (201,382) (565,656) (179,909) (946,947) UNEXPENDED PROCEEDS $ - $ - $ 9,179 $ 9,179 Source: Bond Series Official Statements and SFPUC Summaries of Unexpended Proceeds and Proceeds Available The following table summarizes the total available proceeds, expenditures, and unexpended proceeds by bond series for the Power bond series subject to the performance audit.
Table 3.3
Available Proceeds, Expenditures
and Unexpended Bond Proceeds by Power Bond Series
($000)
Power 2021
Series A
2021
Series B Total
Proceeds from Official Statements
Capital projects fund $ - $ - $ - Commercial paper defeased 82,710 55,005 137,715 Subtotal proceeds from Official Statements 82,710 55,005 137,715 Post-issuance adjustments
Investment earnings -
Other adjustments (1,030) (685) (1,715) Subtotal post-issuance adjustments (1,030) (685) (1,715) TOTAL AVAILABLE PROCEEDS 81,680 54,320 136,000 EXPENDITURES (81,680) (54,320) (136,000) UNEXPENDED PROCEEDS $ - $ - $ - Source: Bond Series Official Statements and SFPUC Summaries of Unexpended Bond Proceeds Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
The following table summarizes the total available proceeds, expenditures, and unexpended proceeds by bond series for the Water bond series subject to the performance audit.
Table 3.4
Available Proceeds, Expenditures
and Unexpended Bond Proceeds by Water Bond Series
($000)
Water 2017 Series A
Proceeds from Official Statements
Capital projects fund $ 65,500
Commercial paper defeased 60,875
Subtotal proceeds from Official Statements 126,375 Post-issuance adjustments
Investment earnings (117)
Subtotal post-issuance adjustments (117)
TOTAL AVAILABLE PROCEEDS 126,258
EXPENDITURES (126,258)
UNEXPENDED PROCEEDS $ 0
Source: Bond Series Official Statement and SFPUC Summaries of Unexpended Proceeds and Proceeds Available
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Project Expenditures by Bond Series
The following table summarizes expenditures by project and bond series for the Wastewater bond series subject to the performance audit.
Table 3.5
Wastewater Expenditures by Project and Bond Series
$(000)
Wastewater Projects 2018 2023 2023 Total Series A Series A Series B Biosolids Digester $ - $ 281,436 $ 36,283 $ 317,719 Repair and Replace Collection System
132,078 -
21,427 153,505
Southeast Community Center
Improvement
22,667 -
84,564 107,231
Wastewater Treatment Plant
Improvements -
84,743 - 84,743
Wastewater Treatment Plant
Improvements -
64,622 - 64,622
Collection System Improvement - 64,526 - 64,526 Stormwater Management - 34,827 - 34,827 Collection Division Consolidation 11,752 - 945 12,697 Ocean Beach 8,730 - 14,730 23,460 Treasure Island Capital Improvements 4,000 - 9,573 13,573 Islais Creek Outfall 10,267 - 266 10,533 Sewer Improvements - Small Diameter - - 3,320 3,320 Outfall Assessment and Rehabilitation - - 1,721 1,721 Flood Resilience – Hydraulic - 8,626 - 8,626 Program Wide Management - 26,834 - 26,834 Commercial Paper Expenditures 11,876 - 6,264 18,140 Other Projects 13 42 817 872 TOTAL $ 201,383 $ 565,656 $ 179,910 $ 946,949
Source: SFPUC Summary of Revenue Bond Expenditures
The following table summarizes expenditures by project and bond series for the Power bond series subject to the performance audit.
Table 3.6
Power Expenditures by Project and Bond Series
($000)
Power Projects 2021 2021
Series A Series B Total
Hetchy Water - Power Infrastructure $
25,984 $
18,016 $
44,000
Distribution Services – Retail
43,985
27,299
71,284
Hetchy Water - Joint Project
11,711
8,303
20,014
All Other Projects
702
702
TOTAL $
81,680 $
54,320 $
136,000
Source: SFPUC Summary of Revenue Bond Expenditures
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
The following table summarizes expenditures by project and bond series for the Water bond series subject to the performance audit.
Table 3.7
Water Expenditures by Project and Bond Series
($000)
Water Projects 2017
Series A
Calaveras Dam Replacement $ 73,966
HTWTP Long-Term Improvements 18,158
New Irvington Tunnel 4,793
Seismic Upgrade of BDPL at Hayward Fault Phase 2 4,345 Regional Ground Water Storage and Recovery 11,839 Habitat Reserve Program 2,350
All Other Projects 10,807
TOTAL $ 126,258
Source: SFPUC Summary of Revenue Bond Expenditures
Bond Expenditure Categories and Assignment to Bonds
AP&P §3.1 states in part:
“…The encumbrance of funds is an important and usually last step in any ordering or contracting process.
Encumbrance is a formal commitment of funds, recorded against a department’s budget in the financial system. An encumbrance is required before an order or contract is issued, and there are very, very few exceptions…”4
Implementation of the encumbrance system requires the assignment of each encumbrance to one or more specific funding sources. Numerous SFPUC construction projects, to include all enterprise funds, have multiple funding sources – including those subject to RBOC oversight, and could have funding sources not subject to RBOC oversight. Because of multiple funding sources and the limitations of the City’s accounting system in place through June 30, 2017, SFPUC determined that it was impracticable to assign each encumbrance to one or more specific funding sources. Therefore, SFPUC used a first-in, first-out (“FIFO”) framework to assign encumbrances and related expenditures to funding sources and represented to us that it had obtained approvals to use the FIFO framework to assign expenditures to bond series.
The general FIFO framework is commercial paper proceeds ultimately refunded by RBOC bonds and “new money” proceeds from bond issuances are assigned to expenditures on a FIFO basis. Under this alternative practice, commercial paper proceeds refunded by later bond series would be expended earlier than new money deposited at a later date. There are exceptions, such as certain Water bond series designated to fund only specific projects.
Separate expenditure pools are established for Water, Power and Wastewater. These pools were further split into “green” and “non-green” subpools upon issuance of green and non-green bond series in 2016.
4 Ibid, §3.1
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Finally, SFPUC was able find other funding source(s) for expenditures originally funded by RBOC bonds, particularly government awards. When such expenditures are identified and their funding is transferred to the other funding source(s), the deposit date of the original RBOC funding is the FIFO date for funds made available by such funding transfers.
Since SFPUC determined that strict compliance with the City’s encumbrance policies to be impracticable, we therefore considered SFPUC’s FIFO funding framework as the de-facto standard for evaluating the propriety of assigning project expenditures to funding sources . We did not consider funds to be available until they were received.
SFPUC informed us that it did not assign Wastewater expenditures from FY 2006-07 through FY 2018-19 to specific bond series until FY 2018-19, at which time it accumulated all expenditures by project and bond series back to Wastewater 2010 Series A and B.
Bond-Funded Expenditures
As part of the audit risk analysis procedures, we summarized bond-funded expenditures by cost category identified and described below:
Table 3.8
Project Cost Categories
Expenditure
Category Description
Labor-related Labor and benefits charged by CCSF employees, and related overhead on labor.
Consultants
Expenditures to consultants such as program management, project management, construction management, environmental services, specialty inspection services, systems consulting, other management consulting services.
Construction contracts Expenditures to contractors for construction labor and materials.
Land acquisition Expenditures for additional land.
Fees, licenses, and permits Expenditures to federal, state, and local government agencies to comply with regulatory and other requirements.
Construction materials Construction materials purchased directly by SFPUC.
Other allocations Allocations from within SFPUC that are not based on labor expenditures.
Legal and related Expenditures under the control of the Office of the City Attorney.
Commercial paper-related Expenditures for commercial paper fees and interest.
Intra-city charges Expenditures to other departments other than labor, benefits and related overhead, and expenditures to the Office of the City Attorney.
Transfers Expenditures for land and buildings from other departments for use on SFPUC projects.
All other All other non-labor expenditures not classified above.
SFPUC informed us that it started to assign Wastewater project expenditures to specific bond series in fiscal year 2018-19, including the assignment of such project expenditures incurred in all prior years. We were provided with assignments of Wastewater project costs to funding sources only at the project level, but not at the account level.
These assignments are documented on spreadsheets and not in SFPUC's general ledger. All expenditures in fiscal years 2009-10 through 2020- 21 were summarized by author ity (consisting of multiple projects) and the general ledger sub-fund in which they were recorded. Expenditures through June 30, 2017, were not summarized by fiscal year; summarization by fiscal year started as of July 1, 2017. All bond proceeds from all Wastewater revenue bond series used to defease commercial paper are included as a separate funding source and not assigned to the applicable bond series. Wastewater's accounting for defeased commercial paper differs from Water's, which assigned expenditures funded by defeased commercial paper to the applicable bond series.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
The following table summarizes estimated expenditures for Wastewater 2023 Series A and B bonds, which were issued at the same time. The Biosolids Digester Project was funded with both bond series, which is allowable under the bond indenture. Accordingly, the table summarizes expenditures funded only by 2023 Series A bonds, funded only by 2023 Series B bonds, and (the Biosolids Digester Project) funded by both 2023 Series A and B bonds.
Table 3.9
Wastewater Bond-Funded Expenditures by Expenditure Classification ($000)
Expenditure Classification
2023
Series
A Only
2023
Series
B Only
2023
Series
A or B
Total
Labor-related and consultants
Labor-related $ 49,245 $ 19,462 $ 12,150 $ 80,857 Consultants 47,609 15,294 29,902 92,805 Subtotal Labor-related and
consultants 96,854 34,756 42,052 173,662 Construction contracts 187,204 95,428 290,297 572,929 Subtotal labor-related, consultants,
and construction contracts 284,058 130,184 332,349 746,591 Other expenditures
Fees, licenses, and permits 219 6,148 4 6,371 Construction materials 895 3 - 898 Legal and related 131 - 165 296 Intra-CCSF charges 54 455 12 521 Fund transfers 129 450 3,500 4,079 All other 2,446 3,740 2,794 8,980 Subtotal other expenditures 3,874 10,796 6,475 21,145 TOTAL EXPENDITURES $ 287,932 $ 140,980 $ 338,824 $ 767,736 Source: SFPUC General Ledger
The $767.8 million of total expenditures shown is $22.2 million greater than the $745.6 million bond- funded expenditures in Table 3.2, because of funding source changes that occur during the middle of a month. The $22.2 million difference includes $21.1 million due to mid-month funding changes in the Biosolids Digester Project.
The negative net transfer of program management costs reflects SFPUC’s success in obtaining Government Awards and transferring the funding of expenditures from revenue bonds subject to RBOC oversight to other funding sources.
We did not summarize expenditures by classification for 2018 Series B bonds, since we found that more than 50% of the expenditures were not properly supported.
The following table summarizes Wastewater bond-funded expenditures by expenditure classification as a percentage of total expenditures (also known as “common size”):
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Table 3.10
Wastewater Bond-Funded Expenditures by Expenditure Classification as a Percentage of Total Expenditures
($000)
Expenditure Classification
2023
Series
A Only
2023
Series
B Only
2023
Series
A or B
Total
Labor-related and consultants
Labor-related 17.10% 13.80% 3.59% 10.53%
Consultants 16.53% 10.85% 8.83% 12.09%
Subtotal Labor-related and consultants 33.63% 24.65% 12.42% 22.62% Construction contracts 65.02% 67.69% 85.68% 74.63%
Subtotal labor-related, consultants, and construction contracts 98.65% 92.34% 98.10% 97.25% Other expenditures
Fees, licenses, and permits 0.08% 4.36% 0.00% 0.83%
Construction materials 0.31% 0.00% 0.00% 0.12%
Legal and related 0.05% 0.00% 0.05% 0.04%
Intra-CCSF charges 0.02% 0.32% 0.00% 0.07%
Fund transfers 0.04% 0.32% 1.03% 0.53%
All other 0.85% 2.65% 0.82% 1.17%
Subtotal other expenditures 1.35% 7.66% 1.91% 2.75%
TOTAL EXPENDITURES 100.00% 100.00% 100.00% 100.00%
Source: SFPUC General Ledger
Overall construction cost percentages continue to be lower than the comparable construction cost percentages for both Power and Water Enterprise construction cost percentages due to the Water Enterprise Construction Program, and particularly WISP, being close to completion.
Table 3.11
Power Bond-Funded Expenditures by Expenditure Classification Expenditure Classification 2021 Series A and Series B
($000) % Of Total
Labor-related and consultants
Labor-related $ 15,857 11.56%
Consultants 33,826 24.67%
Subtotal Labor-related and consultants 49,683 36.23%
Construction contracts 68,073 49.66%
Subtotal labor-related, consultants, and construction contracts 117,756 85.89% Other expenditures
Fees, licenses, and permits 17 0.01%
Construction materials 3,524 2.57%
Utilities 13,850 10.10%
Legal and related 377 0.27%
Commercial paper related 706 0.51%
Intra-CCSF charges 39 0.03%
All other 844 0.62%
Subtotal other expenditures 19,357 14.11%
TOTAL EXPENDITURES $ 137,113 100.00%
Source: SFPUC General Ledger
Total expenditures in Table 3.11 are $1.1 million higher than total bond- funded expenditures, as SFPUC did not specifically allocate the related project expenditures to bonds in the general ledger, and the $1.1 million reflects mid-month cut-off between bond series, which is normal.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
We note that labor -related, consultant, and construction expenditures were almost 86% of total bond- funded expenditures. The relatively high percentage of labor -related and consultant expenditures to total expenditures reflects the early phases of the Power bond-funded projects.
The following table summarizes the journal entries to transfer expenditures from the Water expenditure pool to reflect amounts funded by Water bonds subject to the performance audit:
Table 3.12
Water Bond-Funded Expenditures by Expenditure Classification
Expenditure Classification 2017 Series A
$(000) % of Total
Labor-related and consultants
Labor-related $ 9,709 7.69%
Consultants 11,583 9.17%
Subtotal Labor-related and consultants
21,292 16.86%
Construction contracts 101,692 80.55%
Subtotal labor-related, consultants, and
construction contracts 122,984 97.41%
Other expenditures
All other 3,274 2.59%
Subtotal other expenditures 3,274 2.59%
TOTAL EXPENDITURES $ 126,258 100.00%
Source: SFPUC General Ledger -
The high percentage of construction contract costs funded by Water 2017 Series A bonds reflects that such expenditures were made during the latter stages of the WSIP.
Identification and Evaluation of Internal Control Significant to the Audit Objectives GAGAS requires the identification and evaluation of internal controls that are significant to the audit objectives.
AP&P states that the City uses the COSO Internal Control Integrated Framework as its internal control framework.
AP&P §1.7 requires all City departments to “…maintain effective internal control systems as an integral part of their management practices…” and “…establish and maintain policies and procedures with department-specific details supplementing the framework described here… SFPUC is also required to comply with Citywide policies established by certain city offices, including but not limited to, Contract Administration, City Attorney, and Labor Standards Enforcement.
We identified the following elements of SFPUC’s system of internal controls to be significant to our audit objectives.
We, therefore, evaluated these elements to the extent necessary to meet our performance audit objectives:
• Contractor/consultant/vendor selection, including bid advertisement, acceptance and evaluation, and contract award procedures
• Encumbrances
• Project cost control
• Claims and change order control process
• Allocation of program management costs to projects
• Assignment of project costs to bond series
• Reporting to Oversight Committees
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Since the COSO Framework adopted by the City is an acceptable framework under GAGAS for our consideration of internal control,5 we evaluated the City’s design and operating effectiveness of relevant internal control against the COSO Framework. The AP&P, as updated from time to time, and the Controller’s Office communication of the AP&P’s contents to City departments and agencies, is a component of internal control. Certain AP&P requirements are identified in various sections of this report.
SFPUC also has multiple specific policies and procedures to supplement the AP&P , particularly related to contracting and project management.
Professional standards promulgate that deficiencies in internal control significant to the audit objectives may exist even though no misstatements were identified during the performance audit.
Consideration of Findings in Prior Audit Reports
GAGAS requires auditors to consider findings from prior audit projects as part of performance audit risk assessment procedures and their effect on planned performance audit procedures.
Other auditors performed the audits of the financial statements of SFPUC’s major funds as of and for the year ended June 30, 2020, in accordance with GAGAS and auditing standards generally accepted in the United States of America. Those auditors issued a report dated February 26, 2021, which identified a material weakness in internal control over financial reporting. This material weakness was a result of a bribery and corruption scheme by SFPUC’s former general manager (GM), who held this position from September 2012 to November 2020, and who was the assistant general manager (AGM) for Infrastructure from March 2003 to September 2012. 6 The former GM was
convicted of bribery and other charges in July 2023 and was sentenced to four years in prison in March 2024.
All contractor, consultant, and vendor selections for contracts subject to RBOC oversight from June 2003 to November 2020 were under the control of this individual as either GM or AGM. Expenditures on such contracts occurred after November 2020. The material weakness identified by the other auditors is also a deficiency in internal control significant to the audit objectives over the allowability of expenditures under bond resolutions and allowability or allocability to project(s) within a bond series.
Our Phase 1 performance audit report includes an observation that SFPUC did not prepare reports of unexpended bond proceeds, available proceeds and expenditures by project and bond series. We have follow-up observations and recommendations on our Phase 1 finding as they relate to bond series subject to our Phase 3 performance audit.
Our Phase 2 audit report includes an observation that SFPUC did not have adequate procedures to ensure that everyone evaluating vendor proposals had signed appropriate conflict of interest statements. SFPUC deemed it impracticable to look at ALL procurements finalized before the issuance of our Phase 2 performance audit report.
We considered all of the above in our risk analysis and determination of our performance audit procedures.
Evaluation of Misstatements
We identified misstatements in the original and corrected financial schedules provided to us. Misstatements could result from either error or fraud. GAGAS defines f raud as “…obtaining something of value through willful
5 GAGAS July 2018 Revision, ⁋8.130.
6 Letter dated February 26, 2021, from KPMG LLP to the Honorable Mayor and Board of Supervisors, which includes SFPUC’s response to the finding.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
misrepresentation...”7 An individual may obtain value, among other ways, directly through misappropriation of assets, or indirectly from fraudulent financial reporting.
7 Government Auditing Standards, July 2018 Revision, ¶8.73 Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
4. FINDINGS
We found that SFPUC’s restated submissions of Wastewater bond proceeds available for expenditure, expenditures of bond proceeds and unexpended bond proceeds had a total of $106.5 million of expenditures that were not assigned to the correct funding sourc es, including $81.1 million of expenditures not subject to RBOC oversight. We questioned these expenditures as not having adequate support since they were not assigned to the correct funding source.
SFPUC also reported to us that its Wastewater reporting in Phases 1 and 2 excludes $98.9 million of expenditures that should have been included. Its original Wastewater reporting, as of June 30, 2023, of the corrected amounts did not reflect the $98.9 million of expenditures. Rather, these are included as reductions of bond proceeds. SFPUC submitted restated reports, which include the $106.5 million of total questioned costs, and $81.1 million of expenditures not subject to RBOC oversight.
Finding No. 1: SFPUC Restated Reports Did Not Assign $106.5 Million of Expenditures to the Correct Funding Sources, Including $81.1 Million of Expenditures Not Subject to RBOC Oversight Summary SFPUC did not assign $106 .5 million of expenditures to the correct funding sources, including $81.1 million of expenditures that are not subject to RBOC oversight . Since one of the audit objectives was to evaluate whether expenditures and exclusions were assigned to the correct bond series, these expenditures are not proper support for claimed expenditures.
SFPUC asserts that it was able to use Wastewater Series 2018B proceeds to refinance expenditures made before the issuance of the bonds. We agree that SFPUC has the authority to use bond proceeds to refund previously issued commercial paper.
However, the information provided by SFPUC to support its assertion that Wastewater 2018 Series B proceeds were used to refund commercial paper was actually support for the commercial paper ultimately being refunded by proceeds from other funding sources.
The combination of internal control deficiencies over the preparation of reports expenditures by project for each bond series is a deficiency in internal control significant to the audit objectives. SFPUC’s internal control over financial reporting cannot be relied on to provide complete, accurate and usable Wastewater reports by bond series of expenditures of proceeds by project.
Criteria Controller Accounting Policies & Procedures §11.7.5.2.1 requires SFPUC to provide periodic reporting to oversight committees. Controller Accounting Policies & Procedures §11.7.6.2 requires SFPUC to track bond funded sources and expenditures by project and fund.
Controller Accounting Policies & Procedures §3.1 requires the use of encumbrance accounting in which each encumbrance must be assigned to one or more (as applicable) specific funding sources. SFPUC represented to us that strict compliance with this policy would be impracticable, so obtained approval to implement a system in which project expenditures were assigned on a first -in, first-out basis. Part of the implementation of the first-in, first-out assignment of expenditures was that commercial paper proceeds would be assigned to the funding source(s) that ultimately refunded the applicable commercial paper proceeds.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
The Administrative Code, Section 5A.31(b), states in part that RBOC “…shall provide oversight to ensure that: (1) The proceeds from revenue bonds authorized by the Board and/or the voters of the City are expended in accordance with the authorizing bond resolution and applicable law; (2) Bond proceeds are expended solely for uses, purposes and projects authorized in the bond resolution; and (3) Revenue bond funds are appropriately expended for authorized capital improvements so that an uninterrupted supply of water and power continues to flow to the City and to the PUC's customers…”
The Administrative Code, Section 5A.31(c)(6), empowers RBOC to “…independent review and evaluation of the disbursement and expenditure of the proceeds of such revenue bonds by accessing any funds set aside for this purpose under Subsection (d) of this section to retain outside auditors, inspectors and necessary experts to conduct such independent review…”One of our performance audit objectives is to evaluate whether expenditures are assigned to the correct bond series and project within each bond series.
RBOC cannot provide the oversight required by the Administrative Code, Section 5A.31(b), unless it is given complete, accurate and usable information about the reporting of bond-funded expenditures, and the assignment of expenditures to bond proceeds.
Observations SFPUC reported expenditures of $106.5 million of Wastewater 2018 Series B proceeds as funded by commercial paper proceeds and ultimately repaid with these bond proceeds. SFPUC asserts that it was able to use Wastewater Series 2018B proceeds to refinance expenditures made before the issuance of the bonds. We agree that SFPUC has the authority to use bond proceeds to refund previously issued commercial paper and other money used to finance capital expenditures.
However, the documentary evidence provided by SFPUC to support the $106.5 million of commercial paper refunded by Wastewater 2018 Series B proceeds actually provided evidence that $81.1 million was specifically refunded by Government Awards proceeds not subject to RBOC oversight and that $25.4 million was specifically refunded by Wastewater 2021 Series B proceeds.
Limited Procedures on Expenditures and Reductions
We performed only limited procedures to evaluate the expenditures and reductions to determine whether they were otherwise allowable. The performance of such limited procedures is not a scope limitation because of the adequacy of other evidence to support our observations that $ 106.5 million was not assigned to the correct funding source. We did not have any further observations resulting from these limited procedures.
Effect SFPUC’s restated reporting of Wastewater 2018 Series B expenditures had $106.5 million of expenditures funded by other sources, so is deemed to be unallowable uses of 2018 Series B proceeds. Since these expenditures were funded by other sources, expenditures by project of the other sources also have unsupported expenditures totaling $106.5 million. We question a minimum of $106.5 million of expenditures as unallowable uses of proceeds. The questioned expenditures include $81.1 million of expenditures not subject to RBOC oversight.
It was beyond the scope of the performance audit to determine the correct assignment to bond series of these $106.5 million of expenditures, as this would have involved the evaluation of almost $3 billion of expenditures, and multiple bond series outside the scope of the performance audit.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Cause SFPUC did not have adequate internal controls to assign expenditures to the correct bond proceeds, a deficiency in internal control significant to the audit objectives.
Recommendations 1. SFPUC should ensure it has adequate internal controls for complete and accurate of reporting expenditures by project within each bond series.
2. SFPUC should re-evaluate its assignment of expenditures to bond series and revise the assignment as applicable.
Finding No. 2: Original Reports Did Not Include
$98.9 Millon of Proceeds and Expenditures
Summary SFPUC’s original reporting of expenditures by project for each Wastewater bond series was inaccurate. SFPUC submitted restated reports of expenditures by project for each bond series, which resulted in changes in the underlying support of expenditures by project for each bond series.
Our evaluation of the restated reports identified misstatements and related questioned costs identified in previous findings. The combination of internal control deficiencies over the preparation of reports of proceeds available and related expenditures by project for each bond series is a deficiency in internal control significant to the audit objectives.
Criteria The Administrative Code, Section 5A.31(b), states in part that RBOC “…shall provide oversight to ensure that: (1) The proceeds from revenue bonds authorized by the Board and/or the voters of the City are expended in accordance with the authorizing bond resolution and applicable law; (2) Bond proceeds are expended solely for uses, purposes and projects authorized in the bond resolution; and (3) Revenue bond funds are appropriately expended for authorized capital improvements so that an uninterrupted supply of water and power continues to flow to the City and to the PUC's customers…”
The Administrative Code, Section 5A.31(c)(6) , empowers RBOC to “…independent review and evaluation of the disbursement and expenditure of the proceeds of such revenue bonds by accessing any funds set aside for this purpose under Subsection (d) of this Section to retain outside auditors, inspectors and necessary experts to conduct such independent review…”
Controller Accounting Policies & Procedures § 11.7.5.2.1 requires SFPUC to provide periodic reporting to oversight committees. Controller Accounting Policies & Procedures §11. 7.6.2 requires SFPUC to track bond funded sources and uses by project and fund. RBOC cannot provide the oversight required by the Administrative Code, Section 5A.31(b), unless it is given complete, accurate and usable information about the reporting of bond-funded expenditures, and the assignment of expenditures to bond proceeds.
Observations SFPUC’s reports of Wastewater bond- funded expenditures as of June 30, 2023, and all prior periods excluded $8.9 and $90.0 million of bond proceeds from Wastewater 2023 Series A and 2023 Series B bonds, respectively. SFPUC also excluded $106.5 million of expenditures, which agreed to bond proceeds excluded. These expenditures were partially funded by $50.0 million and $54.5 million of proceeds from 2010 Series A and 2010 Series B bonds, respectively, as well as other bond series.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Our observations on misstatements of expenditures of 2010 Series A and B bond proceeds are within the scope of this performance audit because they are directly associated with the misstatements of 2023 Series B proceeds available.
SFPUC disagreed with our evaluation because the explanation for the $98.9 million reduction of Wastewater 2023 bond proceeds i s included in the footnotes of the
schedule of expenditures by project and bond series . SFPUC’s treatment of expenditures funded by 2010 Series A and B proceeds as reductions of 2023 Series A and B proceeds results in multiple misstatements, as explained below in the effects.
The explanation of the $98.9 million as a reduction of Wastewater 2023 Series A and B proceeds only caused misstatements of proceeds and expenditures of these two bond series and did not correct any of the misstatements in the reporting of expenditures by project and bond series of multiple prior bond series.
SFPUC submitted restated reports of proceeds available and related expenditures by project for each bond series. We note that even though the Audit Team recommended the revision and resubmission of the Wastewater reporting, SFPUC is responsible for the completeness and accuracy of all reports, including any decision to restate any reports.
SFPUC also reported to us that it did not assign Wastewater expenditures by project to bond series until fiscal year 2018-19. Such expenditures were incurred as far back as fiscal year 2007-08.
The restated reports include the $106.5 million of questioned costs identified in Finding No. 1, including $81.1 million of expenditures not subject to RBOC oversight.
Effect After corrections made by SFPUC, we questioned a total of $106. 5 million of expenditures assigned to the incorrect funding sources , and therefore were unallowable uses of proceeds, as more fully described in Finding No. 1. Total questioned expenditures include $81.1 million of expenditures not subject to RBOC oversight.
Before corrections made by SFPUC:
• $8.9 and $90.0 million of bond proceeds from Wastewater 2023 Series A and 2023 Series B bonds, respectively, are deemed to have been used for unallowable purposes because the expenditures supporting the total $104.5 million of expenditures were funded by 2 010 Series A and 2010 Series B bond proceeds. Total expenditures of Wastewater 2023 Series A and B bonds were also understated by $8.9 and $90.0 million, respectively, to match the corresponding understatement of available proceeds that were actually expended.
• $98.9 million of expenditures of Wastewater 2010 Series A and 2010 Series B bonds are deemed to be used for unallowable purposes because the expenditures supporting these amounts were funded by other bond series. Since Series 2010A and Series 2010B proceeds are deemed to be “fungible” and therefore interchangeable with each other, the misstatement was not allocated between the two series. The expenditures to support the total $98.9 million of these expenditures were excluded from the reports of bond proceeds available for expenditure and related bond-funded expenditures.
• Reporting of all other Wastewater expenditures by project for each bond series was misstated because of the improper exclusion of expenditures funded by 2010 Series A and 2010 Series B proceeds, which affected the assignment of expenditures to all subsequent bond series. Proceeds from Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
all Wastewater bond proceeds required reassignment to projects after the missing expenditures were included in the restated reports.
Cause
SFPUC did not have adequate internal controls to:
• Identify all expenditures subject to RBOC oversight;
• Account for all bond proceeds;
• Match expenditures to available proceeds; and
• Prepare complete, accurate and usable reports.
The combination of these internal control deficiencies is a deficiency in internal control significant to the audit objectives.
SFPUC asserted to us that it could not identify the $98.9 million of expenditures until after the completion of Phase 2 of our performance audit and could not assert as to whether the misclassification of expenditures was due to error or fraudulent financial reporting. Accordingly, we did not determine whether the misstatement was an error or fraudulent financial reporting.
As discussed previously, SFPUC reported in October 2024 that its Audit Bureau would assume RBOC’s mission and objectives regarding the oversight of revenue bond expenditures after RBOC’s term expired.
Recommendation 3. SFPUC should ensure it has adequate internal controls to account for all bond proceeds, and for completeness, accuracy and consistency of reporting bond proceeds and related expenditures by project by bond series.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
5. CONCLUSION
We met our audit objectives for the Phase 3 performance audit of capital expenditures funded by proceeds from public utility revenue bonds subject to RBOC oversight.
We found that, as of the beginning of Phase 3 of our performance audit, SFPUC did not have adequate controls over the complete and accurate reporting of proceeds available for expenditure, expenditures of bond proceeds and unexpended bond proceeds. This was evidenced by SFPUC’s submission of restated reports to the Audit Team.
Even after submission of restated reports, we concluded that SFPUC had inadequate controls to assign Wastewater expenditures to the correct funding source.
Finally, we conclude that reports of Wastewater proceeds and related expenditures by bond series should not be relied upon until SFPUC re-examines its assignment of expenditures to bond proceeds.
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
6. APPENDIX A: DEPARTMENT RESPONSE
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Recommendations and Responses
For each recommendation, the responsible agency should indicate in the column labeled Agency Response whether it concurs, does not concur, or partially concurs and provide a brief explanation. If it concurs with the recommendation, it should indicate the expected implementation date and implementation plan. If the responsible agency does not concur or partially concurs, it should provide an explanation and an alternate plan of action to address the identified issue.
Recommendation Agency Response CSA Use Only
Status Determination*
The San Francisco Public Utilities Commission should:
1. Ensure it has adequate internal controls to
account for all bond proceeds by bond series,
and for completeness and accuracy of reporting
bond proceeds and related expenditures by
project within each bond series.
☐ Concur ☐ Do Not Concur ☒ Partially Concur
SFPUC partially concurs with the recommendation’s objective.
Adequate internal controls to account for bond proceeds by bond series, and for the completeness and accuracy of
reporting bond proceeds and related expenditures, are in place and operating effectively. The audit did not identify a control design or operating failure. No additional corrective action is required beyond existing processes.
☐ Open
☐ Closed
☒ Contested
2. Re-evaluate its assignment of expenditures to
bond series and revise the assignment as
applicable.
☐ Concur ☐ Do Not Concur ☒ Partially Concur
SFPUC partially concurs with the recommendation’s objective.
SFPUC’s assignment of expenditures to bond series is
governed by long-standing accounting and capital financing practices that have been applied consistently across multiple decades of bond programs. The assignments examined during this audit were evaluated and substantiated through
documentation provided, and no revisions are warranted. ☐ Open
☐ Closed
☒ Contested
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Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
Recommendation Agency Response CSA Use Only
Status Determination*
3. Ensure it has adequate internal controls to
account for all bond proceeds, and for
completeness, accuracy and consistency of
reporting bond proceeds and related
expenditures.
☐ Concur ☐ Do Not Concur ☒ Partially Concur
SFPUC partially concurs with the recommendation’s objective.
Internal controls supporting the completeness, accuracy, and consistency of bond proceeds reporting are in place and operating effectively. The reporting issue identified by the audit was corrected through existing controls, and no
additional corrective action is necessary.
☐ Open
☐ Closed
☒ Contested
* Status Determination based on audit team’s review of the agency’s response and proposed corrective action. 3 Revenue Board Oversight Committee SFPUC Revenue Bond Audit – Phase 03
7. APPENDIX B: AUDITOR COMMENTS TO SFPUC
RESPONSE
To provide clarity and perspective, we are commenting on SFPUC’s response to our audit report. The boxed number below corresponds with those we have placed in the margin of SFPUC’s response.
We appreciate that SFPUC acknowledged the items of concern that the audit team notes in the report.
Although SFPUC partially concurs with the objectives of Recommendations 1, 2, and 3, the department effectively contested all 3 recommendations , indicating that no revisions or corrective actions were necessary. However, the auditor's findings and recommendations contained in this report remain valid as discussed in our audit report.
For Recommendations 1 and 2, as part of its reporting to RBOC, SFPUC did not assign $106.5 million of expenditures to the correct funding sources, including $81.1 million of expenditures funded by sources not subject to RBOC oversight. T he misassigned bond expenditures were evidenced by SFPUC’s submission of restated reports to the audit team. One of the audit objectives was to evaluate whether expenditures and exclusions were appropriately assigned to the correct bond series . The expenditures reviewed were not adequate to support proper expenditures under the respective bond series. A performance audit need not identify one or more specific deficiencies in design or operating effectiveness, only that internal control deficiencies exist. I t is SFPUC’s responsibility to determine whether the identified internal control deficiencies are design and/or operating effectiveness deficiencies.
For Recommendation 3, w e found that SFPUC did not have adequate preparation and review procedures over the complete and accurate reporting of bond expenditures to RBOC. SFPUC’s original reporting of expenditures by project for each Wastewater bond series was inaccurate. SFPUC submitted restated expenditures reports by project for each bond series . However, the reports continued to contain incorrect information on the bond series under RBOC’s authority. SFPUC’s assertion that the “…reporting issue identified by the audit was corrected through existing controls…” is not correct – effective controls would have prevented or detected the misstatements prior to issuance of the original expenditure reports.
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