Agenda packet — Audit Committee, April 23, 2025

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4/23/2025 4:00:00 PM
www.modestogov.com
AGENDA
City of Modesto

SPECIAL AUDIT COMMITTEE

COUNCIL WORKSHOP
2001-40 Del Puerto Room
Tenth Street Place, 1010 10th Street
Modesto, California
Wednesday, April 23, 2025 at 4:00 PM
Roll Call: Sue Zwahlen, Chair
David Wright, Vice-Chair
Chris Ricci, Member
Camille Garcia, Public Member
Alternates: Eric Alvarez, Rosa Escutia-Braaton, Nick Bavaro, Jeremiah Williams Council has not delegated directive or final approval authority to the Committees.

Committee actions are recommendations to the full City Council, not final decisions on an issue. * Public Comment will only be in-person. Members of the public who wish to address the Committee, by providing public comment, during the meeting must do so in-person in the 2001-40 Del Puerto Room. As an alternative, members of the public may also provide written public comment submitted via email as indicated in the Submitting Comments by Email instructions on this agenda. Zoom will still be available for viewing and Wordly translation. *Members of the public will be allowed to provide public comment through Zoom if a Committee Member is participating remotely pursuant to the provisions of Assembly Bill 2449.

Effective March 1, 2023, if a technical issue arises with Zoom or the phone dial-in option, the Committee meeting will continue unless the meeting is being held pursuant to the provisions of Assembly Bill 2449. Alternative viewing options are listed below, and the meeting is physically open to the public.
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You may observe a livestream of the meeting at http://media.modestogov.com. You may also view or listen to the meeting as indicated below.

THE MEETING CAN BE VIEWED BY ZOOM VIDEO

CONFERENCING OR TELEPHONE
Joining the Committee meeting via Zoom
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Joining the Committee meeting via Telephone
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PUBLIC COMMENTS IN PERSON
Three-minute time limit per speaker.

Only interested persons in the audience may present these matters. Under State law, Committee Members may respond to matters being presented under this item only as follows:
a. Briefly respond to statements made or questions raised. b. Ask a question for clarification.
c. Provide a reference to staff or other resources for factual information. d. Request staff to report back at a subsequent meeting. e. Finally, a Committee Member or the Committee itself may take action to direct staff to place a matter of business on a future agenda.

SUBMITTING COMMENTS BY E-MAIL
Written comments may be submitted via email to: [email protected] - 2 -
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(include Agenda Item Number in the subject line). All comments will be shared with the Committee Members and placed in the record but will not be read aloud during the meeting.

Written comments must be received two hours before the meeting.

This Agenda is on file in the City Clerk’s Office, Sixth Floor, 10th Street Place, Posting Board at entry of 10th Street Place, and is available on the City’s Web site at www.modestogov.com.

Materials related to an item on this Agenda submitted to the Council after distribution of the agenda packet are available for public inspection in the Clerk’s office during normal business hours. Such documents are also available online, subject to staff’s ability to post the documents before the meeting, at the following website www.modestogov.com/councilmeetings In accordance with the requirements of Title II of the Americans with Disabilities Act (“ADA”) of 1990, the Fair Employment & Housing Act (“FEHA”), the Rehabilitation Act of 1973 (as amended), Government Code section 11135 and other applicable codes, the City of Modesto (“City”) will not discriminate against individuals on the basis of disability in the City’s services, programs, or activities. For more information, please visit the City of Modesto website at https://www.modestogov.com/865/Americans-with-Disabilities-Act-ADA In compliance with the Americans with Disabilities Act, if you need special assistance to participate in this meeting, please contact the City Clerk (209) 577-5396. Notification 48 hours prior to the meeting will enable the City to make reasonable arrangements to ensure accessibility to this meeting
Any and all of the following agenda items are subject to action by the Modesto City Council.

NEW BUSINESS

1. Consider the FY Internal Audit Status Report dated April 16, 2025. (Funding Source:

Not Applicable)
 Motion to receive and file the Internal Audit Status Report dated April 16, 2025.

CITY AUDITOR; Colleen Rozillis, 206-302-6795, [email protected]

2. Consider the Audit Finding Validation Report dated April 15, 2025. (Funding Source:

Not Applicable)
 Motion to receive and file the Audit Finding Validation report dated April 15, 2025.

CITY AUDITOR; Colleen Rozillis, 206-302-6795, [email protected]

3. Consider approving the Payroll Internal Controls Review report. (Funding Source: Not Applicable)
 Motion to approve the Payroll Internal Controls Review report and forward to Council for acceptance
CITY AUDITOR; Colleen Rozillis, 206-302-6795, [email protected] - 3 -
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4. Consider approving the Utilities Fiscal Review Performance Audit report. (Funding Source: Not Applicable)
 Motion to approve the Utilities Fiscal Review Performance Audit report and forward to Council for acceptance.

CITY AUDITOR; Colleen Rozillis, 206-302-6795, [email protected]

5. Consider approving the FY25-26 Internal Audit work plan. (Funding Source: Not Applicable)
 Motion to approve the FY25-26 Internal Audit work plan and forward to Council for acceptance.

CITY AUDITOR; Colleen Rozillis, 206-302-6795, [email protected]

6. Consider the Final Report of the Employment after Retirement Review conducted by California Public Employees’ Retirement System (CalPERS) and forwarding to Council for approval. (Funding Source: Various Funds)
 Motion recommending accepting the Final Report of the Employment after Retirement Review conducted by California Public Employees’ Retirement System (CalPERS) and forwarding to Council for approval.

HUMAN RESOURCES; Dawn Kelley, 209-577-5490, [email protected]

ADJOURNMENT
Posted pursuant to Government Code Section 54954.2 on the bulletin board at Tenth Street Place on at by
date time signature
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4/23/2025

CITY OF MODESTO

COMMITTEE AGENDA REPORT
DATE OF MEETING:

April 23, 2025
Date: April 16, 2025
TO: Audit Committee
FROM: Colleen Rozillis, City Auditor
SUBJECT: Receipt of the FY24-25 Internal Audit status report dated 4-16-25.

CONTACT: Colleen Rozillis, City Auditor, [email protected], 206-302-6795 DESCRIPTION:

Consider the FY Internal Audit Status Report dated April 16, 2025.

STRATEGIC PLAN ELEMENT:

The recommended action supports the following 2020-2025 City of Modesto Strategic Plan Initiatives: Goal J: Build a high-performance organization.

BACKGROUND:

City Council approved six projects for this fiscal year’s Internal Audit work plan, plus program management. The attached report details the status of projects in progress.

DISCUSSION:

Internal Audit projects for FY24-25 are proceeding as planned.

FISCAL IMPACT:

None.

RECOMMENDED COMMITTEE ACTION:

Motion to receive and file the Internal Audit Status Report dated April 16, 2025.

Approved by:

Colleen Rozillis, City Auditor
Attachments:

1. Internal Audit Status Report dated 1-14-25
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CITY OF MODESTO INTERNAL AUDIT STATUS REPORT 04-16-25
April 16, 2025
To: City of Modesto Audit Committee
From: Moss Adams LLP
Subject: Internal Audit Status Report January 14, 2025 through April 16, 2025 _____

INTERNAL AUDIT PROJECTS

WATER AND WASTEWATER

UTILITIES FISCAL REVIEW

PAYROLL PROCESS AND

CONTROLS REVIEW

RECOMMENDATION

VALIDATION PROCESS

CAPITAL PROGRAM BEST

PRACTICES

ACCOUNTS RECEIVABLE

INTERNAL CONTROLS REVIEW

PERMITTING EFFICIENCY

STUDY UPDATE
Schedule August 2024 -February 2025 October 2024 - March 2025 August 2024 - June 2025 November 2024 - April 2025 March - June 2025 February - June 2025 Budget Status: Total Budget and
% Expended through 3/31
$55,000
100%
$40,000
89%
$15,000
77%
$35,000
68%
$35,000
38%
$40,000
22%
Activities for This Period Completed fieldwork and analysis, developed draft and final reports Drafted and finalized report Continue to close findings based on submitted documentation
Completed interviews and
documentation review.

Consolidated key takeaways and
submitted initial observations and
recommendations report. Met with
key stakeholders to discuss initial
feedback.

Held project kick-off, requested and
received initial documents,
completed interviews, consolidated
key takeaways from interviews,
prepared testing plan
Interviews nearly completed (90%),
customer service survey of permit
applicants is live, completed
document review, began analysis.

Activities for Next Period None None Continue to close findings based on submitted documentation
Incorporate management
responses and issue final report.

Conduct fieldwork, compile
findings, reporting
Finish analysis, develop draft and
final reports
Issues None None None None None None

BASIC INTERNAL

AUDITOR SERVICES

ONGOING INTERNAL AUDIT

SERVICES

ETHICS HOTLINE STATISTICS
Schedule July 2024 through June 2025 Complaint Type
Complaints Received During
the Period Under Review
Referred to Appropriate City
Official(s) Closed
Budget Status: Total
Budget and %
Expended
$30,000
69%
Compliance & Ethics 4 0 4 4
Fraud 0 0 0 0
Employment Matters 0 0 0 0
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CITY OF MODESTO

COMMITTEE AGENDA REPORT
DATE OF MEETING:

April 23, 2025
Date: April 15, 2025
TO: Audit Committee
FROM: Colleen Rozillis, City Auditor
SUBJECT: Receipt of the Audit Finding Validation Report dated 4-15-2025 CONTACT: Colleen Rozillis, City Auditor, [email protected], 206-302-6795 DESCRIPTION:

Consider the Audit Finding Validation Report dated April 15, 2025..

STRATEGIC PLAN ELEMENT:

The recommended action supports the following 2020-2025 City of Modesto Strategic Plan Initiatives: Goal J: Build a high-performance organization.

BACKGROUND:

City Council approved a project to validate the corrective actions of audit findings and recommendations issued since 2016.

DISCUSSION:

The review incorporates all audit findings and recommendations dating back to 2016, a total of 237 findings. In the last quarter, Moss Adams was able to verify that 10 findings have been closed.

To date, Moss Adams has verified that 178 findings have been closed, indicating that the issue is resolved.

FISCAL IMPACT:

None.

RECOMMENDED COMMITTEE ACTION:

Motion to receive and file the Audit Finding Validation report dated April 15, 2025..

Approved by:

Colleen Rozillis, City Auditor
Attachments:

1. Audit Finding Validation Report dated 4-15-2025
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City of Modesto - Audit Recommendations Tracking Report 4/15/2025
( A) ( B) ( C) ( D)
Reports
Total Recommendations Open Recommendations
(Not Yet Completed by City)
Validated
Recommendations
(By Moss Adams)
Reportable
Recommendations
(Newly validated since last
summary)
Single Audit Report - 2017 (17-SAR ) 4 0 4 0
Single Audit Report - 2018 (18-SAR ) 3 0 3 0
Single Audit Report - 2019 (19-SAR ) 1 0 1 0
Single Audit Report - 2020 (20-SAR ) 1 0 1 0
Single Audit Report - 2021 (21-SAR ) 1 0 1 0
2018-2019 Stanislaus County Civil Grand Jury (18_19-SCCGJ ) 8 0 8 0 2022-2023 Stanislaus County Civil Grand Jury Final Report (22_23-SCCGJ ) 5 0 5 0 2021-2022 Stanislaus County Civil Grand Jury Final Report (21_22-SCCGJ ) 7 0 7 0 2024- FORESTRY AND SOLID WASTE EFFICIENCY STUDY UPDATE (24-FASWES ) 20 14 6 0 2024- PROCUREMENT PERFORMANCE AUDIT (24-PPA ) 11 11 0 0 2016- Solid Waste Efficiency Study (16-SWES ) 12 4 8 0
2016-WATER AND WASTEWATER EFFICIENCY STUDY UPDATE (16-WWE ) 14 3 11 1 2017- BILLING AND ACCOUNTS RECEIVABLE REVIEW (17-BAR ) 4 0 4 4 2017- FLEET SERVICES EFFICIENCY STUDY (17-FSE ) 27 5 22 0 2017- INTERNAL CONTROLS TESTING: PROCUREMENTCARDS (17-ICTPC ) 19 1 18 1 2017-INTERNAL CONTROLS TESTING: TRAVEL EXPENSES (17-ICTTE ) 17 0 17 0 2017- INTERNAL SERVICE FUND REVIEW (17-ISF ) 18 11 7 1
2018- Fleet Utilization Study (18-FUS ) 13 8 5 0
2018- PERMITTING EFFICIENCY STUDY (18-PES ) 10 0 10 3
2016 INTERNAL CONTROLS TESTING: CASH HANDLING (16-ICTCH ) 42 2 40 0 0 0 0 0
0 0 0 0
Total 237 59 178 10
Legend:

Total Recommendations = number of recommendations in the report Open Recommendations = number of recommendations not yet completed by City Validated Recommendations = number of recommendations validated by Moss Adams as completed and adequately addresses the finding Reportable Recommendations = number of recommendations validated since last summary report for Audit Committee #2..
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ID
Finding
Number
from
Report
Report
Year Report Code Finding Recommendation Moss Adams Determination Notes 73 12A 2016 16-WWE
Pay grades for most Water and Wastewater positions are lower than neighboring cities.

Review compensation and benefits for Water and Wastewater positions and consider adjusting compensation accordingly.
most recent class/comp study for utilities was provided and dated 2023 Final.
75 1 2017 17-BAR
Community and Economic Development (CED) Department billing procedure documents have not been updated within the last four years.

Review and update departmental billing procedures, and institute an annual or biennial review process. Permit Accounting Procedures were provided and have an approval data of 8/1/2024. The city reports that the procedure will be reviewed and updated annually.
76 2 2017 17-BAR
The Risk Management claims settlement process is inefficient. Establish and document claims settlement procedures. Claims Settlement documentations was provided. Broken up in to two section. A process for Under 50K non-llitigated and a process for those litigated.
77 1 2017 17-BAR
Risk management claims are tracked on an Excel spreadsheet, which results in process inefficiencies and presents a risk of error.

Consider implementing a claims management system. City provided the vendor contract with the the TPA, George Hills Company.

That agrrement was approved by Council on May 25, 2021
78 2 2017 17-BAR
Billing activities are performed outside of the Oracle ERP system. Investigate possibilities to integrate the billing process into Oracle. Permit Accounting Procedures were provided and have an approval data of 8/1/2024. Based on the procedures provided there is an integration with GL and Oracle
132 10 2017 17-ICTPC
Although the City performs P-Card audits each month, the current approach may not be the most efficient or effective.

Modify current P-Card audits to provide more timely and robust oversight.

Provided April, May and June 2024 P card Audit logs. They list every cardholder by name, mark if it was reviewed with no concern. If there is needed justification that information is provided along with the Pcard # 158 17 2033 17-ISF
N/A Continue to adequately fund the Mail ISF. Consider changing the funding formula to better match current utilization levels.

We reviewed the Mail Service ISF provided, Dated FY24/25 and calculations seem to match utilizations numbers.
178 6 2018 18-PES
Inconsistent and Outdated Policy and Procedure Documentation Strengthen policies and procedures, cross-training, and workforce planning; prioritize the documentation of policies and procedures related to the various permitting processes, updating outdated policies and documenting previously uncaptured processes, and identifying key personnel. the City provided all the permitting related policies and procedures. Ther were revised as of 10/7/24. Policies and Procedures cover topis around Accoutning and permitting, Buildign Safety, Board of Buildign Appeals, Rental Housing Safety Program and Vacant Property Registrations. 180 8 2018 18-PES
Negative Impacts to Customer Service at Development Services Center Reevaluate how the Development Services Center reception counter is staffed, and provide training on customer service expectations and permitting activity processes.

MOU of the receptionist position was provided and was signed in oct 2020.

The city also provided a list of all the trainings received by the reception staff between Jan and Nov 2024. Training topics include: ADA Parking; COD/RCOD Mailings; TCO Processing; New Notice and Order Procedure; All Gender Restrooms; Mobilehomes on permanent foundations; New Deposit Permit Reports; Locking Parcels; TCO Procedures; Romex Wiring; Historic Parcels; New Inspector Onboarding; Soft Skills for Building Safety Staff; Inspection Conditions
181 9 2018 18-PES
Lack Capacity for Environmental and Stormwater Related Permitting Activities.

Prioritize appropriately resourcing and staffing the positions required to safely and efficiently conduct the environmental and stormwater requirements for permitting activities.

The KPIs proivded for all of 2024 showed that the environmental and stormwater plan checks are occurring timely and they were continually being tracked and monitored
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CITY OF MODESTO

COMMITTEE AGENDA REPORT
DATE OF MEETING:

April 23, 2025
Date: April 16, 2025
TO: Audit Committee
FROM: Colleen Rozillis, City Auditor
SUBJECT: Approval of the Payroll Internal Controls Review report.

CONTACT: Colleen Rozillis, City Auditor, [email protected], 206-302-6795 DESCRIPTION:

Consider approving the Payroll Internal Controls Review report.

STRATEGIC PLAN ELEMENT:

The recommended action supports the following 2020-2025 City of Modesto Strategic Plan Initiatives: Goal J: Build a high-performance organization.

BACKGROUND:

City Council approved an internal controls review of select aspects of the City’s payroll function as part of the FY24-25 Internal Audit work plan.

DISCUSSION:

The review assesses select aspects of the City’s payroll internal controls framework, focused on assessing select key controls for the payroll interactions amongst the Finance Department (City Payroll), the Police Department (PD), and the Fire Department (FD). The report contains five recommendations to improve controls and efficiency. This engagement was completed under Generally Accepted Government Auditing Standards (GAGAS).

FISCAL IMPACT:

None.

RECOMMENDED COMMITTEE ACTION:

Motion to approve the Payroll Internal Controls Review report and forward to Council for acceptance.

Approved by:

Colleen Rozillis, City Auditor
Attachments:

1. Payroll Internal Controls Review dated March 28, 2025 #3..
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This report is intended for the internal use of City of Modesto, and may not be provided to, used, or relied upon by any third parties.

CITY AUDITOR’S OFFICE

FINAL REPORT

PAYROLL INTERNAL CONTROLS REVIEW
March 28, 2025
Moss Adams LLP
999 Third Avenue, Suite 2800
Seattle, WA 98104
(206) 302-6500
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Payroll Internal Controls Review Report

FOR INTERNAL USE OF CITY OF MODESTO ONLY
Table of Contents
I. Executive Summary 1
A. Introduction 1
B. Summary of Results 1
II. Introduction 2
A. Background 2
B. Scope and Methodology 2
C. Statement of Compliance with GAGAS 3
III. Payroll Internal Controls Review 4
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Payroll Internal Controls Review Report | 1

FOR INTERNAL USE OF CITY OF MODESTO ONLY
I. EXECUTIVE SUMMARY
A. INTRODUCTION
As part of the fiscal year 2025 internal audit program, the Modesto City Auditor, Moss Adams LLP (refer to as “Moss Adams” or “we”), conducted a review of select aspects of the City of Modesto’s (the City) payroll internal controls framework. This review took place between September 2024 and February 2025 and focused on assessing select key controls for the payroll interactions amongst the Finance Department (City Payroll), the Police Department (PD), and the Fire Department (FD).

B. SUMMARY OF RESULTS
Based on the review performed, we identified the following examples of commendable activities that appeared to have well-designed internal controls across the City:
 Time entry approvals from employee supervisors within PD and FD  Hiring and termination approvals from the Human Resources (HR) Department There were opportunities to strengthen controls, policies, procedures, and systems within the City.

Suggested priorities to address over the next 6 to 12 months include, but are not limited to:
 Implementing a unified timekeeping system for both the PD and FD that integrates with Oracle or using automated data transfer tools to integrate PD and FD timekeeping data more seamlessly with Oracle.
 Strengthening City Payroll’s routine audit process.
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Payroll Internal Controls Review Report | 2

FOR INTERNAL USE OF CITY OF MODESTO ONLY
II. INTRODUCTION
A. BACKGROUND
As part of the City’s fiscal year 2025 internal audit program, Moss Adams conducted a payroll internal controls review to determine the general adequacy of internal controls around the City’s payroll function specific to PD and FD to identify areas for improvement.

The City has a centralized payroll and timekeeping function, with the exception of the PD and the FD.

Currently, the City utilizes the Oracle system for tracking and reporting employee time, pay rates and processing the City’s payroll biweekly. The PD utilizes an external timekeeping system (InTime), from which final timecards are exported and then manually imported into Oracle for payroll processing. The FD utilizes an external timekeeping system (Resource Management System), from which final timecards are exported and then manually imported into Oracle for payroll processing. Individual employees report their time in their respective systems, which is subsequently reviewed and approved by an assigned supervisor or manager. City Payroll is responsible for processing payroll within Oracle for each pay period.

The HR Department is responsible for setting up new employees, entering and editing pay rates, and processing employee terminations.

B. SCOPE AND METHODOLOGY
The scope of the internal controls review included the following functions specific to PD and FD:
 Approving timecards
 Approving time corrections
 Reviewing timecard exports
 Reviewing payroll reconciliation reports
 Documenting controls and processes within policies and procedures For the payroll function, as it relates to the PD and FD, we conducted a review of identified key controls within the payroll function, which included:
 Identifying control objectives in specific areas and controls that would satisfy each objective  Reviewing policies and procedures
 Examining relevant documentation in support of select payroll key controls  Performing control walkthroughs to observe the design of key controls and understand workflow processes
 Obtaining an understanding of each relevant control activity’s characteristics (i.e., who performs it, how often it is designed to operate, whether it is designed to mitigate fraud, whether it is a manual or automated control, and whether it is a preventive, detective, or corrective control)  Assessing whether the controls in place would prevent or detect errors  Providing recommendations on key controls that need to be implemented or changed #3..
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Payroll Internal Controls Review Report | 3

FOR INTERNAL USE OF CITY OF MODESTO ONLY
The work performed included interviews with City Payroll and HR management and staff, and PD and FD employees who oversee timekeeping in their respective departments.

In support of the internal controls review, the matrix provided in Section III provides results by including the following:
 Control objectives
 Control issues
 Recommendations
 Likelihood of occurrence
 Impact of occurrence
“Likelihood of occurrence” is defined as the probability of a negative event occurring. “Impact of occurrence” is defined as the level of significance if a negative event occurs. Risk levels of low, moderate, and high were used to rate the likelihood and impact of occurrence for each finding.

Beyond the controls that are noted within this report as issues, additional controls were reviewed without exception. Key controls with exception conditions are reported in this report.

C. STATEMENT OF COMPLIANCE WITH GAGAS
We conducted this internal controls review in accordance with Generally Accepted Government Auditing Standards (GAGAS). Those standards require that we plan and perform the internal controls review to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our objectives. The internal controls review, control objectives, control issues, recommendations, and conclusions on the likelihood and impact of occurrence are included in this report.

This internal controls review did not constitute an audit of financial statements in accordance with GAGAS. Moss Adams was not engaged to, and did not, render an opinion on the City’s internal controls or over financial management systems.
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Payroll Internal Controls Review Report | 4

FOR INTERNAL USE OF CITY OF MODESTO ONLY
III. PAYROLL INTERNAL CONTROLS REVIEW
NO.

CONTROL

OBJECTIVE CONTROL ISSUE RECOMMENDATION

LIKELIHOOD OF

OCCURRENCE

IMPACT OF

OCCURRENCE
1 Timekeeping systems
used within the PD
and FD are
seamlessly integrated
within Oracle.

During our testing procedures
and interviews with the PD and
FD, it was discovered that each
department utilizes its own
unique timekeeping systems
from which they have to extract
reports to send to City Payroll
for processing. The PD and FD
have much more complex
scheduling and timekeeping
needs compared to other City
departments, which
necessitates the separate
systems.

These systems differ from the
one used by City Payroll
(Oracle) to record time for all
other departments, and these
systems do not automatically
integrate with Oracle. The use
of different systems creates
additional manual work for both
the FD and PD, as well as for
City Payroll, which increases
the risk of payroll errors or
inconsistencies.

The timekeeping system structure for the PD
and FD is similar to that of other similarly sized
cities, with each department utilizing distinct
timekeeping systems to meet their specific
needs. Additionally, during our research, we
found that it is common practice among cities
to perform manual processes on system
extract files before importing them into the
main timekeeping system similar to the City.

These manual processes are necessary to
ensure accurate data management for payroll
processing.

Although PD and FD have distinct timekeeping
systems given their unique scheduling and
timekeeping needs, the City should consider
utilizing timekeeping systems that
automatically integrate with Oracle to alleviate
the burdens of the manual processes that the
City currently performs. Based on the PD’s
and FD’s scheduling and timekeeping needs,
the City should contact Oracle to explore the
compatibility of the following systems, as it
appears that the systems below integrate with
Oracle:
● ADP
● Paychex
● Ceridian Dayforce
● UltiPro
● Paylocity
● Workday
● SAP SuccessFactors
High High
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Payroll Internal Controls Review Report | 5

FOR INTERNAL USE OF CITY OF MODESTO ONLY
NO.

CONTROL

OBJECTIVE CONTROL ISSUE RECOMMENDATION

LIKELIHOOD OF

OCCURRENCE

IMPACT OF

OCCURRENCE
Alternative to adopting new timekeeping
systems, the City should consider whether it
can develop automated workflows to integrate
the current PD and FD timekeeping systems
(InTime and Resource Management System,
respectively) with Oracle. This might entail
using automated data transfer tools that can
facilitate a seamless transfer of timekeeping
data from the PD and FD’s systems into
Oracle.

These approaches would centralize
timekeeping functions, enabling City Payroll to
manage all checks and balances each pay
period.

Lastly, pertaining to the payroll staffing
structure, interviews with employees from both
the PD and FD confirmed that they are
effectively managing their timekeeping
systems with adequate staffing to implement
necessary controls, reflecting their
commitment to operational efficiency and
accuracy. Additionally, compared to other
similarly sized cities, the City’s payroll staffing
structure appears to be at a reasonable level.
2 As part of its routine
payroll audits, City
Payroll reconciles the
PD’s and FD”s
timecard detail reports
prior to importing into
Oracle and after
importing into Oracle
to ensure that payroll
is calculated and paid
accurately based on
City Payroll retains an audit
checklist, which among other
tasks, includes documenting all
timecard reconciliation
procedures performed on
timecard imports from the PD
and FD timekeeping systems
into Oracle. Although the City
provided evidence of the
individual who prepared the
reconciliation on the checklist, it
The City should implement a process to add a
column to the current audit checklist that
documents who reviews each type of task
(including the PD and FD timecard
reconciliations) related to the FD and PD
timecard data. When reviewing, the
designated reviewer should perform the
following tasks:
● Documentation of the Review Process:

Ensure that the preparer has documented
their review process clearly, including any
High Moderate
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Payroll Internal Controls Review Report | 6

FOR INTERNAL USE OF CITY OF MODESTO ONLY
NO.

CONTROL

OBJECTIVE CONTROL ISSUE RECOMMENDATION

LIKELIHOOD OF

OCCURRENCE

IMPACT OF

OCCURRENCE
final approved
timecards. City Payroll
also designates an
employee to review
and approve these
reconciliations.
did not designate an employee
to review the reconciliation
performed and the entire audit
checklist as a whole. The
absence of a documented
reviewer in the checklist
increases the likelihood of
errors going unnoticed during
the audit process, potentially
leading to inaccuracies in
payroll processing.
checks performed, discrepancies noted,
and actions taken to resolve issues.
● Consistency with Policies and Procedures:

Verify that the preparer's review and
documentation align with any established
payroll policies and procedures. This
includes adherence to potential guidelines
for sufficient documentation and timeliness
of the audit checklist tasks.
● Error Identification and Resolution: Check
that the preparer has identified any errors
or discrepancies in the timekeeping data
and taken appropriate steps to resolve
them. This includes following up on any
outstanding issues.
● Cross-Verification: Look for evidence that
the preparer has cross-verified the
timekeeping data with other relevant
records such as employee schedules,
leave requests, and previous payroll
records.
● Timeliness of the Review: Ensure that the
review was completed within the
established timelines to avoid delays in
payroll processing.

This additional layer of review will help
enhance accountability and ensure that all
steps in the payroll process are thoroughly
complete, accurate, and verified.
3 The FD and PD review
their respective
timecard reports prior
to submission to City
Payroll.

Based on interviews, both the
PD and FD have extensive
review processes in place prior
to sending timecard reports to
City Payroll; however, the actual
timecard reports are not signed
The FD and PD should implement a process
to document review and approval of timecard
reports prior to being sent to City Payroll. Each
department should first designate an
employee who will be responsible for
performing this review, along with a backup
High Low
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NO.

CONTROL

OBJECTIVE CONTROL ISSUE RECOMMENDATION

LIKELIHOOD OF

OCCURRENCE

IMPACT OF

OCCURRENCE
off as evidence of review prior
to sending out—although it
appears that the PD and FD do
conduct these reviews. The
absence of evidence of
review/approval increases the
likelihood of errors going
unnoticed and decreases the
level of accountability,
potentially leading to
inaccuracies in payroll
processing.
employee. After conducting the review, the
reviewer should document evidence of their
review. This can be an email stating
completion and review, physical signoff on
reports, or something similar.
4 The checklist used to
generate the PD
timecard report for
submission to City
Payroll is reviewed
and approved prior to
sending the report.

The checklist used by the PD to
generate the timecard report for
submission to City Payroll does
not have documented evidence
of being reviewed or approved.

The absence of a documented
reviewer in the checklist
increases the likelihood of
errors going unnoticed during
the review process and
decreases the level of
accountability, potentially
leading to inaccuracies in
payroll processing.

The PD should implement a process to
document review and approval of the checklist
used to submit timecard data to City Payroll.

The PD should first designate an employee
responsible for conducting this review, along
with a backup employee. The reviewer should
ensure that all steps of the checklist were
followed by the preparer, and any
discrepancies should be investigated. After
completing the review, the reviewer should
document evidence of their review, which can
be accomplished by adding a "Reviewer"
signature section within the checklist to record
the overall review and approval of all outlined
steps.

High Low
5 Within the FD, all
timecard corrections
are approved by the
Captain or the Chief.

We obtained corrected
timecards for each of our eight
sample selections, noting that
the Chief’s signature was
provided at the bottom of the
page. However, it was unclear
whether the signature indicated
approval of the original timecard
or the corrected timecard.

The FD should implement a process that
clearly documents review and approval for
timecards and separately documents review
and approval of timecard corrections. This
updated process might include using
differently colored pens to identify approvals of
original timecards and approvals of corrected
timecards. It could also include having a
specific line on timecards for original timecard
Moderate Low
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NO.

CONTROL

OBJECTIVE CONTROL ISSUE RECOMMENDATION

LIKELIHOOD OF

OCCURRENCE

IMPACT OF

OCCURRENCE
Without clarity around timecard
approvals, the risk increases for
incomplete or inaccurate
timecards.
approval and a secondary line for corrected
timecards.
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CITY OF MODESTO

COMMITTEE AGENDA REPORT
DATE OF MEETING:

April 23, 2025
Date: April 16, 2025
TO: Audit Committee
FROM: Colleen Rozillis, City Auditor
SUBJECT: Approval of the Utilities Fiscal Review Performance Audit report.

CONTACT: Colleen Rozillis, City Auditor, [email protected], 206-302-6795 DESCRIPTION:

Consider approving the Utilities Fiscal Review Performance Audit report.

STRATEGIC PLAN ELEMENT:

The recommended action supports the following 2020-2025 City of Modesto Strategic Plan Initiatives: Goal J: Build a high-performance organization.

BACKGROUND:

City Council approved a performance audit of the Utilities’ fiscal management practices as part of the FY24-25 Internal Audit work plan.

DISCUSSION:

The performance audit evaluates the City’s fiscal management of its water, wastewater, and storm drain utilities. This included a review of the sources and uses of funds, rate setting, other fees and charges, billing, and policies and procedures to identify opportunities for improvement in sustainability, effectiveness, equity, and transparency. The report contains five recommendations for operational improvements. This performance audit was completed under Generally Accepted Government Auditing Standards (GAGAS).

FISCAL IMPACT:

None.

RECOMMENDED COMMITTEE ACTION:

Motion to approve the Utilities Fiscal Review Performance Audit report and forward to Council for acceptance.

Approved by:

Colleen Rozillis, City Auditor
Attachments:

1. Utilities Fiscal Review Performance Audit dated March 11, 2025 #4..
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This report is intended for the internal use of the City of Modesto, and may not be provided to, used, or relied upon by any third parties.

CITY AUDITOR’S OFFICE

FINAL REPORT

WATER AND WASTEWATER UTILITIES FISCAL REVIEW

PERFORMANCE AUDIT
March 11, 2025
Moss Adams LLP
999 Third Avenue, Suite 2800
Seattle, WA 98104
(206) 302-6500
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Table of Contents
Executive Summary 1
A. Introduction 1
B. Summary of Findings and Recommendations 1
Introduction 3
A. Background 3
B. Scope and Methodology 3
C. Statement of Compliance with GAGAS 4
Commendations 5
Findings and Recommendations 6
A. Utilities Fund Expenditures 6
B. Funding Mechanisms 10
Appendix A: Sources and Uses Analysis 15
Appendix B: Rate Study Best Practice Checklist 18
Appendix C: Peer Benchmarking 20
Appendix D: Management Response 23
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EXECUTIVE SUMMARY
As part of the City of Modesto’s (the City’s) fiscal year 2024–2025 internal audit program, Moss Adams LLP (Moss Adams) conducted a review to evaluate the City’s fiscal management of its water, wastewater, and storm drain utilities to identify opportunities for improvement in sustainability, effectiveness, equity, and transparency. This included a review of the sources and uses of funds, rate setting, other fees and charges, billing, and policies and procedures. We conducted this performance audit between September 2024 and January 2025 using a four-phased approach consisting of project planning and management, fact-finding, analysis, and reporting.

Findings and recommendations are grouped into two categories: 1) Utilities Fund Expenditures and 2) Funding Mechanisms. Detailed findings and recommendations are provided in Section IV of this report. The Sources and Uses Analysis is discussed in the Utilities Capital Project Budgets section (Finding 1) and provided in Appendix A. The City’s response to recommendations is included in Appendix D.

FINDINGS AND RECOMMENDATIONS
Utilities Fund Expenditures

1. Finding The Department lacks a systematic approach to tracking total anticipated project costs within its Capital Improvement Program (CIP), leading to large fluctuations in project costs and raising potential transparency and cash flow issues.

Recommendation Clearly document total project anticipated costs, update totals as new projects are added, and evaluate project budget versus actuals to assess trends.

2. Finding The City lacks key maintenance data, an asset management system, and staff capacity to effectively address utility-related maintenance needs.

Recommendation A. Collect and track maintenance data including installation dates, renewal periods, and estimated costs.

B. Utilize Lucity as an asset management system, or explore other systems to track asset management data more effectively and efficiently.

C. Evaluate inspection staffing within the Utilities Department to address maintenance needs.

D. Review recruitment strategies and compensation practices for inspectors within the Utilities Department to ensure effectiveness. #4..
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FINDINGS AND RECOMMENDATIONS
Funding Mechanisms

3. Finding The City’s storm drain budget is projected to decline over the next five years, impacting the City’s ability to maintain the program that helps prevent flooding and protects the City’s water quality.

Recommendation A. Evaluate reallocating storm drain fees, establishing development impact fees, and levying special taxes to fund the storm drain program more effectively over time.

B. Consider reallocating street sweeping expenditures to be financed by a different fund than the storm drain fund.

4. Finding Although water and wastewater rates have increased in recent years, the City has not adjusted related fees in over a decade, which may result in insufficient revenue to cover costs.

Recommendation Evaluate water and wastewater fees to ensure costs are adequately covered.

5. Finding Despite grant opportunities, the Utilities Department lacks the capacity to pursue and manage grants effectively due to the absence of a dedicated grants management position.

Recommendation Consider establishing a dedicated grants management position (potentially as a shared resource for City departments) to streamline the grant application process and reduce the workload on existing staff.
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INTRODUCTION
As part of the City’s FY 2024–2025 internal audit program, Moss Adams conducted a review to evaluate the City’s fiscal management of its water, wastewater, and storm drain utilities. This included a review of the sources and uses of funds, rate setting, other fees and charges, billing, and policies and procedures to identify opportunities for improvement in sustainability, effectiveness, equity, and transparency.

The City’s Utilities Department (Utilities, the Department) has four divisions: Administration, Water Services, Wastewater Services, and Engineering Services. The Department plans, designs, constructs, operates, and maintains the infrastructure of all City water, wastewater, and storm drain systems. It also prepares plans and studies to address current and future water resource needs, develops utility rates, and participates in regional water partnerships to improve water operational efficiencies and provide services for nearby districts and agencies. The Department is overseen by a director and has over 250 employees.

This performance audit was conducted between September 2024 and January 2025. It examined utility fiscal management including sources and uses of funds, rate setting, other fees and charges, billing, and policies and procedures to identify opportunities for improvement. This project consisted of four phases that are detailed below.

PHASE DESCRIPTION
1 Project Initiation
and Management
This phase concentrated on comprehensive planning and project management, including identifying employees to interview and documents to review, communicating results, and providing regular updates on project status. 2 Fact-Finding This phase included interviews, document review, and peer benchmarking. ● Interviews: We conducted interviews with Utilities leaders, managers, and staff, as well as staff in the Budget division and Finance department. Overall, we spoke to 22 City employees. The purpose of these interviews was to gain insights into the current operational environment, including strengths and opportunities for improvement related to fiscal management within Utilities at the City.
● Document Review: We reviewed a variety of documents, data, and information provided by the City, including but not limited to budget documents, rate studies, city resolutions, master plans, engineering reports, facilities assessments, customer engagement documents, and billing information.
● Peer Benchmarking: We performed peer benchmarking with three peer organizations: the City of Livermore, the City of Tracy, and the Modesto Irrigation District. Our benchmarking analysis included a review and comparison of fiscal management practices.
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PHASE DESCRIPTION
3 Analysis Based on the information gained during our fact-finding phase, we conducted and consolidated research on relevant industry standards and best practices. We identified potential areas for improvement and developed practical recommendations.
4 Reporting We communicated the results of our analysis with findings and recommendations, presented first in a draft report we reviewed with management to confirm the practicality and relevance of recommendations before finalizing the report.

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 our findings and conclusions based on our audit objectives.
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COMMENDATIONS
It is important to note the City’s areas of strength and existing good practices that can be leveraged for further improvements. The following is a list of commendations that the Moss Adams team would like to note:
• Billing: Interviewees reported the City is in the process of implementing a new billing software set to go live in April or May of 2025. This software will automate some of the manual billing processes that are currently in practice and provide more transparency to customers on their bills through a user-friendly customer portal.
• Budget Process: The Department has monthly meetings to monitor and discuss its budget on a regular basis, which is a best practice to support effective financial management and accountability. Many interviewees reported this process is beneficial and collaborative, allowing teams to make budget adjustments as needed. Additionally, interviewees reported that staff track expenses on a granular level which allows the Department to easily identify outliers and variances. This is a strong practice to support the identification of potential issues (e.g., significant variances in budget projections or miscoded expenditures). • Customer Satisfaction: The Department receives feedback from customers through customer service calls and feedback surveys following work requests. Customer feedback has generally been positive over the last few years. Most respondents surveyed by the City (82%) reported an excellent rating on wastewater work orders from 2021 to 2024. All 34 water customers who called the City from 2020 to 2024 on matters related to water had complimentary responses for water utilities.
• Equity: To support equitable services, several steps in the City’s rate study process involve public engagement through outreach and public hearings. Additionally, the City provides a assistance program that provides discounts on utility bills for residents enrolled in an eligible public assistance program.
• Rate Study Process: The City’s rate study process is generally aligned with best practices, including sustainable financial management practices from the Environmental Protection Agency’s Office of Wastewater Management. A comparison of the City’s rate study process to best practices is included in Appendix B.

We would like to commend Utilities staff and management for their willingness to assist us in this assessment process. These commendations, coupled with our findings and recommendations, provide an overview of areas of strengths and weaknesses that can help improve Utilities operations and reduce risk at the City.
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FINDINGS AND RECOMMENDATIONS
Our findings and recommendations are grouped into two categories: 1) Utilities Fund Expenditures and 2) Funding Mechanisms.

Recommendations Clearly document total project anticipated costs, update totals as new projects are added, and evaluate project budget versus actuals to assess trends.

Most funding for the Utilities Department is generated from charges for services, fees, intergovernmental service agreements, and interest income. Most expenses are related to infrastructure maintenance and capital improvement projects. A detailed analysis of the sources and uses of funds for the City’s Utilities Department is included in Appendix A. Based on the City’s preliminary pro forma budget reports for FY24, the City’s revenues for water, wastewater, and storm drain services were insufficient to cover expenses. Staff reported this was largely due to unanticipated increases in capital improvement expenses. This condition required the City to use reserve funds to cover expenses in FY24.

The City at large does not require total anticipated project costs be tracked in the CIP or other public documents. The Department uses internal cash flow forecasting spreadsheets to manage project costs, but these documents are not consistently maintained or publicly accessible, impacting transparency around total capital project costs.

The Department documents the design portion of a project in the CIP budget as these are known costs at the beginning of the project. Later, when construction contracts are awarded, the CIP budget is increased to account for these costs. As the project continues, the budget is adjusted to account for other project changes such as combing projects or changing project scopes. In reviewing three CIP projects, we found the original budget (which only represented the design portion) had large percentage increased throughout the project following approval of the construction phase.

Project
Number
FY22-23 Budget
(Design Portion)
Total Budget
Adjustments
(Construction
Portion)
FY24-25 Budget
(Total Project Cost)
Percent
Increase
101094 $7,560,000 $15,024,837 $22,584,837 199%
100535 $3,039,400 $5,526,488 $8,565,888 182%
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Project
Number
FY22-23 Budget
(Design Portion)
Total Budget
Adjustments
(Construction
Portion)
FY24-25 Budget
(Total Project Cost)
Percent
Increase
100851 $240,000 $11,059,582 $11,299,582 4608%
In addition, the Department’s total CIP budgets show significant increases in multiple capital projects since FY23. Utilities capital project budgets increased nearly $23 million between FY23 and FY24 and are projected to increase another $84 million between FY24 and FY25. It is difficult to determine the reason for these increases because the Department uses a phased budget approach. This phased approach results in an inability to verify the initial project cost estimates, as discrepancies often arise from the inclusion of additional projects or costs not originally accounted for. Additionally, this approach lacks a realistic total project estimate that may lead to funding shortfalls that require the use of reserves. Cost overruns on Utilities capital projects are an industry challenge. All peer organizations reported some challenges with budget overruns, due to increased inflation in recent years and challenges accurately estimating costs.

Accurate and complete estimates are important to ensure sufficient funds are available from a project’s initiation to completion, while minimizing the use of reserve funds or the need for additional financing. In FY24 the Department had to draw $17,618,204 in reserves from water and wastewater funds to cover the increase in capital project spending. Inaccurate, phased estimates and insufficient budget monitoring can impact effective financial management and public trust in the City's capital project budgeting processes.

The Department should clearly document total project anticipated costs, update totals as new projects are added, and evaluate project budget versus actuals to access trends. The Department should first clearly document total project anticipated costs that includes an estimate for all project phases. These estimates are likely to change throughout the project but a total estimated cost will help in planning the project to ensure the City has sufficient funds and resources to complete the project.

The Department should also update totals as new projects are added. As noted, changes are likely to occur throughout the project. These changes, including the addition of new projects should be added to the project budget as they occur. This practice will help the City evaluate the impact of combining projects to potentially save costs and resources and ensure funds are used effectively. This will also provide better transparency in cases of cost savings or budget overruns.

Finally, the Department should report project budget versus actuals to assess trends such as financial accountability or project efficiency in cases of budget savings. When significant budget overruns occur, projects should be evaluated for the cause to determine if practices should be adjusted such as changing how project budgets are estimated.
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2. Finding The City lacks key maintenance data, an asset management system, and staff capacity to effectively address utility-related maintenance needs.

Recommendations A. Collect and track maintenance data including installation dates, renewal periods, and estimated costs.

B. Utilize Lucity as an asset management system, or explore other systems to track asset management data more effectively and efficiently.

C. Evaluate inspection staffing within the Utilities Department to address maintenance needs.

D. Review recruitment strategies and compensation practices for inspectors within the Utilities Department to ensure effectiveness.

The City has taken steps to address infrastructure concerns for its utilities—such as developing and maintaining current master plans with prioritized infrastructure projects. Staff reported they are working on updating the Supervisory Control and Data Acquisition (SCADA) system to support more effective monitoring of its infrastructure. They also reported the City recently purchased a new truck equipped with closed-circuit television (CCTV) cameras that can inspect water lines, sewer systems, and storm drains to support the City with more proactive and preventative maintenance needs. In FY24, the Department repaired 540 water leaks, replaced 112 damaged fire hydrants, and cleaned over 464.2 miles of sewer pipe—all measures to support effective maintenance of the City’s water and wastewater infrastructure. However, the City lacks comprehensive maintenance data, an effective asset management system, and staff capacity to address utility maintenance needs fully and effectively.

Maintenance Data
The City has some asset management data for utilities, including data in its Facilities Conditions Assessment Report (FCA) completed for wastewater in 2022. However, the City does not have comprehensive information such as installation dates, renewal periods, or estimated costs for all its water, wastewater, and storm drain infrastructure. Additionally, the data is not maintained in a consistent database or system to support efficient operations (see Asset Management System below). Without comprehensive asset management data, the City is limited in its ability to predict and proactively address maintenance needs in a prioritized and efficient manner. This results in a more reactive approach to maintenance that is often less strategic and more costly. Maintained assets are vital for the sustainability of operations and the safety of the community, ensuring access to clean water and the safe management of wastewater.

The Department should collect and track comprehensive maintenance data to proactively prepare and plan for repairs and replacements of utility assets. Key asset maintenance information to track includes asset description, installation date, estimated repair or replacement date, expected lifecycle, location, conditions assessment, maintenance records, usage data, compliance checks, performance metrics, and estimated cost to repair or replace. This information is important in making data-driven decisions such as estimated budgets, future project costs, and staffing needs to perform inspections or repairs. This information is standard for asset management programs and will help to better predict and plan for the Department’s future.
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Asset Management System
The City does not use an asset management system to store and track all asset management data in one location. It currently uses Lucity as a work order management system; however, it also has asset management capabilities that are not fully utilized by the Department. Instead of relying on a centralized system, staff reported using various spreadsheets and institutional knowledge to gather information on asset conditions and maintenance schedules.

Though prioritized maintenance is being completed and tracked, without a centralized asset management system the Department struggles to proactively and efficiently identify, track, and plan for repair and maintenance needs. Comprehensive, accessible, and accurate information is essential for more robust preventive maintenance and the associated budget forecasting process. Unplanned maintenance needs due to system failures or emergencies can create significant unexpected costs and adversely affect the Department’s budgets and utility rates. Staff interviewed expressed particular concern regarding wastewater maintenance needs, noting that these pipes tend to corrode quickly and require repairs or replacements more frequently than initially anticipated. This situation requires substantial funding for maintenance. When small maintenance issues are not addressed, they can escalate into larger, more expensive problems, including emergency replacements. Emergencies and major replacement projects impose additional costs and resource demands on the City. Furthermore, increased water and wastewater maintenance needs can lead to flooding, water quality issues, and sewer backups, all of which can negatively impact the health and livability of the community.

The Department should explore how to use Lucity as an asset management system or explore a new, comprehensive system to track this data in one place. Using an asset management system will allow for more accurate information about assets and a more efficient process that helps staff make informed decisions on when repairs or maintenance are needed and plan for the associated costs in the budget. This will allow the Department to better estimate costs and resource needs. This is particularly important in periods where many assets require maintenance at one time and in equitably prioritizing which areas have more needs based on maintenance data.

Staffing
Staff reported the City lacks adequate inspectors to address utility-related maintenance needs and that turnover in inspector positions has negatively impacted proactive maintenance. Staff also reported difficulty recruiting new staff for vacant positions. Inspectors play a vital role in identifying maintenance needs before issues escalate.

Year 2022 2023 2024
Percent of inspector
turnover for the year 0% 50% 33%
Staff reported challenges with retention and recruitment are due in part to retirements, relocations, and competitive pay challenges. Without adequate inspectors, the Department may not be aware of asset conditions that need attention through repairs or maintenance. This can lead to more costly fixes or replacements.

The City should evaluate inspection staffing to ensure staffing levels meet the City’s maintenance needs. This assessment should include considerations for the volume of work, complexity of assets, #4..
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and specific needs of the community. This analysis will be better informed with the comprehensive asset management data and system noted above, to show future trends in potential inspection needs.

Additionally, the City should develop targeted recruitment strategies to attract qualified candidates for inspector positions, such as through partnerships with local colleges or vocational schools, by attending job fairs, and initiating outreach activities with professional organizations in relevant fields.

The City should also consider reviewing the compensation packages for inspector positions and ensuring they are competitive with similar roles across the industry.

Recommendations A. Evaluate reallocating storm drain fees, establishing development impact fees, and levying special taxes to fund the storm drain program more effectively over time.

B. Consider reallocating street sweeping expenditures to be financed by a different fund than the storm drain fund.

As shown in the graph below, the City’s storm drain pro forma budget is projected to steadily decrease over the next five years. Interviewees reported that the City has not raised storm drain rates in over 20 years, resulting in minimal revenue for storm drain needs. Storm drains are essential for removing rainwater from streets and helping prevent flooding in the community. They also play a crucial role in keeping drains clean and free from hazardous contamination that can flow into local waterways.
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Outdated storm drain rates have led to insufficient revenue to cover necessary maintenance, repairs, and replacements for the City’s storm drains. With aging infrastructure, increased flooding, and the impacts of climate change, securing funding to maintain the storm drainage system is vital. This funding would be used to support infrastructure that can help prevent flooding and road deterioration, and protect water quality for residents.

Under Proposition 218, voters must approve property-related storm drain fee increases; the proposition also allows a protest vote. Staff reported that mobilizing citizens to vote in favor of increased rates is challenging and can be very costly, which has made the City hesitant to pursue a rate increase.

In addition to insufficient revenue due to stale storm drain rates, existing funds are also allocated to other needs, which impacts how much funding is available for storm drain infrastructure improvements. Approximately $2 million of storm drain funding is allocated to Public Works for street sweeping. To address the funding shortfall for storm drains, staff reported that they pursue grants.

However, these strategies may not cover the increasing gap in revenues and expenses in the coming years.

Storm drain funding challenges are not unique to Modesto, given Proposition 218’s application to all of California. The three peer organizations involved in this assessment also reported challenges with raising storm drain rates, and that storm drains are currently funded through a combination of current rates and supplemented by the general fund. Despite these industry wide challenges, the City will need to address gaps in funding or reduce expenses to meet the needs of its community.

FY24-25
$3,185,074.00
FY25-26
$243,818.00
FY26-27
-$2,921,032.00
FY27-28
-$6,311,326.00
FY28-29
$(12,000,000.00) -$9,933,207.00
$(10,000,000.00)
$(8,000,000.00)
$(6,000,000.00)
$(4,000,000.00)
$(2,000,000.00)
$-
$2,000,000.00
$4,000,000.00
Storm Drain Projected Fund Balance
Ending Fund Balance
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The California Stormwater Quality Association (CASQA) proposes the following list of resources that stormwater managers in California may consider in overcoming funding barriers1:
• Storm Drain Utility Fees: CASQA recommends that utilities departments set up storm drain utility fees as an enterprise fund, to charge fees for services delivered to the public. The City already does this through the storm drain enterprise fund. • Realignment of Services: CASQA recommends reallocating storm drain activities under water, sewer, or trash collection services, which are exempt from Proposition 218. For example, street sweeping funding could be reallocated to a different service. Street sweeping accounted for almost 30% of the City’s storm drain budget in FY24, which is a significant portion of the fund. In addition, no other peer city interviewed funds street sweeping with the storm drain budget.

Reallocating street sweeping may be the easiest first step in reducing the gap in the storm drain budget. Additional opportunities to reallocate activities may also exist. The City of Livermore funds storm drain projects through stormwater user fees, a development impact fee, the General Fund, and Federal Emergency Management Agency (FEMA) funding. The City of Tracy funds storm drain expenses through customer utility rate payments and the General Fund. • Local Development Impact Fees: CASQA recommends setting up development fees—a fee imposed on developers to cover or offset the cost of public facilities related to development projects. The City of Livermore partially funds storm drain projects through an impervious surface development impact fee.
• Special Taxes: CASQA recommends special taxes, which require a two-thirds majority vote for approval. This may provide an easier avenue than attempting to raise storm drain rates. For example, CASQA recommends a special tax called a parcel tax. According to CASQA, parcel taxes on individual properties are the most common type of special tax for storm drain services.

These taxes are levied against real property and can be flat fees or aligned with acreage, building size, impervious surface cover, or land uses. Culver City, Los Angeles, Santa Cruz, and Santa Monica have all successfully implemented parcel taxes for storm drain services.

In addition to recommendations from CASQA, the City may also consider using its share of the state gas tax to address improvements in storm drains. According to the California State Controller, entities that have a Special Gas Tax Street Improvement Fund and Road Fund may use funding to finance storm drain construction or reconstruction. This is another way to help fund storm drain projects for the continued operation of the City’s storm drain program.

4. Finding Although water and wastewater rates have increased in recent years, the City has not adjusted related fees in over a decade, which may result in insufficient revenue to cover costs.

Recommendation Evaluate water and wastewater fees to ensure costs are adequately covered.

The Department is primarily funded by utility rates and some separate fees/charges (e.g., connection and installation charges, meter fees, pavements fees, capacity charges, and reimbursement fees). 1 https://www.casqa.org/resources/stormwater-funding/sustainable-stormwater-program-funding #4..
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While water and wastewater rates have steadily increased over the last few years, the City has not raised water and wastewater-related fees/charges in over 10 years. Staff reported this is because a cost analysis has not been conducted to assess whether fines and fees are meeting the City’s needs (i.e., covering specific costs or deterring certain activities).

The Department may also consider new storm drain fees to adequately cover costs. One storm drain related fee CASQA recommends is a local development impact fee (see the Storm Drain Program Budget section). Impact fees may also be relevant to water and wastewater, depending on the types of capital projects related to new developments at the City. In addition, because the City does not currently charge fees for storm drain inspections, the costs of inspections are absorbed by other revenue sources. Another fee in the industry is a conservation fee to encourage water conservation efforts. No other peers reviewed have this, but this fee may be used to penalize excessive water use during drought conditions, which can promote sustainability of water resources over time.

The City should evaluate water and wastewater fees to ensure they adequately cover related costs, including staff time, overtime, and additional resources. Adjusting fees is a strategy for ensuring that costs are met, as these fees are independent of Proposition 218, making implementation easier.

5. Finding Despite grant opportunities, the Utilities Department lacks the capacity to pursue and manage grants effectively due to the absence of a dedicated grants management position.

The Department lacks the capacity to pursue new grants and monitor awarded grants due to the absence of a dedicated grants management position. Currently, some grant responsibilities are contracted out to consultants and others are managed by internal engineers or project managers.

However, these staff members have other responsibilities and priorities that take away from researching or overseeing grant activities. Without dedicated resources for grants management, the City may miss out on valuable funding opportunities for essential projects or be limited in its ability to effectively monitor grants.

The City has been successful in obtaining several grants. As reported in the FY24 Operating Budget, it received $11.6M in State grants for utility projects, and $19.9M in grant applications is pending approval. In FY24, the City was awarded grants for projects related to storm drain and well treatment systems and pipes. Staff also reported they are actively working on obtaining a grant to help fund SCADA updates.

Modesto’s percentage of grants that cover expenses is smaller than one peer (the City of Livermore) but larger than the City of Tracy and the Modesto Irrigation District, which did not have any grant revenue in their FY23 financial reports (also see Appendix C). All three peers interviewed for this assessment likewise do not have a dedicated grants management position. One peer, like the City of Modesto, has a consultant at the city to help find and apply for grants. Another city is considering #4..
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hiring a consultant to assist with grants. Currently, all peers have department staff apply for and manage grants. Several also mentioned they do not fund many projects with grants as historically there have not been many grants for utilities. However, they have seen an increase in relevant grants for utilities in the last few years.

The City should consider designating a dedicated grants management position, potentially as a shared resource among various City departments. This role would alleviate the burden on existing staff by focusing on researching and applying for grants. While departments would still need to ensure that staff have the capacity to oversee grant management, this dedicated position could enhance the identification of relevant grant opportunities and increase the likelihood of successful applications. Typically, grant management positions are self-sustaining, as they generate revenue through the acquisition of grant funds, some of which may cover the salary of the position. #4..
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APPENDIX A: SOURCES AND USES ANALYSIS
The following tables include the City’s sources and uses of funds for water, wastewater, and storm drain for FY24.

Water
Sources of Funds FY24 YTD
Service-related revenue (e.g., charges for services; refunds, damages, and cost recovery/other; service credits) $84,165,110
Water development fees $1,731,616
Utility assistance fees $229,650
Interest income $5,426,475
Rental income $42,983
Miscellaneous income $15,607
Legal settlement $238,052
Other income (e.g., sale of assets, project revenue, loan repayment) $1,115,712 *Draw from reserves $6,491,007
Total Sources of Funds $99,456,212
Uses of Funds
General expenses $348,924
Utility bills and collections $171,896
Finance expenses (i.e., cashiering, utilities and collections, assistance programs, software) $5,525,979
Engineering expenses $1,039,797
Administrative expenses $3,428,666
Analyses, plans, and studies (e.g., management, systems, studies, rates, SOI) $366,820 Maintenance $3,481,766
Wells and tanks $9,405,818
Water quality $2,875,371
Service and meters $2,810,930
Grant expenses $16,965
Litigation $14,268
Transfers to other funds (e.g., projects, grants, wastewater, storm drain, General Fund, IT) $1,197,857
Capital planning services $739,430
Construction services $6,908,820
Water conservation $1,155,589
Modesto Irrigation District payments for surface water treatment $14,444,022 Other expenses (e.g., ASR Program, Revenue System, UCMR5) $411,053 Total debt service $12,194,696
Capital improvement projects $32,917,545
Total Uses of Funds $99,456,212
*The water fund drew from the reserve balance in FY24. Staff reported there were increases in capital project expenses in the year that resulted in the need to draw from reserves to cover expenses. #4..
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Wastewater
Sources of Funds FY24 Actuals
Service-related revenue $65,692,343
Intergovernmental revenues related to the Del Puerto Water District, the City of Turlock, and other governmental agencies $2,725,831
Interest income $2,373,873
Rental income $508,717
Interfund charges (charges from other departments or divisions, e.g., Public Works or Utilities) $1,894,381
Miscellaneous Income $4,329,729
Transfers in from other funds (e.g., General Fund, Compost Fund, loans) $1,333,493 *Draw from reserves $11,127,197
Total Sources of Funds $89,985,564
Uses of Funds
General expenses $890,650
Utility bills and collections $1,042,114
Engineering expenses $387,070
Administrative expenses $2,481,890
Plant operations $4,679,546
Wastewater collections $7,515,513
Lab and environmental services $2,283,026
Analyses, plans and studies (e.g., management, systems, studies, rates, SOI) $87,346 Maintenance $11,942,758
Segregation line (e.g., wastewater barriers to keep wastewater streams separate) $507,731 Transfers to other funds (e.g., General Fund, Water Fund, Sewer Fund) $5,054,890 Capital improvement services $515,595
Non-capital projects $2,009,623
Other projects (e.g., Parklawn and Airport) $37,931
North Valley Regional Recycled Water Program $1,055,674 Sewer Cost Sharing Program $4,320
Total debt service $10,412,754
Capital improvement projects $39,077,131
Total Uses of Funds $89,985,564
*The wastewater fund drew from the reserve balance in FY24. Staff reported there were increases in capital project expenses in the year that resulted in the need to draw from reserves to cover expenses. #4..
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Storm Drain
Sources of Funds FY24 YTD
Operating revenue $5,613,895
Interfund labor and equipment income (charges from other departments or divisions, e.g., Public Works or Utilities) $128,519
Interest income $167,726
Transfers In (e.g., water fund for the Source Water Protection Program) $700,000 Miscellaneous income $222,847
Total Sources of Funds $6,832,987
Uses of Funds
General expenses $77,178
Utility bills and collections $353,224
Sewer collections $3,192,915
System analysis $41,295
Stormwater lift stations $159,747
Street sweeping $1,887,196
Compliance $924,830
Transfers from other funds (e.g., Water Fund for utility billing software) $22,368 Capital improvement projects $314
*Additions to reserves $173,919
Total Uses of Funds $6,832,987
*The storm drain fund added to the reserve balance in FY24, as expenditures came in under budget and interest revenue and fair market value revenue were higher than expected for the year. #4..
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APPENDIX B: RATE STUDY BEST PRACTICE

CHECKLIST
This checklist assesses whether the City’s rate study process is aligned with best practices. We compared the City’s Utilities Rate Studies’ Standards Operating Procedures (SOP) and recent rate study to best practices, including those from the Environmental Protection Agency’s Office of Wastewater Management.

Best Practice
Category
Item Best Practice Description
Modesto
Adherence Modesto Alignment
Determine
Current
Revenues and
Expenses
Revenues may include annual
collections from rates/charges to
customers, interest, transfers,
and other sources. Expenditures
may include physical equipment,
staff, outstanding loans,
mortgage payments, and other
costs. All costs should be
included and budgeted at the
appropriate levels.
☒
Per the SOP, budget details, and
revenue and expenditure by object
reports, current costs are included in the
financial information used to determine
rates. This includes capital project
expenses. The rate study is also
supported by an engineering report that
provides the justification and allocation
of costs for the water and wastewater
capital projects.

Determine
Reserve
Build reserves into the rate.

Note: There are no national
standards for reserve amounts,
although some funders have
requirements for borrowers.
☒
Per the SOP, the reserve balance is
included in the financial information
used to determine rates. Both the water
and wastewater rate studies include
reserve policies in the rate setting
process (water pg. 64 and wastewater
pg. 27).

Project
Revenues and
Expenses
Project future revenues and
expenses by taking into
consideration current revenues
and expenses and considering
changes in the future (e.g.,
changes in customers,
infrastructure costs, capital
projects, labor).
☒
Per the SOP, a step in the rate study is
for a consultant to develop a 10-year
financial plan. Additionally, the rate
study includes cost projections (water
pg. 65 and wastewater pg. 26) for future
users (water pg. 21 and sewer pg. 39)
and water demand (water pg. 23).

Determine
Rate Structure
Determine what rate structure
works best for the
City/community.
☒
Per the SOP, one step of the process is
to develop appropriate cost allocations
and rate designs.

Consider
Public
Perception
Customers should be aware of
changes to rates, and the utility
should consider smaller
incremental rate increases to
ease the shock of rate increases. ☒
Per the SOP, several steps in the
process involve public engagement
through outreach and public hearings.

Communication is a goal in the Charter
and each rate proposal is reported to
City Council. The City has also instituted
smaller rate increases over time rather
than one-time large increases.
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Best Practice
Category
Item Best Practice Description
Modesto
Adherence Modesto Alignment
Consider
Regulatory
Requirements
Consider regulatory
requirements, such as with the
state’s drinking water standards
and regulations.
☒
Both rate resolutions consider regulatory
requirements such as state compliance
with Proposition 218 (water pg. 1,
wastewater pg. 1).
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APPENDIX C: PEER BENCHMARKING
We reached out to five peer organizations who have similar water, wastewater, and storm services.

Among them, three participated: the Modesto Irrigation District, City of Tracy, and City of Livermore.

Our discussions were to understand current and best practices related to the fiscal management of water and wastewater utilities. The benchmarking process involved comparing key data points and current practices, allowing us to identify trends, strengths, and areas for improvement. The table below provides an overview of the key characteristics and observations. Under the table is a summary of lessons learned and best practices based on our conversations.

Metrics City of Modesto Modesto
Irrigation District
City of Tracy City of Livermore
Budget (FY24) $400,137,714.00 $636,500,000.00 $485,677,607.00 $293,280,402.00 Number of
households/account
s served (FY23)
72,418 132,803 27,943 30,835
Number of FTE 1,326 493 506 497
Asset management
program (name of
system or N/A)

N/A N/A N/A NEXGEN
Percentage of grant
revenue to each
fund’s revenue
(Annual
Comprehensive
Financial
Report FY23)
Water – 0.43%
Wastewater –

0.66%
Stormwater –
No revenue
(a storm-related
grant was awarded
in FY24)
No grant revenue
for water,
wastewater, or
stormwater
No grant revenue
for water,
wastewater, or
stormwater
Water – 3.66%
Wastewater –

4.49%
Stormwater –

18.10%
Dedicated grant
staff? (Yes/No)
No No No No
Date of last rate
increase
Water – 2023
Wastewater –
2022
Stormwater –
over 20 years
Irrigation – 2023
Electric – 2024
Water – 2023
Water – 2020
Wastewater –
2024
Stormwater –
over 20 years
Water – 2024
Wastewater –
2024
Stormwater – 2006
Date of last rate
study
Water – 2021
Wastewater– 2021
Stormwater –
over 10 years
Irrigation – 2023
Electric – 2024
Water – 2023
Water – 2019
Wastewater –
2023
Stormwater –
over 20 years
Water – 2022
Wastewater –
2020
Stormwater – 1992
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Metrics City of Modesto Modesto
Irrigation District
City of Tracy City of Livermore
Advanced Metering
Infrastructure (AMI)
system? (Yes/No)
No Yes Yes Yes
Storm Drain Funding Storm drain fees
and transfers from
other funds, like
the Water Fund
No storm drain
services
Storm drain fees
and General Fund
transfers
Storm drain fees,
General Fund
transfers, FEMA
funding, and
development
impact fees
Street Sweeping
Funding
Yes (funded
through the Storm
Drain Program)
N/A (no street
sweeping
services)
Yes (funded
through the
Streets &
Right-of-Way
Maintenance
Program)
Yes (funded
through solid
waste collection
fees)
Advanced Metering Infrastructure (AMI) Systems
• All peers use AMI systems. Peers reported AMI systems have significantly improved operational efficiency by automating meter readings, reducing the need for manual meter reading, and allowing for real-time data collection.
• Real-time data provided by AMI facilitates quicker identification of leaks and issues within the system, leading to more timely responses and reduced water loss. • AMI can enhance customer service by allowing utility staff to address inquiries about usage more effectively, allowing detailed consumption data to be accessed during customer interactions.

Cost Overruns
• Peers emphasized the importance of conducting regular reviews of budget allocations and historical spending to manage budgets and identify potential cost-saving opportunities. Cities emphasized the importance of ensuring that adequate cash reserves are available before initiating capital improvement projects, to avoid reliance on theoretical future funding.

Forecasting Revenues and Expenses
• Forecasting processes varied, but peers agreed that best practice involves comprehensive rate studies every five years. These studies help set realistic revenue expectations based on historical data and anticipated changes in costs (e.g., inflation rates for utilities). • Peers had varying methods for forecasting revenues and expenses, including applying different inflation rates to expenditure categories, maintaining conservative growth assumptions to avoid overestimating revenues, and incorporating a contingency buffer of 5% to 10% in the budget to account for unexpected expenses and ensure financial stability. The City of Livermore also utilizes a robust asset management system to project future capital costs and integrates these projections into long-term financial plans.
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Grants
• Cities are beginning to recognize the importance of actively identifying and applying for grants in the utility space, particularly for infrastructure improvements and capital projects. Some of the entities mentioned that have applicable utility grants were the State Revolving Fund, Department of Water Resources (DWR), and Bureau of Reclamation.
• Currently at all peers, grant writing and management responsibilities fall to staff within respective departments, with no dedicated grant management personnel. This has made it challenging to prioritize applying for funding opportunities. The City of Tracy has been utilizing contractors to assist with finding and proofing grant applications.

Rates
• Peers highlighted the necessity of conducting regular rate studies and implementing incremental rate increases, allowing constituents to experience smaller, more manageable increases over time and thereby enhancing public acceptance and minimizing financial strain. • The City of Livermore emphasized the importance of public outreach to educate constituents about the necessity of rate adjustments and the value of services provided, to foster trust and understanding within the community.

Storm Drain
• All peers are grappling with challenges related to storm drain budgets under Proposition 218, often relying on general funds to bridge funding gaps. Like Modesto, other cities have been unable to raise storm drain rates in many years. The City of Tracy's storm drain rates have remained unchanged for over two decades, while Livermore has not increased its rates since 2006. This highlights a significant need for rate adjustments to ensure sustainable storm drain management.
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APPENDIX D: MANAGEMENT RESPONSE
Finding 1: Utility Capital Project Budgets: The department lacks a systematic approach to tracking total anticipated project costs within its Capital Improvement Program (CIP), leading to large fluctuations in project costs and raising potential transparency and accountability issues.

Recommendations Management Response/Implementation Plan Clearly document total project anticipated
costs, update totals as new projects are added,
and evaluate project budget versus actuals to
assess trends.

We acknowledge that some of the CIP projects reviewed
by the auditors does not reflect the accurate costs of the projects for various reasons (provided to the auditors), such as increase in project scope to increase design
efficiencies, which results in minimizing resident impact during construction. Currently, the cash flow internal
document is updated and then the proforma in accordance with it which is included in our adopted operating budget book. Additionally, as part of our five-year rate study, we include the cash flow projections and scenarios for
projects. However, we recognize we could present this in a more public facing document. A solution would be to utilize the CIP Database to allow for better tracking year-overyear on each individual project. A change in this process could be implemented immediately and would allow us to
earmark and plan for projects 5 years outward. During the award of a contract, the budget can be “trued” up for the actual increases. We are committed to improving the
coordination between the internal cash flow/Proforma and the CIP list.

Finding 2: Asset Maintenance Needs: The City lacks key maintenance data, an asset management system, and staff capacity to effectively address utility-related maintenance needs.

Recommendations Management Response/Implementation Plan A Collect and track maintenance data
including installation dates, renewal
periods, and estimated costs.

1. For most of the infrastructure, the City currently has most installation data in our GIS system. Staff is
tracking maintenance of assets through the work order
system, Lucity, and will need to assign designated
staff members to continually track updates and costs.

2. Staff is at the early stages of developing a more robust Asset Management Plan.

B Utilize Lucity as an asset management
system, or explore other systems to track
asset management data more effectively
and efficiently.

The Department is finishing up a Request of Proposals to conduct an Asset Management Plan gap analysis to assist staff to determine what is needed to centralize all asset data in a single system.
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C Evaluate inspection staffing with the
Utilities Department to address
maintenance needs.

The Department will re-assess and/or re-adjust staffing levels to transition from a reactive maintenance mode to proactive maintenance mode. A team dedicated to a
proactive maintenance program and utilizing technology for work orders and reports will assist in meeting this
challenge.

Staff will research opportunities to leverage technology and/or request additional resources to ensure maintenance needs continue to be identified, budgeted for, and
addressed.

D Review recruitment strategies and
compensation practices for inspectors
within the Utilities Department to ensure
effectiveness.

Staff will work with Human Resources department to
analyze recruitment and retention strategies for the
Environmental Compliance Inspector classification. An
overall assessment of the organization of assignments / tasks in this work unit could improve retention as well.

Finding 3: Storm Drain Program Budget: The City’s storm drain budget is projected to decline over the next five years, impacting the City’s ability to maintain the program that helps prevent flooding and protects the City’s water quality.

Recommendations Management Response/Implementation Plan A Evaluate reallocating storm drain fees,
establishing development impact fees, and
levying special taxes to fund the storm
drain program more effectively over time.

Utilities staff is currently coordinating with Budget to identify and implement opportunities for both short term fixes and long-term strategies to address revenue shortfalls in the Storm Drain fund.

B Consider reallocating street sweeping
expenditures to be financed by a different
fund than the storm drain fund.

This is currently being reviewed and in discussion for what other funding sources may be available and feasible to
cover the street sweeping expenditures. Once the funding sources are identified, staff will be working on an
implementation plan for how much of the current
expenditures will be covered by the new funding source.

Finding 4: Fee Setting: Although water and wastewater rates have increased in recent years, the City has not adjusted related fees in over a decade which may result in insufficient revenue to cover costs.

Recommendation Management Response/Implementation Plan
Evaluate water and wastewater fees to ensure
costs are adequately covered.

Impact fees analysis will be included in the next Water and Sewer Rate Studies, anticipated to begin in FY 2027/28.

Finding 5: Grant Setting: Despite grant opportunities, the Utilities Department lacks the capacity to pursue and manage grants effectively due to the absence of a dedicated grants management position.

Recommendation Management Response/Implementation Plan
Consider establishing a dedicated grants
management position (potentially as a shared
resource for City departments) to streamline the
grant application process and reduce the
workload on existing staff.

City staff has been coordinating with other departments and City Manager’s office to potentially centralize grant management as a shared resource.
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CITY OF MODESTO

COMMITTEE AGENDA REPORT
DATE OF MEETING:

April 23, 2025
Date: April 16, 2025
TO: Audit Committee
FROM: Colleen Rozillis, City Auditor
SUBJECT: Approval of the FY25-26 Internal Audit work plan.

CONTACT: Colleen Rozillis, City Auditor, [email protected], 206-302-6795 DESCRIPTION:

Consider approving the FY25-26 Internal Audit work plan.

STRATEGIC PLAN ELEMENT:

The recommended action supports the following 2020-2025 City of Modesto Strategic Plan Initiatives: Goal J: Build a high-performance organization.

BACKGROUND:

Each year, the City Auditor develops a proposed work plan to address internal controls, compliance, risk, and performance. In accordance with section 902.1 of the Modesto City Charter, “At the beginning of each fiscal year, the Auditor shall submit a one (1) to five (5) year audit schedule to the Audit Committee and Council for review and comment. The schedule shall include the proposed plan, and the rationale for the selections, for auditing departments, offices, boards, activities, subcontractors, and agencies for the period. This schedule may be amended after review with the Audit Committee and Council, but the Auditor shall have final authority to select the audits planned.”
DISCUSSION:

This year’s work plan was informed by the 2024 Internal Controls Review, 2022 Enterprise Risk Assessment, and discussions with Council and management. The City Auditor proposes the following projects for FY25-26:
 Enterprise risk assessment
 IT policy review
 Cash handling internal controls testing
 Homelessness response performance audit
 Fee benchmarking and cost recovery audit
 Parks Recreation & Neighborhoods performance audit
 Recommendation validation
 Ongoing Internal Audit services
#5..
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Audit Committee, July 9, 2024
Internal Audit Work Plan

Page 2 of 2 ends

FISCAL IMPACT:

None.

RECOMMENDED COMMITTEE ACTION:

Motion to approve the FY25-26 Internal Audit work plan and forward to Council for acceptance.

Approved by:

Colleen Rozillis, City Auditor
Attachments:

1. Internal Audit work plan presentation, dated 4-16-25. #5..
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FY25-26 INTERNAL

AUDIT WORK PLAN
Audit Committee Meeting
April 23, 2025
#5..
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● The City retained Moss Adams to serve as the designated Internal Auditor and conduct projects focusing on:
○ Risks
○ Internal controls
○ Efficiency and effectiveness
○ Best practices
○ Compliance
● Work is being completed under appropriate industry standards (IIA,

GAGAS, AICPA)
Internal Audit Overview
#5..
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Holistic Internal Audit Program Approach
Tracking &
Reporting A Program Inputs B Opportunities C
• Enterprise
Assessments
• Employees and
Community
• Performance
Metrics
• Risks
• Controls
• Compliance
• Performance
• Findings &
Recommendations
• Fraud, Waste, and
Abuse Hotline
• Corrective Actions
• Implementation
• Validation
#5..
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Internal Audit Program Review
Department Project Department Project
Community & Economic
Development Permitting (25) Information Technology
Engineering Services Parks, Recreation, and
Neighborhoods
Finance Procurement (24), Payroll
(25), AR (25) Police
Fire Public Works Fleet Controls (24), Solid
Waste & Forestry (24)
Human Resources Utilities Fiscal Review (25)
Citywide Projects Internal Controls Review (24), FWA Policy & Training (24), Property Management (24), Capital Program (25)
#5..
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Internal Audit Program Review
5 Focus Accomplishments
Enterprise Risk Assessments 2022*
Enterprise Internal Controls Review 2024
Functional Internal Controls Reviews 3
Functional Internal Controls Testing To come
Performance Projects 5
Recommendations Validated Implemented & Tracked 178/237 Ethics Hotline Statistics Over 190 reports since 2016
*conducted prior to Moss Adams contract
#5..
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Performance projects:

1. Enterprise risk assessment

2. Parks, Recreation & Neighborhoods
performance audit

3. Homelessness response performance audit

4. Fee benchmarking & cost recovery audit

5. Prior audit update: Transportation or fleet

6. Prior audit update: Utilities operations

7. Contract audit: City Attorney

8. Measure H compliance & performance
audit

9. Governance assessment: Committees,
commissions, & boards
Internal controls and compliance projects:

1. IT policy review

2. P-card internal controls testing

3. Cash handling internal controls testing
Program management:

1. Recommendation validation

2. Ongoing internal audit program
management
Potential FY25-26 Internal Audit Projects
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1. Enterprise risk assessment: Identify, analyze, and measure risks by the level of inherent vulnerability, the level of preparedness to mitigate them, and the impact such negative events could have on the City should they occur. This assessment informs the three-year internal audit work program.

2. IT policy review: Review IT Department policies, identify gaps and opportunities for improvement, and support the Department during the policy update process.

3. Cash handling internal controls testing: Test internal controls related to cash handling activities across the City.

4. Homelessness response performance audit: Assess economy, efficiency, and effectiveness of the City’s response to homelessness in the community. Compare City practices to industry best practices.

5. Fee benchmarking & cost recovery audit: Review the City’s fee schedule, compare fees to peers, and assess the extent to which fees cover costs.

6. Parks, Recreation & Neighborhoods performance audit: Assess economy, efficiency, and effectiveness of departmental operations and compare to industry best practices.

7. Recommendation validation: Continue to track and validate recommendation implementation.

8. Ongoing internal audit program management: City Auditor activities including overseeing the internal audit program and managing the fraud, waste, and abuse hotline.

Recommended FY25-26 Internal Audit Program
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Recommended Internal Audit Program
Project Budget 7-9/24 10-12/24 1-3/25 4-6/25
Enterprise risk assessment $45,000
IT policy review $25,000
Cash handling internal controls testing $30,000
Homelessness response performance audit $40,000
Fee benchmarking & cost recovery audit $40,000
Parks, Recreation & Neighborhoods performance
audit $35,000
Recommendation Validation $10,000
Ongoing Internal Audit Services $25,000
Total $250,000
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CITY OF MODESTO

AUDIT COMMITTEE AGENDA REPORT
DATE OF MEETING:

April 23, 2025
Date: March 26, 2025
TO: Audit Committee
Sue Zwahlen, Chair
David Wright, Vice-Chair
Chris Ricci, Committee Member
Camille Garcia, Committee Member
THROUGH: Joseph P. Lopez, City Manager
FROM: Christina Alger, Director of Human Resources
SUBJECT: Employment after Retirement Review Final Report CONTACT: Dawn Kelley, Human Resources Manager
[email protected], 209-577-5490
DESCRIPTION:

Consider the Final Report of the Employment after Retirement Review conducted by California Public Employees’ Retirement System (CalPERS) and forwarding to Council for approval. (Funding Source: Various Funds)
STRATEGIC PLAN ELEMENT:

This item supports the 2020-2025 Strategic Plan’s focus of Governance and Service Delivery under Goal H: Achieve Financial Sustainability.

BACKGROUND:

All City of Modesto qualified employees are required to participate in the City of Modesto Safety (Police and Fire) or Miscellaneous (all other) Plans, agent multi-employer defined benefit pension plans administered by the California Public Employees’ Retirement System (CalPERS), which acts as a common investment and administrative agent for its participating member employers.

Benefit provisions under the Plans are established by the State statute and City resolution. At any point of time, CalPERS can perform audits on the City’s Plans to ensure we are following the applicable laws and resolution.

In March 2024, the City was informed by CalPERS that the Office of Audit Services (OFAS) would be performing a review of the City’s use of Retired Annuitants. The objective of the review was to determine whether public agencies employed retired annuitants (RA) in compliance with employment after retirement provisions in accordance with Government Code sections 21220.5, 21221, 21224, and 7522.56 and Title 2 of the California Code of Regulations sections 579.25 and 586.2.
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Audit Committee, April 23, 2025
Employment after Retirement Review Final Report

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OFAS selected a sample of twenty-five (25) public agencies who reported active RA appointments. OFAS performed procedures to determine whether the agencies properly employed and reported RA appointments, work hours, and payroll information to CalPERS in accordance with employment after retirement requirements. The review covered the period of January 1, 2020 through December 31, 2023. They sampled six (6) RA from City of Modesto.

On September 10, 2024, the City was provided a draft report of the results of this audit. OFAS reported four (4) areas of findings- 1) Two (2) RA’s did not comply with unemployment insurance compensation certification (certify in writing they had not received unemployment benefits in the 12 months prior to becoming an RA); 2) One (1) RA whose position was not supported with documentation to support the initial hiring of the RA; 3) One (1) RA the City did not provide sufficient documentation to demonstrate the RA’s work was consistent with extra help purposes; 4) One (1) RA hours were inaccurately reported when an RA reported working overtime in errorthe time sheet correction was not reported to CalPERS; one (1) RA hours were reported inaccurately and the RA exceeded the maximum number of hours allowed to work during a fiscal year.

City of Modesto was given the opportunity to respond to the draft report. Human Resources and the Payroll Division in the Finance Department drafted the response. We agreed with finding 1) and provided documentation that had already been corrected and includes unemployment insurance compensation certification at the time of the RA initial appointment date. We also agreed with finding 4) and provided information that additional staffing within the payroll division is needed and additional training will occur to ensure timely audits of works hours and pay rates to ensure accurate reporting. We disagreed with findings 2) and 3) and submitted information within CalPERS Publication 33 to support our need for the specialized skillset of a Police Officer as extra help and specialized skillset related to recreation and golf courses within the City of Modesto.

DISCUSSION:

The final audit report was received by the City in November 2024. OFAS reported that all 25 agencies reviewed did not employ RAs in compliance with employment after retirement provisions in various areas.

OFAS Employer Compliance Review Final report included the four (4) areas of findings for City of Modesto, all as stated within the draft report. The final report is attached to this item for review.

The report identified the common causes for the non-compliances identified above, for all agencies, were due to agencies not having a clear understanding and knowledge of all employment after retirement requirements, inadequate processes to obtain and maintain documentation to support RA hiring needs, clerical errors and employer system issues and limitations impacting accurate reporting of required RA information.

The final report states any issue identified within the report will be forwarded to the appropriate division and includes a recommendation that employers work with CalPERS Employer Account Management to resolve any working after-retirement findings noted and identify all impacted retirees.
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Audit Committee, April 23, 2025
Employment after Retirement Review Final Report

Page 3 of 3 ends

FISCAL IMPACT:

There is no fiscal impact to the action of accepting the CalPERS Office of Audit Services Employer after Retirement Review final report.

RECOMMENDED COMMITTEE ACTION:

Staff Recommendations:

Motion recommending accepting the Final Report of the Employment after Retirement Review conducted by California Public Employees’ Retirement System (CalPERS) and forwarding to Council for approval.

Christina Alger, Director of Human Resources
Joseph P. Lopez, City Manager
Attachments:

1. CalPERS Office of Audit Services Employer after Retirement Review final report. #6..
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Audit CommitteeApril 23, 2025

Audit Committee
April 23, 2025