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California State Auditor Report Number : 2015-125

San Joaquin Valley Air Pollution Control District
To Cover Its Costs, It Recently Increased Permit Fees and Continues to Use Supplemental Revenue but Can Improve Consistency and Transparency for Certain Program Requirements


Response to the Audit


SAN JOAQUIN VALLEY AIR POLLUTION CONTROL DISTRICT

March 15, 2016

Elaine M. Howle, CPA
State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Dear Ms. Howle,

We have reviewed your draft report of the audit that you were requested to conduct by the Joint Legislative Audit Committee. At the outset, I want to express our gratitude for the thoroughness and proficiency of your team, including the legal staff. We believe that the District was treated fairly and professionally throughout the entire process.

1

Thank you for a positive audit report. We are happy with the report as written, and only have a request for a minor clarifying change to the title. We believe that the draft report's title can be misleading for individuals that may not carefully read the entire report. The first part of the title references a recent fee increase and then continues to the second issue, stating “…but Can Improve Consistency and Transparency for Certain Program Requirements". The title connects two separate issues and leaves one with the impression that the consistency and transparency issue relates to the District's fee programs, rather than only the indemnity agreement process. We therefore suggest that the title be changed as follows: "San Joaquin Valley Air Pollution Control District: To Cover Its Costs, It Recently Increased Permit Fees and Continues to Use Supplemental Revenue, and with Respect to Indemnification Agreements, It Can Improve Consistency and Transparency."

With respect to the major focus of the audit relating to fees, we appreciate your findings that the District's fees are low compared to program costs and that the District lawfully uses supplemental sources of revenue to make up the difference. We take pride in having the lowest fees in the state. As you have noted, the District routinely assesses the costs and needed revenues for administering an active and effective air quality management program. With a strict adherence to the zero-based budgeting principles, significant investment in automation, and implementation of countless streamlining and efficiency measures, the District has been able to achieve low administrative overhead and great productivity in all program areas and therefore reduced costs.

2

The other area addressed by the audit relates to process utilized by the District to garner indemnification from the cost of litigation related to the issuance of certain District permits. This issue is of relatively minor scope. As the audit report notes, this indemnification process was required on only 13 projects per year of the 4,800 permitting projects the District issued over the past four years.

3

We appreciate your audit finding that the District exercises allowable risk-management discretion. The parties requesting the audit had questioned the need for letters of credit which they had confused with the posting of bonds. However, your audit concludes that the District should have required more letters of credit than it did. While we appreciate your strict interpretation of the District's existing policy, on which your conclusion was based, we believe that the District was correct in not requiring letters of credit for the projects cited in your report. As noted in your audit report, to avoid unnecessary burden on permit applicants, the District does not require indemnification for projects with low risk of litigation. Based on the concerns raised and the recommendations in your report, and consistent with the District's core values which call for continuous improvement and open and transparent public processes, we have revised our policy to clearly describe the case-by-case nature of these risk management decisions and to require documentation of those decisions in each project's engineering evaluation report.

Sincerely,

Seyed Sadredin
Executive Director/Air Pollution Control Officer






Comment

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM SAN JOAQUIN VALLEY AIR POLLUTION CONTROL DISTRICT

To provide clarity and perspective, we are commenting on the response to our audit report from the San Joaquin Valley Air Pollution Control District (district). The numbers below correspond with the numbers we have placed in the margin of the district’s response.

1

We disagree with the district’s comment that our title can be misleading for individuals who do not carefully read the entire report. Our title fairly reflects the contents of this report and is intended to only summarize its contents and is not intended to contain every detail found in the report. Further, the district’s suggested title only mentions the issue with indemnification agreements and is more narrow than the concerns we identified because it does not include our concerns regarding letters of credit.

We also disagree with the district’s comment that the title connects two issues and leaves one with the impression that the consistency and transparency issue relates to the district’s fee programs. The use of but in the title indicates that we had no concerns with the first issue but did have concerns with the second issue.

2

We have updated the number of permits and indemnification agreements to which the district refers. Specifically, we updated the numbers to consistently reflect fiscal year information, and we added the most recent fiscal year 2014–15. We have also clarified the report text to indicate that the average number of permits we cite is an annual average. Therefore, as we indicate in the Audit Results, the district issued an annual average of more than 4,600 Authority to Construct permits for fiscal years 2010–11 through 2014–15 and required fewer than 15 indemnification agreements and only 10 letters of credit on average for the last 5 fiscal years.

3

The district’s statement that our audit concludes that the district should have required more letters of credit than it did is misleading. Our report does not conclude whether the district should have required fewer or greater numbers of letters of credit. Rather, our report concludes that the district did not always follow its policy and internal methodology regarding letters of credit. As we state in the Audit Results, despite having a published policy and internal methodology, the district does not always follow either the policy or methodology when obtaining indemnification agreements and letters of credit. In some instances, we noted that the district policy required it to obtain a letter of credit and it did not.



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