Report 2014-121 All Recommendation Responses

Report 2014-121: University of California, Davis: It Has Not Identified Future Financing for the Strawberry Breeding Program nor Collected All Available Revenues (Release Date: June 2015)

Recommendation #1 To: University of California, Davis

UC Davis should ensure that the strawberry program is adequately funded. To address the strawberry program's recent loss of funding, the university should consider allocating more of the strawberry program's patent income back to the program itself. In addition, UC Davis should regularly reassess the appropriateness of the strawberry program's royalty rates charged to licensees and adjust the rates as needed to support the program.

1-Year Agency Response

The Strawberry Breeding Program (SBP) has established a budget approved by the CA&ES dean's office and the Plant Sciences department. The $1.2 million annual budget for 2015-16 and 2016-17 is funded entirely with strawberry patent revenue. A copy of the budget is provided. Financial activity is recorded in UC Davis Kuali accounts 3-PATDVS2 and 3-PATSJK2 (summary of financial activity for July 1, 2015-March 31, 2016 provided). As the SBP evolves to full maturity over the next few years, if the net strawberry patent revenue allocated from the campus to the Plant Sciences department and CA&ES dean's office are insufficient to fund the full SBP budget, the campus will partner with the college and department to resolve the difference.

Additionally, a royalty rate assessment has been completed by InnovationAccess. Assessment documentation provided.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

UC Davis provided documentation supporting its statement that it is now using its strawberry breeding program's (strawberry program) patent revenue to fund the strawberry program. In addition, UC Davis provided documentation showing that it has finished assessing the appropriateness of the strawberry program's current royalty rates.

6-Month Agency Response

The strawberry program has recently submitted a budget demonstrating adequate support for the strawberry program to the CA&ES Dean's office for review. The campus budget office will participate in reviewing the strawberry program budget as part of the follow-up to the audit (note: the budget office does not routinely review individual program or department budgets).

Progress to date regarding assessment of the strawberry program's royalty rates is in the form of focused (ongoing) discussion at InnovationAccess in furtherance of the corresponding UC Davis Action (as set forth in our May 22, 2015 letter). We anticipate the process will be completed by December 31, 2015. Over the next several weeks we will continue to take steps toward such completion.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

The department, along with all departments on campus, are in the process of evaluating year-end financial results from 2014-15 along with budgets for 2015-16. The department is working with the dean's office to prepare a multi-year budget to demonstrate adequate support for the strawberry program. The campus budget office will review the budget as part of the follow-up to the audit (note: the budget office does not routinely review individual program or department budgets). It is anticipated that a budget plan will be available for the budget office to review by late October.

With regards to reassessing the appropriateness of royalty rates - Progress to date for this recommendation is in the form of focused (ongoing) discussion at InnovationAccess in furtherance of the corresponding UC Davis Action (as set forth in our May 22, 2015 letter). We anticipate the process will be completed by December 31, 2015. Over the next several months we will continue to take steps toward such completion.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #2 To: University of California, Davis

The department should prepare a balanced budget for each fiscal year that details how it will fund the strawberry breeding program. In addition, it should begin comparing actual income and expenses to the budget periodically to ensure that the program is operating in a cost-efficient manner and is adequately funded.

1-Year Agency Response

The Strawberry Breeding Program (SBP) budget has been established. The Plant Sciences department completes a quarterly "budget versus actual expense" analysis. Analysis for the first three quarters of fiscal year 2015-16 provided.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

UC Davis provided a copy of its budget for fiscal years 2015-16 and 2016-17. UC Davis also provided documentation showing that it is comparing budgeted vs actual costs quarterly.

6-Month Agency Response

The Strawberry Breeder and Plant Sciences Department Chair have developed and submitted a budget request to the CA&ES dean's office on October 30, 2015. The CA&ES dean's office plans to review this budget request in the next couple weeks and hopefully reach a conclusion by the end of December 2015.

Once the budget is finalized it will be used to perform the budget to actual analysis of the first two quarters of fiscal year 2016.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

- The CA&ES dean's office has been working with the Plant Sciences department chair, chief administrative officer, and new strawberry breeder Steve Knapp to develop a balanced budget for the Strawberry Breeding Program. As of September 15, 2015 a rough draft budget has been developed. It is currently under review and expected to be finalized by October 15, 2015.

- Plant Sciences has developed a budget to actual worksheet for the Strawberry Breeding Program. It will be reported quarterly for periods July-September, October-December, January-March and April-June.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #3 To: University of California, Davis

To better enable it to effectively monitor and report the financial condition of the strawberry program, UC Davis should implement its plan to begin accounting for the strawberry program's financial activities separately from those of the breeder in fiscal year 2015-16.

60-Day Agency Response

Plant Sciences has moved the Strawberry Breeding Program financial activities into a unique Kuali Organization, separate from those of the breeder. Kuali ORG "ASBP" is the Strawberry Breeding Program ORG code which is a subordinate ORG under ORG "FSJK" which is Steve Knapp's ORG. We will provide the Organization Detail report in support.

California State Auditor's Assessment of 60-Day Status: Fully Implemented

UC Davis provided a report from its financial system, which shows that it created a subordinate organization code for the strawberry program. If UC Davis uses this new code appropriately, it will be able to account for the the strawberry program's financial activities separately from those of the breeder.

Recommendation #4 To: University of California, Davis

UC Davis should collect all late fees that its licensees owe.

Annual Follow-Up Agency Response From November 2019

UC Davis will not implement this recommendation as written.

In our 2015 draft report response we stated our position and provided an alternative action: "UC Davis' historical practice of waiving late fees appropriately fostered the development of positive working relationships with our strawberry industry partners. UC Davis will continue to maintain the contractual right to collect late fees and will retain its discretionary ability to waive that right. We will consider, on a case by case basis, whether to assess late fees so long as doing so will not jeopardize long term relationships with licensees. UC Davis will develop a process to document, on a case by case basis, these collection efforts and decisions."

As demonstrated to the auditors in 2016, UC Davis established a process to determine and document whether late fees may be appropriate in certain circumstances. We continue to operate under these late fee guidelines.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

We stand by our recommendation that UC Davis should collect all late fees that its licensees owe. We noted in the audit report that the university's existing funding mechanisms for the strawberry program did not adequately cover certain funding losses, which placed the viability of the strawberry program in jeopardy. Despite this funding loss at the time, UC Davis did not collect $157,000 in late fees from licensees that were late in making royalty payments in fiscal years 2010-11 through 2012-13. Thus, we believe that collecting all late fees could help ensure the strawberry program's viability.

Annual Follow-Up Agency Response From October 2019

The University of California, Davis makes individual determinations regarding the appropriateness of assessing late fees based on guidelines established in June 2016. These guidelines were provided to the California State Auditor in the 2017 annual update.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

Annual Follow-Up Agency Response From October 2018

UC Davis continues to operate under the late fee guidelines established in June 2016 to determine whether late fees may be appropriate in certain circumstances. These guidelines were provided to the California State Auditor in the November 2017 update.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

We continue to stand by our recommendation that UC Davis should collect all late fees that its licensees are contractually obligated to pay, as this funding could be used to support the strawberry program.

Annual Follow-Up Agency Response From November 2017

UC Davis strawberry agreements continue to contain a late fee assessment provision and UC Davis continues to have the right to invoke or waive such provision. We agree with the CSA that the assessment of late fees may be appropriate in certain circumstances and remain diligent in considering and enforcing late fees according to the structure established in the June 7, 2016 Late Fee Process document. In support of these efforts, we provide the 2016 strawberry licensee compliance spreadsheets documenting any late payments and the subsequent determinations regarding late fees.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

We stand by our recommendation that UC Davis should collect all late fees that its licensees are contractually obligated to pay, as this funding could be used to support the strawberry program.

1-Year Agency Response

UC Davis Innovation Access performed an analysis of the appropriateness of late fees, the process for determining whether to assess late fees, and the process by which late fees might be assessed as associated with payments from UC Davis strawberry program licensees. The analysis is based on the following considerations: (1) background; (2) process for determining late fee collection; and (3) implementation of late fees. Based on an on-balance assessment of the considerations listed above, the assessment of late fees may be appropriate in certain circumstances.

The full analysis is provided for your information.

California State Auditor's Assessment of 1-Year Status: Will Not Implement

UC Davis provided a copy of its analysis of the appropriateness of late fees, which outlines its procedures for waiving late fees. However, we stand by our recommendation that UC Davis should collect all late fees that its licensees are contractually obligated to pay, as this funding could be used to support the strawberry program.

6-Month Agency Response

Progress to date for this recommendation is in the form of focused (ongoing) discussion at InnovationAccess in furtherance of the corresponding UC Davis Action (as set forth in our May 22, 2015 letter). We anticipate the process will be completed by June 30, 2016. Over the next several weeks we will continue to take steps toward such completion.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

Progress to date for this recommendation is in the form of focused (ongoing) discussion at InnovationAccess in furtherance of the corresponding UC Davis Action (as set forth in our May 22, 2015 letter). We anticipate the process will be completed by June 30, 2016. Over the next several months we will continue to take steps toward such completion.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #5 To: University of California, Davis

If UC Davis considers providing future discounts on royalty rates, it should structure the agreements to ensure that it receives a commensurate benefit during the entire time that licensees receive discounts.

60-Day Agency Response

We continue to agree with this recommendation. Discount strawberry royalty rates are not envisioned at this time. Accordingly, there is no current action to be taken.

California State Auditor's Assessment of 60-Day Status: Resolved

Recommendation #6 To: University of California, Davis

UC Davis should develop a risk-based audit plan to begin periodically reviewing the financial records of master licensees and licensed nurseries to ensure that they are accurately reporting all of their sales of licensed strawberry varieties and paying the university all the royalties it is entitled to. To encourage compliance, UC Davis should notify all master licensees and licensed nurseries that it will begin auditing the sales records of selected licensees.

Annual Follow-Up Agency Response From November 2017

Consistent with UC Davis' commitment in response to the CSA's recommendation to audit a strawberry licensee beginning in fiscal year 2017, and in each of the following three fiscal years, an audit of a California strawberry licensee was completed in fiscal year 2017. UC engaged the services of an experienced outside intellectual property auditor to perform a royalty examination. Per the auditor's report, the results of the royalty examination established that "royalty accountings are complete and there were no underpayments". UC Davis plans to audit a second strawberry licensee in fiscal year 2018.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

UC Davis provided evidence that it engaged the services of an external auditor who completed an audit of a strawberry licensee in fiscal year 2017.

1-Year Agency Response

A cost-benefit analysis of implementing a licensee auditing program was completed by UC Davis Innovation Access February 12, 2016. (This analysis is provided to you separately.) The results of the cost-benefit analysis suggest that wholesale auditing of strawberry licensees would not be advantageous or an appropriate expenditure of funds at this time. However, for certainty and in response to CSA's recommendation for periodic auditing, UC Davis will conduct strawberry licensee audits as follows:

- Beginning in fiscal year 2017, and in each of the following three fiscal years, UC Davis will audit a strawberry licensee.

- The selection of licensee will be in view of licensee reporting, field representative input, input from others in the strawberry program, and cost-benefit considerations associated with auditing.

- After the 4th audit (conducted in fiscal year 2020), UC Davis will consider the benefits derived and any cost recoveries made from the audits and reassess this approach.

California State Auditor's Assessment of 1-Year Status: Pending

Although UC Davis provided its cost-benefit analysis of auditing its strawberry program licensees, the analysis did not provide any reliable evidence for its conclusion. However, UC Davis stated that it will conduct audits of the strawberry program beginning in fiscal year 2017. As a result, we look forward to the results of those future audits.

6-Month Agency Response

Progress to date for this recommendation is in the form of focused (ongoing) discussion at InnovationAccess in furtherance of the corresponding UC Davis Action (as set forth in our May 22, 2015 letter). We anticipate the process will be completed by June 30, 2016. Over the next several weeks we will continue to take steps toward such completion.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

Progress to date for this recommendation is in the form of focused (ongoing) discussion at InnovationAccess in furtherance of the corresponding UC Davis Action (as set forth in our May 22, 2015 letter). We anticipate the process will be completed by June 30, 2016. Over the next several months we will continue to take steps toward such completion.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2014-121

Agency responses received are posted verbatim.