Our review of the Ross Valley Sanitary District's (district) policies and practices over its financial and administrative operations highlighted the following:
The Ross Valley Sanitary District (district) has only recently taken steps to correct weaknesses in its financial and administrative policies and practices. Located in Marin County, the district provides wastewater collection services to residents and businesses in the communities of Fairfax, Greenbrae, Kentfield, Larkspur, Kent Woodlands, Ross, San Anselmo, and Sleepy Hollow. The district's revenue comes in large part from wastewater collection fees and property taxes. A five-member board of directors (board) governs the district, and a general manager oversees the district's day-to-day activities. The district's former general manager resigned in July 2012 and has since been arrested on charges of misappropriation of public funds, embezzlement, and money laundering related to a $350,000 down payment assistance loan the district provided him as part of his employment contract.
Reviews of the district by an external auditor in October 2013 and October 2014 found that the district had weak or missing internal controls. For example, the auditor found that one employee was responsible for entering invoices into the accounting system, preparing checks to pay those invoices, and reconciling bank statements to the district's records. Such an arrangement could allow the employee to create and conceal fraudulent financial transactions. In addition, in April 2014 a team of human resources consultants found that the district had ineffective or nonexistent organizational administrative systems and processes. The human resources consultants created a work plan that calls for the district to revise and in some cases develop administrative and human resources policies and performance measurement metrics, among other tasks.
The district is in the process of implementing the external auditor's outstanding recommendations and the elements of the human resources consultants' work plan. We also reviewed the district's controls over significant financial and administrative functions, including the controls implemented in response to the findings of the district's external auditor, and found that new policies strengthen these controls but that weaknesses still exist.
As the governing body of the district, the board needs to ensure that management further develops existing controls and implements additional controls over key financial and administrative functions to ensure prudent management of the district and to protect against the potential for fraud, waste, abuse, and conflicts of interest. One potential cause of the board's failure to adequately oversee the district is that board members receive inadequate training. Board members have demonstrated a lack of understanding of their roles in certain key district processes, including establishing appropriate compensation levels, reviewing and approving declarations for emergency procurements, and contracting for professional services. Further, the board's responsibilities are not adequately documented to ensure that board members, particularly those that are newly elected, fully understand their fiduciary responsibilities. For example, the district has not documented in its policies the board's responsibilities for establishing appropriate salary structures or reviewing district finances. In addition, the district's management failed to begin implementing key controls over the district's financial and administrative functions until fiscal year 2013-14.
The board's oversight over employee compensation has been lax and resulted in high salaries for district employees, relative to what employees in similar positions receive at comparable sanitation agencies. For example, the top salary ranges of some of the district's key management positions are 12 percent to 18 percent higher than those for similar positions at larger sanitation agencies. Furthermore, the district has paid its employees excessive annual cost-of-living adjustments (COLAs) of between 3 percent and 5 percent that are not tied to changes in an actual cost-of-living index. For example, even though the consumer price index increased by only 0.7 percent in 2009, the district paid its employees a 5 percent COLA that same year. In addition, the district provides its employees longevity pay without justifying the need for this extra pay to retain or attract qualified employees. We do not believe that the district's practice of offering excessive compensation to its employees is an appropriate use of revenue generated from fees and taxes paid by its ratepayers.
In contrast, the salary for the district's new general manager is in line with comparable agencies, ranking 11th out of the 13 sanitation agencies and comparison groups we reviewed. Furthermore, the district's employment contract with its current general manager does not include the same excessive provisions found in the former general manager's contract, such as a $350,000 down payment assistance loan, a one-time $9,850 bonus, and student debt relief. However, the board still has not established in policy its approach for periodically evaluating the general manager's performance and for determining any merit-based compensation increases.
Additionally, the board did not appropriately review two of the district's most costly emergencies to determine if it should continue the work without seeking competitive bids. In an emergency—a sudden, unexpected occurrence that poses a clear and imminent danger, requiring immediate action to prevent or mitigate the loss or impairment of life, health, property, or essential public services—state law allows the board to vote to avoid competitively bidding the work necessary to resolve the emergency. However, state law also requires the board to reassess and vote whether the situation is still an emergency at every subsequent monthly board meeting. The board did not follow this requirement at meetings during which the two emergencies were ongoing and thus may have unnecessarily allowed the district to continue to avoid competitive bidding.
Although the district adhered to state law when awarding capital and construction-related contracts, it does not ensure that it receives the best value for its ratepayers when contracting for professional services, because it does not always use a competitive process or justify using sole-source contracts. For example, the district awarded a sole-source contract not to exceed $84,000 for one year of marketing-related services that the board approved without questioning why district staff did not solicit additional proposals. In addition, after the contract term expired, the district continued to pay for the marketing services for several months without having a written contract in place, until the district renewed the contract. Ultimately, the district terminated this contract as part of its efforts to reduce expenses. However, by that point the district had paid this contractor more than $175,000.
Finally, the district has not properly managed its human resources functions. For most of the period from fiscal years 2009-10 through 2013-14, the district did not have staff with expertise in human resources management to whom district employees could turn for guidance in handling human resources issues. Also, the district did not have established processes for some essential human resources functions and/or did not ensure that those functions were performed. For example, the district did not comply with state law by ensuring that its supervisory employees attend sexual harassment prevention training every two years, nor did it always complete annual performance evaluations of its employees as required by its policies. In addition, the district did not ensure that all required employees filed documentation to identify potential conflicts of interest.
The board should ensure that management continues to develop and strengthen its controls over the district's financial and administrative functions. For example, district management should fully implement all of the external auditor's remaining recommendations by June 30, 2015. Management should also ensure that staff follow these policies and should create and implement a plan for monitoring its system of controls.
The district should implement all of the remaining recommendations contained in its human resources consultants' work plan.
To clarify the roles and responsibilities of board members, the district should create a more comprehensive board member manual that describes all of the board's roles and fiduciary responsibilities. The district should also provide for additional training for board members in the following areas over which they exercise important responsibilities: financial management, contracting, emergency procurement, and human resources.
The board should reduce the salary ranges for all positions in the district's salary schedules to better align with comparable positions at comparable sanitation agencies. While we are not suggesting that the board cut the current salaries of its employees, it is imperative that the board reduce the salary ranges in its salary schedules before more employees reach the top step of their respective salary ranges. The board should also ensure that COLAs are tied to an appropriate cost-of-living index and that any merit raises are based on satisfactory performance that is documented in an appraisal. Further, the board should either justify its need for longevity pay to attract and retain qualified employees or discontinue its practice of offering longevity pay to those employees who are not already receiving this extra pay. The board should make these changes for unrepresented employees immediately and should seek to make these changes for represented employees by negotiating with the American Federation of State, County, and Municipal Employees Local 2167 when the current memorandum of understanding expires in July 2015.
To ensure that compensation for the general manager remains reasonable, and to prevent the excesses that existed in the former general manager's contract, the district should develop a policy that establishes the criteria to be used when periodically evaluating the general manager's performance and determining any merit-based compensation increases.
To ensure that it follows state law and its policies for emergency procurement, the board should review and reapprove all emergencies at each board meeting subsequent to the initial emergency declaration and should terminate emergency declarations as soon as possible to ensure that it competitively bids any work that is no longer an emergency.
The district should ensure that it hires qualified vendors at a reasonable price by using a competitive process when contracting for professional services. When this is not possible or appropriate given the nature of the services, the district should adequately justify its use of a noncompetitive process (sole-source procurement).
The district should ensure that it has access to qualified human resources professionals, whether contracted or in-house, to assist staff when handling human resources issues.
The board unanimously agrees with all of our recommendations and will make their implementation a top priority.