Los Angeles County One Gateway Plaza ~ Metropolitan Transportation Authority Los Angeles, CA metro.net

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1 @ Metro Los Angeles County One Gateway Plaza ~ Metropolitan Transportation Authority Los Angeles, CA metro.net FINANCE, BUDGET AND AUDIT COMMITTEE APRIL 18, 2012 SUBJECT: MEASURE R LOCAL RETURN PROGRAM AUDITS ACTION: RECEIVE AND FILE MEASURE R LOCAL RETURN PROGRAM AUDIT FINDINGS RECOMMENDATION Receive and file report on the findings identified in the audits of the Measure R Local Return Program. ISSUE On November 4,2008, Los Angeles County voters approved Measure R that imposed an additional half-cent transactions and use tax to fund transportation improvements in the County. Measure R, also known as the Traffic Relief and Rail Expansion Ordinance also establishes an Independent Taxpayers Oversight Committee and an oversight process to ensure that the Los Angeles County Metropolitan Transportation Authority (MTA) and local subrecipients comply with the terms of the Ordinance. The oversight process requires that an annual audit be conducted six months after the end of the fiscal year to determine compliance with the provisions of the Ordinance related to the receipt and expenditure of sales tax revenues during the fiscal year. At the February 2012 Measure R Oversight Committee, the committee reviewed the three audits of Measure R sales tax revenues used in FYI 1. Thompson, Cobb, Bazilio and Associates (TCBA) completed an audit of MTA's compliance to the Measure R Ordinance. The audit found that MTA complied in all material respects with the requirements applicable to Measure R revenues and expenditures for the year ended June 30, Two CPA firms, Vasquez & Company and Simpson and Simpson, were contracted with to audit the 87 cities and County of Los Angeles' compliance of use of Measure R sales tax revenues. The Measure R Oversight Committee directed staff to take corrective action on the 39 findings identified in the Vasquez & Company and Simpson & Simpson audits. Fourteen of the 39 findings were administrative and had no questioned costs associated with them. However, 25 findings had questioned costs totaling approximately $3.5

2 million. Thirty-two of the 39 findings have already been corrected. The uncorrected findings are as follows: + I Maywood Maywood r Pomona I funds wkre ex~ended transportation Funds used for non- Measure R Program Revenues not properly recorded in Measure R Account No adequate evidence funds were expended on I transportation on I I will work with LACMTA to implement a I $1,571 reasonable documentation process. City agrees with the corrective actions. City is working towards implementing them. City will change recording habits. $1 1,767 City needs to revise their current method of employee expense I procedures. Pomona I No adequate evidence 1 $12,667 I City needs to revise their current Rosemead Rosemead DISCUSSION funds were expended on transportation No adequate evidence funds were expended on transportation No adequate evidence funds were expended on transportation $1,134 $1 3,908 method of employee expense procedures. City needs to revise their current method of employee expense procedures City needs to establish controls to document costs. City agrees that this was a formula error and will be corrected. The firms contracted to perform the audits, TCBA, Vasquez & Company and Simpson & Simpson conducted the audits of compliance in accordance with auditing standards generally accepted in the United States of America as stated in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that they plan and perform the audits to obtain reasonable assurance about whether noncompliance with the requirements in the Ordinance could have a direct and material effect on the Measure R Local Return program. For efficiency and effectiveness purposes, we contracted with three firms to conduct the audits of Measure R sales tax revenues used in FYI 1. TCBA audited MTA1s use of Measure R funds, and there are no findings reported in the audit report (Attachment C). Vasquez & Company and Simpsons & Simpson split the audits of the 87 cities and the County of Los Angeles. The summary of compliance findings are on page 3 in each of the respective reports (Attachment A and B). Detailed information on each of the findings is included in Schedule 2 in both of the reports. Attachment D lists the entities audited by each of the firms. Measure R Audit Findings Page 2

3 NEXT STEPS Staff will follow-up on the outstanding findings to verify that they are corrected. ATTACHMENTS A. lndependent Auditor's Report on Compliance with Requirements to Measure R Ordinance and Measure R Local Return Guidelines (Simpson & Simpson) B. lndependent Auditor's Report on Compliance with Requirements to Measure R Ordinance and Measure R Local Return Guidelines (Vasquez & Company) C. lndependent Auditor's Report on Schedule of Revenues and Expenditures for Measure R Special Revenue Fund for the Year Ended June 30,201 1 (TCBA) D. List of Cities Audited by Firm E. Detail of Compliance Findings Prepared by: Ruthe Holden, Chief Auditor Measure R Audit Findings

4 Ruthe Holden Chief Auditor JI b. Arthur T. Leahy Chief ~xecutive Officer u Measure R Audit Findings Page 4

5 Attachment A INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO MEASURE R ORDINANCE AND MEASURE R LOCAL RETURN GUIDELINES TO THE LOS ANGELES COUNTY METROPOLITAN TRANSPORTATION AUTHORITY FOR THE FISCAL YEAR ENDED JUNE 30,2011

6 TABLE OF CONTENTS Page INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE Summary of Compliance Findings Schedule 1 - Summary of Measure R Audit Results Schedule 2 - Schedule of Findings and Questioned Costs

7 SIMPSON & SIMPSON CERTIFIED PUBLIC ACCOUNTANTS FOUNDING PARTNERS BRAINARD C. SIMPSON, CPA MELBA W. SIMPSON. CPA INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO MEASURE R ORDINANCE AND MEASURE R LOCAL RETURN GUIDELINES To: Board of Directors of the Los Angeles County Metropolitan Transportation Authority and Measure R Oversight Committee We have audited the compliance of the Cities and the County identified in Schedule 1, with the types of compliance requirements described in the Measure R Ordinance enacted through a Los Angeles County voter approved law in November 2008; Measure R Local Return Guidelines, issued by the Los Angeles County Metropolitan Transportation Authority (LACMTA), approved by its Board of Directors on October 22,2009 (Guidelines); and the respective Assurances and Understandings Regarding Receipt and Use of Measure R Local Return Funds, executed by LACMTA and the respective Cities and the County for the year ended June 30,2011 (Requirements). Compliance with the above noted Requirements by the Cities and the County are identified in the summary of auditor's results section of the accompanying Schedule of Findings and Questioned Costs. Compliance with the Require~nents is the responsibility of the respective Cities' and the County's management. Our responsibility is to express an opinion on the Cities' and the County's compliance based on our audit. We conducted our audits of compliance in accordance with the Guidelines, auditing standards generally accepted in the United States of America, and the standards contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards rcquire that we plan and perform the audits to obtain reasonable assurance about whether noncompliance with the types of requirements referred to above could have a direct and material effect on the Measure R Local Return program occurred. An audit includes examining, on a test basis, evidence about each City's and the County's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Our audits do not provide a legal determination of each City's or the County's compliance with those requirements. As described in Findings Number 4 and 9 in the accompanying Schedule of Findings and Questioned Costs, the Cities of Compton and Maywood did not comply with requirements as stipulated in the Assurances and Understandings regarding the use of Measure R Local Return Funds that are applicable to their Measure R Local Return Programs. Compliance with such requirements is necessary, in our opinion, for the Cities of Compton and Maywood to comply with the requirements applicable to that program. In our opinion, except for the noncompliance described in the preceding paragraph, the Cities and the County complied, in all material respects, with the requirements referred to above that are applicable to the Measure R Local Return program for the year ended June 30, The results of our auditing procedures also disclosed other instances of noncompliance with those requirements, which are required to be reported in accordance with the Guidelines and which are described in the accompanying Summary of Compliance Findings, Schedule 1 and Schedule 2 as Finding Numbers 1 through 3, 5 through 8, and 10 through 18. The CPA. Never Underestimate The Value?

8 Internal Control Over Compliance The management of each City and the County is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal, state, and local programs. In planning and performing our audits, we considered each City's and the County's internal control over compliance with the requirements that could have a direct and material effect on the Measure R Local Return program in ordcr to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control ovcr compliance in accordance with the Requirements, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Cities' and the County's internal control over compliance. Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over compliance that might be significant deficiencies or material weaknesses and therefore, therc can bc no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be material weaknesses. A deficiency in internal control over compliance exists when the design or operation of a control over compliance docs not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance under the Rcquircments on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance undcr thc Rcquircmcnts will not bc prcvcntcd, or dctcctcd and corrcctcd, on a timcly basis. Wc consider the deficiencies in internal control over compliance described in the accompanying Schedule of Findings and Questioned Costs as items Findings Number 4 and 9 to be material weaknesses. Responses by the Cities and the County to the findings identified in our audits are described in the accompanying Schedule of Findings and Questioned Costs. We did not audit each City's and the County's responses and, accordingly, we express no opinion on the responses. This report is intended solely for the information and use of the LACMTA, the management, the City Councils, and others within each City and the County and is not intended to be and should not be used by anyone other than these specified parties. Los Angeles, California December 15,201 1

9 Summary of Compliance Findings The audit of the 38 Cities and the County of Los Angeles has resulted in 18 findings. The table below shows a summary of the findings: Finding No adequate evidence that funds were expended for transportation purposes Separate Measure R Local Return Account was not established Revenues received, including allocations and interest income werc not properly recorded in Measure R Local Return Account Funds were expended without LACMTA's approval Funds were used for non-measure R Local Return programs Form One (Expenditure Plan) was not submitted timely Form Two (Expenditure Report) was not submitted timely # of Findings Responsible Cities1 Finding Reference Cudahy (#5), Pomona (#1 1 and #12), Rosemead (#I3 and #14), South El Monte (#I5 and #16) Westlake Village (#IS) Maywood (# 1 0) Baldwin Park (#I), Bell Gardens (#3), El Monte (#7), South Gate (#17) Compton (#4), Maywood (#9) Baldwin Park (#2) Cudahy (#6), County of Los Angeles (#8) Questioned Costs $ 171, , ,865 1,449, Total Findings and Questioned Cost 18 $1,926,110 Details of the findings can be found in Schedule 2.

10 Los Angeles County Metropolitan Transportation Authority Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 SCHEDULE 1 Agoura Azusa Baldwin Compliance Area Tested Hills Park Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including allocations, project generated revenues, and interest income were properly credited to Measure R account Verification that funds were expended with LACMTA's approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings Finding-#$ Timely submission of Expenditurc Plan (Form One) I I I Finding-#2 I I I Timely submission of Expenditure Report (Form Two) / I I Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval - - obtained from LACMTA for fund exchange - (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon reimbursement Verification that funds exchanged with another jurisdiction were properly recorded by thatjurisdiction Establishment of and approval by LACMTA for a reserve fund For capital reserve fund, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the I recreational transit services I I I

11 Los Angeles County Metropolitan Transportation Authority Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 SCHEDULE 1 Compliance Area Tested Bell Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including - allocations, project generated revenues, and interest income were I properly credited to Measure R account Verification that funds were expended with LACMTA's auuroval 1 Comuliant L L Verification that funds were not substituted for property tax and is comuliant with Assurances and Understandings Comuliant Bell Beverly Gardens Hills + -k-- I Findin -#3 I Timelv submission of Exuenditure Plan (Form One) / ~omuliant Timely submission of Expenditure Report (Form Two) Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly - credited to the LR account upon reimbursement Verification that funds exchanged with another jurisdiction were properly recorded by thatjurisdiction Establishment of and approval - - by LACMTA for a reserve fund For capital reserve fund, verification that a separate account has been established, and the current status isereported in the I expenditure plan Recreational Transit Form was submitted timely for the recreational transit services I I Au~licable ort L A plicable

12 Los Angeles County Metropolitan Transportation Authority Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 SCHEDULE 1 Compliance Area Tested Calabasas Carson Commerce Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR nurnoses Comnliant Verification of revenues received, including allocations, project generated revenues, and interest income were.- - I properly credited to Measure R account Verification that funds were expended with LACMTA's approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings I Timely submission of Expenditure Plan (Form One) Timely submission of Expenditurc Rcpon (Form Two) Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange - (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon reimbursement Verification that funds exchanged with another jurisdiction were properly recorded by that jurisdiction Establishment of and approval by LACMTA for a reserve fund For capital reserve fund, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the recreational transit services I I Applicablc Auulicable Applicablc

13 Los Angeles County Metropolitan Transportation Authority SCHEDULE 1 Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 Compliance Area Tested Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including allocations, project generated revenues, and interest income were properly credited to Measure R account Verification that funds were expended with LACMTA's approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings Compton Cudahy Culver City Finding-#4 Timely submission of Expenditure Plan (Form One) I I / Timely submission of Expenditure Report (Form Two) Finding-#5 Finding-#6 1 Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange - (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon reimbursement Verification that funds exchanged with another jurisdiction were properly recorded by that jurisdiction Establishment of and approval by LACMTA for a reserve fund For capital reserve fund, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the recreational transit services

14 Los Angeles County Metropolitan Transportation Authority Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 SCHEDULE 1 Compliance Area Tested El Monte Gardena Hawthorne Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings ameement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including allocations, project generated revenues, and interest income were properly credited to Measure R account Verification that funds were expended with LACMTA's approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings Com~liant Comuliant Finding-#7 Comuliant Timelv submission of Exuenditure Plan (Form One) Comuliant Comuliant Comuliant Timely submission of Expenditure Report (Form Two) Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon reimbursement Verification that funds exchanged with another jurisdiction were properly recorded by that jurisdction Establishment of and approval by LACMTA for a reserve fund For capital reserve fund, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the recreational transit services Com~liant

15 Los Angeles County Metropolitan Transportation Authority Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 SCHEDULE 1 Hidden Huntington City of Compliance Area Tested Hills Park Industry Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including allocations, project generated revenues, and interest income were properly credited to Measure R account Verification that funds were expended with LACMTA's approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings ( I I Timely submission of Expenditure Plan (Form One) I I I Timely submission of Expenditure Report (Form Two) I I I Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon reimbursement Verification that funds exchanged with another jurisdiction were properly recorded by that jurisdiction Establishment of and approval by LACMTA for a reserve fund For capital reserve fund, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the recreational transit services

16 Los Angeles County Metropolitan Transportation Authority SCHEDULE 1 Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 Compliance Area Tested Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including allocations, project generated revenues, and interest income were properly credited to Measure R account Verification that funds were expended with LACMTA7s approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings Inglewood Irwindale La Puente Timely submission of Expcnditure Plan (Form One) / I I Timely submission of Expenditure Report (Form Two) I I I Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange - (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon reimbursement Verification that funds exchanged with another jurisdiction were properly recorded by that jurisdiction Establishment of and approval by LACMTA for a reserve fund For capital reserve fund, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the I I recreational transit services I Aa~licable I I I 1

17 Los Angeles County Metropolitan Transportation Authority SCHEDULE 1 Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 I Compliance Area Tested Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues receivcd, including allocations, project generated revenues, and interest income were properly credited to Measure R account Verification that funds were expended with LACMTA's approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings Lawndale Los Angeles Lynwood County Timely submission of Expenditure Plan (Form One) I / I Timely submission of Expenditure Report (Form Two) I I Finding-#$ I I I I Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another hnd were properly credited to the LR account upon reimbursement Verification that funds cxchanged with another jurisdiction were properly recorded by that jurisdiction I I I Establishment of and approval by LACMTA for a reserve A A fund For capital reserve fund, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the recreational transit services

18 Los Angeles County Metropolitan Transportation Authority Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 SCHEDULE 1 Com~liance Area Tested Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local I revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including allocations, I project -. generated revenues, and interest income were - properly credited to Measure R account Verification that funds were expended with LACMTA's approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings Malibu Maywood Montebello C- Com liant Com liant -tp- Timely submission of Expenditure Plan (Form One) I I I I I I Timely submission of Expenditure Report (Form Two) Finding-#BO Finding-#9 Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange - (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon reimbursement Verification that funds exchanged with another jurisdiction were properly recorded by that j urisdiction Establishment of and approval by LACMTA for a reserve fund For capital reserve fund, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the recreational transit services T I I

19 Los Angeles County Metropolitan Transportation Authority Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 SCHEDULE 1 Monterey Pico Pomona Compliance Area Tested Park Rivera Finding-#l 1 Funds were expended for transportation purposes Finding-#12 Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including allocations, project generated revenues, and interest income were I I 1 properly credited to Measure R account Verification that funds were expended with LACMTA's approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings / I I Timely submission of Expenditure Plan (Form One) Timely submission of Expenditure Rcport (Form Two) I I I Timely use of funds I Administrative expenditures did not exceed 20% of the total I annual LR expenditures Approval obtained from LACMTA for fund exchange (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon reimbursement Verification that funds exchanged - with another iurisdiction were properly recorded by that jurisdiction Establishment of and approval - by LACMTA for a reserve fund For capital reserve fund, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the recreational transit services I I I

20 Los Angeles County Metropolitan Transportation Authority Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 SCHEDULE 1 Compliance Area Tested Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including allocations, project generated revenues, and interest income were properly credited to Measure R account Verification that funds were expended with LACMTA's approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings Rosemead Finding-#I3 Finding-#14 Timely submission of Expenditure Plan (Form One) / Timely submission of Expenditure Report (Form Two) I Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange - (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon reimbursement I Verification that funds exchanged with another iurisdiction I were properly recorded by thatjurisdiction Establishment of and approval by LACMTA for a reserve fund Auplicable For capital reserve fund, verification that a separate account has been established, and the current status is reported in the 1 sxpenditure plan Recreational Transit Form was submitted timely for the recreational transit services I Au~licable San Santa Fe Fernando Springs + Com liant Com liant Com liant Com liant P Com liant Com liant I ---I- I I I + I I Com liant Com liant & I

21 Los Angeles County Metropolitan Transportation Authority Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 SCHEDULE 1 Santa South El South Gate Compliance Area Tested Monica Monte Finding-#I5 Finding-#16 Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including allocations, project generated revenues, and interest income were properly credited to Measure R account Verification that funds were expended with LACMTAYs Verification that funds wcre not substituted for property tax -- Fioding-#17 and is compliant with Assurances and Understandings I I I I I I Timely submission of Expenditure Plan (Form One) I I I I I I Timely submission of Expenditure Report (Form Two) I I I Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon. -. reimbursement Verification that funds exchanged with another jurisdiction were properly recorded by thatjurisdiction Establishment of and approval by LACMTA for a reserve fund For capital reserve fimd, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the recreational transit services

22 Los Angeles County Metropolitan Transportation Authority SCHEDULE 1 Summary of Measure R Audit Results For the Fiscal Year Ended June 30,2011 Walnut West Westlake Compliance Area Tested Hollywood Village I I I I Funds were expended for transportation purposes Fund were used to augment, not supplant, existing local revenues being used for transportation purposes - I I Evidence of signed and returned Assurances and Understandings agreement Accounts and records have established a separate operating Measure R Local Transportation Assistance Account for LR purposes Verification of revenues received, including allocations, project generated revenues, and interest income were properly credited to Measure R account Verification that funds were expended with LACMTA's approval Verification that funds were not substituted for property tax and is compliant with Assurances and Understandings Timely submission of Expenditure Plan (Form One) I I I I I I Timely submission of Expenditure Report (Form Two) Timely use of funds Administrative expenditures did not exceed 20% of the total annual LR expenditures Approval obtained from LACMTA for fund exchange (Trade, Loans, or Gifts) Verification that funds expended and reimbursed by another fund were properly credited to the LR account upon reimbursement Verification that funds exchanged with another jurisdiction were properly recorded by thatjurisdiction Establishment of and approval - - by LACMTA for a reserve fund For capital reserve fund, verification that a separate account has been established, and the current status is reported in the expenditure plan Recreational Transit Form was submitted timely for the Applicablc I recreational transit services I Annlicable I Annlicable I Annlicable I

23 LACMTA Consolidated Audit Fiscal Year 2011 Schedule of Findings and Questioned Costs SCHEDULE 2 Finding 1 Compliance Reference Condition Cause Effect Recommendation Management's Response City of Baldwin Park Per Measure R Guidelines, Section B (II.l), it states that "LACMTA will provide Local Return funds to a capital project or program sponsor who submits the required expenditure plan containing the following: (1) The estimated total cost for each project and/or program activity." Street Repairs and Maintenance on Bus Routes and Near Bus Stops and Pavement Restriping and Marking to Improve Multi-Madal Use projects for a total amount of $33,335 for Measure R Local Return Funds were incurred without receiving approval from LACMTA. However, the City subsequently received LACMTA's approval on February 9,2011. The City did not submit Form One (Expenditure Plan) on time as they were unaware of the importance of meeting the filing requirements of the Measure R Local Return Guidelines. The City expended Measure R Funds prior to LACMTA's approval. Incurred expenditures prior to LACMTA's approval resulted in questioned costs of $33,335. In accordance with the Guidelines, the City should be required to reimburse its Measure R Local Return Account $33,335. In addition, we recommend that the City establish procedures to ensure that the Form One (Expenditure Plan) is properly prepared and submitted before the due date of August 1st so that the City's expenditures of Measure R Local Return Funds will be in accordance with LACMTA's approval and the Guidelines. The City has previously spent LACMTA funds and has knowledge of the types of expenses allowed for LACMTA projects, which includes Measure R. Since the City began to receive funding, it began spendng based on project guidelines while the Form One was finalized; the monies spent were for eligible expenses. The City will submit Form One prior to spending monies in the future.

24 LACMTA Consolidated Audit Fiscal Year 2011 Schedule of Findings and Questioned Costs SCHEDULE 2 Finding 2 Compliance Reference Condition Cause Effect Recommendation Management's Response City of Baldwin Park Per Measure R Guidelines, Section B (Ill), it states that "Jurisdictions shall submit to LACMTA an Expenditure Plan (Form One), annually by August 1 St of each year." The City did not meet the August 1, 2010 deadline for submission of Form One. However, the City submitted the Form One on February 8, The City was not aware of the importance of submitting Form One to meet the compliance requirements of the Measure R Local Return guidelines. The City's Form One was not submitted timely. We recommend that the City establish procedures to ensure that the Form One (Expenditure Plan) is properly prepared and submitted before the due date of August 1st so that the City's expenditures of the Measure R Local Return Funds will be in accordance with LACMTA's approval and the Guidelines. The City will submit all required reports on a timely basis. Since Measure R was a new hnding source, the City required additional time to prepare the projects that would use the hnds in the upcoming year.

25 LACMTA Consolidated Audit Fiscal Year 2011 Schedule of Findings and Questioned Costs SCHEDULE 2 Finding 3 Compliance Reference Condition Cause Effect Recommendation Management's Response Auditor's Rejoinder City of Bell Gardens Per Measure R Guidelines, Section B (Ill), it states that "LACMTA will provide Local Return funds to a capital project or program sponsor who submits the required expenditure plan containing the following: (1) The estimated total cost for each project and/or program activity." The expenditures for Truck Impacted Intersection; AjaxIFlorence and JabonerialFlorence Project in the amount of $98,912 were incurred prior to approval from LACMTA. However, the City subsequently received LACMTA's approval on June 7,2011. The City's Form One (Expenditure Plan) did not include all Measure R Local Return projects. The City expended Measure R Local Return Funds prior to LACMTA's approval. Incurred expenditures prior to LACMTA's approval resulted in questioned costs of $98,912. In accordance with the Guidelines, the City should be required to reimburse its Measure R Local Return Account $98,912. In addition, we recommend that the City establish procedures to ensure that the Form One (Expenditure Plan) is properly prepared and submitted before the due date of August 1st so that the City's expenditures of the Measure R Local Return Funds will be in accordance with LACMTA's approval and the Guidelines. In accordance with the Guidelines, the City should include all new, amended, ongoing, and carryover projects in Form One. The project was approved on February 23, 2010 under FY 2009 budget. A revised amount was submitted to the LACMTA based on final expenditures incurred. The requirement by LACMTA states that all Measure R Local Return projects, on-going and/or new, which are expected to incur costs in any particular fiscal year should be reported on Form One (Expenditure Plan) and concurrently should be approved by LACMTA annually. The fact that the project was initially approved under the fiscal year 2009 budget does not waive the aforementioned requirement. Expenditures incurred in fiscal year 2011 still need LACMTA's approval through the submission of Form One by its required due date, regardless of the City having the same projects year-to-year.

26 .. LACMTA Consolidated Audit Fiscal Year 2011 Schedule of Findings and Questioned Costs SCHEDULE 2 Finding 4 Compliance Reference Condition Cause Effect Recommendation Management'sResponse City of Compton Per Measure R Guidelines, Section A (I), it states that "Local Return funds are to be used for transportation purposes. No net revenues distributed to Jurisdictions may be used for purposes other than transportation purposes." Cash and cash equivalents were not properly maintained. As of June 30, 2011, the City should have restricted Measure R Local Return cash balance of $1,008,149 to be used for transportation purposes. However, the City's total cash balance has a deficit of $6.4 million. Therefore, the City has spent all of the Measure R Local Return Fund balances on expenditures unrelated to Measure R Local Return Funds purposes. Because of the City's poor financial conditions, cash and cash equivalents for Measure R Local Return Funds were not properly maintained. Measure R Local Return Funds were used for the City's other programs which were not Measure R Local Return programs. Questioned costs for improper use of funds are $1,008,149. In accordance with the Guidelines, the City should be required to reimburse its Measure R Local Return Account $1,008,149. In addition, we recommend that the LACMTA ascertain that the City has re-established its Measure R Local Return Account balance and it has establishcd adequate controls to ensure that the Measure R Local Return Fund balance is properly maintained and restricted to be expended only for the LACMTA's approved Measure R Local Return projects regardless of the City's financial conditions. As of June 30, 2011, the General Fund checking account bank reconciliation showed a negative balance of $10,378,288. However, there were unreleased checks in the amount of $12,464,291 that should be accounted for as liabilities. If the unreleased checks are added back to liabilities, the bank balance will be approximately $2 million. In addition, the City has a Local Agency Investment Fund (LAIF) restricted investment balance of $3.9 million for Measure R and other grants. Subsequently, the City opened a separate bank account for Measure R Local Return Funds with the sole purpose of tracking Measure R Local Return Funds bank balance. The City Treasurer has agreed to break the LAIF investment (with balance of $6.9 million as of June 30, 2011) and put Measure R Local Return Funds' balance in the newly opened bank account.

27 LACMTA Consolidated Audit Fiscal Year 2011 Schedule of Findings and Questioned Costs SCHEDULE 2 Finding 4 Auditor's Rejoinder City of Compton When considering all of the City's cash and cash equivalences, based upon this City's bank reconciliations, the City has a cash deficit at June 30, This indicates that all of the City's cash, including the Measure R Local Return cash of $1,008,149 have been used or obligated to pay the City's Non-Measure R Local Return obligations. The representation by the City's management that $12.4 million of written checks are being held and not released for payment does not resolve the City's overall deficit financial position. The City management represents that even though the City may have an overall deficit, its LAIF investment balance of $3.9 million includes the Measure R Local Return Funds. However, we conclude that because of the City's overall significant cash deficit position, it is not possible to ascertain whether any of the LAIF investment account balances includes Measure R Local Return Funds. We agree with the City's subsequent action of maintaining a separate bank account for Measure Local Return Fund.

28 . LACMTA Consolidated Audit Fiscal Year 2011 Schedule of Findings and Questioned Costs SCHEDULE 2 Finding 5 Compliance Reference Condition Cause Effect Recommendation Management's Response City of Cudahy Per Measure R Guidelines, Section A (I), it states that "Local Return funds are to be used for transportation purposes. No net revenues distributed to Jurisdictions may be used for purposes other than transportation purposes." The City was not able to provide an invoice to support a payment in the amount of $2,000 to D&J Engineering. The City misplaced the invoice. Questioned costs for unsupported expenditures in the amount of $2,000. In accordance with the Guidelines, the City should be required to reimburse its Measure R Local Return Account $2,000. In addition, we recommend that the City maintain proper accounting records and adequate internal controls over its source document. The invoice from D & J Engineering in thc amount of $2,000 for engineering services rendered in connection with street work done at Patata street was covered by check No This check includes several invoices among of which the invoice for $2,000 is missing. We presented the cancelled check to the LACMTA auditor with the supporting invoices. However, the invoice for $2,000 was separated from the batch and missing. There have been personnel transitions at City Hall and with the engineering firm of D & J. It is possible that that particular invoice was misplaced when the invoices pertaining to D & J were reviewed by several people during the transition. The City staff have been instructed not to release original invoices from now on, to prevent a repeat of this happening again. Instead, copies would be made from the original to be given to anyone requesting to see any invoice from our vendor files. The recommendation to return the funds to MTA is unwarranted because the invoice from D & J engineering is a valid Measure R expenditure and hnds have been disbursed to the vendor supported by a cancelled check paid to the vendor for services rendered and a legitimate expenditure.

29 LACMTA Consolidated Audit Fiscal Year 2011 Schedule of Findings and Questioned Costs SCHEDULE 2 Finding 6 Compliance Reference Condition Cause Effect Recommendation Management's Response City of Cudahy Per Measure R Guidelines, Section B (II.2), it states that "Jurisdictions shall submit a Form Two, to LACMTA annually, by October 15'~ (following the conclusion of the fiscal year)." The City did not meet the October 15, 2010 deadline for submission of Form Two. The City did not submit the Form Two to LACMTA as of December 15,2011. The City was not aware of the importance of submitting Form Two to meet the compliance requirements of the Measure R Local Return guidelines. The City's Form Two was not submitted timely. We recommend that the City establish procedures to ensure that the Form Two (Expenditure Report) is properly prepared and submitted prior to the October deadline and the City retain a confirmation of receipt by LACMTA to comply with the Guidelines. A report was filed and submitted online. It was possible that upon, transmission it was lost.

30 b. ' s LACMTA Consolidated Audit Fiscal Year 2011 Schedule of Findings and Questioned Costs SCHEDULE 2 Finding 7 Compliance Reference Condition Cause Effect Recommendation Management's Response City of El Monte Per Measure R Guidelines, Section B (II.l), it states that "LACMTA will provide Local Return funds to a capital project or program sponsor who submits the required expenditure plan containing the following: (1) The estimated total cost for each project andlor program activity." The expenditures for the SR-60 Gold Line Coalition- Eastside Extension project in the amount of $12,000 and Project Planning Studies in the amount of $74,586 were incurred prior to the approval from LACMTA. However, the projects were subsequently approved by LACMTA on November 3, The City was not aware of the reporting requirement for Form One. The Expenditures for Measure R Local Return programs were incurred prior to LACMTA's approval. Incurred expenditures prior to LACMTA's approval resulted in questioned costs of $86,586. In accordance with the Guidelines, the City should be required to reimburse its Measure R Local Return Account $86,586. In addition, we recommend that the City establish procedures to ensure that the Form One (Expenditure Plan) is properly prepared and submitted before the due date of August 1st so that the City's expenditures of the Measure R Local Return Funds will be in accordance with LACMTA's approval and the Guidelines. In accordance with the Guidelines, the City should include all new, amended, ongoing, and carryover projects in the Form One. Finally, we recommend that LACMTA's Program Manager seek approval from the Board for any retroactive approvals granted to jurisdictions. In FY , the City incurred expenses for planning studies associated with the SR-60 for Gold Line Coalition Planning Study $12,000. At the time, the city had interpreted the LACMTA Measure R Local Return guidelines stipulate that an annual submission was required by August I" of each year and that resubmission of expenditure plan (Form One) was not required for reallocation of plan monies. The City has been aware of this requirement, and has submitted a revised Form One for these costs; and more importantly, the City has complied with this requirement going forward.