January 10, 2006

SUBJECT:      Transmittal of Water Supply and Distribution Program Results Audit FY 2003/2004

REPORT IN BRIEF

This report presents the results of the performance audit of the Water Supply and Distribution Program for FY 2003/2004. The Water Supply and Distribution Program operates as an Enterprise Fund located in the Public Works Department and is responsible for maintaining and distributing the City’s water supply.  Primary activities performed by the Water Supply and Distribution Program include: managing water resources cost-effectively through the utilization of conservation programs, reclaimed water, city wells, and the purchase of potable water; and managing the construction, operation, and maintenance of the water distribution system.  In FY 2003/2004, the Water Supply and Distribution Program had a budget of $14,859,040 and 56,135 work hours to achieve its goals.

Auditors noted some overarching issues present in this Program that have been encountered in other City programs through the audit process.  These City-wide issues are summarized below:

• In many cases, programs are still recording and tracking measure results manually, which is time consuming and open to human error;
• Measures frequently change from year to year which could be an indication of development or implementation issues; for example, measures using a three-year average are often changed or deleted before a three-year average is established; and
• Calculation and filing systems are often inadequate for auditors to reproduce reported results.

In addition, auditors identified some overarching Program-wide issues which are summarized below:

• There is a general disconnect between Program performance targets and resource allocation in planning for critical tasks such as system repairs and maintenance;
• The City’s goal of keeping water rates significantly below the local average may have adversely impacted the Program’s ability to budget for and meet industry standards in maintaining the City’s distribution system; and
• The Program lacks an automated work order system which impacted staff productivity and contributed to poor documentation of program performance results in FY 2003/2004.

These issues, compounded by a severe managerial staffing shortage from the end of 2002 until January 2005, affected the results of this audit.

Data was available for 59% of the measures and auditors could reproduce reported results for 33% of the measures and activities.  Auditors could not verify results for 41% of the measures.  Thirty-seven percent of the measures were not verified in part because the data was not systematically collected, maintained and/or could not be cross-referenced to calculation sheets or reported results.  Thirty-three percent of the measures had Standard Operating Procedures (SOPs) requiring minor to major revisions in order to provide correct and adequate instruction to record and calculate performance results.

BACKGROUND

Fieldwork for the performance audit of the Water Supply and Distribution Program for FY 2003/2004 commenced in FY 2004/2005 and was completed in October 2005. Audit staff completed a draft report, which the Water Supply and Distribution Program reviewed for factual accuracy. The final report was released on December 5, 2005 for Departmental review and formal response. The Departmental response to the audit was issued on December 9, 2005 and is included as Appendix 1 of the report.  It should be noted that Water Supply and Distribution Management had already identified some of the issues outlined in the findings and had started addressing these issues in the new FY 2006/2007 budget restructure.   

The timeline for completion of this audit was adversely impacted by a significant staffing shortage in the Internal Audit area during most of FY 2004/2005.   These problems have now been corrected and the Internal Audit Program was fully staffed as of September 2005.

Following Council’s receipt of the audit report, the Public Works Department will have 60 days to prepare a plan for implementation of the recommendations. Audit staff will monitor the Department’s implementation progress on a quarterly basis during FY 2005/2006.

EXISTING POLICY

This report is issued to the Council and the public in accordance with the City of Sunnyvale Audit Charter and the FY 2004/2005 Performance Audit Work Plan, as adopted in May 2004.

DISCUSSION

The purpose of the audit was to review the program results as reported by the Water Supply and Distribution Program staff for FY 2003/2004.  As mentioned in the introduction, the Water Supply and Distribution Program operated under a severe managerial staffing shortage from late 2002 until January 2005.  The Program lost its supervisory staff (1.5 FTE) at the end of 2002, and the Superintendent of Field Services covered all supervisor duties for eight months in addition to his other duties.  Following that time, an out-of-class appointment was made to temporarily assume a portion of the supervisor duties. This situation continued until January of 2005 when a permanent supervisor was appointed.  In addition to cutting back staff hours, the City’s budget crisis of 2003 halted all implementation plans for an automated work order and asset management system.  These two factors contributed to the results of this audit outlined below.

To verify accuracy of the reported results, auditors need to see the source documentation that is used to build the product numbers.  The audit examined twenty-seven unique, active measures and activities.  Six activities were not audited because they were comprised of work hours, which do not require/generate source documentation other than timecards.  Due to data management issues, auditors were unable to verify the reported results for eleven measures (41% of the 27 measures).  Ten measures could not be verified because data was not systematically collected or maintained and support documentation could not be cross-referenced to calculation sheets and/or reported results.  One measure could not be verified because the SOP did not provide adequate instruction on how to calculate the result.

Sufficient data was available for auditors to determine the accuracy of the reported results for sixteen measures (59% of the 27 measures). Of the sixteen measures reviewed, auditors found nine measures (33% of the 27 measures) were accurate.  Out of the seven measures that were not accurate, five had reporting discrepancies where the result provided by staff on summary calculation sheets did not reconcile with reported results.  Four had data integrity issues including insufficient data to support reported results and inadequate data collection procedures.  Five of the inaccurate measures had measure text that was inconsistent with the results reported or the measure text did not provide adequate context for the results to be understood by its audience.  Three of the inaccurate measures were not calculated correctly.

A more detailed discussion of these findings is found in the Specific Findings section of the Audit Report, pages 8 – 9.

FISCAL IMPACT

Costs associated with preparation of the audit report were included in the operating budget.

Conclusion

The audit report provides a broad scope of recommendations, primarily related to improved documentation and reporting procedures and measure clarification and simplification to ensure the accuracy of future results. The Department has already implemented some of the recommendations in the audit plan and will be restructuring the Program as part of the City’s move to a new and enhanced Performance Based Budgeting system in FY 2005/2006.  As stated above, audit staff will follow-up on the Program’s implementation plan on a quarterly basis.

PUBLIC CONTACT

Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the report in the Library and the City Clerk’s Office.

ALTERNATIVES

1. Receive the audit report and concur with management’s acceptance of recommendations.

2. Receive the audit report and direct staff to hold a study session to discuss the audit findings and recommendations.

3. Receive the audit report and give alternative direction regarding specific recommendations.

RECOMMENDATION

Staff recommends alternative #1.

Kate Murdock

Internal Auditor

Reviewed by:

Director of Finance

Reviewed by:

Marvin Rose

Director of Public Works

Approved by:

Amy Chan

City Manager

1.  Water Supply and Distribution Program Results Audit FY 2003/2004 (.pdf)

2.  Water Supply and Distribution Program Results Audit FY 2003/2004 - Appendix A (.pdf)