L.A. City Controller Audit Finds City Paid Up to $54M in Unnecessary Interest

Posted on June 29, 2016

Audit of Prop O Clean Water Program Finds Good Projects But Poor Financial Practices; Galperin IDs New Bond Issuance Policies

View the Audit Online: http://www.lacontroller.org/audit_of_prop_o

Los Angeles – When City Controller Ron Galperin began an audit of Prop O — the 2004 measure that financed stormwater cleanup — he expected to delve into a world of catch basins, storm drains and wetlands. What he didn’t expect was to discover that L.A. was making millions of dollars in unnecessary interest payments on its bonds.

Yet once the audit was underway, Galperin and his auditors noticed large balances in the accounts associated with  Prop O. The Controller looked for an explanation and found out the City regularly issued bonds for Prop O’s long-term construction projects long before the bills came due. In many cases, bonds were issued long before contracts were even awarded. The problem? Even though the borrowed money was invested, those investments typically yielded rates of return 2.0% to 2.5% lower than the rates the City paid out to its bondholders.

“No savvy investor would borrow money and then leave it sitting dormant in a bank account. And yet, that’s exactly what the City has been doing,” said Controller Galperin. 

 

In the case of Prop O, auditors determined that the City spent $6.8 million on unnecessary interest payments over five years. To see if this was a fluke, auditors looked at three other bond programs and found the same pattern of premature issuance. Auditors estimated that City taxpayers may have paid as much as $47 million in excess interest on these bond programs over an eleven-year period.

City policy has been to require that a department have all cash on hand to pay for the full amount of a multi-year construction contract at the time the contract is signed. In the report, Galperin recommended that the City change its procedures so it issues bonds closer to when the money is needed.

“Changing our practices and becoming more efficient in how we finance construction projects will translate into savings for taxpayers,” said Controller Galperin.

Prop O authorized $500 million in bonds to bring L.A. into compliance with the federal Clean Water Act, and increase flood and habitat protections and recreational opportunities.

Overall, the audit found that while Prop O projects are taking longer to complete than planned and some administrative processes are in need of improvement, the City agencies with key roles—the Bureau of Engineering, the Bureau of Sanitation and the City Administrative Office—have done a commendable job in implementing the complex program.

For example, using funds provided by the bond measure, the City outfitted stormwater catch basins throughout the City with screens to stop trash from flowing into waterways, rehabilitated Echo Park Lake, began to restore the ecosystem at Machado Lake, and created a wetlands park in South Los Angeles at a former bus and rail yard. Measurements by the regional water quality control board and by the Bureau of Sanitation indicate that Proposition O projects have contributed significantly to improved ocean water quality.

“LA has taken important steps toward becoming a better steward of its environment,” said Controller Galperin. “Now the City needs to become a better steward of the people’s money.

“Our goal has always been to be accountable to the voters who approved Prop O, and Controller Galperin’s exhaustive audit helps make that possible,” said Adi Liberman, director of the Proposition O Citizens Oversight Advisory Committee. He added, “Controller Galperin’s bond issuance recommendations have the potential to free up additional funds that we could use to build even more environmental projects that would make a difference to the Los Angeles community.”

To see pictures and videos of projects funded by Prop O, visit our story map at www.lacontroller.org/geopanel_la

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