you know, the great thing about puc is they have a very robust community engagement history and practice. so, i know that they're among the best in terms of doing that. but i think that you have a real opportunity, a lot of groups out there that can be allies in this effort. >> thank you. supervisor mar. >> yeah, i think that's a perfect segue because i think roberto vargas and dr. ba tell -- roberto coordinates a really great coalition of community-based groups that hopefully can be a great partner with our puc rec and park and other departments. i did want to say that public utilities commission, radika mentioned, there is a strong focus on equity and social justice as a lens on how to look at implementation of projects. and i think this is -- this may be a perfect example to make sure that neighborhoods like the southeast neighborhoods from the mission to the bayview

hunters point and other vis valley have strong drink tap stations. i also wanted to say on big themes, the issue of privatization of water was brought up, i think that's a really good one, whether it's the soda corporations or the bottled water companies, the advertising and marketing kind of from that end to even the lack of access to drink tap stations i think is a really important issue. on equity and maintenance of the drink tap stations and the existing water fountains, i think that's a rec/park and a puc issue. if people are fearful that it will be dirty or they won't work, i think they will not use them. so, broad community outreach and education about where the new stations are, where existing ones are, and clear focus on maintenance and cleanliness, especially in the lowest income neighborhoods, too, i wanted to say that president chiu has important legislation that some of us are supporting as well.

i think we should be advocating for and more funding for more equitable access for drink tap stations as they're implemented through our city. the last thing i just wanted to say was i think new technology and app are being use ford all kinds of purposes. often you can't find the stations and maybe having -- use the technology to know where drink tap stations are might be a helpful advance as well. and lastly, i think the cultural change that was brought up by christina and others, it's an education process. so, i'm really glad that it's starting early with the child care centers and in the k-12 system and teachers are using great curriculum as provided by dph and puc as well. ~ grade curriculum this has been a wonderful hearing, but i'm hoping it's just the beginning as we look at equity and social justice and the privatization of water and making san francisco a leader in this area so that we have a healthier san francisco and communities for everyone.

but thanks for giving us so much time as well for this issue. i know there are many others before us. i'd like to urge us to continue this item to the call of the chair. >> okay, thank you very much. all right, colleagues, you've heard the request. supervisor mar would like to continue this to the call of the chair. >> so moved. >> moved by supervisor campos and a second by supervisor katy tang. the motion has been moved and accepted by all to the call of the chair. [gavel] >> madam clerk, could you please call item number 3? >> item number 3, hearing for the city's external auditors to present the comprehensive audit financial report, single audit, and management letters related to city audits for the fiscal year ending june 30, 2012, and audit plans for fiscal year 2012-2013. >> all right, thank you. i think we have a presentation from ms. [speaker not understood] who is with the controller's office here to present on this item. thank you for being with us. >> yes, thank you for having me and the external auditors. good morning, supervisors. i'm here to introduce the city's two external audit firms, kpmg and [speaker not

understood]. they have a short presentation for their audit plans as well audit and results of their last audit. there are only a total of five findings. we're going to have kpmg present first and [speaker not understood] will be the presenter. and those are the last two items in your packet if you want to follow along. >> all right. [speaker not understood]. >> all right, thank you. so, [speaker not understood]. >> good morning, everyone. my name is [speaker not understood] with kpmg, i'm here to present as carmen mentioned the [speaker not understood] with respect to the year-ended june 30th, 2013. >> can you speak into the microphone a little bit or pull it down closer? >> is that better? >> thank you. >> great. if i could please refer you to page 3 of the presentation, which i believe is in your packages. this slide really just highlights our engagement team which is led by the engagement partner nancy rose and the

individual managers that are serving the engagement with respect to hsf, mta, [speaker not understood], they're highlighted on this slide. slide 5 really highlights the objective of the audit. and i just wanted to emphasize here that the objective is really to enable the auditors to express an opinion about whether or not the financial statements have been prepared by management are presented fairly and [speaker not understood] in conformity with generally accepted accounting principles in addition to standards applicable to gaap. slide number 7 highlights management's responsibility in addition to the committee's responsibility. and i just wanted to highlight on this slide here that the audit of the financial statements does not relieve management or the audit committee of their responsibility. slide number 8 highlights kpmg's responsibilities and i just wanted to highlight a few

points on this slide. specifically, our responsibility is to form and express an opinion about whether or not the financial statements have been prepared by management are presented fairly in all material respects as i mentioned before. i also wanted to highlight that the audit does not attain absolute assurance, but rather we attain reasonable assurance as to whether or not the financial statements are free of misstatement, whether due to fraud or error. we do have a responsibility to communicate with the committee and management in a significant findings, deficiencies, or anything of that nature. ~ any so, i wanted to highlight that as well. slides 11 and 12 really emphasize the audit approach, and i'm not going to spend too much time on these slides as we -- it is consistent with what we have presented in the past. our audit methodology and approach is consistent, like i mentioned. if i may refer you to slide 14,

this is really highlights the scope of our work. and just in summary, we will be performing financial statement audits as year-ended june 30th for hsf, mta, puc, sfo. we'll also be performing a single audit for mta and various agreed upon procedures as listed on the slide here. we will also be performing a single audit over sfo. and the audit will be performed in accordance with u.s. gaap, u.s. gas and u.s. government auditing standards. slide 15 highlights the report that we will be issuing in accordance with this audit plan. as i mentioned before, we will be issuing audit reports on the financial statements of hss, mta, puc, and sfo. we will also be issuing a single audit report for mta, a tda compliance letter for mta.

various agreed upon procedure reports, various public compliance reports for mta, report on [inaudible]. and also a single audit report for sfo. i did want to highlight on this slide that in the prior years single audit report, there was one finding in relation to noncompliance with the davis beacon requirement with respect to the timeliness of submission of weekly certified payroll reports. we do anticipate adding this to our current year schedule. we'll be looking to ensure that the recommendations have been implemented. okay. then if i may refer you to slide 18, slide 18 really highlights our audit timeline and key dates. we are currently in the planning and interim fieldwork phase which is expected to continue through august 2013.

our final fieldwork is scheduled for september through january 2014. and our expected date of issuance of the financial statements is october 25th. that also includes any significant deficiency reports. and the issuance of the single audit report is expected to occur before january 31st, 2014. on slide 19, i just wanted to highlight as auditors we do have a responsibility to identify fraud risks and respond to those fraud risks. we will be performing risk assessments of those risks through increase with management and discussions with the engagement team. and we will also design audit procedures to respond to those respective fraud risks and report to you any findings we may have. and then lastly, i just wanted

to indicate on slide 22 that we are in our professional judgment independent with respect to the city as that term is defined by professional standards. and at this time if there are any questions that i can help address. >> thank you very much. are there any questions, colleagues? supervisor campos. >> thank you. so, in terms of the process, how long, again, would it take for us to hear from you in terms of your findings? >> it depends. i can get with you sometime after the audit is could have pleat. it would be sometime after october for the audits and january for the single audit and the other report. ~ complete >> in the process of continuing your work, does the scope change as you're getting some of the information and doing some of the work? >> yeah, the scope does change, the concepts that we consider in determining the nature and timing and extent of our

procedures is materiality which is calculated every year. so, depending on materiality, depending on the events that have occurred with each respective entity, our scope could change. >> okay, great. thank you. >> all right, thank you so much. is that it? great. i think we have one more presenter, right? >> yes, we do have one more presenter. also, if you do have any questions, we also have representatives from each of the departments that is on the handout before you in case you have any questions. >> i just have one administrative. [speaker not understood] standing in the back of the committee room, if you could go to the chamber where the overflow room is, we have seats there. unfortunately we have a committee room rule that you cannot stand in the aisles. when this item is over, i'm sure there will be seats available. so, you're more than welcome to come back at that time. please continue. thank you. >> thank you.

so, our next presenter is annie lou aloe director from the [speaker not understood] and she will be presenting, again, her audit plans for the year-ending june 30th, 2013, as well as going over the four findings that we have related to the rest of the city ~. so, that would be -- we have one financial statement finding which is material witness related to the successor agencies to the former redevelopment agency. and you have three single audit findings. one is for dph, office of environment, and the office of emergency management. >> great, thank you so much. >> good afternoon. i actually prepared a powerpoint presentation for you. today i'm going to go over the audit results for 11-12. i'm actually here to present two reports, city reports. the first one is the city's comprehensive annual financial

report or what is known as the c-a-f-r. the second report is the board as the governing body of the city. and lastly the third report is the single audit report which is the compliance audit of the city's federal program. i do want to mention that [speaker not understood]. we audit all of the city's funds except for the ones that are audited by kpmg and other auditors which includes the health services, the airport, the puc, the mta, as well as the market corporation. for the city's c-a-f-r, we issue an unqualified opinion which is the highest level issuance that the city may have. i do want to point out that in our audit opinion for 2012, we had two additional paragraphs to emphasize certain matters. the first one related to the solution of the redevelopment

agencies as effective february 1st 2012. and the city had selected to become the successor agency for the development agency which is responsible for overseeing [speaker not understood] ~ of the activities. the second item of emphasis related to the [speaker not understood] that related also to the deliberation process, the state controller's office as well as the department of finance are responsible for reviewing the dissolution process and the distribution of any remaining assets to the city's [speaker not understood]. and because the process is still ongoing at the time of the issuance of the city's c-a-f-r, we wanted to point out that the results were unknown at the time. the second report that i want to go over is the report to the gao. this report included all the required communications that [speaker not understood] we have to report back to the

city's governing body. these items that i have listed on the slide are very typical of any [speaker not understood] communicationses that you may see. i do want to point out that the first item, the equal tate i have access of accounting practices, this is the item where we would list any significant estimate included in the city's financial statement. and the -- any funds for the [speaker not understood] that may be included. in the report we have estimates related to the city's pension as well as opab benefits and those are disclosed in 9a and 9b of the city's c-a-f-r. and i'll also go over an upcoming accounting standard that will change the presentation of these benefits in the near future. the other items included in this include current new findings. so, we have in relation to the city's financial reporting, we

do have a material weakness relating to the successor agency or the [speaker not understood] agency that was dissolved in february of 2012. because of that issue, that we have noted as a result of the dissolution process, we noted that there is not an adequate staffing in terms of financial reporting process. so, we wanted to point out that -- and what we had a recommendation for the city to provide any additional assistance that may be needed by the successor agency to prepare the [speaker not understood] financial statement going forward. and i understand that there are some representatives from the successor agency to speak on this item if you have any questions in this regard. >> thank you. i assume it's probably better if we have a question about a finding to raise it as you're -- in that presentation, portion of the presentation. so, what is the material weakness mean? and specifically what kind of

staffing is it that they don't have? >> okay. there are basically three levels of assigning in terms of internal controls. the most severe level is material weakness. what that means is we think there is a likely -- high likelihood that such deficiency will result in a material statement in your financial statement. the next level, we call it [speaker not understood] deficiency. it may not lead to a material misstatement, but we think it is important enough to warrant attention. so, we bring it to your attention as the governing body. the lowest level is just a regular deficiency. it could be any improvement areas and whatnot, but not necessarily something that would lead to a material misstatement [inaudible]. >> so, for the successor agency, a material weakness is the worst of the three. >> and if you refer to the report, all the details are included on page 6 of the report to the gao.

and the reason for this particular finding to be classified as a material weakness, as you go through the details basically, because of the dissolution process, in 2011 the agency had five individuals who were involved in the financial reporting process. because of the dissolution, the federal agency now only has two individuals who were left to do all the work. basically [speaker not understood] successor agency. with the dissolution, there were a lot of questions that were raised on how items should be reported in the financial statement. so, it's really a complicated process, and there's a lot of reconciliations that needed to be done. so, we felt like reduce staffing and all the additional requirements that needed to be met wasn't necessarily being fulfilled. >> and what's the budget of the successor agency? >> [speaker not understood].

>> okay, thank you. >> members of the committee, i'm leo levinson and i'm the deputy director for finance and administration for the successor agency. our administrative budget is approximately $10 million. our overall budget is around 300 million, that's mostly debt service and bond proceeds. but in terms of administration, it's about $10 million. our salary budget is about 4 million. >> so, i don't know -- so, what was your initial reaction when you saw the material weakness from the suggestions from the audit? >> well, actually, at the time this audit came about, i was with the controller's office where i was a division director. and, so, i guess to some degree i have a response to the material weakness. in january, i was invited and asked to take an assignment with the successor agency

specifically to address the situation. and as what had already been in place was the transition -- the former redevelopment agency used to use its own financial system that was separate from the city's system, a system called j.d. edwards. and the capacity to really use that system had declined, especially with the loss of staffing. and as part of the dissolution, there was a decision made to fold the accounting into the city's famous accounting system, which both had better internal controls and that was a very important thing, and also medthctionv ~ meant there would be many more people to make sure [speaker not understood]. so, that process has been substantially -- made progress through the course of the year and will essentially be completing it through the summer as we prepare our financial statements [speaker not understood]. so, i think that's really been a major part of our response. so, we had both -- since i came into the agency, i've done

cross training of staff so we have more knowledge of famous and we have basically four staff now in addition to me that are working in different ways of the famous system. and we have also maintained quite a large amount of support from the controller's office, very grateful for that. and continue to have a large work order to support this year so that they can supplement that and help us make sure that our financial statements are fully and accurately prepared over the summer. >> i just want to make sure i hear you correctly. you're taking on this assignment and it's in response to the understanding of where our weaknesses are as it relates to the successor agency? >> there's many things i'm doing there, but that's probably my most important function when i came into this and replaced the former deputy director who had left for other things in january. >> thank you. supervisor campos. >> so, just a quick question. so, are you -- is this a permanent assignment for you or -- >> this is my assignment now.

i can't say that i'm -- actually continue to be a city employee. so, i'm formally an employee of the -- under the city administrator's office at this point, sort of on assignment from my former job in the controller's office, and there's no specific length that i'll be there, but i'm committed to the success of this effort. >> i guess one question i have is one of the deficiencies in the housing authority on it was that they did not have a chief financial officer for a number of years. and, so, even though your administrative budget is 10 million, but you still have 300 million debt or other that you're managing, i would like to know from the auditor if they feel that this arrangement makes sense. i mean, i think you're very capable and we're glad to have you there. i just don't know if structurally that's the best way to do it. i'm not an expert on that.

so, i'm wondering from the auditor what their thinking is in terms of staffing level and the way that it's structured. >> it really depends on the continued activities of the successor agency. now, because the dissolution happened for 11-12 and because at the time the run down period was so quick, if you will, there were a lot of uncertainties that were involved in the process. and this year being the first full year where the successor agency is preparing its own financial statements, we will come back and as part of our 12-13 audit to evaluate whether the new staffing situation is adequate. in terms of the staffing resources that are needed going forward, it really does depend on the activities because conceptually, the successor agency should be winding down so it is not going into any new contracts or building [inaudible] going into new

redevelopment projects. so, when the process is just paying off continuing debt and whatnot, the staffing resource he, staffing needs may not be as high as it currently is. so, it's something that has to be continually validated. >> great. thank you. thank you very much. >> and i certainly appreciate the response, the swift response, if you will, you know, to this issue and i think it's just something that we have to continue monitoring. so, thank you. >> so, can we move forward with my presentation that was the only comment in terms of financial reporting. we do have a second comment relating to the new pension accounting standards. this is just an informational comment. it is not a deficiency in any sense. but because we do expect that it will have significant impact to the citifinancial statement, we want to bring it forward to your attention now.

the new pension accounting standards [speaker not understood] will end by the city in 2015. what has been the biggest difference in the newest pension accounting standard is that currently the city's financial statement that's not recognized the liability for the unfunded pension and opab promised benefits. with the new standards there will be a new -- the viability will be [speaker not understood] so that will have a negative impact on the city's [speaker not understood]. so, that will be the biggest change. we are currently working with the controller's office and as well as the [speaker not understood] system to evaluate the impact to prepare for the changes that need to happen in the next couple years for the implementation 2014-2015. so, our recommendation, i don't know if you want someone from the controller's office to speak on this item as well. >> thank you. please.

>> yes. so, we are working with both the auditors and retirement. retirement already started, again, it is going to be implementing the next coming two years. so, not this audit, but the audit of the next year, june 30, 2014 and the 2015. and we will be bringing retirement at the conclusion for the planning of the next audit so you can hear from them directly. >> thank you very much. colleagues, are there any other questions? okay, seeing none. >> thank you. >> next i would like to go over the report that we have, which is the single audit report. the single audit is a [speaker not understood] and compliance audit. for 2012, we have selected 18 major programs which cover 13 different city departments. we have three findings as a

result of our single audit. the first one related to different health programs at the department of public health and it is on the subject to pay [speaker not understood] requirement. what that requirement entails is any time the city passes funding onto an external entity whether it be a nonprofit organization, any cdos, or any other local government, the city as the primary grantee would have the responsibility of monitoring those other entities to make sure they are in compliance with the federal requirements. the finding related to a [speaker not understood] member, the data universal numbering system which is a number that is applied to an organization and it's used by the federal agencies to help track where the funding is going. so, there is a requirement to obtain the required number from the [speaker not understood] prior to awarding any subcontracts. so, as a result of our audit

for these two federal programs, we found that the dph did not obtain such numbers from the recipients for 2012. would you like the department to speak on this item? >> thank you. >> [speaker not understood] from department of public health. we have notified all our contractors that they're required to submit the [speaker not understood] number that will be part of their requirement along with the turning in their audited financial statements. and, so, we are -- we do have that corrective action in place. >> if i may, i have just a quick question. in which case did you guys not know that you had to require this of them? i just wanted to -- >> yeah, that's correct. >> okay. >> sometimes we did have the duns numbers, but we weren't

aware it was required for all single audit contractors. >> thank you for responding to that. thank you. >> so, the next finding, 2012 3 related to indirect costs at the department of environment. this is a grant from the u.s. department of energy and the grant allows for claiming reimbursement for indirect costs. during the audit we found that the indirect cost rate used for reimbursement claims was from [speaker not understood] indirect cost rate plan. when the state had approved the indirect cost rate plan, the rate was -- the approved indirect cost rate was actually lower than what was proposed by the department. but because the proposed rate was used for reimbursements, we did identify a question caused in this item. so, we report this particular finding. and i think the department is here to speak on this item as well.

>> sure, let's bring them up. >> yes. >> department of environment. >> hello, commissioners. joe [speaker not understood], department of environment. this issue came up because we're using the proposed rate of the icrp when we were creating the budget for this agreement. and subsequent to that, the actual approved rate was different than the one that we had put into the agreement. so, this audit actually brought it to our attention and since then we have rectified that with the funding agency and made our indirect rate conform to the approved icrp rate. thank you. >> thank you. >> so, that was the last of the findings from our single audit report. do you have