Washington State Auditor’s Office

1. Washington State Auditor’s Office Local Government Performance Audits: Outreach efforts and audits in progress Puget Sound Finance Officers Association December 10, 2010 Chuck Pfeil, Director of State / Local Audit Chris Cortines, Principal Auditor for Local Government Performance Audits

2. Today’s presentation • Initiative 900 performance audits – background • How are we selecting future audit topics? • Outreach to local governments • Criteria for selecting topics • Local government performance audits under way • Allocation of overhead charges to utilities • Construction change order pricing • Reinventing audits – status report • Questions and discussion

3. Initiative 900 Voters passed I-900 in 2005. Since then the State Auditor’s Office has audited more than 80 state agencies and local governments across the state. Our local government performance audits have included: • City and county governments • School districts and educational service districts • Ports • Public utilities • Hospitals

4. Performance audit outreach efforts We selected the initial I-900 performance audit topics after: • Asking citizens and state and local officials to identify their highest priorities for audits. • Reviewing our past financial and accountability audit results. We are attempting to better focus our 2011-13 local audits by: • Using a risk-based analysis of state and local government agencies to identify the agencies, programs and functions that could most benefit from in-depth evaluation. • Meeting with and surveying city and county elected officials and administrators across the state to identify topics that will have potential statewide benefit. • To date we have met with the state Finance Officers Association, the City/County Management Association, the Association of County Officials and the statewide associations of cities and counties.

5. Outreach results so far Local government officials express strong support for audit topics that have potential statewide impact and reflect a strategic framework. Our surveys allow elected and appointed officials to indicate audit topics whose results could enable all local governments to: Save money Improve productivity Deliver high-quality results

6. Criteria for selecting future topics Ultimately, we will use the following criteria to select the local government performance audits we will conduct in 2011-13: Focus on the highest priorities by emphasizing audits that address the most important and costly operations. Identify potential savings and efficiencies in light of ongoing budget challenges. Address areas of high risk and the most significant opportunities for reform. Provide practical, actionable recommendations that have value to more local governments than just those covered in the audit. Prioritize audits that can be completed in a timely manner.

7. Two local government audits in progress While we plan our future audits, we are conducting two local audits this fall whose results will guide the processes we use in the future. 1. Utility overhead charges: We are evaluating the practices of eight cities to determine whether their overhead charges to municipal utilities are consistent with state law and leading practices. 2. Construction change orders: We are evaluating how effectively seven cities and one county control costs on construction change orders and related professional services contract extensions. Our goal is that local governments across the state – not just those being audited – will be able to use the results of both audits to improve their operations in these areas.

8. Overhead charges to utilities Water, sewer and other utilities are funded through user fees, which may be used only for the utilities’ operating and capital costs. Cities also have central services like information technology, personnel and facilities that serve all city departments, including utilities. Cities must distribute the costs for central services legally and equitably. As cities face increasing demands on their general funds, they are increasingly looking for ways to charge utilities for shared overhead expenses. Assigning overhead costs to the proper funds and for the right amounts is legally required but complicated.

9. Overhead charges to utilities We expect the audit will help local governments by providing information about: Central service costs that cities and counties can appropriately charge to the utilities. Leading practices for allocating central service costs between the general fund and the utilities. The types of overhead that should not be charged to the utilities and the risks that result from those charges. Various statutes that cities and counties need to consider when charging overhead to the utilities.

10. Change order pricing Local governments usually award contracts competitively for construction and architectural & engineering services to ensure fair prices for labor and materials. However, contracts often are modified due to unforeseen conditions, design changes, owner-requested changes or requests for additional work. In contrast to the underlying contracts, change orders are not competitively bid but are negotiated individually. For that reason, contractors are better positioned to seek more generous pricing for labor and materials through change orders.

11. Change order pricing We expect the audit will help local governments by providing information about: Typical overhead and profit markups for both construction and A&E contracts. How they can develop contracts that provide more control over the pricing of change orders. How to scrutinize change orders and how to evaluate sources of information and the documentation needed from contractors.

12. Reinventing audits State Accountability Audits Conservation District Audits K-12 Enrollment Re-assessing Audit Risk in Local Audits

13. State Auditor Brian Sonntag, CGFM (360) 902-0360Brian.Sonntag@sao.wa.gov Larisa Benson, Director of Performance Audit(360) 725-9720Larisa.Benson@sao.wa.gov Chuck Pfeil, Director of State/Local Audit(360) 902-0366 Chuck.Pfeil@sao.wa.gov Chris Cortines, Principal Auditor for Local Government Performance Audits (360) 628-7752 Christopher.Cortines@sao.wa.gov