Compliance Review: Payroll for the Los Angeles Department of Water and Power

Cover Letter

DATE: February 1, 2019
TO: David H. Wright, General Manager Los Angeles Department of Water and Power
FROM: Bob Wingenroth, Audit Director Office of the Controller

SUBJECT: PAYROLL COMPLIANCE REVIEW

The Office of the Controller conducted a review of payroll at the Los Angeles Department of Water and Power (LADWP) to ensure that LADWP bases its payroll on approved time worked (including overtime), and that any supplemental pay (i.e., bonuses, mileage reimbursements, etc.) are authorized, reasonable, and properly supported.

While management of each City department is responsible for designing, implementing, and maintaining a system to provide reasonable assurance that payroll and mileage reimbursements are authorized, supported, and comply with established policies and regulations, the Office of the Controller assists management by performing periodic reviews of the effectiveness of these departmental systems. These reviews compliment, but do not in any way replace, management’s assurance responsibilities.

Our review identified a few opportunities where LADWP can enhance its internal controls to ensure payments to employees are authorized, supported, and comply with policies and regulations, as detailed in the attached report.

We thank your management and staff for their cooperation and assistance during this Review.

Background

Payroll is the largest cost incurred by the City of Los Angeles (City). Department management must ensure employee pay is accurate and supported by appropriate authorization, especially for overtime and other additions to pay, such as bonuses for professional certifications.

The Office of the City Controller conducts periodic payroll compliance reviews to assess how well departments are following through on their responsibilities. This is especially important at the Los Angeles Department of Water and Power (LADWP), which uniquely processes its own payroll. All other City departments (including the City’s two other proprietary departments, i.e., Airport and Harbor) process their payroll through the Office of the City Controller.

Key Facts

FACT #1: LADWP provides water and power utility services to more than 4 million residents across 470 square miles.

FACT #2: LADWP resources include 23 power generating plants, 160 distributing stations, 119 water tanks and reservoirs, 96 pump stations and 7,337 miles of pipes.

FACT #3: LADWP employs approximately 10,000 staff. For calendar year 2017 LADWP payroll totaled nearly $1.3 billion, including $190 million (15%) paid for overtime and $130 million (10%) in other additions to pay. For fiscal year 2018, LADWP’s payroll costs represent 16% of its $8 billion budget.

FACT #4: For calendar year 2017, LADWP ranked 2nd in overtime payments among City departments, after the Fire Department but before the Police Department. Further during calendar year 2017.111 LADWP employees collected $100,000 or more in overtime payments. Another 216 employees collected between $75,000 and $100,000 in overtime.

Compliance Review Results

Based upon a small sample of employee overtime and additions to pay, the pay was supported by documentation. However, we learned that LADWP’s Internal Audit Division has not audited overtime or additions to pay for more than 10 years. LADWP is a large organization with each division establishing its own policies and procedures to control overtime and additions to pay. These disparate controls warrant a review of their effectiveness by the LADWP Internal Audit Division.

Further, during our Review, we noted that LADWP’s mainframe based payroll system has limitations in providing ad-hoc monitoring reports, or details on the reasons for certain types of add-on bonuses. LADWP management indicated it is in the process of evaluating potential replacement payroll systems amongst other priority projects. We highly encourage LADWP to prioritize the replacement of this mainframe-based payroll system.