Condition of All Funds in the City Treasury and Review of Cash and Investment Activities as of June 30, 2015
Our prior year’s audit report included an observation noting a risk of non-compliance with the State Government Code with respect to maturity restrictions for medium-term notes. In that report (issued May 2015) we recommended that management implement a system to identify and segregate the source of funds in the Treasury’s Cash Management System that is used to purchase investments, to ensure compliance with guidelines.
State Code 53601(m) provides an exception for investments over the five-year period if they were purchased with bond proceeds and provisions governing the bond issuance allows it. The City’s funds used to buy investments is composed of all sources of revenues including taxes and bond proceeds.
OOF does not yet have a system or method to segregate the sources of funds for specific investment instruments; however, the Department updated the Investment Policy in 2015 to prohibit purchases of private securities exceeding a five-year maturity. Though OOF no longer purchases corporate notes in excess of five years, it kept private securities in its portfolio that were purchased prior to January 1, 2015. We noted that at June 30, 2015, OOF held 31 medium-term notes totalling $295 million, whose maturity goes beyond five years.
The second issue relates to standalone bank accounts that are not under the control of the Office of Finance. OOF reported to the Controller there were 261 standalone bank accounts with cash balances totaling $95 million. Every quarter, Departments that maintain these accounts are required to report and certify the amounts to the Office of Finance. During our audit, we found that LAPD did not submit certifications or account reconciliations for 15 of its 50 standalone bank accounts. The Office of Finance did not follow up with LAPD; and reported assumed year-end balances to the Controller’s Financial Reporting Division, posing a risk of inaccurate amounts being included in the total cash reported in the City’s official financial statements. The 15 LAPD bank accounts had a combined balance of approximately $1 million.
Finally, based on our current evaluation of the status of six recommendations that were included in our prior year’s audit report, three have been Implemented, while three remain In Progress; outstanding issues relate to the planned implementation of a new Treasury Management System.