Los Angeles CAO Fires Back at Controller's Bond Audit

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LOS ANGELES — An audit that accused Los Angeles of wasting millions of dollars in interest costs by issuing bonds too soon "over-simplified important factors," said the head of the office in charge of the city's bond issuance.

Los Angeles Controller Ron Galperin said in a June 30 audit report that the city has paid $47 million in unnecessary bond payments over 16 years.

Galperin's report focused on the city's 2004 Proposition O bond measure.

The audit acknowledged the successful delivery of Proposition O projects, but said $6.8 million had been wasted on interest for Prop. O bonds that were issued too far in advance of the city's ability to spend them.

Santana, in a response dated July 27, said he "believes that the audit has over-simplified important factors including state law requirements for contracts and project-related issues that are at the core of the audit findings pertaining to project management and the existence of large cash balances in the Prop O program." a.

During the audit, Galperin said he and his auditors noticed large balances in the accounts associated with Proposition O and that 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, according to the audit.

According to Santana's response, the controller did not take into account project delays and cancellations that were beyond the control of the city and resulted in unspent funds.

"They are important factors that we believe were not appropriately considered in the findings," Santana wrote.

The audit also did not take into account "state law requiring the city to have enough cash on hand to pay for all obligations incurred via a contract at the time the contract is signed," Santana wrote. "This requirement is the reason why such large bond issuances were made at the start of the program, which when combined with the delays mentioned earlier have resulted in the large cash balances noted in the audit."

The CAO said his responding memo restated information already provided to the controller's office with regard to methodology used for determining what was referred to as "unnecessary interest on idle funds." The audit over-simplified the analysis and merely stated an average value of the net interest cost incurred on existing funds, Santana wrote.

"The one-sided analysis does not recognize that interest payments would still be made if bonds were issued on a different date," Santana wrote.

In the report, Galperin recommended that the city change its procedures so it issues bonds closer to when the money is needed.

Santana responded that his office has significant problems with recommendations to explore the use of short-term financing, such as commercial paper, to balance the cash flow needs of projects while improving the timing of bond issuances. While this approach may be theoretically possible, Santana wrote, the city has not used this interim financing method for its general obligation bond program, nor to his knowledge have other cities or counties used this method.

Galperin did not respond to a request for comment on the CAO's critique of the audit.

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