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08 Staff Report - SCC Grand Jury Request DATE: TO: FROM: SUBJECT: MEETING DATE: 4/19/04 ITEM NO. 8 COUNCIL AGENDA REPORT April 16,2004 MAYOR AND TOWN COUNCIL DEBRAJ. FIGONE, TOWN 􀁍􀁁􀁎􀁁􀁾􀀭􀀭􀀭􀂭 ORRY P. KORB, TOWN ATTORNEY 􀁴􀀩􀁾 APPROVE RESPONSE TO SANTA CLARA COUNTY GRAND JURY REQUEST -INQUIRY INTO LOS GATOS REDEVELOPMENT AGENCY FINANCIAL OPERATIONS RECOMMENDATION: Approve response to Santa Clara County Grand Jury Final Report-Review ofAudits and Financial Reports. . . DISCUSSION: In response to a citizen complaint questioning the tax increment distributions made by the Town of Los Gatos Redevelopment Agency, the Santa Clara County Civil Grand Jury conducted an inquiry of the Agency's financial calculations showing how it has complied with tax sharing agreements between the Agency and other taxing entities in the redevelopment project area: Additionally, the 2002-03 Santa Clara County Civil Grand Jury examined the Agency's record retention policies. As addressed below, the Grand Jury found no current irregularities in the manner the Agency shares revenue with other entities. It did, however, state that the Agency had in the past held funds that were improperly paid to the Town by the County of Santa Clara. Further, it incorrectly concluded that Agency records are not addressed by the Town's document retention policy. 􀁐􀁒􀁅􀁐􀁁􀁒􀁅􀁄􀁾􀀦􀁯􀁎􀀭􀁾􀀭􀀭 Town Manager N:\MGR\AdminWorkFiles\cnclrpts\Grand Jury Audit Report.wpd Reviewed by: __Assistant Town Manager 􀁾Town Attorney __Clerk.__.Finance __Community Development Revised: 4/16/04 5:21 pm Refonnatted: 5/30/02 PAGE 2 MAYOR AND TOWN COUNCIL SUBJECT: APPROVE RESPONSE TO SANTA CLARA COUNTY GRAND JURY REQUEST -INQUIRY INTO LOS GATOS REDEVELOPMENT AGENCY FINANCIAL OPERATIONS April 16, 2004 THE REPORT The Civil Grand Jury is empowered to investigate complaints concerning the operations of local government entities and to make recommendations for adopting new or changing existing procedures. California Penal Code section 933©) requires that the governing body of the entity subject to a Grand Jury report respond within 90 days to the findings and recommendations ofin the report. The response must either agree or disagree in whole or in part with the findings and state the reasons for any disagreement, and further state whether the recommendations will be implemented, the plan for doing so, or an explanation ofthe reasons for 􀁮􀁯􀁾 doing so.. In this case, the Grand Jury reviewed the annual "pass through" tax sharing agreement calculations made by the Agency providing tax sharing revenues to seven other taxing jurisdictions within the County. The Grand Jury was provided copies of all tax sharing agreements and calculations of increment sharing for the most recent three fiscal years. Based on this information, the Grand jury concluded that the Agency had properly calculated tax increment payments pursuant to the tax sharing agreements. No corrective action was recommended by the Grand Jury. The Grand Jury report contains four factual statements, two findings and two recommendations. Emtinerated below are the factual statements and a response to each. Below that is a summary of the Town's response to the findings and recommendations of the Report. First Fact: Contrary to what should have happened, theRDAhad not forwarded the ElectionAmount! payments . to the taxing entities even though the RDA had received these payments fromthe County for the years 96/97 through FY 01/02. During this six,Year period the monies remained at the RDA and not the taxing entities. Response: Shortly after his appointment in May 2001, the Director of Finance· inquired about amounts being held on the Agency's balance sheet from prior years' audited financial statements shown as being "due to other governments." The Director was informed by staff that his predecessor had learned that the County of Santa Clara was mistakenly forwarding the election amounts due to the other taxing jurisdictions directly to the Town's Redevelopment Agency and, beginning in fiscal year 1996-97, attempted without success to return the funds and get the County to correct the amount of 1As stated in the Report, taxing entities receive a negotiated portion of the tax increment or they may elect to receive the allowed two percent annual property tax increase, which is referred to as the "election amount." In fact, some entities can and do choose to receive both negotiated passthrough and election amounts. PAGE 3 􀁍􀁁􀁙􀁏􀁒􀁁􀁎􀁄􀁔􀁏􀁗􀁎􀁃􀁏􀁕􀁎􀁃􀁾 SUBJECT: APPROVE RESPONSE TO SANTA CLARA COUNTY GRAND JURy REQUEST -INQUIRY INTO LOS GATOS REDEVELOPMENT AGENCY FINANCIAL OPERATIONS April 16, 2004 , tax increment payments to the Agency. The Agency accounted for the excess payments received as liabilities "due to" each specific taxing jurisdiction. The overpayments by the County were never recorded or treated as revenue to the Agency. In fiscal year 2001-02, the Town's Finance Director was successful in arranging for the County to take the overpayments back and to have those and all future amounts paid directly to the affected taxing jurisdictions. Second Fact: A principal of Urban Analytics LLC, an independent auditor, uncovered the incorrect financial spreadsheet listings ofthe yearly tax increments with reference to the Election Amounts during the RDA bond audit conducted in May 2002. Town Response: While the facts are correct, the statement erroneously implies that the Town was not aware ofor had done anything about the overpayments until discovered by the independent auditor in 2002. As stated above, the Town had attempted to return the funds to the County and stop the overpaymen.ts starting in fiscal year 1996-97. What the independent auditor discovered was that the initial election amount calculations made in fiscal year 1991-92 relied on the assessed value ofland, improvements and unsecured property in the Agency project area to arrive at the base year value used to 􀁣􀁡􀁬􀁣􀁵􀁬􀁡􀁴􀁾 all future election amounts. The independent auditor, an expert hired by the Agency to 􀁣􀁡􀁬􀁣􀁵􀁬􀁡􀁴􀁾 future tax increment revenues, indicated the base year value should include only the assessed value of land and improvements, but not unsecured property. Once the base year value was adjusted to include only the value of land and improvements, the difference in election amounts from year to . year were slight. Third Fact: The Town's current Finance Director corrected the financial spreadsheet records and, in a letter dated August 1, 2002 to the County Property Tax Manager, requested that the past six year Election Amounts be sent directly from the County to the taxing entities and that this be the future protocol between the County with reference to the transmittal of Election amounts. Town Response: The facts are correct. Again, what is not stated is that the Town initiated these efforts to get the County to take back the election amounts and distribute them to the affected taxingjurisdictions well before the citizen complaint or the Grand Jury review, a fact stated by the Grand Jury investigators in their field review. PAGE 4 􀁍􀁁􀁙􀁏􀁒􀁁􀁎􀁄􀁔􀁏􀁗􀁎􀁃􀁏􀁕􀁎􀁃􀁾 SUBJECT: APPROVE RESPONSE TO SANTA CLARA COUNTY GRAND JURY REQUEST -INQUIRY INTO LOS GATOS REDEVELOPMENT AGENCY FINANCIAL OPERATIONS April 16, 2004 Fourth Fact: A check for $1,496,142.62 from the RDA to the County, was enclosed in the above letter for transmittal of the monies, by the County, to five districts. The monies were distributed as follows: ($401,251.91 to Los Gatos Saratoga High School District, $481,687.2 to Santa Clara County, $303,481.42 to County Central Fire District, $278,287.61 to the Town ofLos Gatos, $31, 434.48). Town Response: The facts are correct. Once arrangements could be made with the County and fiscal year 2001-02 financials had been closed, the Town immediately and pro-actively forwarded a check for the amounts it had held on its balance sheet as being due to the 􀁾􀁦􀁦􀁥􀁣􀁴􀁥􀁤 taxing agencies. The County in turn paid these amounts directly to the taxing jurisdictions. Since that time, the County has been annually paying the amounts directly to the taxing agencies as per agreement with the Agency. FindinKs: The Grand Jury made two findings based on its inquiry, the first being that "Tn]o notations had been made onthe Town's corrected financial spreadsheets, for future reference, to ensure that the Election Amounts shown were for reference only and were not distributed by the RDA, but rather directly by the County to the taxing entities." The second finding was "RDA records are not listed as part of the Town's Record Retention Policy." The proposed response (Attachment 2) agrees with the first finding but, to the extent the second finding implies that Agency documents are not subject to the Town record retention policies, the response rejects that finding as incorrect. While the Town record retention policies do not expressly refer to the Redevelopment Agency, all Town documents, Agency documents included, are subject to and retained pursuant to the policies. Recommendations: The Grand Jury made two recommendations, the first being that "[p]ermanent notation should be made in the RDA financial spreadsheet records referencing the newly established protocol with the County for the distribution of the Election monies to the taxing entities. The second recommendation is that "[t]he RDA should be formally included in the Town's Records Management Policy with the retention ofRDA 􀁲􀁾􀁣􀁯􀁲􀁤􀁳 being classified as permanent." PAGES 􀁍􀁁􀁙􀁏􀁒􀁁􀁎􀁄􀁔􀁏􀁗􀁎􀁃􀁏􀁕􀁎􀁃􀁾 SUBJECT: APPROVE RESPONSE TO SANTA CLARA COUNTY GRAND JURY REQUEST -INQUIRY INTO LOS GATOS REDEVELOPMENT AGENCY FINANCIAL OPERATIONS April 16, 2004 The proposed response explains that the first recommendation has 􀁡􀁬􀁲􀁾􀁡􀁤􀁹 been implemented. Regarding the second recommendation, the response states that, to avoid any doubt about their. applicability to the Agency, the Town will amend its record retention policies to refer expressly to the Agency, but not make all ofthose records permanent because doing so is neither warranted nor reasonable. CONCLUSION: The report of the Civil Grand Jury concerning its Inquiry into Los 􀁇􀁡􀁴􀁾􀁳 Redevelopment Agency Financial Operations found nothing improper in the current financial operations ·of the Agency. It correctly states that for a period of years ending in 2002, the election amounts, which constitute a small portion ofthe funds due to ·the seven taxing entities that share tax increment revenue with the Agency, were improperly paid by the County of Santa Clara to the Agency. However, the Report fails to refer to the efforts of the Town beginning in fiscal year 1996-97 to get the County to take back the overpayments and to change its payment procedures. The Report also fails to state that the Town succeeded in this effort in 2002 without being compelled to do so. Lastly, the Report erroneously concludes that the Town record retention policies do not apply to Agency documents. The proposed response addresses errors in the fmdings and recommendations of the Report. Once approved by Council, the response will be forwarded to the Presiding Judge of the Santa Clara. County Superior Court who supervises the·Civil Grand Jury. ENVIRONMENTAL ANALYSIS: Responding to the recommendations ofthe Grand Jury is not a project as defmed by CEQA. FISCAL ANALYSIS: No fiscal impact at this time. Attachments: 1. Grand Jury Report-Final Report-Inquiry into Los Gatos Redevelopment Agency Operations 2. Response APR 0 􀁾􀀺 2004 April 8, 2004 Honorable Steve Glickman Mayor and Members ofthe Town Council Town of Los Gatos 110 East Main Street P.O. Box 949 Los Gatos, CA 95031 Dear Mayor Glickman and Members ofthe Town Council: The 2003-2004 Santa Clara County Civil Grand fury is transmitting to you its Final Report, Inquiry into Los Gatos Redevelopment Agency Financial Operations. California Penal Code Section 933(e) requires that a governing body of the particular public agency or department which has been the subject of a Grand Jury final report shall respond within 90 days to the Presiding Judge of the Superior Court on the findings and recommendations pertaining to matters under the control of the governing body. California Penal Code Section 933,05 contains guidelines for responses to Grand Jury findings and recommendations and is summarized in the attached form, which should be filled out and returned. PLEASE NOTE: 1. As stated in Penal Code Section 933.05, you are required to "Agree" or "Disagree" with each FINDING(S) -Numbered I and II. If you disagree, in whole or part, you must include an explanation ofthe reasons you disagree. 2. As stated in Penal Code Section 933.05, you are required to respond to each RECOMMENDATION(S) -Numbered I and II, with one offour possible actions. Your comments are due in the office of the Honorable Thomas P. Hansen, Presiding Judge, Santa Clara County Superior Court, 191 North First Street, San Jose, CA 95113, no later than July 12, 2004. Copies of all responses shall be placed on file with the Clerk of the Court. 􀁓􀁻􀀡􀀩􀁉􀀡􀁾􀀯 4CHARD H. WOODW􀁾 Foreperson 2003-2004 Civil Grand Jury RHW:dsa Ene. ATTACHMENT 1 2003-2004 SANTA CLA.RA COUNTY CIVIL GRAND 􀁊􀁕􀁒􀁙􀀺􀀻􀁾􀀧􀁾􀁾􀀧􀀺􀁾 8. CHOPOFF INQUIRY INTO LOS GATOS REDEVELOPMENT AGENCY FINANCIAL OPERATIONS Summary An inquiry was conducted into the financial records of the Los Gatos Redevelopment Agency (RDA) with specific emphasis on tax revenue from the County of Santa Clara (County) and its distribution to the Los Gatos-Saratoga high school district and six other taxing entities. The criteria for retention ofRDA records by the town of Los Gatos (Town) were also the subject of this inquiry. The 2003-2004 Santa Clara County Civil Grand Jury (Grand Jury) concluded its inquiry with two findings and two recommendations. The recommendations, if adopted, will improve understanding of the RDA's financial records and add the RDA's files to the Town's collection ofpennanent records. . \ '. Background In response to a citizen complaint, the Grand Jury conducted an inquiry into the -management of the RDA. The complainant had questioned the amount of tax monies transferred to the schools during past years as shown in the Town's reports and the increasing property values in the Town's redevelopment area as shown in County reports. The complainant was unable to obtain the financial records requested from the Town. The RDA was created, after the 1989 earthquake, on November 25, 1991 under Town Ordinance 1882. The Central Los Gatos Redevelopment Project includes an area of 404,000 square feet, a little more than 9 acres, surrounding the downtown area. This is called the Project Area that is designated in the redevelopment plan for redevelopment and revitalization. New income from property taxes (i.e. the increase in property taxes within the redevelopment project area resulting from assessed value that exceeds the base year assessed value) is called the Tax Increment. The Tax Increment in this area is currently about $4,000,000 per year, and has been growing atiabout eight percent per year. Taxing entities such as the county, school districts, and special districts, that serve the Project Area, continue to receive all the tax revenues they received the year the redevelopment Project 1 Area was fanned (the base year). In addition, taxing entities receive a negotiated portion of the Tax Increment from the redevelopment Project Area called a Pass-through or they may elect to receive the allowed 2% annual property tax increase, which is referred to as the Election Amount. The choice to receive this Election Amount or the Pass-through amount is only available initially and can not be changed thereafter. Some Redevelopment Agencies pay each taxing entity their contracted Pass-through percentage directly, while the County pays each entity the Election Amount directly. However the RnA had not requested this arrangement until 2002. Until then, the RnA followed a common Redevelopment Agency practice· to receive the ElectionAmount from the County. The Eleciion Amount should have been forwarded to the taxing entities. FactsPayments: • Contrary to what should have happened, the RnA had not forwarded the Election AlJlount payments to the taxing entities even though the RDA had received these payments from the County for the years FY 96/97 through FY 01/02. During this six-year period the monies remained at the RDA and not the taxing entities. • A principal of Urban Analytics LLC, an independent auditor, uncovered the incorrect financial spreadsheet listings of the yearly tax increments with reference to Election Amounts during an RnA bond audit conducted in May 2002. • The Town's current Finance Manager corrected the financial spreadsheet records and, in a letter dated August 1,2002 to the County Property Tax Manager, requested that the past six-year Election Amounts be sent directly from the County to the taxing entities and that this be the future protocol between the RDA and the County with reference to the transmittal ofElection Amounts. • A check for $1,496,142.62, from the RDA to the County, was enclosed in the above letter for transmittal ofthe monies, by the County, to five districts. The monies were distributed as fonows: $401,251.91 -Los Gatos-Saratoga High School District $481,687.20 -Santa Clara County $303,481.42 -Central Fire District $278,287.61 -Town oLLos Gatos $ 31,434.48 -Mid Peninsula Regional Open Space District Records: 􀁾 • The Town established a Records Management Policy (Town Resolution· 1990-22) on January 16, 1989, before the RDA was created. • The Records Management Program in the Administrative Manual for the Town became effective on August 25, 1993 but did not specifically mention the RDA. 2 • An internal memorandum from the Town's office staff to the Finance Manager dated September 9, 2003 referenced the current State Records Management Guidelines and listed the guidelines specific to RDA budgets and bond issues as requiring pennanent retention. • One of the key projects in the Town's budget for FY 2003-04 is the development of a records management policy and program by the clerk's office. Finding I No notations had been made on the Town's corrected financial spreadsheets, for future reference, to ensure that the Election Amounts shown were for reference only and were not distributed by the RDA, but rather directly by the County to the taxing entities. Recommendation I Pennanent notation should be made in the RDA financial spreadsheet records referencing the . newly established protocol with the County for the distribution of the Election monies to the taxing entities. Finding II RDA records are not listed as part ofthe To\'ll1's Record Retention Policy. Recommendation II TheRDA should be formally included in the Town's Records Management Policy with the retention ofRDA records being classified as-pennanent. PASSED and ADOPTED by the Santa Clara County Civil Grand Jury on this 11 th day ofMarch 2004. Foreperson 3 References Documents Map of Central Los Gatos Redevelopment Project by Los Gatos Planning, dated November 21, 1994. Draft Report "Fiscal Consultant Report for the Los Gatos Redevelopment Agency Tax Allocation Bonds 2002 Series A." Financial spreadsheet from Finance Manager's computer records showing "Election Amounts per Original Calculations" arid "Revised Amounts per Urban Analytics," dated May 20, 2002. Letter dated August 1, 2002 from the Los Gatos FinaQce and Administrative Manager to the Property Tax Manager for the County ofSanta Clara. Inter-Office Memorandum to the Los Gatos Finance Manager entitled "Current State Records Management Guidelines," dated September 9, 2003. Page IV-10 from the Los Oatos 2003-2004 Budget. Interviews Meeting with the Los Gatos Redevelopment Manager on July 16, 2.003. Meeting with the Los Gatos Finance and Administration Director on September 11,2003. Telephone conversations with Urban Analytics LLC. Telephone conversations and fax transmittals dated October 17, 2003 with with the Los Gatos Finance Manager. Meeting with the former Santa Clara County Tax Manager on January 29,2004. 4 Response to Grand Jury Report 2003-2004 Civil Grand Jury Report Title: Inquiry into Los Gatos Redevelopment Agency Fina,ncial Operations Report Date: March 11, 2004 Response by: Honorable Steve Title: Mayor and Members of the Town Glickman and Members of Council the Town Council FINDINGS [!]. I (we) agree with the Findings numbered: 1 -------􀁾 I (we) disagree wholly or partially with the Findings numbered: 2 --....,.-'--,...----(Attach a statement specifying any portion of the Findings that are disputed; include an explanation of the reasons therefor.) . RECOMMENDATIONS 􀁾 Recommendations numbered 1 have been implemented. (Attach a summary describing the implemented actions.)have not yet been implemented, 􀁾􀀭􀀭􀀭􀀭􀀭 o Recommendations numbered but will be implemented in the future. (Attach a fimeframe for the implementation.) o Recommendations numbered . require further analysis. (Attach an explanation and the scope and parameters of an analysis or study, and a timeframe for the matter to be prepared for discussion by the officer or director of the agency or department being investigated or reviewed, inclUding the governing body of the . public agency when applicable. This timeframe shall not exceed six months from the date of publication of the grand jury report.) 􀁾􀀮 Recommendations numbered 2 will not be implemented because they are not warranted or are not reasonable. (Attach an explanation.) Date Signature 2 Number of pages attached: __ Print Name ../1Ii [-'---------1 -.JI ATTACHMENT 2 EXPLANATION OF RESPONSES Finding No.2: . The finding that "RDA records are not listed as part of the Town's Record Retention Policy is incorrect. As explained below, many records result from the operations of the Town's Redevelopment Agency. The retention requirements for all Agency records are addressed by State law and existing Town policies, which are designed to address in a generic manner all records generated by the Town, including the Agency. Therefore while these policies do not make separate and specific reference to the Agency, they nevertheless apply equally to all Agency records. The Town Council in 1990 adopted a Town-Wide Records Retention Schedule and Policy for Ongoing Records Management (Resolution No. 1990-22), and the Records Management administrative policy, effective August 25, 1993, each pursuant to the authority of Government Code section 34090 concerning the creation, maintenance and disposal of municipal government records. Section 34090 allows for the destruction of records 'after two years, but also specifies certain records that must be maintained, subject to section 34090.5, which allows the destruction of records that must be otherwise be maintained so long as those records have been properly reproduced. The Redevelopment Agency operates under the authority oithe CommunityRedevelopment Law, which empowers it to exercise broad governmental 􀁦􀁵􀁮􀁾􀁴􀁩􀁯􀁮􀁳􀀮 Government Code section 33122, et seq. In exercising these powers, the Agency generates many of the saine document types as are generated by the Town; for example, resolutions, meeting minutes, staff reports, contraCts, warrants, budgets, financial statements, audit reports, etc. As is true of records generated by the Town, not all Agency records should be permanently maintained. Accordingly, all Agency records are subject to the requirements of Government Code section 34090 and the Town records retention 􀁰􀁯􀁬􀁩􀁣􀁩􀁾􀁳 and are handled in the same manner as the equivalent Town records. Recommendation No.1: This recommendation has been implemented. Each year the Redevelopment Agency instructs the County of Santa Clara to pay the two percent election amounts due to other agencies directly out of the tax increment otherwise paid to the Agency. The amounts due to the other entities are taken from a sp'readsheet developed, annually updated and provided to the County by the Agency. The spreadsheet now contains a notation explaining that the calculation has been changed by the Agency so that base year values now include assessed valuation for "land and improvements only," while the calculations prior to fiscal year 2002 were based on "land, improvements and unsecured valuation." Recommendation No.2: The recommendation that will be implemented only to the extent that it suggests that Town record retention policies include a spacific reference to documents of the Redevelopment Agency. The policies will be amended within the next six month. The recommendation that Town policies require the permanent retention of Agency documents will not be fully implemented because it is neither warranted nor reasonable. While including a specific reference to the Redevelopment Agency in the Town record retention policies would be appropriate to eliminate any doubt about their applicability to Agency records, the remainder of the recommendation is too broad, fails to recognize what records are already subject to permanent retention, fails to take into account the diverse variety ofrecords produced by the Agency or the obligation of the Town to effectively manage information and records created or received by all Town offices. Recommendation No.2 was apparently derived from the current State Records Management Guidelines, which is referred to in the Report. As stated in the Report, the guidelines, officially entitled: "Local Government Records Management Guidelines," refer to redevelopment budgets and bond issues." While the Town's record retention policies does not expressly refer to the Agency, they nevertheless requires that all audits and budgets be permanently retained. In addition, because all agency bond documents are approved by resolution, these records must be permanently retained pursuant to Government Code section 34090, which requires permanent retention of all resolutions. The recommendation also goes beyond the Guidelines to require the permanent retention of all Agency records, but provides no authority or explanation for this broad recommendation. As discussed above in the response to Finding No.2, which is fully incorporated in this response, the Agency generates a variety of records, many of which should not be permanently retained. Consequently, good records management requires that the Town reject this part of the recommendation and rely instead on Government Code section 34090 and its current record retention policies.