Audit Uncovers Cost Overruns in Laguna Niguel

JEFF ANTENORE, Voice of OC Contributing Photographer

Laguna Niguel City Councilmembers conduct city business during a council meeting on Tuesday, September 5, 2017.

A long-awaited audit that looked at 21 Laguna Niguel vendors found a $410,000 cost overrun in a tree trimming contract among problems that affected eight of the city contractors.

After the Sept. 5 presentation to the City Council by the Santa Ana-Based Pun Group accounting firm, Councilwoman Laurie Davies asked Frances Kuo -- a partner with the firm -- if they found any illegal activity during their research. Kuo said they hadn’t.

However, Councilman Jerry Slusiewicz challenged that conclusion.

“In our municipal code, we have policies and procedures on how we’re doing our purchasing,” Slusiewicz said. He asked Kuo, “if they did go above that (spending cap), then they violated the municipal code of Laguna Niguel, correct?”

“Correct,” said Kuo.

Slusiewicz was referring to the Pun Group’s discovery that department heads and the city manager went over their respective $10,000 and $25,000 spending limits in two of the findings. The city manager can go above a department head’s spending cap by up to $25,000.

The city hopes to halt some contract oversight issues and cost overruns by installing an electronic purchasing system that won’t allow money to be spent if it’s over the contract limit or missing an invoice. The city still uses paper with carbon copies for its purchasing system. The electronic system isn’t expected to be online for about a year.

One contract that far exceeded spending limits was the $410,000 in excess spending that went to vendor West Coast Arborists for trimming city trees.

“That’s the salary of two (Sheriff's) deputies … because we didn’t follow municipal code of the city of Laguna Niguel,” Slusiewicz said.

The excess spending has been the subject of multiple contentious city council meetings since July.

The audit itself was initially scheduled to be released in mid July, but its public disclosure kept getting postponed, according to Slusiewicz. Unlike a traditional audit, this report focused on purchase orders and contracts.

Ultimately, tensions on the city council led to Slusiewicz resigning as mayor and the tensions continued at the Sept. 5 meeting.

Slusiewicz earlier called for a District Attorney investigation into the tree contract overrun before his resignation last month, but didn’t gain any traction on the council. After he brought the tree trimming contract to light, a former city manager accused him of bullying.

The city has a three-year contract with the arborists -- with an annual limit of $140,000 -- that it entered in October 2015.

The circumstances that led to the findings of the cost overrun prompted Councilman John Mark Jennings to ask Kuo and Pun Group Managing Partner Ken Pun how the financial group found the overspent contract.

Jennings started to question how many meetings they had with Slusiewicz and Mayor Fred Minagar and when exactly the tree trimming contract came up.

“What about the question with respect to instructions that you received from then-mayor Slusiewicz about West Coast Arborists? Do you have an understanding of how many total meetings...that you had with the mayor and mayor pro tem (Minagar at the time)?” Jennings asked.

“We should actually defer those questions. We need to pull our records to accurately tell you,” Pun answered.

Jennings also asked why the Pun Group withheld the draft report from City Attorney Terry Dixon after he asked for it in July.

Kuo said that’s part of the questions they deferred until a later date.

“I think we know the answer to that. Do you have an answer for it tonight?” Jennings said.

“First of all, the city attorney is still an outside party. According to agreed upon procedures, the specified party is not the city attorney,” Pun said, adding that Slusiewicz and Minagar instructed the group to get management’s responses to the findings before handing the report over to Dixon.

Under the procedures of the report, the accounting firm works with the Mayor and Mayor Pro Tem during their review of financial records and are able to somewhat steer where the report goes.

Slusiewicz, during the council meeting, asked Jennings why he had so many questions about the process used to select contracts to be reviewed by the audit.

“Mr. Jennings, why is it important why we picked West Coast Arborists? Why is that even important?” he asked.

Jennings answered, “One, I’m not going to be interrogated by you on the dais and, secondly, I think it's very important because I want to know what you were up to. Frankly, it came out of someplace and I want to know where and I want to know why.”

Slusiewicz replied it doesn’t matter why the arborists were chosen, but said he got a tip from a concerned citizen that West Coast Arborists did work at former City Manager Rod Foster’s house and that the company doesn’t typically do residential work.

“So it was just a shot in the dark. We found out that they also got $410,000 in excess spending over two years … it was a stroke of almost pure luck,” Slusiewicz said.

Among the eight different findings in the audit was the discovery of an aggregated $54,766 for recreation brochures, neighborhood newsletters and postcards from Westamerica Communications Inc., which is over the city manager’s spending cap. In this instance, Foster, the former city manager, delegated his purchasing responsibilities to the city’s former purchasing manager.

In the report, the city management’s response to the brochure and newsletter findings is that some of the costs were split between parks and recreation and police newsletters. Some of the purchase orders included in the accounting firm’s total is before the city entered an agreement with Westamerica in February for parks and recreation literature, and the new purchasing manager will be working with the Sheriff’s to bid out their quarterly brochures. The response doesn’t address how the amount went over the city manager’s threshold.

The audit group also found a problem with purchase orders not matching invoices. The accountants found that for fiscal year 2016-2017, the aggregate purchase order amount issued to Triton Air was $10,632 for air conditioning work, while the three separate invoices in that time only total $5,987.

City management agreed with the group’s findings and said the purchasing manager will work with the Public Works Department and issue a contract to a vendor for air conditioning maintenance.

The overall findings and management responses didn’t satisfy Minagar, who said he wanted a concrete conclusion from the Pun Group.

“So no red flags that would constitute illegalities in the city by anyone?” Minagar asked.

“Let me put it this way ... we are not lawyers. We can not determine or opine on legality,” Pun said.

Kuo chimed in after Minagar kept pressing for some type of opinion or conclusion.

“In accordance with the professional standard, we cannot provide a conclusion or opinion,” she said.

Spencer Custodio is a Voice of OC reporter who covers south Orange County and Fullerton. You can reach him at scustodio@voiceofoc.org.