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Fallen Leaf Lake Community Services District Its Billing Practices and Small Electorate Jeopardize Its Ability to Provide Services Report Number: 2018-133

Audit Results

The District Inappropriately Profited From Providing Firefighting Assistance Under the Fire Agreement

Because it overbilled Cal OES and paid its own personnel less than the rate it told Cal OES it would, the district improperly profited from reimbursements it received from paying agencies for providing personnel to fight wildfires. Under the fire agreement, local fire agencies—such as the district’s—can provide strike teams to respond to incidents such as wildfires. We discuss the forms and authorizations local agencies must submit to Cal OES to seek reimbursement for providing these strike teams in the Introduction. According to the senior emergency services coordinator for Cal OES, Cal OES does not intend for local fire agencies to make money or profit from the fire agreement’s reimbursement process.

During our audit period, the district’s strike teams generally consisted of a captain, who was a paid employee, and two or three apparatus (equipment) operators and firefighters, most of whom were recruits. According to the fire chief the district does not send its volunteers to work on strike teams. During 2018 the district paid its six nonmanagement firefighting personnel $18 per hour, regardless of rank, when performing regular, or non‑strike team, duties in the district. The district did not pay its 16 recruits for performing regular duties in the district, such as responding to medical incidents or searching for lost persons. Given that the hourly salary rates for the district’s personnel when performing regular duties were below the fire agreement’s base rate of $20.69 per hour and that the fire agreement’s default reimbursement rate is the base rate, we expected the fire chief to include the base rate—rather than an enhanced rate—on the annual salary form when claiming reimbursement amounts for the district’s personnel who served on strike teams.

However, rather than using the base rate for personnel, the fire chief instead improperly claimed enhanced rates for the firefighter through captain ranks for strike teams during each calendar year from 2016 through 2018. For instance, for 2018 the fire chief submitted hourly salary rates that ranged from $32 for the district’s firefighters—including recruits—to $37 for company officers, or captains. The district assigns both its nonmanagement personnel and its recruits to strike teams, and the fire chief told us that recruits receive pay only when assigned to a strike team. Further, the district did not pay its firefighters the full rate that it claimed for their strike team duty. For example, although the fire chief submitted an hourly salary rate of $32 for a firefighter on strike team assignments for 2018, he told us that he instead paid each firefighter only $28 per hour, a difference of $4 for each hour.

By claiming enhanced salary rates for the district’s personnel rather than the base rate, the fire chief failed to adhere to the terms of the fire agreement when submitting the annual salary form. Specifically, according to the fire chief, he included in his calculations of the enhanced rate his employees’ overtime rates plus an additional amount to pay for personnel who covered the strike team’s duties at the district when they were on strike team duty. This practice violates the instructions for completing the salary form, which he signed. The fire chief told us that he read the fire agreement and watched a video that Cal OES created to describe the instructions for filling out the salary form but that he found them confusing. For example, he was unsure if the base rate included overtime. However, we believe the fire agreement and its instructions, which we discuss in the Introduction, are clear. In addition, the instructions for calculating the average actual rate state specifically that the rate should not include overtime. If the fire chief was unclear about the rates to include on the salary form, he should have contacted Cal OES for clarification.

In addition to claiming reimbursements based on the enhanced rates instead of the base rate, the district also retained reimbursement amounts that could cover overtime compensation for strike team personnel. The agreement includes provisions for compensating local fire agencies for its strike teams’ direct costs. Direct costs can include overtime pay and payments for other employees to fill in for those who are on a strike team. Specifically, when calculating reimbursement amounts for firefighters and certain other strike team personnel, Cal OES multiplies the rate the local fire agencies submit by 1.5. By doing so, the fire agreement and Cal OES intend the payment to be a full reimbursement for direct costs for strike team personnel.

Documents pertaining to strike teams are clear regarding amounts local fire agencies should pay their personnel. First, the fire agreement states that it will not reimburse local fire agencies for enhanced rates that exceed the rates that the agencies themselves pay their personnel. Furthermore, Cal OES expects local fire agencies to compensate their personnel the rates they submit on their annual salary form. The fire chief told us that the district pays its personnel overtime compensation when they perform regular duties at the district for more than 106 hours in a two‑week pay period. Given this information, we expected the district to pay its firefighting personnel the rates the fire chief claimed on the annual salary form, and to pay overtime of 1.5 times the claimed rate when strike team assignments exceed 106 regular hours in a pay period. However, the district did not meet this expectation. Specifically, in 2018 11 strike teams worked more than 106 hours in a pay period, but the district did not pay them overtime.

The fire chief’s practice of paying firefighting personnel less than the rate he claimed on the annual salary form and of not paying overtime to personnel for strike team assignments contradicted Cal OES’s intent in providing the reimbursements. According to the fire chief, the district paid each firefighter—paid or recruit—$28 per hour while on a strike team assignment, regardless of the number of hours worked. Given that for 2018 Cal OES reimbursed the district $48 for each hour a firefighter worked on a strike team, or 1.5 times the $32 per hour rate that the fire chief submitted, we calculate that the district generally received about $20 more than it paid its firefighters for every hour they worked on a strike team assignment. Furthermore, as we show in Table 1, the district claimed even higher rates for apparatus operators and company officers on strike teams.

Table 1
When Claiming Reimbursements Under the Fire Agreement, the District Inflated Its Hourly Rates for Three Types of Positions

YEAR	STRIKE TEAM PERSONNEL TYPE	HOURLY RATE DISTRICT PAID ITS STRIKE TEAM PERSONNEL	HOURLY RATE DISTRICT CLAIMED	HOURLY RATE REIMBURSED BY CAL OES*	DIFFERENCE BETWEEN CAL OES REIMBURSED RATE AND DISTRICT PAID RATE
2018	Firefighter	$28.00	$32.00	$48.00	$20.00
	Apparatus Operator	30.00	35.00	52.50	22.50
	Company Officer	32.00	37.00	55.50	23.50
2017	Firefighter	$26.00	$30.00	$45.00	$19.00
	Apparatus Operator	28.00	32.00	48.00	20.00
	Company Officer	30.00	35.00	52.50	22.50
2016	Firefighter	$26.00	$28.50	$42.75	$16.75
	Apparatus Operator	28.00	28.50	42.75	14.75
	Company Officer	30.00	30.00	45.00	15.00

Because the fire chief submitted inflated salary rates rather than base rates to Cal OES and did not pay its strike teams overtime, the district improperly profited by receiving higher reimbursement amounts than it should have. In fact, we calculated that the district improperly claimed a total of nearly $703,000 in excess personnel reimbursements from Cal OES for 2016 through 2018. In Figure 2, we depict the annual excess reimbursement amount for each year, along with the appropriate reimbursement amounts based on the base rate. Because it also provided personnel for strike teams during 2013 through 2015, we believe it is possible that the fire chief also overbilled Cal OES for personnel in these years.

Figure 2
The District Overbilled Paying Agencies by More Than $700,000 in Personnel Costs
From 2016 Through 2018

The district’s fire chief stated that he submitted the enhanced pay rate in part to offset the low wages that the district’s personnel make performing their regular duties. He asserted that he could not morally send district personnel on strike team assignments at the salary rate that the district pays for regular duties at the station. He further stated that the district’s pay scales are lower than other fire districts nearby and that he believes it is uncommon for firefighters to serve on strike teams for low pay rates unless the firefighters are volunteers. He stated that he based the strike team salary rates he included on the survey form on his employees’ overtime rates. Because the district pays its nonmanagement personnel $18 per hour for their regular work at the district, they would receive $27 per hour for overtime. Thus, a firefighter paid $28 an hour would receive a slightly higher amount while on a strike team than they would for overtime work at the district.

The fire chief’s explanations do not excuse his improper use of the fire agreement’s reimbursement process. Had he claimed the base rate as he should have for 2018, Cal OES would have reimbursed the district at 1.5 times this rate, as the fire agreement describes. The reimbursement amounts the district would have received would have covered the personnel costs for its strike teams: the base rate of pay for the firefighters on strike teams and overtime pay for these firefighters when necessary.

The fire chief also appears to have circumvented the board’s role in governing the district. State law gives special districts’ boards the authority to adopt policies for their districts’ operation, including fiscal and personnel policies. The district provided no such fiscal or personnel policies related to its strike teams. In the absence of a policy delegating the authority to the district’s fire chief to determine salary rates for fire fighters on strike teams, we expected the district’s board to have approved the proposed salary rates. However, the fire chief could not provide evidence that the district’s board approved the pay rates he submitted to Cal OES. Budget documents the fire chief presented to the board did not contain sufficient detail to demonstrate that the board knew of or approved the enhanced salary rates the fire chief claimed for strike team personnel. Furthermore, board meeting minutes that we examined similarly lacked this level of detail. Consequently, the fire chief should not have submitted the salary rates for strike team personnel without approval from the district’s board.

Because the district inappropriately claimed excessive personnel reimbursements under the fire agreement, it sharply increased financial reserves for the fire department fund. The district’s financial statements show that these reserves increased from about $527,000 in fiscal year 2015–16 to about $867,000 in fiscal year 2017–18, or an increase of 64 percent. Furthermore, this amount does not include most of the fire agreement reimbursements that the district received for 2018 because many of these fires happened after the end of the fiscal year. In a September 2018 report to the board, the fire chief stated that strike team income had provided the fire department the ability to establish reserve funds for anticipated projects, such as purchasing a new firetruck, planning for an expansion for the fire station, and planning for upgrades to the marina pier for the fireboat. However, if the district intends to pursue these projects, we believe it should find more appropriate funding sources. Namely, if the district’s community members are the primary beneficiaries of these projects, then they should provide the funding rather than the fire chief inappropriately claiming reimbursements from the paying agencies under the fire agreement. One possible funding source could be the fire special tax paid by the district’s property owners; if it is not currently high enough to cover the projects’ costs, then the district could consider raising the tax.

Based on the fire chief’s improper use of the fire agreement’s reimbursement process and the resulting excessive strike team reimbursement amounts the district claimed, we forwarded our report to the Forest Service, Cal OES, CAL FIRE, and the El Dorado County District Attorney’s Office for their consideration and, if appropriate, further investigation.

The District Mischaracterized Its Employment Relationship With Its Recruits

Not only did the district inappropriately profit from providing personnel for strike teams, it may also have violated federal law by not treating its fire agency recruits as employees. Laws related to whether employers should treat their personnel—including firefighters—as volunteers, interns, independent contractors, or employees are complex, and several factors can influence the determination. For instance, the Fair Labor Standards Act (Fair Labor Act) is a series of federal statutes that provide numerous protections, including minimum wages and allowable maximum work hours, for employees. The Fair Labor Act excludes persons such as volunteers or interns working as volunteers from being considered employees, but also it limits the amount of compensation volunteers can receive and continue to retain their volunteer status.

The federal regulations under the Fair Labor Act state that volunteers may be paid expenses, reasonable benefits, a nominal fee, or any combination thereof, for their service without losing their status as volunteers. Although the regulations do not specify what a “nominal fee” would be, the U.S. Department of Labor suggested that a fee would be considered nominal if it were 20 percent of what an entity would otherwise pay to hire someone for the same service. We would have expected that the district would have determined what a “nominal fee” amount would be as it relates to the district’s recruit firefighters working on strike teams and that it would have then ensured that its recruits did not earn more than that amount from their strike team assignments.

Recruits can easily earn 20 percent of a district firefighter’s annual salary while on strike team assignments because a single assignment can last for several weeks. For example, in 2018 three different strike teams had assignments that lasted about three weeks. On each of these assignments recruits earned more than 20 percent of what a paid firefighter for the district would normally earn in a year. Therefore, the risk exists that the district may have violated the Fair Labor Act by not treating these recruits—and other recruits who worked significant hours on strike teams—as employees.

When we questioned the fire chief about this issue, he stated that he does not consider the district’s recruits to be volunteers. As we note earlier, the district does not pay recruits for their normal duties at the district’s fire station. According to the fire chief, he views the recruits as unpaid interns who are working toward completing the job performance requirements for their Firefighter 1 certifications. He noted that the district provides them with equipment and training, at no cost to the recruits other than their time.

The fire chief stated that the district pays recruits when they respond to strike team incidents because their strike team duties exceed their normal duties within the district. However, because the district has paid the recruits the same rates it paid employees while on strike team assignments and because those assignments are part of the training regimen for the recruits, the district may be in violation of the Fair Labor Act. To ensure that it complies with the applicable labor and wage laws, the district should have sought advice from appropriate experts regarding the payment of salaries to its recruits for strike team assignments. The consequences of violating the Fair Labor Act can be costly. For example, violation of the minimum wage law, which would include treating personnel as volunteers, can result in payment of back wages for up to two years and an equal amount as liquidated damages.

Furthermore, the district’s treatment of recruits as independent contractors for payroll purposes appears incorrect. Different tax requirements exist for independent contractors and for employees. For instance, on wages it pays to its employees, the district is required to withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes. On the other hand, the district is not required to take these actions for independent contractors. According to the fire chief, before 2019 the district provided its recruits Internal Revenue Service Form 1099 (1099 tax forms). Doing so indicates that the district treated its recruits as independent contractors. However, the job requirements of a strike team firefighter suggest that the district should have treated the recruits as employees and provided them W‑2 forms instead.

Because the fire chief treated the recruits as independent contractors rather than employees, he may have put the district at risk of unintended financial consequences. Specifically, the district may have violated federal law by misclassifying the recruits. Misclassifying workers as independent contractors rather than employees could subject the district to various unanticipated expenses, including penalties and payment of unpaid Social Security, Medicare, and unemployment taxes. Furthermore, under state law, willful misclassification of an employee as an independent contractor could subject the district to penalties of $5,000 to $15,000 for each violation, among other penalties.

The district could not provide a valid reason for treating its recruits as independent contractors for strike teams. According to the fire chief, the district gave the recruits 1099 tax forms based on advice that the district’s auditor and bookkeeper gave it several years ago, when the district first started the recruit program. Specifically, he stated that the auditor and bookkeeper did not raise concerns about giving the recruits 1099 tax forms, so he assumed doing so was appropriate. We did not find, nor did the district provide, evidence that the board approved the recruits’ classification as independent contractors. After we brought this issue to the fire chief’s attention, he stated that for the 2019 fire season, the district would classify its recruits as employees. Nonetheless, the district should seek advice on this topic from appropriate experts.

Because the district’s treatment of recruits as independent contractors may have violated federal and state laws, we forwarded our report to the U.S. Department of Labor, the Internal Revenue Service, and Employment Development Department for their consideration and, if appropriate, further investigation.

The District’s Ongoing Financial Viability May Be in Jeopardy

Given the financial risks the district could face in the future, we believe its ongoing financial viability may be in jeopardy. Even the district’s $1.2 million reserve balance shown in its fiscal year 2017–18 financial audit report—of which $867,000 is in the fire department fund—may not be sufficient to maintain its viability. Possible financial risks that could impact the district’s reserve balance include a repayment to the paying agencies of up to $703,000 in excess reimbursements the district claimed for 2016 through 2018 under the fire agreement; any repayments of excess reimbursements the district claimed for 2013 through 2015; and any penalties, back pay, or liquidated damages that federal and state agencies assess if the district violated labor laws. Should these potential risks become actual financial liabilities and if their combined total exceeds the district’s reserve balance, the district may have to decrease its expenses; increase revenues from other sources, such as imposing a higher fire special tax; or both.

The district may also have to consider expenditure cuts or revenue increases if its strike team revenue drops when it starts submitting appropriately completed salary forms in the future. The district’s audited financial statements for the three fiscal years from 2015–16 through 2017–18 show that the district’s revenues exceeded its expenditures during each of these years and that the district’s total revenues for this period exceeded its total expenditures by roughly $450,000. However, this apparent financial stability was because the district received $703,000 in excessive reimbursement amounts for providing strike teams for wildfires. Without these excessive reimbursements, it would have experienced financial shortfalls had it not reduced its expenditures or increased revenues from other sources.

The district’s ongoing financial viability is further jeopardized by a budget practice that it implemented for its budgets for fiscal years 2017–18 and 2018–19. Generally speaking, government entities can plan to achieve financial sustainability by enacting structurally balanced annual budgets that they intend to implement in an upcoming fiscal year. A government entity can demonstrate a budget is structurally balanced when its recurring revenues meet its recurring expenditures. Therefore, counting on nonrecurring, or volatile, revenue sources to cover recurring expenditures can jeopardize the government’s ability to operate programs.

Although the district did not include strike team revenues in its budgets for fiscal years 2015–16 and 2016–17, the district did include them in its budgets for fiscal years 2017–18 and 2018–19. For fiscal year 2017–18, the district budgeted strike team revenue of $109,000, or 28 percent of the fire department’s total budgeted revenue of $384,000. Strike team revenue was the second largest budgeted revenue source for the district’s fire department that year. It appears that the district included this revenue to help cover a $124,000 (74 percent) increase in its budgeted personnel costs for the fire department, from $169,000 in the prior fiscal year to $293,000. For fiscal year 2018–19, the district budgeted strike team revenue of $350,000, or 54 percent of the fire department’s total budgeted revenue of $645,000. Strike team revenue was the largest revenue source for the district’s fire department in this fiscal year. Because the revenue amounts that strike team reimbursements actually generate can fluctuate based on a number of variables (including, for instance, the number of strike teams the district is capable of providing, the number of strike team assignments the State makes, and the length of the strike team assignments), we consider strike team reimbursements to be a volatile revenue source.

Likewise, the El Dorado LAFCO’s 2013 review of the district stated that the district could be in a “deeper hole” if its strike team revenues were lower than budgeted. The LAFCO’s executive officer also stated that strike team revenue cannot be considered regular, stable, and ongoing because it depends on a district’s ability to field a strike team and the number of wildfires that occur around the State in any given year. Therefore, although the district’s financial statements note that it received almost $730,000 in strike team revenues during fiscal year 2017–18, we believe the district took an unnecessary financial risk when it included such a volatile source as a relatively large proportion of the revenue in its budget and counted on this revenue to pay for personnel. Had this revenue not materialized, the district’s other budgeted revenues would not have been enough to cover its budgeted expenditures for the fiscal year.

Weaknesses in the Fire Agreement’s Reimbursement Policy and Cal OES’s Oversight of Enhanced Salary Rates Enabled the District’s Overbilling

We identified three weaknesses in the fire agreement’s reimbursement process that enabled the district’s overbilling. First, Cal OES stopped auditing salary forms and reimbursement claims submitted by local fire agencies. In our January 2012 report, California’s Mutual Aid System: The California Emergency Management Agency Should Administer the Reimbursement Process More Effectively, Report 2011‑103, we recommended that the California Emergency Management Agency (Cal EMA) analyze the accuracy of the rates local fire agencies reported in their salary surveys and audit a sample of invoices each year. ⁴ 

Effective July 2013, a Governor’s Reorganization Plan transferred Cal EMA to the Governor’s Office, renaming it Cal OES.

In that report, we identified instances of local fire agencies misbilling the State for personnel costs under the fire agreement. We noted that Cal EMA did not ensure that local fire agencies’ calculations for the salary forms were correct and that until Cal EMA took steps to ensure the accuracy of the rates that local fire agencies claimed in their salary forms, local fire agencies would continue to be able to submit erroneous bills to the government agencies paying for these resources.

Although Cal OES told us that it fully implemented our recommendation to analyze the accuracy of rates local fire agencies submitted on salary forms and to audit a sample of invoices each year, it completed only eight such audits—four in 2013 and four in 2016. According to Cal OES, it completed only these audits because of extraordinary fire season activities and the statewide flooding disasters from 2015 through 2018. It stated that these fire seasons collectively resulted in approximately 32,100 fires, 4.9 million acres burned, and hundreds of thousands of structures destroyed. It also stated that its response and recovery priorities affected not only itself, but also the fire agencies it needed to audit because of their increased response and recovery commitments. Notwithstanding its reasoning, had Cal OES continued to perform these audits and had it performed more of them, it might have identified the fire chief’s overbilling or overbilling by other fire agencies. Furthermore, even if Cal OES had not selected the district’s salary forms for review, the fire chief’s knowledge that Cal OES was performing such audits might have deterred him from improperly using the fire agreement’s reimbursement process. Cal OES is working to reinstate these audits: as of June 2019, it was negotiating an interagency agreement with the State Controller’s Office to perform the salary survey audits and was in the process of developing the audit selection and performance methodologies.

A second weakness in the fire agreement’s reimbursement process is that the current fire agreement does not require local fire agencies to submit documentation to support the enhanced salary rates they claim. As we discussed previously, a local fire agency must submit only an annual salary form to claim an enhanced salary rate that is higher than the base rate. Cal OES then uses the enhanced rate, along with the number of hours that the local fire agency claims for an incident, to calculate reimbursement amounts. Because the fire agreement does not require any supporting documentation for enhanced salary rates, Cal OES has insufficient evidence to confirm the accuracy of the enhanced rates that local fire agencies submit.

If the fire agreement were to require local fire agencies to submit two types of supporting documents, it would help Cal OES better ensure the accuracy of the enhanced salary rates they claim. First, the fire agreement can require each local fire agency to submit to Cal OES documents demonstrating that its governing body has reviewed and approved the enhanced salary rate. Because a local fire agency ought to have already completed its calculations of its average actual rates to support the enhanced salary rate, a reasonable next step would be to have the local fire agency’s governing body review and approve those rates. Such documentation could be in various formats, including an approved resolution or copies of approved governing body minutes showing a motion and approval of the rates.

The fire agreement could also require each local fire agency to submit documentation to support the agency’s calculations of an enhanced rate if it claims one and demonstrate how the agency calculated it. Given that local fire agencies should already be performing the calculations to support enhanced salary rates they claim, documentation to support those calculations should not present an additional burden. Their inclusion would give Cal OES the opportunity to review for reasonableness the documents supporting the enhanced salary rates and to ensure that the local fire agencies’ calculations are reasonable and based on actual rates. Examples of documentation that could provide this level of assurance are average rate calculations supported by salary tables, labor agreements, or other similar documentation. We would expect Cal OES and the other fire agreement signatories to negotiate and agree on the specific types of documentation that would suit this purpose. Alternatively, local fire agencies could forego submitting the calculations and documentation by accepting the base salary rate.

The third weakness we noted was that neither the annual salary form nor the reimbursement invoice requires a signature from the fire agency’s representative under penalty of perjury. Although the forms require signatures, they state only that the signers certify to the best of their knowledge and belief that the information is correct. The Cal OES senior emergency services coordinator told us that Cal OES accepts the enhanced salary rates that the local fire agencies include on their annual salary forms as factual in part because they are signed to the best of the signers’ knowledge and belief. However, the current statement was clearly not sufficient to deter the district’s fire chief from completing, signing, and submitting forms with inflated salary rates to Cal OES. Including a penalty of perjury statement can serve as a deterrent to signers providing false information.

We observed that other state agencies use forms that require a signature under penalty of perjury when local government entities claim reimbursement from the State. For instance, when counties claim reimbursement from the State for administrative expenses associated with certain Medi‑Cal services, county representatives must sign under penalty of perjury that the amounts claimed are in accordance with state law. If the fire agreement were to require that signatories sign the annual salary form and the reimbursement invoice are made under penalty of perjury, Cal OES could obtain additional assurance that enhanced salary rates and the related reimbursement claims were accurate.

Because Cal OES’s State Fire and Rescue Chief (fire and rescue chief) is the chair of the Agreement Committee, Cal OES is uniquely positioned to take a role in addressing the reimbursement issues we identify in this report. According to Cal OES’s senior emergency services coordinator, about 1,100 local fire agencies participate in the California Fire Service and Rescue Emergency Mutual Aid System; each of them can be reimbursed for providing strike teams under the fire agreement. This large number, Cal OES’s limited oversight of enhanced salary rates local fire agencies submit, and our prior audit work demonstrate that a significant risk exists that local fire agencies other than the district may have and may continue to submit unsubstantiated enhanced salary rates that may lead to excessive reimbursements.

The current fire agreement is set to expire in December 2019. The fire agreement is the appropriate document for the signatory agencies, including Cal OES, to communicate expectations to local fire agencies seeking reimbursement. When we discussed our recommendations with Cal OES, the senior reimbursement coordinator stated that the Agreement Committee must approve any changes to the agreement, such as requiring additional documentation from local agencies, and that Cal OES cannot make such changes unilaterally. Additionally, according to the fire and rescue chief, any changes require agreement among all Agreement Committee members through a formalized negotiation process.

According to its state fire and rescue chief, Cal OES is currently renegotiating a new fire agreement with the other members of the Agreement Committee. Cal OES expects the new fire agreement to become effective in January 2020 and run through the end of 2024. Cal OES’s participation in these negotiations provides the opportunity for it to advocate for the inclusion of written provisions related to strengthening its oversight of the enhanced salary rates that local fire agencies submit under the fire agreement, including, but not limited to, the following provisions:

• Cal OES will audit a sample of annual salary forms and reimbursement invoices that the local fire agencies submit and will work with local fire agencies to rectify any errors.
  
• Each local fire agency must provide sufficient documents to support its calculations of average actual salary rates and to demonstrate its governing body’s approval of those rates.
  
• Each local fire agency must sign annual salary forms and reimbursement invoices under penalty of perjury.

Cal OES also has an opportunity to use this audit report and its implementation of our recommendations to help it address ongoing issues with the Forest Service related to the current fire agreement. In a July 2017 letter, the Forest Service informed Cal OES that a federal audit had determined that the Forest Service was overpaying local governments and that controls needed to be in place to ensure that such overpayments did not occur again. Similarly, in an April 2019 letter, the Forest Service informed Cal OES that a January 2019 federal audit had also questioned reimbursements made to multiple California fire agencies. Based on these findings, the Forest Service stated that it would impose additional requirements on reimbursements until the current fire agreement expires in December 2019. We show two of these requirements in the text box.

Cal OES and other California fire organizations have expressed concerns that the Forest Service’s new requirements will present cumbersome administrative and fiscal burdens on local fire departments. In an April 2019 letter to the Forest Service, Cal OES stated that the Forest Service’s new requirements would have a significant impact on volunteer fire agencies with small operating budgets, in part because they would require those fire agencies to pay their responding firefighters to create documentation before receiving any reimbursement from the Forest Service. Cal OES stated that because of budgetary constraints, small agencies do not have the cash flow to pay their responding firefighters before receiving reimbursement, much less the funding to hire additional staff to manage the new administrative requirements.

Although the Forest Service’s new requirement that local fire agencies include documentation for actual paid costs on each invoice could be onerous for both the local agencies submitting the reimbursement forms and the agencies processing these forms, we believe that the fire agreement’s existing terms that allow Cal OES to rely on average actual salary rates when calculating reimbursement amounts continues to be a reasonable alternative in principle when properly followed. Cal OES’s successful implementation of our current recommendations would provide additional assurance that local agencies will follow the terms of the fire agreement related to average actual salaries and, therefore, that Cal OES will calculate proper reimbursement amounts. Also, if the Agreement Committee takes steps to better ensure the accuracy of the rates that local fire agencies submit in their salary forms, local fire agencies will be less likely to submit potentially erroneous bills to the government agencies paying for these resources.

The District’s Small Electorate May Threaten Its Ability to Function Effectively

The district’s ongoing ability to have a complete board and therefore to provide fire protection and park and recreation services within the Fallen Leaf Lake area is uncertain. Only permanent residents, for whom Fallen Leaf Lake is their domicile, can legally register to vote and run for the board, meaning that very few people in the seasonal community are eligible. A district board member told us that none of the relatively few district residents are interested in serving on the board. If the district’s board has too many vacancies, it will be unable to perform duties such as authorizing taxes, entering into contracts for services, and paying staff. Several options exist that could resolve this concern: the State could expand the district’s electorate, the district could consolidate with another special district, or the district could dissolve. Although implementing any of these options would necessitate overcoming certain hurdles, expanding the district’s electorate is the best option to ensure that the area will continue to receive services at their existing levels and costs.

The District’s Ability to Provide Services to Community Members Depends on It Having Enough Board Members

According to state law, the district’s board is responsible for establishing policies for its operation, and its general manager is responsible for implementing those policies. Further, the board has the specific authority to impose taxes, such as seeking voter approval for a fire special tax assessed on each affected parcel of land and, in the cases of Forest Service land, each cabin; enter into contracts, such as the contract with the concessionaire who manages the park and recreation services; and pay staff, such as the district’s fire chief. For the board to conduct district business and exercise its authority, state law requires that a majority of board members be present; thus, to have a quorum, the board needs three members to be present. If fewer than three board members are present, the board cannot propose a fire special tax for voter approval, approve contracts, or set salaries. The board also cannot appoint members to fill vacant seats without a quorum.

The district’s recent history in fielding candidates for election to its board raises concerns regarding its ability to have a full‑size board. The district has not had a contested election for a board seat since August 2010. In the five opportunities for elections since then, no more than one person has run for each open seat. Specifically, for 12 of the 15 open seats in the last five elections, one person filed to be a candidate for each one, and the El Dorado County Board of Supervisors (board of supervisors) appointed the lone candidates in lieu of holding the elections. For three of the 15 open seats, no one ran. In those instances, the county’s board of supervisors appointed nominees whom the district’s existing board members recommended.

In addition, the district’s board has experienced numerous vacancies since 2010; too many vacancies at the same time can jeopardize the board’s ability to achieve a quorum and conduct business. From January 2010 through November 2018, the board had a total of seven vacancies spanning 43 months. The shortest vacancy was about two months, while the longest was about 14 months. Moreover, for two months during 2013, the board experienced three vacancies at the same time. Because it had only two members at that time, the board did not have the ability to achieve a quorum and could not have conducted the district’s business had it been necessary. The county’s board of supervisors appointed board members in lieu of an election to fill two of the vacant positions in March 2013, which reestablished a quorum.

The Seasonal Nature of the District Limits the Number of Permanent Residents

A major factor contributing to the uncertainty over the district’s ability to field a full board is the small size of the district’s electorate. State law requires candidates for the board to be voters of the district. As of January 2019, records from the El Dorado County Elections Department show that the district had only 62 registered voters. According to one of the district’s board members, the area is a community of summer cabins with only seasonal access. Therefore, it seems likely that many community members would register to vote in the locations of their primary homes. According to the board member, none of the residents who live only at Fallen Leaf Lake are interested in serving on the board.

The number of the district’s registered voters declined sharply after the Secretary of State’s Office identified improprieties associated with a 2010 district election. In August 2010, the district held a special election to recall and replace two board members and to select a third member to fill a vacancy. El Dorado County records for that election show that 313 votes were cast out of 461 registered voters. According to a September 2011 letter from the El Dorado County district attorney (district attorney), the Secretary of State’s Office investigated complaints of voter fraud and candidate ineligibility or fraud related to this election. The letter indicated that the investigation revealed widespread improprieties surrounding voter registration. Specifically, the letter described that many, if not most, of the persons registered to vote at the time of the August 2010 election were ineligible to vote in the district. The district attorney placed all registered voters on notice that similar future violations would be prosecuted and that voting is permissible only in the location of a person’s domicile, rather than in connection with any other residence a person may own. By June 2014, the number of registered voters in the district had declined to 102, suggesting that many of the district’s registered voters from 2010 did not keep their voter registration in the district.

It is difficult to determine a precise number of domiciled residents who live in the Fallen Leaf Lake area and, of those, how many are eligible to vote in district elections. However, by taking into account the number of landowners who claimed a homeowner’s exemption, the number of registered voters within the district who reported mailing addresses in the South Lake Tahoe area, and the number of individuals with vehicle registrations or driver licenses with addresses within the district, we estimated the number of domiciled residents to be between five and 33. ⁵ 

A portion—$7,000—of the full value of an owner’s principal residence is exempt from property taxation. A property owner can receive this exemption for only one property. To receive the homeowner’s exemption, homeowners in El Dorado County must file an application with the county assessor’s office.

The board member said that his analysis showed that the district has only 13 people who could legitimately claim domicile and lawfully vote.

In particular, the number of registered voters in the district who have mailing addresses outside the South Lake Tahoe area raises questions regarding whether these individuals registered to vote in the correct location. Specifically, of the 62 individuals currently registered to vote in the district, only 17 (27 percent) identified mailing addresses in South Lake Tahoe. The other 45 voters (73 percent) registered with mailing addresses outside the area, and eight of those 45 have out‑of‑state mailing addresses. Out‑of‑area mailing addresses are an indication that these community members could be domiciled elsewhere; if true, this would mean they are not eligible to register to vote in the district. It is worth noting that the voter registrations of all five current board members include mailing addresses outside the district.

During our review of the district’s voter registration information, we observed other irregularities in addition to out‑of‑area mailing addresses. These irregularities included 10 individuals with voter registrations in more than one county or state, two individuals who received ballots from more than one county for the same election, and four individuals who have switched their voter registrations at least twice since 2010 between El Dorado County and other counties. Because these irregularities indicate possible violations of California law, we forwarded our report to the California Secretary of State and the district attorney for their consideration and, if appropriate, further investigation.

Expanding the District’s Electorate Would Likely Resolve the Governance Challenge It Faces

Although several options exist that could enable the district to have a full board and continue to provide services, each option faces hurdles and would have different effects on the levels and costs of services at Fallen Leaf Lake. The key options are for the State to expand the size of the electorate that can vote on district matters and serve on the district’s board, for the district to consolidate with another special district, or for the district to dissolve and for another entity or entities to provide its services. Table 2 summarizes these options, along with the risks and hurdles each presents. Because of the district’s small geographic size and because it consists mostly of vacation homes, we believe that expanding the district’s electorate provides the best opportunity for the Fallen Leaf Lake community to continue receiving services that are similar in terms of their level and cost to the services it currently receives. We discuss the other two options in more detail in Appendix B.

Table 2
Each Option for Resolving the District’s Governance Issues Involves a Number of Risks and Hurdles

OPTION	GOAL	ACTIONS REQUIRED	RISKS OR HURDLES	IF SUCCESSFUL, IMPACT ON SERVICE LEVELS AND COSTS
Legislative Solutions
Expand the district’s electorate	More community members are eligible to vote and to serve on board.	Legislature enacts new statutes.	The State may not enact legislation. The new law may be challenged in court.	None anticipated.
Local Solutions
Consolidate the district with another special district	New successor special district provides fire protection services; a different entity would provide park and recreation services. New successor special district provides both fire protection and park and recreation services.	District board,* voters,† LAFCO, or county board of supervisors proposes the change. LAFCO holds public hearing.‡ – Change is stopped if 50 percent of voters protest it in writing.  – District election is required if the district does not object to dissolution and 25 percent of voters or landowners protest.	District fails to give up its park and recreation power and therefore cannot consolidate with a fire protection district.§ District gives up its park and recreation power, but no other entity begins providing those services. Fallen Leaf Lake or the other special district’s community members successfully protest or vote against consolidation.	Potential cost increases to Fallen Leaf Lake landowners: – Fire special tax – Fire insurance Potential decrease in emergency response time, if successor does not staff the station at Fallen Leaf Lake. Potential loss of park and recreation services.
Dissolve the district	One or more other entities provide services; the district ceases to exist.		Fallen Leaf Lake community members successfully protest or vote against dissolution. District dissolves but one or more other entities do not take on responsibility for structure fire protection or park and recreation services at Fallen Leaf Lake.	Potential cost increases to Fallen Leaf Lake landowners: – Fire insurance Potential decrease in level of service for fire protection and in response time for emergency medical services. Potential loss of park and recreation services.

The first option in Table 2, enacting legislation to expand the electorate, would increase the likelihood of the district’s maintaining a full board, achieving a quorum, and having the ability to continue providing services at their current levels and costs. By expanding the district’s electorate to include nonresident landowners and permit holders in addition to resident voters, the State could give a larger number of people the ability to vote on district matters and to serve on the board. As we discuss previously, although the district had 62 voters registered as of January 2019, only 17 provided local mailing addresses. In contrast, information from the El Dorado County Assessor’s Office shows that the district has 172 landowners and 96 permit holders.

A board member summarized the district’s electorate issues for us in this way:

In 2011, the El Dorado County District Attorney sent letters to the Fallen Leaf Lake community, advising them that they could no longer vote on Fallen Leaf Lake issues unless they were domiciled at the lake. . . . That letter was followed by another to all permittees from the Forest Service . . . [stating that] anyone who declared their cabin at Fallen Leaf to be their “domicile” would be in violation of the terms of their “recreational” permit. . . . Therefore . . . anyone who holds a Forest Service permit risks losing that permit if they vote at Fallen Leaf, even if they are domiciled there. Other community members vote at the peril of prosecution. Furthermore, since state law requires that board members be registered voters of the district, it has become nearly impossible to recruit candidates to serve on the . . . board. LAFCO recognizes that there is not [a] sufficient number of domiciled voters . . . to support the district.

Expanding the district’s existing electorate of residents to include landowners and permit holders would allow these two groups of people to vote on district matters without fear of prosecution or loss of permit. Landowners and permit holders could receive ballots to vote only on district matters and could maintain their voter registrations at their domiciles. These individuals have an interest in the district’s governance because they must pay the fire special tax that the district levies.

In addition, enacting legislation to enfranchise landowners and permit holders would resolve the issue of the district having a small electorate from which to select board members. Although we did not identify other community services districts that allow both nondomiciled landowners and domiciled residents to vote on district matters, we did identify a water district—which is another type of special district—that does so. In 1990 the Legislature enacted a statute that enfranchised domiciled residents of the Sierra Lakes County Water District (Sierra Lakes) in Placer County for district elections—a right previously reserved by law for landowners only. Therefore, it is possible for the State to enfranchise the district’s landowners and permit holders for district elections. The Sierra Lakes service area, similar to the Fallen Leaf Lake area, has many nonresident landowners and relatively few permanent residents. The two districts both cover small areas geographically—6 square miles or less—and are composed primarily of vacation or second homes. Further, the boards for both districts address issues of interest to both property owners and residents alike, such as charges on property owners that fund district operations. Sierra Lakes has had three contested elections in the last seven elections, with an average of 840 people voting in each contested election.

Legislation to include landowners in the district’s electorate could face legal challenges because it would increase the number of potential voters, thereby diluting the influence of the resident voters. However, a California court already upheld similar legislation when the Legislature expanded the electorate for Sierra Lakes. In 1991 a California appellate court held that legislation that allowed both landowners and resident voters to vote on issues related to Sierra Lakes did not violate the U.S. or state constitutions. The court made its decision partly because Sierra Lakes’ operations affected landowners financially and affected both landowners and residents through services. The court noted that one factor contributing to its conclusion was that the legislation limited Sierra Lakes’ powers. To follow this precedent, legislation to expand the district’s electorate to include Fallen Leaf Lake landowners and permit holders could similarly limit the district’s powers to providing only its existing services.

The executive officer of El Dorado LAFCO believes that if the Legislature expands the district’s electorate to include both residents and landowners, the district will continue to have difficulty funding its fire protection services, largely because resident and landowner voters would be reluctant to raise the fire special tax to the level that the district needs to have a sustainable fire department. Further, with a larger electorate, obtaining the necessary number of votes could be even more difficult. We believe that despite this potential risk, an expanded electorate would provide the district the best chance to maintain its services at their current levels and costs.

When Creating and Modifying Special Districts, LAFCOs Are Not Required to Evaluate Their Electorate Size

LAFCOs must evaluate several factors when considering the creation of and modifications to special districts. These factors include the need for organized community services and the sufficiency of the revenue to pay for the services that will be provided. However, state law does not require LAFCOs to consider whether a special district’s electorate will be large enough to provide an adequate pool of eligible board members. Without a large enough electorate, special districts run the risk of not having enough eligible people to serve on their boards.

Like the Fallen Leaf Lake district, other special districts have had issues with small electorates. The Legislature has attempted various solutions to resolve the issues, such as reducing the size of these special districts’ boards of directors, with limited success. These special districts include the Sawyers Bar County Water District (Sawyers Bar) in Siskiyou County, the Santa Rita Hills Community Services District (Santa Rita Hills) in Santa Barbara County, and the Sierra Cedars Community Services District (Sierra Cedars) in Fresno County. Over the past 20 years, each of these special districts has at times had fewer than 20 registered voters and, like the Fallen Leaf Lake district, has faced vacancies, uncontested elections, or both.

To address their electorate problems, legislation sought to convert Sawyers Bar, Santa Rita Hills, and Sierra Cedars from five‑member boards to three‑member boards. However, these districts have continued to struggle to maintain full boards and to hold contested elections. For example, documents show that in 2001 Sawyers Bar had only 14 registered voters. In that same year, legislation required Sawyers Bar to reduce its number of board members from five to three if it received a petition requesting the change signed by a majority of its voters. Sawyers Bar serves a remote rural community in Siskiyou County, making it difficult to find five people who were willing to serve as board members. Although Sawyers Bar reduced its board size, it still has difficulty because of its small electorate. Specifically, it had uncontested elections in 2015 and 2017 and at least one vacancy during that time period.

Similarly, in 2014 Santa Rita Hills had 10 to 12 registered voters. Located in northern Santa Barbara County, Santa Rita Hills is authorized to provide road‑related services. Legislation enacted in that year authorized Santa Rita Hills to reduce its board size from five members to three. However, no board members ran for reelection for the November 2014 election, and as of December 2014, the board had no members. Therefore, the board lost its quorum before it could enact the change to its board size. As of August 2018, Santa Rita Hills still did not have a quorum and was unable to provide services. Because Santa Rita Hills was not conducting business, the Santa Barbara County LAFCO attempted to dissolve it in early 2016. However, more than 50 percent of the landowners protested, which stopped the dissolution. Efforts by the Santa Barbara County Board of Supervisors to appoint members to Santa Rita Hills’ board have not been successful. Santa Rita Hills’ continued struggle to function calls into question whether the Fallen Leaf Lake district’s board would benefit from legislation to reduce its size from five members to three.

Finally, the Legislature considered legislation introduced in 2015 to allow Sierra Cedars to have a smaller board. However, the Legislature did not enact this legislation, which would have allowed the Sierra Cedars board to reduce its members from five to three. While the Legislature was considering this bill, Sierra Cedars had board vacancies and lacked a quorum. Fresno County records show that in January 2016 the county’s board of supervisors appointed two members to Sierra Cedars board because of vacancies that put the board below a quorum. They also show that Sierra Cedars had an uncontested board election in 2017 and the board had a vacant seat in early 2019. As of April 2019, Sierra Cedars had 18 registered voters and was considering reorganizing as a landowner‑voter district.

LAFCOs could reduce the risks presented by small electorates by considering electorate size when reviewing proposals to create or make changes to special districts. Current law related to special districts encourages orderly growth and the efficient provision of services. It requires LAFCOs to consider the likelihood of significant growth in the area, the need for organized services, and the ability of a special district to provide the proposed services. Although current law requires LAFCOs to consider population size and density when reviewing proposed changes to special districts, it does not require them to consider the number of individuals eligible to vote in the district and whether the electorate provides a large enough pool of eligible board members. The executive officer of the El Dorado LAFCO believes that when LAFCOs consider forming or making changes to a special district, they should consider whether that special district has a large enough base of voters and whether enough individuals are eligible to serve on the district board to enable contested elections. By enacting legislation that requires LAFCOs to consider an electorate’s size when reviewing proposals to create or change a special district, the State would better ensure that special districts do not encounter governance issues like those faced by the district, Sawyers Bar, Santa Rita Hills, and Sierra Cedars.

Recommendations

Legislature

To ensure that the district has an electorate of sufficient size from which it can elect members to its board, the Legislature should enact legislation to allow landowners and holders of Forest Service permits within the district, along with otherwise domiciled registered voters in the district, to vote on district matters and serve on the board.

To help voters in special districts elect full‑size boards of directors and to help special district boards avoid quorum issues and service disruptions, the Legislature should amend state law to require a LAFCO to assess whether an electorate is of sufficient size when it considers creating or modifying a special district.

Cal OES

To better ensure that it reimburses local fire agencies appropriate amounts for responding to incidents, including the provision of strike teams for fighting wildfires, Cal OES should complete implementation of its plan to audit a sample of salary forms and invoices that local fire agencies submit under the fire agreement. It should, by September 15, 2019, complete its negotiations to have the State Controller’s Office perform these audits.

To further ensure that local fire agencies receive proper reimbursement for responding to incidents, Cal OES should recommend to the Agreement Committee that it include the following steps in the new fire agreement, anticipated to be effective starting in 2020:

• Require local fire agencies to submit documents showing approval by their governing bodies of the average actual salary rates included on the salary form that the local fire agencies submit to Cal OES.
  
• Require local fire agencies to submit documentation to support their average actual salary rates.
  
• Revise the salary form and reimbursement invoice form so that authorized representatives of local fire agencies sign them under penalty of perjury.
  

To ensure that local fire agencies receive proper reimbursement for responding to incidents for the remainder of the current fire agreement, Cal OES should recommend that as part of the negotiations process, the Agreement Committee implement the preceding recommendation for the remainder of the current agreement.

District

To ensure that the district complies with the reimbursement terms of the fire agreement and does not claim excessive reimbursement amounts, the district’s board, by September 15, 2019, should create and implement a policy governing the reimbursement rate the fire chief claims for paid and recruit firefighters who participate on strike team assignments under the fire agreement. Additionally, the district’s board should review and approve the annual salary form before the fire chief submits it to Cal OES.

To rectify the excessive reimbursement amounts it received for strike team assignments, the district should take the following actions by December 31, 2019:

• Develop and implement a plan for returning to the paying agencies the excessive reimbursements it received for 2016 through 2018.
  
• Work with Cal OES to identify the amounts of excess reimbursements the district received for 2013 through 2015 and then develop and implement a plan for returning those amounts to the paying agency.
  

To ensure that it complies with all applicable labor and wage laws, the district should, by September 15, 2019, seek advice from appropriate experts, such as legal counsel and tax advisors, regarding the proper characterization and compensation of its recruit firefighters. It should develop and implement a policy in this area that meets all applicable requirements.

To improve its financial viability and safeguard its ability to continue providing services to the Fallen Leaf Lake community, the district should take the following actions by December 31, 2019:

• Monitor the financial risks it may face in the future, forecast their impact on its finances and budget, and plan and implement appropriate changes to its budget as necessary throughout the fiscal year.
  
• Limit the extent to which it relies on volatile revenue sources to balance its budget.
  
• Develop and implement a budget plan that realistically estimates changes in revenues and expenditures, and identifies approaches to address such changes.
  
• Develop a five‑year forecast of estimated revenues and expenditures and a plan to guide its decisions and actions in the event of fluctuations.

We conducted this audit under the authority vested in the California State Auditor by Government Code 8543 et seq. and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Respectfully submitted,

ELAINE M. HOWLE, CPA
California State Auditor

Date: July 18, 2019

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