Anthony Travis
Laborers 261 member Anthony Travis worked for the San Francisco Water Department for 16 yearsPhoto: San Francisco Building Trades Council

Whistleblower's lawsuit noting misuse of public resources meets with retaliation and resulted in discharge from the Water Department

SFPUC‘s Shrinking Inventory

•••••••••• September 13, 2022 ••••••••••

Derek Kerr
Dr. Derek Kerr

Employee theft is a persistent drain on private and public organizations. Recall the Public Utilities Commission’s (SFPUC) 2009 embezzlement, theft and fraud scandal involving workers at Treasure Island. That malfeasance was exposed by a whistleblower – not an audit. As reported in Matt Smith’s article “They Must Be Stealing” for the San Francisco Standard, current and former employees now allege widespread theft and misuse of SFPUC resources.

Anthony Travis, a former foreman at SFPUC’s main warehouse, the City Distribution Division, says he endured retaliation after reporting equipment misuse and pilfering. He has filed a whistleblower retaliation and racial discrimination lawsuit in SF Superior Court. In a February 2022 whistleblower retaliation lawsuit, Local 261 union members alleged corruption in SFPUC’s contracting — specifically in its troubled Community Benefits Program.

Long-Standing Problems

If the most recent whistleblower claims of plundered inventory are true, surely the many SFPUC audits would have shown something was amiss. A 2003 California Department of Finance audit identified weaknesses in SFPUC’s asset management that hobbled its ability to track the maintenance, inspection and repair of capital assets.

quote marks

...despite spending $230,000 on a fuel monitoring system. A 21,000-gallon diesel fuel deficit recorded in MAXIMO was deemed “incorrect.” Moreover, the City Distribution Division warehouse struggled to track its $4.7 million stock of tools that weren’t placed in its inventory. ”

A series of audits by the City’s Budget & Legislative Analyst in 2004-2005 determined that money allocated to SFPUC for asset management wasn’t spent. Two of these audits recommended better materials management at SFPUC warehouses, including annual audits. At that time, SFPUC’s major warehouses, like the City Distribution Division, were “at varying points in the process of developing an inventory and recording assets in Maximo.” Maximo is an IBM asset management system that SFPUC purchased to track its inventory and maintain its assets. Although the SFPUC had received $980,000 to develop its asset management program, the audits concluded that; “The Public Utilities Commission has failed to move forward in developing the asset management program, due largely to lack of oversight by the executive management team…

Nancy Hom
Nancy Hom SFPUC's Financial Officer

In 2011, the Controller’s City Services Auditor conducted an audit of the Water Enterprise’s warehouse inventory management. These warehouses store and distribute equipment needed to maintain SFPUC’s water infrastructure. Inventory controls reduce the risk of; theft or loss, unexpected shortages of critical equipment, and unnecessary purchases of items already on hand. The audit concluded that SFPUC had “mostly adequate processes and controls” but “does not fully utilize MAXIMO to track items issued from inventory.” By then, SFPUC had instituted annual inventory counts.

Yet, major flaws were noted in monitoring fuel reserves, despite spending $230,000 on a fuel monitoring system. A 21,000-gallon diesel fuel deficit recorded in MAXIMO was deemed “incorrect.” Moreover, the City Distribution Division warehouse struggled to track its $4.7 million stock of tools that weren’t placed in its inventory. Although the CSA auditors cited inventory count best practices, including “Set inventory record accuracy goals at 95% or better,” they omitted the discrepancy rate between the Maximo records and their test counts. Instead, they simply noted the value of the missing inventory. Among the “low dollar-error rates” uncovered, there was a 3.6% value deficit (then $50,400) at the City Distribution Division. Discrepancies were attributed to “miscounts”: Finance Staff had purportedly botched their inventory hand-counts and entered wrong numbers into MAXIMO. CSA’s 2014 follow-up survey found that 8 of its 13 recommendations had been implemented. However, the faulty tracking of gasoline and diesel fuels persisted after three years.

Outside Auditors Find Persistent Flaws

The Westside Observer obtained copies of contracts and 12 recent SFPUC inventory audits via public records requests and confidential sources.
 
From June 2015 through December 2020, Macias, Gini & O’Connell, LLP (MGO) received $122,500 to perform inventory audits. That averages to $22,272 per year. Subsequently, Crowe, LLP was hired to perform these audits, presumably at a comparable cost. These audits continue, year after year, due to persistent discrepancies, mostly negative, between SFPUC’s MAXIMO inventory system and audit hand-counts. Public concerns arise when audits find less equipment than what SFPUC reports. Such negative variances may be due to theft. Positive variances, when audits find more equipment than what is recorded, point to sloppy inventory supervision.
 
MGO conducted a 100% audit of Water Enterprise warehouse inventories in 2019. There were 591 discrepancies between the SFPUC’s MAXIMO records and the hand-count. That amounted to a 44% discrepancy rate. Most were negative variances, suggesting missing equipment. The potential loss amounted to $83,184, or 2% of the inventory’s value. MGO cited William Toman, SFPUC’s Materials Coordinator, who explained that “the reason for the discrepancies is due to warehouse staff miscounting items prior to MGO’s physical inventory count.”

If that is the case, undercounts should approximate the over-counts. Instead, the ratio was 2 to 1 in favor of finding less rather than more equipment than what was logged in MAXIMO. Prior and subsequent partial audits had shown similar negative trends attributed to “miscounts.” For example, MGO’s 2020 partial audit had found a 21% discrepancy rate, with a negative variance of $86,725, or 3% of the inventory value. What’s more, the auditors photographed rusty piles of steel equipment stored outdoors - directly exposed to the elements. The value of these deteriorating items was $126,754.

Piles of SFPUC waste
Rusting piles of steel equipment stored outdoors. Photo: SFPUC

 Repetitive recommendations to more carefully track equipment and implement “corrective measures” failed to restrain discrepancies. Oddly, SFPUC’s Financial Officer, Nancy Hom, had reportedly congratulated staff for their good stewardship of City resources, despite the lopsided drift toward missing items.

The next full audit of the Water Enterprise’s main warehouses was conducted by Crowe, LLP in 2021. This time, the discrepancy rate was 27%, and the negative and positive variances were more balanced. However, positive variances were mistakenly boosted by counting equipment that was not part of the inventory (e.g., items temporarily stored for other units or that were project-related). Even so, the audit found that the value of the missing equipment exceeded the value of newly-found items. The resulting deficit was $161,134, or 3.3% of the $4.9 million inventory. Again, Maximo's records had overstated the actual inventory.

Notably, Crowe auditors found that the quantities of gasoline and diesel fuel stored on-site “were dramatically below those in the MAXIMO system.” The negative variance for fuels amounted to $118,125 or 75% of the total cost variance. That “reflected a significant amount of fuel dispensed which was not identified in the MAXIMO system”. The main explanation referenced a faulty interface between SFPUC’s automated fuel tracking system and its MAXIMO log. The auditors reckoned that without accurate fuel tracking, the agency “will have difficulty…identifying variances that are the result of missing fuel (e.g. theft), delivery errors, data entry errors, tank leaks, or shrinkage”. The same problem was identified 10 years earlier in the Controller’s CSA audit summarized above.

Some Warehouses Do a Good Job

It should be stated that the Water Enterprise’s smaller warehouses in Sunol and Millbrae have consistently shown negligible inventory variances. Similarly, the Hetch Hetchy Power Enterprise and the Wastewater Enterprise audits have shown minimal discrepancies, although a 2021 audit identified $24,596 of obsolete or broken equipment in the latter’s inventory. Most discrepancies arise in the Water Enterprise’s big warehouses.

Sometimes, the auditors get it wrong. For example, the 2020 audit of SFPUC’s Power Enterprise warehouses on Treasure Island and Bryant Street found an 82% discrepancy rate! The auditors thought they discovered many items that were not logged into MAXIMO, resulting in an unexpected positive variance of $214,100. It was too good to be true. SFPUC managers realized that the auditors had counted items that did not belong in the operating fund inventory. When they fixed this error, the discrepancy rate declined to a sterling 4.9%. But the variance had shifted to negative - with a shortage of $69,684. Awkwardly, the 2021 audit found a 39% discrepancy at the new Power Enterprise warehouse at Pier 23, perhaps because the inventory was still in flux. Still, the variance was negative, or $139,141 short.

Next Steps

 Frustratingly, expenditures for audits and inventory tracking systems haven’t prevented sizeable discrepancies in larger Water Enterprise warehouses. And the variances are almost always negative, meaning that there’s less inventory than what SFPUC’s tracking system shows. Warehouse employees allege that folks “must be stealing”. Managers insist that workers “miscount” the inventory.

 

Annual deficits in warehouse inventories may represent “low-dollar values” statistically. But these apparent shortfalls signify hundreds of thousands of ratepayer dollars. So, the audits must continue. Commendably, the SFPUC monitors its $5 million inventory and hires independent auditors to check the accuracy of its tracking systems. At some point, management must contend with habitually negative inventory variances that don’t get fixed.

 

Hat Tip: Thanks to concerned insiders who sent valuable leads.

Dr. Derek Kerr is a San Francisco investigative reporter for the Westside Observer Contact: watchdogs@westsideobserver.com

SEPTEMBER 13, 2022

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