Summary

Audit Scope

The scope of this audit of the St. Johns River Water Management District (District) and the Florida Department of Management Services (FDMS) focused primarily on equipment acquisitions and dispositions related to the Lake Apopka restoration project. Our audit included examinations of various transactions (as well as events and conditions) and related activities for the period July 1, 1996, through March 31, 1999, and selected District and FDMS actions taken through June 30, 1999.

Summary of Report on Compliance and Internal Control

We found that the District and the FDMS may not have, in several material respects, complied with the significant provisions of laws, administrative rules, and other guidelines governing the acquisition and disposition of equipment related to the Lake Apopka restoration. Matters noted on audit relating to noncompliance with governing laws, administrative rules, and other guidelines, as well as deficiencies in the design or operation of the internal control, are presented in the Summary of Audit Findings below:

Summary of Audit Findings

Findings and Recommendations for Legislative action

Purchase of Farms and Related Facilities

The law should provide for additional controls over land acquisitions.

Section 373.461(5), Florida Statutes, provides for the acquisition of land and related equipment by the District for the restoration of the Lake Apopka Basin but does not provide for certain basic controls that are typically required for such acquisitions. We recommend that for any future laws similar to Section 373.461, Florida Statutes, the Legislature consider including basic control requirements for appraiser selection, number of appraisals, appraisal reviews, and documentation of negotiations. For example, Section 259.041, Florida Statutes, requires the Trustees of the Internal Improvement Trust Fund to provide for such controls. (See paragraphs 1 through 4.)

Appraisals

The law should clarify the appropriate methodology for appraisal of the farms.

Section 373.461(5)(b), Florida Statutes, provides that the appraisals of the farmlands may consider income from the use of the equipment for farming in determining the fair market value of the land and equipment and that the income shall be attributable to the real estate. For nine of the farms, the District arrived at three principal values. Two values were determined by taking the fair market value in continued use of the equipment determined from one appraisal of the equipment and adding it to each of the two land fair market values determined for each of the farms. The third value was determined through business valuations using either capitalization of earnings or net asset value methodology or, in the instance of Zellwin farms, both. We recommend that the Legislature clarify its intentions as to what appraisal methodologies should be used to arrive at values which serve as the basis for the negotiation of purchase prices. Any methodology so defined in the law should either be consistent with the Uniform Standards of Professional Appraisal Practice (USPAP) and the body of knowledge associated with these standards or recognized as a jurisdictional exception to the USPAP and generally accepted appraisal practices. (See paragraphs 59 through 62.)

Surplus Property

The law should clarify if equipment should be included in the lease back provision.

Section 373.461(5)(d), Florida Statutes, requires that the District give the sellers the option to lease back for a period not to exceed five years any lands not needed for stormwater management facilities, with the proceeds of the leases to be used to offset the cost of acquiring the land. The law does not address the lease back of equipment, some of which the District also leased back to the sellers. The value of the equipment at the close of the lease period declined from the value at the time of sale due to loss, damage, and depreciation. We recommend that the Legislature consider amending the law to clarify whether equipment should be included in the lease back provision. If continued use of the equipment by the sellers is necessary, the law should require a downward adjustment to the sales price of the equipment. (See paragraphs 46 through 50.)

Findings and Recommendations for Management

Purchase of Farms and Related Facilities

The District had not established adequate controls to ensure accountability.

As the entity assigned responsibility for the acquisition of the Lake Apopka farms, the District was obligated to establish appropriate controls to assure proper accountability for the moneys received and expended as the assets were acquired. Our examination disclosed that the District had not established such controls. Subsequent to the audit period, the District indicated that they were in the process of identifying and solving some of the problems noted in our audit. We recommend that the District continue its efforts to adopt the proper internal control procedures to ensure that all financial transactions are timely and completely recorded in the District’s general accounting records. (See paragraphs 5 through 9.)

Compliance with the purchase price requirement was not demonstrated.

Purchasing agreements, bills of sale, and closing documents for 9 of the 10 farms purchased did not separate the cost of the land. As a result the District could not demonstrate that these farms were purchased pursuant to Section 373.461(5)(c), Florida Statutes, which provides that the purchase price paid for the acquisition of lands related to the Lake Apopka restoration shall not exceed the highest appraisal obtained by the District. To ensure that future land acquisitions are made in compliance with Section 373.461(5)(c), Florida Statutes, we recommend that the District maintain records which clearly establish the separate purchase prices of the land and equipment and demonstrate that such acquisitions satisfy the requirements as provided for in the statutes. (See paragraphs 10 through 13.)

The District did not document negotiation of additional benefits granted to sellers.

Documentation supporting the acquisitions of land and equipment for ten farms disclosed that the District granted additional benefits to the sellers in addition to the total purchase amount of $85,904,427. However, District records did not document how the District considered the values of these benefits in negotiating the final purchase prices or how granting these benefits were in the best interests of the taxpayers. We recommend that, for all future acquisitions, the District obtain and maintain documentation to support the negotiation process. Such documentation should include an explanation of why such benefits were granted and how such benefits were beneficial to the taxpayers. (See paragraphs 15 through 17.)

Surplus Property

Equipment appraised at $29,757,316 yielded gross sales proceeds of only $5,783,401.

Section 373.461(5)(f)1., Florida Statutes, requires that equipment acquired by the District, and classified as surplus by the District, shall be sold by the FDMS. Our review of the appraisals for the equipment related to the 11 farms disclosed an appraised value totaling $29,757,316 per the bills of sale. However, as of October 8, 1999, gross sales proceeds from the sale of this equipment by the FDMS totaled only $5,783,401, or approximately 19 percent of the total appraised value. In order to demonstrate compliance with Section 373.461(5)(f)1., Florida Statutes, we recommend that the District and the FDMS coordinate identification and sale of the equipment. If some of the surplus equipment cannot be located, the District should file a missing property report with the appropriate law enforcement agency. (See paragraphs 22 through 26.)

Final dispositions of 24 of 38 sample equipment items were not identified.

We examined District and FDMS records to determine the final disposition of 60 items of equipment. Our examination indicated that 38 of the 60 items should be located in the custody of the District. However, 24 of the 38 items with an appraised value totaling $1,663,950 could not be located or otherwise explained by District personnel. Although the equipment may have been lost, stolen, or otherwise diverted, no missing property reports had been filed with any law enforcement officials. We recommend that all attempts be exhausted to account for this equipment, including soliciting the aid of law enforcement agencies if necessary. (See paragraphs 30 through 32.)

The District and the FDMS did not properly identify equipment to be sold.

It was the joint responsibility of the District and the FDMS to ensure that the equipment dispositions were properly identified. However, our review disclosed that, in some instances, neither the District nor the FDMS properly identified equipment that was transferred to the FDMS for sale. We recommend that for any future sales, the FDMS and the District work together to ensure that equipment items are properly identified to the District’s equipment identification (appraisal) numbers. (See paragraphs 33 through 36.)

There were no signed custody receipts to document the transfer of equipment from the District to the FDMS.

Considerable property was certified by the District to the FDMS for sale; however, there were no signed receipts to document the transfer of the equipment. Although the FDMS was able to identify some of the equipment that was surplused by matching lot numbers to the appraisal numbers, the disposition of a substantial amount of the equipment could not be determined by the FDMS. We recommend, that for any future transfers of equipment, the District and the FDMS prepare signed and verified custody receipts for transfer of equipment to provide proper accountability for the equipment. (See paragraphs 37 through 40.)

District records of equipment for nine farms did not properly identify the equipment.

Section 10.450, Rules of the Auditor General, states that each item of property shall be accounted for in a separate property record. Our review of the District’s records disclosed for 9 of the 10 farms, the District did not always properly identify the equipment purchased from the seller. We recommend that the District implement appropriate controls to ensure complete accountability for equipment purchased and to ensure that such accountability is in accordance with the provisions of Chapter 10.400, Rules of the Auditor General. (See paragraphs 42 through 45.)

The District leased equipment back to a seller without authority and proper documentation.

The District entered into a purchasing agreement and two lease agreements with a seller to lease back land and equipment related to the Lake Apopka restoration project for the continuation of farm operations. However, Section 373.461(5)(d), Florida Statutes, authorizes the lease back of land but does not authorize the lease back of equipment. Additionally, our review disclosed that lease agreements approved by the District’s Governing Board did not identify either the land or the equipment that was leased back to the seller. We recommend that the District discontinue the practice of leasing back equipment. We also recommend that the District’s Governing Board only approve complete contractual agreements. We further recommend that the equipment be recovered and sold as soon as practicable and the proceeds deposited into the Governor’s Economic Trust Fund as required by law. (See paragraphs 46 through 50.)

Appraisals

Equipment and business valuation appraisers were selected by the land appraisers rather than the District.

The District did not select the equipment appraiser or the business valuation appraisers. These appraisers were selected by the land appraisers and were subcontractors to the land appraisers. Additionally, the land appraisers stated in their written report that they took no responsibility for the equipment or business valuation appraisals. For future equipment acquisitions and acquisitions requiring business valuations, we recommend the District either select its own appraisers or hold the lead appraiser responsible for any work performed by subcontractors. (See paragraphs 53 through 55.)

The District did not review the equipment or business valuation appraisals.

The District did not review, nor contract to review, the equipment appraisals or the business valuation appraisals to determine whether such appraisals were performed in accordance with applicable appraisal standards and guidelines. In order to ensure that all appraisals are properly performed, we recommend that the District establish procedures requiring that all appraisal reports, including equipment and business valuation appraisals, be reviewed by appropriate qualified appraisers. (See paragraphs 56 through 58.)

Equipment appraisal reports did not always include adequate descriptions.

Our review of the appraisal reports prepared by the equipment appraiser indicated that generally the appraiser did not adequately describe numerous items of equipment contrary to the guidelines adopted by the American Society of Appraisers, of which the equipment appraiser was a member. In order to ensure complete and accurate appraisals of equipment, we recommend that the District establish procedures requiring that all equipment appraisals include detailed descriptions for each item of equipment. (See paragraphs 63 through 66.)

Equipment appraisal reports did not indicate adequate consideration of economic obsolescence.

The equipment appraiser used the market approach and the cost approach in valuing the equipment. However, in appraising equipment, the income approach should be used in conjunction with the market and/or cost approaches to determine if economic obsolescence exists. In order to ensure that values assigned to equipment are accurate, we recommend that the District require appraisers to determine the economic obsolescence of the equipment when appraising such equipment. (See paragraphs 67 through 70.)

Documentation of equipment appraisals was not adequate.

The Uniform Standards of Professional Appraisal Practice requires that an appraiser must prepare written records of appraisal, review, and consulting assignments. The written records of an assignment are known as work files. We requested from the District the equipment appraiser work files for 84 items of equipment. The equipment appraiser provided work files for 42 of the 84 items. Our review of documentation provided by the equipment appraiser disclosed that appraisal values were consistently established on the high end of referenced values (usually at or near retail) and many of the work files did not include adequate documentation to support the appraisal of the equipment. We recommend that the District require equipment appraisers to perform their appraisals in accordance with applicable standards and guidelines and that appraisers be required to maintain adequate documentation to demonstrate that applicable standards and guidelines are followed. We also recommend that the District establish procedures requiring that all appraisals be reviewed by appropriate qualified appraisers. (See paragraphs 71 through 78.)

The District relied on an appraiser who was contracted by and paid by a seller.

The equipment appraiser issued an appraisal report for one of the farms on September 26, 1996, which was performed on behalf of, and was paid for by, the District. However, we noted that a subsequent appraisal report by the same appraiser for the same farm was issued on July 17, 1998, which was performed on behalf of, and was paid for by, the seller. Performing appraisals for both the buyer and seller of the equipment gives the appearance that transactions may not have been performed at arms-length. We recommend that the District, by written contract, specifically exclude future appraisers from performing work for both the seller and the District. (See paragraphs 79 through 81.)

Business valuation appraisals were not always adequately documented and reviewed by District staff.

The business valuation appraiser adjusted the earnings for several of the farms. However, our review of the appraisal reports for these two farms disclosed that the appraiser had not identified the specific source and nature of the adjustments. Our audit also disclosed that the District did not review the appraisal reports or the work files. Therefore, although documentation supporting these adjustments may have existed in the appraiser’s work files, since the District did not perform a review of either the appraisal report or the work files, the District did not obtain assurance that appropriate documentation existed to support these adjustments. We recommend that the District review all future appraisals. We also recommend that the District obtain and maintain written documentation explaining any significant adjustments made by the appraiser. (See paragraphs 84 through 89.)

Other Matters

Equipment purchased and restricted for use on the Lake Apopka project was located in other areas.

The District acquired land and equipment with moneys restricted to the Lake Apopka restoration project. However, the surplus listing approved by the Governing Board disclosed that some of the equipment was located in areas other than Lake Apopka. By placing equipment in such locations, the District has not demonstrated that use of this equipment was restricted to the Lake Apopka restoration. To ensure compliance with applicable laws, we recommend that the District properly document that equipment purchased with Lake Apopka funds is used only for Lake Apopka projects. (See paragraphs 91 through 94.)

Equipment sold to the District was sometimes bought back by the sellers.

Sales for the December 1998 equipment auction for four farms totaled $3,349,105. Our review disclosed that four previous owners bought back equipment acquired by the District from that sale. These owners who paid a total of $199,095 for equipment appraised at $1,882,002 were allowed to buy back equipment for approximately 11 percent of the appraised values. Subsequent to this purchase, the 1999-2000 General Appropriations Act provided that no sellers shall purchase tangible personal property sold by the District. We recommend that the District and the FDMS comply with established law and discontinue the practice of selling equipment back to the previous owner. (See paragraphs 95 through 98.)

The written responses of the Executive Director of the St. Johns River Water Managment District and the Secretary of the Florida Department of Management Services to the audit findings and recommendations included in audit report No. 13640 are presented as Appendices F and G.