Background. I. Overall Assessment

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1 SUMMARY Every year, the City disposes of thousands of surplus, obsolete items it has purchased that still retain some residual value. The items range, from old vehicles to office furniture to computers to scrap metal. Currently, the City sells most of these salvaged items at public auction, earning about $3 million per year, mainly through the sales of vehicles. The City has other options. It can reuse or donate salvaged items. While doing so forgoes recouping money, such alternatives can help meet other City goals. For instance, old computers may not be worth much on paper, but when donated to non-profits that help low-income residents access technology, they can help the City provide a broader social good. Ultimately, the decision of what to do with salvaged items rests with the City Council, the Department of General Services, which arranges auctions, and the individual departments who identify equipment or items that are surplus or obsolete. We conducted this audit to determine how and when the City disposes of its salvaged items, how effective its processes are and how the City considers its other disposal options. We found that the City: Could potentially have a more effective salvage operation through centralized control or other alternatives. Does not do an effective job of finding out whether other City departments could make good use of items before sending them to auction. Holds onto some items too long, spending more to maintain some vehicles, for instance, than they would cost to replace.

2 Background Departmental general managers or their designees first determine when an item should be salvaged based on established guidelines that generally consider age and use. Next, that department determines the best disposal option, which can include: Sale Reuse (sharing between departments) Donation The City typically sells its salvaged items. Reuse options are not frequently used or well-known, although departments are required to list certain salvaged items (electronic equipment) on a City intranet site, CitiMAX, to give other departments a chance to claim them before they are sold. Some items are donated to other jurisdictions or nonprofits. Most donations are initiated by City Council Offices and require formal Council approval. Departments do not typically dispose of an asset if they cannot receive a replacement, so the main criterion for declaring an item obsolete is frequently how soon it can be replaced. However, replacements have been limited in recent years due to the City s financial constraints. This has prevented the disposal of some aged assets that would otherwise have been disposed of. I. Overall Assessment

3 The audit found a lack of citywide leadership, or ownership of the entire salvage process; inconsistencies led to a lack of effective oversight of the City s disposal of its salvaged items. With few exceptions, departments rely on GSD to manage the salvage process, including all related decision-making, monitoring and reporting. While GSD bears responsibility for the salvaging process as outlined in the Administrative Code, it lacks dedicated resources for this function. As a result, GSD has not provided leadership or guidance to departments to effectively manage the salvage process, nor verified consistent data, nor monitored approvals for items salvaged, nor provided meaningful reporting. While transparency promotes accountability and better decision making, the City does not have adequate information systems or reporting on its salvaging operations. The City cannot effectively manage its salvaging efforts without proper tools and suitable information. We had to assemble limited and disjointed data from numerous Excel spreadsheets to obtain most of the information presented in the report. Our testwork found no items that were salvaged too early, per the City s current criteria. In fact, the City generally holds onto assets longer than their estimated useful life, increasing repair and maintenance costs. We also noted there are significant opportunities to improve the potential for effective reuse of items ready for disposal with other City departments or non-profit agencies. II. Key Points Salvage Oversight

4 The City s decision to eliminate GSD s Salvage Section and decentralize the process because of budget constraints in 2011 essentially eliminated leadership and oversight. Since that time, departments have had to handle their own disposals with GSD s assistance. GSD uses staff from the warehousing operations of the Supply Services Division to manage the sale of salvaged items but it does not have ownership over the entire process. Rather, GSD takes a passive role to assist in the City s disposal of salvaged items. The City spent excessive amounts on vehicle repair and maintenance because the City s replacement and disposal criteria only consider a vehicle s expected life (years and usage). These criteria are less detailed and comprehensive than the factors used by other jurisdictions which can include repair costs and distinguishes categories of vehicles based on their use. This lack of detail combined with the City s financial austerity has resulted in an aging fleet that has incurred excess repair and maintenance costs. In some cases, the City has spent more on repair costs than it has on the original cost of the vehicles. While 41% of sedans and street sweepers in the City s current fleet meet the disposal criteria, 11% have incurred excessive repair costs, amounting to $640,000 more than the vehicles original acquisition costs. We reviewed the entire population for all GSD-maintained sedans and street sweepers in service as of April While 515 sedans and 70 street sweepers met existing disposal/replacement criteria, of those, 58 sedans and 7 sweepers had excessive repair costs, which combined totaled 125% of their total acquisition cost. Notably, we found a sedan purchased for $24,000 with $44,000 in repair costs and a street sweeper purchased for $230,000 with $360,000 in repair costs. This represents $20,000 of excessive repair costs for the sedan and $130,000 for the street sweeper.

5 The lack of oversight has also led to inadequate management of the salvage process and limited reporting. GSD has not required complete, consistent and approved Request for Sale (RFS) forms from departments to start the disposal process. This has contributed to a lack of reporting that identifies basic information such as the number and types of items sold, how much they sold for, and other information that could determine if the City received the most value for its items. The lack of citywide standardization and oversight also results in a lack of transparency. No citywide information on salvage results is available. Instead, the City has a disjointed method of reporting disposals; for example, GSD tracks the number of lots sold, the Bureau of Sanitation reports on items diverted from landfills, ITA reports on how many personal computers (PCs) are donated through the OurCycle LA program, and the Bureau of Street Lighting reports on old street lights salvaged as it transitions to LED lighting. GSD has outdated salvage policies and procedures which do not address current operations or proper cash handling functions to protect against fraud. GSD s current processes for reviewing documents, providing meaningful reports and segregating incompatible cash handling functions are insufficient. Tracking Sales of Salvaged Items The City s fixed asset system is outdated and is not integrated with other financial systems; therefore, there is no integration of information nor a system-driven reporting process on the disposal of capitalized fixed assets or other valuable items (e.g., personal computers). Although the City reported $1.4 billion1 in capitalized machinery, furniture, and equipment at June 30,

6 2014 (excluding proprietary departments), the City s financial system does not provide a comprehensive, integrated system to track the acquisition, maintenance, location, and disposal of these fixed assets. Further, this $1.4 billion figure does not include thousands of other valuable items that do not meet the City s capitalization threshold and are not reported as assets. Additionally, GSD has not established an information system to track and report on sales of salvaged items. Instead, GSD uses a series of disjointed Excel spreadsheets that require separate and redundant data entry. This highly manual process has resulted in errors in internal GSD reporting, preventing GSD management from having an accurate view of salvage disposal results. If the City had better reporting, it could monitor the number of similar items sent to any one auction, which would allow it to identify optimal sales opportunities and yield more revenue. In our review of GSD s spreadsheets, we noted that over the three year audit period, a public auction company sold nearly 5,000 lots for $9.5 million; nearly 85% of that amount was from vehicle sales (including vehicular equipment, e.g., lawn mowers, street sweepers, construction equipment, etc.). We analyzed all 44 auctions that occurred during the audit period, and grouped them by number of Crown Victorias sold at the auction. At the 22 auctions that sold 1 to 5 Crown Victoria sedans, the average sales price was $1,187; however, at the 2 auctions with more than 35 Crown Victorias sold, the average sales price dropped to $706. While there may be other factors influencing the price, the Department may have realized greater salvage revenue by controlling the number of vehicles sent to auction; however, the Department lacked adequate monitoring and reporting to understand the impact of supply and demand on pricing.

7 Disposal Methods The salvage operation is functional, but the City does not effectively consider alternative disposal options, which could support other departments needs or be used for a social good. Once departments notify GSD of their salvaged items, the only decision made by GSD is whether to sell the items at public auction, or through a different sales venue. City departments expect GSD to make the salvage decisions and GSD expects departments to identify alternative disposal opportunities. This disconnect is evident when considering the limited reuse among departments. For the three fiscal years ended June 2014, the City achieved only 125 successful exchanges through the CitiMAX site. It is unknown how successful reuse through other means is (i.e., another department visiting the salvage warehouse and requesting an item for reuse prior to sale) because GSD does not track items requested by departments visiting the salvage warehouse. GSD does not actively promote reuse of salvage items; it does not use blasts, take pictures or encourage or inquire if items were listed on CitiMAX. We surveyed a sample of employees authorized to issue purchase orders and found that only 2 of the 14 individuals responding had used CitiMAX to try to find an item, but neither succeeded in finding items the department needed. Half of those contacted had not heard of CitiMAX even though it has existed for years. The majority of available items on CitiMAX are electronics, which must be listed per the City s Administrative Code to limit the City s e-waste. The only creative salvage initiative identified during the audit period was the OurCycle LA pilot project, where the City donates old PCs to underserved populations. However, this was a unique situation where a department

8 identified an alternative use. GSD and other departments do not typically identify alternative disposal options. III. Significant Recommendations By implementing the recommendations in this audit, the City should be able to improve the salvage process and obtain better results with more transparency. Key recommendations include: The City Administrative Officer, in coordination with the Mayor and City Council, should pursue options to achieve more effective salvage operations through centralized control. This should include equipping GSD or other responsible entity, within or outside City operations, with the authority and resources necessary to establish guidelines, monitor, and periodically report on salvage outcomes. GSD, in coordination with other departments with fleet operations, should develop specific and detailed disposal criteria, and adopt a systematic methodology that considers and documents other relevant factors for disposal/replacement. GSD and the departments should use this criteria to support a cost/benefit justification per asset, to decide when replacements should occur. The City Administrative Officer (CAO), in coordination with the Mayor and City Council, should require detailed and specific justifications for asset replacements that include cost/benefit analysis and approve replacements that are more cost-efficient or are considered mandatory for effective operations. GSD management should revise salvage operations and the Salvage Manual, to modernize processes and o eliminate cash payment requirements, o reflect the current cash receipt process, and o incorporate proper internal controls.

9 The Controller s Office should provide for automated integration of fixed assets and other valuable items, including automated entries through the purchasing system, as well as the disposal process. GSD management should develop automated, integrated tools or an information system that reduces inaccuracies. This system should track the steps of the disposal process until the City provides a fully integrated financial system with fixed asset tracking capabilities. The system should be designed to prevent inconsistent data entry, verify proper authorizations, segregate incompatible duties, and provide informative reporting. The City Council and Mayor should provide clear guidance to GSD and departments for what items should be alternatively disposed of and how. For example, City leaders should decide if they want to increase donations, use salvaged items for specific programs, or maximize salvage revenue by continuing to sell almost all salvaged items. GSD management should determine which disposal options City leaders prefer and develop a process to consider these alternative options prior to selling the City s salvaged items. GSD management should work with the Bureau of Sanitation to increase the City s reuse of salvaged items by identifying and promoting best reuse options, whether CitiMAX, a City warehouse or another exchange program. IV. Review of the Report On August 28, 2015, a draft of this report was provided to GSD management. We met with GSD management at an exit conference held on September 29, 2015, and considered their comments as we finalized this report. We also provided the applicable sections of the draft report to the Director of Financial Reporting and Analysis in the Controller s Office and budget

10 personnel at the Office of the City Administrative Officer, to obtain input regarding recommendations directed to those Offices. V. Departments Responses GSD, the City Administrative Officer, and the Controller s Financial Analysis and Reporting Division all provided formal responses to the audit. (See Appendix VII). Below is our assessment of the status of the recommendations as reported by each Department/Office in their responses. GSD GSD agreed with five (#2.1, #3.1, #3.2, #5.1, and #6.3) of the six recommendations addressed to the Department, and we now consider these recommendations to be In Progress. GSD disagreed with one recommendation (#6.2), and we present the following clarification regarding GSD s comments. Recommendation 6.2 stated GSD should determine which disposal options City leaders prefer and develop a process to consider these alternative options prior to selling the City s salvaged items. This issue must be considered in concert with Recommendation 6.1, which was directed to the Mayor and Council, to provide guidance for what items should be alternatively disposed and how. The intent of our recommendation is that GSD should take a broader leadership role in the overall salvage process, by implementing a process or mechanism that would inform and/or determine the appropriate option for item(s) disposition. This goes beyond GSD s current practice of managing alternative options, such as donation or city reuse, only when requested.

11 We urge GSD, in its reinvigorated leadership role of managing the citywide salvage process, to proactively develop and implement a strategy for determining and recommending appropriate disposal options, rather than awaiting direction from user departments or Councilmembers. City Administrative Officer (CAO) The Office agreed with the two recommendations (#1.1 and #2.2) addressed to the CAO. Based on the Office s response, we now consider both recommendations as In Progress. Both recommendations addressed resources and the budget process. We emphasize the need to provide adequate resources to achieve a more effective salvage operation and to require detailed specifications for asset replacements to prevent excessive repair costs. Controller s Office The Financial Analysis and Reporting Division agreed with the recommendation (#4.1) addressed to it. Based on the Division s response, we now consider the recommendation as In Progress. The recommendation addresses the need to have a comprehensive and integrated fixed asset system to improve departmental oversight of assets and facilitate reliable fixed asset reporting. We would like to thank GSD, CAO and Controller staff and management for their time and cooperation during this audit.