Broward Sheriff s Office Cost Recovery for Contract Services

Transcription

1 EXHIBIT 1 Broward Sheriff s Office Cost Recovery for Contract Services October 1, 2013 Report No Office of the County Auditor Evan A. Lukic, CPA County Auditor

2 Table of Contents Topic Page Executive Summary... 2 Objectives and Scope... 3 Methodology... 3 Background... 3 Findings & Recommendations... 7 APPENDIX I APPENDIX II Office of the County Auditor 1

3 Executive Summary This report presents the results of our review of the Broward Sheriff s Office (BSO) cost recovery for law enforcement and fire rescue services provided to contract agencies. Our objective was to determine if BSO has made progress in recovering the full cost of providing contracted services since our previous report dated May 15, We also evaluated BSO s accounting and financial management practices relative to the contract services. Our review focused on analyzing financial transactions and allocations in fiscal year ended September 30, We also compared annual revenues and costs of contracted services for the three fiscal years ended September 30, We found: Omissions, inaccuracies and inconsistences in accounting for costs impede BSO s financial management of contracted services, and BSO has made progress in recovering its costs for contracted services. To address the issues noted above, we recommend the Sheriff: 1. Take steps to ensure the reliability of BSO s accounting records and financial reporting. At a minimum, the Sheriff should: o Limit BSO s budget division s involvement in the recording of accounting entries to ensure that the accounting records and financial reports accurately and consistently reflect actual results. o Require BSO s accounting division to prepare ic financial reports of the revenues and actual costs of contracted services and provide them to appropriate levels of management. o Establish formal written policies and procedures defining BSO s policy and methodology regarding contracted services, and develop controls to ensure reliability of financial reports. 2. Determine the reasons for Lauderdale Lakes significant revenue surplus and ensure that actual financial results are considered in determining service fees in subsequent s, as appropriate. 2

4 Objectives and Scope Our objective was to determine if BSO has made progress in recovering the full cost of services over its contracted agencies for law enforcement and fire rescue services by evaluating BSO s accounting records and management practices. Our review focused on analyzing financial transactions and allocations in fiscal year ended September 30, 2012 and comparing them to the results of operations in fiscal years ended 2010 and Methodology To accomplish our objectives, we: Reviewed: BSO s service contracts with municipalities, Fort Lauderdale International Airport (Airport) and Port Everglades (Port), BSO s accounting records for fiscal years (FY) and tested FY 2012 contract services general ledger, BSO s allocations of indirect costs and operating expenses, Department of Law Enforcement (DLE) and Fire Rescue collective bargaining agreements, The actuarial valuation reports for BSO s Retiree Health Care Program as of October 1, 2009 and 2011, Adopted and supplemental budgets for 2012, and Comprehensive Annual Financial Report for FY Interviewed: BSO s Finance, Budget, Human Resources, Central Supply, and Fleet division staff, Management and payroll staff from specific municipalities and the airport, and Broward County s Office of Management & Budget staff. Background BSO provides law enforcement, detention, fire rescue, emergency medical services, and public safety support to the residents and visitors of Broward County. The office is funded annually by appropriations from the Broward County budget. In FY 2012, BSO had an operating budget of approximately $690 million with 5,301 full-time equivalent positions. BSO provides law enforcement and fire rescue services to numerous municipalities and two Broward County departments under fee for service contracts. In FY 2012, these contracts accounted for $261 million (38%) of the total BSO adopted budget. As 3

5 displayed in Exhibit 1 below, the law enforcement and fire rescue contracts accounted for approximately 26% and 12% of budgeted costs, respectively. Exhibit 1 Contracted services represented 38% of the BSO FY 2012 Adopted Budget BSO Contracted Services as a Percentage of the FY 2012 Adopted Budget 26% Law Enforcement Contract Services Fire Rescue Contract Services Other BSO Services 62% 12% Source: Prepared by the County Auditor s Office based on the FY 2012 Adopted Budget. Contract Provisions In FY 2012, BSO provided contract services to a total of 16 agencies, including 14 1 municipalities, the Port and the Airport. Specifically, BSO provided law enforcement services to all 16 of these agencies and fire rescue services to six. The terms of BSO s contracts differ from agency to agency, but they generally include: A service term equaling five years with renewal options for additional years, The minimum number and type of staff that BSO is required to provide to the agency, and Payments for minimum staffing levels that are subject to change annually based on mutual agreement between the contracted agencies and BSO. In addition, some contracts include restrictions on annual rate increases for health insurance, worker s compensation, and retirement plans. For example, the contracts with Weston and Southwest Ranches limit BSO s annual rate increases for health insurance to no more than 9%. Appendix I on page 12 lists FY 2012 contracted agencies, minimum staffing requirements, contract expiration dates, and contract limitations. 1 For financial purposes, Pembroke Park and West Park are considered one contract because they have merged their services. 4

6 Services Provided Law Enforcement Services BSO law enforcement services contracts include patrol functions, traffic enforcement, crime investigations, responses to emergency calls from residents, and one or more of the following: Traffic and drug law enforcement, Community service aides and community policing initiatives, Assistance with aircraft and other disasters, Issuance of parking citations, Industrial/Port-related response techniques and security programs, K-9 deputy patrols, Harbor Patrol Units, Waterborne security, Security surveys and crime prevention education, and Municipal code enforcement. Fire Rescue & Emergency Services BSO s fire rescue contracts include: Fire protection services, Comprehensive medical services, Rapid response to life threatening medical emergencies, Fire prevention and investigations, Enforcement of adopted fire and life safety codes, Fire safety inspections, and Public education and community awareness programs. Regional Services All Broward County cities, including BSO s contract agencies, have access to various regional services provided by BSO at no additional cost. Examples of these services include the use of a criminal investigations unit, full service crime lab and air rescue team. Appendix II on page 13 lists the regional services and related costs provided by BSO in FY Financial Management of Contracts Cost Recovery The Board of County Commissioners, as the funding agency for BSO, has directed that BSO recover the cost of all contracted services. Recovering these costs requires sound budget and accounting processes. 5

7 Budget Process In January of each year, BSO prepares annual budgets of expected costs for providing contracted services. Individual budgets for each contract agency are prepared reflecting direct and indirect costs including allocations of shared expenses. BSO calculates the direct costs for inclusion in agency budgets for the following fiscal year. Direct costs are defined as costs for services that specifically benefit only one project or agency. For contracted agencies, direct costs are primarily composed of the salaries and benefits of deputies and fire personnel assigned to the agency. Direct costs also include some operating expenses such as utilities, rent and office supplies. BSO then calculates indirect costs, which are defined as the cost of services that cannot be easily assigned to one agency because they benefit multiple agencies. In FY 2012, BSO had a total of 28 administrative divisions that provided support to the entire organization. BSO allocates a portion of the budgeted payroll costs of these administrative divisions to the contracted agencies based on the percentage of employees assigned to each agency. For example, if the Human Resources Division s total payroll cost is $100,000 and an agency was assigned 10% of the total employees then the agency s budgeted indirect cost allocation for Human Resources would be $10,000. BSO also uses a similar methodology for allocating certain operating expenses (e.g., fuel) for inclusion in agency budgets. In May of each year, BSO sends the preliminary budgets to each contracted agency for approval. At the beginning of each fiscal year, the contract agencies are billed on a monthly basis for 1/12 th of the approved budget. 2 Accounting Process The responsibility of recording contract agency expenses in BSO s financial records is shared between the accounting and budget divisions. 3 The accounting division is responsible for the recording of direct expenses, such as payroll and purchases of materials. These expenses are recorded by accounting personnel based on payroll records and vendor invoices. However, the budget division is assigned the responsibility of recording all indirect and allocated expenses. The budget division records all of these expenses during the first month of the fiscal year based on the budget allocations described above. 2 Billings to the Airport are generally based on actual costs. 3 The accounting and budget divisions are both in the Finance Bureau. 6

8 Findings & Recommendations Finding 1 Omissions, inaccuracies and inconsistences in accounting for costs impede BSO s financial management of contracted services. Management is responsible for the reliability of financial reporting, including the assurance that financial records accurately and consistently reflect the actual cost of services. Reliable financial reporting is the foundation for making effective decisions and for formulating future budgets. According to the United States Government Accountability Office (U.S. GAO), 4 it is difficult to make informed operational or budget decisions when actuals costs are incorrect or unknown. Thus, management should ensure reliable financial reporting through the implementation of controls that ensure accurate and consistent financial records. In order to determine if BSO s accounting records accurately and consistently reflected the actual cost of contracted services, we reviewed BSO s: General ledgers for FY 2010, 2011 and 2012, and Method for recording allocations, for example, indirect costs, worker s compensation and fleet costs. As displayed in Exhibit 2 below, we adjusted the cost of contracted services by approximately $4.7 million to better reflect the actual cost of services. Exhibit 2 Adjustments of approximately $4.7 million were necessary to reflect actual cost of services for FY 2012 Unadjusted Cost Revenues $ 254,968,254 Expenditures (251,958,833) Total Before Adjustments 3,009,421 Adjustments to Reflect Actual Costs Cost Allocations 831,321 Indirect Cost (5,566,440) Total Adjustments (4,735,119) Adjusted DLE & Fire Expenditures in excess of Revenues $ (1,725,698) Source: Prepared by the County Auditor s Office based on our review of BSO s general ledger. 4 United States General Accounting Office, Reliable Financial Information: A Key to Effective Program Management and Accountability, January

9 The $4.7 million of adjustments were necessary because: Cost allocations were recorded based on budgeted expenses rather than the actual cost of service, Cost allocations were sometimes recorded inconsistently or omitted from the accounting records, and All relevant administrative costs were not included as a part of the indirect cost allocation to contracted services. The above noted inaccuracies and inconsistencies appear to be caused by the assignment of accounting and reporting responsibility for contracted services to the BSO Budget Division and not to the BSO Accounting Division. The budget focus is typically on balancing revenues and expenses and not necessarily on capturing and reporting actual expenses. As a result certain costs were omitted from BSO contracted services accounts and other costs were reported based on the budgeted rather than the actual amounts. Cost Allocations Recorded Based on Budgeted Expenses We found that in FY 2012 allocations totaling approximately $831,000 were inappropriately expensed to contracted services (See Exhibit II on page 7). 5 These allocation inaccuracies occurred because expenses were recorded based on budgets rather than allocations of the actual cost of service. For example, contracted agencies were expensed their entire budget of approximately $4.5 million for gas and oil. However, based on the actual results of operations, the amount that should have been allocated was approximately $4.25 million ($250,000 less). Cost Allocations Inconsistent or Omitted We also found that some allocations of expenses were either not recorded consistently or were not recorded at all. For example: Indirect costs were not allocated to West Park/Pembroke Park and Port Everglades in FY 2010, but were allocated in FY 2011 and 2012, Indirect costs were allocated to Lauderdale by the Sea in FY 2012, but not in FY 2010 and Indirect costs were allocated to Cooper City in FY 2010, but not in FY 2011 and 2012, Overhead costs were not allocated to Lauderdale Lakes in FY 2012, but were allocated to all other agencies, and Self-insurance expenses were not allocated to Deerfield Beach in FY 2012, but were allocated to all other agencies. 5 Of this amount, $982,000 was over-allocated to law enforcement and approximately $151,000 was not allocated to fire rescue. 8

10 All Administrative Costs Not Allocated In addition, we found that approximately $5.6 million in administrative costs were not expensed to contracted services as a part of the indirect cost allocation (See Exhibit 2 on page 7). This occurred because BSO omitted the total costs of 10 administrative divisions and omitted the operating costs of 18 administrative divisions in their calculation of the indirect cost allocation. BSO management indicated that they do not have formal written policies and procedures for indirect cost allocations, but have been following a similar and evolving process since FY Documentation of formal cost allocation policies and procedures is an important control in ensuring that allocations are consistently applied and include all appropriate expenses. Recommendation 1. We recommend that the Sheriff take steps to ensure the reliability of BSO s accounting records and financial reporting. At a minimum, the Sheriff should: o Limit BSO s budget division s involvement in the recording of accounting entries to ensure that the accounting records and financial reports accurately and consistently reflect actual results. o Require BSO s accounting division to prepare ic financial reports of the revenues and actual costs of contracted services and provide them to appropriate levels of management. o Establish formal written policies and procedures defining BSO s policy and methodology regarding contracted services, and develop controls to ensure reliability of financial reports. Finding 2 BSO has made progress in recovering its costs for contracted services. Recovering the cost of services from contracted agencies should be a priority of BSO management because failure to recover the costs results in a subsidy from the County. To determine BSO s progress in recovering the cost of its law enforcement and fire rescue contract services, we: Analyzed each agency s FY 2012 financial data, Made adjustments described in Finding 1 totaling approximately $4.7 million, and Compared the FY 2012 adjusted data against the results of operations in FY 2010 and FY BSO presently uses Microsoft PowerPoint slides to outline brief desktop procedures for allocations. 9

11 Progress in Recovering Total Contracted Costs Over the three fiscal years ending September 30, 2012, BSO has moved closer to recovering its cost of contracted services. As displayed in Exhibit 3 below, the total revenue deficit (costs greater than revenue) for all contracted services in FY 2010 was approximately $5.3 million. The revenue deficits for FY 2011 and FY 2012 were reduced to approximately $2.5 million and $1.7 million, respectively. Exhibit 3 BSO is recovering more of its contracted services costs 7 Break Even $6,000,000 $4,000,000 $2,000,000 $- $(2,000,000) $(4,000,000) $(6,000,000) Source: Prepared by Office of the County Auditor based on BSO s general ledgers. Financial Results by Agency $(5.3 M) $(2.5 M) $(1.7 M) Adjusted We further analyzed the revenues and expenses for each contracted agency in FY To do so, we calculated the revenue surplus (revenue greater than costs) or deficit (costs greater than revenue) that existed for each contracted agency. 8 Exhibit 4 on page 11 displays the percentage by which contracted agencies were above or below the break-even point (the point where revenues equal costs). With the exception of Cooper City and Lauderdale Lakes, the financial results for the contracted agencies were generally consistent. 7 The figures for FY 2010 and 2011 are unadjusted. 8 We divided the surplus/deficit of each contracted agency over the contracted revenue. 10

12 Exhibit 4 Financial results for contracted agencies were generally consistent 15% 10% 5% Break Even 0% Point -5% -10% -15% 12% Lauderdale Lakes Source: Prepared by the Office of the County Auditor based on BSO s general ledgers Cooper City 4% West/Pembroke Park As shown in Exhibit 4 above, BSO s contracted services to Cooper City resulted in a comparatively large revenue deficit for Fiscal Year Upon review of Cooper City s costs, we found the major reason for their deficit was the large employer contribution required by the City s pension plan and contract limitations on annual fee increases. Per BSO management, Cooper City became a contracted agency with a City pension plan with funding of only 20% of payroll, but over the years the funding has increased substantially, climbing to 154% of payroll in FY Furthermore, Cooper City s contract restricts increases of pension revenue to only 5.3% annually. We attempted to determine if the revenue deficit from Cooper City s service contract had improved or declined over the past three fiscal years. However, the inaccuracies and inconsistencies described in Finding 1 precluded an accurate analysis. Lauderdale Lakes BSO s contracted services to Lauderdale Lakes resulted in a comparatively large revenue surplus for the year ended September 30, BSO management could not explain why services provided to Lauderdale Lakes resulted in such a large surplus, but stated the reason was likely due to overestimation of costs in the budget process. BSO did not provide documentation in support of such overestimation. Recommendation 3% Parkland 2% Oakland Park 1% North Lauderdale 0% 0% Tamarac Weston -1% -1% -1% Pompano Beach -2% -2% 2. We recommend the Sheriff determine the reasons for Lauderdale Lakes significant revenue surplus and ensure that actual financial results are considered in determining service fees in subsequent s, as appropriate. Airport Port Everglades Dania Beach Deerfield Beach -3% Lauderdale by the Sea -4% Southwest Ranches -13% Cooper City 11

13 APPENDIX I Agency Cooper City Dania Beach Deerfield Beach Lauderdale Lakes North Lauderdale Oakland Park Staff (as of 9/30/12) Expiration Date: Sep 30th Rate Cap: General Services Rate Cap: W/C, Pension Rate Cap: Health Ins. Renewal Options Remaining as of Sep 2013 Staff (as of 9/30/12) TOTAL Source: Prepared by the Office of the County Auditor based on BSO contracts. Expiration Date: Sep 30th Rate Cap: General Services Rate Cap: W/C, Pension Rate Cap: Health Ins. Renewal Options Remaining as of Sep % 5.3% n/a % 5.3% n/a < 27.5% Over Term Parkland % Pompano Beach Tamarac Lauderdale By The Sea Pembroke/ West Park Southwest Ranches No Cap 9% Renewals Exhausted Three 5-yr s n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a % No Cap 9% % No Cap 9% n/a n/a n/a n/a n/a n/a n/a Weston % No Cap 9% % No Cap 9% Airport 130 n/a Based on actual cost n/a 58 n/a Based on actual cost n/a Port Everglades Summary of BSO Law Enforcement and Fire Rescue Contracts Law Enforcement No Cap 5.3% Not Specified Fire Rescue 82 Expired 5.1% n/a 51 Expired 5.1% n/a 12

14 APPENDIX II FY 2012 Law Enforcement Regional Services Regional Service Actual Cost Law Enforcement Management $ 1,769,840 Communications 18,975,890 Technical Support 1,573,624 Crime Scene 2,358,546 Crime Lab 4,938,162 Operation Administration 7,417,773 Youth/Neighborhood Services 5,427,930 Mounted Patrol 155,346 Regional Narcotics 5,056,006 Auto Crimes & Gang Unit 1,464,636 Regional Street Crimes 1,357,152 SWAT 469,038 Bomb Squad 356,287 Aviation Unit 3,174,389 Marine Unit 920,889 Regional Traffic Unit 3,165,494 Criminal Investigations 9,813,681 Investigative Projects 612,678 Strategic Investigations Admin 5,380,257 Organized Criminal Activities Section 2,015,887 Counter Terrorism Unit 1,561,245 Total $ 77,964,748 FY 2012 Fire Rescue Regional Services Regional Service Actual Cost Air Rescue $ 1,405,218 Technology 291,516 Air/Sea Regional 662,486 Logistics 2,163,418 Hazardous Materials 5,471,315 Technical Rescue Team 3,886,331 Everglades 2,627,801 Training 136,823 Administration 1,295,426 Total $ 17,940,334 Total Cost of DLE & Fire Regional Services $ 95,905,082 Source: Prepared by the Office of the County Auditor based on BSO s FY 2012 general ledger. 13