City Cost Allocation Plan Follow-up Report

Transcription

1 City Cost Allocation Plan Follow-up Report June 2014 Office of the Auditor Audit Services Division City and County of Denver Dennis J. Gallagher Auditor

2 The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the proper and efficient use of City resources and providing other audit services and information to City Council, the Mayor and the public to improve all aspects of Denver s government. He also chairs the City s Audit Committee. The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee assists the Auditor in his oversight responsibilities of the integrity of the City s finances and operations, including the integrity of the City s financial statements. The Audit Committee is structured in a manner that ensures the independent oversight of City operations, thereby enhancing citizen confidence and avoiding any appearance of a conflict of interest. Audit Committee Dennis Gallagher, Chair Maurice Goodgaine Leslie Mitchell Rudolfo Payan Robert Bishop Jeffrey Hart Timothy O Brien, Vice-Chair Audit Staff Audrey Donovan, Deputy Director, CIA, CGAP, CRMA Dawn Wiseman, Audit Supervisor, CRMA Emily Owens, Senior Auditor, MPA You can obtain copies of this report by contacting us at: Office of the Auditor 201 West Colfax Avenue, Department 705 Denver CO, (720) Fax (720) Or download and view an electronic copy by visiting our website at:

3 City and County of Denver 201 West Colfax Avenue, Department 705 Denver, Colorado FAX Dennis J. Gallagher Auditor June 3, 2014 Ms. Cary Kennedy, Deputy Mayor, Chief Financial Officer City and County of Denver Re: Audit Follow-Up Report Dear Ms. Kennedy: In keeping with professional auditing standards and the Audit Services Division s policy, as authorized by D.R.M.C , our Division has a responsibility to monitor and follow-up on audit recommendations to ensure audit findings are being addressed and to aid us in planning future audits. This report is to inform you that we have completed our follow-up effort for the City Cost Allocation Plan audit issued October 18, Our review determined that the Department of Finance has adequately implemented the recommendation made in the audit report. For your reference, this report includes a Highlights page that provides background and summary information on the original audit and the completed follow-up effort. Following the Highlights page is an implementation status update for the recommendation. This concludes audit follow-up work related to this audit. I would like to express our sincere appreciation to you and to Department of Finance and Budget Management Office personnel who assisted us throughout the audit and follow-up process. If you have any questions, please feel free to contact me at or Dawn Wiseman, Internal Audit Supervisor, at Sincerely, KRM/leo Kip Memmott, MA, CGAP, CRMA Director of Audit Services cc: Honorable Michael Hancock, Mayor Honorable Members of City Council Members of Audit Committee Ms. Janice Sinden, Chief of Staff Mr. David P. Edinger, Chief Performance Officer Ms. Beth Machann, Controller Mr. Scott Martinez, City Attorney To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

4 Ms. Janna Young, City Council Executive Staff Director Mr. L. Michael Henry, Staff Director, Board of Ethics Mr. Brendan Hanlon, Budget Director To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

5 City and County of Denver Office of the Auditor Audit Services Division REPORT HIGHLIGHTS City Cost Allocation Plan Follow-up Report: June 2014 The Department of Finance has implemented the recommendation made in the October 2012 audit report. Background The City and County of Denver creates a citywide full cost allocation plan each year that calculates the value of central services (e.g., police, fire, public works) provided to each City agency. The plan allows the City to identify and recover costs associated with central services provided by the City to the four enterprise fund agencies Denver International Airport, Wastewater, Golf, and Environmental Services. Unlike taxpayer-funded agencies such as the Denver Police Department, enterprise fund agencies are funded by fee-forservice dollars, not the general fund. The Budget and Management Office (BMO) oversees the process and bills enterprise fund agencies as needed. Purpose The purpose of the audit was to: Assess the extent to which the full cost allocation plan is reasonable and equitable; Determine whether the plan provides for full reimbursement to the City s general fund for services provided to enterprise fund agencies; and Understand how the plan process is managed and applied. Highlights from Original Audit Although the process used by the City and its consultant, MGT of America, Inc., (MGT) to create the plan was found to be reasonable and equitable, BMO had not applied the plan equitably among the four enterprise fund agencies. Furthermore, the City had no formal policy in place to ensure an accountable and transparent process is utilized. The full cost allocation plan, developed by MGT, is adjusted each year to ensure it reflects any changes in the organization or services provided by the City. For example, the cost allocation payment assigned to the Golf Enterprise Fund (Golf) increased significantly between FY2008 and FY2009 due to a new shared services initiative, additional allocations of administrative costs, and a change in methodology for assigning costs related to the Career Service Authority. The audit found that BMO reduced the Golf cost allocation in FY2009 and FY2010 by more than $1.2 million without documenting the decisions in financial statements. The reduction was provided after Golf asserted that it could not pay the full cost allocation amount and continue to meet its business obligations. At the same time, the other three enterprise fund agencies paid their full cost allocation amounts. This reduction in Golf s reimbursement represented a continuing unofficial subsidy granted to the agency without the knowledge of citizens and City leaders. A formal policy for reviewing and accepting reduced cost allocation payment requests would allow BMO to address the issue in a transparent manner that holds Golf accountable for its full cost allocation payments. Findings at Follow-up The Department of Finance developed a formal policy that describes the required process enterprise fund agencies must follow to request reduced cost allocation payments. All discounts will be considered during the annual budget process and approved discounts will be reflected in the annual budget. BMO also instituted a cap on cost allocation payments to reduce the financial burden on enterprise fund agencies. For a complete copy of this report, visit Audit Contact Person: Dawn Wiseman dawn.wiseman@denvergov.org

6 Recommendations: Status of Implementation Recommendation Auditee Action Status Finding 1: Formal Policy Needed to Ensure Accountability and Transparency in City s Application of the Cost Allocation Plan 1.1 The City s Chief Financial Officer should create a formal policy through a fiscal rule that holds all enterprise fund agencies accountable for their full cost allocation amounts and requires appropriate documentation of the liability of the costs in financial statements. The policy should require that general fund subsidy requests be considered for approval by City leadership, including elected officials, during the budget process and not through cost allocation. The Department of Finance developed a policy that describes the required process enterprise fund agencies must follow for requesting a reduction to the full cost allocation reimbursement due to the general fund. The policy also states that decisions will be made based on the financial impact of the reimbursement amount on the requesting enterprise fund. Further, the policy reports that requests for discounts will be considered as part of the annual budget process and the Mayor and City Council will make the final determination. Any approved discount requests will be reflected in the annual budget. Implemented Page 1 Office of the Auditor

7 Conclusion We found that the Department of Finance has fully implemented the recommendation made in the 2012 audit report. Over the last several years, the Golf Enterprise Fund (Golf) received significant reductions to its cost allocation payments. For fiscal year 2011, Golf paid slightly less than $400,000 of its total cost allocation burden of $1,215,348. For fiscal year 2012, the City instituted a cap on the amount owed by enterprise funds; essentially, the enterprise fund cannot be required to pay more than five percent of its operating budget in cost allocation payments to the general fund. As a result, in fiscal year 2012 Golf paid approximately $700,000 less than the amount calculated by MGT and reported in the cost allocation plan. Although the Golf Enterprise Fund continues to be the one enterprise fund agency not paying its full cost allocation reimbursement amount reported in the cost allocation plan, the process to grant a reduced cost allocation payment is now transparent and in the hands of City leaders as requested by auditors. The Audit Services Division may revisit this area in future audits to assess the degree to which the Golf Enterprise Fund continues to require reductions in its cost allocation payments to the general fund. On behalf of the citizens of the City and County of Denver, we thank staff and leadership from the Department of Finance and the Budget and Management Office for their cooperation during our followup effort. City and County of Denver Page 2