Community Planning and Development: Development Services Permitting and Inspection Services Performance Audit

Transcription

1 Community Planning and Development: Development Services Permitting and Inspection Services Performance Audit August 2012 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, CRMA Dawn Hume, Audit Supervisor Brian Hartman, Lead Auditor, MPA Jessica Quintana, Senior Auditor Kevin Vehar, 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 August 16, 2012 Mr. Kelly Leid Development Services Director City and County of Denver Dear Mr. Leid: Attached is the Auditor s Office Audit Services Division s report of their audit of Community Planning and Development: Development Services Permitting and Inspection Services (Development Services). The purpose of the audit was to assess the efficiency and effectiveness of the permitting and inspection processes, evaluate whether Development Services has the appropriate fee structure, and to assess Development Services customer service activities. Our study of the permitting and inspection services revealed a long history of attempted reorganizations to gain efficiencies and establish a one-stop shop for customers. Although these efforts have improved some elements of the process, none of them have resulted in the ideal efficiencies indicative of a true one-stop shop. The process continues to require that customers interface with a variety of departments around the City to receive the permits they need to begin construction. Audit work found that most of Development Services building permitting and inspection fees have not been increased since 1999 and that Development Services has not conducted a thorough analysis of the appropriateness of its fee structure. Our survey of other municipalities indicated that industry best practice supports regular fee review to ensure that an organization s fee structure aligns with the actual cost of providing related services. Some cities conduct these reviews on an annual basis and incrementally adjust fees accordingly. However, having thirteen years between significant fee adjustments indicates that Development Services current fees likely do not reflect the true cost of doing business. In addition, Development Services is funded by the general fund, but because it functions as a fee-for-service organization, it may be better suited for an enterprise fund structure. Moving to an enterprise fund structure would require Development Services to formalize its financial strategy and incentivize greater efficiency, which would in turn realize true efficiencies for customers. The structure would also provide greater budget predictability for the general fund from year to year for the portion of the Department of Community Planning and Development that does not generate fees for services. Finally, it is important for City leadership to consider whether it is appropriate for Development Services to continue varying between requiring subsidies from and generating surpluses for the general fund. The question is not only about whether, in lean years, taxpayers via the general fund should be subsidizing activities that largely benefit the private sector, but also whether City leadership believes it is appropriate to collect large surpluses in good years from the 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 Mr. Leid August 16, 2012 Page two construction industry for the general fund, essentially amounting to a tax on the development community. If you have any questions, please call Kip Memmott, Director of Audit Services, at Sincerely, Dennis J. Gallagher Auditor DJG/blh cc: Honorable Michael Hancock, Mayor Honorable Members of City Council Members of Audit Committee Ms. Cary Kennedy, Deputy Mayor, Chief Financial Officer Ms. Janice Sinden, Chief of Staff Ms. Stephanie O Malley, Deputy Chief of Staff Mr. Doug Friednash, City Attorney Mr. L. Michael Henry, Staff Director, Board of Ethics Ms. Janna Bergquist, City Council Executive Staff Director Ms. Beth Machann, Controller Ms. Molly Urbina, Interim Manager, Community Planning and Development 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 Dennis J. Gallagher Auditor 201 West Colfax Avenue, Department 705 Denver, Colorado FAX AUDITOR S REPORT We have completed an audit of Community Planning and Development: Development Services Permitting and Inspection Services (Development Services). The purpose of the audit was to assess the efficiency and effectiveness of the permitting and inspection processes, evaluate whether Development Services has the appropriate fee structure, and to assess Development Services customer service activities. This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The City s long-term goal has been to create a one-stop shop experience for permitting and inspection customers through an efficient process. Our examination of Development Services revealed several organizational barriers to establishing a one-stop shop including a mandated decentralized management structure, a lack of clear authority over the permitting process, a lack of critical data collection and analysis to guide management decisions over permitting and inspection services, and a lack of management accountability for customer service issues. Additionally, Development Services current fee structure is not up to date and may be misaligned with its costs, which does not support long-term stability and flexibility. We extend our appreciation to the Interim Manager of Community Planning and Development, the Director of Development Services, and the personnel who assisted and cooperated with us during the audit. Audit Services Division Kip Memmott, MA, CGAP, CRMA Director of Audit Services 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.

6 TABLE OF CONTENTS EXECUTIVE SUMMARY 1 INTRODUCTION & BACKGROUND 6 SCOPE 14 OBJECTIVE 14 METHODOLOGY 14 FINDING 1 16 The City Has Taken Actions Toward but Has Not Fully Implemented an Efficient and Effective Permitting and Inspection Process 16 RECOMMENDATIONS 27 FINDING 2 28 Development Services Lacks a Financial Strategy that Provides Long-Term Stability and Flexibility 28 RECOMMENDATIONS 35 APPENDICES 36 Appendix A Themes of Previous Studies on Denver s Permitting and Inspection Services 36 Appendix B Executive Order Appendix C Building Permitting Process Flowchart 46 Appendix D Building Inspection Process Flowchart 47 AGENCY RESPONSE 48

7 EXECUTIVE SUMMARY Permitting and inspections are critical functions of municipal government. These activities preserve the integrity of a city s built environment and ensure the safety of its citizens. In order to achieve these goals for the City and County of Denver, any construction project in Denver s jurisdiction must be vetted by the City for compliance with building and zoning rules and regulations. These responsibilities are carried out by the Development Services program, which conducts project plan reviews, building permitting, and inspections. The purpose of this audit was to assess the efficiency and effectiveness of the City s permitting and inspection processes, evaluate whether Development Services has the appropriate fee structure, and assess Development Services customer service activities. The audit resulted in two findings, one with regard to the organizational structure of the Development Services program and the second with regard to the program s financial strategy. FINDING 1: The City Has Taken Actions Toward but Has Not Fully Implemented an Efficient and Effective Permitting and Inspection Process City leaders have long envisioned a customer-centric service model to serve Denver s permitting and inspection customers. For example, the creation of the Development Services program in 2009 successfully improved coordination of some critical permitting and inspection process functions. However, Development Services continues to face challenges in fully realizing the envisioned customer-centric service model in two specific areas. First, Development Services permitting and inspection process involves multiple departments, resulting in unclear areas of responsibility and accountability. Second, Development Services lacks critical information about the program s performance, stemming from both a lack of adequate data collection and analysis and a lack of a comprehensive system to address customer service issues. The Permitting and Inspection Process Involves Multiple Departments with Unclear Areas of Responsibility and Accountability Critical aspects of Development Services organizational structure continue to hinder progress to becoming a truly customer-centric program. Executive Order 137 created Development Services as a cross-departmental program in order to better integrate the variety of plan review types that are often required for a project into a single process. However, permitting review functions still reside in multiple departments, making it difficult to coordinate plan reviews even within an individual customer s project. As a result of the cross-departmental structure, roles and responsibilities are often unclear, particularly related to the day-to-day management of the plan review and permitting process. This lack of clarity with regard to ultimate responsibility and accountability for the process was evident in five specific areas: Page 1 Office of the Auditor

8 Development Services Executive Committee The Executive Committee comprises representatives from the Mayor's Office; the City Attorney; the managers of the Department of Community Planning and Development (CPD), the Department of Public Works (Public Works), and the Department of Parks and Recreation; and the Fire Chief. The Development Services director cannot make critical management decisions without the approval of the Executive Committee. Development Services Director Established by the Executive Order the director has authority over certain portions of the permitting and inspection process, but only at the behest of the Executive Committee, whose members can usurp that authority for any reason at any time. For day-to-day operations this limitation of authority means that other departments priorities could take precedence over Development Services needs without the input of the Development Services director. In addition to reporting to the Executive Committee, the Development Services director must also report directly to the Mayor. Building Official The Building Official is the City s senior engineer related to building permitting and inspection provisions as defined by the Denver Building Code. However, this individual is only empowered to oversee part of the permitting process and does not oversee the inspection process. Site Engineering and Fire Prevention Teams Although these teams of engineers function as part of Development Services, their positions are funded by Public Works and the Denver Fire Department, respectively. Plan review functions that reside outside Development Services Unlike the Site Engineering and Fire Prevention teams, other plan review functions, such as wastewater, reside outside of Development Services, which makes coordination more challenging and results in delays to customers. The convoluted authority and accountability structure results in several negative impacts. For example, in recent years Development Services customer survey data has shown a steady decline in customer satisfaction. Additionally, uncoordinated parts of the plan review process create an average of three weeks of delay in permit issuance for some projects. In order to streamline the process for customers, the Mayor and director of Development Services should establish clear lines of authority and clarify roles and responsibilities. Accordingly, two organizational changes should be made to the Development Services program. First, Executive Order 137 should be revised to make permanent the resource dedications it sets forth. In its 2012 Strategic Plan, Development Services states that Executive Order 137 was intended to be a temporary step toward a more permanent structure. Although the Order includes letters of designation to identify functions outside of Development Services that are essential to the permitting and inspection process, the letters result in only a conditional commitment of resources. Accordingly, the resources can be revoked at any time for any reason. Permanently transferring all of the dedicated functions to one department most logically CPD, since it has the largest City and County of Denver Page 2

9 portion of resources dedicated to the Development Services program will create a more stable structure for Development Services. Second, the role of the Building Official should be realigned to incorporate overseeing building plan reviews and building inspections. The Building Official should also be better positioned within the organization to effectively coordinate all reviews that are required prior to the issuance of building permits. Once these organizational changes are made, Development Services should follow the guidance from the City s Structural Financial Task Force and undertake process improvement methods to identify further efficiencies that may exist within building permitting and inspection processes. Development Services Lacks Sufficient Data Management and Analysis to Guide Critical Decisions and Customer Service Management Data management and analysis are inconsistent throughout Development Services, and in some cases are altogether insufficient. Development Services currently uses an operating system called PILAR to track plan review and permitting activities, but data retrieval from the system is difficult and time consuming. As a result, management has failed to use valuable data in PILAR to evaluate the overall plan review and permitting process. Inspection activities are not tracked in PILAR but instead are documented on paper through a manual process. Very little data about inspection activities are transferred to usable electronic formats, resulting in a lack of critical aggregate-level information about inspections, such as reasons for inspection failures or particular code violations. Additionally, Development Services lacks a comprehensive process for addressing customer feedback. Although managers of individual processes have the responsibility to address customer service issues for their own work domain areas, Development Services has not established a program-wide system to ensure that customer feedback is addressed consistently and used to make improvements to the overall process. Good data management and analysis are critical to identifying trends and inefficiencies. Accordingly, Development Services should implement comprehensive data collection and analysis practices to identify inefficiencies and improve customer service. FINDING 2: Development Services Lacks a Financial Strategy that Provides Long-Term Stability and Flexibility Development Services has not developed a policy formalizing a financial strategy that periodically reviews and updates fees and identifies how revenue streams will be used to promote long-term stability and flexibility. Development Services Has Not Determined the Cost of Delivering Services Development Services has not adjusted most building permitting and inspection fees since In 2011, the City s Budget and Management Office (BMO) and Development Page 3 Office of the Auditor

10 Services conducted a study of the fees charged for permitting and inspection services, but did not utilize an activity-based costing methodology to determine the actual costs of service delivery. 1 Additionally, the study included revenues and costs associated with the Office of the Manager and Planning Services within the Department of Community Planning and Development. 2 As a result, Development Services does not know the true cost of providing each of its services. A goal of the 2012 Development Services Strategic Plan is to develop a financial model that will balance longterm stability and flexibility. Building permitting and inspection fees have not been updated since The City s Structural Financial Task Force has recommended that City fees and fines be reviewed and adjusted on a regular basis. In addition, our survey of nine other cities permitting and inspection functions found that all had performed fee assessments within the last five years, which led to an increase in fees across the board. Instituting a regular practice to evaluate and adjust fees based on actual costs of service delivery that accounts for market conditions and inflation would enhance long-term fiscal sustainability and be less burdensome for customers than possible significant fee adjustments every ten years. Current Finance Strategy Should Be Enhanced to Promote Fiscal Stability and Flexibility Development Services current financing strategy should be enhanced to promote sustainability and flexibility. Specifically, Development Services does not have a formal strategy or policy dictating the extent to which revenues should cover operational costs. However, one of Development Services organizational goals identified in its 2012 Strategic Plan is to develop a financial model that will provide balance between longterm stability and flexibility. 3 One mechanism by which Development Services could implement this strategy is to consider operating as an enterprise fund, which would require adjusting the service delivery model to better align the revenue stream to the costs of delivering services. An enterprise fund would allow Development Services to establish reserves to be used to cover costs during economic downturns, thereby improving financial stability and flexibility. Many cities operate their building permitting and inspection departments through an enterprise fund, which eliminates or reduces the dependence of these departments on general fund subsidies by requiring them to cover costs with fees collected. Operating as an enterprise fund also would eliminate the potential for any surpluses resulting from these fees from being inappropriately used to subsidize other City activities. In five of the last ten years, Development Services collected fees resulting 1 Activity Based Costing is a method used to identify specific activities and the costs associated with those activities to determine true cost of service. 2 The Office of the Manager provides administrative, operational, and financial functions and Planning Services provides City planning services for the Department of Community Planning and Development. The majority of these services are internal services that benefit the public. 3 City and County of Denver, DevelopDENVER: Moving the city to even greater heights, Development Services Strategic Plan , Feb. 2, 2012, p. 22. City and County of Denver Page 4

11 in a surplus large enough to cover not only its own expenses, but also the expenses of the Office of the Manager and Planning Services within the Community Planning and Development Department. 4 Development Services activities are based on a fee-for-service model wherein a specific group, as opposed to the entire population, pays a fee for the services they directly receive from a public entity. For comparison purposes, the City utilizes an enterprise fund structure for City golf courses. Golfers are charged green fees to access these courses. Members of the general public who do not golf are not required to subsidize these golf courses through general fund monies. In the case of Development Services, the specific group that directly receives services is the developer community. As such, an enterprise fund structure is logical for Development Services. Converting to an enterprise fund would require Development Services to make organizational and financial changes that would improve fiscal stability, efficiency, and customer service. In addition, Development Services could expand financial flexibility options as a means of responding to fluctuations in demand for services. Building permitting and inspection organizations that operate under a fee-for-service model often face fluctuations in demand for services, based on industry trends and other external economic conditions. Development Services will face such a fluctuation in demand from the City s South Terminal Redevelopment Project at Denver International Airport, which will increase the need for services for a period of time. Development Services has some flexible options in place currently. For example, it offers weekend and after-hours inspection services for customers who are willing to pay a premium fee, providing the customer with greater flexibility. Additionally, it has recently begun the process of establishing combination inspectors, which will allow for more-efficient inspections. 5 Although these options provide greater flexibility in their service delivery model, there are additional options that Development Services could consider. For example, offering a fast-track plan review for an additional fee can provide added flexibility and improve customer service. Also, it may be necessary to utilize on-call contractors to assist with additional services when demand spikes beyond the core service level needs. Development Services should perform an analysis of critical services and service levels that need to remain constant, as well as identify services for which alternative options should be considered to provide additional flexibility. Creating and implementing a financial policy based on such an analysis would reduce expenses and improve customer service. 4 Office of the Manager expenditures are for administrative activities and Planning Services expenditures are for Citywide planning and GIS mapping. 5 A combination inspector will be able to perform more than one trade inspection at the same project site. Page 5 Office of the Auditor

12 INTRODUCTION & BACKGROUND Denver s Permitting and Inspection Activities Permitting and inspection activities have long been a core function of local governments, which are responsible for ensuring the safety of buildings in their jurisdictions. They do so by setting building construction standards, approving builders plans in accordance with those standards, and inspecting buildings upon construction to enforce those standards. Denver s permitting and inspection process is governed by two sets of regulations: the Denver Zoning Code and the Denver Building Code. 6 The Denver Zoning Code was most recently updated in 2010 with amendments in Its purpose is to enact and implement Denver s Comprehensive Plan and guide orderly development of the City that preserves and promotes the public health, safety, prosperity, and welfare of its inhabitants. 7 Denver s permitting and inspection activities currently reside in the Development Services Division within the Department of Community Planning and Development (CPD). In 2002 CPD was established as a department in the Denver Revised Municipal Code. CPD is primarily responsible for planning and regulating land use, development within the City and County of Denver, and construction standards designed to enhance and protect Denver's natural and built environments. 8 Building Code The purpose of the Building Code is to provide minimum standards to safeguard life, health, property, and public welfare by regulating and controlling the design, construction, quality of materials, use, occupancy, location, and maintenance of all buildings and structures within the City. The Denver Building Code is based on the International Code Council s International Building Code with variations approved by the Denver City Council. The last revision was completed and approved by City Council in The purpose of the Denver Building Code is to provide minimum standards to safeguard life, health, property, and public welfare by regulating and controlling the design, construction, quality of materials, use, occupancy, location, and maintenance of all buildings and structures within the City and County of Denver. 9 Employees performing various permitting and inspection functions follow Denver Zoning Code, Denver Building Code, and other discipline-specific regulations when conducting day-to-day business 6 Other regulations may apply depending on the nature of the project, such as Wastewater Management s technical specifications. 7 City and County of Denver Zoning Code, City and County of Denver 2012 Budget Book, p City and County of Denver Building Code, City and County of Denver Page 6

13 and determining whether building plans and new construction comply with industry regulations. Construction-related permitting and inspection activity is a solid indicator of a city s economic vitality. Table 1 illustrates the number of permits and inspections completed in Denver in each of the past five years. Development Services management has attributed the decline in the number of issued permits in 2008 and 2009 and completed inspections in 2008, 2009, and 2010 to the economic downturn and attributed increases in 2010 and 2011 to an economic recovery. Table 1: Permitting and Inspection Activity in Denver Permits Issued 53,274 45,999 41,474 49,664 51,549 Inspections Completed Source: Development Services. Development Services 163, , , , ,465 Development Services coordinates the development permitting process, from concept to certificate of occupancy, for all residential and commercial construction projects. This program provides streamlined service by coordinating development-related functions between CPD, the Department of Public Works, the Department of Parks and Recreation, and the Denver Fire Department. Development Services supports zoning, plan review, building permits, construction, and inspection for all residential and commercial projects. 10 The majority of the Development Services program resides within CPD. CPD consists of three divisions: the Office of the Manager, the Planning Services Division, and the Development Services Division on which the audit focused. The Development Services program consists of two general functional areas: Permitting Services and Inspection Services. Permitting Services is responsible for serving customers who need building permits for construction projects. The following six teams collectively accomplish that goal: Site Engineering Team Reviews transportation and wastewater site plans for large projects and is housed in the Department of Public Works Fire Prevention Engineers Perform fire safety plan reviews and are housed within the Denver Fire Department Major Project Coordination Team Performs commercial and multi-family residential zoning reviews and project coordination for large complex projects and is housed within CPD 10 Neighborhood inspections were not included in the review of the permitting and inspection process. Page 7 Office of the Auditor

14 Small Projects Coordination Team Under supervision of the Zoning Administrator, performs commercial and multi-family residential zoning reviews and guides small business owners through the permitting process and is housed within CPD Permit Services Coordinates project intake at the Development Services permit service counter and is housed within CPD Building Plan Review Team Under supervision of the Building Official, oversees building plan review (electrical, architectural, structural, plumbing, and mechanical) for commercial and multi-family residential projects and building and zoning review for residential projects and is housed within CPD Inspection Services, responsible for addressing zoning complaints and for enforcing zoning and building code and housed within CPD, is composed of the following two sections: Building Inspections Performs building inspections in a number of trade areas to ensure that construction complies with Denver Building Code and issues final approval for Certificate of Occupancy, when applicable Neighborhood and Zoning Inspections Responds to citizen complaints related to zoning and performs zoning inspections to enforce Denver Zoning Code Permitting and Inspection Process There are four major steps in the permitting and inspection process: the zoning review process, the building plan review process, permit issuance, and the inspection process. All of these steps are summarized in the high-level process flow shown in Figure 1. Figure 1: Denver's Permitting and Inspection Process Source: Auditor s Office As Figure 1 demonstrates, a customer must first establish that their project meets applicable zoning requirements before being issued a zoning permit. The customer then submits construction documents and plans for review. Once the plans are approved, permits are issued and construction can begin. Throughout various phases of building completion, an inspection is requested and performed in accordance with the Denver City and County of Denver Page 8

15 Building Code. Upon passing of all necessary inspections, the permit is closed out and in the case of many projects the final step is the issuance of a Certificate of Occupancy. 11 Plan Review and Permitting Process A customer may obtain a permit through one of three methods: through issuance of a quick permit, through same-day review (or walkthrough review ), or through plan review. A quick permit requires no plan review and is often issued for replacing existing equipment such as a water heater or a furnace. Projects that are not eligible for a quick permit may qualify for same-day review or may require more thorough review. 12 Same-day review permits are reserved for less complex residential or commercial projects, such as finishing a pre-constructed storefront for a In-depth plan review is required for complex projects and can take several days, weeks, or months depending on the nature of the project. new business or house remodeling projects that do not require increases to the footprint of the building. If a project is determined to be more complicated, as is the case for new commercial or residential buildings, an in-depth plan review will be required. The plan review process for more complex projects can take several days, weeks, or months depending on the nature of the project. Most projects require multiple types of plan review, including zoning, architectural, structural, electrical, mechanical, plumbing, and wastewater. The customer must submit relevant construction documents to Development Services, which will calculate the associated plan review fees. 13 After the customer pays the fees, each individual type of plan is reviewed by engineers, who evaluate compliance with relevant Denver codes. If a particular plan is not approved, the engineer submits comments to the customer who then must submit revised plans. Some plans must be resubmitted multiple times, which can extend the time it takes to issue permits by up to several months. In rare cases in which excessive repeated reviews are required, Development Services can charge additional plan review fees. Once all plans are approved, the customer pays the required permit and inspection fees and is issued the building permits. Table 2 shows the fee schedule A Certificate of Occupancy is official verification that a building is in full compliance with current building codes and is safe for occupancy. 12 See Appendix C, Permitting Process Flowchart, for same-day review and plan review processes. 13 Fees are determined based on project values submitted by the customer, consisting of construction materials and labor costs. 14 Same-day plan review fees are charged at 20 percent of the full plan review fee. Permit fees provide for customary inspections. Re-inspection, inspections conducted outside of normal business hours, and non-customary inspections required by the City are charged at a rate of $100 per hour of inspection. Page 9 Office of the Auditor

16 Table 2: Denver s Building Permit and Plan Review Fee Schedule Valuation of Work Permit Fee Plan Review Fee $1 to $500 $20 0 $501 to $2,000 $35 0 $2,001 to $25,000 $35 for the first $2,000 plus $8 for each additional $1,000 or fraction thereof, 50% of permit fee to and including $25,000 $25,001 to $50,000 $220 for the first $25,000 plus $8 for each additional $1,000 or fraction 50% of permit fee thereof, to and including $50,000 $50,001 to $100,000 $420 for the first $50,000 plus $7 for each additional $1,000 or fraction 50% of permit fee thereof, to and including $100,000 $100,001 to $500,000 $770 for the first $100,000 plus $5.60 for each additional $1,000 or fraction 50% of permit fee thereof, to and including $500,000 $500,001 to $1,000,000 $3,010 for the first $500,000 plus $4.75 for each additional $1,000 or fraction 50% of permit fee thereof, to and including $1,000,000 $1,000,001 and over $5,385 for the first $1,000,000 plus $3.65 for each additional $1,000 or fraction thereof 50% of permit fee Source: Development Services web page: DevelopmentServices/Fees/tabid/436371/Default.aspx, accessed August 7, Inspection Process After the plan review process is complete and all required fees are paid and permits issued, the customer is allowed to begin construction. When the construction is nearing completion, inspections are scheduled and assigned to individual inspectors by their respective disciplines (e.g., electrical, mechanical, structural, etc.). Inspectors pass or fail an inspection based on compliance with Denver Building Code. If an inspection fails, the customer must perform necessary corrections and schedule a reinspection. Once a project passes inspection, the permits will be closed out and the contractor will be issued a certificate of occupancy, if applicable. 15 Operating Systems Development Services currently manages permitting information with a system created by the Technology Services Department called the Permitting, Inspection, Licensing, and Plan Review Portal or PILAR. Development Services personnel have indicated that PILAR does not accommodate easy data retrieval in a usable format. However, the City has purchased an off-the-shelf enterprise system called Accela, which is currently being implemented in multiple departments that issue permits. According to the Technology Services project manager overseeing the implementation of the new system, Accela will better meet the needs of Development Services; users will be able to monitor the 15 See Appendix D, Inspection Process Flowchart. City and County of Denver Page 10

17 progress of projects through the permitting and inspection processes from start to finish. Accela will also allow citizens and customers better access to permitting and inspection data online and eventually allow customers to pay fees online rather than in person. Accela will also add functionality to the tracking of inspection activities. According to Development Services, there is a proposal in place now to obtain mobile field devices for all inspectors. If fully funded, at the end of the implementation phase, all building inspectors should be completely paper-free and mobile in the field. These new devices will allow inspectors to record and perform their activities more efficiently, and will allow inspection management to monitor time and track their employees via global positioning systems. Although Accela is not yet fully deployed, Permitting Services is benefitting from efficiencies realized by another new operating system called QLess. This queue management system has been implemented at the Permit Service Counter, and it allows customers to sign in online or in person for the service they require. QLess provides an estimated wait time and contacts customers via cell phone when the customer s turn is approaching giving the customers the flexibility to manage their time. The Evolution of Denver s Permitting and Inspection Process The concept of a one-stop shop is commonly used in local governments in reference to a variety of services with only one point of entry for a fully integrated support solution. Denver has a long history of studying and reorganizing the City s permitting and inspection process in an effort to The concept of a onestop shop is commonly used in local governments in reference to a variety of services with only one point of entry for a fully integrated support solution. achieve a one-stop shop for customers. 16 In the late 1980s, the City acquired a building to relocate many of the permitting and inspection functions in a single permit center, reducing the number of locations at which customers were required to visit for permit issuance. Over the years various reports by external consultants, the Mayor s Office of Regulatory Reform, and the Denver Renaissance Project called for the reorganization of departments that eventually resulted in what today is CPD, which includes the planning and development functions that were formerly under Public Works The one-stop-shop concept can refer to a single point of contact, a single location, or a single online portal for multiple phases of a process, or all of the above. In any of these cases the one-stop shop aims to simplify and consolidate processes as much as possible and reasonable as a time- and money-saving convenience to citizens and customers. 17 See Appendix A for themes from previous studies of Denver s permitting and inspection process. Page 11 Office of the Auditor

18 In 2009, Mayor Hickenlooper issued Executive Order 137, which reassigned some of the primary review, permitting, and inspection functions from disparate departments to a new Development Services program. The contributing departments (CPD, Public Works, Parks and Recreation, and Denver Fire) retained control over their resources but ceded partial authority to a new mayorappointed director of the program. The program is overseen by the contributing departments. The majority of resources dedicated to the Development Services program come from CPD. 18 Development Services Strategic Plan In 2011, Mayor Hancock appointed a new Development Services director. As part of the Mayor s Peak Performance Initiative, Development Services was selected as one of six areas within the City required to develop a new strategic plan in line with the Mayor s priorities for streamlining processes and improving performance. The new Development Services director published the History of Efforts to Improve the Permitting Process 1988-Development Services Study 1989-Permit Center Opens 1993-John Prior and Assoc. Study 1995-Mayor s Office of Regulatory Reform Improvements 1997-Renaissance Project 2002-Permit Center Relocation 2003-AIA Streamlining Study 2008-Process Improvement Team Created 2009-Executive Order 137 Establishes Formal Program 2012-DevelopDENVER 2012 Strategic Plan DevelopDENVER Development Services Strategic Plan in February The plan identifies the program s mission as follows: As the steward of Denver s built environment, Development Services is the City s central hub for managing plan review, permitting and inspection services in collaboration with our public, private and nonprofit partners to enhance and preserve safe, high quality and sustainable development for a vibrant Denver. 19 The plan proposes a variety of improvements to the permitting and inspection process, including the creation of process improvement teams for zoning and site engineering issues, leveraging best practices for residential project plan review, implementing project coordination tools for large projects, and implementing a telecommuting policy for field inspectors. All of the proposed improvements have associated performance indicators. The plan also identifies global needs for improvement such as the need to formalize the organizational structure and to implement a continuous improvement process system. Finally, the plan contains three exhibits summarizing recommendations made by employees and 18 See Appendix B for Executive Order City and County of Denver, DevelopDENVER: Moving the city to even greater heights, Development Services Strategic Plan , Feb. 2, 2012, p. 6. City and County of Denver Page 12

19 stakeholders to improve Development Services for the Mayor s transition into office. The recommendations include establishing Development Services as an independent agency, establishing more clear lines of authority and streamlining cross-departmental functions, and improving measurement of customer satisfaction to improve service and to increase staff accountability. Page 13 Office of the Auditor

20 SCOPE The scope of the audit addressed the building permitting and inspection processes performed by the Development Services Division within the Department of Community Planning and Development (CPD). The audit did not examine the other divisions in CPD the Office of the Manager and the Planning Services Division or the processes related to the Neighborhood Inspection section of Inspection Services. 20 OBJECTIVE The audit consisted of multiple objectives: To determine the efficiency and effectiveness of the permitting and inspection processes To determine whether Development Services has the appropriate fee structure, procedures, and controls to ensure minimal reliance on the general fund To assess Development Services customer service activities METHODOLOGY The team used various methodologies to gather information to complete this audit. Interviewed key CPD and Development Services personnel Interviewed building contractor associations Conducted a focus group with builders regarding their experience with the permitting and inspection process Reviewed relevant federal, state, and local laws and regulations Reviewed reports from the Mayor s Peak Performance Initiative and the Structural Financial Task Force Reviewed CPD and Development Services policies and procedures Analyzed data from the permitting and inspection processes Analyzed Development Services financial data and cash-handling procedures Analyzed Development Services data usage and tracking Observed activities of Development Services personnel, including plan intake and interaction with customers at the permit counter, plan review, permit issuance, cashiering, and inspection activities 20 The audit did not address the soundness of the enforcement of zoning or building code because the audit staff does not have the relevant expertise in these areas. City and County of Denver Page 14

21 Conducted research on industry best practices and efficiency methodologies 21 Reviewed the Technology Services Department s Accela implementation plan and the contractual scope of work Completed two separate surveys of other municipalities regarding the functions and structure of their permitting and inspection services Conducted research on and interviewed five cities that currently operate permitting and inspection activities with an enterprise fund structure: Atlanta, Georgia; Aurora, Colorado; Los Angeles, California; Portland, Oregon; and Tacoma, Washington Conducted a benchmark survey of ten municipalities using the Survey Monkey software program to gather information from other organizations Aurora, Colorado Charlotte/Mecklenburg County, North Carolina Denver, Colorado El Paso County, Colorado Louisville/Jefferson County, Kentucky Oklahoma City, Oklahoma Phoenix, Arizona Portland, Oregon Sacramento, California Tampa, Florida 21 Such methodologies include Lean Six Sigma and Activity-Based Cost analysis. Page 15 Office of the Auditor

22 FINDING 1 The City Has Taken Actions Toward but Has Not Fully Implemented an Efficient and Effective Permitting and Inspection Process City leaders have long envisioned a customer-centric service model to serve Denver s permitting and inspection customers. However, Development Services continues to face challenges in fully realizing the envisioned customer-centric service model in two specific areas. First, Development Services permitting and inspection process involves multiple departments, resulting in unclear areas of responsibility and accountability. Second, Development Services lacks critical information about the program s performance, stemming both from a lack of adequate data collection and analysis and a lack of a comprehensive system to address customer service issues. The Permitting and Inspection Process Involves Multiple Departments with Unclear Areas of Responsibility and Accountability The creation of the Development Services program in 2009 successfully improved coordination of some critical permitting and inspection process functions. However, critical aspects of the organizational structure continue to hinder progress toward becoming a truly customer-centric program. Permitting review functions still reside in multiple departments, and the management structure created by Executive Order 137 codified a wide span of control across departments providing only limited authority to the Development Services director to administer an effective process. Additionally, unclear roles and responsibilities exist within Development Services, particularly related to the day-to-day management of the plan review and permitting process. As a result, in recent years Development Services customer survey data has shown a steady decline in customer satisfaction, and specific parts of the plan review process create an average of three weeks of delay in permit issuance for some projects. Permitting and Plan Review Functions Reside in Multiple Departments In order to be issued building permits, customers must submit plans for review by the City in a variety of trade areas, which are performed by multiple departments. The number of different types of plan review that must be completed depends on the nature and scope of the building project. Not all of the possible reviews are required for every project. For example, most one- or two-unit residential projects do not require transportation, health, fire, or landmark preservation reviews. Large new commercial Plan review is the process by which customers are issued building permits required for construction. buildings, on the other hand, are more likely to require all of the reviews. Although customers can submit plans at one location in the beginning of the process, the reviews are performed by as many as four separate City departments. After initial review of each type of plan, customers must interact with each individual department to address any City and County of Denver Page 16

23 issues detected with each respective plan. Figure 2 illustrates the possible review types and the departments in which they are performed. Figure 2: Major Development Review Functions and Their Departments Source: Auditor s Office. As illustrated in Figure 2, the plan review process involves twelve major plan review functions performed in four different departments. Seven of the functions are performed in the Department of Community Planning and Development (CPD), three are performed in the Department of Public Works (Public Works), one is performed in the Denver Fire Department, and one is performed in the Department of Environmental Health. Since most of the functions reside in CPD, the Development Services director works most closely with CPD. For the five functions that reside outside of CPD, the Development Services director lacks full authority to ensure the efficiency and effectiveness of the permitting process, which has resulted in varying degrees of cooperation and coordination. Development Services Organizational Structure Results in Unclear Areas of Responsibility and Accountability Currently, the Development Services program is managed by multiple parties across several departments with no clear assigned authority or accountability over the entire permitting and inspection process. The Development Services program s current management structure resulted from Executive Order 137, which created a director position that is overseen by an Executive Committee composed of representatives from the Mayor s Office; the City Attorney; the managers of CPD, Public Works, and the Department of Parks and Recreation (Parks and Recreation); and the Fire Chief. The Page 17 Office of the Auditor

24 Order includes letters of designation from various Executive Committee members identifying dedicated positions for the Development Services program. These letters do not fully cede authority over these positions to the Development Services program director. Figure 3 illustrates this structure. Figure 3: Development Services Current Organizational Structure Source: Auditor s Office. The following components of the Development Services organizational structure have unclear or misaligned areas of responsibility and accountability in the permitting and inspection process, which are indicated in orange in Figure 3: Development Services Executive Committee This committee is composed of representatives from the Mayor s Office; the City Attorney; the managers of CPD, Public Works, and Parks and Recreation; and the Fire Chief. Executive Order 137 created the Committee and charged it with establishing policy and direction for the program; reviewing and approving program goals and strategies; and reviewing and approving any decisions that require reallocation of major resources, re-assignment of staff, or significant process changes. 22 However, the Order did not establish performance metrics to guide the Committee s activities. In effect, the Executive Committee diminishes the authority of the program director, a position where comprehensive authority and accountability for the permitting and inspection process would typically reside. As a result, the program director is reliant on other managers to make critical decisions about the permitting and inspection process related to staffing and workload priorities based on their specific understanding of and role within the process rather than based on a comprehensive process perspective. Development Services Director Established by the Executive Order the Development Services director has authority over certain portions of the permitting and inspection process, but only at the behest of the Executive Committee, the members of which can usurp that authority for any reason at any 22 City and County of Denver Executive Order 137, Responsibilities of the Executive Committee, 6.0 (July 2009). City and County of Denver Page 18

25 time. For day-to-day operations this limitation of authority means that other departments priorities could take precedence over Development Services needs without the input of the Development Services director. The director s salary is paid by Public Works and the director reports to the CPD manager, the Executive Committee, and the Mayor. The eclectic and convoluted funding and reporting structure for this key position illustrates some of the structural flaws inherent with the current organizational structure. Building Official Per the Denver Building Code, the City s Building Official has primary authority for interpreting and enforcing the Code. However, under the current organizational structure, the Building Official effectively only has authority over the building plan review functions. 23 Under the current organizational structure, the Building Official lacks authority over building inspections even though the Code explicitly provides the position with such authority. As is the case with the Development Services director, the Building Official reports to multiple parties, including both the Development Services director and the CPD manager. Site Engineering and Fire Prevention Teams As established by Executive Order 137, the manager of Public Works and the Fire Chief assigned these teams to the Development Services program. However, these positions are funded by their respective departments and can be reallocated at any time. Other Development Functions As illustrated in Figure 2 on page 17, there are additional functions that reside outside the Development Services program, most notably wastewater quality control plan review, which resides in Public Works. Executive Order 137 requires the wastewater development review function to be included in the Development Services program, but currently this function does not coordinate effectively with Development Services. For example, Development Services personnel told us that they are frequently not informed when wastewater quality control reviews are completed, leading to delayed building permit issuance in some cases. 24 Unclear Authority Has Resulted in Delays to Customers and Decreased Customer Satisfaction The mission defined for the Development Services program per the Executive Order is: To provide an efficient and effective single point of contact for members of the public who seek regulatory approval of any private land development or construction on private property in Denver. The ultimate objective of the [program] is to ensure that an applicant for any type of private land development or construction on private property is able to 23 The building plan review functions currently overseen by the Building Official include electrical, mechanical, plumbing, architectural, and structural reviews for commercial and multi-family residential projects; and zoning and building review for one- and two-unit residential projects. 24 Development Services cannot issue construction permits until all types of plan review, including wastewater quality control, have been completed and approved. Page 19 Office of the Auditor

26 navigate the City s various regulatory processes in a linear, consistent, cost effective and timely manner. 25 The creation of the program in 2009 may have led to internal efficiencies and improved inter-functional communication in some cases. However, customers still experience delays and have expressed frustration with the City s inability to improve processes that could reduce the time it takes for customers to complete the permitting and inspection process. In recent years, Development Services voluntary survey of customers has shown a consistent decline in the percentage of customers who are satisfied with permit and inspection services, decreasing from 92 percent in 2008 to 79 percent in 2011, as shown in Figure 4. Figure 4: Percent of Survey Respondents Satisfied with Permit and Inspection Services, Source: Auditor s Office analysis of Development Services data. 26 Additionally, a focus group of developers conducted by the Auditor s Office revealed that developers find the plan review and permitting process to be frustrating and unwieldy, and that they often experienced delays in being issued permits. As noted, the lack of clear authority over elements of the process, especially related to wastewater plan reviews, has resulted in customer delays. An analysis of commercial and multi-family residential building projects that were submitted for review in the first six months of 2011 illustrates this problem. For almost 40 percent of commercial and multifamily residential projects submitted to Permitting Services from January through June 2011, wastewater was the last approved review. 27 These projects took an average of 25 City and County of Denver Executive Order 137, Mission, 3.0, (July 2009). 26 See Figure 7 below for the comment card used to collect the customer satisfaction data. 27 This analysis was of projects logged January 1 through June 30 of 2011 in what Development Services refers to as the Main Log (or M-Log ) and the Expedited Log (or X-Log ), which consist of commercial and multi-family residential projects that require more than a same-day review. The analysis excluded projects that had not been issued permits as of April 2012, projects logged as modifications to existing projects, and projects that did not require at least three different types of review. The building or other review category included review types of architectural, structural, electrical, plumbing, mechanical, fire, zoning, health, landmark preservation, and transportation. City and County of Denver Page 20

27 three weeks longer to get through the approval process for building permit issuance, as shown in Figure 5. Figure 5: Average Number of Calendar Days from Initial Plan Submittal to Final Plan Approval, Commercial and Multi-family Building Projects, January through June 2011 Source: Auditor s Office analysis of Development Services data. The specific causes for delay attributable to wastewater review likely varied from project to project, but because it has no authority for wastewater review, Development Services cannot ensure that wastewater review timelines are prioritized and managed in a manner consistent with other review activities occurring in the process. Clear Lines of Authority and Well-Defined Roles and Responsibilities can Improve Process Efficiency and Enhance Customer Satisfaction Delays to customers and declines in customer satisfaction can be improved by establishing clear lines of authority and better defining roles and responsibilities for the Development Services program. To achieve this, the Mayor s Office and the Development Services director should address three areas: a permanent transfer of resources and duties to the Development Services program including wastewater reviews, utilizing formal service-level agreements in some cases; developing a role for the Building Official consistent with the position s legal duties and responsibilities; and identifying inefficiencies with the permitting and inspection process. Permanent Transfer of Resources and Duties to Development Services As noted, the letters of designation included in Executive Order 137 from the managers of CPD, Public Works, and Parks and Recreation, and the Fire Chief provide only a conditional commitment of resources and duties to the Development Services director. For example, the letter from the then-manager of Public Works states: Any power, duty or function delegated pursuant to the [Development Services Organization] by this letter is subject to modification or revocation at any time at the discretion of the Manager of Public Works. Any assignment of personnel to work under the supervision of the Director of Page 21 Office of the Auditor

28 the [Development Services Organization] pursuant to this letter is likewise subject to reassignment at any time at the discretion of the Manager. 28 The conditional commitment of resources and duties to the Development Services director compounds the wide span of control of the program inherent in the assigned role of the Executive Committee. The program director may be prevented from making critical management decisions without the approval of department heads who may have competing priorities. Specifically, the Executive Order states that the director must gain the approval of the Executive Committee for matters relating to the reallocation of major resources, re-assignment of staff, or significant process changes. This authority is essential for effectively carrying out the director s responsibilities. The functions dedicated to the Development Services program in the Order should be permanently transferred to the Development Services division within CPD. Because the majority of Development Services functions currently reside in CPD, that department is the logical place to transfer other departments functions. In cases in which such a commitment is not possible, formal service-level agreements that include performance metrics should be established between Development Services and the relevant department. The wastewater quality control review deserves particular attention when considering permanent transfer of resources and duties. Executive Order 137 provides the Development Services program conditional authority over wastewater review functions along with many other functions. However, in practice the Lack of coordination between Development Services and wastewater has caused delays to permitting customers. wastewater review team in Public Works does not coordinate with Development Services. The Building Official and other Development Services personnel acknowledged that coordination between the Development Services program and the Wastewater Management Division has not been successful. Although other types of review related to the development function, such as landmark preservation and environmental health reviews, also remain outside of the Development Services program, these other reviews are much less common than wastewater; they have not exhibited challenges with coordination, nor have there been any consistent delays due to these functions. Development Services 2012 Strategic Plan includes the goal of streamlining the wastewater review process by creating a strategy for improved time frames in cooperation with the Wastewater Management Division of Public Works. 29 Realign Building Official s Role to Denver Building Code Guidance As noted, the administrative chapter of the Denver Building Code provides authority to the Building Official for any and all issues related to the enforcement of the code, as follows: 28 City and County of Denver Executive Order 137, Public Works Letter of Designation, (July 2009). 29 City and County of Denver, DevelopDENVER: Moving the city to even greater heights, Development Services Strategic Plan , Feb. 2, 2012, pp City and County of Denver Page 22

29 The Manager of CPD appoints the Building Official, who is authorized and directed to act on behalf of [building permitting and inspection services] in the interpretation and enforcement of all provisions of [the] Code. 30 Since the Denver Building Code is enforced through plan review, permit issuance, and building inspections, the Building Official is granted the authority over the entire permitting and inspection process as it pertains to the engineering sub-trades of architectural and structural, electrical, mechanical, and plumbing. However, the current structure of Development Services embeds the Building Official in the Permitting Services side of the organization with no relationship to Inspection Services, as shown in the diagram of the current organizational structure illustrated in Figure 3 on page 18. In practice, the Building Official addresses matters pertaining to interpretation and enforcement of Denver Building Code, including coordinating the various plan review functions leading to building permitting, but still lacks the formal authority with accompanying performance metrics to oversee the entire process. Realigning the Building Official to better reflect actual duties, along with establishing performance measures for the Building Official s actual role, will encourage better responsibility over the building permitting and inspection process. Figure 6 illustrates a possible revised organizational structure. Figure 6: Possible Revised Development Services Organizational Structure Source: Auditor s Office Leaning the Process Upon restructuring the organization and better defining roles and responsibilities, a thorough examination of the building permitting and inspection processes can help management identify remaining inefficiencies. Leaning processes defined tools for process improvement, such as Lean Six Sigma, have proven effective in private and public sector organizations with complicated procedures 30 City and County of Denver Building Code, Page 23 Office of the Auditor

30 as their core activities. 31 The City s Structural Financial Task Force recommended in its January 2012 report that the City make use of such methods as leaning to identify and achieve efficiencies. 32, 33 Also, as part of the City s Peak Performance Initiative, Development Services has already incorporated some continuous improvement processes in its 2012 Strategic Plan. As organizational and structural changes are made to Development Services, the impact of those changes on the permitting and inspection process should be considered in any ongoing process improvement initiatives. By doing so, Development Services can realize further efficiencies as they strive to achieve an effective customer-centric service model. Development Services Lacks Sufficient Data Management and Analysis Practices to Guide Critical Decisions and Customer Service Management Data management and analysis practices are inconsistent throughout Development Services, and in some cases are altogether insufficient. For an organization with core functions that are fee-for-service, customer-focused activities, data management and analysis are critical for identifying operational inefficiencies and customer service issues. In its January 2012 report, the City s Structural Financial Task Force recommended that efficient and effective service delivery should be based on data-driven business models. 34 Our audit work found that Development Services does not effectively use the existing electronic data that tracks permitting activities and that it cannot effectively use data tracking inspection activities because they are not documented electronically. Furthermore, Development Services management does not have a comprehensive system for tracking customer service issues, and therefore lacks critical information from customers that could help management implement important changes to increase efficiency. Existing Data about Plan Review and Permitting Process Is Not Managed or Analyzed Sufficiently PILAR is the operating system currently used to track plan review and building permits, but data retrieval from the system is unwieldy and difficult. As a result, valuable data about the plan review and permitting process is not being regularly extracted and analyzed. The analysis we conducted of commercial and multi-family building projects shown in Figure 5 on page 21 demonstrates the type of critical analysis that can be performed to make the case for important process or organizational changes that improve efficiency. Currently, many departments in the City, including Development Services, are transitioning from using PILAR as their main operating system to the off-the-shelf enterprise Accela. Technology Services project managers have said that Accela will offer improved data retrieval and live querying functions, which managers overseeing development functions have stated will help them save time and 31 Lean Six Sigma is a business strategy that seeks to identify and eliminate causes of errors or defects or failures in business processes by focusing on outputs that are critical to customers. Antony, Jiju. "Pros and cons of Six Sigma: an academic perspective." Archived from the original on July 23, Retrieved May 8, The Structural Financial Task Force is composed of a diverse group of local community and business leaders with a broad cross-section of expertise charged with analyzing the City s financial condition and making recommendations to ensure a sustainable financial future. 33 City and County of Denver Structural Financial Task Force, Structural Financial Task Force Report, Jan. 2012, p Ibid. City and County of Denver Page 24

31 increase their ability to conduct effective data analysis. However, Accela as with PILAR still requires programmed queries to produce reports. If the necessary operational resources are not dedicated to programming queries for these critical reports, as was the case with PILAR, data retrieval may not improve, even with Accela. Development Services Does Not Have a Strategy for Collecting and Analyzing Data about Inspection Activities Building inspection activities are tracked manually and are not entered into the PILAR system resulting in a lack of critical aggregate-level information about inspections, such as reasons for inspection failures or particular code violations. Administrative staff who support Inspection Services use Management does not track critical data about inspections to identify trends such as common code violations or reasons for inspection failures. the paper files to track very basic metrics, such as number of inspections completed per day per inspector, but aggregate data about reasons for inspection failures, re-inspections, or particular code violations identified in inspections do not exist. The final phase of Accela implementation calls for the deployment of electronic devices in the field for building inspectors. If this phase receives funding building inspectors should begin tracking their activities electronically sometime in 2013, which should provide much improved data collection capabilities for Inspection Services management. If the final phase is not funded, however, alternative methods for improving inspection data collection will be necessary. Development Services Does Not Have a Comprehensive System for Tracking and Responding to Customer Feedback The decentralized organizational structure of Development Services affects more than just efficiency it also affects the ability to improve customer service. Although managers of individual sections within Development Services endeavor to address customer service issues as they arise, the program does not have a comprehensive system to collect feedback process-wide in order to recognize customer service deficiencies and implement improvements. Development Services does not track customer feedback at an aggregate level in order to perform trend analysis and does not have a system to ensure that all complainants receive follow-up. Section managers stated that they personally follow up with all complaints that they receive, but none could provide evidence of complaint follow-up tracking. Builders provided anecdotes indicating inconsistent or a complete lack of follow-up to their complaints in some cases. Since Development Services is one of the most visible and citizen-facing agencies in the City, it is important that customer complaints are tracked and customer service problems are easily accessible for review by management. Without sufficient customer feedback or analysis of that feedback, management cannot readily identify and remedy recurring process and personnel problems. Development Services main tool for collecting customer feedback is a voluntary customer service survey card available for customers to fill out at the permit counter, shown in Figure 7. Page 25 Office of the Auditor

32 Figure 7: Development Services Customer Satisfaction Questionnaire Source: Development Services Currently, there is no single point of contact or manager responsible for the overall experience of customer satisfaction. Assigning to an individual manager the authority to manage the overall permit and inspection process can improve management s accountability for the full experience of customers, rather than leaving that authority decentralized with each of the section managers responsible only for customer service delivery through their own procedures. City and County of Denver Page 26

33 RECOMMENDATIONS The Auditor s Office offers the following recommendations to assist Development Services with implementing an efficient and effective permitting and inspection process. The Mayor s Office: 1.1. Authority of the Director The Mayor should revise Executive Order 137 to provide formal authority to the director of Development Services by transferring dedicated personnel identified in the Letters of Designation to the Development Services Division of CPD. When such transfer of positions is not possible, formal service-level agreements that include performance metrics should be established between Development Services and the relevant departments. The Development Services Director: 1.2. Organizational Structure The Development Services director should propose to the Mayor a new Development Services organizational structure that will achieve enhanced process efficiency and provide world-class customer service. Notably, the new organizational structure should include formalized coordination of the wastewater quality control review Role of the Building Official The Development Services director should reorganize the structure of Development Services so that the Building Official oversees all matters related to interpretation and enforcement of Denver Building Code, including building plan review, permits, and inspections, as provided in the code Lean Process Improvement The Development Services director should analyze and adjust current Peak Performance Initiative programs and goals to align with new organizational changes Data Collection and Analysis The Development Services director should create and implement a comprehensive policy to provide for sound and consistent aggregatelevel data collection and analysis across all functions within Development Services including Inspection Services and assign ongoing responsibility of the policy s implementation to a single manager with associated performance metrics Comprehensive Customer Service Management The Development Services director should develop a comprehensive customer service management strategy that includes a formal system for tracking customer feedback, performance metrics for managers and staff regarding customer service, and assigning comprehensive customer service management duties to a single manager. Page 27 Office of the Auditor

34 FINDING 2 Development Services Lacks a Financial Strategy that Provides Long- Term Stability and Flexibility Audit work identified that Development Services has not developed a policy formalizing a financial strategy that periodically reviews and updates fees and identifies how revenue streams will be used to promote long-term stability and flexibility, especially during economic downturns. This condition was apparent in two specific areas. First, Development Services has not evaluated the costs of each activity involved in delivering building permitting and inspection services. Second, there is a lack of a financing strategy that ensures Development Services business-like activities are covered by the revenue it generates. Accordingly, Development Services should develop a strategy to expand options that would allow greater financial flexibility during times of high demand or economic hardship. Development Services Has Not Determined the Cost of Delivering Service Audit work determined that Development Services has not adjusted most building permitting and inspection fees in thirteen years. Development Services lacks the detailed activity-based information necessary to assess whether or not the fees it charges cover the cost of performing plan review, building permitting, and building inspections. In addition, a survey of other municipalities found that it is common to periodically update fees in an effort to align services with the cost to provide those services, accounting for market conditions and inflation. The City s Budget and Management Office (BMO) with Development Services conducted a study in 2011 of Development Services fee schedule, which compared fee levels to those of other cities as well as analyzed revenues and expenditures. BMO s fee study also included revenues and expenses from the Office of the Manager and Planning Services within the Department of Community Planning and Development. However, the majority of fees are generated by Development Services building permitting and inspection services. The study found that Denver s fees are similar to other Colorado municipalities, regardless of the volume of development occurring in the other municipalities. The Structural Financial Task Force recommended the City review fees on a regular basis. Even though the fee study was useful for a general understanding of how Denver s development-related fees compare to those of other Colorado municipalities, it did not include a detailed activity-based cost analysis of each service provided by Development Services and the associated fees it charges customers. 35 Although this more detailed type of fee study is not required by any particular rule or regulation, 35 Activity-Based Costing is a method used to identify specific activities and the costs associated with those activities to determine true cost of service. City and County of Denver Page 28

35 without one, Development Services does not know the true cost of providing each of its respective services. In addition, the City s Structural Financial Task Force noted in its January 2012 report to the Mayor that City fees and fines have been increased on an inconsistent basis without an established review schedule. 36 The Task Force also recommended that the City review fees and fines on a regular basis to determine whether adjustments should be made. 37 Whether an evaluation of Development Services fees is initiated by Development Services or as a result of Task Force recommendations, a more detailed fee study will allow Development Services to set fees that are designed to recover the cost of its operations. Best Practice of Periodic Evaluation of Fees Not Employed In order to determine whether or not fees cover costs, similar agencies conduct regular assessments, adjusting fees accordingly. In our benchmarking of nine comparable cities, we found that six of the nine adjusted their building permitting and inspection fees within the last two years, and the remaining three had adjusted their fees within the last five years, as shown in Table 3. Eight of the nine cities indicated that they increased their fees to account for inflation or align fees with the cost of services provided. Table 3: Development Fee Increase Frequencies and Reasons City Latest Fee Increase Reason for Fee Change Denver, CO More than 10 years ago No response Aurora, CO Within the last 2 years To account for inflation Charlotte/Mecklenburg To better cover costs of Within the last 2 years County, NC services Louisville/Jefferson County, KY Within the last 2 years No response Portland, OR Within the last 2 years To reflect market conditions Phoenix, AZ Within the last 2 years To better cover costs of services Sacramento, CA Within the last 2 years To account for inflation El Paso County, CO 2-5 years ago To better cover costs of services Oklahoma City, OK 2-5 years ago To better cover costs of services Tampa, FL 2-5 years ago To better cover costs of services Source: Auditor s Office benchmarking survey results. When adjusting fees for inflation, many cities use indices, such as the Municipal Cost Index (MCI), which combines three different indices including the Consumer Price Index, Construction Cost Index, and Producer Price Index. The MCI was created specifically to 36 The Structural Financial Task Force is composed of a diverse group of local community and business leaders with a broad cross-section of expertise charged with analyzing the City s financial condition and making recommendations to ensure a sustainable financial future. 37 City and County of Denver Structural Financial Task Force, Structural Financial Task Force Report, January 2012, p 23. Page 29 Office of the Auditor

36 show the effects of inflation on the cost of providing municipal services and provide local government managers a tool to measure inflation. It is an industry best practice to examine on a regular basis the alignment between fees and the cost of the services for which they are charged. Instituting a regular practice of examining fees in relation to costs as often as annually and adjusting fees incrementally would be less burdensome to customers than abrupt fee adjustments every ten years or more, and would help encourage long-term fiscal sustainability. Current Finance Strategy Should Be Enhanced to Promote Fiscal Stability and Flexibility Currently, Development Services is not required to cover its costs with its revenue and has no incentive to align its fees with the actual cost of providing services. Development Services has not identified how revenue streams will be used to promote long-term stability, especially during economic downturns and the extent to which its revenues would cover its costs. One mechanism to formalize this is to consider an enterprise fund, which would require Development Services to adjust its service delivery model to match its revenue stream and allow for growth of reserves, which can be used to cover costs during periods of economic hardship and provide resources for improvements of the building permitting and inspection process. Goal to Develop a Financial Model that Provides Financial Stability One of Development Services organizational goals identified in its 2012 Strategic Plan is to develop a financial model that will provide balance between long-term stability and flexibility. 38 The recent recession and decreased development activity contributed to the A goal of the 2012 Development Services Strategic Plan calls for long-term financial stability. decrease in demand for permits and the fees associated therewith. As a result, Development Services began to experience the effects of declining revenue in 2007, which became more pronounced in 2008 and An enterprise fund is a mechanism for achieving operational and financial flexibility by assigning the portion of revenues that can cover the cost of delivering service and designating remaining funds as reserve funds to cover any shortfalls resulting from an economic downturn. In government entities, enterprise funds are distinguished from general funds in that, like a business, the core activities of entities supported by an enterprise fund generate revenue that covers the cost to perform the activities. These operating revenues are generated by charges to customers for sales and services delivered. Operating expenses for an enterprise fund include administrative expenses, the cost of sales and services, and depreciation on capital assets. 39 For example, the City utilizes an enterprise fund structure for City golf courses. Golfers are charged green fees to access these courses. Members of the general public who do not golf are not required to subsidize these golf courses through general fund monies. 38 City and County of Denver, DevelopDENVER: Moving the city to even greater heights, Development Services Strategic Plan , Feb. 2, 2012, p City and County of Denver 2012 Budget Book, p City and County of Denver Page 30

37 Development Services Well Suited for an Enterprise Fund Structure In practice, Development Services has many of the characteristics of other enterprise fund agencies operating in the City and County of Denver. 40 In the last five years, 2009 was the only year that Development Services was unable to cover its own expenses without a subsidy from the general fund, as shown in Table Although these figures do not include indirect costs and depreciation, which would become Development Services responsibility if it became an enterprise fund, it is feasible that it could cover these added costs, given adequate planning, budgeting, and organizational improvements, as mentioned in Finding 1. Table 4: Community Planning and Development Revenue and Expenses Development Services Revenue and Expenses * Total Revenues $19,660,731 $17,328,126 $10,080,010 $11,436,407 $14,245,103 Total Expenses $12,190,326 $11,831,465 $11,301,630 $10,756,282 $10,715,672 Surplus/(Deficit) $7,470,405 $5,496,661 ($1,221,620) $680,125 $3,529,431 Office of the Manager and Planning Services Revenue and Expenditures Total Revenues $1,188,039 $1,371,157 $1,242,284 $589,968 $815,511 Total Expenses $5,306,406 $5,139,539 $4,835,190 $4,208,635 $3,841,993 Surplus/(Deficit) ($4,118,367) ($3,768,382) ($3,592,906) ($3,618,667) ($3,026,482) Total CPD Surplus/(Deficit) $3,352,038 $1,728,279 ($4,814,526) ($2,938,542) $502,949 Source: City and County of Denver Budget Books, *Data for 2011 are preliminary and provided by CPD s Office of the Manager. Furthermore, in the last five years, Table 4 illustrates that fees generated by Development Services permitting and inspection activity have managed to recover the cost of operating CPD s Office of the Manager and Planning Services, and, in some years, have generated additional millions of dollars for the general fund. Although Development Services has some of the characteristics of other enterprise fund agencies operating within the City, the decision to convert to an enterprise fund is ultimately a policy choice to be made by City leadership. This kind of decision should take into account the mission of Development Services, the City s vision for the program, and recommendations made by the City s Structural Financial Task Force. In January 2012, the Task Force published a report in which they identified structural imbalances between City revenues and expenditures and proposed solutions to ensure long-term viability and stability for the City. One of the recommendations proffered was to determine whether there are general fund services or departments that would benefit 40 Enterprise fund agencies are Denver International Airport, Denver Golf, the Department of Environmental Health, and the Wastewater Management Division, which is part of the Department of Public Works. 41 City and County of Denver Budget Books, Page 31 Office of the Auditor

38 from creating a self-sustaining enterprise fund selfsustaining enterprise funds charge a fee for service and operate independently of the City s general fund. 42 Other Municipal Development Functions Operate as Enterprise Funds Many comparable cities operate building permitting and inspection services with an enterprise fund. Four of nine cities in our benchmarking The Structural Financial Task Force recommends general fund services or departments that are self-sustaining become enterprise funds. survey indicated that they were enterprise funds. We interviewed two of these cities and three additional cities with enterprise fund permitting and inspection operations: Atlanta, Georgia; Aurora, Colorado; Los Angeles, California; Portland, Oregon; and Tacoma, Washington. All five cities, as shown in Table 5, indicated they would recommend an enterprise fund structure to other municipalities. Table 5: Selected Cities that Operate Building Permitting and Inspection Functions as an Enterprise Fund City Operates as an Enterprise Fund? Recommend Enterprise Funding Structure? Improves Efficiency? Atlanta, GA Yes Yes Yes Aurora, CO Yes Yes Yes Los Angeles, CA No Yes Yes Portland, OR Yes Yes Yes Tacoma, WA Yes Yes Yes Source: Auditor s Office Furthermore, cities that operate their building permit and inspection services through enterprise funds indicated that they would still recommend the structure even though, in some cases, it required significant cuts to their operations during tough economic times. For example, Portland, Oregon, which operates its development functions as an enterprise fund, had its reserve decrease from $13.5 million in 2008 to $500,000 in Additionally, it had to decrease its number of full-time employees from 320 in 2008 to about 150 currently. Although Portland was hit hard during the economic crisis, Portland s Plan Review and Permitting Manager told us he would still recommend operating as an enterprise fund, stating that, It makes business sense and makes government more efficient. All stakeholders benefit from this system. Benefits to Development Services of an Enterprise Fund Structure An enterprise fund structure could assist Development Services in achieving many of its long-term goals outlined in the 2012 Strategic Plan, including formalizing its organizational structure and implementing long-term efficiency improvements. For example, it has been a challenge to establish an effective organizational structure for Development Services because of the disparate functions from several different City departments that contribute to the permitting process. Establishing an enterprise fund would require permanent structural 42 City and County of Denver Structural Financial Task Force, Structural Financial Task Force Report, January 2012, p. 24. City and County of Denver Page 32

39 shifts in resources from the various departments to Development Services that to date the City has not had the will to formalize. Additionally, as an enterprise fund agency, Development Services would have true incentive to minimize inefficiencies and match its resources with the demand for services in any given year. Currently, as part of the general fund, Development Services is not required to operate in a way that recovers its expenses. As such, it has not been necessary to perform activity-based cost analyses to determine the true cost of doing business. As a general fund agency, the program can operate An enterprise fund structure could allow Development Services the ability to make technology and other investments to improve its services. without this type of regular analysis, but as an enterprise fund, such analysis would be essential. Further, an enterprise fund structure could allow Development Services the ability to make technology and other investments to improve its services. For example, operating as an enterprise fund, Development Services could retain surplus revenue and accumulate reserve funding that could then be used to purchase mobile devices for inspectors in the field or its own fleet of vehicles for inspectors. Operating with the general fund structure places limitations on its budget authority that do not allow for such purchases, particularly when economic conditions have resulted in reduced tax revenue for the general fund. Finally, it is important for City leadership to consider whether it is appropriate for Development Services to continue varying between subsidies by and surpluses to the general fund. The question is not only whether in lean years taxpayers via the general fund should be subsidizing activities that largely benefit the private sector, but also whether City leadership believes it is appropriate to collect large surpluses in good years from the construction industry for the general fund, essentially amounting to a tax on the development community. Development Services Could Expand Financial Flexibility Options Organizations that operate under a fee-for-service model often face fluctuations in demand for services, based on industry trends and other external economic conditions. Accordingly, it is essential for a fee-for-service organization to plan for periods of time during which its core service delivery model may become insufficient to sustain the organization financially. As a fee-for-service organization, Development Services faces these same fluctuations and thus could benefit from flexible financing solutions that would promote financial stability while benefitting the customer. For example, the 2012 City Budget recommends a 431- percent increase for internal services based on projected increased demand for services due to work generated by the South Terminal Redevelopment Project at Denver International Airport. The project will increase Development Services revenue in excess of one million dollars. Furthermore, the 2012 Strategic Plan identifies a key initiative to explore resource model options that provide a balance between long-term stability and Page 33 Office of the Auditor

40 flexibility, which would better meet the evolving nature of design and construction demand, ongoing project support, and complex development needs. 43 Development Services Could Add to Current Service Delivery Options Development Services currently offers weekend and after-hours inspection services for customers who are willing to pay a premium fee, providing the customer with greater flexibility. Further, Development Services recently gained approval from the Career Service Authority Board for combination inspectors, which will allow Inspection Services to perform more-efficient inspections. 44 The 2012 Strategic Plan identifies a method of providing internal flexibility for the residential plan review process through potential outsourcing of the function. Although these three options provide greater flexibility in their service delivery model, there are additional options that Development Services could consider. For example, offering a fast-track plan review for an additional fee can provide added flexibility and improve customer service. A focus group of local builders suggested that they would be willing to pay increased fees to expedite the process. Development Services workload fluctuates with the development industry s demands, and as such is a good candidate for outsourcing and leaning a variety of its functions. Development Services should perform an analysis of critical services and service levels that need to remain constant, as well as identify services for which alternative options should be considered to provide additional flexibility. Creating and implementing a financial policy based on such an analysis would assist Development Services in achieving their goal of long-term financial stability and flexibility as well as improve customer service. 43 Development Services Strategic Plan 2012 City and County of Denver, DevelopDENVER: Moving the city to even greater heights, Development Services Strategic Plan , Feb. 2, 2012, p A combination inspector will be able to perform more than one trade inspection at the same project site. City and County of Denver Page 34

41 RECOMMENDATIONS The Auditor s Office offers the following recommendations to assist Development Services with developing a financial strategy that provides long-term stability and flexibility Fee Study The Development Services director should conduct an activity-based cost analysis to determine the true cost of providing building permitting and inspection services. The analysis should be completed once Development Services has adjusted its organizational structure Periodic Fee Analysis The Development Services director should create a policy to update fees annually, bi-annually, or a frequency aligned with industry practice associated with the building permitting and inspection process. The policy should include criteria such as the Municipal Cost Index that will be used when updating fees Alternative Fund Types The Development Services director, in conjunction with City leadership, should determine if Development Services would benefit from alternative fund types such as becoming an enterprise fund once the organizational and fee structures noted in recommendations 1.2 and 2.1 have been solidified Financial Policy The Development Services director should develop a financial policy that promotes stability. The plan should identify what changes to the current financial structure would be necessary, what costs would need to be covered, and what steps must be taken to codify the structure Flexible Resource Options The Development Services director should develop a policy to address flexible resource options when business needs of the department and the customer fluctuate beyond core business activity. This should include criteria for utilizing the other resource options such as outsourcing in periods of high demand and determining what services could be expedited and the associated fee for the services. Page 35 Office of the Auditor

42 APPENDICES Appendix A Themes of Previous Studies on Denver s Permitting and Inspection Services Table 6: Themes over the years in studies aiming to improve Development Services in Denver Create a one-stop shop for customers Align fees with cost of services Re-evaluate processes for efficiency Decentralized structure causes inefficiency Provide or improve means for customers to submit feedback Sources: 1988: Application Transfer Study, Team of City and County of Denver development services employees led by Margaret Browne. 1993: Evaluation of Development Review and Permit Process, John Prior Associates, under contract of the City Council Public Works Committee. 1995: Visions of the Future: Development Services in the Year 2000, Mayor s Office of Regulatory Reform, under Mayor Wellington Webb. 1997: Denver Renaissance Project, Team of stakeholders within and outside the City and County of Denver. 2003: Denver s Development Review Process: Can It Be Fixed? Streamline our Permitting Process (STOPP) Task Force of the Denver Chapter of The American Institute of Architects. City and County of Denver Page 36

43 Appendix B Executive Order 137 Note: For illustration purposes, only one of the Letters of Designation mentioned in Section 4.0 of the Order is included here. Page 37 Office of the Auditor

44 City and County of Denver Page 38

45 Page 39 Office of the Auditor

46 City and County of Denver Page 40

47 Page 41 Office of the Auditor

48 City and County of Denver Page 42

49 Page 43 Office of the Auditor

50 City and County of Denver Page 44

51 Page 45 Office of the Auditor

52 Appendix C Building Permitting Process Flowchart Source: Auditor s Office. City and County of Denver Page 46

53 Appendix D Building Inspection Process Flowchart Source: Auditor s Office. Page 47 Office of the Auditor

54 AGENCY RESPONSE City and County of Denver Page 48

55 Page 49 Office of the Auditor

56 City and County of Denver Page 50

57 Page 51 Office of the Auditor