APPROVAL OF AGREEMENTS FOR REVENUE ENHANCEMENT SERVICES RELATING TO SALES AND USE TAX, TELEPHONE LINE TAX, UTILITY USERS TAX AND FRANCHISE FEES.

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1 COUNCIL AGENDA: 6/16/15 ITEM: CITY OF ST SAN TOSE CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR AND CITY COUNCIL Memorandum FROM: Julia H. Cooper SUBJECT: SEE BELOW DATE: Approved Date uh is- SUBJECT: APPROVAL OF AGREEMENTS FOR REVENUE ENHANCEMENT SERVICES RELATING TO SALES AND USE TAX, TELEPHONE LINE TAX, UTILITY USERS TAX AND FRANCHISE FEES. RECOMMENDATION Adopt resolutions: a) Authorizing the Director of Finance to negotiate and execute the following agreements with MuniServices LLC, a Delaware Limited Liability Company ("MuniServices") to provide: (1) Sales and Use Tax revenue enhancement services and data analysis for the term of July 1, 2015 through June 30, 2018 at a maximum annual compensation not to exceed $412,000, with two one-year options to extend through June 30, 2020, at the same rate of compensation for each additional optional year subject to the City Council's annual appropriation of funds; and (2) Telephone Line Tax, Utility Users Tax and Franchise Fee compliance services for the term of July 1, 2015 through June 30, 2018 at a maximum annual compensation not to exceed $70,000, with two one-year options to extend through June 30, 2020, at the same rate of compensation for each additional optional year subject to the City Council's annual appropriation of funds. b) Authorizing MuniServices to examine all Sales and Use Tax records of the California State Board of Equalization for tax collection purposes and other governmental functions of the City of San Jose ("City"). OUTCOME Approval of the recommendations will allow MuniServices to assist staff with Sales and Use Tax revenue enhancement services and data analysis; and Telephone Line Tax, Utility Users Tax and Franchise Fee compliance services to recover monies due to the City.

2 Page 2 EXECUTIVE SUMMARY The City issued a Request for Proposal ("RFP") near the end of 2014 for revenue enhancement services relating to Sales and Use Tax; Telephone Line Tax, Utility Users Tax and Franchise Fees; and Lodging Taxes and Fees. These specialized tax and fee programs provide the City with cumulative revenues of approximately $350 million annually. Two consultants who specialize in these respective fields responded. Staff evaluated the proposals and the consultant with the highest score is MuniServices. Staff recommends the selection of MuniServices to conduct, for the City, revenue enhancement services pertaining to these highly specialized tax and fee programs and to authorize the Director of Finance to enter into three separate agreements with MuniServices for Sales and Use Tax consultant services, for Telephone Line Tax, Utility Users Tax and Franchise Fee consultant service, and for Lodging Taxes and Fee consulting services. Given the dollar value of the agreement, the Lodging Taxes and Fee consulting services agreement does not require Council approval and will be executed under the City Manager's contract authority. BACKGROUND Annually, the City receives taxes and fees totaling approximately $350 million relating to Sales and Use Tax ($168 million); ($138 million); and Lodging Taxes and Fees ($44 million). Given the dollar amounts associated with these revenue programs and the volume of remitters, it is critical that the City performs regular audits and compliance reviews to maximize the collection of revenues due. To facilitate compliance, the Finance Department issued a RFP to solicit proposals for three specific areas of revenue enhancement and compliance services: Sales and Use Tax; Telephone Line Tax, Utility Users Tax, and Franchise Fees; and Lodging Taxes and Fees. Proposers had the option to submit a response for one or any multiple combinations of services. ANALYSIS On December 9, 2014, the Finance Department issued the RFP on the City's Purchasing website (i.e. BidSync) for maximum exposure. Two firms, MuniServices and HdL Companies ("HdL"), submitted proposals. The two proposing firms submitted proposals for all three areas of services. The evaluation team included staff from the Finance Department and the City Manager's Office. Proposals for each service request were evaluated separately using the following criteria and weighting:

3 May 28,2015 Page 3 Evaluation Criteria: Description Weight Proposal Responsiveness Pass/Fail Experience of Proposer/Technical Capability 50% Customer Satisfaction/Firm Reputation 20% Fee Structure (Cost) 20% Local Business Enterprise 5% Small Business Enterprise 5% 100% The Finance Department is recommending entering into three separate agreements to more efficiently manage the services provided under each agreement and to maintain the rights to manage each individual agreement's term when it comes to extending terms of services. Sales and Use Tax Experience / Customer Fee Local Small Rank Firm Capability Satisfaction Structure Business Business Total 1 MuniServices HdL The table above summarizes the scoring results for the Sales and Use Tax revenue enhancement services portion of the RFP. Out of 100 points, MuniServices received the highest total points of 83.20; HdL received a score of Based on the results of the evaluation process, staff recommends MuniServices to provide Sales and Use Tax revenue enhancement services and data analysis for the City. As a result of the competitive process, the City will realize contract savings as MuniService's will reduce their maximum quarterly compensation from 11 quarters to 10 quarters, decrease the contingency rate from 15% to 14%, and discount the fixed data analysis price from $15,000 to $12,000. MuniServices will be paid on a contingency basis for reallocation of Sales and Use Tax to the City at a maximum annual compensation of $400,000 for the Sales and Use Tax audits and a fixed annual compensation of $12,000 for data analysis for an aggregate annual total not to exceed $412,000. The agreement will be for three years with two one-year options to extend, subject to the City Council's annual appropriation of funds. The term of the agreement may be extended by the Director of Finance upon written notice to MuniServices. MuniServices' fees are based on a percentage of new Sales and Use Tax revenues received by the City resulting from MuniServices' allocation efforts of Sales and Use Tax to the City and, therefore, are contingent upon MuniServices' performance under the terms and conditions of the agreement. MuniServices currently provides the City with Sales and Use Tax audit services. MuniServices' annual compensation has historically averaged approximately $260,000 (fixed portion was $15,000 and contingency average fee was $245,000). Accordingly, staff is appropriating less than the maximum annual compensation permitted under the agreement, a total of $257,000 for

4 Page 4 combined fixed ($12,000) and contingent fee ($245,000) services. To the extent MuniServices audit activities produce reallocation of Sales and Use Tax revenue in excess of $257,000, staff will return to Council with a recommendation to recognize the additional revenue and appropriate the associated contingent fee expenditures. The total maximum compensation for the Initial Term of the Agreement from July 1, 2015 through June 30, 2018, shall not exceed $1,236,000, subject to annual appropriation of funds. In addition, the City has two one-year options to extend the MuniServices contract at a maximum annual compensation not to exceed $412,000 for a total maximum option period compensation of $824,000, subject to annual appropriation of funds. The total maximum compensation for the initial term and the option periods is $2,060,000. MuniServices will provide the following services and deliverables: Sales and Use Tax audits; Correction of tax filings with the State Board of Equalization ("SBOE"); Technical and analytical support in regards to Sales and Use Tax related legislation and administrative rulings; Sales and Use Tax quarterly trend reports and budget analysis; and Sales tax database with quarterly updates of sales tax permit records and distribution reports. The Sales and Use Tax compliance services portion of the agreement provides that MuniServices will receive 14% of new revenues received by the City resulting from MuniServices' reallocation efforts of Sales and Use Tax to the City, subject to an annual cap of $400,000. The agreement itself is divided into two phases - the primary services phase and completion services phase. The primary services phase is the first three years of the agreement and any option years exercised by the Director of Finance. The completion services phase begins at the expiration or termination of the primary services phase, whichever is sooner. It is during the completion services phase of the agreement that MuniServices resolves any unresolved claims with the SBOE identified during the primary services phase. For each option year, there is a three year completion phase as described above. In this agreement, the completion phase will extend no later than June 30, 2023, and each year of the completion phase is subject to the cap of $400,000. In addition to providing services related to the collection of local Sales and Use Taxes, MuniServices will also provide the City with services related to other governmental functions, such as revenue analysis and projection services for purposes of budget development. These revenue compliance and data analysis services individually and collectively add value to the Finance Department and the City Manager's Office and are essential for additional protection of the City's Sales and Use Tax revenues. Accordingly, to ensure that MuniServices has access to the Sales and Use Tax records of the State Board of Equalization, MuniServices is authorized, by resolution of the City Council, to examine all Sales and Use Tax records of the California State Board of Equalization, consistent with Section 7056 of the California Revenue and Taxation Code.

5 Page 5 Experience / Customer Fee Local Small Rank Firm Capability Satisfaction Structure Business Business Total 1 MuniServices HdL The table above summarizes the scoring results for Telephone Line Tax, Utility Users Tax and Franchise Fee revenue compliance services portion of the RFP. Out of 100 points MuniServices received the highest total points of 81.20; FIdL received a score of Based on the results of the evaluation process, staff recommends MuniServices to provide Telephone Line Tax, Utility Users Tax and Franchise Fee revenue enhancement services for the City. MuniServices will be paid on a fixed rate basis at a maximum annual compensation of $70,000 for the Telephone Line Tax, Utility Users Tax and Franchise Fee audits. The agreement will be for three years with two one-year options to extend, subject to the City Council's annual appropriation of funds. The term of the agreement may be extended by the Director of Finance upon written notice to MuniServices. The total maximum compensation for the Initial Term of the Agreement from July 1, 2015 through June 30, 2018 shall not exceed $210,000, subject to annual appropriation of funds. In addition, the City has two one-year options to extend the MuniServices contract at a maximum annual compensation of $70,000 for a total maximum option period compensation of $140,000, subject to annual appropriation of funds. The total maximum compensation for the initial term and the option periods is $350,000. MuniServices will provide the following services and deliverables: Telephone Line Tax audits; Energy transporters Utility Users Tax audits; Electric and Gas Franchise Fee audits; Water Franchise Fee audits; Telecommunication Users Tax audits; Revenue trend reports and revenue budget analysis to the City; Analysis of state and federal legislation that may threaten utility tax revenues; and Utility Users Tax training seminars for City staff. Lodsins Taxes and Fees Experience / Customer Fee Local Small Rank Firm Capability Satisfaction Structure Business Business Total 1 MuniServices HdL

6 Page 6 The table above summarizes the scoring results for the Lodging Taxes and Fees revenue enhancement services portion of the RFP. Out of 100 points MuniServices received the highest total points of 78.00; HdL received a score of Based on the results of the evaluation process, staff recommends MuniServices to provide Lodging Taxes and Fees revenue enhancement services for the City. The information on the results of the RFP are provided for informational purposes given that the total compensation of both the initial and option periods is under $270,000 (City Manager's contract authority). MuniServices will be paid on a fixed rate basis at a maximum annual compensation of $49,000. The agreement will be for three years with two one-year options to extend, subject to the City Council's annual appropriation of funds. The term of the agreement may be extended by the Director of Finance upon written notice to MuniServices. The total maximum compensation for the Initial Term of the Agreement from July 1, 2015 through June 30, 2018 shall not exceed $147,000, subject to annual appropriation of funds. In addition, the City has two one-year options to extend MuniServices' contract at a maximum annual compensation of $49,000 for a total maximum option period compensation of $98,000, subject to annual appropriation of funds. The total maximum compensation for the initial term and the option periods is $245,000 which is within the City Manager's contract authority and the ability to extend the agreements. MuniServices will provide the following services and deliverables: Transient Occupancy Tax ("TOT") audits; Convention Center Facilities District ("CCFD") Tax audits; Hotel Business Improvement District ("HBID") Fee audits; Technical and analytical support to the City in regards to legislation that threatens the revenue source; Revenue trend reports and revenue budget analysis to the City; Assist with the implementation of online lodging service (e.g. VRBO, Couchsurfmg, HomeAway) taxation; and Lodging Taxes and Fees training seminars for City staff. EVALUATION AND FOLLOW-UP Revenues collected through the revenue enhancement program will be reported quarterly through the Public Safety, Finance and Strategic Support Committee. PUBLIC OUTREACH The RFP was posted on the City's BidSync and was downloaded by 41 parties potentially interested in providing auditing and compliance services. Additionally, this memorandum will be posted on the City's website for the June 16, 2015 City Council Agenda.

7 Page 7 COORDINATION This report has been coordinated with the City Manager's Budget Office and the City Attorney's Office. FISCAL/POLICY ALIGNMENT The revenue enhancement and compliance program agreements with MuniServices to provide Sales and Use Tax; ; and Lodging Taxes and Fees revenue enhancement compliance services would support a General Fund approach to maximize revenues to provide the most essential services to the community. COST SUMMARY/IMPLICATIONS 1. AMOUNT OF RECOMMENDATION/COST OF PROJECT: For the initial term of July 1, 2015 through June 30, 2018 the total maximum compensation for the three Agreements will not exceed $1,593,000, with annual compensation not to exceed $531,000, with two one-year options to extend through June 30, 2020, at the same rate of compensation for each additional optional year subject to the San Jose City Council's annual appropriation of funds. MuniServices Sales and Use Tax revenue enhancement consultation service fees are based on a percentage of new Sales and Use Tax revenues received by the City resulting from MuniServices' reallocation efforts of Sales and Use Tax to the City and, therefore, are contingent upon MuniServices' performance under the terms and conditions of the agreement. MuniServices currently provides the City with Sales and Use Tax audit services. MuniServices' annual compensation has historically averaged approximately $260,000 (fixed portion was $15,000 and contingency average fee was $245,000). Accordingly, staff is appropriating less than the maximum annual compensation permitted under the agreement, a total of $257,000 for combined fixed ($12,000) and contingent fee ($245,000) services. To the extent MuniServices audit activities produce reallocation of Sales and Use Tax revenue in excess of $245,000, staff will return to Council with a recommendation to recognize the additional revenue and appropriate the associated contingent fee expenditures. 2. SOURCE OF FUNDING: City-Wide Appropriations in the City's Finance Department for Revenue Enhancement Consulting Services. 3. FISCAL IMPACT: N/A-One time cost.

8 Page 8 BUDGET REFERENCE Fund # Appn # Appn. Name Total Appn Amt. for Contract Proposed Budget Page Last Budget Action (Date, Ord. No.) Revenue Enhancement Consulting Services $455,000 $531,000* IX-23 N/A * The Sales and Use Tax portion of the contract is paid on a contingency basis. In the event that the actual contingent fees exceed the appropriation amount, staff will return to Council to request an increase in the appropriation amount which would be offset by recognizing increased Sales and Use Tax revenues. CEOA Not a Project, File No. PP10-066(a), Agreements and Contracts. /s/ JULIA H. COOPER Director of Finance For questions, please contact Wendy J. Sollazzi, Revenue Management Division Manager, at (408)