Performance Audit of the City of Los Angeles Fire Service Billings to the Los Angeles Harbor Department

Transcription

1 Folsom (Sacramento), CA Management Consultants Performance Audit of the City of Los Angeles Fire Service Billings to the Los Angeles Harbor Department August 10, East Bidwell St., Ste #100 Folsom, CA (916) Fax: (916)

2 TABLE OF CONTENTS Section Page Section 1 Executive Summary Citygate Observations and Findings Findings Citygate Recommendations Implementation Plan... 7 Section 2 How the Audit Team Conducted the Performance Audit... 9 Section 3 Understanding the Background Timeline of Significant Issues Agreements History City and Harbor Department Memorandum of Understanding Section 4 Fire Protection System Review Risk Protection by an Appropriate Response to Mitigate and Terminate Emergencies General Framework for Fire Service Deployment Response Goal Policy History Hazardous Materials Squad Risk Prevention Efforts Program Operations Deployment System Efforts Deployment System Outputs Incident Location Measurement Results Deployment System Outcomes Section 5 Current Fiscal Billing Systems Review Auditing and Review of Records The Fire Department Invoice Table of Contents page i

3 5.3 Fire Department to Harbor Department Invoice Preparation Process Invoice Column Calculations Summarizing the Bill Differently for a Services-Expensed Managerial View Direct Fire Protection Costs and Staffing Sections of the Bill Application of CAP Charges to Direct Fire Expenses Explanation of the Citywide Cost Allocation Plan (CAP) Fire Department Bill Columns for Overhead, Support and Indirect Costs Fireboat Major Repair Expenses Citygate s Observations Other Cost Items for Further Discussion between the Parties Assistant Fire Chief Assigned to the Harbor Department Fire Department Emergency Incident and Station Command Positions Additional Land-Based Fire Units Assigned to Battalion Six After the MOU Agreement Hazardous Materials Squad 48 Cost Allocation Section 6 Limitations of This Performance Audit Exhibits Exhibit F1 Billing Agreements Historical Review Exhibit F2 LAFD Battalion Six Resources Exhibit F3 Worldwide Fireboat Perspectives Exhibit F4 Fire Invoice Exhibit F5 Invoice Cost by Service Groups Exhibit F6 Invoice Cost by Apparatus Unit Exhibit F7 Percentage Level of City-wide Applied CAP Charges Table of Contents page ii

4 Table of Tables Table 1 Ground-Based Units in Battalion Six Included in 1997 City-Harbor Dept MOU Table 2 Fireboat Locations, Cost Allocation, and Daily Staffing Table 3 Emergency Incident Counts Per Fireboat Table 4 Comparison of Land-Based Fire Units Incident Response Percentages Table 5 Comparison of Applying 09/10 Unit Response Percentages to 09/10 FD Invoice Table 6 Fire Department Bill Definitions Table 7 Citygate Managerial Summary View of FY Bill Table 8 Citywide CAP Charges and Fire Department Overhead Table 9 Land-Based Fire Resources in the CAP Table of Contents page iii

5 SECTION 1 EXECUTIVE SUMMARY Citygate Associates, LLC was retained to review fire service billings to the Harbor Department for three completed fiscal years prior to FY 10/11. The study was to review the accuracy of the billings and determine if the services and billing methods were consistent with the MOU between the agencies covering these issues. This study was not a review of fire service operational decisions, the 1985 Fire Master Plan for the Harbor or the benchmarking study of other similar harbors as required by the 1997 MOU between the agencies. Citygate Associates, LLC s review of the fire services billing to the City of Los Angeles Harbor Department is based on an extensive review of written records, prior inter-agency agreements and interviews of key personnel. Both the City of Los Angeles and the Harbor Department were cooperative, transparent and provided access to the necessary records, if available. Overall in this study Citygate makes 21 key findings and 12 recommendations. There are no significant errors in the billing that Citygate can identify. There are, however, serious philosophical differences between the parties on how to handle cost allocation and service changes going forward. Both agencies are operating under a 1997 cost allocation Memorandum of Understanding (MOU) that is still in use even though none of the current managers designed it and it does not necessarily fit the current situation. While technically past its envisioned life, the MOU contained a provision for its continued use until replaced by a successor agreement, which is the current practice. More important than the age of the MOU is the fact that neither party has been tightly following the MOU procedures for making changes to billed Fire Department services. In addition, the fire services billing is not easy to understand and it does not link services to cost centers or provide backup to verify citywide and fire department overhead charge calculations. Costs were incurred for major maintenance to fireboats, without those charges being placed into Fire Department overhead. These charges outside of the standard billing have not been resolved at the time this study was completed. Most of the changes to services and billings over the years have not been well documented in writing, if at all. Understanding many of the current issues and how service levels were determined requires reliance on staff verbally recalling history, and many of the key personnel are now retired. In summary, while the current bill largely tracks the MOU foundation formulas, with the undocumented changes over time and the minimum documentation provided on overhead charges, the Harbor Department would be challenged to easily pass a review pertaining to service and cost relationships by State Tidelands Trust oversight staff. The findings and recommendations of this study need to be considered as a tune-up for two very good, but large agencies, whose practices around the fire service delivery and billing issues have Section 1 Executive Summary page 1

6 become separated from a 14-year-old cost share nexus study and interagency cost agreement. In other areas, sections of the prior cost sharing agreement (MOU) have become obsolete or do not cover all issues, which creates the need for updating the agencies cost share agreement. Overall, the relationship between the parties has frayed on many levels. The City is using general documentation to bill the Harbor Department and when questions are asked about service levels or costs, the Harbor Department does not feel listened to or partnered with. Stated this way, the Harbor Department does not feel it is treated as a customer, but rather as a captive bill payer. City staff needs to design service levels and billings in a manner that follows the Tidelands Trust regulations that require a close nexus of services and costs to Harbor operations and risks to be protected. 1.1 CITYGATE OBSERVATIONS AND FINDINGS The issues covered in this performance audit span several themes including Harbor and Fire Department operational, administrative and fiscal issues. The following findings range from better utilizing existing written agreements and studies, to the need to formally update and revise the cost allocation agreement, and to match current and future Fire Department operational decisions to the fiscal content of the actual Fire Department billing itself to the Harbor Department. This study also notes that the last Fire Master Plan was done in 1985 and that the current ground- and water-based deployment system may or may not meet the Port s needs going forward. This performance audit for three years of billings has to be framed in the context that a complex set of prior studies and inter-agency agreements formed the basis for a cost allocation agreement that is almost 14 years old and is past its envisioned 10-year usage. The MOU envisioned a major update every ten years. Many of the current Finance staff that facilitates both sides of the Fire Department billing to the Harbor Department were not in place years ago when the foundation was set down. Even if they were in place, it is apparent in interviews that Citygate conducted that the current staffs do not take the historical foundation into account when questioning the current billing. The communication between the parties is infrequent and usually occurs when there is a question. There are no written procedures other than the stale agreements as to how the bills are to look, be clarified or amended. Basically the ongoing operations have become standardized and separated from the procedures the MOU envisioned, even if some of the MOU sections were vague. In particular, the MOU did outline a procedure for changes to the billing and an appeals process. It is not evident that these steps have ever been formally undertaken, or at least reduced to written amendments. The usual course of business for issues that arose was for informal discussions to ensue, the results of which were reviewed by senior administrators, who may not have enough background information to guide them in making new decisions. Section 1 Executive Summary page 2

7 In order to operate under the MOU, there is not a clearly designated key manager in each agency that fully understands the MOU, its historical context, the provision of fire services and the cost accounting policies of the City Controller s Office. If two such contact points existed and met regularly, the chance of miscommunication would be greatly reduced. Further, as operational points of contact, others would know whom to ask clarifying questions to. When successor agreements are needed, these designated liaison agreement managers would provide the best information on what and how, if anything, needs to be updated. Both agencies have very legitimate needs to control costs. As such, when new services and costs arise, both agencies have to consult each other before committing. Each agency has specialists that, when working together, can make the most informed decision. Such teamwork, for example, can reduce the costs of fireboat maintenance by better understanding what is needed, beyond the suggestions of a boatyard or other vendor that may have a vested interest in suggesting more extensive and expensive work. This process already exists in the MOU structure, but is rarely utilized. Last but not least, most of the annual operating costs in fire services are in personnel expenses. If both parties want to control or accept the current cost of services, or modify them, they need a modern fire services master plan agreement to drive informed resource level (unit and staffing) decisions. With these observations in mind and the technical information contained in this report, Citygate makes the following findings: 1.2 FINDINGS 1. The current Fire Department bill needs updating to provide better manageriallevel information and to allow the addition or subtraction of specialty charges year to year as agreed to by the two agencies. 2. There is no prior MOU or other agreement on major fireboat repairs, and no evidence that prior major repairs performed by outside vendors were placed into Fire Department overhead when they were expensed by the Fire Department. 3. For the Assistant Fire Chief position assigned to the Harbor Department, Citygate finds that adding a CAP and Fire Department overhead expense of $84,541 appears inconsistent with the current situation with the position being placed in the Harbor Department Homeland Security group, receiving administrative support from Harbor Department resources. These overhead charges should be removed. 4. For the costing of the Incident Command Chief teams, the Fire Department overhead and overtime assignment policy is cost heavy when reviewed against a Section 1 Executive Summary page 3

8 response area or incident response methodology as the ground-based units are. This section of the bill is outside of the prior MOU, inconsistent with the DMG study foundation and needs adjustment. A formula closer to the ground-based units allocation could reduce the fire service bill by $117,978 to $474, The addition of staffing to Hazardous Materials Squad 48 was done informally for costing purposes; there is no written agreement and if the unit remains in the Harbor Department billing, a consistent formula needs to be agreed to by the parties. 6. The Fire Department billing staff is very knowledgeable and transparent on bill procedures and background facts, when asked in an audit setting. However, as currently designed, the current Fire Department bill is not easy to understand, it does not at a glance provide managerial information on total services and costs, and does not provide the necessary back-up data on overhead charges. 7. Overall, there is a low institutional historical knowledge of the fire services agreement, levels of protection and billing. This leads to ineffective communications and frayed inter-agency relations. 8. The two agencies do not have a designated single point of contact to manage the fire services issues and billing. This leads to multiple parties being involved, not all of which have detailed knowledge of the prior MOU and its historical foundations. 9. The agencies do not work closely enough together to reach prior agreement on major new costs, such as adding response resources or capital fireboat repairs, as encouraged in existing documents. 10. The prior MOU called for an outside review of services, economies and efficiencies within 18 months of the MOU start in June There is no evidence that this ever occurred. However, per the MOU the study was not to have any effect on the 1985 Fire Master Plan. These two goals are not compatible to a healthy joint-agency review of what is needed to protect the Harbor Department risks. 11. There is not a written record or other evidence that the parties have fully used the 1997 MOU provisions for billing changes, modifying the billing, or handling disagreements to fire service expenses. 12. The current fire services bill, as designed, does not effectively communicate how it is constructed and what services are in total provided. The Fire Department bill needs an executive summary that is easier to read which ties costs to service area, where the results are being expensed. Section 1 Executive Summary page 4

9 13. The Fire Department needs to provide the Harbor Department an annual report for the types of fire service incidents, risk prevention measures and emergency outcomes so the Harbor Department understands the total services to the annual billing. 14. The costing methods used by the City and Fire Department for charges to the Harbor Department are substantially correct for the years of review in , and The fire service overhead charges follow the City Controller s Office Cost Allocation Plan (CAP) and Fire Department overhead policies. 16. The Fire Department overhead rate does not also include billing for central CAP charges. Thus, there is not double billing for overhead as some Harbor Department staff were concerned about. 17. The City s CAP policy is a reasonable process consistent with Citygate s experience in other agencies and is federally approved and audited. 18. All fire service charges are built up from the same data used for the actual Fire Department budget, as reviewed and approved by City Hall. 19. The current Fire Department billed costs are in alignment with the MOU, and the charges for the percent of use allocation of land-based fire units have not deviated from the MOU mandated percentages. 20. The land-based fire unit cost allocations were fixed at the beginning of the MOU in Given this fixed status, the parties saw no need for data procedures to periodically count incident workloads. The current data systems do not make this easy or completely accurate. Given the review in this study, the workload percent measures for the units in the 1997 MOU have only modest variance from the MOU rates. 21. On a go-forward basis until the next cost allocation MOU is agreed to, the charges being made for fire service costs in the MOU structure appear to be adequately supported, except those identified for further clarification in this study. 1.3 CITYGATE RECOMMENDATIONS 1. The parties should immediately designate a lead person per agency to be the focal point and knowledge base for the fire service billing and services relationship between the parties. 2. Prior to a new MOU being agreed to, the parties need to fully utilize the change and dispute resolution process in the prior MOU. Section 1 Executive Summary page 5

10 3. Prior to FY 11-12, the parties need to review and reach agreement in these items that are not covered in the 1997 MOU: a. Assistant Chief overhead assigned to the Harbor Department. b. Command Chief team overhead the two agencies need to reconsider the Command Chief expense method since these positions and their resultant overhead costs were not in the MOU. As such, the agencies need to design a formula that reduces command team overhead expense to more closely reflect the low amount of Harbor-related daily command efforts in comparison to those for the entire City. c. Obtain formal agreement per the MOU if the Harbor Department is to be billed a portion of Hazardous Materials Squad 48. If so, fix and document a cost allocation percentage for Hazardous Materials Squad 48 per the MOU percent of emergency incidents inside the Harbor Department method. 4. Citygate recommends that either the parties agree on a one-time resolution for the past major fireboat repairs, and as they make that commitment, settle ownership, replacement liability and determine what, if anything, exceeds the routine Fire Department overhead charges. The fireboat fleet will continue its need for repairs and future costs need to be shared and absorbed through written arrangements. As the two agencies know, the current cost allocation MOU is past its original envisioned life. They need to consider the ramifications on the development of the replacement MOU by making a one-time decision on major repairs that is then used as precedent going forward. 5. Citygate recommends the agencies set up and document a process for charging previously unbilled, missed amounts to the Harbor Department. Many public agencies put a limitation of time on the ability to bill previously incurred costs within a certain timeframe. Most agencies limit just missed charges to three or four years from the time they occur. 6. In order to fully understand fire service level of service choices and resultant costs, the agencies need to undertake a full fire master plan to current and future risks. Changes in service levels should be considered with cost to benefit information. 7. Citygate recommends the agencies develop a process to understand and then use cost controls for major repairs to the fireboats. Upon further research, the Harbor Department itself may be able to handle some of the fireboat major repairs as it does with other specialty boats in its operation. Section 1 Executive Summary page 6

11 8. The Fire Department, with Harbor Department input, needs to develop more informative billing summaries and content glossaries as modeled in this study. From the perspective of this performance audit, we recommend that the billing can be adapted or modified as soon as possible to improve the understanding of costing items such as the overtime costs associated with the Indirect Field Support. We suggest: a. A consolidation of columns for the smaller dollar items like the Emerg OT, Bonus and Expns, which would allow space to clearly present costs that will be more understandable; b. We also suggest that the invoice improve its use of terminology by calling Direct Costs as Salaries & Wages and by labeling Central Services as City CAP Charges ; c. Currently there is no place to add items to the invoice due to annual special needs the parties might agree to. A special charges or reconciliation row could be added to the end of the bill. 9. The Fire Department needs to provide the Harbor Department an annual report of services and tie the services to costs in the bill and expected service outcomes. 10. If emergency incident counts are to be used going forward for ground-based unit cost allocation, the two agencies need to develop an addressing record keeping system to easily and reliably tie the locations to Harbor Department properties. The agencies should consider the fact that, year to year, emergency counts will vary and swing costs. A three-year average and tri-annual updating would allow smoothing to the billing. 11. Given that some fire units over recent years were not in the 1997 cost share MOU, the next version of the MOU has to address which ground-based units in Battalion Six are in the cost share plan. 12. The Harbor and Fire Departments should jointly develop satisfactory document standards on a go-forward basis that provide supporting detail on overhead and supplemental charges to the main categories in the invoice to the Harbor Department. 1.4 IMPLEMENTATION PLAN Recommendations #1 through #5 can occur within 90 days of receiving this study and, as implemented, will guide practices for Fiscal Year Section 1 Executive Summary page 7

12 The Fire Department should have the time to prepare a more informative bill for Fiscal Year and an annual report by the end of Fiscal Year The redesign of the bill should include Harbor Department input from both management and finance tracking perspectives. The agencies can design an improved emergency incident location data tracking system in Fiscal Year and begin its use with Fiscal Year As part of their Fiscal Year work plan, the agencies can fund and complete a Harbor area fire services master plan. Section 1 Executive Summary page 8

13 SECTION 2 HOW THE AUDIT TEAM CONDUCTED THE PERFORMANCE AUDIT This performance audit was commissioned to address these key areas of billing for fire services to the Harbor Department by the City: The historical context of the City charges paid by the Harbor Department for Fire Department services over the last three fiscal years (FY 06-07, FY 07-08, and FY 08-09) showing the trend of amounts paid each year, the causes for any change in costs over time (including changes by cost component, if possible), and any other pertinent information available. A verification of the mathematical accuracy of the calculations and informational support underlying the Fire Department billings, using actual costs and corroboration of specific invoices to associated charges for equipment and services. The verifications included: obtaining clear descriptions of all components of such costs of City services, including all personnel positions by Civil Service class included; matching salary schedules for all sworn and civilian staff involved by cost center; verifying the calculations of Field Rate, Department Administrative, Battalion, Central Services, and Fringe Benefits rates; and understanding the cost allocation methodologies governing each calculation. A review of cost allocation plan rates and the models used by the Fire Department to identify charges and calculate the Harbor s imputed share of individual services. Such rates and models were analyzed for accuracy. A review of a list of the Fire Department personnel assigned and billed to the Harbor, as specified by the attached fire services bill, including sufficient detail to identify specific employees and functions to cost allocation plans and billing supporting schedules, such as employee payroll numbers, names, job class, and position control numbers. A review of the Nexus MOU and settlement agreement to assess the progress made to date in making the Harbor whole. An assessment was made to gauge whether any unallowable costs are being charged. The review team began by collecting background and historical documents on the fire protection services and fiscal relationship between the Harbor Department and Fire Department. The team then held a series of listening meetings to obtain a deeper understanding with Harbor finance staff, Mayor s office staff, City Controller s Office, Fire Department finance staff and the Assistant Fire Chief assigned to the Harbor Department Homeland Security office. These meetings resulted in additional document requests, especially for emergency incident data, Fire Department resource allocation data, and City cost allocation plan details. Section 2 How the Audit Team Conducted the Performance Audit page 9

14 Over a period of time as the information was assessed, key facts were confirmed with Harbor and Fire Department members to ensure an accurate composite picture of the issues was emerging. The performance audit team also met in person several times with Harbor and City staffs to jointly build an operational and fiscal understanding. As would be expected for a performance audit of this scope, the project amassed a considerable quantity of agency records, and while not all are attached to this report as exhibits, they are referenced by name so that the parties can refer to them as needed if a deeper understanding beyond this report becomes necessary. The following sections of the report will address these key review components: Section 3 Section 4 Section 5 Section 6 Various Exhibits The background agreement structure between the parties and how the current services expense billing was designed. A review of the fire protection response system in place today and a determination as to if the response forces match the prior agreedto levels and billing formulas; a brief review of what the risks being protected are and the quantity of emergency incidents. The financial review of the current billings. Discussion of the performance audit s limitations. Section 2 How the Audit Team Conducted the Performance Audit page 10

15 SECTION 3 UNDERSTANDING THE BACKGROUND 3.1 TIMELINE OF SIGNIFICANT ISSUES This section references multiple regulations, studies and inter-agency agreements over a long period of time that have collectively resulted in the current level of Fire Department services and resultant costs to the Harbor Department. The performance audit team feels it critical that the parties understand how they came to the current construct, then how the costs and invoices do or do not follow what was intended, and finally, what steps could be considered to clarify and enhance the inter-departmental relationship regarding fire service costing going forward. The following is a list of key events, many of which will then be covered in more depth before being referenced in this performance audit report: 1911 The City of Los Angeles obtains port property via the Tidelands Trust. The Trust allows port use for Commerce, Fisheries and Navigation and the logistical support of these issues. The granted lands are subject to a public trust, imposing certain restrictions on their use and the use of the revenues derived from the lands. With respect to the granted lands and the revenues derived there from, the trust confers the status of trustee upon the City. The trust requires the City to administer the trust property in accordance with the trust, and solely in the interest of the trust beneficiaries. The fundamental purpose of the trust is to protect and preserve the tidelands and submerged lands of the state for the benefit of all of the citizens of the state, and to that end restrict the use of the granted lands to purposes in connection with, or for the promotion or accommodation of, commerce, navigation and fishery. These are individually and collectively called the trust purposes Formal legal agreement between the State, City and Harbor Department regarding billing and payment for all Tidelands Trust issues A 30-year Port Fire Protection Master Plan was developed jointly by the Fire Department and the Harbor Department and delivered to the Harbor and Fire Commissions. There is evidence that the Harbor Commission Vice President and Department Director as well as the Fire Department General Manager signed the Master Plan, but there is no indication of formal adoption by either Commission. There is no written record of updates to the Harbor Commission or other indications that the parties ever really followed the Plan. Section 3 Understanding the Background page 11

16 1993/94 The Nexus study was conducted to clarify issues not specified in the 1977 City and Harbor Department billing agreements A Hazardous Materials Response Squad was moved to Fire Station 48 in the harbor area and cross-staffed with personnel from fire engine Company 48. In cross-staffing there is only one crew which responds with the single apparatus best fitting each emergency response The Harbor Department approved the Nexus study, which covered all City services charged to the Harbor Department. The study also recommended a payment schedule to retroactively reimburse the City for certain under-paid Fire Department and other services in the years prior to the study The State requested that the City return funds to the Harbor that were paid as retroactive payments, claiming they were a misuse of trust property, and further that the City cease negotiation of the MOU (later called 1997 MOU) based on the Nexus study The State files suit against the City and Harbor Department regarding charges for service, and the Steamship Association also files suit against City on these issues A new MOU between the City and Harbor Department is implemented based on the 93/94 Nexus study Post 9/11, Hazardous Materials Squad 48 becomes staffed full-time using overtime staffing The State, City and Harbor Department enter into a Settlement and Mutual Release, and the court awards $750,000 from the Harbor Revenue Fund to pay the Steamship Association for legal fees. The State also agrees to notify the Association if the State or City wishes to amend their agreement. The City agrees to repay the Harbor Department for certain under-billed Fire Department services resulting from the 1997 MOU with the Harbor Department Hazardous Materials Squad 48 becomes staffed full-time with dedicated staffing, and the Fire Department develops a cost recovery procedure for it based on the 1997 MOU method to apportion cost based on Hazardous Materials incident activity on Harbor property. 3.2 AGREEMENTS HISTORY Exhibit F1 provides a brief framework for the service and costs relationship between the agencies. It is also important to understand that the agencies over a very long period of time have Section 3 Understanding the Background page 12

17 operated with informal or other written agreements outside of the Nexus Study or the 1997 MOU. Examples are the Harbor Department financed construction of fire stations and fireboats. In the case of the fireboats, the Harbor Department purchased them per the specifications of the Fire Department. The verbal understanding (this audit did not find any written agreements on this issue) was that after purchase, the Fire Department was to maintain the fireboats. Section 5.9 on page 42 will discuss fireboat maintenance in greater detail. However, before explaining the current fire service bill and assessing its accuracy, it is essential to understand how the billing formulas were created. The technical work that preceded the 1997 MOU Fire Department billing schedule originated with a study called the 1993 Nexus study. In the fire service-costing portion of that study, the consultant recommended the City charge the Harbor Department a percentage of the assigned land-based fire company costs based on a sample period of time for the number of emergency incidents that occurred on properties controlled by the Harbor Department City and Harbor Department Memorandum of Understanding The following key points are extracted from the 1997 Memorandum of Understanding for services rendered by the City of Los Angeles to the Harbor Department, in support of the Tidelands Trust. This MOU was set to expire 10 years from the effective date unless otherwise extended by the parties hereto. The effective date was June 4, On page 10(B), the MOU states renegotiation to be Five years from the effective date of this MOU, and every five years thereafter this MOU shall be renegotiated by the parties if no new agreement is reached prior to expiration of this MOU the existing MOU shall continue in effect until such time as a new agreement is reached. To Citygate s knowledge the MOU was never renegotiated at the 5 th year point and was allowed to technically lapse in 2007, but under the continuation clause, the parties continue to use the MOU framework for cost allocation. The parties desired a stable, predictable basis for determining the cost of ongoing City services provided to the Department in accordance with the requirements of the trust. The following statement appears on page 6(C). It is recognized by the parties hereto that the trust principles applicable to the granted lands require the trustee to pay only the reasonable value of the services necessary to further the trust purposes and as a consequence thereof, the trust cannot pay for unnecessary or unsatisfactory services.it shall be the responsibility of the Department, through its authorized representative, to promptly communicate to the authorized representative of each City department, bureau or office providing services pursuant to the memorandum when any service provided by the City is deemed to be less than satisfactory. Section 3 Understanding the Background page 13

18 The MOU allows the Harbor Department to enter into interim agreements that increase the agreed-upon costs of services if, among other things, the change amounts to no more than 5% in any one fiscal year and 10% for the term of the MOU. The MOU states that according to the Nexus Study the Board recognizes that the Department has received certain City services, and full payment for such services has not yet been made to the City, and affirms its intent to reimburse the City for said services. The MOU on page 12(D) covers a Disputed Invoice. It says, The Department reserves the right to audit, dispute or challenge any cost contained in the annual invoice. It goes on to lay out the specifics of how that is done, including how the Mayor and Council will be involved. On page 14(C), the parties agree to utilize the City of Los Angeles Cost Allocation Plan (CAP). On page 16, Article 9 the MOU states that during the term of the MOU the City may seek funds from the Department for alteration, modification, preservation, upgrade.of equipment or assets under the control of the City departments.. Article 9 goes on to state, The City, prior to undertaking such work, shall obtain the concurrence of the Department in writing, stating the costs to be incurred and the necessity for making the improvement. Fire Service Study On page 18, Article 15 the MOU states, The parties agree to jointly finance and support an outside study to Benchmark 1 Fire Department services that are provided to the Department with those of other ports providing similar services. The study s goal is to maintain effective fire protection in the Harbor District while at the same time achieving economies and efficiencies and support the Department s ability to compete effectively with other ports. Such study shall be submitted to the City, the Fire Department and the Department no later than 18 months from the effective date of this memorandum. Study findings shall be used for planning purposes and to determine whether reasonable economies and efficiencies can be achieved in the cost of fire service. On page 18, Article 15(A) the MOU states, The parties agreed that this MOU shall have no effect upon the 1985 Fire Protection Master Plan. 1 The benchmarking was never done to Citygate s knowledge and was excluded from the scope of this study. Section 3 Understanding the Background page 14

19 Fire Department Cost Allocation On pages 25 and 26, a footnote identifies that there is an Exhibit A that addresses the Allocation of Fire Service Costs to Department by Fire Station and Apparatus. This is the table containing similar figures to the 1994 DMG report that the Fire Department has used since then to charge the Port for services. This report in later sections will identify areas where the parties did not follow the provisions of the MOU. Examples are obtaining the concurrence of the Harbor Department in writing for new expenses such as fireboat dry dock repairs, periodically benchmarking Fire Department services to other comparable ports, or jointly agreeing in advance how to add and cost allocate new resources such as the Hazardous Materials Squad. Section 3 Understanding the Background page 15

20 SECTION 4 FIRE PROTECTION SYSTEM REVIEW 4.1 RISK PROTECTION BY AN APPROPRIATE RESPONSE TO MITIGATE AND TERMINATE EMERGENCIES This performance audit reviews the two different aspects of the fire services billed by the City to the Harbor Department. First, this section reviews the services delivered to the Harbor Department for firefighting, emergency medical and technical responses including fireboats, urban search and rescue and hazardous materials. The second aspect is covered in the following fiscal section (Section 5), which addresses whether the actual Fire Department bills follow the agreement and services framework that they are supposed to General Framework for Fire Service Deployment In the United States, there are no federal or state regulations on what a minimum level of fire services has to be. Each community, or responsible agency, through the public policy process, is expected to understand the local fire risks, their ability to pay, and then to choose their level of fire services. If fire services are provided at all, the federal and state regulations specify how to do it safely for the personnel providing the service and the public. Thus both the Harbor Department and its fire services partner (the City) should periodically assess the risks to be protected, set desired outcomes, and from the desired outcome design the deployment plan for personnel and equipment to accomplish the goal within the needed timeframe. Fire department deployment, simply stated, is about the speed and weight of the attack. Speed calls for first-due, all risk intervention units (engines, ladder trucks, fireboats) strategically located across a service area. These units are tasked with controlling everyday, average emergencies without the incident escalating to second alarm or greater size, which then increases the risk to life and property and unnecessarily depletes the department resources as multiple requests for service occur. Weight is about multiple-unit response for significant emergencies like a room and contents structure fire, a multiple-patient incident, a vehicle or industrial accident with serious injuries or patient extrication required, or a heavy rescue incident. In these situations, departments must assemble enough firefighters in a reasonable period in order to control the emergency safely without it escalating to catastrophic proportions. Thus small fires and medical emergencies generally require a single- or two-unit response (engine and ambulance) with a quick response time. Larger incidents require more companies. In either case, if the appropriate companies arrive too late or the total personnel sent to the emergency are too few for the emergency type, they are drawn into a losing and more dangerous battle. The art of fire company deployment is to spread companies out across a service area for quick response to keep emergencies small with positive outcomes, without spreading the stations Section 4 Fire Protection Systems Review page 16

21 so far apart that they cannot quickly amass enough companies to be effective in major emergencies. In the Port operational area, in addition to protecting people, unique equipment and buildings, there are the ships and pleasure craft, and the ocean resource to protect, along with the waterfront side of structures and wharfs that have limited landside access. Then there are the special risks in the Port to protect. First, there is the need for business continuity to ensure the economic product flow through the Port is not unnecessarily disrupted due to an emergency that was not controlled in a timely manner. Second, there are the hazardous commodities that transit the Port that might require specialty firefighting efforts such as spill containment or control, foam for petrochemicals, Urban Search and Rescue specialists for structural or scene instability, or a hazardous materials response team in case of a dangerous leak or spill Response Goal Policy History In 1985, the Los Angeles Fire Department and Harbor Department staffs developed a Port Fire Protection Master Plan that was intended to meet the needs of the Harbor Department for 30 years for firefighting, emergency medical and technical emergency responses. The LAFD Fire Commission and the Harbor Commission, along with the Harbor Department Director and Fire Chief, signed the Plan. Today, neither agency can locate evidence that the Harbor or Fire Commission actually formally adopted or approved the Plan upon receiving it. On page 12 paragraph 2, the Fire Master Plan notes that the recommendations will be implemented when approved by the Harbor and Fire Commissions. Despite the lack of evidence that the Plan was formally adopted, some of the Plan s significant and reasonably expensive goals were in fact implemented in the Plan s early years. The Plan was commissioned at a time when the Vice President of the Harbor Commission was the Chair of the Fire Services Committee. The President and Vice President of the Fire Commission were also members of the Harbor/Airport Fire Protection Committee. Fireboat deployment was 5 boats, three small and two large, which have remained unchanged since The locations of boats 1, 2 and 5 have changed due to construction projects, but they remain in the same general location of the Port. Some key elements of the 1985 Fire Master Plan were: The Plan recommended adding one additional large fireboat to the fleet, and the removal of one small fireboat, due to the Harbor Department s planned use of the pier 400 (the South landfill) project for petrochemical storage, a plan which, to date, has not materialized. The third large fireboat was never added, although new Section 4 Fire Protection Systems Review page 17

22 Fire Station 111 was built to accommodate the changes, and the fleet in 2011 remains at two large and three small fireboats. If a third large fireboat was built as the plan recommended, then there were to be staffing reductions on Fireboat 2, reducing the overall crew from eight to six per shift, by removing two firefighters per platoon. The proposed (but never built) third large third fireboat was to be staffed by only two members per shift, utilizing flex staffing from co-located small boat 3 to enhance the crew when needed. Fireboat 4 was to have one firefighter position added (this large boat was to be first in to the South landfill project). If these 1985 Fire Master Plan proposals had been fully implemented, these staffing and fireboat changes would have reduced fireboat staffing by 6 positions, which could have easily saved over $15 million across 27 years. Citygate Observations: There is no written record describing why the Fire Department maintained the staffing of Fireboat 2 at 8 personnel per day when this boat was re-designed and replaced in recent years. At the time of its construction, there were verbal discussions regarding the possibility of staffing new Boat 2 with five dedicated personnel by removing three firefighter positions per day, but those discussions never materialized into formal approvals or changes. Given that Harbor operations have materially changed since 1985, there is no record of why the current fireboat quantities, capabilities and staffing now meet or exceed the Harbor s reasonable risks to be protected and what the desired emergency incident outcomes should be. While new Fireboat 2 was designed based on an updated risk assessment, it has really been 26 years since all Harbor fire service levels were last considered between the agencies. Apparently, fireboat quantities and staffing levels have just been continued as a legacy practice Hazardous Materials Squad 48 Although the Fire Department has responded to hazardous materials incidents since its inception, it began a formal Hazardous Material (Haz Mat) program after a series of major Haz Mat incidents in the early 1970s. The Fire Department gradually implemented a Haz Mat response unit in the Port operational area over many years (using shared staffing from an engine at first). In July of 1994, a Haz Mat squad apparatus and specialty equipment was moved to Fire Station 48 in San Pedro but due to budget constraints, no staffing was assigned to the squad. Under this configuration, when Squad 48 was dispatched to a Haz Mat incident, the fire engine was shut down and personnel were moved to the Squad. An additional trained Fire Department decontamination company was dispatched with them to form a full complement of trained members. Firefighters at Fire Station 48 who were to staff Haz Mat Squad (HM) 48 received additional training and hazardous materials certifications before they were allowed to staff the squad. Section 4 Fire Protection Systems Review page 18

23 The Hazardous Materials unit without dedicated staffing was part of the response plan assets in the DMG cost allocation plan. However, starting in 2001, staffing changes with resultant billing to the Harbor Department did occur, as described below: Immediately following the terrorist attacks in New York in September of 2001, due to the increased concerns about the Harbor Department s vulnerability to terrorist activities, the Squad at Fire Station 48 was activated on a full-time basis with firefighters assigned on overtime. In July of 2002, four permanent full-time position authorizations were added for HM 48. There is no written record that the Harbor Department was involved with this decision or formally agreed to increased cost sharing due to this decision by the Fire Department to move to dedicated staffing on the HM 48 unit. By 2010, the Fire Department operated four full-time Haz Mat Response units, and they are deployed so that each can cover roughly a quarter of the higher-riskprobability areas of the City. Haz Mat squads are currently stationed in San Pedro at Fire Station 48, downtown LA at Fire Station 4, the LAX area at Fire Station 95, and Northridge at Fire Station 87. There is no record in the years since 2001 that the Fire and Harbor Departments discussed the continuing need for a dedicated Hazardous Materials Squad as the actual quantity of bulk hazardous materials used in and transiting the Harbor has changed as the national economic needs change Risk Prevention Efforts One way to control risks is through built-in protection, building and fire code enforcement inspections, public education and employee safety training. As is typical throughout Los Angeles, fire station personnel conduct business inspections and fire prevention bureau personnel conduct more technical plan reviews and inspections for permits. The fireboat crews conduct tank ship inspections before they are allowed to load or unload, waterway and homeland security awareness inspections, waterside fixed fire suppression equipment inspections and special dive operations as necessary. The fire prevention bureau work for buildings on Harbor Department property is handled via normal City/Harbor Department permit and development fees and as such, is not part of the fire protection cost allocation plan. The fire company fractional cost model includes the routine fire prevention program activities that the fire crews provide Program Operations Deployment System Efforts The Los Angeles Harbor District is in Los Angeles Fire Department Battalion Six, serving the San Pedro and Wilmington areas. Section 4 Fire Protection Systems Review page 19

24 The Fire Department uses a standardized level of staffing for the apparatus assigned to field emergency assignments. The following table lists the ground-based units in Battalion Six (B6) that are part of the 1997 City-Harbor Department MOU for cost allocation: It also lists the staffing level that remains in place to this date for those units: Table 1 Ground-Based Units in Battalion Six Included in 1997 City-Harbor Dept MOU Station/Unit # 1997 MOU Cost Allocation % Current Annual Cost Allocation % Daily Firefighters Assigned Engine Engine Engine Engine Light Force Light Force Light Force Engine Engine Engine Haz Mat Squad Rescue Ambulance Rescue Ambulance Rescue Ambulance Total 56 Engines are the primary firefighting units; the Light Forces are two-piece units consisting of an engine and aerial ladder. Rescue Ambulances are transport ambulances staffed with two firefighter-paramedics for Advanced Life Support (ALS), or two firefighter-emergency Medical Technicians (EMTs) for Basic Life Support (BLS). There are also other types of resources in Battalion Six. In addition to other firefighting units, the supervising Battalion Chief responds from Fire Station 49 as the initial incident commander for incidents requiring that level of management. The fireboats are located strategically around the harbor to provide a 1.5-mile response distance radius given wake speed operating restrictions necessary to protect moored vessels and other property. The fireboats range in size and capabilities and when combined on serious incidents can handle anything from a small pleasure craft taking on water to a large ship fire or oil spill Section 4 Fire Protection Systems Review page 20

25 fire, and other types of maritime incidents. The fireboat locations, staffing and cost allocation rates are shown below: Table 2 Fireboat Locations, Cost Allocation, and Daily Staffing Unit # & Station Current Annual Cost Allocation % Daily Firefighters Assigned Fireboat No. 1 FS Fireboat No. 2 FS Fireboat No. 3 FS Fireboat No. 4 FS Fireboat No. 5 FS Total: 22 Land Based FF: 56 Total Daily FF in 1997 Cost Plan: 78 The location of these fire stations, some with fireboats, is depicted in Exhibit F2. There is an important omission to the resources in the above two tables for resource costing the Battalion and Division Chief Command Teams. They were expensed in the DMG study both retroactively for the Nexus settlement and going forward operationally. Yet when the staffs at the time constructed the MOU, they were not assigned cost allocation percent rates. This meant Fire Department staff had to construct a costing method and use Fire Department overhead costing policy to share these costs into the Harbor Department bill. This issue will be covered in more detail in Section 5.10 of this study. Depending on the type of emergency reported and the risks presented at the location, the Fire Department dispatches a variety of resources designed to stop the escalation of the emergency to greater alarm proportions resulting in significant causality, economic losses, or business interruption. Generally, a single-patient emergency medical event in a building would require an engine and rescue ambulance. A modest building fire (First Alarm) would require 3 engines, 1 ladder truck, 1 rescue ambulance and 1 battalion chief for a total of 19 personnel. Water incidents can require from one fireboat to several boats with supporting ground units. Land-based fire and EMS personnel can also be ferried to larger ship incidents via the fireboats and Fire Station 112 was designed to park several fire engines so those crews can re-deploy to on-water incidents. Hazardous Materials Incidents under Occupational Health and Safety (OSHA) safety regulations, require certified personnel plus a certified incident commander. These personnel are deployed via the Haz Mat Squad, supporting engines and Light Forces. Section 4 Fire Protection Systems Review page 21

26 Best practice response times would place the initial response unit within 1.5 miles or about 4 minutes maximum travel time to the incident. Follow-up units for a serious emergency should all arrive within 8 minutes travel time. The spacing of fire stations and fireboats around the irregularly shaped harbor provides these response times Deployment System Outputs In Fiscal Year 09-10, the San Pedro area units in Battalion Six responded to 10,690 incidents. This was an average of incidents per day. On average, each incident had 2.4 responding apparatus, either ground or fireboat units. Of these there were 103 structure fire incidents of varying types and severity. Over 70% of the incidents were for emergency medical or rescue problems. The actual percent varies depending on which types of EMS incident categories are included in the percent of EMS workload. The EMS workloads in Battalion Six are normal for a mixed-use urban area. There are multiple types of fireboat responses for incidents from small watercraft flooding to emergency medical to fires, rescues or incidents where scuba divers are needed. Not included in the count below (Table 3) are Homeland Security operations for patrol and dive teams. Boats perform EMS on and around the water, regularly supporting the cruise ship tenants while transiting in LA area waters, as well as other boating and water enthusiasts. They also respond to petrochemical and other spills, work with the Coast Guard, place oil spill control booms, use fire stream monitors to break up or direct spills, determine the boundary of threat, etc. Boats often prevent spills by preventing vessels from sinking. Boats also respond to various on-water and near-water fires and drowning emergencies, and can also perform search and rescue and other utility tasks. Utility tasks include providing a water supply to land companies or ruptured water mains, including marine oil terminal and storage facilities engineered fire protection systems, landside fire suppression, emergency incident high intensity night lighting and public address for hazard notifications to boats and ships. The emergency incident counts per fireboat are: Table 3 Emergency Incident Counts Per Fireboat Unit ID Fire Station ID Incident Count Boat Boat Boat Boat Boat The busiest units in Battalion Six are the Rescue Ambulances followed by Engine 38 and 48. The incident command teams (chiefs) in Battalion Six responded on 416 incidents, a rate of a Section 4 Fire Protection Systems Review page 22

27 little over one per day. Squad 48, which makes responses to hazardous materials incidents and other technical emergencies, responded to 160 incidents in the year, of which about 25 were onto Harbor Department lands. Responses on Harbor Department Lands By Ground Based Units The 1997 MOU and the 1993 DMG study, upon which it was based, expensed the fireboat costs for operations and staffing 100% to the Harbor Department. There does not appear to be any historical disagreement to this approach and Citygate feels it is appropriate going forward. However, the parties previously needed and still need a system to allocate the costs of emergency response onto Harbor Department properties or vessels in the Harbor by land-based fire units that also serve the broader community outside of Harbor Department control. While the 1993 DMG study counted incidents on Harbor lands for two years, there is no record attached to that study as to how the actual counts were determined to be on Harbor Department property. The DMG counts resulted in cost share allocations for the ground-based units, which were fixed into the 1997 cost allocation MOU. Since the incident share percentages were fixed by agreement at one point in time, the agencies did not build a records set to annually capture emergency incident counts on Harbor properties. The reality is that at present the Fire Department records system does not capture address fields that can easily be electronically matched to Harbor properties. There are many reasons for this, from the fire records system accepting any free form address text entered to the use of an address that may actually be a public street, not on Harbor property, but then the actual location extends into a terminal operator area or out on the water. For example, if an incident address is entered as Acme St., and the actual address is Acme Boulevard, a computer match cannot be easily obtained to locate the incident on a map, or counted on a list of Harbor addresses. Ideally each incident location would contain X,Y coordinates (Lat/Long) for geocoding onto maps. However, this information is not currently collected either. This study took the available Fire Department address information for three fiscal years as listed in Table 4 on the next page. Citygate and Harbor Department GIS staff tried to verify incident counts on Harbor lands to check the ground-based units cost allocation percents. Initially, Harbor Department staff tried to verify and count Fire Department incident addresses onto Harbor Department property, but could only locate an average of 40% of the incident addresses. Given the total volume of incidents needing to be processed and that these counts onto Harbor Department lands drive a cost allocation formula, better results were needed. Harbor Department GIS staff did not have the advanced software tools and data sets to locate incident addresses (geocode in GIS language). The Harbor Department Auditor then requested that Citygate use its GIS sub-contractor, The Omega Group of San Diego, to perform this work. The Omega Group deals with public safety GIS issues and is also currently a contractor to Los Angeles Police and Los Angeles County Fire Departments. As such, The Omega Group had the best possible Harbor Department area street and address information data sets available. They Section 4 Fire Protection Systems Review page 23

28 also understand how to translate and fix imperfect addresses from the Fire Department s dispatch data. To add to the Los Angeles area GIS data that The Omega Group had, Harbor Department GIS staff provided GIS data sets for the property lines to all Harbor Department areas so incidents could be accurately plotted. The Omega Group processed 25,219 incident records for the entire LAFD Battalion Six area. Harbor Department and Citygate staff identified all of the units and call types that went to Harbor Department properties. From this data, the Omega Group was able to geocode addresses for 99.1% of the incident locations (Exhibit F2). The result was 1,018 emergency unit responses that located within Harbor Department property in the 12-month period. This is not the count of incidents, as some incidents require the response of multiple units Incident Location Measurement Results The table below compares the incident count audit results from three previous years to the 1997 MOU percentages. This first table is only for the land-based fire units in the 1997 MOU: Table 4 Comparison of Land-Based Fire Units Incident Response Percentages Station/Unit # Base Year 1997 MOU Cost Allocation % 2007/08 Incident Share % 2008/09 Incident Share % 2009/10 Incident Share % Engine Engine Engine Engine Light Force Light Force Light Force Engine Engine Engine Haz Mat Squad Rescue Ambulance Rescue Ambulance Rescue Ambulance As can be seen, there is a variance in the percent of responses onto Harbor Department lands. This is to be expected, given that population changes and different types of businesses over time drive emergency medical calls for service. Section 4 Fire Protection Systems Review page 24

29 As a baseline comparison to what the 09/10 unit response percentages would mean if applied to the 09/10 Fire Department invoice to the Harbor Department, this table compares and totals the differences: Table 5 Comparison of Applying 09/10 Unit Response Percentages to 09/10 FD Invoice Unit ID 1997 Percent to Harbor 09/10 Percent to Harbor 1997 Percent Based Cost to Harbor 09/10 Percent Based Cost to Harbor Engine % 1.75% 97,912 57,115 Engine % 88.30% 2,103,362 2,857,337 Engine % 2.99% 195,823 97,585 Engine % 24.80% 522, ,403 Engine % 0.60% 16,319 19,582 Engine % 0.84% 81,593 27,415 Engine % 12.85% 259, ,231 Light Force % 6.42% 560, ,838 Light Force % 6.58% 609, ,635 Light Force % 0.66% 194,915 32,161 Haz Mat % 17.60% 466, ,759 RA % 3.37% 300,954 55,422 RA % 0.57% 87,162 9,374 RA % 7.77% 222, ,118 Total $5,718,339 $5,744,976 Net Difference + $26,636 As can be seen, while the percent factor measures vary being 16 years apart, the net cost change is a slight increase to the Harbor Department. So there will likely be an increased cost to the Harbor Department if the agencies continue to use response count allocation measures for all responding units in a revised agreement Deployment System Outcomes The agencies have not agreed to, nor are there reliable data points collected to measure, emergency outcomes. Even structure fire loss is hard to estimate as the losses are fire crew estimates of damage without final verification to insurance payouts or value saved from the Assessor s Office value records. Citygate reviewed the raw dispatch computer data and finds the response times and unit mix to emergencies meets Los Angeles Fire Department policy and generally accepted national guidelines. Section 4 Fire Protection Systems Review page 25

30 Most of the emergencies are typical single responder events, such as a single-patient medical emergency or accident. There are multiple complex incidents from rescues to fires to boating emergencies. In reviewing the incident log comments and from interviewing agency staffs, the outcomes are generally viewed as good, and there is no question that the resources provide acceptable outcomes. However, the 1985 Fire Master Plan for the Harbor Department is very dated. Since then the Harbor has undergone great change in the quantity and type of materials and ships transiting the Harbor. Some of these technologies and hazards were not even on the drawing board in In other instances the types of hazards found have been reduced as business practices changed over time. Given these changes, it would be appropriate now for the agencies to undertake a joint fire master plan effort to understand current and future risks, what the current response assets can or cannot mitigate, and from that gap analysis choose the level of fire, emergency medical and technical response assets the Harbor needs going forward. As this study will explain in the fiscal section, most of the Fire Department charges to the Harbor Department are for personnel, and most of those are on fireboats as can be seen in this listing: Harbor Department charges in FY 09/10 were approximately $24 million: Fireboats in FY 09/10 cost $18 million or 75% of total bill Of the fireboats, Boat 2 with a crew of 8, cost $6.6 million or 36% of the boat s subtotal cost 22 personnel per day are assigned to fireboats Land-based unit costs were $5.9 million for a total of 1,018 incidents; most were for EMS This quantity of land-based calls is very modest and less than what is typical for a moderately busy urban fire station. Yet given the billing formula percents per unit, the Fire Department must track and bill for: 14 separate Battalion 6 units in the legacy MOU framework 168 line unit personnel, plus command staff. The Harbor Department is protecting its risks by buying fire insurance in the form of response and preventive forces. This purchase has to be balanced against risk probabilities and outcomes as to what the Harbor Department can reasonably pay for in fire services to mitigate the perceived risks, to the extent determined cost-beneficial. The best way to have this discussion is through a master plan review so the Harbor Department and City leadership can choose the level of protection it desires and can afford to pay for. Section 4 Fire Protection Systems Review page 26

31 SECTION 5 CURRENT FISCAL BILLING SYSTEMS REVIEW This section of the report will review how costs are built up, overhead is allocated and how these details are presented to the Harbor Department. Once this baseline is understood, a gap analysis will determine if the billing matches not only the Los Angeles City mandated methods, but those directed by the formal agreements between the parties. This financial relationship analysis thus includes four areas of review as follows: Understanding the Fire Department billing invoice; Understanding the City Cost Allocation Plan (CAP) and how it is or is not applied to Fire Department billing to the Harbor Department; A review of the Fire Department costs to staffing, fire logistical (overhead) costs; Specialty costs and costs outside of the legacy agreement framework. This fiscal review covered the years of and The Fire Department invoice to the Harbor Department was also inspected and reconciled to its source data. 5.1 AUDITING AND REVIEW OF RECORDS Article 7 of the 1997 MOU provides parameters for the accounting and documentation of records relating to the services noted in the agreement. As noted in this article, such provisions apply whether an audit of the records are performed by the City or a third party. Under this article covering records and accounts, parties to the MOU will retain records consistent with the City Records Retention Plan but for a period of not less than five years. It does not appear that parties to the MOU could contest charges beyond a five-year period. The Audit and Review Records section specifically states that, to the extent that invoice costs are based on the Cost Allocation Plan, no other documentation shall be required. The MOU specifically exempts the Cost Allocation Plan from disputes between the parties of the MOU. For clarity, the MOU in Article 1 defines the Cost Allocation Plan. The procedures in this engagement verified that the Cost Allocation Plan charges in the annual Fire Department invoice meet the MOU definition. Article 7 of the MOU states: In the event the Department (Harbor) requires documentation that is not readily available, both parties agree to use their best efforts to develop a satisfactory document standard. To the extent that significant costs are incurred by the City to develop and produce additional documentation or develop new cost accounting systems, those costs shall be passed through to the Department provided they are used solely for the purposes of this Memorandum. Section 5 Current Fiscal Billing Systems Review page 27

32 During the course of this engagement, issues arose pertaining to the tracking and documentation of Battalion Chief overtime and major boat repairs. The current Fire Department billing methods and back-up detail are insufficient to answer very specific questions from the Harbor Department. As such, it would be prudent for both parties to develop a satisfactory document standard on a go-forward basis that provides supporting detail to the main categories in the invoice to the Harbor Department. Article 6 of the MOU pertaining to Payment Calculation specifies that calculation methods to be used are to follow instructions issued by the City Chief Administrative Officer for Fees for Special Services Annual Review. In the course of our analysis, these procedures are assumed to be the method standards for calculating all other costs unless specifically noted by the MOU (i.e., Cost Allocation Plan). There are numerous accounting regulations pertaining to arriving at the cost of services billed to the Harbor Department including Federal issued cost accounting rules, Federal Administrative Regulations (FAR) and OMB Circular A-87. However, the Federal rules and references only pertain to the Cost Allocation Plan, which is specifically defined by the MOU in Article 1. Our analysis assumes all other costs on the annual invoice are not covered by such Federal regulations. The Federal regulations are not referenced anywhere else in the 1997 MOU except in the definition section covering the Cost Allocation Plan, which again, is exempted from further discussion per Article 7(b) which states, To the extent the invoice costs are based on the Cost Allocation Plan, no other documentation shall be required. 5.2 THE FIRE DEPARTMENT INVOICE The Citygate team, via document requests and on-site meetings, assembled significant detail and was able to successfully trace the fire service invoicing for the Harbor Department to supporting documentation in the Fire Department and City overhead fiscal systems. This factual understanding was supported at every step by interviews with Harbor, Fire and City Hall staffs. In total, the Citygate team obtained an understanding of the invoicing process and identified some gaps from the actual methods to the legacy inter-agency agreement intent. The Fire Department currently assembles a four-page annual bill for the Harbor Department that details 18 columns of financial data covering 20 cost centers or apparatus units (see Exhibit F4 for FY 09-10). The Fire Department bill is difficult to read for several reasons; not only is it a line-item document, but also the content and detail assume a very detailed understanding of what goes into the bill. The columns across the top of the bill contain various definitions and component costs. Listed down the left side of the bill are the Fire Department resources listed in the cost allocation MOU. Section 5 Current Fiscal Billing Systems Review page 28

33 For clarity, here is a brief introductory definition of each column in the bill, which will be followed by a more detailed description in the very next report sub-section where the terms are matched to the fiscal formulas. Table 6 Fire Department Bill Definitions Direct Costs Harbor Staffing Class Code No. Average Salary Total Salary Total SOD SOD Per Auth 30.85% Emerg OT Bonus 913 Expenses 5159 Direct Cost Indirect Costs Brief Definition Job classification title for position assigned to a unit. City pay code for the job class. Number of personnel in the job class for that unit based on 3-platoon duty schedule. Average base salary for the job class. Average is midpoint of seniority Department-wide. Number of total personnel in job class times average salary. Scheduled Overtime Duty replacement cost as calculated from the percentage in the SOD per Auth in the next column to the right, times the # of positions. Cost in dollars calculated as a percent of Department-wide overtime divided by all included positions to maintain the required minimum staffing on shift-based positions. The overtime cost includes Fair Labor Standards Act (FLSA) costs. Costs include all compensated time off (CTO) leave types. Overtime cost per position when an employee is worked past the end of a shift due to an emergency call that started prior to end of shift. Average cost per job class for special duty callback, uniforms, etc. The direct expense share per position for the operation of the Bureau of Emergency Services and Emergency Medical Services Division. Total of all direct costs for the number of personnel in each class row. Explanation Fringe Benefits % Central Services % Div/Batt OH % Dept Admin % Total Average cost of benefits to each job class salary. City controller s CAP allocation costs for Citywide overhead. The costs of Battalion and Division Chief teams divided by the cost of front-line field staff to get a percent per job class. Fully loaded costs for these job classes. Remaining general Fire Department overhead position costs shown as a percentage of cost allocated to each line job class. These are costs of support personnel and supply expenditures that benefit the Fire Department as a whole and are not directly charged to a fee program. Sum of direct and indirect costs prior to applying Harbor Department MOU cost allocation percentages. % Charged Harbor Cost share percent applied to total cost for each job class per the MOU. Total Harbor Cost Adjusted final cost of services per job class to the Harbor Department. Some of the more detailed items above such as Citywide and Fire Department overhead will be reviewed in detail further into this report section. Section 5 Current Fiscal Billing Systems Review page 29

34 5.3 FIRE DEPARTMENT TO HARBOR DEPARTMENT INVOICE PREPARATION PROCESS The understanding of the invoice billing begins with a recap of the base documents used to assemble and calculate the information for each column. The base documents used by the Fire Department for devising the charges on the Harbor Department invoice are as follows: Fire Department Budget Summary (48 pages) identifying all of the programmed funding for the Fire Department. The detailed worksheets described in this report s Section 5 tie back to the Budget Summary and internal cost documents shared with Citygate. Position classification salary worksheet (12 pages) supporting the position salaries in budget summary. Budget detail worksheet (4 pages) identifying allocated costs for the Bureau of Emergency Services (BES) and the Bureau of Support Services (BSS). Calculations are devised as a flat dollar rate per position in the Fire Department, one for regular fire personnel and another for emergency ambulance positions. Fire Department Overhead worksheet (3 pages) detailing the formulas used by the Fire Department for overhead allocations. The annual CAP memorandum from the City Controller s office specifying the various CAP rates to be used to capture citywide overhead charges. The CAP itself is a voluminous set of documents, worksheets and allocations summarized by the City Controller s Office for different internal charges. CAP Fringe Benefit Plan summary identifies the fringe benefit percentage to be used by any position classification. The City devises two rates to be used for the Fire Department, one for sworn/safety personnel and another for civilian personnel Invoice Column Calculations After assembling and calculating the base documents, the Fire Department uses the information in those documents to formulate the details in the 18 columns of financial data covering 20 cost centers or apparatus units for the Harbor Department. The existing invoice provides staffing information for all group settings including areas where the Harbor Department only pays a portion of the grouping. The following narrative explains the compiling of information for each column. Harbor Staffing and Class Code: Each apparatus or service group identifies the position classification and their class code number for each position assigned to the Harbor Department. The Class Code ties directly to the position classification salary worksheet used to assemble the Section 5 Current Fiscal Billing Systems Review page 30

35 entire Fire Department Budget. The position title and class code number must be used together for arriving at the correct salary amount. The Fire Department has numerous pay levels for the same rank. No. (number): The number of staffing currently assigned to a particular apparatus or fire service group in the Harbor Department. Average Salary: The average base salary cost for that particular class code as identified in the position classification salary worksheet used to assemble and document the entire Fire Department Budget request. Total SOD: Total Scheduled Overtime Duty (SOD) per Fire Department-wide job class to maintain constant staffing during vacation, sick leave and other earned or injury leave times. Amount shown on invoice is a multiple of the Total Salary times the SOD percentage rate. SOD per Auth (shown as a percentage): Scheduled overtime duty per authorized position. The annual rate for SOD comes from position classification salary worksheet. Cost in dollars calculated as a percent of Department-wide overtime, including Fair Labor Standards Act (FLSA) premium pay, divided by all included positions to maintain the required minimum staffing on shift-based positions. The amounts shown per position do not factor into the billing amount totals. Emerg OT: Overtime cost per position when an employee is worked past the end of a shift due to an emergency call that started prior to the end of the shift. Amount calculated in position classification salary worksheet. Bonus: Average cost per job class for special duty callback, uniforms, etc. Amount calculated in position classification salary worksheet. A more accurate definition would be supplemental compensation including stipends for special duty. Expns: Cost per position derived from the allocation of costs from the Bureau of Emergency Services and Bureau of Emergency Medical Services as identified in the budget detail worksheet. The Harbor Department is charged two rates on its invoice, one for apparatus safety positions and another for ambulance personnel. Direct Cost: A more accurate definition would be total wages or total direct wages, since this column sums direct compensation costs as shown under these current bill headings defined just above: Total Salary Total SOD Emerg OT Bonus Section 5 Current Fiscal Billing Systems Review page 31

36 Expns. Fringe Benefits (shown as a percentage): The fringe benefit percentage to be used by any employee group or work class. The City devises two rates to be used for the Fire Department, one for sworn/safety personnel and another for civilian personnel. The percentage is set annually and comes from the CAP Fringe Benefit Plan sheet. Central Services (shown as a percentage): City-wide CAP charges set annually as a percentage in varying amounts depending upon the allocation of facility costs. Three different rates are shown on the Harbor Department invoice depending on the facility used by the apparatus or service group. The annual rates are identified in the Annual CAP Memorandum. DIV/BATT OH (shown as a percentage): Calculation of Indirect Field Support is developed on Fire Department Overhead worksheet. Personnel costs are split on this Fire Department worksheet into three groupings: 1. Direct costs billable which are front-line staff; 2. Indirect Field support which is the field supervision battalion chief and division chief teams and their support staff; 3. Indirect Dept Admin & Supt which are the department administrative and support staff. The Div/Batt OH column amount in the Harbor Department bill is a percentage arrived at by taking the Div/Batt costs and dividing it by the Direct Costs billable. DEPT ADMIN (shown as a percentage): Calculation of Indirect Field Support as shown on Fire Department Overhead worksheet and listed above in the DIV/BATT OH description. The Dept. Admin cost is a percentage arrived at taking the Indirect Dept Admin & Supt costs and dividing it by the Direct Costs billable to the Harbor Department. TOTAL: The addition of the following columns: Direct Cost Fringe Benefits Central Services Div/Batt OH Dept Admin. Charge Harbor (shown as a percentage): An agreed amount by the two parties for allocating the costs to the Harbor Department. The arrangement charges 100% of the staffing for the fireboats and the Assistant Fire Chief to the Harbor Department. The remaining service Section 5 Current Fiscal Billing Systems Review page 32

37 groupings and apparatuses use a variety of percentage ranging from 65% for Engine Company 40% to 2.5% for Engine Company 101. Total Harbor Costs: The computed amount of the Total Column multiplied by the Charge Harbor Percentage. At the end of the invoice, the Fire Department computes a portion of the emergency revenue services (collected ambulance charges) and allocates them as a credit to the Harbor Department invoice. In Fiscal Year , the gross amount of the invoice totaled $24,268,784 with a revenue credit of $123,988 for a net invoice of $24,144, SUMMARIZING THE BILL DIFFERENTLY FOR A SERVICES-EXPENSED MANAGERIAL VIEW For review and understanding in this summary report, Citygate has summarized the invoice information in a more understandable set of tables. These Citygate summary tables are located in Exhibits F5 and F6 for data from Harbor Department bills for FY The Harbor Department bills for all three fiscal years reviewed indicate the same level of staffing (84.7 FTEs) for services attributed to the Harbor Department. Given we found that the bills for all three fiscal years are identical in content and format, the following Citygate summary table is for Fiscal Year as these costs are the most recent the agencies have seen. The Citygate table identifies resources by service grouping and shows the percent charged to the Harbor Department, the approximate full-time equivalents (FTE) and the billed amounts. This allows a big picture perspective of the very detailed, line-item invoice and expected annual fire cost budget the Harbor Department receives: Table 7 Citygate Managerial Summary View of FY Bill FY Amount Charged to Port FTE Assigned to Port Wages and Benefits Command Team Supervision City-wide Cost Plan (CAP) Fire Dept Overhead Sum Billing To Port Fire Boats 100.0% 66.0 $12,533,074 $1,359,954 $1,634,363 $2,653,635 $18,181,026 Engine Companies 12.4% 13.8 $3,190,669 $346,002 $429,549 $675,143 $4,641,363 Haz Mat % 1.6 $319,237 $34,958 $43,957 $68,212 $466,363 Emergency Medical Asst Fire Chief 12.4% 2.2 $420,661 $43,311 $56,822 $89,820 $610, % 1.0 $285,002 0 $47,510 $37,031 $369,543 Subtotals 84.7 $16,748,642 $1,784,225 $2,212,201 $3,523,840 $24,268,908 Source: LAFD. Summarized by: Citygate Associates. Less EMS Revenue $123,988 FY Invoice $24,144,920 Section 5 Current Fiscal Billing Systems Review page 33

38 As noted earlier, we have re-formatted the invoice information for two fiscal years into 7 data columns and grouped the cost centers by function in Exhibits F5 and F6. Aside from grouping the expenses by service groups in the new format, the re-formatted exhibits clearly show the personnel full-time equivalents (FTEs) for each functional category. The existing bill provides staffing information for individual fire response units but not FTEs for entire similar response units such as all the fire engines or all the fireboats. The existing invoice format superficially presents an audit trail for tracing expenses but is without sufficient detail or supporting documentation. The current invoice is cumbersome to read at an executive management level for gaining a perspective on categories, not just units of fire service operation with their expense for the Harbor Department. The agencies can, of course, continue the use of the existing invoice structure. However, a better managerial perspective can be gained by adding a summary review of the same information presented in Exhibits F5 and F6. For easier managerial review, we suggest the labeling of costs using different terminology for Central Services and Div/Batt OH as found in the Fire Department bill. Citygate has consolidated unit staffing personnel costs into one column labeled Direct Wages and Benefits. In the column labeled Field Supervision we have included the incident command battalion and division chief teams. The re-formatted exhibits add a column for approximate full-time equivalents (FTE) to quickly show the level of resources in each service grouping dedicated to protecting the Harbor Department service area. Furthermore, a total of FTEs can quickly show any change in resources or allocated costs from year to year. 5.5 DIRECT FIRE PROTECTION COSTS AND STAFFING SECTIONS OF THE BILL The source invoice currently used can be easily enhanced by providing a glossary of terms for each billed row and column such as Citygate provided on page 29. It should be noted that the Fire Department bill provides a detailed breakdown of the various field service units encompassing these direct staffing costs. We inspected the various staffing assignments per the agreed-to Fire service charges MOU and followed the allocation of charges (wages, benefits, and supervision) for arriving at the annual bill to the Harbor Department. The Fire Department uses typical methods for collecting and then billing out its own costs. The Fire Department follows the City Controller s Office policy for applying both Citywide and Fire Department overhead costs. Fire Department costs are based on the number of response units and headquarters personnel assigned to Harbor Department operations per the MOU cost for services formula that listed the units providing service to the Harbor area. The Fire Department uses a Department-wide average cost for each position charged to account for differing seniority cost levels. In the course of our review, we examined supporting cost schedules covering 3,586 authorized safety positions and 352 authorized civilian positions. The base salaries and wages for all Section 5 Current Fiscal Billing Systems Review page 34

39 positions noted in the annual invoice tie back to supporting schedules as summarized by the Fire Department Budget for Fiscal Year Amounts for Scheduled Overtime Duty (SOD) to maintain staffing for vacation absence and other direct position compensation are consistent with the data used for compiling the departmental budget. The bill column noted as Bonus appropriately covers the amounts paid to each position for negotiated specialty pay types. We found that the amounts on the bill trace back to the budget detail. On the bill, many cost columns use average compensation percentages per position to arrive at direct compensation totals. For example the average holiday pay per job classification is used, since each line-item is a composite of people at different pay/seniority steps. The fringe benefit rate of 48% is within the range that Citygate sees in public safety agencies today. Some safety benefit costs are already in the high 50% range, and we have not seen any below the low 40% range. Please note that the fringe benefit costs itemized on the invoice do not include any unfunded pension liabilities the City may have. For many defined benefit plans, the unfunded portions of these pensions continue to increase. The Los Angeles Fire and Police Pension unfunded portion went from 11% to 17% even though the employer contributions were moved up from 22% to 28%. The governmental accounting rules for accounting for pension costs are in the midst of change. In future years, the City may need to recognize the unfunded liabilities on an annual basis and in turn possibly increase annual charges to the Harbor Department for these costs. 5.6 APPLICATION OF CAP CHARGES TO DIRECT FIRE EXPENSES The annual invoice for Fire Department services to the Harbor Department labels the CAP charge as Central Services. Each Fire Department staffing function line item in the bill is charged one of the applicable Controller s Office CAP rates. For Fiscal Year , the rates varied from 25.3% to 20.9%. The Citywide Cost Allocation Plan (CAP) charges come through the fire billing without modification by the Fire Department. The City Controller s Office provides the various cost rates to the Fire Department in an annual memorandum. The Citywide overhead charges for the Fire Department ranged from 25.3% to 23.0% in FY For the incoming FY bill, the City Controller s Office decreased the overhead rates down from 18.7% to 15.5% reflecting the results of budget cutting and staff reductions Citywide. Exhibit F7 shows the CAP percentage charges for two years. The Controller s Office uses different rates (actually lower rate charges) depending how the City recoups the cost of facilities used for delivering the departmental service. If a department pays for and recovers the costs associated with facilities, then a lesser charge applies; otherwise the higher published rate is used. On 57% of the billed charges, the Fire Department bill applied a lowered CAP rate that recognizes the Fire Department maintains and recoups costs for facilities associated with delivering services to the Harbor Department. However, these fire station costs Section 5 Current Fiscal Billing Systems Review page 35

40 are in turn recouped by the Fire Department through its departmental administrative overhead charge of 39%, so, in other words, the Harbor Department was not doubled-billed for CAP and Fire Department overhead charges, where Fire Department overhead is more appropriate. 5.7 EXPLANATION OF THE CITYWIDE COST ALLOCATION PLAN (CAP) The City Controller s Office manages the complete accounting of the Citywide Cost Allocation Plan charges or CAP. The City Controller s Office provided Citygate with supporting materials and, through meetings, verified our understanding of the information that details and outlines the various costs associated with the City s CAP. The Controller s Office provides an identification number for each version of the cost plan as it is updated over the years. In Fiscal Year , the Controller s Office used CAP #31 to identify the cost plan. Within each annual CAP the Controller s Office calculates a published rate and revised rates (discounted rates). The Controller s Office specifies the use of the discounted rates for the Harbor Department whenever the facilities or utility costs are directly paid by the Harbor Department. Typically, general government City facilities like City Hall have the highest CAP rates. Whereas facilities purchased, maintained and used by only one department, have the lower CAP rates. The City maintains a federally approved cost plan that must be reviewed periodically by one of the federal departments providing federal grants to the City. The Federal Government designates a Federal Department (Health and Human Services or HHS) to serve as the cognizant agent to the City. The City must file the cost plan with the Federal cognizant agent who verifies that it conforms to the Federal regulations governing cost plans (Federal Circular A-87). For several decades, the Federal Government has published rules and limitations for arriving at the methods and assumptions used to calculate cost plans. Furthermore, the City s independent audit firm performs audit procedures annually surrounding the use of cost plan charges to federally funded programs and more recently to all other Citywide functions receiving cost plan charges. We were not provided with any information stating that either the Federal or City independent audits had found any flaws with the CAP methods. However, the billing to the Harbor Department does not provide any detailed back-up calculations on the City s CAP charges, the CAP Federal approvals, or for Fire Department overhead rates. Thus, if a State Tidelands inquiry was made into the reasonableness of all aspects of the billing, just producing Fire Department invoices would not likely meet the State s needs. The City Controller s Office maintains a practice of reducing the applied cost allocation plan (CAP) rates where departments own and maintain their own facilities. The CAP procedures are voluminous. The Controller s Office annual CAP memo citing the various CAP rates is categorized by who owns the facilities, who maintains them, who provides utilities, etc. Section 5 Current Fiscal Billing Systems Review page 36

41 The Port staff indicated that the current invoicing does not use the reduced CAP rates on some of the facilities which are owned and maintained by the Port. However, the current invoice does show a different CAP rate for some fire stations owned and maintained by the Harbor Department and provides reduced CAP rates on 45% of the charges. If the facility discounts are incorrect, Harbor Department staff should send written correspondence to the City Controller s Office that specifies the facility CAP rates. In the course of Citygate s work, concerns were expressed by staff at the Port in regards to other City General Fund departments being charged other reduced CAP rates. We made inquiries with the City Controller s Office in regards to this practice. In contacting two different staff members at the CAP Division of the City Controller s Office, we learned that the City does not have any other published rates other than those provided in the CAP documentation. The documented and published CAP rates currently applied to the invoicing uses methods permitted by the federal regulations that the City operates the CAP Plan under. The City s CAP accumulates cost data from the various central support, administrative departments and indirect cost pools. The City Controller s Office CAP unit maintains descriptive narratives on the above noted cost pools and the manner by which they allocate them across the various City functions. Non-staffed Indirect Cost Pools include the following items: Building Leases Building Depreciation Communications Lease Computer Assets Depreciations Equipment Expenses Under $5,000 Equipment Depreciation Gas Utility General City Purposes Insurance Internal Service Units (Fringe Benefits) Liability Claims Petroleum Products Vehicle Depreciation Water & Electricity Methods and procedures for allocating Staffed Indirect Cost Pools become a bit more complicated in order to comply with the various Federal regulations limiting charges from elective offices and for departments involved with the legislative aspects of government. The Controller s Office carefully documents the amounts of exclusionary cost in each overhead department that has elective offices, lobbying activities and legislative functions. The Staffed Indirect Cost Pools include the following functions: (list continued on following page) City Chief Administrative Office City Attorney City Clerk City Ethics Commission Information Technology Mayor s Office Personnel Department Public Works Board Office Section 5 Current Fiscal Billing Systems Review page 37

42 City Controller s Office Council & Chief Legislative Analyst Emergency Management Dept Employee Relations Board Environmental Affairs Office of Finance General Services Department Public Works Contract Compliance Public Works Engineering & Streets Treasurer s Office Pension Dept., Overhead Employees Retirement System Below is a flow chart that shows the process that the CAP uses to identify the individual costs that comprise the overall CAP charge rate: Section 5 Current Fiscal Billing Systems Review page 38

43 Part of the rules governing the use of cost plans specify the procedures for updating the cost plan to actual costs incurred for the City s overhead. All cost plans initially use budgeted amounts for allocating organization-wide administrative overhead. Later on, the City must reconcile such administrative overhead to actual costs incurred. The common term used by independent auditors for this reconciliation is called a carry forward. The federally approved rules governing the reconciling of actual costs permits the City to carry forward the difference between actual and budget and add or subtract the difference, if any, from overhead charges on a prospective basis. No adjustments are made to past overhead charges as long as the City performs this carry forward reconciling at least once every three years. The City of Los Angeles chooses to practice this reconciliation procedure on an annual basis. Unfortunately, for clear reading of the Fire Department bills to the Harbor Department, the resulting CAP computations are interchangeably referred to as either a charge for Central Services or CAP. Not knowing the distinctions for CAP and Department overhead and what is contained in each has created confusion with those receiving the bill and their ability to determine accurate value for the services billed. 5.8 FIRE DEPARTMENT BILL COLUMNS FOR OVERHEAD, SUPPORT AND INDIRECT COSTS The next section of the bill to the Harbor Department is the column for the Fire Department s overall management and support costs associated in providing, supervising and overseeing the entire operations of fire protection to the City and, via the MOU, to the Harbor Department. The fire services bill to the Harbor Department has to thus account for more than Harbor area fire personnel expenses. There are the fire apparatus, small tools, specialty equipment, consumable supplies, training, etc. all to be accounted for. Each of these logistics headquarters bureaus has to be staffed and supervised. Finally, there has to be incident command teams. The Controller s Office also issues guidelines to cover the preparation and use of line service (police, fire, etc.) departmental overhead charges formally known as Department Administration and Support which are labeled in the fire services bill as Fire Department Overhead. Thus, the Fire Department alone does not decide what to include in departmental overhead. Given the size of federal grants the Fire Department receives and the auditing of those grants, justifying overhead is not a trivial task, or one done quickly. However, even though Federal Grant rules would allow the City departments wide latitude in what departmental costs are totaled and then divided into requisite employee counts for overhead, the Tidelands Trust clearly requires that state tidelands pay for direct services only. Thus, some of the Fire Department cost centers such as wildland fire prevention or Citywide chief officer command team overtime could be considered for removal from Harbor Department fire overhead calculations. Section 5 Current Fiscal Billing Systems Review page 39

44 However, removing some small non-harbor Department items does not reflect that the Fire Department does not budget for supplies expenses by fire station or group of fire stations (a battalion); the Fire Department budgets by theme apparatus replacement, repair, small tools, fuel, etc. The approved cost allocation model for the Fire Department then divides these support service supply and personnel costs into the number of firefighters Citywide. The number of personnel assigned to a unit then multiplies this fractional number to arrive at Fire Department overhead. Such cost allocation methodology is very common in local government in Citygate s experience. At first glance, the current Fire Department administrative overhead charge of 39% may appear high. However, the amount of support and logistics surrounding the delivery of fire protection has grown immensely. This departmental overhead charge captures everything from utilities, training costs, paramedic and scuba diver certifications to fuel and communications. In the budget detail, a few of the Citywide Fire Department operating cost line items could be questioned as to their relevance to the Harbor Department. For example, there is a small cost for Wildland Fuel Management ($450) and Fire Road Maintenance ($40,000). However, the Harbor Department does not bear the entire cost for other line items such as scuba diver equipment, certifications and repairs separately in its bill. Such costs are largely needed only by the Harbor Department, not the City at large. While such offsets may or may not result in an accurate direct charge to the Harbor Department, the budgeting and billing system has never been designed to separate out and track such small details in a billing that exceeds $20 million. Thus, the allocation of Fire Department line-item support costs into a per-full Time Equivalent (FTE) allocation is a two-way street. For City only costs that end up in the total overhead charge, the Harbor Department actually only pays a very small percentage of a small line item. For example, if the $40,000 fire road maintenance cost is divided by the 3,907 FTEs in the total Fire Department budget, the result is $10 per FTE, which is then reduced further by the cost share percentage for many of firefighters in the Harbor Department MOU. Conversely, the Harbor Department does not pay a separate line item for diesel fuel as an example. While fire trucks Citywide consume a lot of diesel fuel, it is averaged out across hundreds of fire trucks divided into thousands of firefighters. If the Harbor Department paid for all of the diesel fuel to assigned fire units in the Harbor Department, the bill could be very large, as the fireboats consume a large amount of fuel. The process currently used to arrive at a departmental overhead charge is not a perfect process, but the time needed to adjust or reconcile charges and level of service benefit to any invoicing unit is not a practical cost. It would take a considerable number of staff hours per year to narrow the Fire budget to Harbor-only relevant support costs. Narrowing the budget only occasionally would not work as Fire Department line items can change year to year. Conversely, it would be very difficult and time consuming for the Fire Department annually to create a Section 5 Current Fiscal Billing Systems Review page 40

45 virtual Harbor Fire Department budget to direct cost all fire crew personnel, logistics and support costs. It has to be remembered that, of the entire fire service bill to the Harbor Department, 77% is personnel expenses. Of this percent, 75% is for fireboat staffing dedicated to the Harbor Department. This ratio holds consistent as 75% of the entire bill to the Harbor Department is for fully loaded fireboat expenses. Citygate would suggest that any cost allocation model for overhead not be so costly in annual staff time as to outweigh the final savings that amount to only a few thousand dollars of movement one way or another, which are negated by accountancy costs. Overall, we found the cost items included in the departmental overhead to be reasonable and relevant to the overall cost of delivering of modern, urban fire services. However, it is impossible to prove that the last dollar of overhead is directly accounted to Harbor Department services. It may well serve the agencies to obtain approval from the State that their methods are reasonable and, while not precise, meet the intent of the Tidelands Trust. At the same time the partners need to design cost-effective billing processes, because if the billing became burdensome, the extra billing cost would also then have to be charged to the Harbor Department. Another view of the overhead costs to the Harbor Department can be viewed from a perspective of fire overhead added to the Citywide CAP charges. The table below shows Citywide CAP charges plus Fire Department overhead totaling $5.7 million, which equates to an average overhead charge percentage of 31.0%: Table 8 Citywide CAP Charges and Fire Department Overhead FY Wages and Benefits Field Supervision Combined Personnel Costs Citywide Cost Plan (CAP) Fire Dept Overhead Combined Overhead Charges Overhead Percent to Port Fire Boats $12,533,074 $1,359,954 $13,893,028 $1,634,363 $2,653,635 $4,287, % Engine Companies $3,190,669 $346,002 $3,536,671 $429,549 $675,143 $1,104, % Haz Mat 48 $319,237 $34,958 $354,195 $43,957 $68,212 $112, % Emergency Medical Asst Fire Chief $420,661 $43,311 $463,972 $56,822 $89,820 $146, % $285,002 0 $285,002 $47,510* $37,031* $84, % Source: LAFD. Summarized by: Citygate Associates. Overall Rate 31.0% *The appropriateness of these two charges will be discussed at length in report Section on page 44. Section 5 Current Fiscal Billing Systems Review page 41

46 When cities set fees for their services, they have to keep overhead costs appropriate to the direct cost of the service received, such as a parks department activity. These cost models are complex and highly audited. In Citygate s experience with local government overhead rates, an average City of Los Angeles overhead rate to the Harbor Department for fire services of 31% is reasonable. When total overhead is considered as a percent of the entire bill, the resultant overhead is a little over 24%, again a reasonable amount. As noted above, what is considered to be a reasonable amount from one perspective may or may not meet State requirements. 5.9 FIREBOAT MAJOR REPAIR EXPENSES One of the issues this review was to understand was the arrangement, if any, for the payment of major repairs to the fireboats. This issue arose because the Fire Department discovered several years of major repair costs for the fireboats were not being included by the Fire Department overhead charge summation system, even though for years Fire Department staff was led to believe they were. Provided documentation indicates that the Fire Department submitted boat maintenance costs for Fiscal Year for reimbursement from the Harbor Department. The total cost for six years in arrears was $2.4 million and averaged $400,000 per year. These charges were for outside repairs or preventive maintenance done at boatyards, not small fire station repairs done by Fire Department mechanics. We inspected copies of the invoices provided to the Harbor Department from the outside boatyards associated with outsourced boat maintenance. Under a multi-year time and materials contract with the City, the boatyard was given a list of issues to fix per boat, and for the most part, the Fire Department paid on a time and materials basis after the repairs were made, with no ability to know if the labor and materials charges were at all reasonable. On some of the repairs, Citygate considers it likely that premature preventive maintenance was done, without the boatyard understanding that fireboats do not have the annual operating hours as do harbor tugs and as such, the fireboat systems do not wear as quickly. In researching the historical agreements referenced in Section 3 and Exhibit F1 of this report, Citygate did not find any written agreement or even a mention of repair costs to the fireboats outside the Fire Department. The only assumption that can be drawn is that the billing MOU would require the Fire Department overhead charge to cover the repairs as it does for any others to fireboats or land-based units. Neither party at present can provide s or an oral history on this issue, other than the current Fire Department staff believed the major repairs were inside the normal wear and tear maintenance that Fire Department overhead would cover. The DMG study stated that they included the maintenance costs related to apparatus parts and the special maintenance needs of Fire Boats were also examined and allocated in the approach. Given this it would have been reasonable for Fire Department staff in 1997 when the MOU was designed and implemented, to believe that future major fireboat repairs would be included in Fire Section 5 Current Fiscal Billing Systems Review page 42

47 Department overhead. This is another example of where the cost allocation MOU provides an insufficient framework for all cost decisions. A retired Fire Department Assistant Chief, who supervised Harbor Fire Services when new Fireboat 2 was built, does not recall any staff discussions about major fireboat maintenance repairs during the years new Fireboat 2 was being designed or if the Harbor Department was to be billed separate from Fire Department overhead. What did occur is the Harbor Department purchased Fireboat 2 and extended warranties were arranged to lower early years repair costs. In the years following new Fireboat 2 major repairs were not included by the City accounting system into either CAP of Fire Department overhead calculations. Citygate attempted a common sense approach to resolve which agency should own the major repair bill by following the ownership and operating liability for the fireboats, which would lead to the owner being responsible for major repairs. This approach yielded a surprising discovery, in that there does not seem to be an owner of record for the fireboats. The last four fireboats were purchased by the Harbor Department and operated by the Fire Department. But, when asked the question by Citygate, the Harbor Department does not have an asset number on the fireboats. Further research is needed into who technically owns them for replacement, legal and liability reasons if an accident happens. The Harbor Department purchased the last four fireboats. However, there is no written agreement or oral history as to which agency owns the fireboat assets, or is responsible for capital repairs or the fireboat eventual replacement. With the Fire Department serving as the operator, it has just performed the needed repairs. This works fine under normal overhead as the Fire Department mechanic goes to the fireboat and fixes a modest problem. When a fireboat is placed in dry dock, the repairs and hull cleaning can cost hundreds of thousands of dollars and such repair efforts exceed the capabilities of the Fire Department mechanics Citygate s Observations The Fire Department also operates a large quantity of land-based apparatus. Repairs on those apparatus, including serious as well as regular replacement, are all in the standard Fire Department overhead charges and passed through via formula to the Harbor Department. Thus, it follows that Fire Department overhead should have included all fireboat repairs. Until identified three years ago, the Fire Department for years believed major repairs were covered by its overhead in the annual billing. The Fire Department then proceeded to ask the Harbor Department to pay for these prior repairs via a catch-up billing. Many public agencies in inter-agency agreements generally do not fix such mistakes past a three- or four-year limitation. However, in this case, the MOU provides direction on overhead and if either party wanted to change or dispute how to charge major fireboat repairs, they should have used the dispute resolution process in the MOU. Section 5 Current Fiscal Billing Systems Review page 43

48 The larger issue the major fireboat repair costs represent is that an entire cost area for Harbor Fire Services capital asset purchase, maintenance and eventual replacement does not have any written agreements between the parties that staff can produce to Citygate. What happens if a fireboat suffers a catastrophic accident and needs total replacement? What if the damage was due to a mistake by the Fire Department operator? What credit against operating costs (fireboat and fire station construction and major repairs to these capital assets) should the Harbor Department receive for providing millions of dollars for fire stations and boats, that in turn, protect economic assets vital to the health of the entire City? The agencies have never negotiated these issues before or during the 1997 MOU period, as far as Citygate can find. The fireboat fleet will continue its need for recurring major repairs and future costs need to be shared and absorbed through written arrangements. As the two agencies know, the current cost allocation MOU has gone past its original envisioned term of service. The agencies need to consider the ramifications on the development of the replacement MOU by making a one-time decision on major repairs that is then used as precedent going forward. Citygate would suggest the parties agree on a resolution for the past major boat repairs, and before they make that commitment, settle ownership, replacement liability and determine what, if anything, exceeds the routine Fire Department overhead charges. In the meantime, the parties need to use the current MOU framework to process issues outside of the MOU cost allocation table. As part of determining if major repairs are expensed via Fire Department overhead or supplemental billing, both parties need to develop a system to ensure that only fireboat specific maintenance is done, and that the labor and materials cost estimates be prepared ahead of the work and be vetted against Southern California marketplace norms. In the end, the Harbor Department does pay for repairs, and they need to be a partner in how the costs are controlled. In fact, after additional study, the Harbor Department may itself be able to undertake some of the major repairs as it does with other specialty boats in its operation OTHER COST ITEMS FOR FURTHER DISCUSSION BETWEEN THE PARTIES Since the 1997 cost allocation MOU went into service, the Fire Department and/or Harbor Department added resources. The services that need further discussion include: how the daily command fire chiefs (Battalion and Division) are cost allocated to the Harbor Department; how the Assistant Chief assigned to the Harbor Department is expensed; and a permanent cost share agreement for Hazardous Materials Squad Assistant Fire Chief Assigned to the Harbor Department In the post 9-11 world, the City Council decided to fund an Assistant Fire Chief to the Harbor Department Homeland Security Section as a planning liaison. Citygate was not able to obtain Section 5 Current Fiscal Billing Systems Review page 44

49 any written agreements on how this position was to be expensed or if the Harbor Department was even in agreement with this added position being expensed to it. If the Harbor Department did object, it did not use the dispute resolution process in the MOU. The City/Fire Department billing system places the position in the Fire Department overall bill and also places City CAP and Fire Department overhead on the position. But the position does not have any direct subordinate reports or general Fire Department upper management responsibilities. Most of this position s duties include serving as a liaison and working with Harbor Department personnel. The current Fire Department bill levies both Fire Department and CAP overhead charges of $84,541 for the Assistant Fire Chief in addition to the salary and benefits associated with the position. The Fire Department bill does not add a command Chief overhead cost to the Harbor Assistant Chief, since the Fire Department chain-of-command does not closely supervise this position. Since the Harbor Department agreed to place this special position inside its organizational structure, in its building, in essence it can be presumed the Harbor Department meant to absorb the entire piece of what would otherwise be City and Fire Department overhead directly. This arrangement also does not impact the remaining overall overhead at the Fire Department, nor would Fire Department overhead be reduced in any way if this position were eliminated. Adding an overhead expense of $84,541 appears inconsistent with the current situation. The actual duties and work arrangement indicates the Harbor Department s current practice, which assumes the Assistant Chief is considered to be a Harbor Department FTE rather than a typical line fire station FTE with Fire Department and CAP overhead allocation. Removing the Fire Department and Citywide CAP overhead charge in the annual invoice for the Assistant Chief would recognize the arrangement as a voluntary add-on of senior fire liaison costs for the issues internal to the Harbor Department Fire Department Emergency Incident and Station Command Positions The DMG report that led to the firefighting unit cost allocations in the interagency MOU cost agreement used a quantity of incidents on Harbor property method to apportion costs for the land- and water-based firefighting units. Such units need trained and certified incident command officers, above that of the fire station or fire unit level. These are commonly called Battalion and Assistant Chiefs who supervise large area Divisions. There is one Battalion Chief assigned 24/7/365 to Battalion Six in the San Pedro area. During the fiscal years studied this position was backed up by a 24/7/365 Assistant Chief assigned to one-third of the entire City area. Neither the DMG study nor the MOU contains a cost allocation percent for these command resources. Yet, the DMG study used all the direct Battalion Chief FTE costs assigned to the Harbor area annually to determine the underpayment by the Harbor Department to the City for several prior years to the DMG study point. If such direct Battalion Chief costs were used for the Section 5 Current Fiscal Billing Systems Review page 45

50 Nexus study settlement, why not use them in ongoing billing? The position counts assigned to the Harbor Department are easy to track. There is no explanation for this disconnect in the DMG report, the MOU or in a subsequent agreement. It is Citygate s assumption that lacking direction, Fire Department staff started placing command Chiefs in the bill as a separate overhead column (Div/Batt OH) when the new MOU went into place. This column of the bill is only for the incident command team positions. Higher ranking chief officer positions, along with support staff are placed in the Dept Admin column. The FY Fire Department total estimated charge for the Division/Battalion Chiefs was $1,437,921. The Fire Department s bill, as constructed, places a percentage of Citywide incident command Chief charges into each firefighting FTE. In the FY estimated bill, this amount per FTE was 20.12%. This is similar to how the CAP and Fire Department overhead places other charges into the overhead sections of the bill. Since these percentage charges for the command Chiefs to each line FTE position was implemented after the DMG study and not agreed to specifically in the cost allocation MOU, Citygate applied two different cost-share tests to determine if the Fire Department method was consistent and comparable in charging the Harbor Department for incident command Chief costs. Test #1 Direct Costs and Allocation by Number of Fire Stations This test is based on the reality that incident command Chiefs are only needed on a smaller number of the total incidents in a given area. But they have to be on stand-by full-time, as well as having the administrative and public presence responsibility for their entire command. One way to apportion a capacity cost would be to divide the direct cost (Chiefs) by the number of fire station areas they are assigned to be primary responders to. Each chief officer unit is a team of two a Command Chief and an Assistant for communication and resource tracking at complex incidents, so the Chief can handle tactical decisions. Thus it takes four personnel per day: Division Chief, Battalion Chief, and two Assistants at senior firefighter levels. Citygate took the senior step direct compensation for these positions, added in the Fire Department billing percent benefits, CAP and Fire Department administrative overhead to gain the total direct cost for the total number of positions needed to staff a 3-platoon staffing plan 24/7/365. While not exact to the current individual costs, this is a very close approximation similar to the Fire Department bill that averages costs per rank to account for varying seniority. The direct cost for these positions is approximately $3,853,917, of which under the current cost share plan, the Harbor Department was billed $1,437,922 in FY Clearly, the bill to the Harbor Department did discount the Chiefs expense to something more appropriate for the shared service areas in Battalion Six, of which the Harbor is only one part. Section 5 Current Fiscal Billing Systems Review page 46

51 In Battalion Six, the ground stations and fireboat stations in the Fire Department billing to the Harbor Department amount to 6 stations of the total 10 Fire Department stations (including fireboats) in the Battalion. Thus approximately 60% of the response areas serve the Harbor Department area. However, as was seen in the FY 09/10 unit response count analysis, more than just the closet stations respond to Harbor Department property. This can be due to the closet unit already being busy or a complex incident needing more than one unit. Citygate applied a 60% cost share to the Battalion Team command loaded costs and 11.3% for the Division Chief for 6 stations worth of the Division Chief unit larger command area in the western City. When this is applied, a cost share of $1,319,942 is reached, which is $117,978 less than the current City billing method. This is close to the current charge and Citygate s direct cost estimate could be a little low, depending on the exact personnel costs currently pulled into the command Chief positions. For example, the Fire Department has other battalion chiefs on duty Citywide and they are called to greater alarm fires, so all of the command teams are in the Div/Batt Overhead column in the bill. However, there is enough of a cost gap between the cost allocation approaches to warrant the parties discussing changing this cost share method. In fact, if the direct cost to fire station quantity share remains substantially lower, the agencies should move to this cost share method in the next agreement. Test #2 Direct Costs and Allocation by Percent of Incidents in the Harbor Property Since the DMG study cost allocation formulas were based upon the number of incidents on Harbor Department lands, Citygate also tested this method. Since the Battalion Chiefs respond to few emergencies, it is logical they go to Harbor incidents at the same ratio that the land-based and fireboat crews do. Citygate took the landside unit percent allocations, added the fireboat percent and then averaged the allocations. The result was a blended 19%. If 19% of the Citygate direct, fully loaded Chief command team costs are calculated, the result is $732,244. This expense is $705,677 or 49% less than the current billed amount. Even if the call for service percent was increased to 25% of the Citygate direct cost amount to account for the total number of command teams on-duty Citywide, the expense of $963,479 is still significantly less than the currently billed amount of $1,437,922. Both these tests indicate that the two agencies need to re-consider the command Chief expense method to design a formula that more closely reflects that the 6 stations in the Harbor area are not a large percent of the Citywide daily command team cost. Tidelands Trust requirements are clear; the Harbor Department is to pay for direct costs. The long-used Fire Department bill does not contain an agreed-to formula for what percent of how many command teams (Battalion and Assistant Chiefs) is a direct service to the Harbor response Section 5 Current Fiscal Billing Systems Review page 47

52 units. Further, the overtime for the agreed-to staffing should be directly tracked and billed, not be an average of overtime across many chiefs Citywide Additional Land-Based Fire Units Assigned to Battalion Six After the MOU Agreement In the years since the 1997 Cost Allocation MOU was agreed to, the Fire Department found it desirable to add additional resources to Battalion Six in San Pedro. Some of these changes were implemented Citywide, not just for Battalion Six. Listed in the table below are the land-based fire resources in the Cost Allocation Plan: Table 9 Land-Based Fire Resources in the CAP Station/Unit # Daily Firefighters Assigned Engine Engine 40 4 Engine 49 4 Engine Light Force 38 6 Light Force 48 6 Light Force 85 6 Engine 38 4 Engine 48 4 Engine 85 4 Haz Mat Squad 48 4 Rescue Ambulance 38 2 Rescue Ambulance 85 2 Rescue Ambulance Total 56 In the years since the MOU, the Fire Department has added: Three Rescue Ambulances to existing stations (Citywide program); Two Paramedic Ambulances; New Station #36 with an Engine Company; Full-time staffing for Hazardous Materials Squad 48. Section 5 Current Fiscal Billing Systems Review page 48

53 These resources add another 18 firefighters daily to Battalion Six. There is specific direction on how to add units to the Cost Allocation Plan, if the Fire Department were to make such a requested change. On page 16, Article 9, the cost share MOU states that during the term of the MOU the City may seek funds from the Department: for alteration, modification, preservation, upgrade of equipment or assets under the control of the City departments.. Article 9 goes on to state, The City, prior to undertaking such work, shall obtain the concurrence of the department in writing, stating the costs to be incurred and the necessity for making the improvement. It makes sense that if the Harbor Department requested an additional resource, that the additional cost for the requested resource would be negotiated. There is no written record of the Fire Department discussing or requesting cost assistance for the addition of Engine 36 and the five Ambulances. Nor were these units added into the bill to the Harbor Department, even though they do occasionally respond to incidents on Harbor property. The only unit added to the cost plan over the years has been Hazardous Materials Squad 48 as previously discussed in this report. Given the added engine and ambulance units were added solely at the Fire Department s discretion, the Harbor Department was not expensed for them. The next version of the MOU will have to address which ground-based units in Battalion Six are in the cost share plan as any one of the Battalion Six units could be sent to an incident on Harbor Department property Hazardous Materials Squad 48 Cost Allocation The DMG 1994 Study recommended a cost share of 48% for Squad 48 based on the frequency of hazardous materials incidents in the DMG review period. As the staffing history section of this report explained (Section 4), subsquently the Squad was not staffed full-time and thus was not in the 1997 MOU cost agreement. Following the terriost incidents of 2001, with the resultant focus on Homeland Security, along with an increase of hazardous materials transisting the Harbor areas, the Fire and Harbor Departments agreed per the MOU to share the cost of dedicated, full-time staffing for Squad 48. To obtain a cost share percentage per the MOU methods, Fire Department staff counted incidents to Harbor areas and started the cost allociation plan at a rate of 7-9% and since FY 05-06, the share remained at 13.64%. The fully-loaded annual cost for Squad 48 amounts to $3,419,086. A review of the most recent calls for service indicated that 18.9% of the Squad s incidents were on Harbor property. In December 2010/January 2011, as this report was being prepared, the Fire Department had to make economy-driven service reductions and one of these options was to eliminate the dedicated staffing for Squad 48. As the MOU envisions, the agencies discussed the need for the Squad and Section 5 Current Fiscal Billing Systems Review page 49

54 based on the most recent incident data, the Harbor Department offered to pay 20% of the cost for Squad 48, or $683,817, starting with FY and going forward. While this issue was handled within the framework envisioned in Article 9 of the 1997 MOU, there really is no MOU provision for an annual or other type of adjustment to the MOU cost allocation percentages for the units in the MOU the percentages were set for the duration of the MOU. Since Squad 48 was not covered in the MOU, a revision to that unit s cost allocation and/or the other more recent units in Battalion Six could be agreed to in writing. For the future, when the agencies settle on a new MOU, they could continue to use incident counts on Harbor Department property as the basis for the cost-sharing formula. If so, they will need to consider how best to evaluate the cost-sharing formula and how to keep the percentages accurate via periodic updates. Or, the agencies could develop another pro rata share approach of the costs incurred to the Harbor Department to provide it fire, emergency medical and technical incident response capability. Section 5 Current Fiscal Billing Systems Review page 50

55 SECTION 6 LIMITATIONS OF THIS PERFORMANCE AUDIT While extensive fiscal and historical records were examined for this performance audit, it needs to be understood that neither agency set up central and permanent documentation to manage the cost share agreement. Some memoranda were found, but much of the current practices are in the form of institutional knowledge and as such, the processes invented and morphed over time, as different staff members handled the billing for both agencies. Thus billing procedures became more distant in the years since the 1997 cost-sharing MOU. New incumbents to positions in each agency do not know why they do something a certain way, just how they were trained to conduct the technical task. The two agencies do not have an easy and reliable way to count emergency responses to Harbor Department property. As such, any counts have to be considered order of magnitude and not precise to the exact number of incidents. As incremental agreements were reached on new services and cost share percentages, there were not written agreements to clearly state the methodology and reasons, nor review and revision procedures. Where historical agency document gaps were found, interviews in this study provided very valuable information. Employees of both agencies are very well informed, and openly shared what they knew and all parties support improved practices going forward. Section 6 Limitations of This Performance Audit page 51

56 EXHIBIT F1 BILLING AGREEMENTS HISTORICAL REVIEW The following history partially from the 1997 Memorandum of Understanding for services rendered by the City of Los Angeles to the Harbor Department, in support of the Tidelands Trust outlines some of the details of the billing agreements: City Charter Guidance Charter Section 145 in stated in part, Harbor revenue fund money shall be kept separate and apart from other moneys of the City. None of the money in or belonging to the Harbor Revenue fund shall be appropriated or used for any purposes except for the necessary expenses of conducting the Harbor Department including operation, promotion and maintenance of harbor or port improvements services and watercraft owned, controlled or operated by the City for promotion and accommodation of commerce, navigation and fishery, or used in connection therewith. (Amended, 1949) The Board may contract for services necessary to preserve and maintain the trust, and may authorize payments from the fund which are fair and reasonable and which are determined to be beneficial to and consistent with the trust purposes. The Harbor Department is obligated to reimburse the City for the reasonable cost of services it requires from the City to maintain and further the trust purposes. Fire Services Costs History The Harbor Department has been paying the City of Los Angeles for Fire Department services for many years, in accordance with the process outlined in the State of California Tidelands Trust. This process has been studied and revised at least five times for the period of time which records were found from 1977 to One of the major revisions to the trust guidelines occurred in At that time the City, the Harbor Department and the State Lands Commission entered into an agreement designated as Harbor Department Agreement No It settled several claims and disputes between the Harbor Department and the City, and reiterated the rights and responsibilities of each to charge and pay for the properties used and services provided each to the other. However, the 1977 agreement failed to directly address the manner or method of the rendering of future services by the City to the Harbor Department, or the method or methods of the calculation of the future costs. In , the City undertook a study called the Nexus study, to determine whether it was properly recovering the costs of services provided and facilities Exhibit F1 Billing Agreements Historical Review

57 used to further the trust purposes. The Nexus study was conducted by two law firms, O Melveny & Meyers, and Orrick Herrington & Sutcliffe, and the Office of the City Attorney. These firms utilized the services of two independent consulting firms, Ernst & Young, and David M. Griffith and Associates. The portion of the study that focused on the Fire Department s services to the Harbor Department was conducted by David M. Griffith and Associates, DMG. In 1996, the State of California filed a lawsuit against the City of Los Angeles and the Board of Harbor Commissioners, titled State of California acting by and through the State Lands Commission v. City of Los Angeles, et al. The State s Complaint contained causes of action to set better clarity as to what the City could and could not charge the Harbor Department for. The Steamship Association became a part of this lawsuit with an interest in protecting Harbor Department finances. In 1997, the City and the Harbor Department entered into a Memorandum of Understanding for services rendered by the City of Los Angeles to the Harbor Department, in support of the Tidelands Trust Nexus Study The technical work that preceded the 1997 MOU Fire Department billing schedule originated with the 1993 Nexus Study. In the fire service-costing portion of that study, David M. Griffith (DMG) found: Prior to Fiscal Year the City had charged the Harbor Department for the costs of Fire Boat operations and a 9.1% factor for land-based operations. DMG said that the 9.1% factor appeared to have been based on a study conducted by the State of the percentage of fire calls for service on Harbor Department land. During Fiscal Year the parties decided to include 100% of the most used land-based unit, Engine Company 48, and none of the other land-based response costs. DMG recommended and used a different approach, concluding that all Los Angeles Fire Department (LAFD) calls for service should be charged for in addition to dedicated Fire boat operations, but that a credit should be provided for possessory interest taxes. The possessory interest method was the process that the State Attorney General favored. DMG subsequently reviewed the Fire Department s dispatch records for the previous two fiscal years, and developed a table that showed how often each of the Battalion Six (Port Area) Fire Department units responded to Harbor property. DMG then listed the Fire resources that had a significant number of responses on Harbor property in a table, and assigned a Ratio to Port percentage figure to each. This table became Exhibit F1 Billing Agreements Historical Review

58 the source document that was presented to the Harbor Department s Commission to support the DMG determinations regarding cost recovery. DMG noted that their process was much more precise in assessing overhead costs, with different rates for paramedics, firefighters, etc. DMG used fully burdened costs associated with the provision of Fire services including Fair Labor Standards Act compensation, overtime, training, retirement, City Cost Allocation Plan (CAP) costs, etc. The DMG study stated that maintenance costs related to apparatus parts and the special maintenance needs of Fire Boats were examined and allocated in the approach. Actual costs were utilized for Fiscal Year DMG also included depreciation on facilities and equipment. (DMG pg , see statement and 15-year table, which also states that FD costs were $15.4 million in Fiscal Year and had gone up an average of 13% per year since Fiscal Year ) Using their suggested cost allocation process across all types of City-to-Harbor Department services and the proposed Fire Department formula based on calls for service, DMG determined that the Harbor Department had been undercharged for Fire Department services over the previous 15 years studied, dating back to Fiscal Year Based on the DMG findings, they determined that the underpayment was over $53 million dollars. In 1995, the Harbor Commission voted to accept the Nexus study and to repay the City for the 15-year underpayment for all City services, including Los Angeles Fire Department services. Exhibit F1 Billing Agreements Historical Review

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