Office of the City Auditor

Audit of Building Permits

September 2014





Audit Staff
City Auditor: Laura L. Doud
Assistant City Auditor: Deborah K. Ellis
Senior Auditor: Hannah Morgan
Staff Auditor: Damon Melfi
Staff Auditor: Robin Glaser

Table of Contents
Executive Summary ...................................................................................................... 1
Background ................................................................................................................... 2
Building Permit Process ............................................................................................................ 3
Plan Checks .............................................................................................................................. 3
Fees .......................................................................................................................................... 4
Building Permits System ........................................................................................................... 5
Objective & Methodology ............................................................................................. 6
Results & Recommendations ....................................................................................... 7
1. Oversight of Fee Process Could be Improved ................................................................... 7
2. Lack of Monitoring and Oversight of System User Access ................................................ 9
3. Need for Periodic Fee Analysis and Development of Formal Fund Reserve Policies ...... 12
Appendix
Managements Response........A-1

Executive Summary

The Department of Development Services Building and Safety Bureau (Bureau) is
responsible for ensuring construction projects in the City of Long Beach (City) are in
compliance with state and local building codes. They assist applicants by providing
essential construction plan reviews, permit issuance, and inspection services. Our audit
objective was to assess the appropriateness and accuracy of building permit fees within
Development Services Building and Safety Bureau.
The Bureau accepted over 9,700 building permit applications and collected almost $7
million in revenue from building plan check and permit fees in fiscal year (FY) 13. In
addition, they collected $518,000 in developer fees that were distributed between
various departments depending on the department impacted. The Bureau uses the
Hansen Building Permits module (Hansen) to track and record all information related to
building permit applications, including fee transactions and history, description of
projects, and key milestone dates.
We found that overall the Bureau correctly calculated and applied plan check and permit
fees in the sample of applications tested. While we did note some exceptions, in
comparison to the volume of applications processed, those exceptions were minimal.
We do have concerns, however, about the potential for errors or fraud to occur. The
use of Hansen is limited in assisting management with adequate supervisory review and
controls over user access in Hansen are poor.
Our audit also reviewed whether fees charged by the Bureau were sufficient to cover
costs to supply the services. The Bureaus financial transactions are included in the
Development Services Fund (Fund), which also houses the Multi-Family Inspections
and Planning Bureaus. Through our analysis, we noted there has been no analysis of
actual costs since 2005 to determine if fees are appropriate. Although it is impossible to
predict economic conditions, the lack of a fee study likely contributed to the
Development Services Fund needing to borrow technology surcharge revenue to keep
afloat from FY2007 to FY2011. While these technology funds have been paid back, it is
unclear how the Department would face similar situations going forward due to the lack
of a formal reserve policy to provide guidance and direction on how to handle excess
fund balances or possible actions to be taken if/when the Fund is in a deficit position.
Based on our audit, we are recommending that the Department increase its reporting
from Hansen or use another report writer product to identify exceptions and improve
controls over user access to reduce the risk for errors and to minimize the potential for
fraud. In addition, a thorough analysis of actual service costs and fees needs to be
completed, along with the development of formal reserve policies.
1
Unfortunately, this audit took much longer than we anticipated mainly due to our inability
to determine employees access to Hansen. With over 101 active users, we spent
many hours trying to assess what data employees had access to and their ability to
modify that data. However, due to the manner in which access was granted and an
absence of monitoring of employee access, we were not able to meet our audit
objective. This raises concerns on the overall integrity of the data in Hansen. This is an
issue we have repeatedly seen in our audits of other City departments and raises
concerns about the Citys ability to adequately secure and safeguard the information
collected. In 2006, the City initiated an Information Technology Optimization Study that
addressed this issue, but the City did not implement the studys recommendations. We
encourage the City Manager to revisit this study and to address the issues identified in
that report on a priority basis.
Additional details regarding the above issues and our recommendations can be found in
the body of this report. A separate memo, discussing an additional issue of less
significance, was distributed directly to Bureau management and not included in this
report. We want to thank Bureau staff for their assistance and cooperation during the
testing of the building permit applications. We respectfully request an update from
management in six months on efforts to implement recommendations detailed in this
report.

Background
The Long Beach Municipal Code, chapter 18.03, states the Building Official within the
Department of Development Services Building and Safety Bureau (Bureau) shall
receive applications, examine construction documents and issue permits for the
erection, addition, alteration, demolition and moving of buildings and structures. These
responsibilities are in place to ensure that all buildings meet minimum standards that
protect occupants and neighbors. The Bureau fulfills these responsibilities as part of the
services they provide during the building permit process. Exhibit 1 below provides an
outline of the normal steps and sequence of this process.

2

Building Permit Process
Exhibit 1
Building Permit Process

The applications submitted by customers are in one of the following main categories:
building, electrical, mechanical or plumbing. Electrical, mechanical, and plumbing
applications are sub-trades that can have either their own application or for residential
projects will be included in combination with a building permit if the project
encompasses multiple categories. The building category encompasses various
construction projects such as: additions, remodels, re-roofs, etc.
Plan Checks
Plan checks are performed to make sure that construction meets building codes,
verifying it will be constructed properly and safely. There are various options regarding
plan checks that can be applicable depending on the application and the projects
complexity. Some straightforward projects do not require a plan check, simplified
projects can be done over the counter, and regular or express plan checks are offered
for more complex plans.
Customer prepares
and submits an
application to
Counter Staff for
construction
project
Counter staff
reviews application
and informs
Customer of plan
check options and
fees
Customer pays the
Cashier the plan
check fees
Engineer/Plan
Checker will review
submitted plans for
compliance with
applicable codes
and State Law
Plan check is
completed and
plans are approved
Customer pays
Cashier for permit
and any other
applicable
inspection fees
Customer returns to
Counter Staff and is
issued a permit and
Inspection Record
Card
Customer can now
begin construction
Inspector will
conduct inspections
throughout
construction project
Construction is
completed
Customer pays
outstanding
developer fees and
is issued a
Certificate of
Occupancy, if
applicable
Counter staff inputs
application
information into
Hansen
3
Regular plan checks are put on a first-come, first-serve track that are reviewed by
Engineers during their scheduled work hours. Therefore, the length of time to complete
a regular plan check depends on the workload and volume of plan checks. The Bureau
also offers express plan checks for twice the cost of regular plan checks. Express plan
checks are to be completed in half the time using overtime hours. Express plan checks
are only offered based on the number of Engineers who volunteer to work overtime.
Fees

The Long Beach Municipal Code, through various chapters in Title 18, requires the
payment of permit application fees for examination of construction documents (plan
check) and issuance of permits. These fees are established each year by the City
Councils adoption of the Master Fee and Charges Schedule. This document
establishes service fees and charges for various departments and sets fees and
charges at full cost recovery levels, except where a greater public benefit demonstrates
the need to impose a lesser fee or charge. Building fees are collected prior to the
services being rendered; for example, permit fees are required to be paid by the
customer prior to the issuance of a permit.
Table 1 shows the revenue received by the Bureau for building plan checks and permits
in fiscal year (FY) 13.
Table 1
Building Revenue
October 1, 2012 September 30, 2013

Fee Type Type of Construction FY13 Revenue
Plan Check Building 1,788,593.61 $
Electrical 272,662.99
Mechanical 109,413.83
Plumbing 79,766.00
Express 221,273.07
Total for Plan Check 2,471,709.50
Permit Building 3,475,421.38
Electrical 697,730.13
Mechanical 147,927.66
Plumbing 196,407.21
Total for Permits 4,517,486.38
Total 6,989,195.88 $
4
Developer fees are applied to certain projects for new buildings and some additions.
Developer fees are collected by Bureau cashiers on behalf of the other agencies that
are receiving the fee. In some cases, Development Services keeps an administrative
charge, but the rest is revenue for another department. See Table 2 below for the
amount of developer fees collected. The amounts include both what was collected for
other departments as well as the portion retained by Development Services.
Table 2
Developer Fee Revenue
October 1, 2012 September 30, 2013



Building Permits System
Hansen Information Technologies Inc. (Hansen) is the supplier of software that
comprises multiple functionalities, including Building Permits. The Land Management
module of Hansen tracks commercial and residential construction permits, and
corresponding plan checks and inspections as needed. It maintains information about
each project, including description of work, fees assessed and paid, important timeline
dates, and employee notes regarding special information. For plan check and permit
fees, Hansen automatically calculates the fees based on application information input
by staff. However, other fees, such as developer fees, require a portion of manual
prompting or calculation by staff in order to be charged. Hansen is also used by multiple
City departments for other functionalities such as Code Enforcement and Business
Licenses. Our audit covered only the information related to Building Permits and the
staff that have access to that information.
Another software, iNovah, is used to collect the assessed fees that were calculated in
Hansen. It functions as a point of sale system. iNovah interfaces with Hansen in order to
extract the fee information so it can determine the amount to be paid and once the
transaction is complete to update fee payment status in Hansen. Our review of iNovah
was limited to determining if staff could modify fee amounts that were originally
calculated in Hansen.

Developer Fee Type FY13 Revenue
Transportation Improvement Fee 187,534.24 $
Park & Recreation Facilities Fee 151,511.25
Police Facilites Impact Fee 111,068.15
Fire Facilities Impact Fee 68,369.05
Total 518,482.69 $
5
Objective & Methodology
Our audit objective was to assess the appropriateness and accuracy of building permit
fees within Development Services Building and Safety Bureau. Our audit scope
covered Building Permit applications submitted from October 1, 2012 through
September 30, 2013 and a review of the fees in relation to the Development Services
Funds financial position. During our audit, we performed the following procedures:

Reviewed applicable regulations relating to building permit fees including
Municipal Code Title 18 and the Citys fiscal year (FY) 2011-2014 Master Fee
and Charges Schedules;
Interviewed personnel and gained an understanding of the internal controls
related to our audit objectives;
Evaluated access to the building permits system, Hansen, for appropriateness;
and performed a limited review of iNovah to determine ability to modify fees;
Analyzed applications during the audit period and selected samples of records
for further review; and
Reviewed fund balance amounts and corresponding fee schedules and
increases.
Our population of building permit applications included 9,758 building, electrical,
mechanical and plumbing applications that had a submittal date from October 1, 2012 to
September 30, 2013. Some applications within the Building Permits module are related
to oil well permits, deputy inspector licenses, business licenses, and citations that were
not related to our audit objectives and were not considered as part of our population.
We selected 1,075 applications (11%) for our sample. Type and percentage of
applications selected was representative of the population. In addition, we included
applications from each plan check type.

We conducted this performance audit in accordance with Generally Accepted
Government Auditing Standards. Those standards require that we plan and perform the
audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our
audit objectives.

6
Results & Recommendations
Our audit focused on the appropriateness and accuracy of building plan check and
permit fees to assess whether fee amounts were adequate to cover related Building and
Safety Bureau (Bureau) expenses for the services rendered, fees were calculated
correctly, and process oversight and controls were effective.
Based on our sample, we found that overall the Bureau correctly calculated and applied
plan check and permit fees during the period audited. While we noted some exceptions,
in comparison to the volume of applications processed, those exceptions were minimal.
While the processing of building permit applications appears to be consistent,
opportunities exist for errors or fraud to occur due to limited review and controls over
system access. In addition, the lack of formal reserve policies for the Development
Services Fund (Fund) limits transparency and provides no specific direction on handling
excess or deficit Fund balances.
1. Oversight of Fee Process Could be Improved
We found that the majority of building plan check and permit fees were appropriately
calculated and applied. However, we also found situations where fees could be
changed, waived or calculated incorrectly and would likely go undetected.
According to the Bureau, they are performing a spot check review of the building permit
applications submitted on a daily and weekly basis. This spot check involves an
examination of the information on the manual application and in the system (Hansen) to
identify anomalies or inconsistencies. Since this process is not documented, we could
not verify it was occurring or how many applications had been evaluated.
The Bureau receives over 9,700 building applications annually. Due to the high volume
of applications, the likelihood of finding an exception by spot checking is statistically low.
A much more efficient approach would be to use exception-based reporting from
Hansen that could identify unusual transactions, such as fees incurred but not paid.
According to the Bureau, Hansens Ad Hoc Reporting function is not able to facilitate the
creation of these types of exception reports, and they are exploring other types of report
writer products.
The following items are areas where the potential for error or fraud could easily occur:

7

a. Developer Fees
Developer Fees are only assessed on projects that will have an impact on the
level of services provided by various City departments: Police, Fire, Public
Works, and Parks, Recreation and Marine. Developer fees apply to a small
number of applications such as new buildings and some additions. However,
when applicable, these fees can be a significant portion of a customers total
dues. On the applications in our sample, developer fees were an average of 35%
of those applications total fees, with one having developer fees that were 64% of
their total bill.
Hansen does not automatically calculate developer fees since they are only
assessed for some applications. Instead, staff must determine necessary
information required and calculate part of the fees manually. These additional
steps require staff to be knowledgeable of whether these fees are to be applied
and how they are calculated. Although the sample size we reviewed for
developer fees was small, there was a high number of errors in the fee
calculations.
Examples:
Of the 11 applications assessed developer fees in our sample, 4 of these
(36%) were calculated incorrectly. These errors were due to staff either
indicating the incorrect square footage or using the wrong occupancy type.
One of these errors resulted in the City losing $8,297 in revenue, while
another error resulted in a $10,550 overcharge to the customer, which was
corrected when brought to managements attention.
One application should have been assessed developer fees but was not,
resulting in $6,937 in lost revenue to the City.

b. Fee Waivers
8
Fee transactions can have a status of waived, indicating the customer is not
obligated to pay the amount assessed on that item. Per the Bureau, there should
not be any fees waived for services that were provided. However, we identified
seven instances in our sample where $3,351 in fees were waived even though
the services had been rendered. There was no documentation in Hansen to
indicate why these waivers were awarded. Without reporting that would easily
identify waived fees, there is the potential for fraud to occur.

c. Manual Application Input
Hansen automatically calculates fee amounts based on information that is input
by Bureau staff. As part of our test work, we reviewed the manual applications to
determine if the information supplied by the customers agreed to the data input
into Hansen by staff. It is this information that is used to calculate and assess
initial fees.

Of the 1,075 applications in our sample, 365 (34%) had information listed on the
manual application that was in some way different than what was input in
Hansen. For these applications, we could not determine the reasons for the
differences due to a lack of documentation either on the manual application or in
Hansen. J ust over 40 of these applications had differences that could have
affected the fee calculation. Without supporting documentation explaining the
differences, we could not confirm that fees were calculated correctly on these
applications.


Recommendation: In order to deter and identify errors and minimize the potential
for fraud, the supervisor should develop exception reports that would target high
risk (i.e. developer fees, waivers, adjustments, etc.) or known areas of concern.
Review of exception reports would be a mitigating control to provide more
assurance that all fees were applied appropriately. This type of information
should be standard reporting used in all Hansen applications.

2. Lack of Monitoring and Oversight of System User Access
The increased usage of technology requires organizations to establish policies that
clarify roles and responsibilities for procurement, security, usage, and maintenance of
technology. These policies are usually initiated at an organizations highest level such
as a steering committee comprised of critical positions throughout the organization or a
Director of Information Technology. Without these policies or strategies, departments
9
do not know or are confused as to their role in managing technology and securing data.
Unfortunately, the City does not have these types of policies even though the
establishment of them was strongly recommended in a 2006 Information Technology
Optimization Study initiated by City management.
Our audit looked at employee access to the Building Permits module of Hansen and the
functionality assigned to each user. According to the Committee of Sponsoring
Organizations (COSO), a joint initiative that provides guidance on internal controls, and
the International Standards Organizations Electrotechnical Commission (ISO-IEC),
which defines the mandatory requirements for an Information Security Management
System, it is the user department that should be responsible for determining the
appropriate access for their employees. This access should be limited to the most
restrictive authority needed by users to accomplish their duties. However, without
specific guidance on assigning, monitoring, and termination of user access, we found
that system access was neither controlled nor documented appropriately.
a. Granting and Monitoring Access
The most common method for assigning access to a software system is to
develop system profiles where functionality is tied to a job description (i.e.
inspector, supervisor, counter staff). Using this method, there would be limited
profiles with multiples users in each profile. For Hansen, similar profiles were
developed; however, as an employees duties changed over time, the
department requested increased/decreased functionality that was not tied to a
particular profile. As a result, each employees access became individualized
with each change, basically creating a profile for each person.
We were able to identify 101 active users in the Building Permits module of
Hansen. Some of these users were not Development Services employees. With
this many users, most with access not tied to a group profile, monitoring each
employees access is extremely difficult, if not impossible. We attempted to
identify access levels for employees assigned to the Building Permits module of
Hansen to determine if functionality fit their job duties, but we were unable to do
so because:
The Hansen access report provided to us was voluminous, 120,260
pages, and had not been nor could be used by management as a tool to
determine levels of access. The report was not structured in a way that
made it possible to easily assess which users had access to specific
functionalities in Hansen.
10
Access changes for users are usually requested through email, but the
emails are not retained. There is not a standard form documenting access
requests which would allow easy tracking of an employees system user
status.

As a result, we were unable to identify which fields each user could modify, such
as being able to change fee amounts or waive fees for a customer. The
combination of not being able to determine which processes each user could
perform and the large number of active users puts the integrity of the data in
Hansen at risk. It is crucial that edit capabilities for key fields are restricted and
monitored based on who should have access in order to perform their basic job
duties.

b. Terminating Access
Once an employees access is determined to no longer be needed, a request is
sent to Technology Services to remove access. Access to Hansen is terminated
by Technology Services in one of two ways. One way is to expire their Hansen
user name and password so they can no longer log on to Hansen itself. The
second way is to remove their mainframe access, which takes away their ability
to log on to their City profile from a network computer and access Hansen and all
other City programs. Both of these methods are performed manually by
Technology Services. Although some systems have the capability for automated
expiration after a specified period of non-usage, such as 60 to 90 days, Hansen
does not have this feature. With the large number of Hansen users, an
automated expiration function could be an effective tool in managing
unnecessary access.

As noted, Technology Services is notified when an employees access needs to
be terminated, either by the user department or Human Resources, or both.
Access removal should occur shortly after termination to prevent unauthorized
access to Hansen and other City applications. We identified occurrences when
access to either Hansen, the mainframe, or both was not terminated timely.
Example:
We found four ex-City employees in the Hansen Building Permits module that
had both active Hansen profiles and active mainframe access over one year
after leaving the City. Furthermore, two of those four employees still have
active mainframe access at the time of our audit.
11
o One employee retired from City employment in May 2010, was
expired from Hansen access in July 2013 (over three years later),
and still has active mainframe access.

Recommendation: The City needs to establish policies governing the
procurement, security, usage, and maintenance of technology in order to provide
direction to all departments on their roles and responsibilities. These policies
would provide direction on setting the appropriate system access levels,
requirements for monitoring access, and timely termination. These policies are
critical to ensure the City is adequately safeguarding and using its data along
with related revenue and expenditures.

3. Need for Periodic Fee Analysis and Development of Formal Fund Reserve
Policies
Cost Recovery
The Bureaus building plan check and permit fees are included in the Citys Master Fee
and Charges Schedule approved annually by the City Council. Fees included in the
Citys Master Fee and Charges Schedule are reviewed annually by a consultant to
ensure the fee fully recovers the cost of providing the related service.
Each year a consultant provides a report recommending the appropriate fee changes to
be included in the Citys Master Fee and Charges Schedule. Fee changes are based
on an analysis of the Consumer Price Index (CPI) and increases to budgeted personnel
costs for the departments affected, which together represent the City Cost Index (CCI).
This approach does not take into account the actual cost of the services provided.
According to the FY13 consultant report, a comprehensive review of user fee costs has
not been completed since 2005.
1
Without this analysis, the Department would not know
the appropriate fees to charge to fully cover their operations or how much operations
could be expanded with current revenues.

Technology Funds
1
In 2011, the Department benchmarked the Citys fees to other comparable cities and found Long Beach was in
the middle to lower range for all categories reviewed. However, this study does not review the Citys costs for
supplying the services.
12

The revenue and expenses of the Bureau are recorded in the Development Services
Fund, which also includes the operations of the Planning and Multi-Family Inspection
Bureaus. A technology surcharge added to each building application by the Bureau was
adopted in 2002 to assist with a one-time purchase of a new permit software system.
The surcharge was made permanent by the City Council in 2007, as management
determined there would be ongoing costs associated with the new software and
additional technology needs in the future.
When we looked at the technology revenues effect on the Fund balance, we found that
the Fund appeared to borrow money from the excess technology revenues over a five
year period in order to meet Planning Bureau needs and keep the Fund from a deficit
position as shown in Table 3 below. According to the Bureau, the General Fund did not
have the capacity to transfer revenue into the Development Services Fund, and it was
decided that the technology funds would be used temporarily to sustain minimum
service levels within the Department.
Table 3
Technology Related Fund Balance
FY07 FY13

All of the technology revenue borrowed between FY07 and FY 11 was eventually
recovered in FY12 and FY13. In FY 13, these funds were officially accounted for as
designated reserves in the Fund only to be used for future technology purchases.
Formal Reserve Policies Do Not Exist

As shown in Table 4 below, the balance in the Fund has increased from $1.7 million in
FY 11 to $7.1 million in FY 13. This is due to increased fee revenue, assumption of
inspection services from the Fire and Health departments and an improved economy.
Table 4
Fund Balance
FY11 FY13
Fiscal
Year
Fund Balance
Total
Technology
Surcharge Portion
Adjusted Fund
Balance
FY07 539,889 $ 649,904 $ (110,015) $
FY08 753,196 1,219,794 (466,598)
FY09 35,754 1,683,757 (1,648,003)
FY10 853,046 2,262,993 (1,409,947)
FY11 1,742,284 2,524,639 (782,355)
FY12 4,176,353 2,890,753 1,285,600
FY13 7,115,569 3,004,906 4,110,663
13


We attempted to obtain information from the Bureau on future plans for using the
excess fund balance, but were denied this information by management. After our audit
was completed, the Citys FY15 proposed budget was released providing a summary of
new staffing and technology purchases for the Department that appear to be financed
by a portion of the excess Fund balance. Since this information was obtained after we
had completed our audit, we did not review any detailed analysis of the numbers.
Exhibit 2 includes the proposed changes for the Development Services Fund as shown
in the proposed FY 15 Budget Book.

Exhibit 2
Extract from FY15 Budget Book

DEVELOPMENT SERVICES FUND
Impact on
Fund

Positions
Increase revenue for construction inspection services to reflect actual
activity.
$ (768,000) -
Restructure the Permit Counter to improve customer service by replacing
Customer Service Reps and Combination Building Inspector with Permit
Technicians I and II. The restructuring will improve customer service and
increase efficiency in completing reviews. This is FTE neutral across all
funds.
$ 465,676 4.00
Add new Civil Engineering Associate to assist with increased workload
and customer volume at the Plan Check Counter. New FTE will allow
senior staff to complete review of larger projects thereby reducing
customer review/wait time and increasing workload capacity of Plan
Check staff.
$ 112,948 1.00
Implement various organizational, staffing, and materials budget
changes to assist with operational and budget management, including
adjusting budget for actual rent at 100 W. Broadway.
$ 214,044 1.05
Convert Deputy Director of Development Services to a Manager of
Planning in the Planning Bureau, which results in saving across all funds.
$ 115,831 0.66
One-time funding for Computer Monitor Upgrades for use with the
Electronic Plan Review System.
$ 56,308 -
One-time funding for the Long Beach Boulevard Plan for the City's
required match towards the completion of this project.
$ 95,000 -
One-time funding for Land Use and Urban Design elements and the
Environmental Impact Reviews related to the General Plan.
$ 350,000 -
One-time transfer to General Services Fund for the FY 15 Development
Services portion of Financial / Human Resources System costs.
$ 792,321 -
Subtotal: Development Services Fund $1,434,128 6.71
FY11 FY12 FY13
Fund Balance Amount 1,742,284 $ 4,176,353 $ 7,115,569 $
14

Based on the information in Exhibit 2, it appears additional staffing will be added to the
Building and Safety and Planning Bureaus, along with one-time costs for Planning
Bureau projects and technology purchases, including almost $800,000 toward the
replacement of FAMIS and the Citys payroll system. The increased revenue noted in
Exhibit 2 does not appear to be generated through fee increases, but from the additional
inspection services the Department assumed during FY 13. Since we were not provided
the analysis for these figures, we could not verify how long these additional costs can
be sustained without increasing fees.


While there is nothing in writing or approved by the City Council, the Bureau informed
us they have created an informal reserve to cover costs should there be another
downturn in the economy or any future financial hardships that may affect the Fund.
Under the Departments informal policy, the goal is for reserves to equal 50% of labor
costs, which in FY13 amounted to approximately $4 million Department-wide. Table 3
previously indicated the Department ran into a deficient position (which required the
borrowing of technology funds) from 2007 to 2011 that amounted to $4.4 million. While
the Department could not provide a methodology behind why 50% of labor costs was
chosen as the goal, the $4 million potential reserve balance appears reasonable.
According to the Department, the goal is to reach the $4 million reserve by FY 2016.
However, the Bureau has allocated $1.4 million of the reserves in its FY15 proposed
budget as discussed previously.

The Bureau does not have a formal reserve policy to provide guidance for handling
deficit or excess fund balances. A formal reserve policy would be written and approved
by City Council. It would increase transparency and provide direction on issues such as
the appropriate reserve balance needed and why, what actions should be taken if the
reserve balance is exceeded or falls into a deficit position, and handling of transfers
to/from the General Fund.

Recommendation: The Department should perform an updated analysis of all
corresponding fee revenues and service-related expenses to ensure all cost
recovery fees are set at the appropriate amount to adequately cover costs. This
analysis should be done at least every 5 years or more frequently if the fund
balance is in or expected to enter a deficit position. In addition, a comprehensive
policy on fund balance reserves needs to be created to provide transparency and
guidance on actions that should be taken depending on the Funds financial
position.

15


16

Appendix A


Managements Response



A-1