· The Controller's Office does not exercise sufficient oversight over the City departments, which file claims for reimbursements for State-mandated programs, known colloquially as the SB 90 program. The Controller's Office does not monitor the quality of the SB 90 claims prepared and submitted by the contractor. A review of four SB 90 claims filed in FY 2001-2002 revealed inconsistent methodology and errors in the claims. For example, the contractor used a methodology for calculating the Election Department's indirect cost rate that was inconsistent with the methodology used for other departments' indirect cost rates. The Budget Analyst estimates that the City would have received an additional $21,000 in departmental indirect cost reimbursements for the Absentee Ballot program if consistent methodology had been used.

· The management audit also found errors in the calculation of hourly staff rates. Out of 26 positions reviewed, we found nine positions with errors, or an error rate of 35 percent. These errors resulted in inaccurate amounts being claimed for reimbursement and could result in the disallowance of claim costs by the State Controller's Office during a desk audit.

· In FY 2001-2002, the City filed reimbursement claims for 31 State-mandated programs out of 54 eligible programs. Although the contract with DMG Maximus, the contractor responsible for assisting City departments in preparing and submitting SB 90 claims to the State for reimbursement, requires documentation of the reasons that City departments do not file SB 90 claims, the Controller's Office does not have such documentation. The Budget Analyst estimates that, based on the claims filing experience of other California counties, San Francisco could receive an additional $95,000 in State reimbursement revenue annually by filing SB 90 claims for all State-mandated services provided by San Francisco.

The State's Reimbursements to Cities and Counties for State-mandated Programs

The California Constitution and California Government Code require the State to reimburse the cities and counties for State-mandated services and programs. The local governments generally receive these reimbursements based on claims they file with the State, calculating the specific costs attributable to a specific State-mandated program. The mandate-reimbursement program is known colloquially as the SB 90 program, after the legislation establishing it.

As a combined city and county, San Francisco is eligible to file claims for reimbursement under 54 State-mandated programs, as defined by the State Controller's Office. In FY 2001-2002, San Francisco filed $10.3 million in claims for reimbursement for 31 of the 54 State-mandated programs and received $5.2 million in actual reimbursements. The Controller's Office is in the process of preparing FY 2002-2003 SB 90 claims.

In FY 2003-2004, the State appropriated no or limited funds for payment of SB 90 claims. Although FY 2003-2004 funding is not currently available to pay FY 2002-2003 SB 90 claims, the State's responsibility to pay such claims will continue for all programs that were mandated during the year of the claim.

The Controller's Office Oversight of SB 90 Cost Claims

In San Francisco, the Controller is responsible for coordinating the SB 90 claims prepared by the City departments. The Controller's Office has assigned one staff person in the Budget and Analysis Division to coordinate SB 90 claims. Departments are responsible for tracking staff hours and other costs which are eligible for reimbursement under SB 90. The Controller's Office has a long standing contract with an outside contractor to work with departments to prepare and submit SB 90 cost claims to the State Controller for reimbursements. Since 1997, the Controller's Office has had a contract with DMG Maximus to prepare and submit claims. The Controller's Office recently submitted a Request for Proposal and selected the Public Resource Management Group for SB 90 claims preparation and submission. Although the contractor has changed, the actual contractor performing the work, who moved from DMG Maximus to the Public Resource Management Group, will remain the same. During the course of this audit, the new contract with the Public Resource Management Group was under review and had not been formally awarded.

The City departments' finance officers are responsible for collecting and reviewing data for SB 90 claims and the contractor reviews and summarizes the claims data to comply with the State Controller's Office requirements. The SB 90 contractor meets with City departments' finance staff to discuss source document requirements for filing claims. The individual departments are responsible for developing and maintaining the source documents, including tracking staff hours and other costs allocated to eligible programs. The Controller's Office does not oversee the work of the departments in tracking eligible program costs and maintaining source documents, although, according to the SB 90 Coordinator, the Controller's Office does tell departments that the Controller's Office is a resource in establishing claims data tracking methods. The SB 90 Coordinator also encourages departments' finance staff to attend State-sponsored training on the filing of SB 90 claims.

State Controller's Office Audits of SB 90 Claims

The Controller's Office SB 90 Coordinator tracks the filing of claims and records actual receipts. The SB 90 Coordinator also assists the State Controller's Office when representatives from that Office conduct desk audits of San Francisco's SB 90 claims. In FY 2001-2002 and FY 2002-2003, the State Controller audited four San Francisco SB 90 claims, including the Domestic Violence Arrest Policies and Standards program, the Absentee Ballots program, the Services to Handicapped Students program, and the Child Abduction and Recovery program. In these four audits, the State Controller's Office determined that a portion of the costs claimed by the City of San Francisco were not eligible costs, reducing the amount of the claims reimbursement. In one instance, because the City was able to produce documentation to support the cost claim, the State Controller's Office allowed additional costs.

The Management Audit Review of SB 90 Claims

The management audit selected four FY 2001-2002 SB 90 claims files to assess the methodology used by the contractor to calculate departments' indirect costs and departments' staff productive hours. The management audit reviewed FY 2001-2002 files for the Peace Officers Procedural Bill of Rights program, the Domestic Violence Arrest Policies and Standards program, the Absentee Ballots program, and the Mandate Reimbursement Process. Under the Mandate Reimbursement Process, the City is able to claim cost reimbursement for the actual costs associated with preparing and submitting SB 90 claims.

Calculation of departments' indirect cost rates

According to the State Controller's Office, indirect costs include (a) the overhead costs for the unit performing the mandate, and (b) the costs of central government services distributed through the central service cost allocation plan and not otherwise treated as a direct cost. If the city or county claims departmental indirect costs, then the city or county may use one of two different indirect cost methodologies.

(1) The city or county may claim 10 percent of the department's direct labor costs, excluding fringe benefits. The State Controller's Office states that this 10 percent rate may benefit small agencies, which provide few supportive services.

(2) If the department's indirect costs exceed 10 percent of the department's direct labor costs, the city or county may prepare an indirect cost rate proposal (or ICRP) which complies with the Federal Office of Management and Budget circular No. A-87, Cost Principles for Grants to State and Local Governments.

In the four FY 2001-2002 SB 90 claims, the contractor calculated the department's indirect cost rates as 10 percent of direct labor costs in one claim, the Peace Officers Procedural Bill of Rights program, and calculated indirect costs based on an indirect cost rate proposal in the other three claims. According to the Office of Citizen Complaints, which provides services under the Peace Officers Procedural Bill of Rights mandate, the contractor determined that the 10 percent of direct labor cost methodology for indirect cost calculations would yield a better result for the Office of Citizen Complaints, due to the small size of the program.

Indirect cost calculation methodologies in three selected claims

In the other three programs, which include the Domestic Violence Arrest Policies and Standards program, the Absentee Ballots program, and the Mandate Reimbursement Process, the contractor calculated an indirect cost rate proposal for each department. The indirect cost rate proposal was based on:

· The department's actual expenditures for the year,

· Identified unallowable, allowable direct, and allowable indirect costs, and

· The department's portion of countywide overhead costs, which are developed by the Controller's Office as part of the countywide cost allocation plan (or COWCAP).

The indirect cost rate proposal was the ratio of total allowable indirect costs to total allowable direct salaries and benefits. The contractor calculated an indirect cost rate proposal for five departments, which filed claims under the three mandated programs reviewed by the management audit. All the indirect cost rate proposals exceeded 10 percent of direct labor costs, as shown in the table below.

Table 12.1

FY 2001-2002 Indirect Cost Rate Proposals for Five City Departments

Source: San Francisco Controller's Office SB 90 Claims Forms

The management audit noted that the contractor was inconsistent in calculating the Elections Department indirect cost rate proposal. For the other four departments, the contractor based the indirect cost rate proposal on the ratio of total allowable indirect costs, including indirect salaries and benefits, and total direct salaries and benefits. Once the contractor established the ratio, the indirect cost rate proposal (or percentage) was multiplied by the total salaries and benefits allocated to the mandated program. For example, for the Domestic Violence Arrest Policies and Standards program, the contractor multiplied the indirect cost rate proposal by the total salaries and benefits allocated to the program to obtain the amount of indirect costs of $22,203, as follows:

In calculating the Election Department's indirect cost rate proposal and actual indirect costs for the Absentee Ballot program and Mandate Reimbursement Process, the contractor used inconsistent methodology. The contractor calculated the indirect cost rate proposal, based on salaries only, whereas the other departments' indirect cost rate proposals were calculated, based on salaries and benefits. The contractor calculated an Election Department indirect cost rate of 104.4 percent, and then applied the 104.4 percent indirect cost rate inconsistently to two different claims to obtain the actual amount of indirect costs.

· In the Mandate Reimbursement Process claim, the contractor applied the 104.4 percent indirect cost rate incorrectly to both Election Department Mandate Reimbursement Process salaries and benefits.

· In the Absentee Ballot claim the contractor applied the 104.4 percent indirect cost rate correctly to Election Department Absentee Ballot salaries only.

The Budget Analyst estimates that, if the Elections Department indirect cost rate had been calculated in the same manner as the other City departments, the indirect costs claimed for the Absentee Ballot program would have been approximately $21,000 more than the indirect costs actually claimed.

Calculation of Departments' hourly rates for staff time

When the State reimburses local jurisdictions for costs incurred for providing State-mandated services, the local jurisdictions are able to receive reimbursement for actual staff hours allocated to the State-mandated programs and for a corresponding number of hours for paid time off, such as vacation time or paid sick time. According to the State Controller's Office, the productive hourly rate for actual staff time allocated to State-mandated programs can be calculated by dividing the actual salary rate by 1,800 hours. This method allows the local jurisdiction to include the cost of paid time off in the reimbursement claim. For example, if the City calculates reimbursement based on 2,080 hours per full time equivalent position (FTE) for an employee in the classification of Police Officer I with annual salary of $62,026, the hourly rate is $29.92. However, as noted below, if the City calculates the productive hourly rate based on 1,800 per FTE, the salary rate is $34.46.

The management audit identified different methods for calculating productive hourly rates in the SB 90 cost claims.

· When staff time are exclusively allocated to a State-mandated program, such as the Child Abduction and Recovery Unit of the District Attorney's Office, the department claims total annual salaries and benefits.

· Other programs, such as the Office of Citizen Complaint, track the hourly pay rate for staff allocated to a State-mandated program over the course of the year, multiply by 2,080 hours and then divide by 1,800 hours.

· The contractor calculated the Police Department staff hourly rate for the Mandate Reimbursement Process by dividing annual salary expenditures for each classification by the number of full time equivalent (FTE) positions in the classification and then dividing by 1,800 hours to obtain the hourly productive rate.

All of these methods are consistent with State Controller's Office guidelines for calculating hourly productive rates for staff hours allocated to State-mandated programs.

The management audit found multiple errors in the actual calculation of productive hourly rates for the Mandate Reimbursement Process, the Domestic Violence Arrest Policies and Standards program, and the Peace Officers Procedural Bill of Rights program. We reviewed the average hourly productive rates for Election Department positions, which were mostly temporary positions, and found them to be generally accurate. However, we reviewed 26 positions, for which claims were filed under the Peace Officers Procedural Bill of Rights program, the Mandate Reimbursement program, and the Domestic Violence Arrest Policies and Standards program and found errors in the calculation of productive hourly rates for nine of the 26 positions reviewed, or an error rate of 35 percent.

· One principal administrative analyst pay rate was entered into the claim as $31.22 per hour when the actual rate was $46.99;

· One police officer III position was entered into the claim as a police officer II; and

· Seven positions had hourly pay rates entered into the claim form which differed from the hourly rate reported by the Department, although the reason for the difference was not identifiable.

Quality Control of SB 90 Claims

The Controller's Office does not closely supervise the process of preparing or submitting claims nor ensure that SB 90 claims are accurately filed. According to the SB 90 Coordinator, the Controller's Office tracks the filing of claims and actual receipts over the fiscal year and assists with desk audits conducted by the State Controller's Office. The Controller's Office does not audit the departments' development of source documents to support claims. The contractor works with departments to develop and maintain source documents, but the Controller's Office serves only as a resource if departments choose.

The Controller's Office does not monitor SB 90 claims to ensure the quality and accuracy of the claims. Our review of four SB 90 claims found that the contractor used inconsistent methodology in calculating indirect costs and made errors in calculating productive hours. These errors and inconsistencies in some instances resulted in cost claims that were less than the actual costs. Additionally, errors in the claims could result in the disallowance of claim costs by the State Controller's Office during a desk audit. The Controller's Office needs to establish a program to audit SB 90 claims to ensure the quality of the claims, including source documentation developed by the departments and review of the contractor's claim submissions.

Alternatively, the Controller's Office could bring the work of claims processing in-house, and allocate a position in the Controller's Office to work with departments to track, process and submit claims. In either case, the Controller's Office needs to increase its oversight over the SB 90 cost claims process.

Determining Which Claims to File

San Francisco files SB 90 cost claims for 31 of the 54 State-mandated programs. Under the contract with DMG Maximus, the City may instruct the contractor to not file a specific claim or the contractor may notify the City in writing of its intent to not pursue a specific claim and the reasons for not pursuing the claim. However, the Controller's Office has no documentation of the reasons for not pursuing claims for 23 State-mandated programs. In some instances, the City may not pursue claims because the City does not provide the State-mandated program or the reimbursements may fall below the minimum reimbursement level of $200. According to the SB 90 Coordinator, some departments do not file claims because they do not have sufficient staff resources to track claims, and other departments, such as Adult Probation, simply do not respond to requests for information about the filing of claims.

As the City's chief financial officer, the Controller has a responsibility to ensure that the City is receiving reimbursements for mandated services. Therefore, the Controller's Office should identify reasons for not filing claims in State-mandated programs, and if the Controller determines that the department's or contractor's justification for not filing claims is insufficient, the Controller's Office should ensure that such claims are filed.

The City could file claims in at least three additional programs, resulting in an estimated $95,000 annually in revenues. The City could receive an estimated $90,000 annually for the Domestic Violence Treatment Services program services, which are currently provided by the Adult Probation Department, and $5,000 annually for the SIDS Training for Firefighters program, currently provided by the Fire Department. The City already incurs costs for such program services and would be eligible for cost reimbursement for claim filing costs as well as program service costs.

Other Counties' SB 90 Experience

Audits of SB 90 claims in two other California counties suggest that San Francisco could increase total SB 90 claims reimbursements by reviewing claims to ensure that all allowable costs are captured and that all possible claims are filed. A review of FY 1999-2000 Santa Clara County claims reimbursements could be increased by $1,610,256 and a review of FY 2000-2001 San Bernardino County claims estimated that reimbursements could be increased by $621,000. The Controller should conduct a post claim audit of FY 2002-2003 SB 90 claims to ensure that all allowable costs are captured and that claims are filed for all applicable mandates.

Conclusions

Although the Controller's Office is responsible for coordinating the SB 90 program, the Controller's Office does not exercise sufficient oversight over the filing of claims. The Controller's Office does not ensure the quality of the claims filed nor ensure that all claims for which the City could receive reimbursement are filed. The Controller's Office should establish a quality review of the SB 90 claiming process, which would include developing a policies and procedures manual for the City departments, conducting audits of the contractor's work, and documenting reasons for not filing claims. Alternatively, the Controller's Office could bring in-house responsibility for working with City departments to file SB 90 claims annually.

Recommendations

The Controller's Office should:

12.1 Develop a quality improvement program to assure the standardization and quality of cost claims, including conducting audits of claims;

12.2 Alternatively, bring the work of the contractor in house to exercise increased oversight over the SB 90 claims preparation and submission process;

12.3 Develop a reporting system for all City departments regarding which claims are filed and not filed. Document the reasons for not filing claims for all State-mandated programs applicable to San Francisco, and submit an annual written report to the Board of Supervisors regarding which claims are filed and the reasons for not filing claims; and,

12.4 Conduct a post-claim audit for FY 2002-2003 and adjust future claims appropriately.

Costs and Benefits

If the Controller's Office decides to terminate the contract with the contractor to prepare SB 90 claims and to bring the work in-house, the savings for terminating the contract should offset the increased personnel costs for performing the work in-house.

If the Controller's Office works with City departments to ensure that all applicable SB 90 claims are filed, the increased annual revenue to the City would be approximately $95,000.