· According to the San Francisco Administrative Code Sections 10.100 and 10.125, the Controller is charged with the responsibility to administer, monitor use, and authorize exceptions to Cash Revolving Funds. As part of its responsibility to monitor the use of Cash Revolving Funds, the Controller's Office is responsible for periodically auditing Cash Revolving Funds, assessing the appropriateness of authorized amounts and recommending changes to authorized amounts of such funds.

· Currently, there are a total of 58 Cash Revolving Funds with a total authorized amount of $765,950. In FY 2002-03, the Controller's Office approved a total of $3,499,150 in transactions through Cash Revolving Funds. Because the Controller's Office does not have clear policies and procedures regarding the appropriate number and authorized amount for Cash Revolving Funds some Cash Revolving Funds are replenished as infrequently as once a year (or not at all) and some are replenished multiple times in one day, based entirely on the frequency of requests by departments. The Controller's Office Audits Division periodically audits Cash Revolving Funds. However the Controller's Office considers such audits a lower priority. The Audits Division performed a total of three audits of Cash Revolving Funds in FY 2001-2002.

· The City's risk for loss is unnecessarily high due to the proliferation of unnecessary Cash Revolving Funds and Cash Revolving Funds with authorized amounts set higher than necessary. In addition, in the absence of a clear policy regarding frequency and amount of replenishments for Cash Revolving Funds, the workload associated with replenishing the funds is not being minimized by the Controller's Office.

· The Controller's Office should implement standards for the replenishment of Cash Revolving Funds, which would reduce and standardize the Controller's Office workload associated with maintaining such funds. In addition, the Controller's Office should annually assess the necessity for Cash Revolving Funds and recommend the elimination of those with zero transactions occurring during a fiscal year and the reduction of the authorized amounts for underutilized Cash Revolving Funds. Cash Revolving Funds should be set at the minimum amount necessary for departments. Implementation of our recommendations would reduce Cash Revolving Funds by $487,100 and would reduce the risk associated with cash disbursements in the affected departments.

The City Charter provides that the Board of Supervisors may establish Cash Revolving Funds "to be used as petty cash funds for specific purposes" and provides that the Cash Revolving Funds are "subject to settlement and audit by the Controller's Office at least monthly." The

Administrative Code provides for 58 Cash Revolving Funds, with a total authorized amount of $765,950 disbursed among 41 departments. In FY 2002-2003, the Controller's Office authorized a total of $3,499,150 in replenishments for expenditures made from Cash Revolving Funds. The Administrative Code further provides that "petty cash purchases and disbursements shall be for purposes and within funds available in the appropriations from which said revolving funds claims are to be reimbursed; and shall be in conformity with applicable rules prescribed by the Purchaser of Supplies and the Controller."

Policies and Procedures

With appropriate policies and controls in place the risk associated with Cash Revolving Funds is moderate for small funds. The Controller's Office considers the controls in place for Cash Revolving Funds to be adequate and considers the funds to be low risk. However, Cash Revolving Funds are inherently risky for loss because they involve cash. Clearly, it is preferable to have only the necessary amount of cash disbursed in departments. The Controller's policies and procedures regarding Cash Revolving Funds for departments are contained in Departmental Instructions Numbers 1051 and 1052 issued by the Controller's Office in August 1996. The memorandum accompanying those instructions stated:

Purpose and Phase-out of Revolving Funds

Departmental Revolving funds were established as petty cash funds for very small expenditures. Over the years, due to the extremely cumbersome purchasing and payment procedures of the Purchaser and Controller these funds grew to allow departments to expeditiously purchase various goods and services. Now that On-line ADPICS (Purchasing) and On-line FAMIS (Accounting) systems are in place, the purchase of goods and payments for them is much simpler and quicker. Therefore, we plan to minimize the use of revolving funds for the routine purchase of goods and services...Over the next several months we expect to work with departments to lower the authorized amount of revolving funds to reflect this reduced usage.

The Administrative Code provides that a "department head, board or commission, with concurrence of the Controller, may authorize such subdivisions in any revolving funds as will effect the most efficient operation thereof." Many departments have disbursed the cash in revolving funds to multiple locations. The Sheriffs Department reports that it has divided its total authorization amount of $13,000 (Administrative Code Sections 10.164. and 10.164-1) among 30 substations. This subdivision of Cash Revolving Funds can result in multiple replenishments of funds on a single day multiple times each month. For example, in April of 2003, the Sheriff's Department requested a total of 19 replenishments of its funds on five separate days for a total amount of $5,112.60. While the Controller's Office has not established any limit to the number of replenishments permitted for Cash Revolving Funds, the Controller's Office reports that "separate documents for multiple replenishments within the same day may require more time and effort" by the Controller's Office. The Sheriff's Department's Cash Revolving Funds authorization amounts were modified based on recommendations of the Controller's Office in 2000 in order to minimize the number of necessary replenishments (Files 00-1851, 00-1852 and 00-1853). However, it appears that in the absence of a clear policy regarding frequency and amount of replenishments for Cash Revolving Funds, the work load associated with replenishing is not being minimized by the Controller's Office.

Authorization Amounts

Some departments require Cash Revolving Funds to serve clients or be prepared for immediate operational needs. However, for most departments, minimal planning for operational needs and the accounting and purchasing systems make a Cash Revolving Fund unnecessary. If Cash Revolving Funds are not clearly justified, they should be closed out.

Although it appears that some Cash Revolving Funds were closed out or reduced following the issuance of Departmental Instructions Numbers 1051 and 1052 and the Controller's review of usage in 1996, the Budget Analyst has identified a total of 19 Cash Revolving Funds that showed no activity for FY 2002-2003 and an additional 37 Cash Revolving Funds that showed transaction activity that did not appear to justify level of the authorized amount. The following table shows those Cash Revolving Funds with current authorization in the Administrative Code that had no activity for FY 2002-2003.

Table 7.1

Cash Revolving Funds With Zero Activity in Fiscal Year 2002-2003

The Controller's Office reports that the San Francisco County Fair Cash Revolving Fund included in the preceding table was closed in 1998. However, the fund is still authorized at $5,000 in the Administrative Code. The Controller's Office should have previously requested that the San Francisco County Fair Cash Revolving Fund authorization be removed from the Administrative Code in order to eliminate unnecessary Cash Revolving Fund authorization. While the Controller's Office maintains that it is the responsibility of departments to suggest Administrative Code changes, the Budget Analyst believes that the Controller should take the initiative to advise the Board of Supervisors on the authorization for funds it is responsible for administering and monitoring.

In addition to the $29,600 in excess Cash Revolving Fund authorization for funds with zero activity in FY 2002-2003, the Budget Analyst has identified $457,500 in underutilized authorization for Cash Revolving Funds, with at least some activity in FY 2002-2003. Appendix 7.1 to this report shows those 37 Cash Revolving Funds that were underutilized in FY 2002-2003 with recommended reductions to authorization amounts.

Expenditure Exemptions

The Controller's Office has a policy that states "no single purchase of goods and services through the revolving fund can exceed $200." Certain departments and funds have exemptions from the $200 limit on purchases, including the Municipal Transportation Authority, the Department of Public Works, the Airport Commission and the Elections Department. For example, the Administrative Code provides for a $500 Cash Revolving Fund for the Elections Department and states that the Elections fund "may also be used, with the approval of the Controller, to reimburse election judges, inspectors and other poll workers" (Sec. 10.162). In FY 2002-03, the Elections Department's Cash Revolving Fund was replenished for $465,000 with individual replenishments of $450,000, $5,000 and $10,000. The Controller's Office has stated that "due to the volume of details, expenditures are not verified at the time reimbursements are made. The revolving fund is subject to periodic audit by the Controller's Internal Audit." The Elections Department Cash Revolving Fund is an example of the risk associated with such funds.

Appropriate Level of Risk

The Controller's Office considers Cash Revolving Funds to be a low risk because procedures and controls are in place and because departments know that the funds may be subject to an audit. However, the Audits Division has significantly reduced the number of audits it performs on Cash Revolving Funds based on the assessment that these funds are of low risk. The Controller's Office has also discontinued conducting risk assessments for funds and departments based on the assumption that the level of risk associated with City assets and departments are low risk. However, the infrequency of audits and the discontinuation of an annual risk assessment have resulted in excessive authorization for Cash Revolving Funds. Therefore the Budget Analyst recommends that the Controller's Office conduct an annual risk assessment of Cash Revolving Funds. Such a risk assessment should include a review of replenishments to Cash Revolving Funds and a more in-depth analysis of transactions when deemed necessary.

The Controller's Office should also conduct an annual analysis of Cash Revolving Fund utilization in an effort to reduce the Cash Revolving Funds authorizations, in accordance with the Controller's Office policy, to phase out unnecessary Cash Revolving Funds as stated in the memorandum issued to departments in August 1996. The phase out of unnecessary Cash Revolving Funds would result in reduced cash disbursed in City departments and therefore a reduced risk for loss.

Conclusions

According to the San Francisco Administrative Code Sections 10.100 and 10.125, the Controller is charged with the responsibility to administer, monitor use, and authorize exceptions to Cash Revolving Funds. As part of its responsibility to monitor the use of Cash Revolving Funds, the Controller's Office is responsible for periodically auditing Cash Revolving Funds, assessing the appropriateness of authorized amounts and recommending changes to authorized amounts of such funds.

Currently, there are a total of 58 Cash Revolving Funds with a total authorized amount of $765,950. In FY 2002-03, the Controller's Office approved a total of $3,499,150 in transactions through Cash Revolving Funds. Because the Controller's Office does not have clear policies and procedures regarding the appropriate number and authorized amount for Cash Revolving Funds some Cash Revolving Funds are replenished as infrequently as once a year (or not at all) and some are replenished multiple times in one day, based entirely on the frequency of requests by departments. The Controller's Office Audits Division periodically audits Cash Revolving Funds. However the Controller's Office considers such audits a lower priority. The Audits Division performed a total of three audits of Cash Revolving Funds in FY 2001-2002.

The City's risk for loss is unnecessarily high due to the proliferation of unnecessary Cash Revolving Funds and Cash Revolving Funds with authorized amounts set higher than necessary. In addition, in the absence of a clear policy regarding frequency and amount of replenishments for Cash Revolving Funds, the workload associated with replenishing the funds is not being minimized by the Controller's Office.

The Controller's Office should implement standards for the replenishment of Cash Revolving Funds, which would reduce and standardize the Controller's Office workload associated with maintaining such funds. In addition, the Controller's Office should annually assess the necessity for Cash Revolving Funds and recommend the elimination of those with zero transactions occurring during a fiscal year and the reduction of the authorized amounts for underutilized Cash Revolving Funds. Cash Revolving Funds should be set at the minimum amount necessary for departments. Implementation of our recommendations would reduce Cash Revolving Funds by $487,100 and would reduce the risk associated with cash disbursements in the affected departments.

Recommendations

The Controller should:

7.1 Conduct an annual risk assessment of Cash Revolving Funds;

7.2 Conduct an annual analysis of Cash Revolving Fund utilization;

7.3 Develop and implement clear policies on frequency of replenishments to Cash Revolving Funds;

7.4 Develop and implement clear policies on disbursement of cash among locations within departments;

7.5 Request that the Board of Supervisors repeal the Administrative Code authorization for the 19 Cash Revolving Funds listed in Table 7.1, resulting in reduced authorization of $29,600; and

7.6 Request that the Board of Supervisors reduce the authorized amount for the 38 Cash Revolving Funds listed in Appendix 7.1, resulting in reduced authorization of $457,500.

Costs and Benefits

These recommendations can be accomplished within the normal management responsibilities within the organization. Our recommendations would result in tighter controls over Cash Revolving Funds and reduce cash authorizations by a total of $487,100.