· The San Francisco Administrative Code charges the Controller with the responsibility to direct and approve indirect cost rates for each City department. Such rates are applied to user fees and grants in order to reimburse the City for administrative and support costs associated with fee and grant activities.

· The Controller's Office has not established consistent methodology for calculating departmental indirect cost rates and their application to City fees. In some cases, the departments calculate their own indirect cost rates and the Controller merely checks for reasonableness. For the remaining departments, the Controller has three different methods for calculating departmental indirect costs. These methods are either calculated at the program level or by department. In addition, some are based on budgeted costs and some are based on actual costs.

· The Controller's Office has no involvement with the analysis or application of indirect cost rates for grants. The Grants Management Unit only checks to ensure the completeness of grant documentation before grants are forwarded to the Board of Supervisors for approval. The Controller's Office does not certify that provisions for appropriate indirect cost reimbursement are included in grant budgets, pursuant to Section 10.170-1 of the Administrative Code.

· The Controller's Office should develop consistent policies and procedures for calculating departmental indirect cost rates. The Controller's Office should also perform analyses of grant budgets to determine whether indirect cost amounts are accurate; and, if not included in the grant budget, that such costs are accurately disclosed. While it is a policy matter for the Board of Supervisors to decide whether grant applications should include indirect costs (if allowable), the Controller's Office should ensure that the Board has complete information prior to grant approval.

In the A-87 Cost Principles for State, Local and Indian Tribal Governments, the federal Office of Management and Budget defines indirect costs as "costs incurred for a common or joint purpose benefiting more than one cost objective, and not readily assignable to the cost objectives specifically benefited, without effort disproportionate to the results achieved." Section 10.170.1d of the Administrative Code states that "every department, board or commission shall establish a rate for such indirect costs that is approved by the Controller and fixed in accordance with a directive issued by the Controller."

The Controller's Office prepares a County-Wide Cost Allocation Plan (COWCAP), which is used to establish indirect cost rates that can be charged to federal and State grants in accordance with A-87 regulations [e.g., an allocation of the administrative and support costs associated with services provided by one City department (such as the City Attorney) to another]. Additionally, City departments may charge for internal administrative and support activities that support services that are funded by fees and grants [e.g., an allocation of the administrative and support costs associated with services provided by one department division (such as a fiscal division) to another].

By applying departmental indirect costs to fees and grants, the City's General Fund can be reimbursed for the cost of administrative and support activities that are generally provided for multiple programs. However, the Controller has not established a consistent or effective process for managing the development of indirect cost rates, also referred to as departmental overhead rates, when determining the cost of fee or grant activities in the City.

Development of Departmental Overhead Rates

When calculating departmental overhead rates for fee and permit administration, the Controller's Office divides total departmental administrative costs by total salaries and benefits (excluding administration salaries and benefits). In some departments, several rates are determined for separate programs or divisions within one department. However, in other departments, only one rate is determined for the entire department. These Departmental Overhead Rates are then applied to departmental fees and charges. However, the Controller's Office employs at least four different methods for determining departmental overhead rates. These are described below.

1. Departments calculate an overhead rate without any direction or guidance from the Controller's Office. The departments then send these rates to the Controller's Office, which checks for reasonableness. For example, the Department of Public Works calculates an overhead rate for seven of its divisions, without formal guidelines or advice from the Controller's Office. The Controller's Office states that all departments use actual costs. However, our research found that there are departments that used budgeted costs rather than actual costs in their overhead calculations.

2. The Controller calculates overhead rates solely from budget information compiled in the Annual Appropriation Ordinance.

3. The Controller calculates overhead rates from budgeted administration costs out of the Annual Appropriation Ordinance and obtains salary costs from FAMIS reports. The Controller's Office utilizes both budget and actual costs in this method.

4. The Controller calculates overhead rates by obtaining budgeted salary information out of the Annual Appropriation Ordinance, and obtains administrative costs directly from the Department. The Controller utilizes both budget and actual costs in this method.

Out of 70 departments (and divisions) for which the Controller records an overhead rate, the Controller's Office calculated only 18 rates for FY 2002-03. The remaining 52 departments or divisions either calculated their own rates, or rates have not yet been determined. For departments that calculated their own rates, the Controller's Office does not offer formal policies or training to departments regarding indirect cost allocation principles or methodologies. According to an analyst in the Controller's Budget and Analysis Division who works with fee administration, the check for reasonableness consists of reviewing individual cost computations to ensure that the rate prepared by the department is "reasonably accurate".¹

In an analysis of the 11 highest revenue producing user fees in the City, indirect cost methodologies varied. Two of these eleven fees, assessed by the County Clerk's Office, applied an indirect cost rate that was calculated by the department based on budgeted costs. Five fees assessed by the Department of Public Health's Food program applied an indirect cost rate that was calculated by the department based on actual costs. The remaining four fees, assessed by County Medical Examiner and the Fire Department, applied indirect cost rates that were calculated by the Controller using budgeted costs. These 11 fees represented $6.5 million in fee revenues in FY 2002-2003.

As is illustrated in this small sample of high revenue generating fees, the indirect cost rate methodology managed by the Controller's Office is highly inconsistent and allows potential for inaccuracies. The Controller's Office methods of calculating indirect cost rates are inefficient, as some departments calculate their own rates using actual numbers and some departments use budget numbers. Similarly, the Controller's Office, when calculating rates in-house, use both budgeted and actual numbers, depending on what is available. Such discrepancies could yield entirely different indirect cost rates. Such differences could result in over-charging for fees, which could result in legal liability, and some could under-charge for fees, which results in lost revenue to the City.

For example, the Controller's Office calculates a departmental overhead rate for the Police Department from budgeted costs (not actual costs) included in the Annual Appropriation Ordinance. The Police Department's rate is calculated at 22.55 percent for FY 2002-03. The rate was obtained by dividing their total Operations and Administrative budget of $49,667,012 by total salaries and benefits (less administration salaries and benefits) of $220,293,945. However, budget costs differ from actual costs. In the Police Department's Operations and Administrative budget, costs were $1.36 million dollars less than actual costs in FY 2001-02, and $4.49 million dollars less in FY 2002-03. If actual costs had been used in the indirect cost rate calculation, a significantly lower rate would have been produced. Thus, if the Controller sets the indirect cost rate too high, as is evident in this example, the Police Department might be overcharging for its fees, a potential legal liability for the Department.

The Controller's Office should establish clear and consistent guidelines for calculating departmental indirect cost rates, rather than using four different methods. Standards need to be established to determine when individual programs or divisions require their own indirect cost rates, or when a department-wide rate is sufficient. The Controller should have standardized guidelines for what is required if a department calculates its own rates, instead of a simple check for reasonableness. Further, the Controller's Office should use actual costs rather than budget costs when calculating rates, as these will be more accurate.

Indirect Costs Applied to Grants

Section 10.170-1 of the Administrative Code states that "the receipt and expenditure of grant funds shall not be approved by the Board of Supervisors unless the Controller has certified that provisions for appropriate indirect cost reimbursement is included in the grant budget." However, as with fees, the Controller's Office is not currently involved in calculating or reviewing indirect cost rates associated with grants for City departments.

The Grants Management Unit performs the Controller's review and authorization for the acceptance and expenditure of grant funds. However, the Grants Management Unit only verifies that the indirect costs have been appropriately disclosed in the `accept and expend' resolution that is forwarded to the Board of Supervisors for approval. There is no review of indirect costs for accuracy or appropriateness.

Departments must submit to the Controller's Office a completed Grant Information Form (GIF) to complete their grant `accept and expend resolution' requirements. The GIF requires departments to state if indirect costs are included in the budget of the grant. If indirect costs are included, departments must state the amount and the calculation methodology. If indirect costs are not included, the department must indicate why they are not included. If indirect costs are not included in the grant budget, the GIF does not require departments to estimate or state how much those indirect costs will be. Therefore, the indirect costs, which are effectively being subsidized by the City, are not detailed in the GIF for informational purposes and are not reviewed or certified by the Controller, as mandated by the Administrative Code.

According to the Grants Unit, approximately 101 grants were reviewed by the Controller's Office between July 1, 2002 and June 30, 2003 for a total of $192,209,176. For these 101 grants, GIFs were located in the Controller's files and analyzed. In 39 cases, or 39 percent of the grants in that year, indirect costs were budgeted within the grant award. The average indirect cost rate for these 39 grants was 7.71 percent, ranging from 0.34 percent to 39.61 percent.

The remaining 62 grants, or 61 percent of the grants reviewed by the Controller's Office between July 1, 2002 and June 30, 2003, did not include indirect costs in the grant budget. In 35 cases, or 35 percent, indirect costs were not included because they were unallowable by the grantor. However, in 27 cases, or 27 percent of the grants, indirect costs were not included "to maximize use of grant funds on direct services." In other words, whatever indirect costs the department might have while expending these grant awards will be absorbed by the City. During the period between July 1, 2002 and June 30, 2003, such grant awards totaled $27,455,818. However, no such analysis is or was performed by the Controller's Office. While it is a policy matter to decide between maximizing direct or program services and using program monies for indirect costs, the Controller should regularly determine whether the grant budget has been appropriately developed in accordance with Administrative Code § 10.170-1.

The Controller's Office should perform a thorough review of indirect cost claiming in terms of grants administration to ensure that indirect costs are being appropriately and accurately reported by the departments. Further, the Controller's Office should revise the GIF to include a budget of indirect costs, even if they are not paid by the grant to provide more accurate information to the Board of Supervisors.

Conclusions

The San Francisco Administrative Code charges the Controller with the responsibility to direct and approve indirect cost rates for each City department. Such rates are applied to user fees and grants in order to reimburse the City for administrative and support costs associated with fee and grant activities.

The Controller's Office has not established a consistent methodology for calculating departmental indirect cost rates. In some cases, the departments calculate their own indirect cost rates and the Controller merely checks for reasonableness. For the remaining departments where rates have been determined, the Controller has three different methods for calculating departmental indirect costs. These methods are either calculated at the program level or by department. In addition, some are based on budgeted costs and some are based on actual costs.

The Controller's Office has no involvement with the analysis or application of indirect cost rates for grants, which ignores a direct mandate in the Administrative Code § 10.170-1. The Grants Management Unit only checks to ensure the completeness of grant documentation before grants are forwarded to the Board of Supervisors for approval. The Controller's Office does not certify that provisions for appropriate indirect cost reimbursement are included in the grant budget, as pursuant to Section 10.170-1 of the Administrative Code.

The Controller's Office should develop consistent policies and procedures for calculating departmental indirect cost rates. The Controller's Office should also perform analyses of grant budgets to determine whether indirect cost amounts are accurate; and, if not included in the grant budget, that such costs are accurately disclosed. While it is a policy matter for the Board of Supervisors to decide whether grant applications should include indirect costs (if allowable), the Controller's Office should ensure that the Board has complete information prior to grant approval.

Recommendations

The Controller should:

10.1 Develop clear and consistent policies and procedures for the calculation of departmental overhead rates, using actual costs rather than budgeted costs;

10.2 Develop standards to determine when individual programs or divisions require individual indirect cost rates, or whether department-wide rates are sufficient;

10.3 Develop and disseminate procedures for departments to follow when calculating indirect cost rates. Such procedures should mirror Controller's procedures for calculating indirect cost rates;

10.4 Develop procedures for the Controller's Office to certify that provisions for appropriate indirect cost reimbursement are included in the grant budget, as pursuant to Section 10.170-1 of the Administrative Code; and,

10.5 Require that all indirect costs be disclosed on the Grant Information Form, even if costs will not be paid by the grantor. This will enable the Board of Supervisors to make a more informed decision regarding how grant money should be allocated and whether administrative costs should be absorbed.

Costs and Benefits

There would be no new cost to implement these recommendations.

The recommendations would increase the Controller's ability to manage indirect cost rate development. Additionally, the recommendations would ensure that the Controller's Office provides full disclosure of indirect costs associated with grant administration to the Board of Supervisors.

¹ The Controller's Office was unable to provide examples or information regarding any Departments whose rates were deemed "unreasonable".