· The Controller's Office does not always enter appropriation reserves into FAMIS in a manner that achieves the Board of Supervisors' policy objectives. In FY 2002-2003, departments expended reserved funds without prior Board of Supervisors approval in two instances, because the FAMIS entry did not capture the work order or subproject level expenditure.

· The Controller's Office procedures for entering Mayor's Office reserves or contingencies into FAMIS to achieve savings targets are redundant. Both the Budget and Analysis Division and the Accounting Operations and Systems Division enter reserves or contingencies into FAMIS to control departments' expenditures, resulting in a process that is inefficient and could lead to errors in FAMIS entries.

· The Controller's Office does not closely monitor General Fund appropriation reserves for continuing projects. Our review of the listing of appropriation reserves, produced by the Controller's Office at the request of the management audit, found that several appropriation reserves on continuing projects had already been released and expended. Two out of the 16 projects reviewed, however, should be closed, and available revenues returned to the General Fund. By reviewing and closing these three projects, one of which was appropriated in FY 1993-1994, at least $177,000 could be returned to the General Fund.

· The Controller's Office approves most City department requests to carry forward unexpended appropriations from one fiscal year to the next. The Controller's Officer generally only denies departments' carry forward requests if the department does not have sufficient funds or if the department has funding for the purpose in the next fiscal year. The Controller's Office approves departments' requests to carry forward funds although some of these requests exceed the Controller's Office written policy for carry forward approval. In FY 2001-2002, the Controller's Office recommended approval of 76 percent of all departments' requests to carry unexpended General Fund monies forward into FY 2002-2003, thus recommending approval of the carry forward of $21,468,665 in unexpended annual appropriations out of $28,423,087 requested. Six percent of appropriations that are carried forward into the next fiscal year are based on policy decisions, rather than stricter guidelines accounting for sufficiency of funds or the prior commitment of funds.

Monitoring Appropriation Reserves

The Board of Supervisors, the Controller, and the Mayor establish appropriation reserves to monitor and control department expenditures.

· The Board of Supervisors, or a committee of the Board of Supervisors, may establish appropriation reserves during the annual budget review, upon adoption of a supplemental appropriation ordinance, or upon approval of a resolution to accept and expend grant funds. Generally, the Board of Supervisors establishes appropriation reserves as a policy tool to monitor departments' expenditures or to require additional information about departments' programs.

· The Controller, under Charter Section 3.105, establishes appropriation reserves during the annual budget review to control departments' expenditures if revenues are not available. The Controller places these reserves when bonds have not yet been issued or if sources of revenues, such as fee revenues or specific tax revenues, may be less than anticipated in the budget.

Reserves established by the Board of Supervisors or by the Controller during the annual budget review are included in the Annual Appropriation Ordinance.

· The Mayor may establish appropriation reserves to set spending targets that are less than the annual appropriation. In FY 2002-2003, the Mayor established reserves throughout the year to meet reduced spending targets (or savings) to offset expected reductions in revenues.

The Budget and Analysis Division of the Controller's Office is responsible for entering appropriation reserves into the automated general ledger system, FAMIS. Appropriation reserves authorized by the Board of Supervisors during the budget review are entered into the automated budget preparation system, BPREP, and then downloaded into FAMIS. Following the budget process, appropriation reserves authorized by the Mayor's Office are entered directly into FAMIS by Budget and Analysis Division staff. Release of reserves requires written documentation. Reserves established by the Board of Supervisors committees require committee action to release. The Budget and Analysis Division requires written requests from the Mayor's Office to release reserves established by the Mayor.

Board of Supervisors Reserves

Often, the Board of Supervisors or its committees establish appropriation reserves to achieve a policy objective. Departments must submit a request to the Board of Supervisors or the committee that established the reserve to release the funds. The request is generally considered in a public hearing before the Board of Supervisors or appropriate committee.

In the past year there have been two instances when Board-authorized appropriation reserves were spent without prior Board of Supervisors approval. In March of 2003, the Department of Administrative Services requested retroactive release of $3,088,926 reserved by the Board of Supervisors in the FY 2002-2003 budget for the maintenance and repair of City-owned vehicles. Because the Department of Administrative Services provides vehicle maintenance services on a work order basis to City departments, the Controller's Office placed the appropriation reserve on the requesting departments. Between July of 2002 and March of 2003, when the Finance and Audits Committee authorized the retroactive release of reserves, the Controller's Office City Projects staff worked with the Department of Administrative Services to address the Board of Supervisor's policy issues. Also, a March 19, 2003 memorandum to the Budget Analyst from the Department of Administrative Services states that the Department had been in regular contact with the office of the sponsoring supervisor "for the last three months in regard to the timing and substance of the release of reserve request".

Although the monies were on reserve, the Administrative Services Central Shops performed the work and charged $836,484 against the $3,088,926 reserve prior to authorization by the Finance and Audits Committee to release the funds. According to the Budget and Fiscal Operations Manager, requesting departments should notify performing departments if insufficient funds are available to pay for the work. According to the Accounting Operations Manager, the reserve was entered into FAMIS at the high work order level for the requesting department and not on the specific work order between the requesting and performing department. Therefore, the Accounting Operations and Systems Division fund accountants could only identify if monies were spent against all the requesting departments' work orders, up to the level of the reserve, and could not identify if monies were spent against the specific work order for which the reserve had been placed.

In April of 2003, the Department of Public Works requested retroactive release of reserves for completed Fire Department capital projects. In 1996, the Board of Supervisors appropriated $14,233,588 in Fire Bonds for 20 Fire Department capital projects and had reserved $7,864,100 of the $14,233,588 appropriation. From 1996 until 2003, the Board of Supervisors released $4,340,872 of the $7,864,100 reserve, with a remaining balance of $3,523,228. The remaining reserves were designated for capital projects at three fire stations. However, the Department of Public Works spent unreserved funds in the Fire Bond program for the three fire station projects, for which funds had been reserved. According to the Deputy Controller, the capital project appropriation was entered into FAMIS at the higher project level, and the Controller's Office could not monitor reserves placed on sub-projects.

The Controller's Office should work with the Board of Supervisors to ensure that the Board's policy objectives are met. In the example of reserves placed on work orders, the Controller's Office should place the reserve on the specific work order rather than on the higher level work order and on the corresponding expenditures in the performing department to ensure that both the performing and requesting departments are meeting the policy objective. In the example of the capital project, the Controller's Office should enter the sub-project appropriation reserve into FAMIS at a lower project level to ensure that the sub-project details are captured.

Mayor's Reserves

In FY 2002-2003, the Mayor's Office placed reserves on City departments' expenditures to reduce spending below the appropriation level. The Budget and Analysis Division entered these reserves into FAMIS. Additionally, in FY 2002-2003 the Accounting Operations and Systems Division began entering "contingencies" into FAMIS, when the Mayor requested a reduction in specific department expenditures. A contingency is a separate line, which pulls out expenditures from the department's budget in order to control spending or to account for revenue shortfalls. Contingencies can be entered into FAMIS for on-going operating expenditures but project expenditures must be entered into FAMIS as reserves.

The Budget and Analysis Division's role in placing "reserves" on expenditures due to projected revenue shortfalls or to achieve savings below the level of appropriation, and the Accounting Operations and Systems Division's role in placing "contingencies" on over-expenditures resulting from decreased revenues are redundant. The Budget and Analysis Division is responsible for monitoring appropriation reserves that are placed by the Board of Supervisors or Controller during the budget process or by the Board of Supervisors during the fiscal year through the legislative process. However, the Accounting Operations and Systems Division is responsible for entering contingencies to control over-expenditures resulting from revenue shortfalls.

During FY 2002-2003, the Budget and Analysis Division and the Accounting Operations and Systems Division both entered the Mayor's appropriation reductions into FAMIS, either as a reserve or a contingency. In one instance, the Budget and Analysis Division entered a $1.5 million reserve for the Department of Administrative Services into FAMIS on September 16, 2002, as part of the Mayor's "Capital Reserve List". The Accounting Operations and Systems Division entered a $340,943 reserve into FAMIS for the Department of Administrative Services on April 11, 2003 as part of the Mayor's savings initiative. According to a May 11, 2003 FAMIS journal entry, the $340,943 "was part of $1,500,000 reserve placed on JECO03000268-03 on 9/16/02 and recorded again on JECO03018086 on 4/11/03". The Accounting Operations and Systems Division released the $340,943 reserves, and entered into the FAMIS notepad that the transaction was to "release portion of reserve that was duplicated". Subsequently, the Controller's Office has stated that the entry was not a duplicated entry and that the monies were released after discussion with the Mayor's Office.

The Controller's Office should define the policies and procedures for establishing reserves and contingencies and the respective responsibilities of both the Budget and Analysis Division and the Accounting Operations and Systems Division for placing and monitoring reserves and contingencies. The Budget and Analysis Division should retain its oversight over reserves placed by the Board of Supervisors and Controller during the budget process and by the Board of Supervisors during the fiscal year through the legislative process. However, the Accounting Operations and Systems Division should assume responsibility for placing reserves on projects and contingencies on operating expenditures that are intended to reduce expenditures to offset projected revenue shortfalls. By defining the purpose of reserves and contingencies and identifying the roles and responsibilities of the respective divisions, the Controller's Office would increase the efficiency of the process and reduce opportunities for duplicated entries or other errors.

Prior Years' Appropriation Reserves

Charter Section 9.113 states that the Controller shall transfer unused or unencumbered balances to the Cash Reserve Fund at the end of the fiscal year. Unexpended annual appropriations for department operations and for annual projects are closed out to the fund balance at the year-end close. The Charter provision does not require the Controller to close out to the fund balance unexpended appropriation balances designated for continuing projects at the year-end. The Controller's Office closes out to the fund balance unexpended General Fund appropriation reserves for department operations (1G AGF AAA) and for annual projects (1G AGF AAP) at the year-end. The Controller's Office does not monitor appropriation reserves for continuing projects separately from continuing project appropriations overall. This management audit requested a listing of appropriation reserves for all funds, which is not a standard report produced by the Controller's Office. The Controller's Office provided a listing of all outstanding appropriation reserve documents in FAMIS through June 30, 2003. According to the listing, all outstanding General Fund appropriation reserves for annual department operating expenditures (1G AGF AAA) and annual projects (1G AGF AAP) are from FY 2002-2003, and according to the Controller's Office, these appropriation reserves will be closed out and returned to the General Fund balance during the year-end close.

According to the listing, as of June 30, 2003, there were $18,144,792 in appropriation reserves for continuing projects (1G AGF ACP). The majority of these projects were multi-year capital or information system projects, although a few of the projects were for other types of programs. More than half of these monies, or $9,728,296, were listed as appropriation reserves for continuing projects established in FY 1999-2000 or earlier. We reviewed the details for the 16 projects that were established in FY 1999-2000 or earlier, and based on our interviews with the respective departments, found that many of these appropriation reserves had been released and expended. For example, of the five Department of Public Works projects, three of the appropriation reserves had been released and expended and the projects closed, one project had been closed and the monies returned to the fund balance, and one project from FY 1993-1994 was still open. Both Recreation and Park Department appropriation reserves had been released and expended.

At least two of the appropriation reserves that we reviewed should be reviewed for appropriateness by the Controller, and the Controller should recommend return of these monies to the fund balance.

· The listing showed a $22,063 appropriation reserve, established in FY 1996-1997, for which the Medical Examiner's Office was able to identify the entry into FAMIS in April 1997 and the enabling Ordinance 101-97, but was not able to identify the associated project. Because the revenue source was Jail Overcrowding Fine Revenue, which is not a revenue source for the Medical Examiner's Office, the Medical Examiner's Office thought that this could be an incorrect journal entry.

· The listing showed a $61,210 appropriation reserve, established in FY 1993-1994, for the Department of Public Works Civic Center Steam System Improvement Project. According to the Department of Public Works, the balance in this account, including the $61,210 reserve, is $177,995. Although the Department of Public Works owns the steam system loop in Civic Center, a private contractor provides the actual steam heat. The Department of Public Works is reviewing the feasibility of transferring the steam system to the private contractor, and therefore, the appropriateness of the $177,995 account, including the $61,210 reserve, needs to be reviewed.

The Controller's Procedures in Reviewing General Fund Continuing Projects

According to the Controller's Office, the Budget and Analysis Division is responsible for working with the Mayor's Office to review and determine which continuing projects and associated reserves should be closed out at the year end. Annual operating and project funds close out automatically at the year-end but continuing projects are carried forward into the next year. The Accounting Operations and Systems Division is responsible for reviewing and closing out continuing projects that do not have appropriation reserves.

As noted above, the Controller's Office does not produce systematic reports on appropriation reserves for continuing projects. Because the appropriation reserves are entered into FAMIS at the project level, if a department attempts to spend against the appropriation reserve, FAMIS will deny the transaction. The Budget and Analysis Division will then look at the history of the appropriation reserve and if necessary request the department to provide justification for the reserve.

Currently, the Mayor's Office plays the lead role in reviewing continuing projects and identifying which projects should be closed. The Mayor's Office requests EIS reports from the Controller's Office on prior year and current year continuing project balances, which include encumbered and unencumbered funds. The Controller's Office also produces a year-end report on inactive projects, which is reviewed by the Deputy Controller. According to the Deputy Controller, in recent times, City departments have identified projects within their budgets that can be closed to meet spending targets. Other projects are not closed because, although the project is nearly complete, the department continues to need some monies for completion or the project. Projects are also not closed if the funded source is project-specific. Although the Mayor's Office takes the lead in working with departments to close continuing projects, the Controller's Office can close projects with the department's agreement.

Carry Forward of Annual Appropriations into the Next Fiscal Year

Although the Charter requires the Controller to return unencumbered balances to the Cash Reserve Fund, the Controller's practice has been to allow departments to carry forward unexpended appropriations from one fiscal year to the next, after review by the Controller's Office and the Mayor's Office. Each year, the Controller's Office sends a memorandum to departmental fiscal officers regarding the Controller's policy for carrying forward unexpended annual appropriations into the next fiscal year, stating that unencumbered balances of all annual appropriations are automatically closed to the fund balance at year end. The memorandum provides the criteria used by the Controller's Office to determine if City departments can carry forward unspent monies into the next year, as follows:

· These monies must be for specific non-recurring items or services.

· The department can not have funds budgeted in the next fiscal year for the specific purpose.

· The department must spend the money in the next fiscal year for the same purposes for which it had been appropriated in the prior fiscal year.

The fund accountants review the departments' requests to carry forward monies and the Accounting Operations Manager reviews the fund accountants' actions. The Accounting Operations and Systems Division staff review departments' carry forward requests in August with further review by the Mayor's Office in September. The fund accountants, Accounting Operations Manager and Deputy Controller meet with Mayor's Office staff as part of the review. In FY 2001-2002, in which final information is available, the Controller's Office approved 76 percent of all departments' requests to carry unexpended General Fund monies forward into FY 2002-2003. The Controller approved carry forward of $21,468,665 out of $28,423,087 requested. The Mayor's Office approved $17,771,396, or 82.8 percent of the Controller's approved amount of $21,468,665.

We reviewed FY 2001-2002 carry forward requests for six General Fund departments. Of the requested carry forward of funds by these six departments, the Controller's Office approved 83 percent, of which one-half were approved because the funds had already been committed and one-half were approved for other reasons, as noted in Table 5.1.

Table 5.1

Controller's Approval or Denial of Requests by Six General Fund Departments to Carry Forward FY 2001-2002 Funds

¹ The total percentages are based on total denials and approvals for all six departments.

Source: Controllers Office

The Controller's Office generally only denied projects for insufficiency of funds or because additional monies had been appropriated in FY 2002-2003. Sixteen of the 18 denied requests for the carry forward of appropriated funds from FY 2001-2002 to FY 2002-2003 were denied by the Controller's Office for these reasons. In two out of the 18 denied requests to carry forward appropriations, the Controller's Office denied the request for other reasons. The Controller denied one request because the project had already been paid and denied another request because the monies had previously been carried forward from FY 2000-2001. The Controller's Office approved all other requests to carry forward FY 2001-2002 unexpended appropriations into FY 2002-2003.

As noted above, one-half of the Controller's Office recommended approvals to carry forward unexpended funds were for reasons other than that the funds were already committed. The majority of approved projects, other than projects for which funds were already committed, were due to delays in capital and information systems projects, or for one-time projects for which no additional monies were available in the next fiscal year.

The Controller's Office approved six Department of Public Health requests to carry forward unexpended funds for varying reasons, other than those in the stated Controller's Office policies, or six percent of the approved requests in our sample.

· The Controller's Office approved three requests to transfer funds for information systems or telecommunications projects. In one instance, the funds were transferred between Department of Public Health cost centers and in another instance the funds were transferred from a professional services contract to a work order with the Department of Telecommunication and Information Services. Another request was to fund an increase in a work order with the Department of Telecommunication and Information Services. According to the notation, the Controller's Office had approved the FY 2001-2002 budget transfer but was unable to increase the work order encumbrance because the deadline had passed.

· The Controller's Office approved one request to carry forward funds to pay for an anticipated workers compensation settlement.

· The Controller's Office approved a request by the Community Mental Health Services Pharmacy to purchase bulk medications due to missing the end of the year purchasing deadline.

· The Controller's Office also approved a request by the Department of Public Health Substance Abuse division to fund a purpose in FY 2002-2003 that differed from the appropriation in FY 2001-2002. The Board of Supervisors had approved monies for contractual services to provide transitional housing for women and children in FY 2001-2002. However, the Department of Public Health requested that these monies, with a remaining balance of $254,000, be used instead to pay off the mortgage of the contractor, who was going out of business in the next fiscal year, and to transfer title of the property to the Department of Public Health.

In the above example, the Department of Public Health used $254,000, appropriated for professional services in FY 2001-2002 and carried forward into FY 2002-2003, to pay off the mortgage balance of the Women's and Children's Family Services facility at 15 Bishop Street. Although the funds were used to pay off the mortgage balance for the non-profit organization, these monies continued to be identified in FAMIS as monies for a professional services contract. According to the City Attorney's Office, the title to the building will be transferred to another non-profit organization, the Mission Neighborhood Development Corporation. Because the transaction involves the transfer of property between two non-profit organizations rather than the purchase or transfer of the property to the City, the proposed transaction has not been submitted to the Board of Supervisors for approval.

According to the Deputy Controller, the Controller's Office approves all requests by City departments to carry forward unexpended funds if the departments provide sufficient justification for expending the funds and if the monies are not needed for other purposes. In one example, the Controller's Office approved the Community Mental Health Service request to carry forward funds for bulk medicines, which is not consistent with the criteria that carry forward requests must be for one-time purposes. The annual appropriation is authorized for the level of spending that is justified. When carry forward requests for ongoing expenditures are approved by the Controller's Office, the annual appropriation level approved by the Board of Supervisors is modified. Appropriation authority is the Board of Supervisors' primary tool to implement policy and account for resources. When City departments shift monies between fiscal years, they circumvent the appropriation process. The City needs a clearly stated policy on the carry forward of appropriations from one fiscal year to the next. Currently, the Administrative Code is silent on the process. Although the Controller's Office has a documented policy to carry forward one-time monies if there is no new appropriation in the next fiscal year and if the purpose is unchanged, the Controller's Office approves the carry forward of funds for many reasons. Our review of the six City department's requests shows that the Controller's Office recommends approval of carry forward requests in most instances, unless the department has insufficient funds or has an appropriation for the purpose in FY 2002-2003.

The Controller's Office should work with the Board of Supervisors to define the policy objectives and scope of carrying forward annual appropriations from one year to the next, and propose Administrative Code amendments as needed. The Controller's Office also should clearly define the policies and procedures for reviewing and approving the carry forward of unexpended annual appropriations into the next fiscal year.

Conclusions

The Controller's Office does not always enter appropriation reserves into FAMIS in a manner that will achieve the Board of Supervisors' policy objectives. Departments have been able to spend against reserves because the Controller's Office did not enter the reserve against the work order or subproject for which it was established. The Controller's Office procedures for entering Mayor's Office reserves or contingencies into FAMIS to achieve savings targets is redundant. Both the Budget and Analysis Division and the Accounting Operations and Systems Division enter reserves or contingencies into FAMIS to control departments' expenditures, resulting in a process that is inefficient and could lead to errors in FAMIS entries.

The Controller's Office does not closely monitor General Fund appropriation reserves for ongoing projects. Our review of the listing of appropriation reserves produced by the Controller's Office at the request of the management audit found that several appropriation reserves on continuing projects had already been released and expended. We identified at least two out of the 16 projects, however, which should be closed, and available revenues returned to the General Fund.

The Controller's Office approves most City department requests to carry forward unexpended appropriations from one fiscal year to the next. Carry forward requests are generally only denied if the department does not have sufficient funds or if the department has funding for the purpose in the next fiscal year. The Controller's Office approves departments' requests to carry forward funds although some of these requests exceed the Controller's Office written policy for carry forward approval.

Recommendations

The Controller's Office should:

5.1 Work with the Board of Supervisors to ensure that the Board's policy objectives are met in authorizing appropriation reserves, including defining such procedures as (a) placing work order reserves on both the performing and requesting departments, and (b) establishing separate project accounts to account for reserves placed on sub projects;

5.2 Define the policies and procedures for establishing reserves and contingencies and the responsibilities of the Budget and Analysis Division and the Accounting Operations and Systems Division for placing and monitoring reserves and contingencies, including the responsibility for the Budget and Analysis Division in overseeing Board of Supervisors and Controller's reserves, and the responsibility of the Accounting Operations and Systems Division in overseeing the Mayor's reserves to achieve savings targets; and,

5.3 Work with the Board of Supervisors to (a) define the policy objectives and scope of carrying forward annual appropriations from one year to the next, and propose Administrative Code changes as needed; and (b) define the policies and procedures for reviewing and approving the carry forward of unexpended annual appropriations into the next fiscal year.

Costs and Benefits

Our recommendation to redefine the responsibilities of the Budget and Analysis and Accounting Operations and Systems Divisions in monitoring reserves and contingencies would increase efficiency by reducing duplicative efforts in establishing and monitoring appropriation reserves.

Our recommendation to increase the Controller's role in monitoring and recommending closure of continuing General Fund projects, including projects with appropriation reserves, would release additional revenues to the General Fund for alternative uses. Closing out the $22,000 Medical Examiner appropriation reserve would clear the books but may not result in additional revenues if no revenues were received from the Jail Overcrowding Fines. However, by working with the Department of Public Works to close out prior year continuing projects, approximately $177,000 could be available for other uses.

Our recommendation to increase oversight over the approval of departments' requests to carry forward unexpended appropriations would ensure that departments' appropriations in the next fiscal year do not exceed the appropriation levels intended by the Board of Supervisors.