Many capital projects are managed solely by the Department of Public Works and its bureaus. However, many other capital projects are managed by the Department of Public Works for, and in coordination with, other City departments. Because of this relationship and how projects are structured in the City's Financial Accounting and Management Information System (FAMIS), one capital project may be bifurcated into two or more segments, each controlled separately by the individual departments.

Because expenditure controls are at the project level, this project management approach can create a situation where one department may overspend its allocation and another department may under-spend its allocation. For example, in the SEP Building 785 Thickening Facilities Improvement capital project detailed below, the Department of Public Works project balance is $230,109, but the client department is over-budget by $137,149, resulting in a total Citywide unexpended balance for the project of $92,961.

The focus of this review was on Department of Public Works accounting and reporting processes and, thus, project activities in other City departments were not reviewed. In order to verify that the accounting for and reporting of capital projects facilitates effective project management, the Budget Analyst reviewed Department of Public Works processes for tracking and monitoring these projects.

As part of the Budget Analyst's assessment, 24 of 920 capital projects that had been or were actively being managed by the Department of Public Works as of February 13, 2006 were judgmentally selected and reviewed to obtain an understanding of the accounting practices related to a variety of projects. This review found several examples of accounting and reporting weaknesses that indicate a lack of internal controls surrounding the management of capital projects. Such examples are listed below:

Samples of the projects where these weaknesses were found are described below.

San Francisco Fire Department Boat Headquarters (CFCFD2, Job Order 5478A)

According to the Department of Public Works' Project Management Database of the Financial and Personnel System, the San Francisco Fire Department Boat Headquarters project was established for "seismic strengthening of existing building and pier, provision of handicapped toilet and women's facilities and upgrading of plumbing, mechanical and electrical systems." According to the Project Management Database, the project start date was May 5, 1997 and the project close date was October 24, 2001. According to the Fire Department, this project was placed on hold while the Fire Department worked with the Port of San Francisco to identify an alternative site because the original project plan proved to be very costly for the limited amount of work allowed on the historic building. Further, the Fire Department reports that during the development of the project plans, Emergency Medical Services was transferred to the Fire Department and accommodations for the additional staff were not included in the original project plans. Therefore, according to the Department of Public Works project manager, although the design work was completed, the project was cancelled because the Fire Department opted to locate at an alternative sight provided by the Port of San Francisco. However, an appropriate alternative proved to be untenable and the Fire Department reports that the original project plan will be re-established and revised.

A review of accounting transactions through February 2006 indicates the last significant labor and non-labor activity occurred in FY 1999-2000 and ended in May 2000, over six year ago. Since that time, an additional 24 hours were charged to the project at a cost of $2,671. Of this amount, nine hours at a cost of $1,239 was charged after the project close date. Further, according to the project manager, the $26,643 in outstanding encumbrances are for specialty engineering consultants used during the initial planning phase. Yet, these encumbrances remain open. Finally, on April 19, 2005, the project budget was reduced by $487,610 to provide supplemental appropriations for the San Bruno Jail and Juvenile Hall projects. It is the understanding of the Fire Department that these funds will be returned to the project.

As noted above, this project was placed on hold for approximately six years while the Fire Department sought to identify project alternatives. During that time, additional charges occurred, encumbrances that were no longer necessary remained open, project scope dramatically changed - and then changed again - and a portion of the budgeted funds were re-allocated. Yet, the project was not closed out as part of a larger comprehensive management of these bond funds or of Fire Department capital projects, in general. The Fire Department reports that when the capital program was at its peak, these funds and projects were managed by a position that was eliminated from the Department's budget in 2002.

San Francisco Fire Department Station #12 (CFCFD2, Job Order 5465A)

According to the Project Management Database, the San Francisco Fire Department Station #12 project was established for general improvements to the fire station, including separate facilities for female firefighters, re-roofing, and mechanical and electrical system upgrades. According to the Project Management Database, the project start date was December 2, 1997 and the project close date was March 17, 2000, with the last labor charges posting in FY 2000-2001. According to the Department of Public Works project manager and the Fire Department, this project is now completed and can be closed. While the Department of Public Works available balance shows $110,569, the Fire Department incurred an additional expenditure on this project totaling $40,213 in FY 2002-2003, which is not included and accordingly offsets the Department of Public Works reported balance, resulting in an adjusted project remaining balance of $70,357.

San Francisco Fire Department Pump Station 1 Renovation (CATES1, Job Order 5228A)

According to the Project Management Database, the San Francisco Fire Department Pump Station 1 Renovation project was established for construction of three office floors and a basement within an existing facility. While there are no project start and project close dates reported in the Project Management Database, the last labor charges were posted in FY 2001-2002 and the last significant non-labor charges occurred in FY 1998-1999. According to the Department of Public Works project manager, this project was completed and the remaining balance should have been returned to the Fire Department's master project funded from the 1989 Earthquake Safety Bond. Since being made aware of the available balance as a result of this management audit, the project manager reports that the project has now been closed.

War Memorial Opera House Seismic Upgrade (CATES2, Job Order 2342U)

The Project Management Database notes that this project was established for the seismic upgrade of the Opera House, including disabled access upgrades, facility preservation, hazardous materials mitigation, and earthquake damage repair. According to the Project Management Database, the project start date was February 1, 1993 and the project close date was September 5, 1997. Because project activity occurred before the establishment of the Project Management Database, there is insufficient information to obtain a clear understanding of the transaction history of this project. Further, in FY 2001-2002 the Project Management Database included $48,420 in labor charges and it is unclear, given the project close date of September 5, 1997, whether these charges were appropriately charged to the project. The Director of the War Memorial reports that an email inquiry was made at the time of the charges for an explanation, but the Department of Public Works did not respond.

The Project Management Database listed an individual that never worked on the main seismic project as the project manager. When contacted during this management audit, this individual was unable to comment on project status other than to indicate that the project may have been kept open to fund other projects. There had been two other Department of Public Works project managers for this project, but both are no longer with the Department of Public Works. According to the Director of the War Memorial, the funding spent after the project close date and the remaining project balance were earmarked for capital improvements to the facility that could not be incorporated into the initial project due to the restricted project schedule. The Director attributed the ten-year delay for expending the final funds to a number of factors, including other repair and maintenance priorities that resulted from the initial construction project and the disintegration of the Department of Public Works project management team. However, the final component of this project, a fire sprinkler protection upgrade, has recently been initiated and is expected to utilize all remaining funding in this project.

Hill Slides/Rockfalls FY 03-04 (CENTRN, Job Order 0910J)

The Project Management Database notes that this project was established to cover expenditures of staff responding to landslides or rockfall incidents and other related tasks. While the Project Management Database reports the project start date as May 3, 2004 and project close date as June 30, 2005 and despite the project title indicating the funds are for FY 2003-2004, it appears this project has accumulated funds from several other projects that have been closed. Additionally, there is a more recent project established for similar activities in FY 2005-2006 with an original appropriation of $100,000, expenditures through February 13, 2006 of $37,807, and a balance remaining of $62,193. The Bureau of Engineering which oversees this project reports that while funds are appropriated in a particular fiscal year, there is no requirement that the funds be spent only during that year. Further, the Bureau reports that hillslide and rockfall projects can and do span fiscal years and that funds are carried forward for this purpose.

According to the project manager, there is annual funding for responding to emergency landslides, but the funds are also used at management's discretion and for construction activities. The project manager reported that the FY 2003-2004 project could not be closed because the funding was needed for current staff expenditures and to pay for staff time preparing plans for how to respond to future emergencies. When asked how staff know which project to charge, the project manager reported that staff try to bill older projects first. Further, the project manager stated during interviews that older projects may also be used to provide "bridge" funding until new appropriation authority is obtained for new projects. Indeed, a review of documentation indicates that the Hill Slides/Rockfalls FY 03-04 capital project with a reported close date of June 30, 2005 had recent expenditures through December of 2005.

Several weaknesses become apparent when examining this project:

SEWPCP Cogen/Digester Gas Study (CENRNR, Job Order 0709J)

The Project Management Database does not have a description of this project. However, the San Francisco Public Utilities Commission reports that this project was for a study of digester gas production and how the digester gas production can be best handled for cogeneration and other reuses. According to the Project Management Database, the project start date was April 15, 2002 and the project close date was December 31, 2004. The individual listed in the system as the project manager reported that his role was only for contract administration. He referred Budget Analyst staff to an individual in another division of the Department of Public Works, who reported his role was limited as well and referred Budget Analyst staff to a third individual, who in turn reported that he had absolutely nothing to do with the project.

As shown above in the table, the project is over-budget by $14,121, but there is no one individual responsible for making the necessary budget adjustments and closing out the project. Further, the Public Utilities Commission's component of the project is also over-budget by $21,219 and the Wastewater Enterprise has an unexpended budget balance of $8,000. Thus, the total project is over-budget by $27,339. According to the Public Utilities Commission, the Department of Public Works is responsible for notifying the Public Utilities Commission that it requires additional funds.

SEP Building 785 Thickening Facilities Improvement (CENRNR, Job Order 0199J)

While the Project Management Database reports a project start date of August 20, 2001 and a project close date of August 20, 2003, the project manager reports that this was a small component of a much larger project started in the mid 1990's by the Public Utilities Commission's Water Pollution Control Bureau. According to the project manager, the role of the Department of Public Works was only to provide support to award a contract. The project manager reported that he needs to be notified by the Public Utilities Commission to close the project.

Office of City Architect (CENBLD, Job Order 0055J)

The Project Management Database notes that this project was established to manage all expenses related to the office of the City Architect. No project start date or project close date was entered in the Project Management Database. The project manager is no longer with the Department of Public Works and is now the department head of the Recreation and Park Department. According to the current Bureau of Architecture manager, this project was handled by the Mayor's Office and the Department did not have any involvement. The last expenditures occurred October 6, 2003.

Compressed Natural Gas (CENTRN, Job Order 0702J)

According to the project manager, the Department of Public Works assisted the Department of the Environment in awarding a construction contract for the building of a natural gas filing station. All funding available to the Department of Public Works has now been expended and, accordingly, the Department is attempting to spend as little time as possible on this project. Thus, the project manager reports that labor charges spent on this project are now being charged to overhead, which as of April of 2006 totaled approximately $4,861. However, the project manager also reported that this is not a typical practice and that he is not aware of any other projects being charged to overhead.

Laguna Honda Hospital Pharmacy Office Remodel (CHLBLD, Job Order 6139A)

According to the Project Management Database, the Laguna Honda Hospital Pharmacy Office Remodel project was established to provide architectural and engineering services for remodeling storage rooms and offices. According to the Project Management Database, the project start date was April 23, 2001 and the project close date was June 30, 2006. The project manager listed in the Project Management Database has not managed capital project for the Department since December 2002. She reports that the last action before she left was to submit the project for permits, but she did not know the outcome. According to the acting Director for Plant Service at Laguna Honda Hospital, there was staff turnover at both the Department of Public Works and Laguna Honda Hospital, which is the likely cause of the project delay. While the permit was granted, it has now expired. Since made aware of this situation during the management audit, the project has now been re-instated with the intention of keeping the project scope the same.

Capital Project Reporting and Reconciliation

As described above, one or more departments may have responsibility over any given project. This decentralized responsibility over project management has lead to a lack of control over project budgets and closeouts. While the Controller's Office does an annual review of capital projects by forwarding project listings and project balances to departments to facilitate the closure of projects in FAMIS, departments either defer to each other as the responsible party or they simply do not report the need to close a project in order to retain the funding within the department for some future use. Such future use may or may not be identified, such as in the San Francisco Fire Department Boat Headquarters example above, or may not be capital-related, such as for repair and maintenance or an occasional charge to the project since funding is available, such as in the Hill Slides/Rockfalls FY 03-04 example above.

The Controller's report of the Department of Public Work's inactive capital projects as of April 27, 2005 identified 1,053 capital project segments with a net project balance of ($164,718,127) that had no activity for at least two fiscal years. In other words, financing uses exceeded financing sources available to the Department of Public Works by $164,718,127. As noted above, this negative balance was likely offset by positive balances in the same projects which were allocated to other departments. Of these 1,053 capital project segments, the Department of Public Works reported that, as part of the FY 2004-2005 year-end close process, 1,017 capital project segments should be closed with a balance of ($157,997,657) and only 34 project segments, with a balance of ($6,423,244) should remain open.

The Department of Public Works reports that the capital projects identified for closure included balances that accumulated over many years because of a lack of reconciliation. According to the Director of Accounting and Contract Administration, the Department is working with the Controller's Office at this time to close out grants and, subsequently, the related capital projects will be closed. For more current projects, the Director reports that capital projects are reviewed annually due to GASB 34 financial reporting requirements. Further, the Director has advised that the Department is reinstating routine reports that will be automatically transmitted to project managers and client departments when project expenditures hit 80 percent of total budgeted funds.

Conclusion

The Department of Public Works has not established strong internal controls over accounting and reporting for the management of capital projects. Internal control weaknesses identified as part of this review are due in large part, but not entirely, to the way capital projects are structured in FAMIS, in which management of a project and budgetary control can be shared by two or more responsible departments. These weaknesses also stem from a lack of established and documented protocol for opening and closing projects, working on projects with no identified and established funding source, lack of appropriate budgetary control, and lapses in maintaining current data and information in the Department's Project Management Database.

The annual reconciliation of inactive funds is not sufficient to mitigate these issues and a significant backlog of unreconciled projects persists. The Director of Public Works, in consultation with the Controller, needs to address process issues and increase internal controls and standardization to the greatest extent possible. This is especially critical at this time given the City's renewed focus on the capital program and the development of the 10-Year Capital Plan.

Recommendations

The Director of Public Works should:

Costs and Benefits

The costs associated with these recommendations would be the staff time required to develop and implement a plan to address capital project accounting process issues and the reconciliation and closeout of inactive projects. These costs, especially as related to the inactive project reconciliation, may be considerable, but should be a priority and absorbed by existing resources. However, the benefits include the reallocation of capital funds once existing inactive capital projects are reconciled.