Inadequate Control of Storeroom Operations Citywide

Since August of 2003, the Budget Analyst has audited the storerooms of the following City Departments:

The audits of the seven storerooms have revealed a lack of standardization in storeroom practices and in some instances significant control deficiencies. Whereas the Public Utilities Commission's Water Pollution Control Division's storeroom operates with effective controls, the following statements from the Port of San Francisco and Recreation and Park Department storeroom audits highlight significantly deficient conditions:

The Budget Analyst released a management audit report on the Purchasing and Storekeeping Functions as Administered by the Purchasing Department in March of 1991. At the time of the audit, the Purchasing Department's Stores and Equipment Division operated 20 storerooms for ten departments, including nine storerooms of the Municipal Railway, which was then a part of the Public Utilities Commission. The Port of San Francisco storeroom was under the Port of San Francisco. Subsequent to the audit, control of the all departmental storerooms under the Purchasing Department was transferred to the respective departments.

The general finding statement and recommendations of Section 2.1, Administrative Control, which pertain to the administrative control of the departmental storerooms and the need for guidelines and procedures, are as follows:

Section 2.1: Administrative Control

Recommendations

According of the Office of Contract Administration, the current management has no knowledge of the Citywide set of guidelines and procedures on storeroom operation and management ever being developed. The City Administrator, who oversees the General Service Agency, including the Office of Contract Administration and the Department of Public Works, should direct the Office of Contract Administration to develop Citywide guidelines and procedures on storeroom operation and management.

According to the Manager, Internal Audits Division of the Controller's Office, the recommendations have not been implemented. The Department of Public Works should work with the Controller's Office to develop materials management internal control guidelines and audit schedule, as part of the Department's work order for City Services Auditor services.

Storage of Materials and Supplies and Tools at the Operations Division

The Department of Public Works maintains a storeroom/toolroom in the Cesar Chavez Street Maintenance Yard of the Operations Division for the purpose of servicing the four Bureaus of the Operations Division. During the entire period of this management audit, the storeroom operation has been undergoing significant physical remodeling and expansion of storeroom responsibilities.

As a percentage of total material usage within the Department of Public Works, the operations of the storeroom expanded from issuances of $288,943 in fiscal year 2004-2005 to issuances of $697,453 in fiscal year 2005-2006, an increase of 141.4 percent. Further, the storeroom inventory reports show a significant increase in the number of line items stocked and total inventory value between fiscal year 2004-2005 and fiscal year 2005-2006: 490 inventoried items with a total value of $250,252 in fiscal year 2004-2005 to 819 items with a total value of $668,890 in fiscal year 2005-2006. The storeroom has assumed storage responsibilities for many of the items used by the Bureaus of Street and Sewer Repair, Street Environmental Services, and Urban Forestry. However, the storeroom responsibility for items used by the Bureau of Building Repair is still small compared to the potential efficient storage by the storeroom.

The Bureau of Building Repair expended approximately $3 million on work order material during fiscal year 2005-2006. However, material ordered for use by the Bureau of Building Repair is not processed through the storeroom. Storeroom issuances from the storeroom to the Bureau of Building Repair in fiscal years 2004-2005 and 2005-2006 were only $11,266 and $11,586, respectively. Following approval of Bureau of Building Repair purchase requests by the Department of Public Works Accounting Office that is located on-site at the Maintenance Yard, material ordered by Bureau of Building Repair personnel is either delivered to the requesting shop or picked up from the vendor by the user. In general, the Bureau of Building Repair trade shops do not order material for inventory; each material order is in support of an approved work order.

The trade shops of the Bureau of Building Repair do, however, maintain material within the confines of the shop or a shop annex. These inventories consist of material left over from completed jobs, from material ordered but not used because of cancellation of the work order, or from material cannibalized from equipment and fixtures no longer in service. There is no formal inventory of these stores of material.

According to the Deputy Director for Operations, the ultimate objective of Operations Division storeroom operation is to store all common items used by the Bureaus and all Bureau-specific items for which there is a recurring demand and which can be economically and efficiently stored by the storeroom. The Budget Analyst agrees that there is much room for efficient and effective expansion of storeroom inventory and control of material. The objective should be adequate control of material without adversely affecting the effectiveness of the Bureau of Building Repair trade shops and other bureaus of the Operations Division.

Lack of a Materials Management Policies and Procedures Manual

The Operations Division of the Department of Public Works does not have a Materials Management Policies and Procedures Manual to standardize its processes for obtaining goods and services. Good practice requires that the Operations Division develop a Materials Management Policies and Procedures Manual to simplify and supplement the various Administrative Code and Office of Contract Compliance provisions that regulate the procurement of goods and services in City government. As an administrative control, a Materials Management Policies and Procedures Manual provides standardization and accountability. The absence of a Materials Management Policies and Procedures Manual, which in addition to this current audit report, the Budget Analyst has reported on in recent audits of the Port of San Francisco, three divisions of the Public Utilities Commission, and the Recreation and Park Department stems from a lack of appreciation by management of the power of policies and procedures as administrative controls. The Budget Analyst strongly recommends that the Deputy Director of Operations develop a Materials Management Policies and Procedures Manual.

Examples of topics covered in materials management policies and procedures manuals that apply to storerooms are shown below in Table 13.1.

Table 13.1

Materials Management Policies and Procedures Policies and Procedures Manual Example Contents

The "Lower Yard"

The "Lower Yard" area of the Operations Division Maintenance Yard is used as a vehicle park; as a store of plant material, soils, and equipment of the Bureau of Forestry; as a store of homeless belongings, and as a store various materials, primarily those of the Bureau of Street and Sewer Repair. At the initiation of this audit, the Lower was unsightly and disorganized. At the time of the April 6 2006, inspection the appearance of the Lower Yard had improved somewhat. However, the Health and Safety Inspector recommended that the Department "Improve housekeeping and store supplies, equipment, and abandoned items in an orderly manner. Discard items that are unusable."

At the time of a final walkthrough of the Lower Yard on October 10, 2006, most if not all of the deficiencies cited in the Health, Safety, and Environmental inspection of April 6, 2006, had been corrected and the orderliness and general appearance was excellent.

The Budget Analyst recommends that the Deputy Director of Operations and the Manager Environmental Health and Safety continue to emphasize the importance of orderliness and good housekeeping to successful operations and a healthy and safe environment.

Procuring Goods and Services

Chapter 21 of the San Francisco Administrative Code governs the acquisition of commodities and services. Section 21.03(a) of the Administrative Code provides approval authority for the acquisition of commodities and services, as follows:

Accordingly, the Purchaser has the authority to delegate signature authority to departments up to the specified dollar amount, currently $10,000, stated in regulation 21.5(a) of the Rules and Regulations Pertaining to the San Francisco Administrative Code, Chapter 21, promulgated by the Purchaser.

In addition to the foregoing "Delegated Departmental Purchasing" authority under which departments are able to procure individual goods and services through Departmental Purchase Orders, the Purchaser may also delegate Departmental Blanket Purchase Order authority. Unlike a City Blanket Purchase Order (also known as a "Term Contract") under which all City agencies may procure commodities and services at a price negotiated by the Purchaser, Departmental Blanket Purchase Orders are established individually between a department and a vendor. Currently, Departmental Blanket Purchase Orders for open market purchases in excess of $50,000 require the approval of the Office of Contract Administration. Individual orders against the Departmental Blanket Purchase Orders, called "releases," are currently limited to $1,000 per vendor, per day.

A third method of departmental procurement, the Direct Voucher method, is used for small purchases, normally $200 or less.

Departmental Purchase Orders

The Purchaser has promulgated specific rules for departments to follow in order to continue to use Delegated Departmental Purchasing authority, as follows:

The Office of Contract Administration provided the Budget Analyst with its list of Department of Public Works staff persons authorized to engage in departmental purchasing. The list contained five names, including one of a recently retired employee. However, our review of delegated departmental purchasing documents showed three Department of Public Works staffmembers who regularly approve delegated departmental procurements were not named on the authorized listing obtained from the Office of Contract Administration. Thus, a set of controls developed by the Office of Contract Administration to provide reasonable assurance that procedures developed to implement the sensitive authority of procuring commodities and services of up to $10,000 on each such procurement, were not being adhered to by the Department of Public Works. The Budget Analyst immediately informed the Department of Public Works management of the deficient condition.

Departmental Blanket Purchase Orders

The Budget Analyst reviewed a sample of Departmental Blanket Purchase Order Releases and Direct Voucher payments processed by the Operations Division in order to determine whether the procurements under these methods were being processed in compliance with acquisition regulations. As previously stated, Departmental Blanket Purchase Orders are established between a department and a vendor. Currently, the maximum dollar amount authorized for Departmental Blanket Purchase Order releases is $1,000 per vendor, per day.

Our review of Departmental Blanket Purchase Orders and Direct Voucher payments disclosed no instances of improper use.

Non-Discrimination in Contracts

The Human Rights Commission, in its administration of Chapter 12B of the Administrative Code, Nondiscrimination in Contracts, requires that contractors entering into contracts with the City for accumulative sums in excess of $5,000 per fiscal year complete a Nondiscrimination in Contracts and Benefits form. The Chapter 12B compliance information on the vendor is entered into the City's Financial Accounting and Management Information System (FAMIS) where it is available to City departments.

The Budget Analyst selected a sample of contractors who had been awarded contracts with the Department of Public Works during fiscal year 2005-2006 for the purpose of determining whether the contractors were compliant with the provisions of Chapter 12B. With the exception of three who were exempt because of the $5,000 applicability provision, all of the contractors were on file as being compliant with the provisions of Chapter 12B.

Conclusion

The Department of Public Works lacks sufficient procedures and controls to ensure the security of its inventory, integrity of the purchasing process, and efficient operation of the storeroom. In a 1991 management audit, the Budget Analyst recommended implementation of Citywide guidelines and protocols to operate and maintain storerooms and to provide internal controls. Fifteen years later, these guidelines have not been developed Citywide. The Department of Public Works should develop internal control guidelines and procedures, including an audit schedule, through its work order with the City Services Auditor. The City Administrator, who oversees the Office of Contract Administration as well as the Department of Public Works, should develop Citywide guidelines and protocols to operate and maintain storerooms. The Department of Public Works could further strengthen its storeroom operations by writing formal policies and procedures to standardize the storeroom's procedures.

The Department of Public Works also lacks sufficient controls over the purchasing procedure, including allowing unauthorized employees to regularly approve departmental purchases and maintaining a retired employee on the list of employees authorized to approve departmental purchases.

Recommendations

Costs and Benefits

Implementing the other recommendations, which would expand and improve the operations of the Operations Division storeroom, can be accomplished within the authorized resources of the Department of Public Works. The benefits of implementing the recommendations 15.1 through 15.3 would be to improve the economy, efficiency, and effectiveness of material management operations citywide, and could be significant. Implementation of recommendations 15.4 and 15.5 would improve the effectiveness of the Operations Division by improving storeroom operations, Implementation of recommendation 15.6 would bring the Department of Public Works into compliance with the requirements of Section 21.03(a) of the Rules and Regulations Pertaining to the San Francisco Administrative Code, Chapter 21, promulgated by the Purchaser, concerning delegated departmental procurements.