Many of the Department of Public Works' activities are project based. To ensure that the Department's overhead costs are allocated equitably among the Department's activities or projects, and to comply with Federal grant requirements, the Department has developed an indirect cost plan in accordance with Federal requirements. This cost plan is updated annually.

The indirect cost plan allocates Citywide overhead costs, the Department of Public Work's general administrative costs and the eight bureaus' administrative costs to the respective bureaus, based on the number of employees in each bureau. The Department uses the indirect cost plan to:

The Department of Public Works' Overhead Costs

The Department of Public Works overhead costs represent administrative and support costs within the Department, as well as Citywide indirect cost charges. In FY 2006-2007, the Department budget includes $57.8 million in overhead expenditures, which are funded by direct charges to the Department's General Fund, Gas Tax and Road Fund, and interdepartmental work order fund budgets.

Departmental Tracking and Applying of Overhead Costs

The Department of Public Works allocates the Department's general administrative costs to each of the eight bureaus as part of the annual budget. Within each bureau, these administrative costs are further allocated across funds, including the General Fund, Gas Tax or Road Fund, and interdepartmental work order funds. In some instances, the citywide overhead is applied to specific funds or projects, depending on funding source or restrictions on the application of this type of overhead.

By allocating administrative costs to each of the bureaus and adjusting the annual indirect cost plan, the Department of Public Works sets the indirect cost rates for each of the Department's bureaus. The indirect cost rate is a percentage rate applied to the hourly cost of labor that accounts for administrative overhead and non-productive labor time. Therefore, when the Department performs services for other City departments or agencies, or when the Department's employees charge their hours to projects, the indirect cost rate is applied to an employee's hourly wage rate to capture total productive and non-productive labor costs and administrative overhead costs.

Prior to FY 2004-2005, the Department of Public Works' finance staff increased the indirect cost rates during the course of the year when the Department's expenditures exceeded recoveries for work performed. These mid-year rate adjustments increased the Department's costs for providing services to other City departments, and thus impacted the budgets set for the services or projects.

In FY 2004-2005, the Department of Public Works' finance staff began calculating indirect cost rates on projected rather than budgeted expenditures for salaries. The Department's finance staff review the bureaus' expenditures and recoveries during the course of the year and reconciled actual recoveries to expenditures at year-end. According to the finance staff, the Department's goal is to maintain expenditures within recoveries, avoiding the need for mid-year rate adjustments. However, the Department adjusted the Bureaus of Architecture, Engineering and Construction Management rates mid-year in FY 2004-2005 and the Bureau of Building Repair's rates mid-year in FY 2005-2006.

The Department's Increases in Indirect Cost Rates

Over the past three fiscal years, the Department of Public Works has increased indirect cost rates for each of the bureaus by 12 to 50 percentage points, resulting in rate increases ranging from 10 percent to 50 percent, as shown in Table 17.1.

Table 17.1
The Department of Public Works' Indirect Cost Rates for the Department's Bureaus
FY 2003-2004 through FY 2005-2006

Source: Department of Public Works Indirect Cost Plan

Increases in the Bureau's Indirect Cost Rates

The indirect cost rates have increased for each of the bureaus due, in part, to mandatory fringe benefits, paid time off, retiree health benefits and general administrative overhead cost allocations. The Bureaus of Street Use and Mapping, Street and Environmental Services, and Architecture, Engineering, and Construction Management had increases in indirect cost rates that resulted from unique circumstances within each of those bureaus. These are described below.

The Bureau of Street Use and Mapping

The 50 percent increase in the Bureau of Street Use and Mapping indirect cost rate between FY 2003-2004 and FY 2005-2006 resulted from increases in non productive labor hours, as well as increases in mandatory fringe benefits, paid time off, and the Department's general administrative overhead allocation.

In FY 2003-2004, the Bureau of Street Use and Mapping included 94.79 full time positions in the budget, of which five were allocated to overhead. In FY 2005-2006, the Bureau of Street Use and Mapping included 90.41 full time positions in the budget, but the number of positions allocated to overhead increased to seven. The Bureau of Street Use and Mapping added new information technology positions, including adjusting the position classifications upward, resulting in increased administrative overhead costs.

The Bureau of Street and Sewer Repair

The Bureau of Sewer and Street Repair had significant indirect cost rate increases, resulting from insufficient direct labor charges to recover overhead costs and increases in non-labor costs allocated through the indirect cost plan, including road and sewer repair equipment. According to Bureau staff, such equipment costs cannot be easily charged to individual projects and is therefore allocated through overhead.

The Bureaus of Architecture, Engineering, and Construction Management

The Department of Public Works combines the indirect costs for the three capital bureaus – the Bureaus of Architecture, Engineering, and Construction Management – into one indirect cost rate. The bureaus' FY 2004-2005 indirect cost rate of 168 percent exceeded indirect cost rates charged by five other California cities participating in the California Multi-Agency CIP Benchmarking Study. According to the Study, the city of Sacramento charged an indirect cost rate of 194.44 percent in FY 2004-2005, but the other five cities charged a rate less than the San Francisco Department of Public Works. In general, the Department's general administrative and bureau overhead rates are higher than those that are reported by other cities.

The Department of Public Works' Need to Contain Administrative Overhead Costs

Containing General Administration Overhead Costs

General administration overhead costs include finance and accounting, human resources, environmental health and safety, information technology, and the general costs of the Director's office. In FY 2004-2005, the City established the General Services Agency under the auspices of the City Administrator, consolidating the Departments of Administrative Services, Telecommunication and Information Services, and Public Works into one agency. In order to fully realize the benefits of consolidation, the Department of Public Works needs to work with the City Administrator to integrate and streamline administrative and support functions within the new General Services Agency. Opportunities to do so are discussed below.

Consolidating Human Resources Functions

In FY 2005-2006, the Department of Public Works human resources manager position was transferred to the General Services Agency to become the Agency's Director of Human Resources. However, the departments making up the General Services Agency continue to have different human resources staffing levels and systems. Consequently, consolidating functions to create a more streamlined and efficient human resource program requires analyzing and standardizing human resource practices and developing uniform systems.

Consolidating Payroll Functions

Within the General Services Agency, the Departments of Administrative Services and Public Works use different payroll systems, preventing easy consolidation of payroll processing between the two departments. Because City departments are largely decentralized, departments have developed systems to address their individual needs but, in the process, have created barriers to streamlining functions. The Department needs to work with the City Administrator to identify ways to consolidate the Department's payroll processing functions within the larger General Services Agency, including developing a work plan, time frame, and cost analysis for its accomplishment. As part of the work plan, the Department needs to work with the Controller's Office on requirements for the new human resources and payroll system package being planned by the City.

Increasing Flexibility in Personnel and Payroll Processing Functions

Consolidation of human resource functions is also hampered by the City's position classification system, preventing employees from performing activities deemed to be outside their classification job description. Thus, personnel and payroll staff cannot be easily cross-trained to perform each other's duties, limiting flexibility in assignments. Because the City departments' work needs change as new systems and processes are introduced, job classifications need to be revised with broader job description to allow the Department to respond to changing needs. The City Administrator should work with the City's Department of Human Resources to assess and revise existing position classifications and job descriptions to permit increased cross-training and assignment flexibility in staffing.

Containing Department and Bureaus Information Technology Costs

The Department of Public Works' information technology services are provided by the Department's Office of Financial Management and Administration Computer Systems Division and by information technology staff assigned to the four Capital Division bureaus – the Bureaus of Architecture, Engineering, Construction Management, and Street Use and Mapping. The Department has assigned information technology staff to these four Capital Division bureaus to provide more timely service to the bureaus for specialized information system requests and needs. In FY 2006-2007, the Department of Public Works' has 30 information technology positions, which has decreased over the past five years from 34 positions in FY 2002-2003. In FY 2006-2007 position costs have been budgeted at $3.4 million. Descriptions of the functions performed by these staff are described below.

Staffing Changes and the Department's Information Technology Needs

The Department of Public Works is facing future vacancies in key management positions as senior information technology staff begin to retire. Many of the Department's more senior staff are trained in COBOL, an obsolete language in which the Department's core applications are written. Because many of the Department's core applications are 15 years old, and the written language COBOL has become obsolete, newer staff are not trained in the old language, creating a skills deficit as senior staff retire. Currently, the Department's Computer Services Division acting manager is assuming the functions of the Division's manager, who is on extended leave; and, the local area network/wide area network manager, who has retired.

The Department of Public Works must address several systems improvement initiatives at the same time that it is losing senior staff with specialized skills. Therefore, the Department needs to assess its long term information technology plan. Further, its existing mainframe system and applications, while serviceable, are outdated and will need to be upgraded or replaced over the next several years.

Information Systems Planning

The Department of Public Works has no strategic plan for its information systems. The Department has prepared a five-year plan for replacement of the Financial and Personnel System (the Department's business process system) and the maintenance management system. As part of this effort, the Department engaged a consultant in 2005 to evaluate the costs of replacing the Financial and Personnel System, and submitted an $8.2 million capital projects funding request to the Capital Planning Committee for FY 2006-2007 to replace the Financial and Personnel System and implement a maintenance management system. That request was not approved.

The Department of Public Works' five-year plan does not include an assessment of the bureaus' current systems and needs or a staffing plan for central and bureau information technology staff.

Capital Bureaus' Information Technology Planning and Coordination

Currently, the Department of Public Works has no formal planning process between the Computer Services Division and the Department's bureaus, or among the three capital bureaus. Each of the three capital bureaus – the Bureaus of Architecture, Engineering, and Construction Management – has information technology staff and functions separate from the other two bureaus. The three capital bureaus' information technology staff have no regular meetings or channels of communication. Nor do the capital bureaus have information technology plans for the specific bureaus or the bureaus jointly.

Because the three capital bureaus are jointly responsible for planning, design and management of capital and construction projects, the bureaus need to work more closely together in planning information technology needs. The Department of Public Works is implementing Primavera, a project management system, that will be shared by the three bureaus. The Bureaus of Engineering and Construction Management are more closely involved with implementation of Primavera than the Bureau of Architecture. In planning present and future needs, the three bureaus need to assess their shared processes and identify opportunities to integrate and streamline staffing.

In the short term, the bureaus should evaluate existing information technology staffing. Currently, the three bureaus have ten positions, including system administrators, engineers, and technicians. According to interviews, staff time is not fully utilized for bureau functions.

Assessing Short Term and Longer Term Staffing Needs

The Department of Public Works needs to evaluate information technology staffing across the Department to identify opportunities to streamline functions and reduce staff.

The Department of Public Works needs to assess its short term and longer term information systems staffing needs. For example, the Department needs to evaluate the best use of in-house information technology staff as project managers. As computer systems migrate to networked-based or other computer architecture, the Department needs to develop information technology staff to serve as project managers and hire vendors to write computer code and implement systems.

The Department of Public Works also needs to evaluate its current information technology staffing levels to allocate staff resources more efficiently and reassess central and bureau staffing levels. As part of this assessment the Department needs to evaluate the Bureaus of Architecture, Engineering and Construction Management current and future information technology functions, planning processes, and coordination. The Department should present an information technology staffing plan during the FY 2007-2008 budget review that details the Department's information systems and support requirements, and information technology staff skills and time needed to support the information systems; and identifies areas of redundancy and opportunities for improved efficiency and productivity. As part of this staffing plan, the Department should recommend re-allocation of staff or staff reductions to streamline services and reduce overhead costs.

Conclusion

The Department of Public Works' overhead costs make up one-third of the Department's annual budget. The Department of Public Works needs to contain its growing overhead costs to limit the impact that such costs have on projects and services.

Including the Department of Public Works into the larger General Services Agency provides the opportunity to consolidate, streamline, and re-engineer administrative functions, especially human resource and information technology functions. The Department needs to evaluate its human resource processes and staffing levels, which are nearly double industry standards, to ensure efficient and cost-effective services.

The Department of Public Works also needs to develop an information technology staffing plan to ensure that it hires and retains information technology staff to meet its current and future systems needs. At the same time, the Department needs to ensure that central and bureau information technology staff are fully utilized and that information technology functions and staff are integrated and performing efficiently.

Recommendations

The City Administrator should:

The Director of Public Works should:

Costs and Benefits

The Department of Public Works needs to evaluate administrative processes, identify opportunities for increased efficiency and productivity, and recommend administrative position reductions in the FY 2007-2008 budget. The Department of Public Works could achieve at least $233,000 in ongoing annual salary and fringe benefit savings by integrating the capital bureaus' information technology functions and staffing, allowing it to reduce capital bureau information technology staff by at least two positions.

If the Department of Public Works successfully reduces human resource positions by 10 percent, through greater consolidation of human resource functions with the General Service Agency, the Department of Public Works could achieve approximately $192,000 in ongoing annual salary and fringe benefit savings. This modest position reduction would still place San Francisco's staffing levels well above industry standards.

The Budget Analyst recommended and the Board of Supervisors approved $260,000 in administrative overhead expenditures reductions in the Department of Public Works' FY 2006-2007 budget. Based on the management audit findings, the Department of Public Works could achieve additional administrative reductions through streamlining processes, consolidating functions with the General Services Agency and reducing redundant information technology and human resources staff.

Altogether, the Budget Analyst's proposed and adopted reductions equal $685,000.