• The Recreation and Park Department allocates overhead costs to the Marina Yacht Harbor Fund through overhead rates charged by the Department's Structural Maintenance and Capital Divisions to Marina Yacht Harbor Fund projects. The Department also allocates a percentage of the Department's administrative costs to the Marina Yacht Harbor Fund in each year's budget.
  
  
• The Budget Analyst's 2006 Recreation and Park Department management audit found that the Recreation and Park Department was not adjusting for the difference between administrative expenditure recoveries from the Department's divisions and funds, and actual administrative expenditures. The Recreation and Park Department began adjusting for differences in paid time off recoveries and expenses, included in the Structural Maintenance and Capital Divisions' overhead rates, in FY 2006-2007, but has not adjusted for the difference in expenditure recoveries and actual expenditures for department-wide administrative expenditures allocated to each of the Department's divisions or funds. As a result, the Department has over-recovered approximately $1.1 million in administrative expenditures. According to the Department, the proposed FY 2008-2009 budget will adjust for the prior years' over-recoveries for administrative expenditures.
  
  
• The Recreation and Park Department allocates electricity charges through the cost allocation plan. However, the cost allocation plan, which allocates costs based on the number of budgeted positions in each of the Department's divisions or funds, is not an accurate measure of electricity use. Further, from FY 2003-2004 through FY 2005-2006, the Recreation and Park Department allocated electricity and waste disposal costs to the Marina Yacht Harbor through the cost allocation plan as well as directly charging these costs to the Marina Yacht Harbor. Consequently, the Marina Yacht Harbor overpaid by $49,207 for these costs during those years. In FY 2006-2007 and FY 2007-2008, the Recreation and Park Department has allocated electricity costs through the cost allocation plan rather than charging for electricity based on actual use. The Department has undercharged the Marina Yacht Harbor for electricity use in FY 2006-2007 by $106,792, resulting in total net undercharges of $57,585 from FY 2003-2004 through FY 2006-2007.

The Recreation and Park Department's Cost Allocation Plan

In FY 2002-2003 the Recreation and Park Department recast its operating budget to better align costs to programs, and developed a cost allocation plan to (a) allocate department-wide and division administrative costs to funding sources and programs within the Department, and (b) set overhead rates for Department employees who charge to capital and facilities maintenance projects. The goal of the cost allocation plan is to:

• Appropriately charge all programs for services and administrative support received.
  
  
• Understand the true cost of programs and services provided by the Department.
  
  
• Meet federal, state and city regulations.

The Recreation and Park Department first implemented the cost allocation plan in FY 2003-2004. Under the plan, department-wide administrative costs are allocated to the Department's programs, funded by the General Fund, the Golf Fund, the Open Space Fund, and the Marina Yacht Harbor Fund. These costs are allocated to each program or fund based on the ratio of full time positions in each program's or fund's budget to the total number of full time positions in the Department's budget.

Additionally, the Capital and Structural Maintenance Divisions apply overhead rates to the hourly wage rates (or direct labor) charged by the Divisions' employees to capital and facilities maintenance projects. These overhead rates are calculated as a percentage of the hourly wage rates and account for administrative costs as well as the costs of mandatory fringe benefits and paid time off.

Prior Audit Recommendations

In the Budget Analyst's January 2006 Recreation and Park Department management audit report, the Budget Analyst recommended that the Department:

• Evaluate it's methodology for determining the Capital Division's indirect and direct costs when setting overhead rates and identify all costs that should be charged directly.
  
  
• Review the Department's methodology for calculating and applying the annual carry forward adjustments when calculating the overhead allocation in the annual budget, to ensure that the special revenue funds and department programs are charged overhead costs correctly and comply with federal, state, and local regulations where applicable.

The Recreation and Park Department's General Manager, in his written response to the report, agreed to implement these two recommendations.

Capital Division's Overhead Rates

In the two years since the management audit report, the Capital Division's overhead rates applied to capital projects have reduced from 245.6 percent of direct labor charges to 204.6 percent of direct labor charges, a reduction of 50 percentage points or approximately 20 percent.

Table 3.1
The Capital and Structural Maintenance Division's Overhead Rates Applied to Direct Labor Charges to Capital and Facilities Maintenance Projects
FY 2003-2004 through FY 2007-2008

Source: Recreation and Park Department Cost Allocation Plan

However, the Recreation and Park Department Capital Division's rates exceed the Department of Public Work's rates for capital projects by 52 points. In FY 2007-2008, the Department of Public Works applied an overhead rate of 152.5 percent to direct labor charges to capital projects compared to the Recreation and Park Department's rate of 204.6 percent. The Capital Division continues to have high overhead rates because a large number of staff are administrative rather than project staff. In FY 2007-2008, nine of 24 positions, or 37.5 percent, are administrative positions charged to overhead.

Carry Forward Adjustments

Each year's cost allocation plan is based on budgeted administrative expenditures. The cost allocation plan allocates the Administrative Services Division's budgeted expenditures to each of the department's divisions and funds, as shown in Table 3.2 below.

Additionally, the cost allocation plan calculates the overhead rates charged by the Capital Division's and the Structural Maintenance Division's to Department projects. These overhead rates are calculated as a percentage of employees' hourly wages (or direct labor charges), and includes both administrative expenditures and mandatory fringe benefits, including paid time off.

The Department's administrative expenditures are recovered from each division's budget or from overhead rates applied to direct labor charges to projects.

The Department's actual expenditure recoveries can either exceed or be less than the budgeted recoveries. In FY 2006-2007, the Recreation and Park Department began adjusting for the difference in recoveries and expenses for paid time off, and applying the adjustment to the Department's overhead rates. The Department has not adjusted for the difference in budgeted and actual administrative expenditure recoveries allocated to each division's budget.

Adjustments to the Department's Administrative Expenditures Allocated in Each Division's Budget

The Recreation and Park Department allocates the Administrative Services Division's budgeted expenditures to each of the Department's divisions and funds in the annual budget, as shown in Table 3.2 below. The Department's budgeted administrative expenditures have increased by an average rate of 10.2 percent per year. The percentage of administrative expenditures allocated to each of the Department's divisions and funds varies each year, based on the relative number of each division's or fund's budgeted positions. The Marina Yacht Harbor's share of administrative expenditures has increased by an average rate of 13.7 percent year, the highest rate of increase among the department's divisions. This increase has resulted largely from the increase in the Marina Yacht Harbor's budgeted positions, from 9.65 full time equivalent positions in FY 2006-2007 to 11.85 full time equivalent positions in FY 2007-2008.

Table 3.2
The Recreation and Park Department's Budgeted Administrative Expenditures Allocated to Each Department Division and Fund through the Annual Cost Allocation Plan
FY 2003-2004 through FY 2007-2008

Source: Recreation and Park Department's Annual Cost Allocation Plan

Between FY 2003-2004 and FY 2006-2007, the Administrative Services Division's actual administrative expenditures were generally less than expenditure recoveries from the Department's divisions and funds. Because the Department has not adjusted for the difference between actual expenditures and expenditure recoveries, the Department has recovered $1,149,767 in excess of the Administrative Services Division's actual expenditures over a four-year period, as shown in Table 3.3 below.

Table 3.3
Cumulative Surplus in the Administrative Services Division's Expenditure Recoveries Compared to Actual Expenditures
FY 2003-2004 to FY 2006-2007

Source: Recreation and Park Department

According to the Recreation and Park Department Director of Administrative Services, the Department will adjust the administrative expenditure allocation to the Departments' divisions and funds in the FY 2008-2009 budget to account for the cumulative surplus. The Recreation and Park Department needs to adjust for the difference between expenditure recoveries and actual administrative expenditures during the course of the year to ensure that the Department does not over- or under-recover for the Administrative Services Division's costs.

Further, in FY 2007-2008 the Structural Maintenance Division has a cumulative surplus and the Capital Division has a cumulative deficit in expenditure recoveries for administrative costs, as shown in Table 3.4.

Table 3.4
Cumulative Surplus/ (Deficit) in the Structural Maintenance and Capital Division's Expenditure Recoveries for Compared to Actual Expenditures for Administrative Costs
FY 2003-2004 to FY 2006-2007

Source: Recreation and Park Department

The Recreation and Park Department needs to adjust the overhead rates charged to Department projects by the Structural Maintenance and Capital Divisions during the course of the year to ensure that each division does not over- or under-recover for the division's costs from each of the Department's divisions and funds.

Directly Charging Electricity Costs to Each Division

The Recreation and Park Department allocates electricity charges through the cost allocation plan. However, the cost allocation plan, which allocates costs based on the number of budgeted positions in each of the Department's divisions or funds, is not an accurate measure of electricity use.

Further, from FY 2003-2004 through FY 2005-2006, the Recreation and Park Department allocated electricity and waste disposal costs to the Marina Yacht Harbor through the cost allocation plan as well as directly charging these costs to the Marina Yacht Harbor. Consequently, the Marina Yacht Harbor overpaid by $49,207 for these costs during those years. In FY 2006-2007 and FY 2007-2008, the Recreation and Park Department has allocated electricity costs through the cost allocation plan. As shown in Table 3.5, the Department has undercharged for the Marina Yacht Harbor for electricity use in FY 2006-2007.

Table 3.5
Electricity and Waste Disposal Direct Charges to the Marina Yacht Harbor and Allocated Charges through the Cost Allocation Plan
FY 2003-2004 through FY 2006-2007

Source: Recreation and Park Department Administrative Services Division

The Marina Yacht Harbor incurs higher electricity charges than allocated through the cost allocation plan because most of the electricity use is generated by the Marina tenants. Consequently, as shown in Table 3.5, the Marina Yacht Harbor consumed $131,146 in electricity in FY 2006-2007 but was charged $24,354 for electricity through the cost allocation plan, resulting in $106,792 in undercharges in FY 2006-2007.

Because the Recreation and Park Department's facilities, including the Marina Yacht Harbor, are metered for electricity, the Department can measure each facility's electricity use. Because the cost allocation plan does not accurately allocate electricity and other utility charges based on actual use, the Recreation and Park Department needs to evaluate electricity and utility use department-wide and develop a method to charge directly for utility use rather than allocate utility charges through the cost allocation plan. Although many of the Department's facilities are funded through a single funding source, such as the Marina Yacht Harbor Fund or the Golf Fund, some Department facilities' programs are supported by more than one funding source, such as the General Fund and the Open Space fund.

Conclusion

The Recreation and Park Department needs to adjust for differences between expenditure recoveries and actual administrative expenditures during the fiscal year to minimize over- and under-recoveries. Because the Department has not adjusted differences between the Administrative Services Division's expenditure recoveries compared to actual expenditures that are allocated in the Department's division and fund budgets, the Department has recovered $1.1 million more than actual expenditures over a four-year period. The Department also needs to adjust the overhead rates charged to Department projects by the Structural Maintenance and Capital Divisions during the course of the year to ensure that each division does not over- or under-recover for the division's costs from each of the Department's divisions and funds.

The Recreation and Park Department also should evaluate the department facilities' utility use and develop methods to charge each division or fund directly for utility use. Currently, the Department allocates electricity charges through the cost allocation plan, based upon the number of budgeted positions in each division or fund. Budgeted positions, however, do not accurately reflect utility us

Recommendations

The Director of Administrative Services should:

3.1 Adjust for the difference between expenditure recoveries and actual administrative expenditures during the course of the year to ensure that the Department does not over- or under-recover for the Administrative Services Division's costs.

3.2 Adjust the overhead rates charged to Department projects by the Structural Maintenance and Capital Divisions during the course of the year to ensure that each division does not over- or under-recover for the division's costs from each of the Department's divisions and funds.

3.3 Evaluate electricity and utility use department-wide and develop a method to charge directly for utility use rather than allocate utility charges through the cost allocation plan.

Costs and Benefits

Implementation of these recommendations would more accurately allocate administrative costs to each division. Regular adjustments to expenditure recoveries would correct the existing $1.1 million surplus in recoveries. Directly charging for electricity and utility use would result in the Marina Yacht Harbor paying its actual share of electricity, reversing the current $57,585 in undercharges.