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HomeMy WebLinkAbout11/07/1995, C-7 - UTILITY USERS TAX AND FRANCHISE FEE COMPLIANCE REVIEWS ����IIII�NIIIyIIIII���1�ppIIII llulll "J f MEMN DA : IIYiN�I C� o san lugs oBispo rrEM M8E : COUNCIL AGENDA REPORT FROM: Bill Statler, Director of Finance Prepared by: Linda Asprion, Revenue Manager � SUBJECT: UTILITY USERS TAX AND FRANCHISE FEE COMPLIANCE REVIEWS CAO RECOMMENDATION Approve contracting with Hinderliter, de Llamas and Associates (HdL) for utility users tax and franchise fee compliance reviews. DISCUSSION Background The City levies a 5% utility users tax paid by all residences and businesses on the consumption of utility services (i.e. telephone, electricity, natural gas, water, and cable television). The tax is collected by the utility companies, who remit the tax on a monthly basis to the City. Although the City provides updated information to the appropriate utility companies regarding changes that affect who should be taxed and the amount of tax, there may be unintentional errors not identified by the utility company. After all, the utility company is merely the collecting agency for the City, and accordingly has no financial interest in ensuring the amount collected is correct. A franchise fee is paid to the City by utility companies utilizing City rights of way. The State sets franchise fees for utilities regulated by them (most notably gas and electricity), based on gross sales or revenues attributable to their investment in infrastructure, whichever is greater. The City sets franchise fees on a gross receipts basis for water, solid waste, and cable television. Again, the utility companies may make errors in the computation of this fee. As shown in Exhibit A, utility user taxes are the number three revenue source and franchise fees are the ninth top sources of revenue for the City's non-enterprise funds; together these two sources account for about 15% of General Fund revenues. As such, it is important to ensure that the City is receiving the correct revenue. To that purpose, one of the Finance Department's objectives listed in the 1995-97 Financial Plan is to contract for a utility users tax audit/compliance review (Exhibit B). In researching contractors performing this work, staff determined that franchise fee reviews can be performed concurrently with the utility users tax compliance reviews - both on a contingency fee basis. What services are included in the compliance review? The compliance review, as performed by HdL, verifies for both franchise fees and utility users tax that: ■ No mathematical errors have been made in the computation of the payments. ■ All customers located within the City are correctly coded as being within the City. - 7 ►���i�H�l�lllllll�{�°1 �Illlll city of San WIS OBISpo COUNCIL AGENDA REPORT ■ All appropriate revenue records have been included in the base for calculation according to ordinance/agreement. ■ That no significant lag time exists from the time of annexation to the time a customer is coded as being within the City. ■ New sources of revenue have been appropriately included in the base for calculation of the fees paid to the City. ■ All appropriate accounting adjustments have been made in calculating the payments. ■ Payments have been made timely and pursuant to the provisions of the agreements/ordinances. Each compliance review will cover the past three fiscal years with the City receiving workpapers and a narrative description of reporting errors. These reports will be submitted to the utility company(ies) for correction of the errors and appropriate refunds to the City. FISCAL IMPACT HdL receives their payinent on a contingency basis. If HdL finds no errors resulting in additional revenue to the City, their services are free. If additional revenue is received by the City due to HdL's compliance review they will receive 25% of the current and past three years of additional revenue. Under the City's purchasing guidelines a formal request for proposal is recommended if compensation is greater than $15,000. With this service being provided on a contingency basis the amount of potential compensation is unknown. Accordingly, staff is not recommending a formal request for proposal process. While there are other firms that provide this service, staff is recommending HdL for this review because of their reputation of having a positive working relationship with the utility companies. Additionally, the City currently has an excellent working relationship with HdL in their role as sales tax advisor to the City which includes a detailed quarterly review of sales tax trends. ATTACHMENT Agreement with Hinderliter, de Llamas and Associates for franchise and utility tax compliance reviews EXHIBITS A. Summary of key revenue assumptions from the 1995-97 Financial Plan B. Program objectives for the revenue management division of the finance Department as shown in the 1995-97 Financial Plan I AGREEMENT FOR FRANCHISE AND UTILITY TAX AUDIT SERVICES This agreement is made and entered into as of the day of 199_ by and between the City of a municipal corporation, herein after called City and Hinderliter, de Llamas and Associates, a California corporation, herein after called Contractor. RECITALS WHEREAS, City has enacted franchise fees on privately owned utility companies that utilize city rights of way for electric, gas, water and oil pipeline purposes, under the guidelines established by Section 6001 et seg and 6201 et seg of the California Public Utilities Code; and WHEREAS, City has further awarded a non-exclusive franchise for the construction and maintenance of community antenna television systems within the City under the guidelines established by Section 53066 of the California Government Code; and WHEREAS, City has further awarded a franchise for the collection and disposal of municipal refuse within the City under the guidelines established by Section 49300 of the Public Resources Code. WHEREAS, the City has further imposed a utility users tax on the consumption of electric, gas,water, and telephone services within the City; and WHEREAS, City desires a review of each of the franchises performance against the franchise requirements to ensure that all franchise fee payments have been correctly calculated, that all revenues sources are included in the City's franchise payment base and that franchisee customers are correctly coded as being inside the City limits; and WHEREAS, City desires a review of each utility company and their compliance with the utility tax ordinance to ensure that it has been applied and calculated correctly and coded for all customers inside the city limits; and WHEREAS, Contractor has the programs and personnel required to deliver the franchise/utility user tax services referenced herein; THEREFORE, City and Contractor for the consideration herein after described mutually agree as follows: SERVICES The Contractor shall provide the following services: A. Contractor shall conduct compliance reviews of those utility companies which are either operating within the City limits pursuant to a franchise agreement with the City or which are required to collect and remit back to the City as part of its regular billing procedure, a utility users tax imposed on the consumption of utility services. The compliance review shall verify that: 1. No mathematical errors have been made in the computation of the franchise or utility tax payments. 2 �� � 2. All customers located within the City are correctly coded as being with in the City. 3. All appropriate revenue records have been included in the base for calculation of the utility tax or franchise fees according to ordinance or agreement. 4. That no significant lag time exists from the time of annexation to the time a franchise customer is coded as being within the City. S. New sources of revenue have been appropriately included in the base for calculation of the franchise or utility tax fees paid to the City. 6. All appropriate accounting adjustments have been made in calculating the franchise fee and utility tax payments. 7. Utility tax and franchise fee payments have been made timely and pursuant to the provisions of the franchise agreements and utility tax ordinances. Each audit for which records are readily available will cover the past three fiscal years and Contractor shall provide to the City a self-explanatory and cross- referenced summary and detailed work papers describing under payment of franchise fees/utility taxes. A narrative description of revenue reporting errors discovered in the review suitable for submission to the company will accompany the summary and detailed work papers. B. Management report- In addition to the summaryof audit findings designed for collection of any underpayments, Contractor shall provide at the completion of each review, a report that sets forth any procedural weaknesses on the part of the franchise holder where errors or irregularities might not be detected or prevented which affect the accuracy of the content of the revenue reports provided to the City by the franchise holder. Contractor shall further provide recommendations on any weaknesses noticed during the review to improve future franchise fee reports and compliance efforts. C. Optional services On a time and materials basis, Contractor is also available to assist City in developing a comprehensive negotiation strategy in renegotiation of future franchise agreements and/or in development of utility tax ordinances. This includes researching and reviewing of legal issues, analyzing industry trends, analyzing alternate methods of calculating gross receipts, and developing model ordinances and franchise proposals. CONSIDERATION A. For services under A and B above, Contractor shall be paid 25 percent of any amounts recovered, refunded, or credited for the fiscal year in which the audit is completed plus any back years as a result of any of the audit findings including 25 percent of the value of any other compensation given to the City in lieu or as a result of the audit findings. Contractor's share in lieu of settlements shall not exceed the 4 ` ' amount that would havc been paid to Contractor if reimbursement to the City had been paid in an amount and method recommended by the review. The percentage shall be applied against the revenues recovered as a result of Contractor's efforts "net" any legal costs incurred by the City or Contractor in recovering revenues. It is further agreed and understood that the City will diligently pursue the collection of any and all monies found due to the City as a result of underpayment, error or omission on the part of the utility. Findings include nonpayments, underpayments or any other omissions. Recovery may take the form of cash payments, installment payments or any other compensation directly benefiting the City. The City may elect to pursue collection or may delegate collection authority to Contractor or its assigns as agents of the City. Should the City elect not to pursue the findings for any reason, then Contractor will be compensated for work done on the basis of hours worked at the Contractor's standard hourly rate. B. Fees for optional services as outlined in Services Section C above shall be billed at the following hourly rates: Principal $125 per hour Associate $85 per hour Secretarial/Administrative $35 per hour Hourly rates are exclusive of expense which are billed at 1.15 times actual incurred cost. 5 C. Except for fees billed under Section B above, all sums billed shall constitute full reimbursement to Contractor for all direct and indirect expenses incurred by Contractor in performing audits including the salaries of Contractor's employees and travel expenses connected with contacting utility company representatives. CITY MATERIALS AND SUPPORT City agrees to provide the following: A. Copies of the franchise fee payments received from each company for the years to be covered by the audit and any supporting documentation the company has provided the City. Similar information will be necessary for utility tax payments. B. A copy of all ordinances and resolutions for each company to be audited and any addendum or amendments thereto. C. A detailed map of the City that accurately and clearly depicts City and county boundaries and all City and county streets so that utility customer coding can be properly verified. D. Notification in writing to each of the companies to be audited of the City's intent and Authorization of Contractor to conduct the audit and advising the company of the date and time of the audit and requesting company to produce the necessary information. TERMINATION This agreement may be terminated by either party given 30 days written notice to the other of such termination and specifying the effective date thereof. On the presentation of such notice contractor may continue work through the date of termination. Upon termination as provided herein Contractor shall be paid the value of all audit work performed less payments previously made by City. For completed audits this shall comprise the percentage and terms already outlined under Section 3A. For audits that have been initiated but not completed, Contractor shall be reimbursed for all costs to date utilizing the hourly rate schedule outlined in Section 3B. All documents, data, surveys and reports prepared by Contractor pursuant to this agreement shall be considered the property of the City and upon payment for services performed by Contractor such documents and other identified materials shall be delivered to City by Contractor. INDEPENDENT CONTRACTOR Contractor shall perform the services hereunder as an independent contractor and shall furnish such services in his own manner and method, and under no circumstances or conditions shall any agent, servant, or employee of Contractor be considered as an employee of City. NON-ASSIGNMENT This Agreement is not assignable either in whole or in part by Contractor without the written consent of City. 7 7 ATTORNEY'S FEES In the event a legal action is commenced to enforce any of the provisions of this Agreement, the prevailing party shall be entitled to recover its costs and reasonable attorney's fees. GOVERNING LAW The laws of the State of California shall govern the rights, obligations, duties and liabilities of the parties to this Agreement and shall also govern the interpretation of this agreement. INDEMNIFICATION Contractor hereby agrees to, and shall hold City, its elective and appointive boards, officers, agents and employees, harmless from any liability for damage or claims for damage for personal injury, including death, as well as from claims for breach of confidentiality or property damage which may arise from Contractor's willful or negligent acts, errors or omissions or those of its employees or agents. Contractor agrees to and shall defend City and its elective and appointive boards, officers, agents and employees from any suits or actions at law or in equity for damages caused, or alleged to have been caused, by reason of any of the aforesaid willful or negligent acts, errors or omissions. City hereby agrees to, and shall hold Contractor, its officers, agents and employees, harmless from any liability for damage or claims for damage for personal injury, including death, as well as from claims for breach of confidentiality or property damage which may arise from City's negligent acts, errors or omissions under this Agreement. City-agrees to and shall defend Contractor and its officers, agents and employees from any suits or actions at law or 8 in equity for damage caused, gr alleged to have been caused, by reason of any of the aforesaid negligent acts, errors or omissions. INSURANCE Contractor shall provide proof of insurance in accordance with Insurance Requirements as described in Appendix A attached hereto and incorporated herein by reference. NOTICE All notices required by this Agreement shall be given to City and Contractor in writing, by personal delivery or first class mail postage prepaid, addressed as follows: City: City Clerk City of San Luis Obispo 990 Palm Street San Luis Obispo, CA 93401 Contractor: Hinderliter, de Llamas & Associates 1340 Valley Vista Drive, Suite 200 Diamond Bar, California 01765 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed the day and year fust above written. ATTEST: CITY OF SAN LUIS OBISPO, A Municipal Corporation By: City Clerk Mayor, Allen Settle APPROVED AS TO FORM: i tt ney HINDERLITER, DE LLAMAS & ASSOCIATES A California Corporation By: e �- ii APPENDIX A INSURANCE REQUIREMENTS The Consultant shall procure and maintain for the duration of the contract insurance against claims for injuries to persons or damages to property which may arise from or in connection with the performance of the work hereunder by the Consultant, its agents, representatives, employees, or subcontractors. Minimum Scope of Insurance. Coverage shall be at least as broad as: 1. Insurance Services Office Commercial General Liability coverage (occurrence form CG 0001). 2. Insurance Services Office form number CA 0001 (Ed. 1/87) covering Automobile Liability, code 1 (any auto). 3. Workers' Compensation insurance as required by the State of California and Employer's Liability Insurance. 4. Errors and Omissions Liability insurance as appropriate to the consultant's profession. Minimum Limits of Insurance. Consultant shall maintain limits no less than: 1. General Liability: $1,000,000 per occurrence for bodily injury, personal injury and property damage. If Commercial General Liability or other form with a general aggregate limit is used, either the general aggregate limit shall apply separately to this project/location or the general aggregate limit shall be twice the required occurrence limit. 2. Automobile Liability: $1,000,000 per accident for bodily injury and property damage. 3. Employer's Liability: $1,000,000 per accident for bodily injury or disease. 4. Errors and Omissions Liability: $1,000,000 per occurrence. Deductibles and Self-Insured Retentions. Any deductibles or self-insured retentions must be declared to and approved by the City. At the option of the City, either: the insurer shall reduce or eliminate such deductibles or self-insured retentions as respects the City, its officers, officials,employees and volunteers; or the Consultant shall procure a bond guaranteeing payment of losses and related investigations, claim administration and defense expenses. Other Insurance Provisions. The general liability and automobile liability policies are to contain, or be endorsed to contain, the following provisions: 1. The City,its officers, officials,employees,agents and volunteers are to be covered as insureds as respects: liability arising out of activities performed by or on behalf of the Consultant; products and completed operations of the Consultant;premises owned,occupied or used by the Consultant; or automobiles owned, leased,hired or borrowed by the Consultant. The coverage shall contain no special limitations on the scope of protection afforded to the City, its officers, official, employees, agents or volunteers. 2. For any claims related to this project, the Consultant's insurance coverage shall be primary insurance as respects the City,its officers,officials,employees,agents and volunteers. Any insurance or self-insurance maintained by the City, its officers, officials, employees, agents or volunteers shall be excess of the Consultant's insurance and shall not contribute with it. 3. Any failure to comply with reporting or other provisions of the policies including breaches of warranties shall not affect coverage provided to the City, its officers, officials, employees, agents or volunteers. 4. The Consultant's insurance shall apply separately to each insured against whom claim is made or suit is brought, except with respect to the limits of the insurer's liability. 5. Each insurance policy required by this clause shall be endorsed to state that coverage shall not be suspended,voided,cancelled by either party, reduced in coverage or in limits except after thirty(30)days' prior written notice by certified mail, return receipt requested, has been given to the City. Acceptability of Insurers. Insurance is to be placed with insurers with a current A.M.Best's rating of no less than A:VII. Verification of Coverage. Consultant shall furnish the City with a certificate of insurance showing maintenance of the required insurance coverage. Original endorsements effecting general liability and automobile liability coverage required by this clause must also be provided. The endorsements are to be signed by a person authorized by that insurer to bind coverage on its behalf. All endorsements are to be received and approved by the City before work commences. �'- -2-/z FINANCIAL AND S ATISTICAL TABLES EXhibitS_ / SUMMARY OF KEY REVENUE ASSUMPTIONS One of the key analytical tools developed during the 1995-97 Financial Plan process was a comprehensive five year financial forecast for the General Fund. The forecast considered key revenue and expenditure projection factors such as population,increases in the consumer price index(cpi)and other growth factors. The trending of these key factors and their effect on revenues and expenditures provided an historical basis for the five year financial forecast. As part of the 1994-95 mid-year budget review process,the revenue assumptions included the 1993-95 Financial Plan were comprehensively reexamined based on actuals for 1993-94 as well as emerging trends at the mid point of the year. The revenue projections reflected in this Financial Plan rely heavily on the revised projections made as part of the 1994-95 mid-year budget review as the underlying base for applying future growth rates. Sources used in developing these revised projections include economic trends as reported in the national media, forecast data for California as developed by the UCLA forecasting project,forecast data for San Luis Obispo County as developed by the UCSB forecasting project(of which the City is a sponsor),and materials prepared by the League of California Cities and State Controllers Office. Ultimately,however,the 1995-97 revenue projections reflect the staffs best judgement about the performance of the local economy over the next two years and how it will affect City revenues Includes all Governmental Fund types The following provides a brief description of the City's top nine General Fund revenue sources(including all governmental fund types) - which account for about 80%of total revenues - along with the general assumptions used in preparing revenue projections for the 1995-97 Financial Plan. General Assumptions The 1995-97 revenue projections generally assume that there will be an improvement in the local economy over the next two years,but recovery will take place at a modest rate. Three key factors that will affect the level of recovery include:how quickly the State economy recovers from the recession;effect of increased economic competition from the North and South county areas on the City's traditional market position as the commercial center of the county; and the impact of any State budget cuts on major local employers such as Cal Poly,the County and the Men's Colony. O Sales tax The City receives 1%from all taxable retail sales occurring in its limits. This is Grows by3S7oin 1995-96 collected for the City by the State of California along with their component of the Grows b 4.0%in 1996-97 sales tax(525%for the State General Fund and 1% for local transportation 1995-96 revenue $6,313,500 purposes,for a total sales tax rate in San Luis Obispo County of 725%). Based 1996-97 reKnue $6,966.000 on recent trends,this revenue source is projected to grow at rates equal to %oftotalrevrnue 25% population and inflation. For 1996-97,sales tax estimates reflect additional revenue from refueling at Diablo Canyon power plant,which occurs on an every other year basis. 9 Property tax Under Proposition 13 adopted in June of 1978,property tax levies for general Grows by2%in 1995-96 municipal purposes may not exceed 1%of market value. Property tax assessment, Grows at29uin 1996-97 collection,and apportionment is performed by the County. The City receives [199-5T-96 rexnue 53.91900 approximately 14%of this levy within its limits. Assessment increases to reflect 996-97 revenue $3.994,700 current market value are allowed when property ownership changes or when %of tow revenue 15% improvements are made;otherwise,increases in assessed value are limited to 2% annuall . This is the basis for the projected growth rate in 1995-97. ® Utr"lity users tax The City levies a 5%tax on all residences and businesses using the following Growsby5%in 1995-96 utilities:telephone,electricity,natural gas,water,and cable television.Although Grows b59,in 1996-97 the taxis collected for the City by the utility companies,it is a tax on the user,not =remnue0 the utility itself. For 1995-97,utility user taxes are projected to grow at rates 00 greater than population and epi based on trends for the past 5 years. % H-2 C_ 7_4 Exhibit.L,I- FINANCIAL AND STATISTICAL TABLES SUMMARY OF KEY REVENUE ASSUMPTIONS © Transient occupancy tax Transient occupancy taxes(TOT)are levied on all individuals occupying their Grows by2_5%in 1995-95 dwelling for 30 days or less. This is generally most applicable to room rentals at Grows b 3.MP in 1996-97 motels and hotels,although it is also applicable to other types of short term 1995-96 revenue $2,531,soo rentals. The TOT rate is 10%of the room rental rate. Although the taxis 1996-97 revenue $2,607,ti00 collected for the City by the dwelling operators,it is a tax on the occupant,not the 45 of total revenue 10% hotel or motel. This revenue source is projected to grow by increases in cpi annually over the next two years. ® Vehicle in—lieu subvention Vehicle license fees(VLF)in the amount of 2%of the market value of the motor Grows by2 5%in 1995-96 vehicle are imposed by the State annually in lieu of local property taxes. The Grows b 2.5%in 1996-97 State allocates 8125%of theses revenues equally betwen cities and counties, 1995-96 revenue $1,486,200 apportioned based on population. Revenue for 1995-97 is projected to grow by 1996-97 revenue $1,523,400 25%annually based on trends for the past 5 years. %oftotal revenue 6% 0 Comm dev block grant Community development block grant(CDBG)funds are allocated by the Stavs constant over 1995-97 federal government to eligible local agencies as"block grants"for housing and 1995-96 revenue $953,700 community development purposes. Within general program guidelines to assure 1996-97 revenue .$953,700 that federal program goals are being met,entitlement cities determine their own 0 ofroral revenue 4% projects and priorities. 6 Gasoline tax subvention The State allocates a portion of gas tax revenues to cities under four distinct Grows by0_3%in 1995-96 funding categories on a population basis totalling about$17.69 per capita. Gas Grows b OS%in 1996-97 tax revenues are restricted by the State for street purposes only(see Section B, 1995-96 revenue $817,400 Policies and Objectives — Revenue Distn'b6tion,for the City's policy regarding 1996-97 revenue $821,500 the use of gas tax revenues)and are projected based on information provided ss of total revenue 3% by the State Controller. © Business tax certificates Anyone conducting business in the City is subject to a municipal business tax. Grows by4.99c in 1995-96 The tax basis and rate are the same for all businesses:$50 per$100,000 of.gross Grows b 5.6%for 1996-97 receipts(or one—half of one—half percent). The tax is not regulatory,and is 1995-96 revenue $813,000 only imposed for the purpose of raising general purpose revenues. For 1996-97 revenue $858,500 1995-97,this revenue source is projected to grow by the population and cpi 45 of total revenue 3% plus 2%based on trends for the past five and ten years. © Franchise fees Franchise fees are levied by the City on a variety of utilities at various rates.The Tax base grows by2.89oin 1996-97 State sets franchise fees for utilities regulated by them(most notably gas and Tax base vows b 3.5%in 1996-97 electricity): 1%of gross sales or 2%of revenues attributable to their investment in 1995-96 revenue $790,400 infrastructure,whichever is greater. The City sets rates on a gross receipts basis 1996-97 revenue $818,100 for the following utilities:water(2%);solid waste collection(6%);and cable %oftotal revenue 3% television(S%). 1995-96 will be the fust full year with the CATV rate at 5%(it was previously set at 4%), resulting in an increase in revenues of about$40,000 on an annual basis. With this adjustment to the base,revenues from this source are projected to increase during 1995-97 by' creases in population and epi As noted above, these nine revenue sources account for about 80%of total General Fund revenues. A wide variety of service charges account for another 10% of revenues summarized as follows: 1995-96 %of Total Revenues Revenues Recreation fees $799,600 3% Development review fees $867,100 3% Other fees and charges $1,059,200 4% H-3 Exhibit, !_ GENERAL GOVERNMENT PROGRAM: Revenue Management (continued) r DEPARTMENT: Finance 1995-97 PROGRAM OBJECTIVES ■ - e Mdupgrade utility�bill■ 1 5-96: ntractax audi on a Conti �ency ee basis. _ 1995-97: Converutility meter reading system. ■ 1995-97: Achieve yields on investments that exceed 90 day U. S. Treasury Bills while safeguarding the City's portfolio from losses due to creditor default or market changes. L ■ 1995-97: Coordinate preparation of annual rate reviews for the water and sewer funds. ■ 1995-97: Update General Fund fees and charges in accordance with adopted City policy. ■ 1996-97: Initiate business tax verification program. f L. PERFORMANCE AND 1993-94 1994-95 1995-96 1996-97 WORKLOAD INDICATORS ACTUAL PROJECTED ESTIMATED ESTIMATED Utility bills issued 99,900 100,500 101,500 102,500 Utility customer service orders 13,700 14,000 15,000 15,000 Accounts receivable invoices issued 4,600 4,600 4,700 41800 L Business tax certificates issued. 5,000 7,000 7,300 7,300 Cashier transactions 29,900 31,000 32,000 32,000 Investment portfolio $29.5 Mil $32.0 Mil $32.5 Mil $33.5 Mil L. . L l l i D-142 L