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HomeMy WebLinkAbout04-19-2016 Item 02 Government Finance Officers Finance Association Recommendations for Finance and Information and Technology Department Meeting Date: 4/19/2016 FROM: Derek Johnson, Assistant City Manager/Interim Finance and IT Director Prepared by: Greg Hermann, Principal Analyst SUBJECT: GOVERNMENT FINANCE OFFICERS FINANCE ASSOCIATION RECOMMENDATIONS FOR THE FINANCE AND INFORMATION TECHNOLOGY DEPARTMENT RECOMMENDATION Receive and file a report outlining recommendations from the Government Finance Officers Association for the Finance and Information Technology Department. DISCUSSION Background The 2015-2017 Financial Plan includes budgeted resources to support ongoing efforts to increase the efficiency and effectiveness of City operations. In recent years, Public Works, Community Development, and the Fire Department have all gone through an organizational assessment and planning process to identify best practices for service delivery and cost containment. In fall 2015, the City retained Government Finance Officers Association (GFOA) to engage in a similar assessment for the Finance and Information Technology (FIT) Department. GFOA's mission is to enhance and promote the professional management of governmental financial resources by identifying, developing, and advancing fiscal strategies, policies, and practices for the public benefit. The organization provides best practice guidance, consulting, networking opportunities, publications including books, e-books, and periodicals, recognition programs, research, and training opportunities for those in the public finance profession. Given this breadth of knowledge and experience GFOA is able to offer independent, objective, and best practice-focused consulting services for financial operations in local government. In addition, their focus is to provide “real” and pragmatic solutions based on industry-leading research with organizations located throughout North America. Assessment Report The purpose of this organizational assessment of the FIT department, specifically the finance division, was to assess challenges with recruitment and retention of staff, assess workload demands, and evaluate existing programs and processes and to determine areas for improvement. The report is designed to assist the City with developing a strategic roadmap to improve 2 Packet Pg. 112 organizational efficiency and effectiveness in these areas by implementing recogniz ed best practices. While the report focused on the FIT department, because finance is the starting and ending point of many business practices, the assessment makes recommendations that directly or indirectly impact the entire City organization. To conduct the assessment, GFOA facilitated focused group meetings with City staff, interviewed individual members of FIT and other departments and reviewed process documentation to identify key issues and opportunities. The issues identified in their report represent opportunities that, in GFOA’s professional assessment, offer the City its best opportunity for sustained improvement. GFOA identified four core issues: Issue #1) Need for an integrated financial system Issue #2) Need for a new chart of accounts Issue #3) Business processes improvements Issue #4) Role clarity and alignment GFOA concluded that these four core issues, represented the most significant challenges faced by the City’s finance function and cause ripple effects throughout all City departments . While there have been attempts to address challenges in the FIT department in the past by allocating temporary resources or re-locating functions to other departments, addressing anything outside of these four core issues will only provide temporary relief. Ultimately, what is required for long term sustainability of this key function are foundational changes and improvements. In short, the City has deferred maintenance and investments in support departments, most especially the finance function, and continued deferral is no longer sustainable, efficient, or effective. The GFOA report recognizes that addressing these core issues will take time, a considerable investment and concerted organizational focus. The biggest challenge will be to fundamentally rethink how the City carries out its day to day administrative functions in light of significantly changed financial, technological and operational realities and provide the adequate resources to effectively manage the process changes. In an attempt to provide some short-term relief to the current staffing workload challenges, GFOA identified potential improvement strategies that the City can implement now to provide temporary “quick wins” until longer term systemic changes can be achieved. The next step is to develop an initial project plan with detailed action steps that capitalize on quick wins and streamline business processes with existing staffing resources and technology. The longer term steps include a comprehensive overhaul of business practices and systems. Based on feedback from the City Council, staff will prepare a Significant Operating Program Change (SOPC) for the Council’s consideration for the 2016-2017 Budget Supplement to implement a comprehensive approach to strengthening support departments and business process improvements. 2 Packet Pg. 113 Overview of Core Issues Identified by the GFOA Issue #1 - Need for an integrated financial system The first issue identified is that the City needs to replace its existing financial system. This system, known as Finance Plus, was purchased in 2005. GFOA recommends that the system be replaced with a modern Enterprise Resource Planning (ERP) system. An ERP financial system provides a technological platform to integrate operational areas such as accounting, budget, human resources, purchasing, grants management, business licensing, and vendor contract management into a centralized application. The Cities of Paso Robles and Santa Barbara are both cities in the region that are currently in the process of implementing ERP systems. Updates to the City’s existing financial system are no longer being developed by the company and represent a “silo” technology that has very limited capability to integrate with other business systems. As an example the City currently develops our budget using spreadsheets and because the City financial system’s budget module is inactive this data has to be re-entered which is highly inefficient (data entry and quality control). This hampers the City’s ability to operate as efficiently and effectively as possible and utilize best practices for financial operations. This is a significant recommendation as the implementation of a system requires a substantial investment of both capital and staff and consultant resources. Implementation efforts usually occur over a three to four year period. The direct costs to purchase and implement a system are projected to be approximately $2.25 million. Issue #2 - Need for a new chart of accounts The second recommendation is to generate a new Chart of Accounts (COA) to simplify City’s accounting and budgetary systems. A COA is a list of the accounts used to define each class of items for which money or the equivalent is spent or received. The COA serves as the financial “DNA” of an organization and if improvements to the City’s financial system and business processes are to be realized; the City needs to “redo” its COA through an organization wide effort. GFOA has extensive best practices and resources to guide the City through an overhaul of the COA. The City’s existing COA is unnecessarily complex and is a barrier to improving the City’s business processes and financial management. The existing COA has resulted in proliferation of side systems to create financial reports, poor reporting capabilities, and is inefficient and time consuming to complete monthly bank reconciliations and to prepare for year-end processes, such as the audit and Comprehensive Annual Financial Report (CAFR). While all of this work is being accomplished and the City is receiving clean audits and awards for our CAFR the process is complex and demanding on staff time. Issue #3 - Business processes improvements Many of the City’s business practices have served the City incredibly well over the years and have been a benchmark for many other local governments. Customer expectations and choices have advanced remarkably since the City purchased its current financial system in 2005 and 2 Packet Pg. 114 today we offer many services that were not available (i.e. credit cards, online payments, etc.) then. In an effort to keep up with the public’s needs, the City has developed business practices within currently owned technology capabilities or have purchased side systems to provide expanded services. Over time, the complexity and limitations of the mixture of financial and side systems have become a barrier to continued innovation and improvement of business practices. . Many of these side systems and processes exist in the operating departments and standardizing business processes will allow for the centralization of support functions. GFOA’s report identifies four different business processes that could substantially benefit from new policies and practices. These include: 1) Purchasing 2) Salary and personnel budget process 3) Standardized cash management 4) Accounts payable. The report includes recommendations for each of the four areas. It is worth noting that it is possible for these process improvements to be simplified through a new ERP financial system. Yet, in the absence of a new system, some process reengineer is recommended to ensure that the city implements best practices and maximizes efficiencies to the extent possible given the limitations created by the continued reliance of an outdated system and chart of accounts. Issue #4 - Role clarity and alignment The fourth issue is to improve role clarity and alignment within the department. GFOA has identified numerous instances where finance staff has been assigned inconsistent (and incompatible) tasks that decrease the efficiency and effectiveness of the department. Turnover in the FIT department has resulted in a distribution of responsibilities and roles that GFOA identified as a prime opportunity for efficiency improvements. The recommendations are to: 1) Reorganize the FIT department into two separate departments (Finance and IT), each led by their own Director 2) Cleary define and align roles in the new Finance and IT Departments 3) Create service level agreements with all City departments to clarify the division of responsibilities for tasks 4) Move the utility billing function to the Utilities Department. FISCAL IMPACT Staff has been working with GFOA to evaluate the one-time and ongoing fiscal impacts associated with their recommendations. If implemented, the recommendations will require both one-time and ongoing resources to purchase and implement a new ERP system. These costs include staff to lead the required overhaul of business processes and to implement the ERP system. Staffing would also be identified to support the reorganization into two departments and continue service responsibilities. 2 Packet Pg. 115 The estimated costs to purchase and replace the existing financial system with an ERP system is $2.25 million. The estimated cost for San Luis Obispo is based on their direct costs for purchasing the system with specific recommended adjustments identified by GFOA. The report highlights the ripple effect of issues identified in the GFOA report to other departments. These discussions day lighted the need for temporary resources in both the City Attorney’s Office and Human Resources Departments. A comprehensive SOPC for the 2016-2017 Supplement Budget is being developed to strengthen the support departments (Finance, IT, HR, and City Attorney’s Office). The preliminary estimates for the 2016-2017 Budget Supplement SOPC are ongoing costs of $266,500 and onetime costs of $1.7 million. The 2016-2017 SOPC is being developed within the context of an updated five year forecast that will be presented as part of the 2016-2017 Budget Supplement. Additional resources will be requested as part of the 2017-2019 Financial Plan that will require other one time and ongoing funding. This SOPC will propose a comprehensive approach to strengthening and aligning staff and other resources in support departments so that they can participate in the overhaul of business processes need to meet the service needs of the public and other City departments. When additional analysis about workload is completed, ongoing resources will also likely be needed in the City Attorney’s Office and Human Resources’ Department which will be integrated into a SOPC request for the 2017-2019. These costs will clearly have a significant impact to the General Fund and all the enterprise funds, but are necessary and urgent to implement the key GFOA recommendations. One time and ongoing costs will be directly allocated and fairly distributed to the Enterprise Funds pursuant to the Cost Allocation Plan and other applicable best practices. It is estimated that it will take four to five years to implement all of GFOA’s recommendations. 2 Packet Pg. 116 GOVERNMENT FINANCE OFFICERS ASSOCIATION (GFOA) RESEARCH AND CONSULTING CENTER San Luis Obispo, California March 24, 2016 Organizational Assessment - Finance Final Page 1 of 15 2.a Packet Pg. 117 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) Table of Contents Section 1 - Introduction ................................................................................................ 3 Approach & Methodology ....................................................................................................... 3 Section 2 - Analysis and Recommendations .............................................................. 5 Issue 1) Need for an integrated financial system ............................................................... 5 Ripple Effects ......................................................................................................................... 6 Recommendations:................................................................................................................. 7 Quick Hit Recommendations: ................................................................................................. 8 Issue 2) Need for a new chart of accounts ......................................................................... 8 Ripple Effects ......................................................................................................................... 8 Recommendations:................................................................................................................. 8 Quick Hit Recommendations: ................................................................................................. 9 Issue 3) Business process improvements.......................................................................... 9 Ripple Effects ........................................................................................................................10 Recommendations:................................................................................................................10 Quick Hit Recommendations: ................................................................................................11 Issue 4) Role clarity and alignment ....................................................................................13 Ripple Effects ........................................................................................................................13 Recommendations:................................................................................................................13 Quick Hit Recommendations: ................................................................................................14 Section 3 – Recommendation Summary ................................................................... 15 Page 2 of 15 2.a Packet Pg. 118 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) Section 1 - Introduction In public sector organizations, the finance function plays an important and often complex role. Not only is finance tasked with performing the accounting functions, it also must serve in a support role for many of the other departments. By coordinating budget, accounts payable, purchasing, billing, distribution and collection of utility bills and business licenses, and other functions, finance is a central player in the overall efficiency of the organization. The purpose of this organizational assessment of the Finance and Information Technology (FIT) department of the City of San Luis Obispo, California (the city), specifically the divisions of the department focused on finance, is to determine areas for improvement. The assessment included the FIT department, as well as other departments and staff that have a role in the City’s financial activities. GFOA’s report is intended to assist the City’s executive management with developing a strategic roadmap that will enable the organization to achieve desired outcomes, adopt recognized best practices, and more effectively serve other city departments and the public. To conduct the assessment, GFOA facilitated focus group meetings with City staff, interviewed individual members of the FIT department and other departments in the City, and reviewed process documentation that is currently available to identify key issues and opportunities. The issues identified in this report represent major areas that in GFOA’s opinion offer the City its best opportunity for improvement. This report is not a comprehensive list of all opportunities for improvement. Our approach to projects is to focus on providing practical guidance and implementing improvements. As part of the conversations with City staff, comments may have been mentioned that did not make it into this report. The exclusion of comments does not necessarily indicate that GFOA did not feel that the issue was significant, but its improvement strategy was not as clear or did not provide the same opportunity as those listed. This report contains a prioritized list of opportunities and recommendations. At the City’s request, we included both long-term recommendations that will provide the foundation for the City’s finance function to be sustainable and successful over many years and short term recommendations that can be implemented in a manner of weeks or months to relieve pressure and provide near term improvements to make time to focus on the more strategic and long term improvements. GFOA has provided additional detail and explanation of its primary recommendations in separate reports for each issue area. documents that Approach & Methodology • Information Gathering and Analysis - GFOA’s standard approach for assessments such as the one conducted for the city is to use a combination of interviews with key stakeholders and a document review process to understand the current situation within the finance office along with other finance related functions – for example, purchasing, contract management, and information technology systems. GFOA then compares the information collected against similar organizations, recognized best practices, and our Page 3 of 15 2.a Packet Pg. 119 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) collective experience with other municipal clients to identify potential improvement opportunities. GFOA’s information gathering efforts with the city focused on the following areas using the overall approach and methodology defined by the graphic below.  Supporting Tools and Inputs  Structure and Governance  Outcomes and Results • Report Preparation & Recommendations - Following onsite work at the City, GFOA reviewed materials and information gathered during and after interviews to identify concerns and prioritize opportunities for improvement. Using our expertise, GFOA conducted research and performed gap analyses between the City’s current state and recognized industry best practices along with common practices adopted in local government. Issues explained in this report identify those gaps where GFOA feels there is room for improvement for the City. In making recommendations, GFOA attempted to make suggestions for improvement to the underlying cause of the issue. As a result, many recommendations appear to address core structural, organizational, or process issues that will provide solutions for the long-term. Where possible, GFOA has also attempted to identify smart and appropriate “quick wins” that will provide temporary relief for the City and help free resources to focus on more long-term strategic improvement efforts. • Review & Action Planning - After the City has had an opportunity to review the issues identified in this report and GFOA’s recommendations for improvement, GFOA will be onsite to facilitate a discussion of the recommendations and assist with the preparation of an Action Plan that the city can use to plan implementation activities and track progress toward improvements. GFOA will use Microsoft project to create a project plan that will track key milestones, tasks, and responsible individuals for the project(s). GFOA would then be available to provide further details to the action plan or participate in implementation efforts. Page 4 of 15 2.a Packet Pg. 120 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) Section 2 - Analysis and Recommendations The focus of GFOA’s assessment was on the financial processes performed by the Finance and Information Technology department (the “finance function”). Using the conceptual approach communicated by the image displayed in Section 1, GFOA has identified a number of issues that require attention by the City. GFOA has identified the City’s primary “core” issues as the following: Issue #1) Need for an integrated financial system Issue #2) Need for a new chart of accounts Issue #3) Business process improvements Issue #4) Role clarity and alignment These core issues, in GFOA’s opinion represent the most significant problems faced by the City’s finance function. The ripple effects from these core issues contribute to the vast majority of challenges within the finance function. Addressing other issues outside of this core may provide temporary relief, but will ultimately fail to provide lasting improvement. However, GFOA recognizes that addressing these core issues will take time. In an attempt to provide some short-term relief to the current staffing workload challenges, GFOA has attempted to identify potential improvement strategies that can be implemented now and provide temporary “quick wins” until the long-term strategies can go into effect. Issue 1) Need for an integrated financial system The City does not have an integrated financial system that meets the needs of the organization. The SunGard Pentamation system could be described as outdated, inefficient, and incomplete. As a result, City staff must perform extensive manual work arounds and utilize a variety of shadow or additional systems to complete basic tasks that have become routine and/or automated in most other municipal governments. Below are a few examples of missing functionality: 1) Purchasing – The City does not have a central system to manage its purchasing function. Purchase requisitions, purchase orders, and contracts are managed and tracked manually by staff in both the FIT department and in other City departments. In addition, without a purchasing system staff is left to manage encumbrances and budget control manually. 2) Financial and Management Reporting – The system lacks modern reporting features to inform staff, provide decision support, and provide accountability. Almost all departments indicated that they rely on spreadsheets and other side systems to perform basic functions such as budget-to-actual reporting, cost accounting, and payment tracking. This creates manual work that is redundant and inefficient. 3) Project and Grant Accounting – When the City’s chart of accounts was configured in the system, it did not provide the opportunity to track projects and grants in an appropriate way. (See Issue #2) for more information. As a result department staff has largely relied on side systems to track grant and project information. 4) Payroll / Human Resources - The City’s human resources and payroll processes are manually intensive and inefficient, mostly due to the lack of an integrated HR/payroll Page 5 of 15 2.a Packet Pg. 121 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) system. Human resource processes require paper based approvals. There is a heavy reliance on manual checklists and spreadsheets to calculate payroll – including some payroll calculations that are done in Microsoft Excel. In addition to the four areas listed above, many features common in most financial systems and in use at many governments across the United States are not available to the City. As a result, processes are not automated and what are simple tasks for other organizations require many hours of work for City staff, and important controls or business rules are not enforced by the system. Examples include: o No systematic workflow o No automated encumbrance accounting o No system-generated notifications or alerts o Lack of integrated modules o Lack of robust security features o Limited integration of third party systems o No automated bank reconciliation o No self-service features o Minimal enterprise-wide use of system functions The fact that the City’s staff completes as much as they do without these essential tools is in itself an achievement. However, for a finance office to be considered high- performing and meet the current needs and challenges that municipalities face, a quality financial system is an essential tool. Ripple Effects As a result of not having a modern financial system, there are many ripple effects that have reduced the effectiveness and/or efficiency of the finance function. GFOA found the following areas for improvement. • Reliance on manual processes – The City relies on many manual processes. Manual processes are inefficient, limit the level of transparency into the process, are prone to errors or inconsistency, and often result in redundant work. • Informal Processes – City staff reported many processes that involve or originate with communication of phone calls or emails. This type of process is difficult to track and is susceptible to variation. • Bank Reconciliation – The City’s bank reconciliation is overly complicated and requires significant time. City staff reported that it takes an entire day to gather information for bank reconciliation. The whole bank reconciliation process takes too much time. • Proliferation of side systems – In almost every meeting GFOA conducted, staff highlighted how side systems are used to perform critical finance functions. This is a common occurrence in many organizations with weak financial systems. However, existence of side systems only seems to exacerbate the situation and create the need for more side systems as information is further fragmented and the primary system’s use is further limited. • Difficulty in obtaining financial information – The existence of side systems and the difficulty in reporting from the main financial system has led to difficulty in easily obtaining current financial information. For example, because commitments (encumbrances and pre-encumbrances) are not tracked in the system from the Page 6 of 15 2.a Packet Pg. 122 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) beginning of the purchasing process budget-to-actual numbers cannot be reported unless a side system is used. The existence of these systems (and the need to manually duplicate information) presents the opportunity for errors. Different departments track this information in different ways and without a reliable standard process. • Roles and Responsibilities – One of the core guiding principles of efficient processes and modern financial systems is that information is captured at its origination point. Once information or data are captured in the system, it can be used throughout the organization, tracked, and reported on. Because the City relies on many paper based processes, it creates the need for staff in finance to spend time keying in information. This effort is redundant and not an optimal use of finance staff time. Recommendations: A. Implement new ERP system - GFOA recommends that the City pursue a strategy to implement a new enterprise resource planning (ERP) system that would include financials, procurement, human resources, payroll and other related functions. Modern ERP systems offer integrated functions combined with modern features such as self- service, workflow, improved analytics, and automation of business process. Implementation of a new ERP system is as much about process change as it is about technology. For projects to be successful, an organization must simplify, streamline and standardize processes, work diligently to train users and manage the overall organizational change. In addition, organizations require focus on a shared vision and the leadership to see the vision through. When implemented successfully, the ERP system will put the needs of the organization above the needs of an individual department and any diversion from this creates the risk to derail the effort. For this reason, GFOA recommends that the City put a moratorium on new system implementations until the core ERP system is established. Other projects will divert resources and divert attention from the ERP system. Also, more importantly and more detrimentally to the system, it will signal weakness in the City’s ERP vision. B. Identify formal governance structure and document with project charter - The scope of a financial system implementation project goes beyond the finance office and IT office. The finance system is viewed by all organizations to conduct their business and the approach to the project needs to consider all of these various stakeholders. In addition, because of the many stakeholders, it is essential to clearly communicate project expectations, roles, and decision authority. A formal governance structure and project charter provides this clarity. GFOA recommends establishing a steering committee made up of City executive leadership and management staff from key stakeholder departments. The City would then establish a project team that identifies an individual to serve as the “lead” for each process/functional area. Lastly, the governance structure should identify subject matter experts or staff throughout the City that contribute to processes/functions. Once a structure is identified, the City will need to clearly define the role of each with respect to the project. A project charter is a document that contains these descriptions along with overall goals for the project, guiding principles, and a clear vision of project success. After implementation, the project governance structure could be maintained in some format to help guide overall use of the system. Many organizations use a steering committee to evaluate and prioritize improvement opportunities with the system or the Page 7 of 15 2.a Packet Pg. 123 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) business case from any new systems that may be contemplated. It is important to make sure that new systems are planned with the same ERP vision. Quick Hit Recommendations: C. Develop system inventory - Because of the City’s extensive use of side systems, it will be important that the City inventory these systems. Moving forward, having an accurate system inventory (including all spreadsheets and custom developed systems) will be important to business process improvement efforts and the process to transition away from the current environment to one that relies on a modern financial system. Issue 2) Need for a new chart of accounts The City’s chart of accounts is unnecessarily complex, redundant, ineffective, and makes everything that the City does from a financial management perspective more difficult. A simpler chart of accounts that is, organized, logical, well understood, and detailed enough to facilitate organization wide planning (budgeting), tracking, reporting, and facilitation of business processes is needed. The chart of accounts forms the foundation of not only the finance system but of all financial transactions. GFOA has experience with organizations that have ended up with a chart of accounts similar to the City’s current situation. It is often the result of growth, inconsistent use over time, and an inflexibility of the system (or the set up) to accommodate change. For example, based on conversations with staff, as the need for tracking new projects, grants, or programs arose, the City would need to “force” the chart of accounts to handle this. Often this resulted in using a segment for a purpose other than what was originally intended. This then fragmented information, made reporting more difficult, and led to challenges that often required shadow systems. As more and more was added, the City began running out of available values. The result then was to start “fitting in” new accounts where there was room which further weakened the chart of accounts. As a result, most departments use Microsoft Excel to track key information. Ripple Effects • Proliferation of side systems – In almost every department, side systems have been created to track financial information at a more detailed level than the chart of accounts easily allows for. This includes projects, grants, programs, or initiatives. Every side system then represents an instance of redundant data entry, potential error, and an ongoing need for reconciliation and maintenance. • Poor Reporting – The state of the City’s chart of accounts makes it extremely difficult to extract or report quality information. As a result, the City does not get timely budget-to- actual reports. • Time Consuming End of Year Processes – As referenced above, the complex and unorganized chart of accounts makes every process and transaction that the City completes more difficult. This is especially true at year end where staff must reconcile many different systems, perform adjusting entries, catch up with batch processes, etc. Recommendations: D. Identify team for CoA development – Chart of account development is an activity that must include representatives from beyond finance. GFOA recommends that the City establish a team made up of representatives from many departments to identify a structure and help define values for the chart of accounts. Page 8 of 15 2.a Packet Pg. 124 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) E. Develop new chart of accounts – See separate report. Quick Hit Recommendations: F. Identify existing accounts that are not used – A large part of the complexity with the City’s chart is due to the many accounts that are no longer used. Where possible the City should combine accounts, eliminate old accounts, and attempt to simplify the structure in the transition period before the new chart and new system are implemented. In addition to making it easier in the short-term, it will also ease the transition to the new chart and new system. Issue 3) Business policy and process improvements Many of the outdated and redundant business processes in use throughout the City can be attributed to the lack of a financial system, as explained under issue #1. However, GFOA has also identified a number of improvement opportunities independent from the financial system. In general, the existence of a financial system will automate existing processes and will provide some improvement. However, the system is only a tool and improvements based solely on the tool will only go so far. Those business processes are explained below. 1) Purchasing - The City lacks an established and centralized purchasing position. The existing system does not have dedicated, purchasing staff, that can to manage the procurement of city goods and services and the management of city contracts. An improved process would clarify roles and responsibilities regarding who will work on the purchasing activities and reduce the effort to make City purchases and still be consistent with City policies and State Law. Any purchasing processes are run primarily through the departments with some coordination by the finance staff. While finance is an approver at the end of the process, the manual nature of the process can lead to inconsistency. GFOA also feels that the assignment of purchasing roles within finance was not made in an effective way. For example, one person is responsible for entering vendors, sending PO’s, and processing payments creating potential issue with non-separation of duties. In addition, the current function relies on unnecessary manual process. Every PO has a manual file folder created where the total amount remaining on the PO is tracked. In addition, finance staff focusing on accounting tasks are asked to be involved with the bid and RFP process and then the subsequent management of contracts. This diversity of role creates unnecessary confusion, timeliness issues and potentially work quality issues. Purchasing is not typically a process where work can be set aside and then batched at weekly intervals. Throughout GFOA’s meetings, staff often commented on the inconsistent turnaround for purchasing tasks. Staff also commented that when contacted, finance staff is often very good about turning around tasks that are time/date sensitive. However managing purchasing workload based on philosophy of the “squeaky wheel” is not sustainable in the long-term. 2) Salary and Personnel Budget Process - Every department head GFOA met with expressed frustration with salary forecasting and personnel budgeting. Department heads are not comfortable with the process to obtain system-generated data; the process is cumbersome and unnecessarily complex. Department heads are using Excel, not system data to budget for personnel and salaries. This is because the City’s Page 9 of 15 2.a Packet Pg. 125 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) Pentemation system does not have a budgeting or Human Resource Information System (HRIS) tool that is commonly used to model and forecast salaries. 3) Standardized Cash Management - The City has many points of cash collection. Revenue collection systems are not interfaced to the general ledger and the City does not have a standardized process or technology across the organization. In most cities, the various business functions require that revenue be collected at multiple locations. However, each location should be following a consistent set of rules to make coordination of the overall revenue collection effort more efficient. 4) Accounts Payable – The City lacks an efficient process for reviewing, approving, and processing invoices because of the current lack of a complete financial system. The use of the manual PO folder is inefficient and confusing. The process of running reports and reconciling those reports to Excel spreadsheets and paper logs is redundant and inefficient. Ripple Effects • Best” practices will help improve productivity and morale: GFOA reviewed business processes across the finance function. In general, GFOA did identified opportunities to , implement, and maintain financial management using best practices. While it is clear that City staff are capable of this effort and in many cases have led efforts independently to gain improvements, there has not been an organization-wide effort or coordinated effort to adopt modern industry best practices. Technology and the existing COA have been a significant barrier to this occurring. The City should be commended for the initiatives completed so far, however GFOA feels that without addressing the underlying “core” benefits were lessened and will continue to be limited. • Clearer Processes. GFOA defines clear processes or transparency as an overall understanding of the subject. Process transparency or the ability for key process stakeholders to understand both the approach and purpose to business process requires that stakeholders understand both what decisions were made and how they were made. Recommendations: G. Establish a purchasing function - A city that is experiencing growth such as San Luis Obispo, should have a dedicated purchasing department/division and resources to manage vendors, the procurement of goods and services, and ongoing contracts. GFOA recommends the City review and/or revise/create: a. A revised set of purchasing policies b. Revised purchasing processes c. Revised purchasing thresholds / approval authority d. Purchasing division with dedicated purchasing staff H. Consider Pooled Cash Approach – It is generally considered a best practice to adopt a pooled cash concept within the City where the City would manage all cash in one “cash fund.” The relationship between the “cash fund” and other funds would be maintained through due-to/due-from entries to identify the commitments of each fund for Page 10 of 15 2.a Packet Pg. 126 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) cash. This would allow all cash transactions to occur in one fund and from one bank account. I. Streamline Budget Process/Document – As stated above, the City puts considerable effort into its budget process. GFOA is not recommending that the City eliminate any of the budget process features that are effective and a core part of the City’s budgeting culture (such as the citizen participation process). However, we are recommending that the City carefully consider the purpose of each activity in the budget process and its direct relationship on budget decisions. At its core, an organizations budget process should be about identifying goals, determining the cost to achieve those goals, and then making any necessary prioritization decisions. Staff commented that the City’s budget document is difficult to prepare and can be difficult to understand. Because the City spends such a large amount of time on the budget process and budget document, GFOA feels that it could significantly reduce effort while still maintaining the important elements the City is proud of and are effective. GFOA recommends that the City take a fresh look at the budget document from a stakeholder perspective or consider surveying various types of stakeholders to determine what is necessary in the budget document. Quick Hit Recommendations: J. Streamline purchasing process - The city department heads are required to provide a purchasing report for purchases over $25,000 to the city manager for approval, even if the funds for goods and services have been budgeted and approved in the budget process (e.g. truck). This can be inefficient for department heads to provide a detailed purchasing report to the city manager. These purchasing memos create a lot of extra, work (emails and phone calls) for department staff, in addition to the city manager. While GFOA acknowledges the level financial controls that the City wants to implement, GFOA believes these purchasing memos to be unnecessary. GFOA considers that the City identify a simple purchase requisition form that can be used for all purchases. GFOA also recommends that the City modify its purchasing workflow and identify alternate approvers (or potentially department only approvers) for small dollar amount POs. K. Hold departments accountable for quality – Staff made repeated comments during interviews and focus group meetings (across many functional areas) that there was a considerable amount of time spent correcting errors made at prior points in a process. In some cases, the errors could be process requirements that are more difficult than necessary for example, personnel forms require departments to add information that is not germane to current transition. Regardless of the source or reason for the error, GFOA recommends that the City focus on eliminating those errors and hold staff accountable for “doing it right the first time.” GFOA advocates for a policy of “sending it back” rather than fixing the error. In addition, City leadership will need to hold staff accountable for quality. L. Transfer responsibility for tracking POs to departments – The City’s purchasing process is mostly run by departments (or the analysts) in departments due to the lack of a procurement function. However, the FIT department manages all paperwork. To reduce work temporarily, the City could require that the departments assume responsibility for monitoring the POs, ensuring invoices match the PO, and that payments don’t exceed the total PO amount, etc. FIT would be responsible for setting policy and providing random checks/audits to ensure compliance with those policies. Page 11 of 15 2.a Packet Pg. 127 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) M. Develop revised cash handling policy – The City should define and document a formal policy with respect to handling cash (including cash, checks, and credit card transactions). The policy should: a. Require standardization among all departments b. Include internal control procedures c. Require that departments accepting cash perform certain quality assurance steps (potentially including: completing deposit slips, reconciling deposits, completing City forms, etc.) N. Consider automation or outsourced services – During the period of time when the City is implementing long term solutions, the City may want to consider implementing temporary changes to relieve staff from certain functions. These services could include any of the following: a. Lockbox services 1 – Lock box services will decrease the amount of processing for City finance staff b. Online payments – The City could implement an online electronic payment portal for City invoices that would decrease the amount of time required for processing payments. c. Accounting services – Temporary staffing firms can provide accounting resources to help reduce workloads from staff during the project transition. d. Outsource to departments – For departments with regular cash handling functions, the City could consider allowing those departments to make cash deposits directly with the bank. The finance office would continue to play an audit and reconciliation role, but reducing daily cash handling could free up staff time. O. Identify appropriate service levels – In many cases, the City might have to accept that current services levels are not sustainable during the project period (where staff have additional responsibilities). It might be necessary to decrease service levels or suspend performing certain tasks. For example the following options could be considered: a. Shift away from batch processes – Reducing then number of batch processes will reduce the time spent on these large manually intensive tasks. GFOA recommends the City explore using on-time processing for functions such as fixed asset acquisition, bank reconciliation, cash deposit handling and others. b. Shift responsibility to departments and use finance staff to audit process/transaction. – The City is in a position to leverage the analysts that exist in the departments to play a larger role in finance activities. Many of these analysts are performing finance tasks now in a redundant fashion. By pulling in these analysts into a larger “team” effort to distribute work could free up resources to focus on more strategic long-term initiatives. c. Reduce counter hours – The City could reduce the hours that the finance counter is open or reduce the service levels presented to either external or internal customers. 1 In banking, a lock box is a service offered by commercial banks to organizations that simplifies collection and processing of account receivables by having those organizations' customers' payments mailed directly to a location accessible by the bank. Page 12 of 15 2.a Packet Pg. 128 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) Issue 4) Role clarity and alignment GFOA reviewed the organization chart for the finance function. While it provides an assignment of key processes to role, it does not provide sufficient guidance to staff carrying out those duties. In addition, GFOA has identified numerous instances where finance staff has been assigned inconsistent (and incompatible) tasks that decrease the efficiency of the role. In an ideal structure, roles will be distributed to take advantage of skillsets and available staffing. The distribution of work is important to producing high performance and the absence or ineffective performance of roles is often a source of poor results. Key organizational roles are listed below. • Executives - create vision, set priorities, and define business strategy • Managers - align work with strategies and simplify-eliminate-automate work • Supervisors - address exceptions so workers can conduct routine work • Workers - perform routine tasks In smaller organizations it is common and acceptable for some individuals to serve more than one role. However, even if the same person is performing multiple roles, each role must be performed well or the organization suffers. In addition, to perform well, the individuals in these roles must understand the requirements of the role. In our review we identified some areas where roles were not clear or simply not filled. As discussed above, this often becomes the source of inefficiency or sub-optimal results. Using the above referenced organizational roles, GFOA found the following: 1) The City has suffered from turnover at the department leadership level. As a result, the department has lacked consistent leadership that could effectively set policy or vision for the department or support staff. Staff at other levels then either had to fill this void or continue to operate without clear direction. The department has benefited from the current interim leadership, but filling the role on a permanent basis is necessary to support lasting change. 2) With leadership turnover in the department, it also suffered from a lack of prioritization. 3) Each finance staff position often fulfilled a combination of “Manager,” “Supervisor,” and “Worker,” roles. As a result, efficiency suffered and staff seemed to be interrupted regularly leading to inefficiencies and an inability to meet stakeholder expectations for turnaround times. Ripple Effects • Inability to Meet Stakeholder Expectations - Based on interviews with department representatives, there is significant room for improvement in both setting expectations and working to meet expectations. In many cases, City staff recognized the hard work of finance staff, but also general lack of understanding of department functions. Almost all discussions with focus groups and one-on-one interviews with city staff indicated frustrations that roles and responsibilities among finance staff are not clear. This lack of clarity of roles and responsibilities creates instances where work may be late, then rushed to complete, and can result in instances were quality can be poor. Recommendations: P. Reorganize the FIT department into a finance department and an IT department – GFOA believes that the City’s finance needs can be best served under a department Page 13 of 15 2.a Packet Pg. 129 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) that is allowed to focus on finance (the same would be true for IT and the City’s IT needs). While GFOA believes that the current challenges are not caused by the combined structure, implementing the necessary improvements will be much easier with split departments. In addition, recruiting a replacement finance director with the necessary finance and leadership skills will be easier if that individual also does not have to oversee IT. (See separate report for more information). Q. Clearly define roles for each position in FIT – GFOA reviewed the org chart that identified the responsibilities and roles of each position. However, some responsibility assignments are not clear and in areas where multiple positions contribute to a function, it is not clear who has overall accountability for this function. (See separate report for more information). R. Create service level agreements for all central FIT functions – Setting clear expectations and defining and documenting specific roles for business processes is essential. For processes that cross departments, GFOA strongly recommends that the City create and implement service level agreements to clearly set expectations. Service level agreements are like contracts between departments to provide services and the contract sets key terms (level of quality, turnaround time, escalation triggers, etc.). (See separate report for more information). S. Move utility billing function to the Utilities Department- Two finance staff that work on utility billing collections have been physically moved out of the finance department into utility billing to focus on collection efforts and customer service. This arrangement, while not intended to be long term, has resulted in positive changes in utility billing operations. Customer services complaints have improved as the number of complaints have been reduced, collections have increased as staff have been able to focus on the collection of late bills and changes payment plans, and utility billing has been able to document processes and procedures that didn’t exist or were outdated. GFOA recommends that these staff positions be permanently transferred out of the FIT department. With the overall changes expected to the finance office, GFOA feels that it is best to separate these positions from the FIT department prior to that split. Quick Hit Recommendations: T. Re-assign job responsibilities so FIT staff can specialize - Having staff specialize in a limited set of the FIT department’s functions will allow staff to take ownership over the issue, limit distractions, and manage workload. U. Use analysts to provide back up to FIT – The challenges facing the FIT department are challenges that face the entire organization. Helping the FIT department become more efficient should not be the responsibility of FIT alone. As stated above, many analysts already perform similar functions for their department and do so in a redundant fashion without a system. GFOA recommends that the City work on leveraging these resources more at the finance level during the City’s project period to implement the long-term improvements. Page 14 of 15 2.a Packet Pg. 130 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) Section 3 – Recommendation Summary GFOA has developed recommendations that have been inserted into this report and aggregated below. GFOA will be reviewing these draft recommendations with City staff. GFOA will work with the City to assist in the development and facilitation of the action plans. In addition, GFOA will assist in providing best practice recommendations and conduct research where appropriate. Recommendation Accountable Quick Win? A Implement new financial system Executive Leadership B Identify formal governance Executive Leadership C Develop system inventory IT Yes E Develop new chart of accounts Accounting Manager / FIT Staff / Department Staff F Identify unused accounts Accounting Manager / IT / Department Staff Yes G Establish a purchasing function Purchasing manager H Pooled cash FIT Leadership / Accounting Manager I Streamline budget process/document Executive Leadership / Budget Manager J Streamline purchasing process Purchasing Manager/ FIT Leadership Yes K Hold departments accountable for quality Executive Leadership Yes L Transfer responsibility for tracking POs to departments Executive Leadership Yes M Develop cash handling policy Revenue Manager Yes N Consider automation or outsourced services FIT Leadership/ FIT Staff Yes O Identify appropriate service levels FIT Leadership Yes P Reorganize the FIT department Executive Leadership Q Clearly define roles for each position in FIT Finance Staff R Create service level agreements for all central FIT functions Finance Staff / Departments S Move utility billing staff to utility billing Executive Leadership T Re-assign job responsibilities so FIT staff can specialize Finance Staff Yes U Utilize analysts within FIT Executive Leadership Yes Page 15 of 15 2.a Packet Pg. 131 At t a c h m e n t : a - G F O A S u m m a r y R e p o r t ( 1 3 0 6 : G F O A R e p o r t ) GFOA Finance and IT Assessment Slide #2 Recommendation Receive and file a report outlining recommendations from the Government Finance Officers Association for the Finance and Information Technology Department. Slide #3 Government Officers Finance Association (GFOA) Founded in 1906 Comprised of 18,000 members (federal, state/provincial and local level throughout North America Federal Liaison Center Operations and Marketing Center Research and Consulting Center Technical Services Center Slide #4 Timeline Initial discussions/agreement - June 2015 Data gathering (GFOA onsite) October/November/December 2015 Draft report review (GFOA onsite) - February 2016 Final report - March 2016 Slide #5 Scope Assessment of the FIT department: Policies Technology Staffing Processes Internal Controls Reporting Outcomes Business process improvement opportunities Organizational structure of FIT Staffing levels within FIT Opportunities for quick wins/temporary solutions Slide #6 Challenges and Opportunities Slide #7 Challenges and Opportunities “The fact that the City’s staff completes as much as they do without these essential tools is in itself an achievement. However, for a finance office to be considered high- performing and meet the current needs and challenges that municipalities face, a quality financial system is an essential tool.” Slide #8 Process Slide #9 #1 Need for an Integrated Financial System Limited or no functionality for critical finance functions Purchasing Project and grant accounting Technology is old and no longer being modernized Common productivity tools not implemented for the City Workflow or automated features not available RECOMMENDATION Replace financial system with an Enterprise Resource Planning (ERP) system Slide #10 #2 Need for a new Chart of Accounts The chart of accounts severely limits the city functions Budget control Project accounting Financial reporting RECOMMENDATIONS Develop a City wide team for a New Chart of Accounts Develop and implement a new chart of Accounts Slide #11 #3 Business Process Improvements Purchasing Budget development Cash management Accounts payable RECOMMENDATIONS Establish Purchasing Function Streamline Budget Process/Document Automation or outsourced services Slide #12 #4) Role Clarity & Alignment Staff turnover rate Leadership focus Inability to meet stakeholder expectations RECOMMENDATIONS Reorganize FIT into two Departments: Finance- IT Define new roles-functional and leadership alignment Establish service level agreements Move utility billing to Utilities Department Slide #13 Ripple Effects Finance is the hub of business activity. Business processes: Typically start and end in Finance. Improvements will benefit all supporting and operating departments. Other support departments need to be engaged in business process improvement effort. Support Departments-Resources need to match business needs and community expectations Internal Support (HR, Legal Issues, Public Information, Financial) External (Grantors, lenders, vendors, state and federal regulators) Public (Transparency, performance measures, billing) Slide #14 Anticipated Benefits Improve customer service Improve business processes and systems Empower and promote engagement amongst employees Improve information and analysis More data driven decisions Prepare (both people and systems) to meet the challenges today and that lie ahead Slide #15 Next Steps Implement Quick Wins Finance Director Recruitment 2016-2017 Comprehensive Budget Request Update IT Strategic Plan Focus on new technologies Continue Healthy and Smart Begin Implementation of Recommendations Slide #16 Recommendation Receive and file a report outlining recommendations from the Government Finance Officers Association for the Finance and Information Technology Department.