Audit Committee
July 9, 2024

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www.modestogov.com
AGENDA
City of Modesto

SPECIAL AUDIT COMMITTEE

COUNCIL WORKSHOP
2001-40 Del Puerto Room
Tenth Street Place, 1010 10th Street
Modesto, California
Tuesday, July 09, 2024 at 2:00 PM
Roll Call: Sue Zwahlen, Chair
Nick Bavaro, Vice-Chair
David Wright, Member
Camille Garcia, Public Member
Jennifer Barillas, Public Member
Alternates: Eric Alvarez, Rosa Escutia-Braaton, Chris Ricci, Jeremiah Williams Council has not delegated directive or final approval authority to the Committees.

Committee actions are recommendations to the full City Council, not final decisions on an issue. * Public Comment will only be in-person. Members of the public who wish to address the Committee, by providing public comment, during the meeting must do so in-person in the 2001-40 Del Puerto Room. As an alternative, members of the public may also provide written public comment submitted via email as indicated in the Submitting Comments by Email instructions on this agenda. Zoom will still be available for viewing and Wordly translation. *Members of the public will be allowed to provide public comment through Zoom if a Committee Member is participating remotely pursuant to the provisions of Assembly Bill 2449.

Effective March 1, 2023, if a technical issue arises with Zoom or the phone dial-in option, the Committee meeting will continue unless the meeting is being held pursuant to the provisions of Assembly Bill 2449. Alternative viewing options are listed below, and the meeting is physically open to the public.
“Wordly” can translate into 25+ different languages! To access written translation during the meeting, please scan the QR Code or click this link https://attend.wordly.ai/join/RJDY-6364.
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"Wordly" puede traducir a más de 25 idiomas diferentes! Para acceder a la traducción durante la reunión, por favor escanee el código QR o haga clic en el enlace https://attend.wordly.ai/join/RJDY-6364.

You may observe a livestream of the meeting at http://media.modestogov.com. You may also view or listen to the meeting as indicated below.

THE MEETING CAN BE VIEWED BY ZOOM VIDEO

CONFERENCING OR TELEPHONE
Joining the Committee meeting via Zoom
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Joining the Committee meeting via Telephone
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PUBLIC COMMENTS IN PERSON
Three-minute time limit per speaker.

Only interested persons in the audience may present these matters. Under State law, Committee Members may respond to matters being presented under this item only as follows:
a. Briefly respond to statements made or questions raised. b. Ask a question for clarification.
c. Provide a reference to staff or other resources for factual information. d. Request staff to report back at a subsequent meeting. e. Finally, a Committee Member or the Committee itself may take action to direct staff to place a matter of business on a future agenda.

SUBMITTING COMMENTS BY E-MAIL
Written comments may be submitted via email to: [email protected] (include Agenda Item Number in the subject line). All comments will be shared with the Committee - 2 -
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Members and placed in the record but will not be read aloud during the meeting. Written comments must be received two hours before the meeting.

This Agenda is on file in the City Clerk’s Office, Sixth Floor, 10th Street Place, Posting Board at entry of 10th Street Place, and is available on the City’s Web site at www.modestogov.com.

Materials related to an item on this Agenda submitted to the Council after distribution of the agenda packet are available for public inspection in the Clerk’s office during normal business hours. Such documents are also available online, subject to staff’s ability to post the documents before the meeting, at the following website www.modestogov.com/councilmeetings In accordance with the requirements of Title II of the Americans with Disabilities Act (“ADA”) of 1990, the Fair Employment & Housing Act (“FEHA”), the Rehabilitation Act of 1973 (as amended), Government Code section 11135 and other applicable codes, the City of Modesto (“City”) will not discriminate against individuals on the basis of disability in the City’s services, programs, or activities. For more information, please visit the City of Modesto website at https://www.modestogov.com/865/Americans-with-Disabilities-Act-ADA In compliance with the Americans with Disabilities Act, if you need special assistance to participate in this meeting, please contact the City Clerk (209) 577-5396. Notification 48 hours prior to the meeting will enable the City to make reasonable arrangements to ensure accessibility to this meeting
Any and all of the following agenda items are subject to action by the Modesto City Council.

NEW BUSINESS

1. Consider the FY Internal Audit Status Report dated July 2, 2024 (Funding Source: Not Applicable)
 Motion to receive and file the Internal Audit Status Report dated July 2, 2024.

CITY AUDITOR; Colleen Rozillis, 206-302-6795, [email protected]

2. Consider the Procurement Performance Audit Report and forwarding to Council for approval. (Funding Source: Not Applicable)
 Motion recommending the Procurement Performance Audit Report and forwarding to Council for approval.

CITY AUDITOR; Colleen Rozillis, 206-302-6795, [email protected]

3. Consider Reviewing and Providing Comment on the FY24-25 Internal Audit Work Plan and forwarding to Council for Review and Comment. (Funding Source: Not Applicable)
 Review and Provide Comment on the FY24-25 Internal Audit Work Plan and forwarding to Council for Review and Comment.

CITY AUDITOR; Colleen Rozillis, 206-302-6795, [email protected] - 3 -
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ADJOURNMENT
Posted pursuant to Government Code Section 54954.2 on the bulletin board at Tenth Street Place on at by
date time signature
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CITY OF MODESTO

COMMITTEE AGENDA REPORT
DATE OF MEETING:

July 9, 2024
Date: July 2, 2024
TO: Audit Committee
FROM: Colleen Rozillis, City Auditor
SUBJECT: Approval of the FY24-25 Internal Audit status report dated 7-2-24.

CONTACT: Colleen Rozillis, City Auditor, [email protected], 206-302-6795 DESCRIPTION:

Consider the FY Internal Audit Status Report dated July 2, 2024. (Funding Source: Not Applicable)
STRATEGIC PLAN ELEMENT:

The recommended action supports the following 2020-2025 City of Modesto Strategic Plan Initiatives: Goal J: Build a high-performance organization.

BACKGROUND:

City Council approved seven projects for this fiscal year’s Internal Audit work plan, plus program management. The attached report details the status of projects in progress.

DISCUSSION:

Internal Audit projects for FY23-24 are proceeding as planned. Four projects are complete, and three are underway.

FISCAL IMPACT:

None.

RECOMMENDED COMMITTEE ACTION:

Motion to receive and file the Internal Audit Status Report dated July 2, 2024.

Approved by:

Colleen Rozillis, City Auditor
Attachments:

1. Internal Audit Status Report dated 7-2-24
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CITY OF MODESTO INTERNAL AUDIT STATUS REPORT 07-02-24
July 2, 2024
To: City of Modesto Audit Committee
From: Moss Adams LLP
Subject: Internal Audit Status Report April 16 through July 2, 2024 _____

INTERNAL AUDIT

PROJECTS

FRAUD, WASTE, AND ABUSE POLICY

UPDATE AND TRAINING

FLEET OPERATIONS INTERNAL

CONTROL REVIEW

PROCUREMENT PERFORMANCE AUDIT SOLID WASTE AND FORESTRY

EFFICIENCY STUDY UPDATE

PROPERTY MANAGEMENT REVIEW
Schedule October 2023 through May 2024 February through August 2024 March through June 2024 March through July 2024 April through August 2024 Budget Status: Total
Budget and %
Expended
$20,000
73%
$40,000
23%
$50,000
62%
$25,000
53%
$35,000
12%
Activities for This
Period Delivered training.

Developed preliminary observations based off
intervewed. Requested sample
documentation to perform testing and
analysis.

Conducted analysis; developed draft and final
reports.

Conducted interviews, reviewed documents,
ran staff survey, conducted research, drafted
preliminary observations.

Conducted interviews and reviewed
documents, began analysis.

Activities for Next
Period None Conduct testing and analysis, develop draft and final reports.

None Complete analysis and develop draft and final
reports.

Develop preliminary observations, draft
report, and final report.

Issues None Schedule delays due to staff vacancies. None Minor schedule delays. None

BASIC INTERNAL

AUDITOR SERVICES

ONGOING INTERNAL AUDIT

SERVICES

ETHICS HOTLINE STATISTICS
Schedule October 2023 through June
2024 Complaint Type
Complaints Received During
the Period Under Review
Referred to Appropriate City
Official(s) Closed
Budget Status: Total
Budget and %
Expended
$30,000
82%
Compliance & Ethics 8 0 8 8
Fraud 0 0 0 0
Employment Matters 0 0 0 0
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CITY OF MODESTO

COMMITTEE AGENDA REPORT
DATE OF MEETING:

July 9, 2024
Date: July 2, 2024
TO: Audit Committee
FROM: Colleen Rozillis, City Auditor
SUBJECT: Approval of the Procurement Performance Audit report.

CONTACT: Colleen Rozillis, City Auditor, [email protected], 206-302-6795 DESCRIPTION:

Consider the Procurement Performance Audit Report and forwarding to Council for approval. (Funding Source: Not Applicable)
STRATEGIC PLAN ELEMENT:

The recommended action supports the following 2020-2025 City of Modesto Strategic Plan Initiatives: Goal J: Build a high-performance organization.

BACKGROUND:

City Council approved a performance audit of the City’s procurement function as part of the FY23- 24 Internal Audit work plan.

DISCUSSION:

The performance audit assessed procurement policies, procedures, and processes and evaluate opportunities to streamline and enhance efficiency. The audit was conducted under Generally Accepted Government Auditing Standards (GAGAS) between March and June 2024. The audit resulted in 7 findings in two categories: People; and Process and Systems.

FISCAL IMPACT:

None.

RECOMMENDED COMMITTEE ACTION:

Motion recommending the Procurement Performance Audit Report and forwarding to Council for approval.

Approved by:

Colleen Rozillis, City Auditor
Attachments:

1. Procurement Performance Audit Report dated 7-1-24

2. Procurement Performance Audit Presentation dated 7-2-24 #2..
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This report is intended for the internal use of the City of Modesto, and may not be provided to, used, or relied upon by any third parties.

CITY AUDITOR’S OFFICE

FINAL REPORT

PROCUREMENT PERFORMANCE AUDIT
July 2, 2024
Moss Adams LLP
999 Third Avenue, Suite 2800
Seattle, WA 98104
(206) 302-6500
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Procurement Performance Audit

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Table of Contents
Executive Summary 1
A. Introduction 1
B. Summary of Findings and Recommendations 1
Introduction 3
A. Background 3
B. Scope and Methodology 3
C. Statement of Compliance with GAGAS 4
Commendations 5
Findings and Recommendations 6
A. People 6
B. Processes and Systems 10
Appendix A: Peer Benchmarking 16
Appendix B: Implementation Plan 17
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EXECUTIVE SUMMARY
As part of the City of Modesto’s (the City’s) fiscal year 2024 internal audit program, Moss Adams LLP (Moss Adams) conducted a performance audit to review procurement policies, procedures, and processes and evaluate opportunities to streamline and enhance efficiency. We conducted this performance audit between March 2024 and June 2024 using a four-phased approach consisting of project planning and management, fact-finding, analysis, and reporting.

Findings and recommendations are grouped into two categories: (1) People and (2) Processes and Systems. Detailed findings and recommendations are provided in Section IV of this report. An implementation plan is included in Appendix B.

FINDINGS AND RECOMMENDATIONS
People

1. Finding High turnover in fiscal years 2022 and 2023 reduced Purchasing’s capacity, which impacted operations and services to other departments.

Recommendation
A. Continue to build team trust through collaboration and support.

B. Continuously monitor and assess staffing and workload needs to anticipate any potential issues and proactively address concerns.

C. Continually solicit feedback from staff to proactively anticipate and understand potential retention issues.

2. Finding
Despite appropriate staffing when compared to peers, some Purchasing staff reported high workloads and limited capacity. This is likely due to unbalanced workloads across buyers, recent turnover, and process and system inefficiencies.

Recommendation
In addition to implementing other recommendations throughout this report related to turnover and process efficiency, perform a workload analysis to support balancing workloads appropriately across Purchasing buyers.

Processes and Systems

3. Finding The City’s small purchase threshold is lower than peers, which may be inefficient. Additionally, staff reported approval processes can be cumbersome.

Recommendation
A. Consider whether adjustments to the small purchasing threshold are appropriate for the City to streamline its approval processes.

B. Review approval processes to determine if any can be streamlined such as by removing unnecessary approvals, clarifying unclear processes, or addressing system limitations.
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FINDINGS AND RECOMMENDATIONS

4. Finding
The Purchasing Procedures Manual is lengthy and difficult to navigate, which can reduce efficiency and effectiveness and increase the likelihood of noncompliance.

Recommendation
A. Update the Purchasing Procedures Manual to improve the navigability of the document.

B. Continue to develop additional resources such as checklists, stand-alone flowcharts, decision trees, or one-page quick reference guides to support departments involved with procurement processes.

5. Finding Expectations between Purchasing and departments are not always clear because Purchasing has not established clear service level standards.

Recommendation Establish service level standards to clarify expectations between Purchasing and other City departments.

6. Finding Some purchasing processes at the City are highly manual, time-consuming, and inefficient due to the City’s systems environment.

Recommendation
Ensure implementation of OpenGov is supported by an effective implementation, communication, and training plan to increase the likelihood of successful implementation and adoption.

7. Finding
Purchasing lacks comprehensive standard operating procedures (SOPs), which are important to promote staff knowledge, consistency, and accountability; and reduce risk.

Recommendation Develop comprehensive procurement SOPs to guide staff on procurement processes.
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INTRODUCTION
As part of the City’s fiscal year 2024 internal audit program, Moss Adams conducted a performance audit to review procurement policies, procedures, and processes and evaluate opportunities to streamline and enhance efficiency.

The City’s procurement processes are managed by the City’s Purchasing Division (Purchasing or the Division). Purchasing reports to the City’s Finance Department. Purchasing coordinates the procurement of goods and services for all departments and divisions within the City. This includes conducting various competitive procurement processes as required by the Modesto Municipal Code, managing contract compliance management, vendor relations, and City central stores functions.

Purchasing is overseen by a Purchasing Manager and includes two senior buyers, four buyers, two assistant buyers, one part-time assistant buyer, and one part-time clerk. The central store’s function includes a stores supervisor, two senior storekeepers, two storekeepers, and two part-time storekeeper staff.

This performance audit was conducted between March 2024 and June 2024. The performance audit examined procurement policies, procedures, and processes and evaluated opportunities to streamline and enhance efficiency. This project consisted of four phases that are detailed below.

PHASE DESCRIPTION
1 Project Initiation
and Management
This phase concentrated on comprehensive planning and project management, including identifying employees to interview and documents to review, communicating results, and providing regular updates on project status. 2 Fact-Finding This phase included interviews, document review, and peer benchmarking. ● Interviews: We conducted interviews with Purchasing staff and department directors. We also conducted 10 focus groups with staff from departments involved in procurement at the City. Overall, we spoke to 50 City employees.

The purpose of the interviews was to gain insights into the current operational environment, strengths, and opportunities for improvement related to procurement at the City.
● Document Review: We reviewed a variety of documents, data, and information provided by the City, including procurement policies and manuals, how-to documents, purchase order (PO) listings, job descriptions, departmental procurement authority matrices, key performance indicators (KPIs), procurement update and training materials, customer survey results, and forms and templates.
● Peer Benchmarking: We analyzed procurement information including staffing and purchasing approval thresholds for six cities who are considered peers to the City. The peer cities analyzed include the City of Bakersfield, City of Fresno, City of Riverside, City of Sacramento, City of San Bernardino, and City of Stockton.
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PHASE DESCRIPTION
3 Analysis Based on the information gained during our fact-finding phase, we conducted and consolidated research on relevant industry standards and best practices. Based on this research, we identified potential areas for improvement and developed practical recommendations.
4 Reporting We communicated the results of our analysis with findings and recommendations presented first in a draft report that was reviewed with management to confirm the practicality and relevance of recommendations before finalizing the report.

We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
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COMMENDATIONS
• Leadership: Many interviewees reported that Finance and Purchasing leadership is strong, noting that leadership effectively supports departments and promotes strong procurement standards and practices. This exemplifies a strong tone at the top, which is an important factor in an effective control environment.
• Updated Policies and Procedures: The City updated procurement provisions in the Modesto Municipal Code in November 2023 with a goal of streamlining procurement processes while also maintaining necessary safeguards and internal controls. These changes included increasing the approval authority of the City Manager to $100,000, allowing the City Manager to approve all emergency contracts, allowing bids to be accepted electronically, and clarifying some exemptions to formal bidding procedures. The Purchasing Policy and Purchasing Procedures Manual was also updated in November 2023 to align with the updated Modesto Municipal Code and clarify processes. Updating policies and procedures is a best practice to promote increased compliance and overall operational efficiency.
• Training and Documentation: It is helpful for centralized procurement functions to provide regular staff training to departments involved in procurement processes to build competency and promote consistency and compliance with procurement processes. Aligned with these best practices, Purchasing provides regular training and support to departments, including providing on-demand training through its online learning management system. Since 2018, Purchasing has also held monthly meetings with departments to provide procurement updates and training refreshers. Staff reported these monthly trainings and updates have been helpful. Procurement policies and procedures are also posted on the City’s intranet, which makes them easy for staff to access.
• Collaboration and Communication: Relationships between Purchasing and other departments are reportedly strong, and many interviewees reported collaboration and communication with Purchasing has improved in recent years.
• Procurement Card Controls: The Procurement Card Policy and Procedures Manual was updated in September 2023 and provides detailed information on the procurement card program, including procurement card controls, restrictions, and consequences of noncompliance with the policy. The manual also describes card responsibilities, how to use the card, and the reconciliation process. Departments reported the procurement card process is clear and understood by employees. Departments also reported a sense that any violation of procurement card rules would be noticed, suggesting a strong control environment in this area. • Technology Purchases: The City has acted to reduce risks related to technology purchases.

Technology purchases can create risks for any city. New technology may not be compatible with existing systems or software and may introduce security risks. Additionally, technology can be expensive, and costs need to be managed across departments to avoid duplication and manage costs. To address these risks, the City has implemented processes to ensure technology purchases are reviewed by the Information Technology Department (IT). According to the Purchasing Procedures Manual, all hardware, software, and telecommunication technology related support services require coordination through IT and approval by the Chief Information Officer. Additionally, purchases over a certain threshold are required to be reviewed by the Technology Steering and Alignment Committee (the specific threshold is not included in the Purchasing Procedures Manual but is included in the Committee’s charter). The Procurement Card Policies and Procedures Manual also provides guidance on what IT items can and cannot be purchased with a procurement card and when IT must be informed of IT purchases made using a procurement card.
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FINDINGS AND RECOMMENDATIONS
Findings and recommendations below are grouped into two categories:
• People
• Processes and Systems

1. Finding High turnover in fiscal years 2022 and 2023 reduced Purchasing’s capacity, which impacted operations and services to other departments.

Recommendation A. Continue to build team trust through collaboration and support.

B. Continuously monitor and assess staffing and workload needs to anticipate any potential issues and proactively address concerns.

C. Continually solicit feedback from staff to proactively anticipate and understand potential retention issues.

Purchasing experienced high turnover in fiscal years 2022 and 2023. While turnover improved in fiscal year 2024, elevated turnover levels in recent years have impacted Purchasing operations and services to other departments. Stakeholders generally reported that Purchasing is supportive and collaborative but is still rebuilding its team and internal competencies after recent turnover. This has reportedly delayed some processes due to the need for extra reviews within Purchasing as newer staff complete their probationary periods. This has also likely contributed to inconsistency in the level of service provided by Purchasing to departments and reports of Purchasing staff providing inconsistent answers about required processes. Staff in Purchasing noted similar challenges as new staff are brought up to speed on procurement policies and procedures, which can be particularly complex in the government environment.

Gallup recommends that organizations aim for a 10% annual turnover rate. In the past three fiscal years, the Purchasing team’s turnover rate has been an average of 24.6%. The following table details each year’s specific rate:

FISCAL YEAR TURNOVER RATE
2022 25%
2023 38%
2024 11%
High turnover rates can lead to lower quality of work, decreased morale, and lost productivity.

Organizations with high turnover often spend more time, money, and energy on recruitment, hiring, #2..
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onboarding, and training. Alternatively, when turnover is low, organizations benefit from employees who are experienced and familiar with the organization’s policies, procedures, and culture.

Staff reported that turnover within Purchasing has largely been the result of camaraderie challenges, interpersonal relationship difficulties, and high workloads within the Division. Within the last year, the Purchasing team promoted a new manager and several new buyers. Staff report these changes have benefited the existing team’s workload and culture. While the Purchasing team’s turnover rate decreased in fiscal year 2024, it is important that efforts to maintain appropriate levels of turnover continue. To continue to stabilize the department and maintain appropriate levels of turnover, Purchasing should:
• Continue building team trust through collaboration and support: Purchasing leadership should continue encouraging collaboration among team members by promoting a sense of shared ownership and accountability in the team’s success. Leadership should also continue to provide support through open communication and providing needed resources. Such efforts will support continued improvements in employee belonging and retention. • Continue assessing staffing needs and workloads: Continued staffing and workload monitoring can aid in anticipating when additional staffing is needed to handle workload needs (see also Workloads). This will help reduce the risks associated with capacity issues that previously led to burnout and retention issues on the team. • Continue soliciting feedback from staff to proactively anticipate and understand if there are potential retention issues: Feedback is an important tool in gaining insight into employee experiences and identifying potential retention issues. Feedback can be collected through a variety of methods, such as surveys, focus groups, and one-on-one meetings.

2. Finding Despite appropriate staffing when compared to peers, some Purchasing staff reported high workloads and limited capacity. This is likely due to unbalanced workloads across buyers, recent turnover, and process and system inefficiencies.

Recommendation In addition to implementing other recommendations throughout this report related to turnover and process efficiency, perform a workload analysis to support balancing workloads appropriately across Purchasing buyers.

In comparison to peers, the City’s Purchasing function appears appropriately staffed. The following table compares the City’s purchasing staff against peer city staffing. It is common for staffing to vary somewhat amongst organizations depending on factors such as purchasing volume, the complexity of purchases, and process efficiency.

City Population FY24 GF
Revenue
FY24 GF
Expenditures
FY24 Total
FTE
FY24 Total
Purchasing
FTE
Staffing
Ratio per
100 FTE
Modesto 218,069 $178,110,000 $184,300,000 1,370.5 10* 0.73 Bakersfield 410,647 403,852,000 403,852,000 1,997 3 0.15 #2..
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City Population FY24 GF
Revenue
FY24 GF
Expenditures
FY24 Total
FTE
FY24 Total
Purchasing
FTE
Staffing
Ratio per
100 FTE
Fresno 545,567 $485,017,000 $461,646,000 4,579 10 0.22
Riverside 320,764 $318,229,147 $311,113,181 2,628 8 0.30 Sacramento 528,001 $775,573,000 $767,061,000 5,075 8 0.16 San
Bernardino
220,328 $193,200,000 $191,900,000 756 4 0.53
Stockton 321,819 $305,323,776 $289,715,631 1,790 7 0.39 *For purposes of comparison, Modesto total purchasing FTE excludes storekeeper staff; Riverside total purchasing FTE excludes storekeeper staff; and Stockton total purchasing FTE excludes materials staff.

The City also added staff to its Purchasing team to accommodate increased purchasing demand in recent years. Purchasing demand has increased at the City since fiscal year (FY) 2022. This is partially due to the passing of a one-cent sales tax measure to fund general City services that passed in November 2022 (Measure H). In both FY23 and FY24, PO volume increased by about 10% each year. 1 The City added one full-time assistant buyer in FY24 and has proposed shifting its part-time assistant buyer to a full-time assistant buyer in FY25 to accommodate this increased demand.

FY22 FY23 FY24
Total PO’s per year 21,602 23,794 26,062
Percent Increase in Total PO’s
from the prior year
4% 10% 10%
Despite appropriate staffing, some Purchasing staff reported high workloads and limited capacity.

This is likely due to recent turnover (see also Turnover), process and system inefficiencies (as described in other findings throughout this report), and the need to balance workloads across buyers.

In addition to continuing efforts to address turnover and process efficiencies, the City should conduct a workload analysis to support better balancing of workloads across buyers. It is important for the City to address these challenges because elevated workloads can impact service levels, accuracy, employee morale, and overall process efficiency.

Workload Analysis
Each Purchasing Buyer is currently assigned to support a set of City departments. Staff within Purchasing and other City departments reported the current distribution of departments among Purchasing Buyers is not balanced. In particular, it was noted that Purchasing Buyers who support departments with the highest volume and more complex procurement needs, like police, fire, and 1 We analyzed purchase order volume as an indicator of overall purchasing workloads. While this metric is a general indicator of purchasing volume at the City, it does not fully account for the volume of Purchasing’s work, since this metric does not consider the difference in time different purchases can take. For instance, formal bids require more effort and time than smaller purchases.
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fleet, have much higher workloads than other buyers, which can make it difficult to support these departments timely. Purchasing leadership reported they know the distribution is not proportional, but they have not had time to do a workload analysis to determine the appropriate assignments given the focus on rebuilding the department and training new staff.

Purchasing should conduct a workload analysis to support balanced workloads across buyers. The purpose of a workload analysis is to assess the workload of individual buyers and the purchasing team as a whole to ensure the team is able to effectively manage its responsibilities. A workload analysis can help identify areas where workload is excessive or insufficient and can help inform staffing decisions and workload management.

The workload analysis should be conducted by management, with input from individual buyers.

Workload analyses typically include the following steps:
• Identifying roles and work activities: Management should identify the relevant roles to be analyzed. After determining relevant roles to be analyzed, management should collaborate with staff to create a comprehensive list of major activities, tasks, and responsibilities for each role.

This includes routine tasks such as processing POs or posting bids, special projects, and any additional responsibilities.
• Collecting data: Management should collect data on the workload of individual buyers over a set period (e.g., one or two months). This data may include, for instance, the number of POs processed, the number of formal bids and proposals processed, the number of supplies managed, and the time spent on administrative tasks. Staff should also track their time over the course of two to four weeks using a worksheet that lists each major activity. This will support a deeper understanding of time estimates for workload activities. It can also be helpful for staff to report the tasks they were unable to accomplish during the timeframe due to bandwidth constraints.
• Analyzing activities: Once tracked, the data can be aggregated to get a sense of overall workloads across the team, time associated with specific tasks or case types, and activity gaps. • Taking action: Once the analysis is complete, it should provide actionable data about areas of success, workload challenges, and staffing gaps.

Although performing a workload analysis as outlined above provides information about potential resource needs, it does not take the quality of work into consideration. As such, it should not be used as a stand-alone metric, but rather part of a wider conversation around staff capacity and team performance. The results of the workload analysis should be used to determine how to balance workloads across buyers, and department assignments should be adjusted accordingly.

Managing buyer workload is not a one-time activity. Purchasing should continuously monitor data on purchasing volume across buyers, such as the number and timeliness of POs processed and the number and timeliness of formal bids and proposals processed. Purchasing recently started tracking such data, and these efforts should be continued to support maintaining balanced workloads over time. Additionally, Purchasing should conduct a more detailed workload analysis, as described above, on a regular basis (e.g., every one or two years) to ensure buyer workload is regularly assessed and proactively managed.
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3. Finding The City’s small purchase threshold is lower than peers, which may be inefficient.

Additionally, staff reported purchasing approval processes can be cumbersome.

Recommendations A. Consider whether adjustments to the small purchasing threshold are appropriate for the City to streamline its approval processes.

B. Review approval processes to determine if any can be streamlined such as by removing unnecessary approvals, clarifying unclear processes, or addressing system limitations.

Staff reported approval processes are slow and cumbersome due to too many approvals being required for purchases and approval thresholds reportedly being too stringent. While strong controls are important to ensure the City’s resources are used effectively and that risks are managed appropriately, there may be opportunities to streamline processes while still maintaining an appropriate level of control.

Approval Thresholds
We compared the City’s approval thresholds to peer cities. Detailed results of the peer city comparison are included in Appendix A.

We found the City’s small purchase threshold is lower than its peers. Small purchases are purchases that can be purchased without informal bids (e.g., three written quotes). The City allows small purchases for purchases under $3,500. Three of the other cities reviewed (Bakersfield, Fresno, Sacramento) allow small purchases under $5,000 and three of the cities reviewed (Riverside, San Bernardino, and Stockton) allow small purchases under $10,000.

Thresholds should be set based on the City’s unique needs and may understandably vary from other cities. However, the City should consider whether threshold adjustments would be helpful to streamline its processes. Revising the small purchase threshold might also reduce the number of required bid waivers. Currently, the City requires three written quotes or a bid waiver form for purchases between $3,501 and $24,999. If the small purchase threshold was revised, these requirements would apply to a smaller subset of purchases.

When determining whether to make an adjustment to its small purchase threshold, the City should analyze recent purchases to understand the impact of the change (i.e., the average number and dollar amount of purchases such a change would impact). This can help the City evaluate risk. If the City revises its approval thresholds, it is especially important to maintain other controls to support an effective control environment, such as requiring purchase requisitions and approvals for all purchases, regularly auditing purchases for compliance with policy, and providing consistent and regular training on purchasing requirements.
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Approval Processes
Staff reported approval processes can be cumbersome. This includes but is not necessarily limited to processes for formal bid processes, change orders, and bid waivers. This may be due to too many approvals being required for purchases. For example, the City’s bid waiver form requires five approvals (or six if it is a technology purchase), including the Division Manager, Department Director, Chief Information Officer (if applicable), Buyer, Purchasing Manager, and Director of Finance. It may be unnecessary for three individuals within Purchasing to approve all bid waivers. The City’s reportedly cumbersome approval processes may also be due to inefficiencies, such as those due to system limitations (see also System Limitations), unclear processes, or a lack of automation. As a result, the purchasing process may be delayed, which can weaken relationships with vendors, impact morale, and ultimately impact public service.

The City should review its approval processes to determine if any can be streamlined. To do so, the City should analyze each of its approval processes to identify inefficiencies, such as unnecessary approvals, unclear processes, or system limitations. Based on this analysis, the City can identify and implement opportunities for improvement. Changes should be incorporated into purchasing documentation. Approval processes should also be monitored over time to ensure they are effective, such as through regular solicitation of feedback from departments involved in purchasing processes.

The City should analyze the risks in removing a position from the approval process when considering removal of an approval requirement. This will support the City in maintaining an effective control environment.

4. Finding The Purchasing Procedures Manual is lengthy and difficult to navigate, which can reduce efficiency and effectiveness and increase the likelihood of noncompliance.

Recommendations A. Update the Purchasing Procedures Manual to improve the navigability of the document.

B. Continue to develop resources such as checklists, stand-alone flowcharts, decision trees, or one-page quick reference guides to support departments involved with procurement processes.

The Purchasing Procedures Manual, which guides departments on procurement practices, is nearly 100 pages and can be difficult to navigate. While most local government purchasing policies and procedures are typically lengthy due to the complexity of government procurement and the number of applicable statues and rules, difficult to navigate manuals can impede staff’s ability to complete tasks correctly and in accordance with purchasing regulations.

Purchasing manuals are an important part of establishing effective internal controls to safeguard the City, but manuals must be understood to be effective. Purchasing should consider improving the navigability and usefulness of the Purchasing Procedures Manual by considering the following elements.
• Link to sections from the table of contents: This will allow for quicker routing to a particular section and will allow staff to quickly find the section they need. #2..
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• Link to relevant sections: Linking can provide quick and easy access to information that may be relevant to a particular topic but included in a different section. For example, linking bid waiver information located throughout the manual would be helpful. • Include visual aids such as diagrams, flowcharts, and tables: For instance, it would be helpful for the City to develop flowcharts for its informal and formal bid processes, rather than including this information in long bulleted lists. This will help users better understand complex processes. The City of Fresno’s Purchasing Manual has process flowcharts for different purchasing types like the RFP process. These diagrams help guide readers to understand the entire process, what decisions they need to make, and who is involved in the decisions. • Simplify the content: The City should review its manual to ensure it is easy for users to find what they need, understand what they read, and use the information they read to meet their needs. For instance, it is unclear to some departments when a bid waiver is required. Based on a review of the Purchasing Procedures Manual the language around when a bid waiver is required could be clarified. The Plain Language Action and Information Network of federal employees created plain language guidelines that can be helpful to support writing complex documents more simply.

Purchasing has created some supplementary resources to support departments in interpreting and understanding procurement policies and procedures, such as a step-by-step guide for requests for proposals for professional services. Purchasing should consider developing additional resources to support departments involved in procurement. This may include additional checklists, stand-alone flowcharts, or decision trees. Purchasing could also consider additional quick reference guides that summarize key information into a one-page document. These resources would give readers an immediate and comprehensive snapshot of a process or activity and enable readers to understand the process or activity quickly and easily.

5. Finding Expectations between Purchasing and departments are not always clear because Purchasing has not established clear service level standards.

Recommendation Establish service level standards to clarify expectations between Purchasing and other City departments.

Staff reported expectations between Purchasing and departments (e.g., around timeliness) are not always clear because Purchasing has not established clear service level standards. Typically, service level standards for procurement include metrics such as response time, approval time, order fulfillment time, and clarity on the performance metrics that will be used to measure the effectiveness and efficiency of purchasing activities. Service level standards help provide transparency related to the timeframes and processes customer departments can expect to experience. Without clear service level standards and expectations, services may be inconsistent and may not fully meet the needs of departments.

The City should establish service level standards to clarify expectations between Purchasing and other departments. Typically, establishing service level standards involves the following steps:
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• Identifying KPIs: Purchasing should identify the KPIs that will be used to measure performance.

Typically, public sector procurement performance metrics include metrics related to efficiency (including cycle time), effectiveness, and equity. Purchasing should prioritize timeliness metrics for the various stages of procurement, since timeliness was a common concern from departments in interviews. The Harvard Kennedy School Government Performance Lab developed a framework for procurement excellence that includes essential procurement performance metrics that Purchasing offices should track to improve their operations. These resources may be helpful for the City as it determines useful performance metrics. Purchasing should consider input from other departments when developing performance standards to promote alignment on expectations, support effective collaboration and communication, and ensure procurement activities are effectively supporting the needs of the City as a whole. • Defining performance targets: Once KPIs have been identified, Purchasing should define performance targets for each metric. Targets should be specific, measurable, achievable, relevant, and time-bound (SMART) and be based on the needs of Purchasing and the departments it serves.
• Communicating service level standards: Purchasing should communicate service level standards to departments through a formalized service level agreement (SLA) or other formal documentation that outlines performance targets and expectations. This promotes transparency and accountability.
• Monitoring performance: Purchasing should monitor its performance against its defined service level standards on an ongoing basis and continuously improve its processes and procedures based on the results. Additionally, Purchasing should report on results to departments on a regular basis to further support transparency and accountability.

6. Finding Some purchasing processes at the City are highly manual, time-consuming, and inefficient due to the City’s systems environment.

Recommendations Ensure implementation of OpenGov is supported by an effective implementation, communication, and training plan to increase the likelihood of successful implementation and adoption.

The City’s formal bidding and contracting processes are manual, time-consuming, and inefficient due to the City’s systems environment.
• Formal bidding: The City uses PlanetBids to support the formal bid process, but this system is used only to upload final bids and proposals. PlanetBids does not comprehensively support the City’s bid processes and is reportedly cumbersome for the City’s vendors to use. The City Council approved the replacement of PlanetBids with OpenGov in June 2024. • Contracting: The process for developing and approving contracts is also manual. The City does not have a system for processing contracts, so contract drafts are routed and revised through email, resulting in multiple versions and difficulty tracking approvals. Staff report the goal is for OpenGov to also support contracting processes.

Now that the City has selected a new bid system, effective system implementation is important. It is common for systems to be poorly implemented, which reduces the likelihood that a new system improves efficiency and effectiveness. The City should be sure to create a detailed implementation #2..
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plan that outlines tasks, milestones, timelines, and responsibilities to provide a roadmap for the implementation process and support sufficient resource allocation. The City should also develop a communication and training plan to support effective system implementation. It is best practice to assign a single point person internally to manage the rollout and keep track of activities, roles, and responsibilities to ensure they are fulfilled.

7. Finding Purchasing lacks comprehensive standard operating procedures (SOPs), which are important to promote staff knowledge, consistency, and accountability; and reduce risk.

Recommendation Develop comprehensive procurement SOPs to guide staff on procurement processes.

SOPs are a step-by-step set of instructions on how to complete a task or activity to guide team members to perform tasks in a consistent manner. While Purchasing has developed several internal how-to guides to clarify and provide guidance to Purchasing staff on detailed processes, Purchasing lacks comprehensive SOPs. Staff noted particular written procedure gaps related to formal bidding processes and cooperative agreements. Comprehensive SOPs are particularly important given that many Purchasing staff are new in their roles. Without clear SOPs, staff are more likely to approach procurement activities inconsistently, which was a concern noted by some departments. A lack of SOPs also increases the risk of error, which can impact efficiency; create rework, waste, or delays; and impact the City’s and Purchasing’s reputation.

To develop purchasing SOPs, Purchasing should consider the following steps:
• Develop a comprehensive framework that outlines the structure and content of the desired SOPs to make sure all areas are covered
• Conduct a gap analysis to identify where SOPs are incomplete or missing • Prioritize SOP needs based on those that will have the most impact and reduce the most risk • Assign responsibility for developing SOPs
• Develop new SOPs based on the framework, gap analysis, and prioritization efforts SOPs should be clear and concise. SOPs may include the following elements to enhance the readability and effectiveness of the document:
• Detailed checklists
• Process flowcharts
• Diagrams
• Forms, including information on how to fill them out
• Definitions
• Roles and responsibilities
• Examples
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• Links to other relevant procedures
SOPs, like the Purchasing Procedures Manual, should be reviewed and updated regularly. Due to the level of detail in SOPs, they may need to be updated more frequently, including when process changes occur. After SOPs are documented, they should be communicated to all Purchasing staff and easily accessible for all staff to reference as needed. #2..
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APPENDIX A: PEER BENCHMARKING
The following table compares the City’s approval thresholds to the City’s peers, including the City of Bakersfield, City of Fresno, City of Riverside, City of Sacramento, City of San Bernardino, and City of Stockton. Data was pulled from publicly available information, including public-facing websites and available policies and procedures.

Modesto Bakersfield Fresno Riverside Sacramento San Bernardino Stockton Population (2022) 218,069 410,647 545,567 320,764 528,001 220,328 321,819 FY24 General Fund Revenues $178,110,000 $403,852,000 $485,017,000 $318,229,147 $775,573,000 $193,200,000 $305,323,776 FY24 General Fund Expenditures $184,300,000 $403,852,000 $461,646,000 $311,113,181 $767,061,000 $191,900,000 $289,715,631 Small or Micro-Purchase Threshold (Direct
Purchase Permitted/No Bid Necessary)
$3,500 $5,000 Under $5,000 Under $10,000 $5,000 $10,000 $10,000 Informal Bid Threshold $3,501–$24,999 (requires
three written quotes or bid
waiver form)
$25,000–$100,000
(requires three written
quotes and invitation for
bid)
$5,001–$40,000 (requires
three written quotes
$5,000–$50,000 (requires
three written quotes)
$10,000–$50,000 (requires
three quotes)
$5,001–$25,000 (requires
three written quotes)
$25,000-$249,999 (requires
invitation for bid)
$10,001–$40,000 (requires
informal quotes)
$10,001–$100,000
(requires three written
quotes)
Formal Bid Threshold $100,001 $40,001 Over $50,000 Over $50,000 $250,000 Over $40,000 $100,001 #2..
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APPENDIX B: IMPLEMENTATION PLAN
Recommendations are listed in order of priority (critical, high, medium, or low). Consideration has been given to both the impact and urgency of each recommended activity. This implementation plan should be viewed as a living document that leadership will discuss, reorganize, and adjust to create a feasible timeline. All items, including those listed as low priority, will be important to execute eventually. Recommendations that are necessary to begin with are categorized as critical priority. The party listed under Primary Responsibility is the leader in coordinating activities to accomplish the line item. This party may or may not directly execute the work detailed but will be responsible for moving the work forward.

Rec. # Category Recommendation Priority Effort Level Primary Responsibility 2 Workloads In addition to implementing other recommendations throughout this report related to turnover and process efficiency, perform a workload analysis to support balancing workloads appropriately across Purchasing buyers.

Critical Medium Purchasing Manager
6 System Limitations Ensure implementation of OpenGov is supported by an effective implementation, communication, and training plan to increase the likelihood of successful implementation and adoption.

Critical Medium Director of Finance, Purchasing Manager, Chief Information Officer
5 Service Level Standards Establish service level standards to clarify expectations between Purchasing and other City departments. High Medium Director of Finance 1A Turnover Continue to build team trust through collaboration and support. High Medium Director of Finance, Purchasing Manager 3A Approval Processes Consider whether adjustments to the small purchasing threshold are appropriate for the City to streamline its approval processes.

Medium Low Director of Finance, Purchasing Manager
3B Approval Processes Review approval processes to determine if any can be streamlined such as by removing unnecessary approvals, clarifying unclear processes, or addressing system limitations.

Medium Medium Director of Finance, Purchasing Manager
4A Purchasing Manual Update the Purchasing Procedures Manual to improve the navigability of the document. Medium Medium Purchasing Manager 4B Purchasing Manual Continue to develop additional resources such as checklists, stand-alone flowcharts, decision trees, or one-page quick reference guides to support departments involved with procurement processes.

Medium Medium Purchasing Manager
7 Standard Operating Procedures Develop comprehensive procurement SOPs to guide staff on procurement processes. Medium High Purchasing Manager 1C Turnover Continually solicit feedback from staff to proactively anticipate and understand potential retention issues. Low Low Director of Finance, Purchasing Manager 1B Turnover Continuously monitor and assess staffing and workload needs to anticipate any potential issues and proactively address concerns.

Low Medium Director of Finance, Purchasing Manager
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PROCUREMENT

PERFORMANCE AUDIT
City Auditor’s Office
July 9, 2024
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Objectives and Scope
● The purpose of this performance audit was to examine procurement policies, procedures, and processes and evaluate opportunities to streamline and enhance efficiency
● This performance audit was conducted between March 2024 and June 2024
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Methodology
● Project Initiation: comprehensive planning and project management ● Fact Finding: interviews and focus groups with 50 City staff; comprehensive document review; and peer benchmarking
● Analysis: comparison of procurement practices to industry standards and best practices and identification of opportunities for improvement and practical recommendations
● Reporting: presentation of report in a draft format to confirm the practicality of recommendations with management before finalizing #2..
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Commendations
● Strong leadership
● Improved relationships between Purchasing and other departments ● Regular staff training and support
● Updated policies and procedures
● Easily accessible procurement documentation
● Clearly defined and detailed procurement card controls ● Technology purchasing controls to reduce risk
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Key Themes – People and Collaboration
● High turnover in recent years reduced Purchasing’s capacity, but turnover is improving
● Purchasing appears appropriately staffed compared to peers, but a workload analysis would be beneficial to support balanced workloads across Purchasing buyers
● Establishing service level standards would be helpful to clarify expectations between Purchasing and other City departments #2..
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Key Themes – Processes and Systems
● The City’s small purchase threshold is lower than peers, which may be inefficient
● There are opportunities to review the number of approvals required for purchases to improve process efficiency
● The City’s systems environment limits the efficiency of Purchasing’s processes, particularly formal bidding and contracting processes ● Some Purchasing documentation could be strengthened, including improving the navigability of the Purchasing Procedures Manual and developing comprehensive SOPs
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CITY OF MODESTO

COMMITTEE AGENDA REPORT
DATE OF MEETING:

July 9, 2024
Date: July 2, 2024
TO: Audit Committee
FROM: Colleen Rozillis, City Auditor
SUBJECT: Approval of the FY24-25 Internal Audit work plan.

CONTACT: Colleen Rozillis, City Auditor, [email protected], 206-302-6795 DESCRIPTION:

Consider Reviewing and Providing Comment on the FY24-25 Internal Audit Work Plan and forwarding to Council for Review and Comment. (Funding Source: Not Applicable) STRATEGIC PLAN ELEMENT:

The recommended action supports the following 2020-2025 City of Modesto Strategic Plan Initiatives: Goal J: Build a high-performance organization.

BACKGROUND:

Each year, the City Auditor develops a proposed work plan to address internal controls, compliance, risk, and performance. In accordance with section 902.1 of the Modesto City Charter, “At the beginning of each fiscal year, the Auditor shall submit a one (1) to five (5) year audit schedule to the Audit Committee and Council for review and comment. The schedule shall include the proposed plan, and the rationale for the selections, for auditing departments, offices, boards, activities, subcontractors, and agencies for the period. This schedule may be amended after review with the Audit Committee and Council, but the Auditor shall have final authority to select the audits planned.”
DISCUSSION:

This year’s work plan was informed by the 2024 Internal Controls Review, 2022 Enterprise Risk Assessment, and discussions with Council and management. The City Auditor proposes the following projects for FY24-25:
 Water and Wastewater Utilities Fiscal Review
 Capital Program Best Practices Assessment
 Payroll Process and Controls Review
 Accounts Receivable Internal Controls Review
 Prior Audit Update: Permitting
 Establish Recommendation Validation Process
 Ongoing Internal Audit Services
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Audit Committee, July 9, 2024
Internal Audit Work Plan

FISCAL IMPACT:

None.

RECOMMENDED COMMITTEE ACTION:

Review and Provide Comment on the FY24-25 Internal Audit Work Plan and forwarding to Council for Review and Comment.

Approved by:

Colleen Rozillis, City Auditor
Attachments:

1. Internal Audit work plan presentation, dated 7-2-24. #3..
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FY24-25 INTERNAL

AUDIT WORK PLAN
Audit Committee Meeting
July 9, 2024
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● The City retained Moss Adams to serve as the designated Internal Auditor and conduct projects focusing on:
○ Risks
○ Internal controls
○ Efficiency and effectiveness
○ Best practices
○ Compliance
● Work is being completed under appropriate industry standards (IIA,

GAGAS, AICPA)
Internal Audit Overview
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Holistic Internal Audit Program Approach
Tracking &
Reporting A Program Inputs B Opportunities C
• Enterprise
Assessments
• Employees and
Community
• Performance
Metrics
• Risks
• Controls
• Compliance
• Performance
• Findings &
Recommendations
• Fraud, Waste, and
Abuse Hotline
• Corrective Actions
• Implementation
• Validation
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Internal Audit Program Review
Department Project Department Project
Community & Economic
Development Information Technology
Engineering Services Parks, Recreation, and
Neighborhoods
Finance Procurement (24) Police
Fire Public Works Fleet Controls (24), Solid
Waste & Forestry (24)
Human Resources Utilities
Citywide Projects Internal Controls Review (24), FWA Policy & Training (24), Property Management (24) #3..
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Internal Audit Program Review
5 Focus Accomplishments
Enterprise Risk Assessments 2022
Enterprise Internal Controls Review 2024
Functional Internal Controls Reviews 1
Functional Internal Controls Testing To come
Performance Projects 2
Recommendations Tracked & Validated Implemented To come Ethics Hotline Statistics Over 170 reports since 2016
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Performance projects:

1. Water and wastewater utilities fiscal review

2. Capital program best practices assessment

3. Prior audit update: Permitting

4. Prior audit update: Internal service funds
Program management:

1. Establish recommendation validation
process

2. Ongoing internal audit program
management
Internal controls and compliance projects:

1. Payroll process and controls review

2. Accounts receivable internal controls
review

3. Cash management internal controls review

4. Grant compliance assessment
Potential FY24-25 Internal Audit Projects
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1. Water and wastewater utilities fiscal review: Conduct a comprehensive review of the fiscal management of the City’s water and wastewater utilities, including sources and uses of funds, rate setting, other fees and charges, billing, and policies and procedures. Identify opportunities for improvement in sustainability, effectiveness, equity, and transparency.

2. Capital program best practices assessment: Assess the current state and identify opportunities for improving the effectiveness of the City’s capital planning and management activities, including project identification, budgeting, planning, execution, and closeout.

3. Prior audit update: Permitting: Assess the efficiency, effectiveness, and customer service within the City’s permitting functions. Review progress toward implementation of 2018 Permitting Efficiency Study recommendations.

4. Payroll process and controls review: Document and review internal controls, systems, policies, and procedures related to the City’s payroll process.

5. Accounts receivable internal controls review: Assess processes and conduct targeted testing of internal controls related to the City’s AR function.

6. Establish recommendation validation process: Inventory prior internal and external audit recommendations, collaborate with City staff to develop a tracking mechanism and process to report and validate recommendation implementation.

7. Ongoing internal audit program management: City Auditor activities including overseeing the internal audit program and managing the fraud, waste, and abuse hotline.

Recommended FY24-25 Internal Audit Program
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Recommended Internal Audit Program
Project Budget 7-9/24 10-12/24 1-3/25 4-6/25
Water and Wastewater Utilities Fiscal Review $55,000
Payroll Process and Controls Review $40,000
Capital Program Best Practices Assessment $35,000
Accounts Receivable Internal Controls Review $35,000
Prior Audit Update: Permitting $40,000
Establish Recommendation Validation Process $15,000
Ongoing Internal Audit Services $30,000
Total $250,000
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