Finance & Management Committee
July 9, 2024
AGENDA REPORT
TO: Jestin D. Johnson FROM: Erin Roseman
City Administrator Finance Director
SUBJECT: Prompt Payment Penalties DATE: June 10, 2024
City Administrator Approval Date:
RECOMMENDATION
Staff Recommends That The City Council Receive An Informational Report On Prompt Payment Interest Penalties Paid To City Vendors And Grantees Pursuant To The Prompt Payment Ordinance.
EXECUTIVE SUMMARY
This report was prepared in response to a request from the Finance & Management Committee on May 14, 2024. The City is required under Chapter 2.06 of the Oakland Municipal Code (Prompt Payment) to compensate local vendors and grantees who do not receive payment, for undisputed invoices, within 20 business days of receipt by the City. The calculation of the penalties is performed in the City’s financial system at the time the payment is issued.
BACKGROUND / LEGISLATIVE HISTORY
Council Ordinance No. 12857 C.M.S. was established on January 15, 2008, and codified as Chapter 2.06 of the Oakland Municipal Code (OMC). The purpose of the Prompt Payment Ordinance is to establish policies and procedures to assure that local vendors receive prompt payment and to increase local business contracting opportunities with the City of Oakland.
On November 19, 2014, Council Ordinance 13269 C.M.S. amended OMC Chapter 2.06 to expand eligibility for this program to local grant recipients.
ANALYSIS AND POLICY ALTERNATIVES
OMC 2.06 establishes an interest penalty on valid invoices that remain unpaid for more than 20 business days, which is equivalent to a 30 calendar day month in the Oracle Financial System.
The penalty is calculated at an interest rate of 10% annually and paid monthly. Thus, the interest compounds at each 30-day period. Interest calculation is automated and is applied to invoices from Oakland vendors and grantees when payments on valid invoices have not been completed within 30 calendar days.
Jestin Johnson (Jun 27, 2024 21:09 PDT)
Jun 27, 2024
Jestin D. Johnson, City Administrator
Subject: Prompt Payment Penalties
Date: June 10, 2024 Page 2
Finance & Management Committee
July 9, 2024
Payment of prompt payment penalty interest is a relatively rare occurrence. As shown in Table 1, approximately one-half of one percent (0.5%) of all payments made by the City over the past five years included prompt payment interest.
Table 1: Five-Year History of Prompt Payment Penalties
Fiscal Year
Total 2020 2021* 2022 2023 2024
year-to-date
Number of interest
payments 88 1 167 344 127 727
Total number of
payments 32,319 27,993 27,712 27,543 24,778 140,345
Payments with
interest penalties 0.3% 0.0% 0.6% 1.2% 0.5% 0.5%
*Prompt payment was suspended during COVID emergency.
The failure to pay invoices on a timely basis can stem from many reasons but is most typically a result of staffing challenges or inefficient approval processes. Many operating departments continue to experience high vacancy rates, particularly for fiscal staff, resulting in higher workloads. Once valid invoices are submitted for payment to the Accounts Payable Unit of the Finance Department, they are typically paid within one week.
The presentation of this report supports the Citywide priority of responsive, trustworthy government. It provides information on all prompt payment penalties made over the past five years and provides assurance to policymakers and the members of the public that these payments are compliant with the OMC 2.06.
FISCAL IMPACT
As shown in Table 2, the financial impact of prompt payment penalties, while substantial, is small relative to total City payments of nearly $350 million over a five-year period.
Jestin D. Johnson, City Administrator
Subject: Prompt Payment Penalties
Date: June 10, 2024 Page 3
Finance & Management Committee
July 9, 2024
Table 2: Five-Year Financial Impacts of Prompt Payment Penalties Fiscal Year
Total
2020 2021* 2022 2023
2024
year-to-
date
Interest
payments $10,839 $1 $56,804 $111,323 $33,811 $212,778
Total
payments $70,963,230 $77,519,723 $85,385,347 $93,135,971 $21,540,037 $348,544,308 Payments
with
interest
penalties
(%)
0.02%
0.00%
0.06%
0.12%
0.16%
0.1%
Average
interest
payment
$123.17
$1.42
$340.14
$323.61
$266.23
$292.68
*Prompt payment suspended during COVID emergency
Expenses for prompt payment penalties represented approximately one-tenth of one percent (0.1%) of all payment expenses over this period. The average prompt payment penalty was just under $300.
Most City departments were responsible for less than $10,000 in prompt payment interest over this five-year period. Departments with total interest payments in excess of this threshold are presented in Table 3 and tended to be the departments with substantial overall payment activity. A five-year history of prompt payment penalties for all departments and vendors is included as Attachment A.
Table 3: Five-Year Financial Impacts of Prompt Payment Penalties by Major Department Fiscal Year
Total
2020 2021* 2022 2023 2024
year-to-date
Human Services
Department $2,753
$35,162 $41,035 $9,650 $91,964
Planning and Building
Department $168
$12,050 $26,449 $517 $39,332
Economic and
Workforce
Development
Department
$2,936
$14,561
$10,193
$27,739
Capital Improvement
Projects $3,071
$324 $2,775 $5,096 $14,423
Oakland Public Works
Department $1,135
$743 $5,026 $2,357 $10,158
*Prompt payment suspended during COVID emergency
Jestin D. Johnson, City Administrator
Subject: Prompt Payment Penalties
Date: June 10, 2024 Page 4
Finance & Management Committee
July 9, 2024
PUBLIC OUTREACH / INTEREST
No outreach was deemed necessary for the proposed policy action beyond the standard City Council agenda noticing procedures because this report is for informational purposes only.
COORDINATION
This report was prepared by the Controller’s Bureau.
SUSTAINABLE OPPORTUNITIES
Economic: There are no direct economic issues associated with this informational report.
Environmental: There are no direct environmental opportunities associated with this informational report.
Race & Equity: This report supports the City’s equity goals through documentation of payments made to local Oakland vendors and grantees that provide services to the City. OMC 2.06 seeks to assure that local Oakland vendors and grantees are paid promptly and establishes a mechanism for their additional compensation when this does not occur. This report documents the payment of such additional compensation.
Jestin D. Johnson, City Administrator
Subject: Prompt Payment Penalties
Date: June 10, 2024 Page 5
Finance & Management Committee
July 9, 2024
Erin Roseman (Jun 26, 2024 09:22 PDT)
ACTION REQUESTED OF THE CITY COUNCIL
Staff Recommends That The City Council Receive An Informational Report On Prompt Payment Interest Penalties Paid To City Vendors And Grantees Pursuant To The Prompt Payment Ordinance.
For questions regarding this report, please contact STEPHEN WALSH, CONTROLLER, at 510- 238-4906.
Respectfully submitted,
ERIN ROSEMAN
Finance Director
Finance Department
Prepared by:
Stephen Walsh
Controller
Controller’s Bureau
Attachments (1):
Attachment A: Five-Year History of Prompt Payment Penalties by Department and Vendor