Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
74 Conduct a Utility Billing Audit
Strategy Type
Service Delivery Change
Impact Estimate
Savings from utility billing audits vary widely based upon the types of utility bills analyzed, the size and complexity of the audit client, and geography. Documented savings of 2% are not uncommon. However, since Sacramento conducted a utility billing audit in 2012, we assume the savings from a follow-up audit would be 1%.
According to the City’s FY 2019-20 Proposed Budget, the Storm Drainage Fund is expected to receive $37,754,000 in charges, fees, and services. The Wastewater Fund is expected to receive $43,019,000, and the Water Fund is expected to receive $139,191,000. The combined total expected revenue from these three funds is $219,964,000. If the City were to realize a 1% increase in revenues as a result of the audit, the increase in revenues would be approximately $2.2 million.
Auditing invoices the City receives for its utilities is another method of ensuring accurate billing and guarding against overpayment. Our experience is that such audits are also conducted by third-party firms and they often result in savings that more than cover the cost of the audit itself. While we believe this would be financially worthwhile given the City’s efforts to reduce costs, it is not possible to estimate the potential savings.
Achievability
Utility bill auditing is a relatively mature and competitive industry. There are several national and regional experts from which clients can choose and the use of competitive RFPs is common. In addition, clients can often structure transactions so that the audit costs are paid out of any future savings. This practice helps to mitigate the risk that the City would have up-front costs it would not be able to recoup. We believe this strategy is highly achievable.
Background/Analysis
Audits are common tools for monitoring water, wastewater, and electricity use and costs. Sacramento has a unified billing system that includes water, wastewater, and solid waste utilities. The City is in the process of installing water meters for all customers. When this program is complete, enhanced billing policies can be considered, such as tiered Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
75 water rates (where high water users pay more for excess water use) and metered sewer charges (based on winter water use).
About two-thirds of the wastewater collection system in Sacramento is managed by the City. (The other third is managed by the Sacramento Area Sewer District [SASD].) Wastewater is transmitted to the Sacramento Regional Wastewater Treatment Plant, operated by Sacramento Regional County Sanitation District (Regional San). In 2010, Regional San engaged KPMG to conduct a review of the City of Sacramento sewer use charges and sewer impact fees. (Regional San conducts these “reviews” from time to time for their contributing agencies.) The review concluded there was a need for process improvement. KPMG noted a significant number of times where the sewer impact fees were not being assessed correctly and where sewer user charges were being billed incorrectly. They made seven recommendations to improve policies and procedures, internal controls, documentation and recordkeeping, and coordination with SASD.
The outcome of this report illustrated the usefulness of billing system audits as well the specific need related to the City of Sacramento.
Regional San issued an RFP for a new audit of the City of Sacramento in 2015. The results of this audit are unavailable at this time.
A related strategy Management Partners considered is to combine the existing utility bills with a non-City utility such as PG&E or SASD. We have concluded this does not merit further consideration because the geographic areas for both PG&E and SASD are vastly different from the City boundaries, and the billing systems are specifically designed for each service.
We understand that the Department of Utilities has conducted past utility billing audits – most recently in 2012. An update to the last audit would provide an opportunity to ensure its recommendations were implemented. Further, we believe an updated audit would allow the City to examine a broader sample of residential accounts, since the prior audit of 100,000 customers was based on a review of only about 25 accounts.
Further, periodic audits (every five to ten years) are a best practice and help to ensure accurate billing and revenue capture. This is especially important given Sacramento’s complex billing system.
Develop a process to continually
review utility billing to reduce errors, maximize
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
76 collections, and improve data quality and accuracy of utility billing.
Another utility auditing approach relates to analyzing the invoices received by the City of Sacramento for the various utility services it receives, e.g., electricity, telecommunications, gas. This is a best practice because these utility invoices often contain errors. For instance, Engie Impact, one consultant that provides such audits, estimates that 17% of all utility invoices contain errors.
The consulting team’s experience is that such utility invoice audits typically pay for themselves and can sometimes be structured in ways that the third-party audit company’s fees are paid directly from the savings.
Conduct a third-party audit of
utility invoices received by the City.
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
77 Implement an Energy Savings Performance Contract
Strategy Type
Service Delivery Change
Impact Estimate
Our research and experience indicate that energy savings performance contracts (ESPCs) typically save cities about 10% in energy costs. Based upon budgeted figures provided by the City of Sacramento, an ESPC could save approximately $1.8 million in the current fiscal year, or about $10.4 million over the next five years. Total utility costs for all City departments are budgeted at $18.2 million for FY 2019-20 and have grown about 2.4% per year since FY 2015-16. Utility costs include electric, gas, and water utilities, all of which could be addressed by an ESPC.
Achievability
Although staff reported having a poor experience with an energy service company (ESCO) concept in the past and expressed concerns about the lack of capital to make the necessary infrastructure investments, we believe implementing an ESPC is highly achievable.
Background/Analysis
An ESPC is a partnership between an agency and an ESCO. Typically, the ESCO conducts a comprehensive energy audit for the agency’s facilities and identifies operating and capital improvements to save energy. In consultation with the agency, the ESCO designs and constructs a proposed project that meets the agency's energy conservation needs and arranges the necessary financing. The ESCO guarantees that the proposed improvements will generate sufficient cost savings to pay for the project over the term of the contract. After the contract ends, all additional energy cost savings accrue to the agency. The savings are typically guaranteed, and agencies often enter into multiyear contracts. Also, we understand that the City Auditor’s Office is currently conducting an audit of the City’s various “green” efforts.
Case Studies
Many public agencies deploy ESPCs and experience financial as well as sustainability gains. About 10 years ago, in response to a spike in annual utility costs, the City of Charlottesville, Virginia used an ESPC to reduce energy consumption and costs. The City evaluated 1,478,499 square feet of its municipal buildings and schools. Through the ESPC, the City developed a plan to upgrade lighting, transition to a solar water heating Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
78 system and implement water conservation measures. As a result, Charlottesville invested about $1.8 million in the plan improvements and reduced its greenhouse gas emissions by 1,996 tons. These upgrades generated an annual energy savings of 10%.
The United States Government Services Administration conducted an analysis in 2014 of 10 energy savings projects to determine if the agency achieved its goal to reduce energy use intensity by 30%. The study found that the ESPC projects (with contract terms from 12 to 23 years) reduced... “… energy consumption by 365 billion Btu per year, resulting in a first- year guaranteed cost savings of $10.8 million, which will be used to pay back the investment over time. A key result from the project was the average 38.2% proposed energy savings…2
Energy Efficiency Efforts in Sacramento
The City developed a Climate Action Plan (CAP) for Internal Operations in 2016 and has incorporated the comprehensive CAP into the 2035 General Plan. The CAP targets an energy reduction goal of 25% by 2035 (with the baseline of 2005). So far, Sacramento has implemented a number of energy efficiency retrofits including:
• Convention Center lighting project;
• Hart Senior Center and Panatoni heating/ventilation/air conditioning system (HVAC) replacements;
• Kinney Police Station light-emitting diode (LED) retrofits, • Citywide LED traffic signal retrofit;
• Streetlight LED retrofitting (currently underway and planned for completion in 2020); and
• Swimming pool variable frequency drives.
To complete this work, the City is also partnering with the Sacramento Municipal Utility District (SMUD).
The City also has adopted a Green Building Policy for construction of new municipal buildings. As part of the Green Building Policy, Sacramento implemented an Energy Services Contract with Solar City.
2 “Energy Savings from GSA’s National Deep Energy Retrofit Program” by John Shonder. Oak Ridge National Laboratory, page 2. September 2014.
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
79 The contract was a power purchase agreement to provide photovoltaics (PV) solar systems at four City facilities.
While we understand the City’s previous poor experience with one contractor, we encourage the City to continue efforts to implement energy efficiency projects, especially when they can be completely funded from energy savings. In addition, approaching the effort comprehensively will connect all of the City’s existing policies (i.e., Green Building Policy, General Plan, Climate Action Plan, etc.) and ensure that all potential energy efficiency opportunities are identified. After a Citywide ESPC energy audit has been completed, Sacramento can evaluate the costs and benefits of the various energy efficiency projects identified across the organization and make informed strategic decisions about prioritization.
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
80 Implement a Business Operations Tax Amnesty Program
and Explore Additional Compliance Opportunities
Strategy Type
Service Delivery Change
Impact Estimate
Subject to state and local laws, well-marketed tax amnesty programs can be an effective tool to capture delinquent payments and increase ongoing revenue collections. An amnesty program associated with the business operations tax represents a significant opportunity that can be replicated for other revenue sources based on initial results. Additional collections enhancements include conducting targeted revenue audits or implementing third-party collections strategies.
The City of San Jose has conducted successful business tax amnesty programs, most recently in 2006 and 2012, and has just established a new program in 2019. Their efforts generated $1.3 million in 2006 and approximately $2 million in 2012. Although San Jose’s tax structure is different (Sacramento’s tax is based on gross receipts, while San Jose’s business tax is largely based on the number of employees a business has), the revenue generation estimates can be scaled because all jurisdictions have substantial numbers of non-compliant businesses or businesses that under-report payments owed.
Based on Sacramento’s current business tax revenue level of $7.3 million, and applying San Jose’s 2012 collection rate, a successful business operations amnesty tax program could potentially generate a range of $650,000 to $1.3 million in one-time revenue.
Achievability
The City will need to navigate its internal rules and practices with respect to adopting tax amnesty programs. Implementing this strategy is highly achievable.
Background/Analysis
A comprehensive revenue maximization strategy is not only a best financial practice, it is a necessary component in addressing structural budget imbalances. Comprehensive strategies most often consist of targeted and ongoing revenue audits, continuous billing/collection improvements, full cost recovery of fees and periodic amnesty programs.
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81 Currently, the City contracts with a provider to conduct Business Operations Tax compliance reviews that include an outreach component.
This effort can be augmented by the recommendations in this strategy to ensure that revenue generation is maximized. An amnesty program will be especially important if efforts are successful to modernize the tax.
Tax amnesty programs generally provide an opportunity for a specific group of taxpayers (those who have not paid the taxes required) to pay back a certain amount owed, usually in a lump sum. Amnesty programs typically include a waiver of interest and penalty payments if the violators come forward during the program period. (For California the statutory limit for collection of back taxes is three years, plus the current year).
The opportunity exists for Sacramento to implement an amnesty program for the Business Operations Tax. A successful model to consider is the program adopted by the City of San Jose. The main components of the San Jose program include:
• A reciprocal agreement with the Franchise Tax Board (FTB) to share taxpayer data for developing contacts (also used for ongoing tax auditing purposes);
• Direct outreach to the business community;
• Waiver of all interest and penalties during the amnesty period; and
• A reduced payment amount for sole proprietors (estimated to comprise 50% of general business in the City).
The 2006 San Jose amnesty program generated $1.3 million in one-time revenue, while the 2012 program generated approximately $2 million in one-time revenue. (San Jose’s general business tax was up $2.6 million in FY 2012-13, but some of the increase can be attributable to an improving economy.) It is important to note that amnesty programs, as well as targeted tax audits, also generate ongoing revenue as newly compliant businesses continue to pay the annual tax.
A tax amnesty program similar in nature to that of San Jose could potentially generate more than $1 million in one-time revenue and result in a modestly higher level of ongoing revenue.
Another option for capturing past due payments is to increase the use of an outsourced, third-party collections strategy for taxes and/or fees.
Collections work is typically utilized for high-volume and highly repetitive collections. Economies of scale are important both to keep costs Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
82 low and to capture a high level of collections. We recommend that the City explore using a comprehensive, third-party collections agency for all its outstanding fines and fees. The collections industry is generally highly efficient, and a well-managed procurement process could yield meaningful results.
In our experience, most firms providing this service work on a contingency basis where the third-party partner pays itself out of incremental collections. For targeted tax revenue auditing (which typically occurs on a one-time basis), however, it is recommended that fixed fee arrangements be pursued rather than contingent fees. A targeted procurement process could be utilized to solicit proposals for revenue audit work.
Implement a business operations
tax amnesty program and explore additional tax/fee
compliance opportunities based on results.
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
83 Update Pavement Cut Fees
Strategy Type
Service Delivery Change
Impact Estimate
Sacramento has the authority to adjust the pavement cut fee based on an analysis of all costs occasioned by such excavations. Our analysis shows that implementing a fee adjustment similar to one recently taken in Los Angeles could generate from $1.7 to $2.4 million in additional annual revenue which could be used for certain capital facilities and maintenance.
Achievability
One of a city’s most valuable assets is its streets and the associated rights- of-way. Utilities use these rights-of-way and often need to make pavement cuts to install or maintain their assets. Many cities have not discovered that the full cost of the damage incurred from a pavement cut is larger than calculated. Consequently, they do not charge as much as necessary to fully recover the costs for such cuts. The result is a deterioration in pavement condition which becomes a responsibility of the City. Shifting this (or any) burden to the City, when it should be funded by private entities, magnifies the challenges of finding sufficient funding for other capital improvements and infrastructure maintenance.
Los Angeles recently adopted a fee revision that will increase revenues from pavement cut fees by nearly ten-fold (up to $70 million annually).
Adjusting the pavement cut fee is highly achievable.
Background/Analysis
Sacramento requires the execution of an encroachment permit to make a pavement cut. The fee for this encroachment is established by the Sacramento City Code as “not to exceed an amount reasonably necessary to recover the estimated costs of all future maintenance, repair, or resurfacing that would be necessary to fully mitigate the damage and degradation caused by the excavation.” The fee decreases with the age of the street surface and is established by resolution of the City Council.
Sacramento’s current per-linear-foot pavement cutting fees are shown in Table 11.
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
84 Table 11. Sacramento Excavation Cost Recovery Fees Per Linear Foot, by Age of Street Surface Surface Age Transverse Cut Linear Cut
Less than Five Years $7.00 per foot $3.50 per foot
5 to 10 Years $6.00 per foot $3.00 per foot
10 to 15 Years $4.00 per foot $2.00 per foot
Over 15 Years $2.00 per foot $1.00 per foot
Source: City of Sacramento Fees and Charges Database
In 2017, the City of Los Angeles conducted a Street Damage Restoration Fees Study to establish the impacts of pavement cuts on City roadways and determine appropriate cost recovery fees for street maintenance and repair. Los Angeles’ Street Damage Restoration Fees were established in 1996. As a result of the study, Los Angeles revised its Street Damage Restoration Fees (SDRF) for the first time in 2018. Prior to the fee revision, Los Angeles’s charges were based on the square footage of the trench, street classification, and age of surface. The new structure simplifies fees into two categories: Local Streets at $8.24 per square foot and Select Streets at $19.44. Select Streets are those that carry greater traffic loads.
These changes increased revenues from street cut recovery fees from $8.3 million in FY 2017-18 to an estimated $70.7 million for FY 2018-19. A summary of Los Angeles’ pre-and-post-revision Street Damage Restoration Fees is provided in Table 12 below.
Table 12. City of Los Angeles Street Damage Recovery Fees, Original and Revised SDRF Version Local Streets per Square Foot (SF) Select Streets (per SF) Original $5.18 to $7.78 $14.18 to $21.26
Revised $8.24 $19.44
Source: City of Los Angeles Municipal Code, Section 62.06 Based on the range of potential fees received by Sacramento, as detailed in Table 13, we estimate that the City issues permits for approximately 86,000 linear feet of excavations per year.
Table 13. Estimate of Linear Feet of Excavations, per FY 2019-20 Budgeted Revenue Range Fee FY 2019-20 Budgeted Revenue Revenue/Fee = Linear Feet Lowest Excavation Fee per Linear Foot $1.00 $150,000 150,000 Highest Excavation Fee per Linear Foot $7.00 $150,000 21,429 Midpoint of High and Low Linear Feet Range (Average Linear Feet) 85,715 The City currently charges for excavations based on linear feet, without considering the width of the excavation. For example, the fee for a 12-foot long transverse cut would be $84.00 plus base encroachment fees, Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
85 regardless of whether the trench is six inches wide or five feet wide.
However, a six square foot trench (12’ x 0.5’) causes less damage to the road surface than a 60 square-foot trench (12’ x 5’). A revision to the Excavation Cost Recovery Fee should therefore be based on square feet, which would more accurately reflect the impact on road surfaces.
The average linear feet for excavations calculated in Table 13 above represents our best estimate for linear feet of cuts to City road surfaces performed in one year. To approximate the number of square feet represented by the same level of annual excavations, we assumed a typical trench width of three feet, or approximately 254,144 square feet of excavations per year. This forms a basis for comparing possible fee revision scenarios, using the same assumptions regarding fee calculation and the area of road surface being excavated. We believe that cost recovery fees should be more aligned with the lifecycle needs of the asset than the depreciated value of the asset. Therefore, it may not make cost recovery sense for fees associated with trenching in older streets to be at lower rates.
Our estimates for potential revenues under a revised fee system are shown in Table 14, below. The first fee scenario charges all pavement cuts at the current rate for surfaces that are less than five years old. The second scenario increases the current top rate by 5.9%, the same approximate adjustment applied to the top Local Streets fee by the City of Los Angeles.
The third scenario is a $10 per square foot flat fee, accounting for differences in repair costs for low-capacity and high-capacity street surfaces. These scenarios provide a range of between $1.7 and $2.4 million in potential new revenues.
Table 14. Potential Revenue from Revised Pavement Cut Fees Fee Scenario
Excavation fee
per SF
Annual
SF
Estimated Total
Revenue
Potential New
Revenue
Scenario 1: Based on current top rate $7.00 257,144 $1,800,005 $1,650,005 Scenario 2: Based on Los Angeles increase
of 5.9% $7.41 257,144 $1,906,432 $1,756,432
Scenario 3: Cost recovery for low and high
capacity streets $10.00 257,144 $2,571,435 $2,421,435 Sacramento may benefit from a street damage restoration and recovery study like the one performed in Los Angeles to determine if the current pavement cut fee is adequate to recover the full costs related to the pavement damage. Developing an estimate of potential new revenues from a revised Excavation Cost Recovery Fee would require an in-depth study of the fees charged at each existing age bracket for both Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
86 longitudinal and transverse cuts, as well as an audit of the impact of excavations on the City’s street surfaces. If warranted by the study findings, the City should consider proposing a fee revision to the City Council.
Conduct a street damage
restoration and recovery study to ensure that the
excavation cost recovery fee captures all related
pavement life cycle costs.
Furthermore, the City may also consider establishing a moratorium on street cuts for a specified period following a pavement resurfacing project. Five years is the most common moratorium period among jurisdictions that have enacted this policy. The impacts of cutting an asphalt street are highly variable based on circumstances but, as part of its 2017 Street Damage Restoration Study, the City of Los Angeles estimated up to a 66% decrease in functional life.3 This reduction in useful life and asset value is especially harmful in the case of new streets, which have otherwise not experienced significant depreciation. The study also found that street surfaces that had experienced trench cutting had PCIs that were, on average, 11 to 15 points lower than non-cut surfaces.
Establish a moratorium of five
years on pavement cuts following new street
construction or major resurfacing projects.
The City has an internal coordination team, the Advanced Planning and Asset Management Group, that meets to help coordinate on construction and maintenance. The plan is for the Group to expand its collaboration to include non-City utilities, such as PG&E, SMUD, Verizon, and various 5G partners. The Group currently relies primarily on meetings, phone calls and emails to coordinate activities. Unfortunately, meetings, phone calls, e-mails, and trading spreadsheets are time consuming and are not as efficient as web and map-based right-of-way management tools.
Time-management research estimates that use of email for coordinating professional work may contribute to a productivity loss of 63 minutes per day checking for updates, addressing notifications, or locating and sorting project-critical emails.4 We used this research as a proxy for daily
3 “Street Damage Restoration Fee Study” Shahin and Associates. City of Los Angeles Bureau of Street Services. June 2017.
4 “How to Spend Way Less Time on Email Every Day” by Matt Plummer. Harvard Business Review. January 22, 2019.
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
87 time coordinating project management activities with inefficient tools.
Assuming improved tools could reduce coordination time by half, we estimate potential savings of up to 7%, or $530,113 for FY 2019-20, based on payroll costs for the Advanced Planning and Asset Management Group; and the Pavement, Concrete, and Streets Maintenance Groups.
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
88 Reduce the Number of Take-Home Vehicles
Strategy Type
Process Improvement and Service Delivery Change
Impact Estimate
The City has an inordinately high percentage of take-home vehicles as compared to the size of its fleet. A spreadsheet provided by the Fleet Management Division showed a total of 432 vehicles have been authorized as take-home vehicles on a full-time or seasonal basis5. This issue was also addressed in two reports prepared by the City Auditor’s Office in December 2011 and June 2019, which also concluded that the number of take-home vehicles resulted in substantial costs.
We estimate that the City may be able to reduce the number by as many as 300 vehicles, while still being able to maintain necessary after hours and emergency response coverage. For the purpose of estimating the impact of such a reduction, the following conservative assumptions have been made: the average round trip for a take-home vehicle is 20 miles; the current IRS standard mileage rate is $.58/mile; the reduction in vehicles is estimated at 300; and there are 260 work days per vehicle per year. Over the course of one year, the impact estimate for mileage alone is $904,800.
These savings will accrue to the various funds that support the respective department or program.
Management Partners understands that, in some instances, the City has factored the value of take-home vehicles into the total compensation for certain employees. In these instances, the reduction of take-home vehicles is likely to result in negotiations that could offset savings, though it is not possible to estimate the amount of such an offset. However, as noted above, the estimated savings are for vehicle mileage alone and do not include the additional liability or long-term fleet costs such as vehicle replacement.
A side benefit that cannot be calculated or estimated without additional data is related to proper use of City vehicles for City business. San Joaquin County, California; Indianapolis, Indiana and Evansville, Indiana found an excessive amount of staff using vehicles for personal use, which
5 According to the Fleet Management Division, seasonal take-home vehicles are those which are assigned in six-month increments.
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89 shortens the life of the vehicle and drives up fuel costs, in addition to potential increases in accident and damage repair costs.
Achievability
Re-assessing the need and number of take-home vehicles is a common problem in many public agencies because, without clear policies and uniform implementation, the use of city vehicles tends to grow over time.
Our experience is that this is a problem in many organizations.
Addressing it saves money in a variety of ways and reduces unnecessary liability. Further, the almost one-in-five ratio of take-home vehicles in Sacramento alone is cause for a reevaluation of existing policies and practices. As noted previously, changes to take-home vehicles may require negotiations with affected bargaining units. Given the potential that certain take-home vehicle assignments could require negotiation with the bargaining unit, we rate the achievability of this strategy as moderate.
Background/Analysis
It appears the number of take-home vehicles citywide has increased over time. For instance, the City Auditor’s previous analyses showed a total of 3586 take-home vehicles. However, as noted above, recent data provided to the consulting team by the Fleet Management Division reflect a total of 432 take-home vehicles. Table 15 summarizes these take-home vehicles by department or functional area.
Table 15. Distribution of Take-Home Vehicles by Department or Functional Area Department/Functional Area
Number of Take-Home
Vehicles Authorized Percent of Total
Fire Department 21 4.86%
Fleet Management 4 .93%
Information Technology 2 .46%
Miscellaneous 41 9.49%
Police Department 197 45.60%
Water, Wastewater, Drainage 167 38.66%
TOTAL 432 100.0%
Source: Fleet Management Division
One interesting point of comparison is that the number of take-home vehicles authorized by the Police Department declined almost 10%, from
6 A 2011 report by the City Auditor’s Office concerning light -duty vehicles identified 243 take-home vehicles, and its 2019 report about the Department of Utilities fleet estimated an additional 115 take-home vehicles.
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
90 218 in 2011 to 197 in 2019. This is important because the Police Department has the largest share of take-home vehicles and it generally has the strongest rationale for authorizing them. However, the overall number of take-home vehicles is still large. It represents almost 20% of the City’s 2,179-unit on-road fleet inventory, and this does not include City vehicles that are taken home on an on-call, standby basis.
The City’s policy regarding take-home vehicles is addressed in the Administrative Policy Instructions (API #21). The policy was last revised in 2001 and another revision is currently being drafted. There are four variations of take-home vehicles referred to in the Transportation Policy as described below.
• "Duty Hour Retention" means vehicle assignment on a continuous basis during duty hours.
• "Overnight Retention" means that an individual may be assigned overnight retention of a City vehicle when it is deemed in the public interest and the task(s) to be performed require(s) immediate response during off-duty hours.
• "Seasonal Overnight Retention" means that an individual may be assigned overnight retention of a City vehicle for a defined period of time.
• "Intermittent Overnight Retention" means that an individual may be assigned overnight retention of a City vehicle when task(s) performed require employee's presence at times other than their normal work schedule.
The assignment of city-owned vehicles is covered in Section 7 of the policy and states that
“All individual vehicle assignments must be justified in writing to the City Manager prior to the assignment and are subject to periodic review. City vehicles may be assigned to individuals when essential to the City for public safety, on-call assignments, and other special or emergency assignments.”
The City of Sacramento does not have a formal vehicle assignment policy containing criteria to justify the need for a vehicle.
However, all vehicles, including take-home units, are reviewed annually by the Fleet Management Division but the focus is on identifying underutilized units. This review uses a 5-year, 6,000-mile average as a minimum standard. Departments are required to fill out an “Underutilized Vehicle Retention Justification Form” if their vehicles do not meet the 6,000-mile minimum criteria. This form is used to justify Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
91 why the vehicle should not be turned in and how returning the vehicle will impact the department’s operations.
To our knowledge, the 6,000-mile minimum standard used by the Fleet Management Division is applied to all light- and heavy-duty vehicles.
Furthermore, it does not consider construction-type, hour-metered units.
This “one size fits all” approach is common among government organizations. However, it fails to consider that vehicles and equipment perform different functions with various mileage characteristics. For example, a police patrol vehicle will travel as much as five times the annual mileage that a pick-up truck belonging to the Street’s division will travel. Vehicles used within a water treatment plant setting will never accumulate the mileage that a Parks and Recreation vehicle would use.
The study and new policy should further establish a minimum number of callouts to justify assigning a take-home vehicle. Together, they can form the basis for determining if a city vehicle qualifies to be taken home or whether an alternative means of transportation should be considered such as reimbursing an employee for using their own vehicle or drawing a vehicle from a pool. Justifying the use of an assigned vehicle or piece of equipment, computing minimum utilization standards and identifying alternative means of transportation would normally be addressed as part of a fleet utilization or “right-sizing” study.
Assigning a certain number of take-home vehicles, based upon specific and definable criteria, is a best practice. The most common examples are vehicles for Public Works staff who work on emergency repairs, and police detectives who may need to go directly to a scene at any time during the day. As part of the analysis for determining need for take- home vehicles, the following questions should be asked on a case-by-case basis:
• Who has the vehicle and what is their job title?
• Why do they need the vehicle?
• Do any supervisors need a take-home vehicle, or will the calls be handled by lower-level staff?
• Does the need fall in line with business needs for after-hours service and emergencies, or is it simply a convenience for the employee to have the vehicle?
The City Auditor report s from 2011 and 2019 also addressed these issues and we understand there are open recommendations which have not yet been implemented . Moreover, we understand that certain take -home vehicle assignments have been made to augment the City’s compensation Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
92 and benefits package. In other words, changes to these policies could raise issues in a collective bargaining context.
Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
93 Automate Human Resources (HR) Processes
Strategy Type
Process Improvement and Service Delivery Changes
Impact Estimate
This strategy is a broad approach to automating HR systems such as making appointments to exempt positions, compiling employee data, and processing Personnel Action Requests (PARs). There are many other examples of HR workflows that could also be automated. Therefore, our recommendation is to automate HR processes to the maximum extent possible. This will save many hours of human labor and improve productivity.
Our financial analysis focused on processing PARs to illustrate how much money potentially could be saved by automating just one workflow or process. To do this, we first estimated the minutes spent processing a single PAR; then estimated the number of times per year a PAR is processed for each full-time employee, and each temporary or seasonal employee. Then we multiplied the result of these estimates by the expected fully loaded cost of manually entering the data into the system a second time by HR staff.
The City’s PAR form is currently a PDF-fillable document that must be completed by the requesting department, and then re-entered into the HR system by HR staff. The duplication of effort by not having an automated system adds unnecessary costs to the City.
The Human Resources Department estimates the City processed 5,000 PARs in FY 2018-19. They explained this estimate was based on processing one PAR for each full-time employee per year; and, approximately two PAR’s per temporary and seasonal employees. The department also estimated it takes 10 minutes each for both the requesting department and HR staff to process a simple PAR, with more comprehensive ones requiring 20 minutes each. However, the HR staff will still need to verify data entered by the departments. Therefore, the This represents a range of 15 to 35 minutes to process a PAR.
As noted above, the problem with the current system is that each PAR has to be filled out twice. When a PAR is submitted to HR, a personnel technician manually enters the form’s data into a PeopleSoft database.
The fully loaded hourly cost for data entry in HR is estimated at $42.88/hour.
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94 Therefore, eliminating the extra data entry task in HR would save 5 to 15 minutes for each PAR. This represents 417 to 1,250 hours, or an equivalent cost of $17,900 to $53,600.
Automating just the PAR form can save at least $17,900 per year in labor.
However, this is just one example of an automation opportunity. An article by McKinsey and Company7 found that four out of five HR processes are at least partially automatable, with the potential to reduce costs by at least 30%. We estimate there are at least 10 such manual processes in the Human Resources Department. Using the modest savings illustrated in the PAR example as a proxy, this could represent a savings of over $179,000 annually if these positions were repurposed to fill other vacancies in HR or other departments. In other words, the cost savings would necessitate lowering the overall FTE count.
A common criticism of automating paper processes is that the time saved represents a small fraction of the overall work effort of any single position and therefore the savings are not worth the effort or investment.
However, labor gets more expensive every year and using it as productively as possible is important in large and small ways. In addition, as shown in the studies cited in this analysis many corporations have aggressively used this strategy to increase productivity.
Achievability
During interviews, HR department staff expressed an interest in shifting away from their current paper-based processes to a more automated approach. The achievability of this strategy is moderate. Automated HR processes are standard practice in other organizations of Sacramento’s size and complexity. Transitioning to such technology will require Information Technology (IT) department support (either in-house or from outside consultants) to develop tools that meet the specific needs of the HR department, training for staff, coordinated implementation, and regular updating and system maintenance.
Background/Analysis
Management Partners understands that the Human Resources and Information Technology departments have already begun efforts to improve automation and that there are already several areas where e- tools and processes are used regularly, but opportunity exists to expand
7 Andersen, Jens Ri is, et.al., “How governments can harness the power of automation at scale.” Public Sector Practice, pages 1-6. February 2019.
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95 and improve on these efforts. Some of Sacramento’s human resources processes are still handled manually with a paper system. Given the repetitive nature of many of these functions, there is a significant opportunity to automate these tasks. Doing so would reduce bureaucracy, save time, lower costs, improve the user experience, enhance data collection and reporting, and reduce errors.
A prime example of the problem is the City’s PAR, which is available electronically, but requires employees to complete the form, print it out and route the physical document to various recipients for approval. Once it reaches HR, staff must transfer the data from the paper form to the City’s human resources management system (PeopleSoft). The City reports that the IT department is working on a project to fully automate the PAR, albeit with very limited capability. PARs are currently used to document and approve a wide range of personnel actions. The IT department project is underway and will create an electronic version that can be used for only two actions: new hires and rehires. However, expanding this effort to fully automate all routine personnel actions, including an online routing and electronic approval process, would create considerable efficiencies Citywide by saving time, improving accuracy and contributing to enhanced recordkeeping and data collection.
An online publication by Ascentis Software, “Cost Savings in Automating HR & Benefits” notes that the Society for Human Resources Management says that “60% to 80% of an HR staffs’ time is tied to repetitive administrative tasks. Much of this time is spent answering employee and manager questions and gathering information for reports.” The amount of paperwork generated in traditional HR management is significant but can be controlled by automating processes and creating a self-service portal for employees.
This frees up HR staffs’ time to focus on core processes, like training and coaching employees.
Another benefit of an automated system would be a reduction in staffs’ time needed to complete HR audits. A single electronic portal would simplify data queries for HR staff and the organization’s employees. In addition, modern electronic systems have layers of security consistent with the needs of large cities like Sacramento which would help reduce errors related to the release of confidential information. Finally, an automated system could allow the City to create a dashboard to track key HR metrics and other information.
The HR Department reports that several years ago the City solicited proposals from qualified firms to begin the process of digitizing forms and other documents. The City received a cost estimate of $250,000 to automate just processing new hires through an automated PAR system.
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96 The department determined the cost of an external vendor to implement only one type of transacation did not make sense when there are more than a dozen types of transactions that need to be automated. As a result, the City’s Information Technology Department was asked to assist. The limited project described above is the result.
Many other opportunities exist for this Department and others to eliminate paper. For example, the City’s process of appointing employees to exempt positions requires a printed appointment letter, routed to and signed by multiple executive staff, all the way up to the City Manager. An electronic process would reduce the time involved for this routine transaction.
Compiling employee data is a third area identified for improvement.
Much of this information is submitted on paper forms such as the annual Supplemental Employment questionnaire and the Alternative Work Schedule declaration. An online process would be more efficient for employees and would create a database for improved tracking and recordkeeping.
Training and certification courses are currently offered online through a public safety focused Learning Management System (LMS) called Target Solutions, and in-person from a variety of sources. The HR Department reports an upcoming transition from Target Solutions to SumTotal, a comprehensive LMS that empowers employees across departments to search the training they need to enhance their performance and grow their careers.
As Sacramento continues to streamline services and programs through enhanced use of technology, it may find collaborating with human resources consultants helpful in automating tasks such as background screening, drug testing, compliance and benefit administration.
Automate human resource and
other support service processes and workflows to
streamline tasks and eliminate manual systems.
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97 Explore Opportunities to Implement Managed
Competition
Strategy Type
Service Delivery Change
Impact Estimate
Based on available case studies from comparable cities, we estimate implementation across all departments could save between 3% and 8% of costs on a number of programs identified below. Summaries of two relevant case studies are included in Appendix 2. The net result from implementing all managed competition opportunities is approximately $3.0 to $8.2 million per year. The wide variance in potential savings is dependent upon the number of available and interested private service providers in the Sacramento area that may wish to bid on such potential contracts.
Achievability
The City will need to navigate its internal rules and practices with respect to contracting and outsourcing. It is also likely that this recommendation could require collaboration with one or more of the City’s labor unions.
Within the State of California, other major cities like San Diego have implemented managed competition programs. We believe this strategy is moderately achievable.
Background/Analysis
Managed competition is a structured program in which public employees compete for the right to continue to deliver public services. The objective is to secure the best value for taxpayers, whether the service is outsourced or provided by the jurisdiction. The City already uses contract providers for certain services, and managed competition is simply an extension of that practice that engages public employees as competitors.
The concept of managed competition allows the private sector to compete with governments to bid to provide services currently provided by the organization’s departments. The government agency designs the criteria and bid components for its departments, and then invites private firms to compete to deliver. The benefits to the community include reduced customer costs and increased public confidence that the services provided are cost competitive. Moreover, managed competition offers other benefits such as the potential to increase revenue without increasing costs. The process can improve customer service through the inclusion of Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
98 competitive qualitative performance criteria. Also, managed competition allows governments to focus more on core services where staff may lack the capacity and expertise within the organization.
The City of Phoenix has relied on the process of managed competition since 1979. Staff in the Phoenix Solid Waste Division reported in a 2011 interview that managed competition saved the taxpayers $38 million8.
The City of San Diego has a long history of using the alternate service delivery model. It conducted four phases of managed competition from 2010 through 2015. The process over that four-year period resulted in an estimated savings of $9 million. The City of Chicago also instituted managed competition for its Blue Cart recycling program in 2011.
According to the City’s projections, it saved $4.7 million in recycling costs in the year following implementation or about 3% of the $144 million budget for recycling and sanitation.
In 2017, the City of Sacramento began a process that resulted in managed competition. In July of that year, the City Council authorized the City Manager to explore negotiations with the Sacramento Kings, SMG and Live Nation to operate one or all of the City’s various convention center venues. After approximately one year of negotiations, the City determined, based on several operational and process improvement changes made by staff in the Convention and Cultural Services Department, that it was in the public’s interest to allow the City to continue operating the Convention Center complex venues.
Based on the savings ranges observed through managed competition in San Diego and Chicago, we have provided estimated ranges of potential savings for various services provided by Sacramento in Table 16. The total cost of these services is taken from line-item budgeted personnel expenses (salary and benefits) from the FY 2019-20 budget. Given that savings under managed competition can be highly variable, we have calculated amounts based on 3% and 8% of personnel costs. These proportions represent the savings seen in Chicago’s Bureau of Sanitation and San Diego’s Fleet Maintenance Operations Division and constitute what we believe are reasonable ranges given the results experienced in other cities. Potential savings at each level are estimated in thousands.
8 “Governments Save Money Using Managed Competition” by Hilton Collings. Government Technology. January 17, 2011.
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99 Table 16. Potential Managed Competition Savings of 3% and 8% for Select City Services, in Thousands Type of Service
Total Expenditures
(Thousands)
3% of
Expenditures
(Thousands)
8% of
Expenditures
(Thousands)
Solid Waste $59,178.3 $1,775.3 $4,734.3
Parking Operations Maintenance and Enforcement $36,064.9 $1,081.9 $2,885.2 Pavement Maintenance $6,434.3 $193.0 $514.7
Concrete Maintenance $470.9 $14.1 $37.7
Traffic Signal Maintenance $1,247.0 $37.4 $99.8
Street Light Maintenance $3,995.0 $119.9 $319.6
Street Marking $2,193.2 $65.8 $175.5
Streetscape Maintenance $3,940.6 $118.2 $315.2
Urban Forest Maintenance $5,096.4 $152.9 $407.7
Park Operations and Maintenance $13,708.3 $411.2 $1,096.7 Aquatics Operations and Maintenance $1,691.3 $50.7 $135.3 Facility Maintenance $4,847.2 $145.4 $387.8
Fleet Maintenance $14,953.4 $448.6 $1,196.3
Marina Operation and Maintenance $789.5 $23.7 $63.2
Convention Center Operation and Maintenance $4,709.1 $141.3 $376.7 Historical Site Operation and Maintenance $2,395.8 $71.9 $191.7 Golf Administration $67.9 $2.0 $5.4
TOTAL $161,873.1 $4,853.3 $12,942.8
Source: Line-item data for Proposed FY 2019-20 Budget for the City of Sacramento The City would benefit from identifying services within each department to include in a managed competition request for proposals. As noted above, taxpayers benefit from the results of managed competition through either streamlined public services or outsourcing the service to a third-party provider, and service cost reductions (i.e., revenue enhancements and/or expenditure reductions). The process also provides for greater public transparency about the true costs to deliver public services.
Since an in-depth and concurrent analysis of each of these program areas would be infeasible, the next step would be for the City to prioritize the program areas and select two to three programs to analyze each year.
Prioritize the program areas and
select at least two to analyze in-depth annually for the next several years.
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Continue to Innovate Parking Services
Strategy Type
Service Delivery Changes
Impact Estimate
Maximizing the revenue potential through simple efficiencies will increase parking revenues. This can be achieved through a combination of introducing Sunday metering and daily demand-response parking rates. A conservative estimate of $1.4 million in gross revenue is expected by simply introducing Sunday meter rates and enforcement. However, this change would also result in increases for both one-time equipment costs and ongoing labor costs. Consequently, the additional net revenue is estimated at $875,000 to $1.0 million annually, however, this revenue may not accrue to the General Fund.
Achievability
We believe this strategy is moderately achievable.
Background/Analysis
Management Partners was impressed with the work done within the Parking Services Division. The Division has been creative about making the City the “front door” for parking services and setting Citywide parking policies and technology strategies while simultaneously incorporating private property into the available inventory. We were especially impressed with the Division’s willingness to “fail fast” using pilot programs, its desire to partner when possible, a tolerance for business and political risk, and for its policy analysis of curb space management and overall transit interoperability. Nevertheless, there are additional opportunities to generate revenues based on our review of the City’s parking practices.
City regulations have established parking meter fees for Monday through Saturday, but parking at meters is free on Sundays. Among the peer cities, Long beach, Minneapolis and Phoenix charge for Sunday parking for all or most metered spaces (Long Beach excludes some downtown parking from Sunday fees but not in the downtown core). The City of San Jose charges for metered parking on Sundays in the vicinity of HP Pavilion when events are occurring. The cities of Denver and San Diego do not apply metered parking charges on Sunday.
Given Sacramento’s vibrancy, the Division should evaluate expanding the parking meter fees by including Sundays. Sacramento’s FY 2019-20 Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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budget estimates parking meter revenues at $11.6 million. Based on meter usage, pricing structure, and revenue data provided by the City, and adjusting downward for expected reduced traffic on Sundays, introducing parking meter fees on Sunday could generate between $1.1 and $1.3 million in gross revenue. There would also be an estimated $300,000 in additional citation revenue. It is understood that labor expenses, transaction fees, and State remittances will offset revenues.
However, accounting for these expenses, the net revenues are still estimated to range from $875,000 to $1.0 million annually.
The consulting team considered the potential impacts of these changes on businesses and, therefore, on the City’s sales tax. A complete analysis of this issue would be difficult because it would rely on highly speculative assumptions.
However, if parking meter rates were set at an absurdly high level, and no other reasonable parking alternative existed, there could in theory be some impact to businesses and the City’s sales tax. However, our expectation is that meter rates would be set at market levels and this would ensure little or no impacts to businesses.
Expand market-based parking
meter fees and enforcement to Sundays.
Disabled parking is widely abused across the nation, including in California9. The problems associated with this abuse include a loss of revenue, adverse effects on parking availability for disabled individuals and the inability to regulate parking through the current pricing model.
The latter two of these problems have also been addressed in a City Auditor’s report from February 2019.
Given its role as a statewide leader on parking issues, the City should continue to explore whether it could build a coalition of cities to address the fraudulent use of disabled placards in the state. Because disabled parking is regulated by State law, it would take State action to modernize and improve the system. There are, however, proven technology solutions available to dramatically reduce fraud, which helps ensure parking is available for those truly in need.
The City Auditor’s Office has previously examined this issue and provided recommendations for addressing it.
9 “High Cost of Disabled Parking Abuse” NBC Los Angeles. August 21, 2014.
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Use Design-Build to Expedite the Completion of Capital
Improvement Projects
Strategy Type
Process Improvement
Impact Estimate
The precise impact of using a Design-Build approach varies from project to project, but studies indicate a range of potential savings over traditional Design-Bid-Build project costs, and faster project completion times 10. These factors are important considerations for long-term capital improvement planning and ongoing operational support costs.
Adoption of a Design-Build approach by Sacramento could result in substantial cost and time savings associated with capital project construction. Based on information referenced in a 2005 Design-Build Effectiveness Study (see also the footnote below), we believe the City could see a cost savings of approximately $6.8 million a year in the CIP, plus an additional $741,000 in the General Fund, if the magnitude of capital projects remains fairly consistent.
Achievability
Design-Build projects have recently been specifically authorized for California communities. We rate the achievability as moderate.
Background/Analysis
Design-Build projects, and related methods such as “Design-Build- Finance-Operate-Maintain,” combine professional design services and construction into a single contract. Design-Build has been successfully and widely utilized for decades in the private sector and by larger cities across the country, but has been slow to develop in California, in part due to the State’s historical opposition toward the practice in favor of the tradition Design-Bid-Build method.
10 A 2005 study prepared for the U.S. Department of Transportation – Federal Highway Administration, Design-Build Effectiveness Study - Final Report, builds on prior studies and provides comparative information on the relative merits of using design – build methods and important factors to consider to maximize effectiveness. A seminal Design-Build study conducted in 1998 found dollar savings of 6% and time savings of 33%. The 2005 study provides a range of savings values with averages/medians similar to the 1998 study.
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Advocates of Design-Build cite significant benefits versus the traditional approach of awarding separate contracts to design and construction firms. Such benefits can include:
• Greater flexibility in awarding contracts,
• Single point of accountability for design and construction, • Higher quality construction,
• Fewer contract change orders and delay claims,
• Faster project completion,
• Lower overall project cost, and
• More opportunity for innovation11.
Examples of city/state government Design-Build projects planned or in process include:
• Caltrans: High Occupancy Vehicle (HOV) Lanes on U.S. Route 50 ($300 million),
• Caltrans: Route 210 Americans with Disabilities Act (ADA) Improvements ($7 million),
• City of Los Angeles: Los Angeles Street Civic Building Project ($400 million)12, and
• City of San Jose: San Jose International Airport Economy Lot 1 Parking Garage ($43 million).
In recognition of the benefits of Design-Build, the California Legislature has steadily, albeit slowly, made it easier for local governments to employ the practice. The most recent substantive change occurred in 2015 with the adoption of Senate Bill (SB) 785, which repealed most of the existing statues that applied to different types of jurisdictions and replaced them with one statute for “local agencies.” While it is encouraging that the state is making it easier for localities to utilize Design-Build methods, it is important to note that it must be thoughtfully considered and that this method will not be appropriate for all projects.
Table 17 applies the cost savings estimates noted above to projects in key programmatic areas including transportation, utility infrastructure and City facilities recommended in the FY 2018-19 to FY 2023-24 Capital Improvement Program (CIP) Budget. While Design-Build may not be appropriate for all projects, if the City utilized the methods for half of the
11 “Design-Build for Public Works Projects” League of California Cities presentation, David S. Gehrig, Hanson Bridgett, May 6, 2015.
12The Los Angeles project is a public-private partnership utilizing the Design-Build-Finance-Operate-Maintain method discussed later in this strategy section.
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projects shown in Table 17, an approximate savings of $7.6 million could be achieved.
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Table 17. Potential Cost Savings for Capital Projects Using Design-Build Methods Program/Project Area
Number of
Projects
5-Year CIP
Total
(Thousands)
6% Estimated
Savings
(Thousands)
6% Estimated
Savings Applied to
50% of Projects
(Thousands)
Transportation 49 $135,200 $8,247 $4,124
Utilities 31 $72,500 $4,423 $2,211
General Government (City
Facilities) 14 $24,300 $1,482 $741
Convention, Culture and
Leisure 8 $6,800 $415 $207
Parks and Recreation 12 $5,300 $323 $162
Public Safety (Fire Station
Replacement) 1 $3,500 $214 $107
TOTALS 115 $247,600 $15,104 $7,552
In addition to the potential cost savings, use of Design-Build contracts can result in substantially faster timeframes13 to design and construct multi- year projects. Figure 32 provides a comparison of Design-Build and Design-Bid-Build methods using a hypothetical 10-year infrastructure project valued at $10 million.
Figure 32. Comparison of Capital Project Cost and Duration Using Design-Bid-Build and Design-Build Methods
13 We estimate the Design -Build process would be 33.5% faster, which in a 5 -year project schedule would reduce the timing by 1.7 years. The average time savings associated with projects identified in the 2005 study is 27%, but delivery methods have improved over the past 15 years.
$10,000
$9,400
120
80 40
60 80
100
120
140
$9,000
$9,200
$9,400
$9,600
$9,800
$10,000
$10,200
Design-Bid-Build Cost Design-Build Cost
Cost (000s) Duration (Months)
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Use of Design-Build and other forms of alternative contracting methods can facilitate collaboration and innovation for public-private partnerships14 and quickly deliver sustainable infrastructure projects (see also the Innovations section, strategy I3 for expanding the use of green infrastructure). These issues were also referenced in the presentation cited in Footnote 11 above. From these perspectives, utilizing Design- Build processes aligns with other established City initiatives such as the Green Building Policy, the Demonstration Partnerships program and the Sacramento Urban Technology Lab (SUTL) that seek to leverage strategic partnerships to foster economic development, livability and sustainability.
Beyond the standard Design-Build approach, the Design-Build-Finance- Operate-Maintain (DBFOM) model (and variants like DBFO and DBFM), and similar long-term leases offer an integrated delivery method that combines the design and construction responsibilities of Design-Build contracts with performance-based operations and maintenance (O&M) contracting and private financing for system development over a fixed period of time (usually anywhere from 25 to 99 years). In exchange for taking responsibility for the asset during the lease period, the private partner has the right to collect the revenue from the project and/or is compensated through payment for services based on performance specifications for the duration of the contract. The responsibility for performance of O&M activities in the long term is transferred to the private partner, creating incentives to optimize life-cycle costs.
There is a great deal of variety in long-term lease arrangements and especially in the degree to which financial risks are transferred to the private partner. Contracting and financing for a project delivered under a long-term lease generally require the incorporation of a new concession company created for the sole purpose of the project called a special- purpose vehicle (SPV). The SPV is the recipient of revenues, which are leveraged to issue bonds or other debt on a non-recourse basis to pay for project development costs. Depending on the revenue sources and the risk allocation, private partners may or may not be exposed to revenue risks.
In nearly all cases, the public agency sponsoring the project retains full ownership over the project assets throughout the concession period, although tax ownership can be (and often is) transferred via lease-
14 Public-Private Partnerships: A Design-Build Primer Done Right. Design-Build Institute of America, October 2016.
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leaseback or similar approaches to allow for tax depreciation. Debt and equity providers in long-term concessions impose strict discipline on the Design-Build and O and M contractors working for the SPV through contractual structures that include enforceable liquidated damages, security packages, and warranty provisions forcing the concessionaire to proactively manage both financial and operational risk.
Regardless of whether the SPV held taxable or tax-exempt status, a DBFOM in the form of a long-term lease would allow for arms’-length financing of the capital improvement program, while simultaneously offering the promise of accelerated infrastructure delivery, life cycle asset cost savings of 25%-30%, and improved commercialization opportunities.
Develop guidelines to determine
when it is most advantageous to use Design-Build and
similar public contracting methods to streamline capital project planning/ construction, align with existing
strategic partnership initiatives and reduce overall
infrastructure costs.
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Evaluate the Feasibility of Public Employee Gainsharing Strategy Type
Service Delivery Change
Impact Estimate
The process of estimating cost savings that may be possible requires identifying the functional areas in the organization that may be good candidates for gainsharing and then engaging with appropriate City and labor representatives to explore the concepts.
Based on gainsharing results in other large cities, we roughly estimate that a sustained effort in this area could save Sacramento up to $5 million annually after an implementation period of one to two years.
Achievability
The City will need to review its internal rules and practices with respect to contracting and procurement. Collaboration with one or more of the City’s labor associations will be essential. The City Attorney’s Office will need to advise the City Council as to State and local laws related to gainsharing; however, Sacramento Charter Section 105 provides as follows:
105 Rewards.
The city council may, on notice from the city manager, reward any city employee for conduct which is heroic or meritorious. The form or amount of such reward shall be discretionary with the city council, but shall not exceed in any one instance one month’s salary.
Based on the experience of a similar policy developed in a comparable California city, we assess the achievability as moderate.
Background/Analysis
Gainsharing is a system or approach to managing that incentivizes a higher level of performance through the structured involvement and participation of employees. As performance improves, employees share in the financial gain created by cost savings. Enhanced performance yields greater compensation, in turn promoting continuous improvement through a reinforcing cycle.
Modern gainsharing dates to the 1930s when a labor union leader, Joe Scanlon, developed an arrangement that would ultimately be called the Scanlon Plan. The premise of the Scanlon Plan was for labor and Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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management to collaborate on how to reduce costs, boost productivity, and eliminate waste. The resulting savings were shared by the company and the workforce. For the plan to work, management had to share responsibility and information with workers, and employees had to become more productive, more resourceful and more flexible. Perhaps most important, workers and managers had to sit down together and talk to each other. And because labor and management were working together toward a common goal, they inevitably began to see themselves as colleagues, not opponents.
The consulting team generally discourages clients from starting a gainsharing initiative by picking departments or functional areas from a pre-established list. Our experience is that the list changes from city to city based on local circumstances. Of course, practically speaking, an organization can deploy gainsharing in just about any business unit.
However, it works best when the agency or department has the following attributes:
• Solid historical financial and operational performance data: It is important to establish both financial and operational baselines and key performance metrics, and a focus on outcome-based metrics (i.e., units of work produced), not input-based metrics (i.e., number of assigned staff).
• Measurability of Work: Certain types of services, such as the number of oil changes performed, and acres of grass mowed are easy to measure, while other service areas may be less
measurable.
• Focused Work Scope: Gainsharing can be more difficult if an agency performs a wider variety of functions. For example, solid waste is easier to gainshare than planning and zoning.
• Functional areas with high numbers of staff: Greater success is possible in larger work units than in those with under 10 people (but gainsharing can still work in small units).
• Management Style and Commitment: The management team
must believe in shared decision making.
• Culture of Teamwork: The values of the department or function should support teamwork and performance improvement.
• Stable Workforce Climate: Employee relations should be relatively stable.
• Buy-In: Both management and employees should be enthusiastic about gainsharing.
• Effective Communications: There should be a strong
communications and feedback loop between management and employees.
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• Alignment with Organizational Strategy: Gainsharing must be an integral part of the department or function’s goals and objectives.
Local government organizations possessing these qualities have successfully implemented gainsharing initiatives in several functional areas as shown in Table 18.
Table 18. Functional Areas of Successful Gainsharing in Other Communities Functional Area of Successful Gainsharing Programs
Solid Waste Fleet services
Facilities maintenance and building management Call center operations and management Parks maintenance, including mowing and landscaping Right-of-way maintenance and management Specialty facilities management (e.g., park venues and
recreational facilities)
Street maintenance, including pothole repair, strip
patching, crack sealing, and guardrail construction and maintenance
Inventory management courier services, and supplies
delivery
Parking meter maintenance and management, parking
meter coin collection and counting
Implementation
The typical approach to implement gainsharing starts with the City providing direction on the functional areas it would like to explore, including any parameters that should be considered. Then discussions are held with labor groups and other stakeholders to discuss options for gainsharing, estimate potential savings, identify potential benefits for employees, and formulate recommendations for further consideration.
Identify one or two functional areas
to begin gainsharing implementation.
Once the City has determined the appropriate functional area to begin gainsharing, there are five implementation tasks as discussed below.
Task 1 – Develop goals and performance measures. After selecting the operation where gainsharing will be deployed, work with city officials to develop specific goals and performance measures for the gainsharing program. Describe at a high level the current state of the selected operation’s finances and performance and create a definition of a Most Efficient Organization. The following sub-tasks would each be a collaboration with City staff.
• Convene a meeting with City staff to discuss high-level goals and objectives for the gainsharing program;
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• Summarize the selected operation’s current financial status using City-provided data;
• Summarize the current operational status, i.e., key performance metrics using City-provided data; and
• Define the specific financial goals and key performance metrics for the to-be-created Most Efficient Organization (MEO).
Task 2 – Develop strategies. Facilitate the development of preliminary strategies for achieving the gainsharing goals.
• Collaborate with City staff to identify preliminary but specific steps required to transition from the status quo to the MEO (generic examples include increasing billable hours, reducing shrinkage, more effectively managing work, consolidating selected operations, improving staffing models, and refining scheduling and tasks);
• Prioritize the specific steps based upon speed of implementation, overall financial value, and degree of difficulty/risk; and • Collaborate with City staff to consider the following administrative topics: gainsharing participation (e.g., union only, some managers, all managers), levels of gainsharing (i.e., percentages or dollar amounts), timing/frequency of payments, inclusion/exclusion from retirement calculations, potential impact on routine labor negotiations, and other logistical and administrative issues.
Task 3 – Present gainsharing. Present the gainsharing program to union leadership.
• Collaborate with City staff to prepare a draft presentation for union leadership to describe the gainsharing program;
• Include summaries in the presentation of other successful gainsharing projects, the “rules of engagement” for labor- management collaboration on gainsharing, the proposed goals and objectives, and potential action steps that might be taken to move the selected operation to the MEO;
• Gather feedback from union leadership on the proposed model and focus on potential barriers to implementation and their recommendations for further improvement; and
• Gather feedback from the union on selected logistical and administrative issues (listed above).
Task 4 – Conduct planning meetings to identify how to manage and monitor the process. Facilitate planning meetings with labor and Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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management to agree on gainsharing goals, the strategies to achieve the goals, and how gainsharing will be structured. Develop a plan for managing and monitoring the gainsharing program, and collaborate with City staff to meet with union leadership to:
• Agree on gainsharing goals;
• Develop strategies and specific steps to achieve the gainsharing goals (including a process to add and refine strategies going forward);
• Create a draft structure for the gainsharing model (e.g., participants, percentage of savings shared, payment timing, other); and
• Establish an initial draft scorecard for measuring the implementation of gainsharing in the selected operation.
Task 5 – Implement the process.
• Implement agreed-upon cost savings strategies to achieve goals; • Measure financial and operational progress;
• Schedule monthly management meetings to review the Monthly Labor-Management Report; and
• Pay gainsharing as earned (typically every 6 or 12 months).
Gainsharing Examples
To illustrate some of these concepts further, the City of Indianapolis15 implemented gainsharing in its fleet services division many years ago.
The union-proposed approach allowed employees to receive 30% of operational savings that the employees generated beyond an agreed- upon baseline. The results over seven years included the following:
• Cumulative savings of $8.6 million or about an 18% expense reduction;
• Headcount was reduced via natural attrition (with no layoffs) even as the fleet grew;
• Billable hours per mechanic increased from 1,190 to 1,442; • Vehicle turnaround time dropped from 47 hours to 18 hours; • Injury time off dropped from 909 hours to 22 hours a year; • Grievances taken to arbitration dropped from 41 to 1 a year; • Written customer complaints dropped from 149 to 5 a year;
15 Indiana is a “right to work” state.
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• First three years of cumulative staff bonuses were $75,659, $64,016, and $154,000.
As noted by the then president of the fleet services AFSCME Local 3131, “It’s not like it used to be . . . we run this whole thing together.” More recently, in 2018, the City of Baltimore16 implemented a successful gainsharing program in its Fleet Services Division. The City, in collaboration with the three local unions that represent employees, completed a successful pilot program in June of 2018 and made its first gainsharing payments to employees in August of 2018. The City and its three local union labor partners recently completed the second phase of the gainsharing program, with gainsharing checks paid to employees in February of 2019.
Determine departments or
functional areas suitable for gainsharing.
Initiate discussions with labor
associations affiliated with the identified departments or functional areas.
16 Maryland is not a “right to work” state.
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Restructure Solid Waste Service Delivery Through
Contracting, Managed Competition or Gainsharing
Strategy Type
Service Delivery Changes
Impact Estimate
The Recycling and Solid Waste Division of the Public Works Department provides refuse collection services to residential customers. (Commercial, industrial and institutional collection is performed by private companies.) The current monthly rate for residential collection (assuming a 64-gallon container) is $36.89. Some customers may use larger or smaller containers, which have higher or lower monthly costs. Solid waste revenues estimated in the proposed FY 2019-20 budget are approximately $64.4 million.
There are three options for restructuring solid waste services including contracting the services, using a managed competition approach to improve efficiencies and lower costs, or using gainsharing to promote improvements and lower costs through employee suggestions and initiatives.
We understand that the City Auditor’s Office previously examined the concept of contracting out the solid waste function, but the idea was dropped due to concerns about displacing public employees.
However, the consulting team presents this concept for reconsideration because of the opportunity to lower costs or increase revenue. As an example, contracting residential collection would enable the City to negotiate a franchise fee from the company selected for the contract. For instance, the City of San Bernardino recently negotiated a 20% franchise fee when it contracted its solid waste operations. However, San Bernardino’s contract involved both residential and commercial collection, and commercial collection is generally thought to be more lucrative. Consequently, the percentage Sacramento could negotiate is likely to be lower because it would only involve residential collection. We estimate Sacramento could negotiate a franchise fee of approximately 15%, which would generate additional net revenue in the range of 4%, because the Solid Waste Fund already contributes an 11% franchise fee to the General Fund. This is estimated to generate an additional $2.6 million of ongoing revenue to the General Fund. As has been discussed previously, the franchise fee is being challenged legally under Proposition 218. A franchise on a private contract is not subject to Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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Proposition 218 restrictions. If the City’s existing fee is successfully challenged, this strategy would increase exponentially in value.
We also believe Sacramento could negotiate other substantial revenues from a prospective contractor, including both one-time and ongoing revenues. Some examples of these additional revenues are outlined below.
Purchase of Equipment and Other Personal Property. This involves the contractor purchasing most or all of the City’s personal property (excluding real estate) used to provide residential collection services. San Bernardino (a city 56% smaller than Sacramento) negotiated a one-time payment of $12.2 million for this personal property. However, this included property related to both residential and commercial collection.
Scaled to Sacramento, we estimate this could result in one-time revenue in the range of $13 to $15 million.
Procurement and Transition Reimbursement. This involves reimbursing the City for its costs to undertake the procurement and transition to the contractor. Based on the San Bernardino example, where the City received a $250,000 reimbursement, we estimate that Sacramento could warrant a reimbursement of $600,000.
One-Time Franchise Payment. This involves negotiating for a one-time payment to the City for the right to provide solid waste services, which in San Bernardino amounted to $5 million. Scaled to Sacramento, we estimate this could generate a one-time payment of $6 million in addition to the annual franchise fees discussed previously.
Infrastructure Repair Fee. This requires the contractor to pay an annual fee to assist the City with maintaining its streets and roads, given the wear and tear caused by the contractor’s refuse vehicles. San Bernardino received $250,000 annually which, scaled to Sacramento, would amount to an annual payment of approximately $600,000.
Based on the foregoing, Management Partners estimates the City could generate from $1.9 to $3.2 million in on-going revenue and from $19.6 to $21.6 million in one-time revenue as shown in Table 19.
Table 19. General Fund Revenue Estimate for Solid Waste Contract Revenue Type Ongoing Revenue (in millions) One-Time Revenue (in millions) Annual franchise fee* $1.3 to $2.6
Purchase of equipment $13.0 to $15.0
Procurement and transition reimbursement $0.6
One-time franchise payment $6.0
Infrastructure repair fee $0.6
TOTAL $1.9 to $3.2 $19.6 to $21.6
* Net revenue in addition to the existing 11% franchise fee paid by the Solid Waste Fund.
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Achievability
The City will need to navigate its internal rules and practices with respect to contracting and outsourcing. It is also possible that this recommendation could require collaboration with one or more of the City’s labor associations. The achievability of this strategy is considered to be low to moderate due to the magnitude of the changes and the number of unknowns it involves.
Background/Analysis
While our scope did not include a detailed analysis of solid waste operations, our interviews with Recycling and Solid Waste Division staff and our experience with other cities suggests that there are several opportunities to reduce costs and improve service associated with the City’s solid waste operation.
Modern solid waste operations are designed to meet two primary objectives: cost-efficient operations and high levels of waste diversion from landfills; i.e. efficiency and effectiveness.
Alternative – Contract Out Residential Collection
The City currently uses in-house crews for residential collection while, as noted previously, commercial, industrial, and institutional collection are performed by private companies.
The trend in California in recent decades has been away from using city crews for refuse collection due to the costs of government employees and benefits. Most large cities in California use contractors for solid waste collection. Examples include San Jose, San Diego, San Francisco, and Oakland. A primary opportunity for improvement would be contracting out or franchising a portion of or all of the residential solid waste collection function.
Recent examples of cities that transitioned from city crews to contractors include the City of Hemet, which in 2011 contracted its solid waste service to CR&R Incorporated. Newport Beach is another example, contracting its residential solid waste services (commercial service had already been contracted) in 2013 (also to CR&R). San Bernardino contracted its solid waste, street sweeping, and right-of-way cleanup in 2016 as a single package of services to Burrtec Waste Industries, as a requirement for reducing costs and exiting bankruptcy.
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compensation, employee recruitment, safety and training programs, customer service/billing, technology, and management.
With state recycling requirements that have been in place for over 25 years, refuse haulers have gradually expanded their businesses to include materials sorting, recycling, public education, and in some cases, street sweeping and other related services, working in partnership with individual cities and counties. In addition, the more sophisticated companies use specialized routing systems to reduce travel times. They track and closely monitor performance measures based on their experience.
Given the expertise developed in many jurisdictions and by these waste companies, and the economies of scale that large operations can provide, it is likely that contracting these services to a private company will result in lower or similar costs to provide the service, and new franchise and a variety of one-time fees for an exclusive agreement with the City.
Another advantage of contracting refuse collection service is that it reduces the operational complexity and scale of services that the City must manage. By contracting for these services, the City would reduce its day-to-day responsibilities. This allows city staff to focus on the strategic elements of waste management.
Cost Effectiveness of Contracting
Considering the challenges related to the City’s budget, the likelihood of continued rapidly increasing personnel costs driven largely by CalPERS increases, and the significant savings that can be realized by contracting with private companies, City leaders should investigate options for contracting solid waste services to private providers. Contracting would insulate the City from the pension increases that it will face in the coming years. Most cities have found that the fully burdened costs of labor (including long-term pension costs) and the full cost of maintaining an up-to-date fleet exceed the cost of contracted operations.
Sacramento has a robust commercial market for solid waste services, with the commercial market served by Waste Management, Republic, and Atlas. The City could solicit proposals from private partners to at least benchmark the market price for all or, potentially, some subset of solid waste services. This could be done using a managed competition model that engages public employees as a potential vendor, either with or without a gainsharing component.
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planning. Further, in deciding to contract, City managers are able to determine the terms of the relationship with its contractor, requirements for employing City staff, the cost for use of City streets, and diversion standards and requirements. The best way to evaluate the potential cost savings of contracting and cost impacts to customers is to prepare a request for proposals and seek competitive proposals from private companies.
Potential Revenue
In addition to better controlling City costs, including pension costs, outsourcing the solid waste function has the potential to increase on- going revenues through franchise fees, street repair fees, and one-time revenue related to an upfront franchise payment, selling equipment, and offsetting the City’s transition costs.
Issue a request for proposals (RFP)
to obtain competitive proposals for solid waste collection and recycling services.
Alternative – Use Managed Competition Approach in Solid Waste
Managed competition is a process designed to allow private sector vendors to compete with public sector organizations to provide services in the most cost-effective way possible. The goal is also to encourage vendors and the public sector organization to identify ways to improve efficiency and service to the public at the lowest cost.
A number of cities across the country have used a managed competition approach for solid waste services, including the cities of Phoenix, Arizona and Chesapeake, Virginia.
The financial benefits of a managed competition approach are difficult if not impossible to estimate properly because they depend on many unknown variables including the amount of the cost proposals that would be submitted from prospective vendors and the public sector organization.
Alternative – Use Gainsharing Approach in Solid Waste
As discussed earlier in this report, gainsharing is an approach that creates incentives for improved performance through the structured involvement and participation of employees. As performance improves, and costs are lowered, employees are able to share in a portion of the savings.
Gainsharing presents another alternative for improving services and lowering costs in the solid waste function. In fact, solid waste is one of the Citywide Innovation and Efficiency Assessment, Potential Strategies Efficiencies, Innovations and Previous Recommendations Management Partners
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key areas where gainsharing has been successful in other communities.
However, estimating the financial benefits of gainsharing is not possible at this point. Developing such an estimate would require working with employee stakeholders to identify productivity improvements that lead to cost savings.
Other Solid Waste Changes to Improve Operational
Effectiveness
Though Management Partners recommends the City consider contracting out its solid waste function, we acknowledge this would be a major change and would be challenging in terms of transitioning the services and addressing concerns about displacing City employees. Consequently, if the City decides to continue directly providing solid waste collection services, there are many operational improvements that should be implemented.
One efficiency relates to the work schedule. For example, the Division is exploring whether to move from a 4 x 10 workday to a 5 x 8 workday.
Given the strenuous nature of solid waste work, a 5 x 8 workday makes more sense because worker productivity typically falls late in the day due to the difficult work. We note that one advantage of the current 4 x 10 schedule is that it reduces the number of weekly mobilization/ demobilization cycles from 5 to 4, and this has a positive effect on productivity. Nevertheless, though employees probably prefer the current four-day work week, the current model results in workers picking up refuse from as many as 1,200 houses per day and this exacerbates the productivity challenge.
During our interviews, staff noted that the existing routes are now out of balance due to changes in development patterns. Therefore, an updated re-routing analysis is also necessary to consider transit times to landfills, transfer stations, and other disposal sites.
Conduct a re-routing exercise to
balance routes, workload, and tonnage on a periodic basis.
Further, modern solid waste systems allow all trucks to be monitored in real-time including their location and documenting each location where the loading mechanism is activated. These additional data figures can provide day-to-day assistance for managers overseeing the program.
Utilize Global Positioning System
(GPS) to monitor efficiency of refuse collection trucks.
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Innovation Strategies
The efficiency strategies in the preceding section focus on ways to reduce costs, raise revenue or both. Finding long-term structural solutions to improve Sacramento’s financial outlook is the primary purpose of Management Partners’ work on this engagement.
However, the City Auditor’s Office also requested we include analyses of other improvements or innovations that would enhance organizational effectiveness. In some cases, these innovations are likely to have positive financial implications. However, estimating the financial benefits is often less straightforward or not possible given the available data. In some cases, more in-depth analysis would be required to develop a reasonable estimate than was possible under the current scope of work.
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I1. Improve Fleet Procurement
Strategy Type
Process Improvement and Service Delivery Change
Impact Estimate
Analysis of fleet operations indicated that several innovations are possible. Much of the fleet is composed of older vehicles and the City may be able to reduce maintenance costs by having a more current fleet, which may require rethinking the current “pay as you go” funding approach. Other improved management techniques might also be adopted as noted in this discussion.
Achievability
The City and Fleet Management take justifiable pride in using pay-as- you-go funding to replace the fleet. Sacramento, in its efforts to be a good financial steward, seeks to avoid debt and leverage to the extent it can. As a result, we anticipate there will be potential pushback from those who want to avoid adding debt to the City balance sheet. In anticipation of that concern, we have suggested that this strategy be used only on a limited and case-by-case basis. Implementing this strategy is highly achievable.
Background/Analysis
As discussed previously, the City Auditor’s Office conducted two audits pertaining to the City’s fleet: an assessment of the use of light-duty vehicles in 2011, and a review of the fleet in the Utilities Department in 2019.
During our interviews, Management Partners learned that Sacramento’s capital fleet needs are managed on a pay-as-you-go (i.e., cash) basis, a process that eliminates interest expense. We also learned, however, that Fleet Management’s user departments have a number of vehicles that have reached the end of their useful lives and need to be replaced. Due to a lack of capital funding, those vehicles are being retained in the fleet.
This practice results in higher maintenance costs.
During our interviews with the departments, we were also told that the shortage of replacement vehicles sometimes results in the need to rent equipment rather than buy it, even when buying would be more cost effective. Public Works staff specifically mentioned a need for additional light-duty vehicles and expressed concern about the life cycle costs for some older vehicles. This issue may be partially solved by better Citywide Innovation and Efficiency Assessment, Potential Strategies Innovation Strategies Management Partners
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management of take-home vehicles, as discussed previously in this report.
Fleet Replacement Planning, Funding and Optimal Surplus Point
An effective fleet replacement program has three components:
• A replacement planning process that projects when each vehicle and equipment should be replaced and its projected cost, • A financing and funding process that ensures there are sufficient funds available to purchase vehicles and equipment when the replacement date is reached, and
• Procedures and criteria to identify which vehicles and equipment should actually be replaced given the available resources.
Each of these components is described below.
Fleet Replacement Planning
The City’s fleet of 2,433 units is comprised of 2,179 on-road vehicles and 254 off-road units. A total of 1,632 units (roughly 67% of the fleet) are less than 10 years old, while the remainder of the fleet, numbering 801 units (15% of the fleet) is more than 15 years old. Table 20 shows the age and number of fleet units that range between 5 and 20 or more years.
Table 20. City of Sacramento Fleet Age
Fleet Age Number of Units Percent
5 Years or Less 1,023 42%
6 to 10 Years 609 25%
11 to 15 Years 428 18%
16 to 20 Years 219 9%
Over 20 Years 154 6%
TOTALS 2,433 100%
Typically, public agencies establish replacement criteria that take into consideration years in service, as well as miles or hours driven.
Sacramento appears to use both miles and hours, except for construction equipment for which usage data are not available.
For the most part the City’s life expectancy mileage intervals are comparable with other government agency intervals for sedans and light- duty trucks. However, some medium-duty trucks appear to have replacement intervals that exceed those typically practiced by most government agencies. In addition, some heavy-duty and construction- Citywide Innovation and Efficiency Assessment, Potential Strategies Innovation Strategies Management Partners
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type equipment appear to be replaced prematurely when compared to other government organizations. For example, rollers have a planned replacement interval of seven years. These are typically replaced at between 12- and 15-year intervals in most government agencies. As a result, Sacramento may be replacing certain fleet units prior to or past their optimal life cycle.
Table 21 compares current and recommended replacement intervals based on life cycle, where applicable, for each class of vehicle and equipment (groups of vehicles that share a common use). Recommended replacement life cycle intervals were developed using best practice data applied to the City’s current fleet.
Table 21. Current and Recommended Vehicle and Equipment Replacement Intervals Vehicle Type
Current Life
Expectancy
(years)
Current Replacement
Interval (miles)
Recommended Life
Expectancy
(years)
Recommended
Replacement Interval
Sedans 5-10 100,000-120,000 10 100,000 miles
Light-Duty
Trucks 10 100,000 10 100,000 miles
Medium-Duty
Trucks 10-15 100,000-150,000 10 100,000 miles
Police Patrol
Units 5 100,000 4-5 100,000 miles
Heavy-Duty
Trucks 10-15 100,000-120,000 12-15 100,000-150,000 miles Construction
Equipment 5-15 n/a 12-15 5,000 to 6,000 hours
Adjust life cycle intervals to align
with more common government fleet cycles.
The City has developed a 30-year replacement plan that identifies future fleet replacement costs. This is a best practice. However, surplus values, auction fees and make-ready fees are not included as part of the future replacement costs. These costs should be included in order to determine a more realistic net cost of acquisition.
Incorporate salvage value, auction
fees, and make-ready costs into future fleet replacement costs.
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Replacement Funding
Sacramento does not have an internal service fund dedicated to replacing vehicles and equipment. Instead, departments must budget each year for acquiring fleet units.
Agencies that elect to budget annually for fleet replacement rather than use a replacement fund find that utilizing cash from ad-hoc budget appropriations can be risky. Often vehicles and equipment must compete with other requests for equipment and/or capital projects during the budget process. Consequently, organizations using this method to finance fleet replacement programs may find themselves with older and less reliable fleets if the money is not appropriated as planned.
Sacramento is attempting to catch up on replacing fleet units that were ignored during and after the recession of 2008. We identified 1,060 units whose maintenance costs (labor, parts and commercial work) exceeded their original purchase price. These may be among the reasons the department is transitioning away from the current point system to a software-based approach.
We identified a total of 163 fleet units that, according to Fleet Management’s point system, are due or are overdue for replacement in FY 2020. A review of these vehicles should be undertaken to determine whether their replacement is justified. However, replacing all 163 units is estimated to cost about $16.5 million. It seems unlikely that the City will be capable of using pay-as-you-go funding to replace all 163 units in one year. Consequently, it might be advantageous to explore some other means of financing such as leasing or acquiring a municipal loan.
City leaders should consider establishing a dedicated internal service fund that accumulates funds for future replacements. Fleet customers should be responsible for contributing to the future replacement cost over time. In this way, city departments are made aware of the ownership costs associated with their respective vehicles and equipment in addition to their operational costs.
Develop a dedicated internal
service fund that supports future fleet replacements.
Develop a comprehensive and
accountable chargeback system that supports the fleet
replacement fund.
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Optimum Surplus Point
Keeping units in the fleet beyond their optimum economic life puts a burden on the customers who must endure greater equipment downtime due to more extensive repairs, thereby impacting the ability to accomplish their goals. It also creates a drain on Fleet Management, forcing them to expend more labor hours and parts to keep the units on the road. “Surplusing” units prematurely leads to higher total life cycle costs associated with the purchase of replacement units.
As mentioned previously, Fleet Management is using an abbreviated “point” system to identify when vehicles and equipment should be replaced. Fleet units are assigned points on a scale of 1-10 for various factors relating to age, miles/hours and maintenance and repair costs.
There are plans to add other factors in the near future such as downtime, energy and reliability to the point system using the “CAM” system provided by Asset Works. Many public agencies use this point system today, which is typically referred to as the “Optimal Economic Life Point.” It is considered a best practice for fleet management.
In 2017 Automotive Fleet Magazine published an article related to increases in maintenance costs. As would be expected, their findings demonstrated increased maintenance costs by both odometer and months in service. Figures 33 and 34 present these findings.
Figure 33. Correlation between Odometer Mileage and Repair Costs
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Figure 34. Correlation Between Months in Service and Repair Costs
The study notes that the average cost of a preventative maintenance service is expected to rise by about 2% annually, and as vehicles get older there is a need for more enhanced preventative maintenance schedules to extend useful vehicle life. Taking this into account, the City can use individual vehicle data to create predictable outcomes for needed replacement by analyzing a number of factors, which can then be used to assist in building the chargeback system for departments. These factors include, for example, the likelihood of increased costs upon the vehicle reaching its recommended replacement criteria, avoidable costs vs. unavoidable costs, and the nature of the use of the vehicle. For many vehicles, it may make sense to keep the vehicle well past the expected useful life due to the way it is being utilized.
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I2. Establish a Capital Asset Management System
Strategy Type
Process Improvement
Impact Estimate
Establishing a comprehensive system for assessing capital assets to plan and budget for maintenance and replacement needs is a best management practice. Inadequate planning for the timely replacement of capital assets can negatively impact service delivery, service levels, and public health and safety and increase the risk of failure. Additionally, deferring infrastructure maintenance and replacement can increase long- term capital and operational costs.
City staff have developed a partial inventory of the City’s capital assets (an important component of a capital asset management system) and has identified through separate, siloed efforts approximately $484 million in deferred maintenance and replacement. These efforts should be coordinated as part of a broader effort to establish an asset management plan for the City’s entire infrastructure portfolio.
Achievability
While a partial inventory of capital assets has been completed, establishing a comprehensive asset management system is necessary. This is likely to require consultant support and/or limited term staff, which could implicate procurement, outsourcing and labor issues. We rate the achievability as high, especially since there are risks associated with not having adequately planned for infrastructure replacements.
Background/Analysis
The Government Finance Officers Association (GFOA) has developed best practice information for establishing a capital asset management system.17 Key system components include:
• Underlying policies to guide financial, operational and engineering capital asset management practices (inventorying, funding replacements, monitoring physical conditions, etc.);
17 “Capital Asset Management, Best Practice.” Government Finance Officers Association. March 2010.
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• Performance standards and measures for assessing conditions and prioritizing infrastructure replacement based on risk and consequence of failure; and
• Monitoring and reporting results.18
Infrastructure Inventory
Staff uniformly expressed a desire to accelerate the inventory development process, but also consistently noted a lack of funding as the primary barrier. The departments have, so far, completed inventories for parks, pools and about 150 City-owned properties. To cost-effectively manage and maintain the City’s assets, it is imperative that managers have a current and complete asset list. Managers need to understand the life expectancy, current condition, maintenance needs and preventative maintenance requirements of each asset to develop a long-term management strategy and to minimize costs and potential asset failures.
Complete a comprehensive
inventory of Citywide infrastructure assets that includes condition assessments and priority levels for
maintaining/replacing.
Capital Improvements and Preventative Maintenance Backlog Sacramento cannot effectively maintain its existing facilities footprint consistent with best-in-class industry standards using historical operating methods, staffing patterns and resources. The City will need to determine how to move forward – and the status quo will likely not suffice.
Although currently incomplete, the City has developed separate estimates of unmet or deferred maintenance needs for three infrastructure areas: facilities, parks, and pavement surfaces. Deferred maintenance needs in these areas total an estimated $484 million, as shown in Table 22, below.
18“Capital Asset Management, Best Practice.” Government Finance Officers Association. March 2010.
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Table 22. Summary of Deferred Maintenance Needs for Facilities, Parks, and Pavement (in Millions) Area Maintenance Needs1 Yearly Need2
FY 2019-20
Maintenance Budget
FY 2019-20
Unmet Need3
Pavement $278.0 $27.8 $9.4 $18.4
Facilities Evaluation $44.6 $4.5 $1.8 $2.7
Parks $143.7 $7.2 $0.0 $7.2
Swimming Pools $17.5 $1.8 $0.0 $1.8
TOTAL $483.8 $41.2 $11.2 $30.0
1Deferred maintenance needs currently identified by the City, based on documentation provided to Management Partners 2Current maintenance needs spread over 10 years for pavement, facilities, and pools, and spread over 20 years for parks. 3Remainder of calculated yearly need less amounts approved for maintenance in the FY 2019-20 budget However, this estimate may not represent the full extent of deferred maintenance needs in the City or represent an apples-to-apples comparison, given the siloed data sources. For example, deferred maintenance needs for facilities is based on the 2017 Facility Assessment; needs in parks are taken from the 2019 Parks Department Deferred Maintenance List; and the estimate for pavement maintenance was first reported in the 2017 Pavement Condition Index Report and quoted again in the FY 2019-20 Proposed Budget. Deferred maintenance needs for swimming pools were provided informally by City staff, i.e., they are not reflected in a particular report. The other factor that should not be ignored is that these cost numbers are rising as assets age and, therefore, the City’s total unmet need is literally growing daily.
Develop a comprehensive asset
management system based on best practices to plan and
budget for the maintenance and replacement of City
infrastructure assets.
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I3. Expand the Use of Green Infrastructure
Strategy Type
Service Delivery Change
Impact Estimate
The rationale for expanding the use of green infrastructure is based primarily on goals for improving environmental quality, mitigating impacts and complying with State and Federal requirements. However, green infrastructure can present cost savings19. Often these savings will accrue to private property owners or developers through their development plans. However, the City could also expect savings as a part of its CIP or construction of facilities. It is not possible to estimate the cost savings because they will vary based on the type, size and other factors associated with the specific infrastructure.
Achievability
Given the City’s existing work on green infrastructure as noted elsewhere in this report, it seems expanding and accelerating those strategies at the margin could be moderately achievable.
Background/Analysis
The implementation of green infrastructure projects is gaining popularity in the United States and around the world. The concepts originally focused on achieving compliance with stormwater regulations by decreasing impervious areas and reducing pollutants in runoff. It is now being recognized as a strategy with broad environmental, social, and economic benefits.
Green infrastructure can be especially beneficial for cities in areas with combined sewer systems and the resulting overflows. It can also bring added benefits for flood control, compliance with Clean Water Act requirements, and asset management. In fact, the Environmental Protection Agency (EPA) has highlighted effective green infrastructure policies and practices in Chicago, Philadelphia, Olympia, Portland, Santa Monica, and Seattle.
19 The EPA website features an analysis of a green infrastructure subdivision in Frederick County, Maryland which resulted in cost savings estimated at more than $5 00,000, in addition to savings in wetlands mitigation and a 17% reduction in paving costs.
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The EPA has also recognized the nearby cities of San Jose and Emeryville as cities with green infrastructure best practices.
For example, San Jose integrates stormwater planning into the development process, uses quantitative performance standards, and promotes the use of vegetation and infiltration-based stormwater controls. It also integrates stormwater with its smart growth objectives.
One best practice resulting from San Jose's policy is a 10,000 square-foot threshold for new development and redevelopment. This threshold gives developers an incentive to find creative ways – such as narrow streets, shared driveways, vegetated swales, and pervious pavement – to reduce impervious surfaces below this limit.
Emeryville was faced with a particularly difficult situation of contaminated soils, dense development, and a high-water table. As a result, the City now requires all new development projects to manage stormwater with green infrastructure and to comply with the City’s green infrastructure guidelines. These guidelines offer a range of alternatives including innovative parking strategies and methods to infiltrate, evaporate, harvest and use stormwater such as green roofs and permeable pavements.
A study by the American Society of Landscape Architects (ASLA) found that green infrastructure practices can be cost effective, reduce energy costs, reduce the impacts associated with flood events, and protect public health. ASLA reviewed 479 case studies and found that green infrastructure solutions often reduced costs related to capital and land acquisition, operations, repair and maintenance, and infrastructure replacement. Examples of green infrastructure successes in other cities include the following:
• Chicago used green infrastructure to divert stormwater from the CSO system.
• Portland, Oregon reported cost reductions resulting from porous pavement, green streets, and green roofs.
• Seattle saw a 49% reduction in pavement costs related to the implementation of green infrastructure policies.
Green infrastructure techniques are especially valuable in areas with combined sewers. The City of Sacramento maintains the sanitary sewers in 65% of the City. The SASD maintains the sanitary sewers in the remaining 35% of the City. About 20% of the area maintained by Sacramento (the older central city) has a combined sewer system, i.e., sewage and storm drainage are collected in the same system. In fact, the Sacramento 2035 General Plan establishes a goal to “rehabilitate the Citywide Innovation and Efficiency Assessment, Potential Strategies Innovation Strategies Management Partners
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Combined Sewer System (CSS) to decrease flooding, CSS outflows, and combined system overflows” for this reason.
Green infrastructure has value beyond the combined sewer areas. As part of its compliance with the NPDES stormwater permit, the City must reduce stormwater pollution to the maximum extent possible. Also, the new stormwater permits give credit to green infrastructure projects.
The 2035 General Plan prescribes that Sacramento shall “encourage green infrastructure design and low impact development techniques for stormwater facilities (i.e., using vegetation and soil to manage stormwater) to achieve multiple benefits.” In addition, it requires “proponents of new development to submit drainage studies that … incorporate … green infrastructure and low impact development techniques.”
Sacramento already has excellent examples of green infrastructure project implementation. For instance, the City required the Railyards Development to incorporate Low Impact Development (LID) measures into the project to reduce the increase in runoff volume and reduce the pollutants in the runoff. Multiple bio-retention planters were installed along the roadway to treat all the runoff from the road right-of-way. A bio-retention planter is designed to receive runoff from the adjoining paved areas. A shallow surcharge zone above the vegetated surface temporarily stores runoff. The runoff gradually infiltrates through the root zone of the vegetation and into the underlying sand/peat bed. A variety of natural mechanisms remove pollutants from the runoff as it infiltrates through the root zone and is detained in the sand/peat bed before reaching a base layer of gravel.
As of July 1, 2019, new development and redevelopment projects larger than one acre (including roadways) and stand-alone roadways equivalent to more than five acres are required to incorporate LID controls to reduce the increase in runoff volume by 50% and reduce pollutants in the runoff.
These LID controls include green infrastructure such as bio- retention/stormwater planters and green streets.
The new development/redevelopment requirements are located in Sacramento’s Stormwater Quality Design Manual. The City keeps a database of all LID controls that are installed in the City to demonstrate compliance with its Stormwater NPDES permit and to ensure the controls are maintained. These LID controls are installed on private and public property. Some LID controls or green street locations in the City include:
16th Street public right-of-way between Capitol Avenue and S Street and Railyards Boulevard. The LID controls are utilized to minimize pollutants Citywide Innovation and Efficiency Assessment, Potential Strategies Innovation Strategies Management Partners
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in runoff before discharging to local waterways protecting aquatic life, recreational use of the waterways and the municipal water supply.
The implementation of green infrastructure projects - such as permeable pavement, rain gardens, and planter boxes - may be a cost-effective way for Sacramento to lower costs associated with both its drainage challenges as well as its wastewater treatment obligations. While the City is already working on several green infrastructure issues, we recommend that strategies be explored to expand its green infrastructure work as part of a long-term cost-management strategy with meaningful environmental benefits. Such strategies include improving integration with other planned capital projects, developing greater economies of scale, leveraging partners using incentives (potentially including public-private partnerships or Pay for Success strategies), and rethinking long-term maintenance strategies with a focus on cost reduction.
Expand and accelerate strategies to
implement green infrastructure.
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I4. Analyze the Cost/Benefit of the Community Workforce Training Program (CWTP)
Strategy Type
Service Delivery Change
Impact Estimate
The focus of the Community Workforce Training Program (CWTP) is to prioritize the use of local employees on larger City capital construction projects with local employees. However, the City’s staff report for establishing the program and other background materials provided little or no analysis of the financial impacts to the City arising from the CWTP.
This was likely because it was assumed that designating employees for these capital projects from the local area would have the same cost as hiring employees without regard to where they live.
However, these types of programs have the potential of increasing costs for related projects. Now that the CWTP is in place, the costs should be examined as a part of a regular program evaluation. For example, increasing project costs for capital projects should be of particular concern in Sacramento given the significant backlog of capital investment in facilities and infrastructure. More analysis is required to assess the full costs of the CWTP, whether the program is accomplishing its intended goals, whether benefits outweigh costs, and whether the program may be resulting in unintended consequences.
Achievability
The achievability of this strategy is moderate. Considerable effort will be required to track and analyze project costs and local labor/employment data and evaluate whether the program is having its intended result.
Background/Analysis
In August of 2018, the Sacramento City Council adopted the Local Hire and Community Workforce Training Program (CWTP), which prioritizes contractor use of local labor for City capital projects over $1 million. The objective of the program is to direct the City’s capital spending to the benefit of local and disadvantaged residents.
The CWTP requires such projects to use local, primarily union labor and meet all other requirements of the Community Workforce Training Agreement (CWTA). Since adoption, the program has been applied to two large projects: the McKinley Vault and the Third Street Sewer, and to Citywide Innovation and Efficiency Assessment, Potential Strategies Innovation Strategies Management Partners
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a portion of the Convention Center and Memorial Auditorium projects with no evidence of adverse impacts. For smaller projects undertaken in 2019 (primarily in Parks), where the bidding environment was already challenging, the requirements of the CWTA may have contributed to higher than expected project cost or resulted in unacceptable bid results.
Considering the City’s substantial capital funding needs and the limited capital resources that have been discussed previously, it is appropriate for the City to evaluate the impact of this program on each capital project.
Estimating the additional cost associated with compliance with the CWTA – on a project by project basis – can help the public better understand the trade-offs between the specific policy goals of the program and the City’s need for efficient capital project completion.
However, the current labor market and constrained bidding environment make it difficult to ascertain how, or if, the CWTA impacts the cost of capital projects. If bids come in over budget, particularly for smaller projects in a tight labor market, the underlying reason is not necessarily due to CWTA requirements, but the availability of qualified contractors and sub-contractors.
When the program was first adopted, engineers’ estimates for City projects included a “CWTA factor” to account for increased labor costs associated with the program. However, that practice was discontinued during the bidding phase of the Convention Center project, when it became clear bidders were including any cost they associated with the CWTP in the project estimate for labor and materials.
As one might expect, non-union bidders, usually subcontractors, are more likely to incur additional costs to comply with the union requirement. Contractors on CWTA-compliant projects may use up to four non-union workers, matched with four union workers, but any additional workers must all come from the union ranks. Electrical contractors are likely being impacted more than other trades, as the current makeup of electrical companies in the Sacramento area is 80% non-union, 20% union.
Anecdotal evidence from contractors indicates that sub-contractors’ availability is the most critical factor in meeting bid requirements, not the impacts associated with the program.
The goal of the CWTA is to:
“promote efficiency of construction operations in the construction of major projects set forth in the City of Sacramento’s Capital Improvement Plan and other public works projects,… thereby Citywide Innovation and Efficiency Assessment, Potential Strategies Innovation Strategies Management Partners
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promoting the public interest in assuring the timely and cost- effective completion of such projects, and supporting the efforts of the City to increase employment opportunities for workers who are local area residents, and to provide construction career training and employment opportunities for the City's at-risk youth, military veterans, women and other disadvantaged residents through local apprenticeship and pre- apprentice programs.” The first goal of timely and cost-effective completion of the project was addressed in the agreement by precluding any strikes or work stoppages.
Evaluating whether the second and third goals of increasing employment opportunities for residents and providing training opportunities for disadvantaged residents are being met requires data tracking and analysis. We are advised that the City has partnered with the Sacramento Employment Training Agency (SETA) to provide this type of analysis.
Given the difficulty in estimating any fiscal impact of the CWTP on a specific project, it may be more useful for the City Council to understand whether the hiring and training goals are being met, or at least what impact the program has had on job seekers and trainees in the Sacramento area. The City should be responsible to conduct periodic audits of the SETA-provided information concerning hiring and training outcomes, and to report that information to the City Council.
Conduct periodic audits of hiring
and training outcomes for the Community Workforce
Training Program and report the findings to the City
Council.
With that information in hand, an economic impact analysis can be completed to quantify the CWTP’s impact on changes in the employment rate and economic health for the segment of the community the program is intended to benefit.
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I5. Monetize Sewer and Stormwater Assets for Fiber Optic Deployment
Strategy Type
Revenue Enhancement
Impact Estimate
To be determined based on demand and project scale.
Achievability
While the practice of monetizing sewer and stormwater assets for fiber optic development is relatively new in North America, we suggest Sacramento evaluate whether this might be viable via a pilot program. In an ideal situation, the City would explore the feasibility of partnering with other local jurisdictions that own sewer and stormwater pipes as part of this process. This is an emerging concept for deploying fiber optic infrastructure, but without consultation with other agencies and a review of governing laws, the achievability of this strategy is low.
Background/Analysis
Because of the increasing demand for internet capacity, the demand for fiber optic cable capacity continues to increase. In many jurisdictions, however, the cost of deploying additional cable is very high. In response to this challenge, boutique service providers have begun to use existing sewer and stormwater pipes to deploy fiber optic cable. In addition to being less expensive, this process can reduce street/curb/sidewalk cuts (along with their resulting infrastructure damage) and congestion, lower weather-related outages, and de-clutter aerial/above-ground installations.
Sacramento has not implemented this concept. The City did support the Verizon Public-Private Partnership for 5G and intelligent transportation systems. The City is familiar with the general concept and has also “monetized” utility assets by renting out antenna space on its elevated water reservoirs.
CableRunner International has installed fiber optic cables in sewers in Vienna, Moscow, Copenhagen, Calgary, St. Petersburg (Russia), and Cleveland. San Francisco installed two miles of fiber optic cable in a joint pilot project with CableRunner in 2003. CityNet Telecommunications Inc. has installed fiber optics in Albuquerque, Indianapolis, and Omaha.
The City of Anacortes (Washington) is in the process of connecting its major facilities with fiber optic cable and plans on using this as a Citywide Innovation and Efficiency Assessment, Potential Strategies Innovation Strategies Management Partners
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backbone to serve businesses and residents throughout the entire City.
Portions of the network are being constructed by feeding the fiber optic cables through existing water pipes. They expect this technique to save a significant amount of time and money. The process also has been successfully implemented in the United Kingdom, Spain, New Zealand, and South Africa.
Water UK (United Kingdom), however, took the position that water companies should not allow the introduction of fiber optic cabling into potable water systems, citing risks of contamination hampering of repairs, introduction of restrictions in the pipes, and concerns over public acceptability.
Explore opportunities to monetize
sewer and stormwater assets with telecommunications
utilities.
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Previous Recommendations
In April 2010, Management Partners completed an analysis to help Sacramento with its efforts to develop a plan for long-term financial and service sustainability. The Citywide Financial and Operational Review incorporated 52 recommendations spanning the City’s various departments and program areas, and which we, at the time, estimated would have a positive financial impact on Sacramento ranging from $101 million to $154 million.
About two years later, in May 2012, Management Partners also assisted the City of Sacramento with an analysis of operational efficiencies in the Fire Department. The Fire Innovation and Efficiency Study provided an additional 13 recommendations for improvements in the Department. At the time we estimated these improvements would have a positive financial impact on the City in the range of $8.6 million to $9.6 million.
Sacramento implemented many of the recommendations contained in these two reports. Indeed the 2010 report identified a local sales tax increase as a possible strategy for fiscal sustainability and the City successfully implemented a 0.50% sales tax increase in 2012. This tax was replaced with a full 1% sales tax measure approved in November 2018.
In the spirit of financial sustainability, the consulting team has reviewed these previous recommendations and proposes reconsideration of six strategies, that were presented in one (or both) of the prior reports, but which have not been implemented. We have reexamined each of these strategies and, wherever possible, updated the analysis and financial impact
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PR1. Closely Monitor and Manage City Hiring, Eliminate Vacant Positions and Give Departments Greater Flexibility on Staffing
Strategy Type
Service Delivery Change
Impact Estimate
The City added approximately 145 full-time positions in the adopted FY 2019-20 budget, but these positions have largely yet to be filled. Over the last 11 years Sacramento has gone from 3,954 employees in FY 2007-08, down to 2,749 employees following the Great Recession and now to 3,59920 positions in FY 2019-20. These employee counts represent only the General Fund positions. However, the point is that the City has added a substantial number of employees in each of the last seven fiscal years.
Per capita staffing provides another way of looking at this issue. Staffing now stands at 7.0 positions per 1,000 population, which is up from the 5.7 per 1,000 observed in 2013, but below the 8.5 per 1,000 level that existed in 2008.
Unfortunately, the fiscal realities dictate that the continuation of this growth cannot be maintained, and the City will have to look at other ways of delivering services.
In addition to the 145 positions added in this year’s budget the City has hundreds of additional vacant positions that could be considered for elimination. The City currently has some 831 vacant positions but not all of these are truly vacant, many are temporary positions, and not all are in the General Fund. Reducing the number of vacancies for so-called “non- budgeted positions” and looking at the General Fund only, we estimate the City has approximately 521 vacant positions in the General Fund.
Eliminating the temporary positions leaves approximately 376 vacant career positions.
If we use an average total cost of $110,600 (conservative) and assume half the vacant career positions are eliminated it equates to an annual savings of $20.8 million. Management Partners recommends that this strategy of eliminating vacant positions be considered in the near term for two
20 This is the total number of FTEs authorized under the General Fund. The grand total number of City employees (including all funds) is 4,774.
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reasons. First, it provides immediate budget relief which will allow the City some time to pursue other more complicated strategies set forth in this report. Second, the City has to find alternative means of delivering services that do not rely on traditional full-time employees. The trends facing the City, and reflected in the fiscal model work, are inescapable.
Employee costs are rising much faster than City revenues. The fact is that the City cannot afford its traditional full-time employee-based service delivery approach and the sooner it considers alternatives such as those discussed in this strategy the better for long run sustainability.
Achievability
Although difficult, given the population growth in the City and accompanying increased demands for service, the achievability (indeed the necessity) of reducing the rate of authorized position growth is high.
Sacramento will also need to navigate its internal rules and practices with respect to contracting and outsourcing. It is also likely that this recommendation could require collaboration with one or more of the City’s labor associations.
Background/Analysis
In the 2010 Citywide Operational and Financial Review we prepared for Sacramento, we recommended the City continue its practice of not filling vacant positions without regard to the City’s long-term strategic need for the position. While the observation is now nine years old, the recommendation remains valid as the City’s current hiring pace is unsustainable and will outpace the growth in revenues if continued.
For the FY 2018-19 budget year, employee services made up 52.5% of the City’s $1.1 billion total budget. In the General Fund, expenditures on employee services account for over 90% of the revenues available. The number of full-time equivalent (FTE) positions added for FY 2019-20 to the General Fund operating divisions was projected at 145 FTEs. Over the last seven years the General Fund has added 850 FTE, an average of 121.4 FTE per year.
This cumulative growth in positions, however, is not sustainable given current and projected revenues. The FY 2019-20 budget document states of the General Fund organizations, “The City’s multi-year labor agreements, coupled with growing benefit and pension costs, are driving expenditure growth well in excess of revenue growth.” The rate of increase in employee costs, therefore, makes the current level of position growth unsustainable.
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Furthermore, during several of our interviews, staff from the departments indicated that they believed they could improve service and reduce costs if they were given more flexibility to customize their staffing models (including the use of part-time staff, contingent staff, and contractors).
For example, the Convention and Cultural Services Department has been migrating towards a dynamic staffing model that more closely resembles the peaks and valleys of its facilities-related workload. That transition was driven, in part, by the need to control costs at money-losing venues.
It was facilitated, however, by the attrition in workforce resulting from the multiple facility renovations currently underway and the recent competitive bid process for the operation and management of key facilities. Similarly, Public Works (Maintenance Services) uses a mix of full-time staff (focused on policy and quality assurance/quality control) and contractor personnel (handling some of the frontline tasks) to manage the peaks and valleys of its workload related to resurfacing, streetscape management, and forestry. Examples of other positions that could be managed this way include construction inspectors, consultant engineers, and leaf season employees. We expect that other departments would similarly benefit from greater workforce flexibility. Similarly, IT and the Utilities departments would benefit from the ability to use specialty sub-contractors and niche partners more extensively.
During our interviews, turnover of parks and recreation maintenance entry-level staff was identified as a challenge for the Parks Maintenance Division. In order to make the best use of a workforce constrained by vacancies and a tight labor market, the Department may wish to consider adopting a dynamic staffing model that recognizes differences in facility usage, customer expectations and project priorities and staffs sufficiently to meet operational demand. Dynamic staffing provides management with greater flexibility to deploy limited resources to meet customer service and operational goals, without assuming “one size fits all” for maintenance of city parks, trails, open space and recreation facilities. The model can lead to high impact results in targeted areas, without needing to upstaff beyond the Department’s capabilities.
Additionally, to the extent there are unfilled positions in high turnover areas, analyses can be conducted to determine whether dynamic staffing models consisting of part-time staff, contingent staff or contractors make operational sense.
Internal and External Constraints
The implementation of dynamic staffing models requires consideration of internal and external challenges and constraints, including negotiations Citywide Innovation and Efficiency Assessment, Potential Strategies Previous Recommendations Management Partners
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with applicable bargaining units and evaluating independent contractor status for potential CalPERS/employment impacts.21
Prepare an analysis of unfilled
positions to identify opportunities to eliminate budgeted positions and implement dynamic staffing models.
Allow departments to use part-time
and contract staffing models to provide greater flexibility in meeting service demands and maximizing cost
effectiveness. Implementation of staffing models must
incorporate analyses of internal/external constraints and unfilled positions/turnover rates and may require
negotiations with applicable bargaining units.
21 When considering the hiring of part-time staff or awarding contracts for services, local agencies must apply common law factors to determine whether to classify an individual as an employee or independent contractor, with employees requiring payroll tax deductions and enrollment in CalPERS if working more than 960 hours in a fiscal year. Agencies must also consider CalPERS annuitant status. The 2018 California Supreme Court Dynamex decision places a substantial burden on private sector employers to justify independent contractor status and its immediate impact is not material on public sector employers. However, future impacts could result from changes to State law, whether adopted by the Legislature, established by wage order determinations or adjudicated through the courts.
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PR2. Calculate Fair Labor Standards Act Overtime in a Manner Consistent with Federal Laws
Strategy Type
Expenditure Control
Impact Estimate
The City of Sacramento generally calculates overtime based on the total number of hours worked during a pay period. However, “time worked” can still include some amount of paid leave. As such, based on our estimates, if overtime was calculated in accordance with FLSA rules, the City would realize savings of about 5%, or an average of $1.1 million per year.
Achievability
Though this strategy may be subject to collective bargaining, we rate its achievability as moderate to high.
Background/Analysis
The City Auditor’s Office completed an audit focused on the use of overtime in the Fire Department in February 2017. Further, as Management Partners identified in our 2010 Citywide Financial and Operational Review and again in our 2012 review of the Fire Department, employees continue to receive overtime pay if they exceed a designated number of hours in a pay period. Federal law provides for overtime payment only when an employee’s actual hours worked in the pay period exceed the maximum amount (generally 40 hours per week).
It should be noted that the beginning in 2015/16 The City addressed the sick leave dimension of this problem for most labor groups and this has reduced costs.
However, under the City of Sacramento’s current practice, paid time off such as vacation and other paid leave is treated as hours worked. For example, an employee on a 5/40 schedule, who worked an hour of overtime on Monday, Tuesday, Wednesday and Thursday but took a vacation day on Friday, would be compensated for four hours of overtime for that week despite having worked just 36 hours. In other words, employees are counting leave time so that they can qualify for overtime. It is difficult to precisely estimate savings from this change because overtime use may be impacted by other paid leave time use.
However, overtime expenditures for 2008 through 2018 ranged from Citywide Innovation and Efficiency Assessment, Potential Strategies Previous Recommendations Management Partners
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$12.9 to $35.1 million per year, with an annual average of $21.6 million.
Assuming just 5% of overtime expenses are derived from the use of paid leave rather than time worked, the average savings to the City from FLSA-compliant overtime calculations would have been $1.1 million over that period.
Change overtime calculation
practices to be fully consistent with Federal law.
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PR3. Eliminate General Fund Subsidies for Non-Essential Services
Strategy Type
Process Improvement
Impact Estimate
Eliminating General Fund subsidies for non-essential services will free up funds for core services associated with the public health, safety and welfare. Based upon our prior assessment, we estimate this may save $2.6 million.
Achievability
Given the importance of maintaining essential services, with political will, the achievability of this strategy is moderate.
Background/Analysis
In our 2010 report, Management Partners identified approximately $2.6 million in savings associated with the elimination of General Fund subsidies for fee-charging non-profit entities including:
• Crocker Art Gallery ($1,428,000),
• Sacramento Zoo ($518,000),
• Discovery Museum ($144,000),
• Center for Sacramento History ($339,000), and the
• Sacramento History Museum ($144,000).
Additionally, the City provides General Fund subsidies for its own fee- based services and programs such as operating the marina and pools, as well as making improvements to golf courses (although golf course maintenance is now outsourced). The question posed in this strategy is twofold: First, are these businesses the City needs to support given core public service delivery responsibilities? Second, if continuation is merited can the General Fund subsidy be reduced or eliminated?
As Sacramento continues to experience significant fiscal pressures associated with personnel-related costs, it is critical that the funding of non-essential services, whether provided by the City or non-profit entities, be carefully evaluated to determine what can and/or should be self-supporting.
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be continued and how the level of General Fund support
can be reduced or eliminated.
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PR4. Establish a Paramedic/Ambulance Subscription Program Strategy Type
Revenue Enhancement and Service Delivery Change
Impact Estimate
Based on results in other agencies which were documented in our 2012 Fire Innovation and Efficiency Study, Sacramento could increase its revenues in the range of $1 to $1.5 million per year.
Achievability
The achievability of implementing this recommendation is moderate.
Background/Analysis
The Sacramento Fire Department does not have a paramedic/ambulance subscription program. Subscription programs implemented by other cities have provided additional revenues as well as a safety net for residents who do not have insurance coverage. Our 2012 report for the Fire Department recommended that a subscription program be established. Revenue data from the seven California cities (mainly in Orange County, with the exception of Burbank in Los Angeles County and Corona in Riverside County) we studied in 2012 have been updated and are shown below in Table 23.
Table 23. Ambulance Subscription Program Revenue for FY 2017-18 Jurisdiction Population Annual Membership Revenue
(FY 2017-18 Actual) Revenue Per Capita
Corona 163,585 $902,803 $5.52
Anaheim 349,007 $1,417,210 $4.06
Fullerton 139,976 $1,452,308 $10.38
Huntington Beach 200,415 $893,180 $4.46
Orange 140,289 $411,577 $2.93
Burbank 104,765 $273,953 $2.61
Santa Ana 334,493 $163,429 $0.49
Average 204,647 $787,780 $4.35
Median 163,585 $893,180 $4.06
Sources: 2017 American Community Survey 5-Year Estimates; FY 2019-20 Approved Budget documents; Burbank OpenGov site Based on the experience of other communities, a subscriber rate of 6% of households is a reasonable estimate. With an annual fee between $35 and $50, the City could expect revenue of $1 million to $1.5 million annually.
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We understand that the Fire Department has concerns about how the payer mix, i.e., the percentage of patients being transported for which ambulance costs are covered by Medicare, Medi-CAL, commercial insurance or private pay, may impact the amount of revenue generated from a Sacramento subscription program (and the overall subscriber rate).
A detailed analysis of the patient transport payer mix of each jurisdiction cited in Table 23 as compared to Sacramento is beyond the scope of this engagement. However, based on publicly available data from the UCLA Center for Public Health Policy Research, the relative mix of insurance coverage types by region is not significantly different, suggesting that the patient transport payer mixes are likely similar.
Given the similarities in insurance coverage and the actual average per capita revenue of $4.35 generated by the cities in Table 23 (all of whom have established subscription programs), we believe the revenue range of $1 million to $1.5 million (or $2.00 to $3.00 per capita) for Sacramento is attainable. However, as suggested below in the recommendation, the subscription program could be established as a limited-term pilot project that will give the Fire Department actual data for further evaluation.
As Sacramento ambulance services are an integral part of the Fire Department, this revenue can offset an equivalent amount of General Fund revenue that can then be used for other priorities. The City may wish to explore collaborating with other fire agencies in the Sacramento area to ensure that the benefits of a paramedic/ambulance subscription program are offered on a regional basis.
Establish a paramedic/ambulance
subscription program. Include a cost/benefit analysis of operating the billing and collection program with City staff or by contractor. The program can be established and
marketed on a pilot basis (a two-year minimum is
suggested) to evaluate results and determine continuation.
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PR5. Pursue Legislation to Collect Franchise Fees from the Sacramento Municipal Utility District
Strategy Type
Revenue Enhancement
Impact Estimate
Based on results in other agencies, Sacramento could increase its revenues in the range of $5 to $7 million per year.
Achievability
Given the unpredictability of legislation we rate the achievability as low.
Background/Analysis
Sacramento is in a unique position relative to the local electric utility, Sacramento Municipal Utilities District (SMUD). SMUD is an independent, publicly owned utility chartered by the State that does not pay the City a franchise fee like those paid by investor-owned utilities such as Pacific Gas and Electric Company (PG&E). As SMUD is not a City-owned utility it is not subject to franchise fees accruing to the General Fund, such as those paid by Pacific Gas and Electric (PG&E). This situation deprives the City of a significant revenue source.
Additionally, Article XIII of the City Charter grants authority to the City Council to issue franchises for the use of public rights-of-way, further enumerated in Chapter 3.74 of the Municipal Code.
As franchise fee formulas are complex, often including factors such as gross revenue and miles of public right-of-way used, it is not possible to make a precise estimate on the City’s revenue loss. However, extrapolating from cities that receive franchise fees from private electricity utilities, the loss is probably in the range of $5 to $7 million dollars annually.
Pursue legislation that allows the
City to collect payments to the General Fund from
SMUD, similar to what private organizations pay.
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PR6. Amend Charter to Remove Binding Arbitration for Police and Fire
Strategy Type
Expenditure Control
Impact Estimate
The amount of savings cannot be estimated currently because it would be based on potential future increases in Police and Fire compensation.
Achievability
This would require voter approval and, given the unpredictability of such a vote, we rate the achievability as low.
Background/Analysis
Articles XVIII and XIX of the City Charter provide for binding arbitration for sworn police and fire personnel. Binding arbitration removes the final authority for determining salaries, benefits and other conditions of employment from directly elected representatives and vests it in the hands of a third party without direct financial responsibility for managing the public’s money.
Police and Fire personnel costs represent more the 50% of City’s General Fund budget. An arbitrator looks only at the prevailing practices of other public agencies and does not consider the City Council’s prerogative to establish priorities for core services and service levels and for the expenditure of public funds that reflect a balance of services to the community.
Sacramento has been to binding arbitration twice. In a 2000 arbitration with the police union, the City settled many significant cost issues including enhanced retirement benefits out of fear that the result of arbitration would be worse. In 2004 the City went to arbitration with the fire union and generally prevailed. The reality of binding arbitration is that the employer, fearful of the dynamics of the arbitration process, will often concede and enter into agreements that are more costly and result in fewer dollars available to provide other services.
Binding arbitration is used by a relatively small number of Charter cities in California and is no longer used by General Law cities pursuant to a 2003 state Supreme Court decision. Additionally, the peer cities of San Jose and Stockton referenced in our 2010 report presented Charter amendments to repeal binding arbitration, both of which have been Citywide Innovation and Efficiency Assessment, Potential Strategies Previous Recommendations Management Partners
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approved by local voters. Other cities including Palo Alto, San Luis Obispo and Vallejo have also successfully repealed their Charter provisions for binding arbitration.
Evaluate the feasibility of placing a
Charter Amendment on the ballot to remove the
requirement for binding arbitration for sworn police and fire personnel.
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Conclusion
Sacramento provides a rich array of municipal services and community enhancing programs that set it apart from many other cities. It is evident that decision makers are committed to the concept of a “full-service” city.
At the same time, these services and programs have grown more and more expensive and this leaves Sacramento at a crossroads. As our fiscal model shows, the trend of expenditures outpacing revenues will continue into the 2030s. Moreover, the projections show the current level of expenditures will deplete the City’s reserves relatively soon.
Fortunately, as this report shows, Sacramento has many options to improve operations, increase revenues and reduce costs. However, there will be certain obstacles and opposition in doing so.
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Attachment A – List of Recommendations
Create an innovation strategy to guide internal and external initiatives, drawing from the more developed similar programs in Denver and Phoenix.
Prepare and submit a local ballot measure to modernize the Business Operations Tax.
Convert three positions within the Police Department Digital Forensic Unit from sworn to non-sworn positions.
Convert the Police Volunteer Coordinator position to a non-sworn position.
Conduct an audit of current Police department administrative duties to determine the non-sworn duties that can be consolidated and civilianized.
Convert the Fire Public Information Officer and two IT positions to non-sworn positions.
Conduct an internal audit of current Fire administrative duties to identify non-sworn duties that can be consolidated and civilianized in the future.
Establish a cross-functional team including Public Safety, Information Technology and Finance staff to create a dashboard, monitor and provide guidance to all departments regarding methods to manage overtime.
Develop a process to continually review utility billing to reduce errors, maximize collections, and improve data quality and accuracy of utility billing.
Conduct a third-party audit of utility invoices received by the City.
Implement a business operations tax amnesty program and explore additional tax/fee compliance opportunities based on results.
Conduct a street damage restoration and recovery study to ensure that the excavation cost recovery fee captures all related pavement life cycle costs.
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Establish a moratorium of five years on pavement cuts following new street construction or major resurfacing projects.
Automate human resource and other support service processes and workflows to streamline tasks and eliminate manual systems.
Prioritize the program areas and select at least two to analyze in-depth annually for the next several years.
Expand market-based parking meter fees and enforcement to Sundays.
Develop guidelines to determine when it is most advantageous to use Design-Build and similar public contracting methods to streamline capital project planning/ construction, align with existing strategic partnership initiatives and reduce overall infrastructure costs.
Identify one or two functional areas to begin gainsharing implementation.
Determine departments or functional areas suitable for gainsharing.
Initiate discussions with labor associations affiliated with the identified departments or functional areas.
Issue a request for proposals (RFP) to obtain competitive proposals for solid waste collection and recycling services.
Conduct a re-routing exercise to balance routes, workload, and tonnage on a periodic basis.
Utilize Global Positioning System (GPS) to monitor efficiency of refuse collection trucks.
Adjust life cycle intervals to align with more common government fleet cycles.
Incorporate salvage value, auction fees, and make-ready costs into future fleet replacement costs.
Develop a dedicated internal service fund that supports future fleet replacements.
Develop a comprehensive and accountable chargeback system that supports the fleet replacement fund.
Citywide Innovation and Efficiency Assessment, Potential Strategies Attachment A – List of Recommendations Management Partners
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Complete a comprehensive inventory of Citywide infrastructure assets that includes condition assessments and priority levels for maintaining/replacing.
Develop a comprehensive asset management system based on best practices to plan and budget for the maintenance and replacement of City infrastructure assets.
Expand and accelerate strategies to implement green infrastructure.
Conduct periodic audits of hiring and training outcomes for the Community Workforce Training Program and report the findings to the City Council.
Explore opportunities to monetize sewer and stormwater assets with telecommunications utilities.
Prepare an analysis of unfilled positions to identify opportunities to eliminate budgeted positions and implement dynamic staffing models.
Allow departments to use part-time and contract staffing models to provide greater flexibility in meeting service demands and maximizing cost effectiveness.
Change overtime calculation practices to be fully consistent with Federal law.
Conduct a program-by-program review to determine which non- essential services should be continued and how the level of General Fund support can be reduced or eliminated.
Establish a paramedic/ambulance subscription program.
Pursue legislation that allows the City to collect payments to the General Fund from SMUD, similar to what private organizations pay.
Evaluate the feasibility of placing a Charter Amendment on the ballot to remove the requirement for binding arbitration for sworn police and fire personnel.
Citywide Innovation and Efficiency Assessment, Potential Strategies Appendix 1 – Summary Baseline Forecast of General Fund and Measure U Management Partners
157
Appendix 1 – Summary Baseline Forecast of General Fund and Measure U
Actuals Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Revenues: FY18-19 FY19-20 FY20-21 FY21-22 FY22-23 FY23-24 FY24-25 FY25-26 FY26-27 FY27-28 Property Tax $160.3 $171.3 $180.7 $189.9 $195.6 $203.5 $215.4 $227.8 $241.3 $253.3 Sales Tax 87.7 90.4 93.9 92.7 93.7 99.2 104.9 111.0 115.0 119.1 Utility Users Tax 60.8 61.2 61.7 62.2 62.8 63.4 64.0 64.6 65.2 65.9 Other Taxes 48.9 48.1 48.9 48.3 48.4 49.7 51.2 52.7 53.5 54.4 Other General Revenue 13.9 9.6 10.3 10.3 10.2 10.1 10.0 10.0 10.0 10.1 Enterprise Tax-Utilities 29.0 31.2 32.0 32.8 33.7 34.5 35.4 36.2 37.1 38.1 Dept Revenues 114.6 106.5 109.2 109.8 111.6 115.4 119.4 123.6 126.8 130.1 Total Revenues 515.2 518.4 536.8 546.1 555.9 575.8 600.2 625.9 649.0 671.0 Expenditures:
Salary/Incentive/Benefits 304.1 380.5 394.2 405.1 416.0 426.9 438.0 449.4 461.0 473.0 Pension 81.6 102.1 114.4 123.9 133.6 141.2 149.2 152.0 157.9 163.7 Medical 31.5 32.4 33.5 34.8 36.3 37.9 39.8 42.0 44.4 47.0 Overtime/Other 44.7 44.7 45.5 46.4 47.3 48.2 49.1 50.0 51.0 52.0 Vacancy Savings - (61.0) (12.7) (13.0) (13.4) (13.8) (14.2) (14.6) (15.0) (15.4) Total Personnel 461.8 498.7 574.9 597.2 619.7 640.5 662.0 678.8 699.3 720.3 Services/Supplies/MYOP 130.9 138.6 141.0 143.4 145.9 148.5 151.1 153.7 156.5 159.2 Equip/Capital Outlay 2.3 8.2 8.3 8.5 8.7 8.9 9.0 9.2 9.4 9.6 Reimbursements (130.0) (168.0) (211.4) (198.7) (204.7) (214.7) (222.7) (232.3) (240.4) (248.8) Debt Service 20.9 20.3 19.2 16.4 17.1 16.6 16.6 16.6 16.6 16.6 Capital Projects 19.5 20.3 7.9 8.3 8.3 8.4 8.7 9.0 9.2 9.5 Budget Additions - - - - - - - - - - Efficiencies/Innovation - - - - - - - - - - Fiscal Capacity Used - - - - - - - - - - Total Expenditures 505.5 518.2 539.8 575.2 595.0 608.2 624.7 635.0 650.6 666.4 Net Surplus/(Deficit) 9.7 0.2 (3.0) (29.1) (39.1) (32.4) (24.5) (9.1) (1.5) 4.6 Total Begining Balance 172.4 210.6 210.8 207.8 178.7 139.6 107.2 82.7 73.6 72.0 OPEB Trust Pymts - - - - - - - - - - Chng in Reserves/Adjusts 28.5 - - - - - - - - - Total Ending Balance 210.6 210.8 207.8 178.7 139.6 107.2 82.7 73.6 72.0 76.6 Cash & Investments 204.4 204.6 201.6 172.5 133.5 101.1 76.5 67.4 65.9 70.5 Allocation of Balance:
Nonspendable 0.4 - - - - - - - - - Operating Programs 62.0 57.7 57.7 42.7 42.7 42.7 42.7 42.7 42.7 42.7 Capital Reserves 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 OPEB Reserve 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 Pension Reserve 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 Econ Uncertainty Reserve 55.2 58.7 62.6 66.6 70.8 75.3 80.2 85.6 91.4 97.5 Unassigned Balance 32.9 34.2 27.3 9.3 (34.0) (70.9) (100.4) (114.9) (122.2) (123.7) Unassign+EUR+PERS+OPEB 108.3 113.1 110.1 96.0 56.9 24.5 0.0 (9.1) (10.7) (6.1) % of Total Expenditures 21.4% 21.8% 20.4% 16.7% 9.6% 4.0% 0.0% -1.4% -1.6% -0.9% Sales Tax $64.0 $103.4 $105.1 $103.4 $104.3 $110.2 $116.4 $122.9 $127.1 $131.3 Interest 1.2 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Total Revenues 65.3 103.6 105.4 103.7 104.6 110.5 116.7 123.2 127.3 131.6 GF Program Support 44.5 59.1 79.9 78.2 79.1 85.0 91.2 97.7 101.8 106.1 Library - - - - - - - - - - Econ Develop/New Progs - 7.5 22.0 19.0 16.0 13.0 10.0 10.0 10.0 10.0 Debt Service - - 3.0 6.0 9.0 12.0 15.0 15.0 15.0 15.0 Capital/Other 9.4 22.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 Total Expenditures 54.0 89.2 105.4 103.7 104.6 110.5 116.7 123.2 127.3 131.6 Net Surplus/(Deficit) 11.3 14.4 - - - - - - - - Total Begining Balance 36.2 47.5 62.0 62.0 62.0 62.0 62.0 62.0 62.0 62.0 Chng in Reserves/Adjusts 0.0 - - - - - - - - - Total Ending Balance 47.5 62.0 62.0 62.0 62.0 62.0 62.0 62.0 62.0 62.0 Bal % of Total Expenditures 88.1% 69.5% 58.8% 59.8% 59.2% 56.1% 53.1% 50.3% 48.7% 47.1%
GENERAL FUND
MEASURE U
Citywide Innovation and Efficiency Assessment, Potential Strategies Appendix 2 – Summaries of Managed Competition Case Studies Management Partners
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Appendix 2 – Summaries of Managed Competition Case Studies
Citywide Innovation and Efficiency Assessment, Potential Strategies Appendix 2 – Summaries of Managed Competition Case Studies Management Partners
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Citywide Innovation and Efficiency Assessment, Potential Strategies Appendix 2 – Summaries of Managed Competition Case Studies Management Partners
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Citywide Innovation and Efficiency Assessment, Potential Strategies Appendix 2 – Summaries of Managed Competition Case Studies Management Partners 161
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
MEMORANDUM
DATE: March 5, 2020
TO: Jorge Oseguera, City Auditor
FROM: Howard Chan, City Manager
CC: Mayor and City Council
SUBJECT: CITYWIDE INNOVATION AND EFFECIENCY ASSESSEMENT,
POTENTIAL STRATEGIES REPORT
This communication is in response to the Citywide Innovation and Efficiency Assessment, Potential Strategies Report prepared by the City Auditors Office and the consultant team at Management Partners. As City Manager, I acknowledge the receipt of this report. The purpose of this memorandum is to provide a succinct response to each of the 39 recommendations included in the report.
I would like to take the opportunity to thank the City Auditor and Management Partners for working with all City Departments and the Assistant City Manager team to ensure accurate, thorough, and responsive information was collected. I would also like to thank my staff for making this work a priority and their openness to the recommendations. This truly was a team effort.
Below please find responses to each of the recommendations.
Recommendation 1. Create an innovation strategy to guide internal and external initiatives, drawing from the more developed similar programs in Denver and Phoenix.
Response: The City Manager’s Office supports this recommendation. The City is a leader in innovative initiatives and partnerships. There are many examples of award-winning innovations like Streamline Sacramento, Front Street Animal Shelter, Electrify America, Parking Modernization, 5G Wireless, 311Call Center, Inclusive Economic Development, as well as many more internal efficiency programs. However, the City also recognizes continued opportunity for growth and formalization of the innovation program. The City is currently in the 162
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
planning stages of updating the city’s Digital Strategy that will include an innovation component with a focus on formalizing innovation culture and measuring innovation successes.
R
ecommendation 2. Prepare and submit a local ballot measure to modernize the Business Operations Tax.
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esponse: The Finance Department has continued to recommend this strategy and supports this recommendation.
Response: The Police Department does not support this recommendation. DFU requires investigative experience and the ability to look at, retrieve and investigate highly classified material for criminal misconduct. Investigators must also testify in court and conduct investigations as a sworn officer.
Response: This recommendation has been implemented. The sworn full-time employee has been transferred to the Outreach and Engagement Division. The duties of the Police Volunteer Coordinator have been transferred to professional staff (non-sworn) employee.
Response: The Sacramento Police Department supports this recommendation. However, this recommendation is specific to the Police Training Unit. The Academy, Field Training, and In- Service Training units are staffed by both sworn and civilian personnel subject matter experts responsible for managing the unit and delivering and coordinating training. Generally, training specific to sworn employees is provided by sworn employees and civilian training is delivered by civilian personnel, although some courses are interchangeable. There is a recognized benefit to having sworn officers train sworn and vice versa with civilians as they are most knowledgeable about certain aspects of the job.
Response: The Fire Department believes that it is necessary to have a subject matter expert on fire and emergency incidents (like the Police Department structure). The department does 163
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
not currently have a budgeted sworn Public Information Officer. However, a Captain currently is serving in this capacity.
The Fire Department believes that it is necessary to have a subject matter expert in the IT Captain position as this position requires operational knowledge. Currently, the Department has one sworn IT Captain position. This was reduced from two IT positions in 2016. The IT Captain is the Computer Aided Dispatch coordinator, which handles verification of response files and run zones, represents the Department at regional meetings with their peers, is the communications supervisor for all field communications, and is tasked with managing and project tasking all day-to-day repairs of in service field units.
Response: The Fire Department supports this recommendation and is continually analyzing its staffing models to identify efficiencies. As efficiencies are identified, we are required to work with our local bargaining units to implement.
Recommendation 8. Establish a cross-functional team including Public Safety, Information Technology and Finance staff to create a dashboard, monitor and provide guidance to all departments regarding methods to manage overtime.
Response: The Finance Department, Fire Department, Sacramento Police Department and Information Technology Department supports this recommendation. However, SPD does maintain significant controls over overtime, including management of overtime policies and reporting procedures. This recommendation, while helpful, does not address the driving factors of overtime or the requirement that the Department provide certain services irrespective of staffing levels.
Response: The Department of Utilities (DOU) supports this recommendation and has recently updated the utility review process as part of a billing system upgrade:
1. As mentioned in the report, DOU’s billing system was audited in 2012 and all recommendations were implemented.
2. A significant upgrade of the billing system was completed in May 2019, which corrected many of the challenges with the previous billing system and initiated a utility billing review process. It would be appropriate to operate under the new system for at least two to three years then evaluate timing of a subsequent comprehensive audit. 164
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
3. To further assist, the City Auditor has developed a risk-based audit priority list for the department. Although a billing audit does not currently rank high, this could change over the next few years as we operate the new system and challenges arise.
Response: The Department of Utilities supports this recommendation. As background, the City has various practices and efforts related to auditing of utility invoices received. The City has over 1,800 energy accounts for municipal electricity and natural gas consumption. Currently, staff monitors and tracks energy use at a high level using the city’s energy management system, EnergyCAP, which is used in part for auditing of billing information.
Additionally, an audit of the City’s green efforts is currently underway, which includes analysis of streetlight data and billing, and may recommend process improvements.
Recommendation 11. Implement a business operations tax amnesty program and explore additional tax/fee compliance opportunities based on results.
Response: The Finance Department does not support this recommendation. The department currently contracts with Avenu Insights & Analytics (AI&A) for business operations tax (BOT) compliance. We are currently working to cross check businesses on our vendor payment list with businesses that have City BOTs to determine compliance. Additionally, AI&A cross checks businesses reporting sales tax with our BOT list.
The department currently works with businesses that are out of compliance by waiving late penalties and offering the business a payment plan to allow them the opportunity to come into compliance. Given the current efforts underway, we are moving businesses to compliance and receiving backpay for unreported taxes. As such, the department does not believe that an amnesty program will result in significant savings and may result in a loss to the City.
Response: The Department of Public Works supports this recommendation and has already initiated development of a scope of work for a pavement cut fee study to evaluate appropriate fees and a moratorium policy for pavement cuts on new street construction and recently resurfaced streets. The goal is to bring a proposal forward for City Council adoption by the end of calendar year 2020.
165
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
Response: The Department of Public Works supports a moratorium but will refrain from establishing a timeframe until we have completed our pavement cut fee study to evaluate appropriate fees and a moratorium policy for pavement cuts on new street construction and recently resurfaced streets. The goal is to bring a proposal forward for City Council adoption by the end of calendar year 2020.
Response: The Finance, Human Resources and Information Technology Departments support this recommendation and have already automated new hire and rehire transactions, which are the most labor-intensive transactions. The departments will continue to work together to automate all additional transaction types.
Response: The City Manager’ Office supports the further evaluation of whether managed competition is a viable strategy. This strategy will require discussion with labor unions prior to implementation as it has a potential to impact our unionized workforce.
Response: The Department of Public Works supports this recommendation. The Parking Services Division has initiated a study that is currently evaluating the needs of the overall parking system including parking and mobility enhancements. This will include an initial review of expanding market-based parking meter fees and enforcement to Sundays.
Response: The City Manager’s Office supports this recommendation to develop guidelines for public contracting methods for capital projects to ensure the best contracting method is used.
Historically, the City has used various contracting methods including Design-Bid-Build, Design- Build (DB) and Design-Assist (DA). The DA contracts were also chosen to proceed with construction contracts using the Construction Management at Risk (CMAR) method. Some recent DB examples include Meadowview Navigation Center, Sam & Bonnie Pannell Community Center HVAC Control Replacement, and Energy Efficiency Retrofit Phase II.
Some DA and CMAR examples include the North Natomas Community Center and Aquatic 166
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
Complex, Memorial Auditorium Renovation, Sacramento Convention Center Renovation and Expansion, and Community Center Theater Renovation.
The Department of Utilities (DOU) is using an alternative procurement method, Multiple Award Task Order Contract (MATOC), for the ongoing Accelerated Water Meter Program (AWMP), which is a best-value contractor selection process based on qualifications, performance, and pricing. The process includes Request for Qualifications, Requests for Proposals, Council approval of a Master List of pre-qualified contractors and award of Task Order contracts. DOU has used a similar process to bid the McKinley Vault and 3rd Street Sewer Upsizing projects.
Response: The City Manager’s Office will further evaluate whether gainsharing is a viable strategy.
Response: The City Manager’s Office will further evaluate whether gainsharing is a viable strategy.
Response: If after evaluation gainsharing appears viable, the Human Resources Department will initiate discussions with appropriate labor unions.
Response: The City Manager’s Office supports further evaluation and analysis prior to issuing a request for competitive proposals. It is important to recognize that an evaluation and contracting for these services is a multiyear process and will require discussion with labor unions as it will impact our unionized workforce.
The Department of Public Works is currently evaluating solid waste and recycling services, rates, and opportunities to reduce costs and improve service. Although these services rank high in the latest Community Survey, the department recognizes that the industry and State regulations and requirements continue to change requiring innovative solutions to improve services while being cost effective.
167
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
Response: The Department of Public Works supports this recommendation and is part of the department’s ongoing management practices. The last re-route study was completed in 2017.
A new re-route study will take place in 2020 to right size routes which have become out of balance with much of the new development that has recently occurred in the City.
As noted above, the department is reviewing opportunities to improve services while being cost effective and periodic re-routing is a best practice that the city will continue to implement.
As part of the proposed re-route study, an evaluation will be done to consider transitioning from a 4-10 work schedule in favor of a 5-8 schedule in order to improve efficiencies.
Response: The Department of Public Works supports this recommendation. In fact, the department is currently evaluating a proposal to pilot innovations, to monitor and improve efficiency, such as real time GPS route management, widespread radio frequency identification deployment, and truck mounted pavement assessment equipment.
Response: The Department of Public Works Fleet Management Division supports this recommendation and has already initiated an effort to better reflect life cycle intervals using best practices.
Response: The Department of Public Works, Fleet Management Division will evaluate the recommendations relative to salvage value and auction fees, however, these are subject to real-time market conditions at the time of disposal and can vary significantly. The department already includes make-ready costs into the fleet replacement budget.
Response: The City has already established an internal service fund for the operation, maintenance and replacement of its fleet. Further, funding for annual fleet operations is centralized and departments do not have to “budget” for fleet replacement, rather funding is 168
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
included in the annual budget to replace vehicles based on established replacement criteria. It is important to note that the City actually has a hybrid funding model, whereby investments in our large apparatus including fire and solid waste vehicles are included in the City’s five-year capital improvement program and funds are set aside in advance for these purchases. While it is our goal to fund all replacements in advance of end of useful life, this is not financially feasible at this time.
Response: The Public Works and Finance Departments do not support this recommendation as outlined above in recommendation 26
Response: The City Manager’s Office supports this recommendation. The City has documented inventories for most of its infrastructure including pools, parks, street lighting, traffic signals, bridges, pavement, traffic signs, pavement markings, parking meters, facilities, floodgates, drinking water, wastewater, and storm drainage. Yet not all have condition assessments and priority levels for maintaining/replacing. The report noted that the City has detailed infrastructure studies for some areas (pavement, facilities, parks, swimming pools) that identify over $484 million of deferred maintenance needs. The Department of Utilities has also identified at least $248 million in drainage system deferred maintenance. Further evaluation is needed to identify other areas that may require a comprehensive inventory and detailed study.
Response: The City Manager’s Office supports this recommendation. As noted in the report, the City does have studies identifying deferred maintenance needs (pavement, facilities, parks, pools) of over $484 million yet it does not account for all the City’s infrastructure needs. The Department of Utilities has identified at least $248 million in drainage system deferred maintenance. There are other asset management systems (traffic signs, pavement markings, streetlights, water, wastewater, and others) in use, beyond those listed in the report. The Department of Utilities is in the process of identifying and categorizing all assets and working on finalizing risk models to develop rehabilitation plans for all three water systems. Further evaluation is needed to determine the feasibility and cost of developing a comprehensive asset management system for the maintenance and replacement of the City’s infrastructure. 169
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
Response: The Department of Utilities supports this recommendation. As noted in the report, the City already has several great examples of advancing green infrastructure through development of Stormwater Quality standards and recently completed projects. The department will continue to explore strategies to continue to implement green infrastructure toward meaningful environmental benefits and as part of a long-term cost-management strategy.
Response: The City Manager’s Office supports this recommendation. Currently, outcomes are monitored on a monthly basis. It is anticipated that a report will be provided to the City Council in Spring 2020.
Recommendation 32. Explore opportunities to monetize sewer and stormwater assets with telecommunications utilities.
Response: The Department of Utilities supports this recommendation yet agrees with the report that achievability is low. Some initial challenges that would need to be reviewed include:
1. Wastewater lines are a corrosive environment and would not be suitable for telecommunications infrastructure.
2. Concern that the presence of telecommunications infrastructure in wastewater, or storm drainage lines would hinder the City’s ability to maintain the lines. Maintenance includes high pressure water jetting, root cutting, root killing herbicide.
3. Concern that there may be some liability for the City if the facilities was damaged.
4. Future rehabilitation/replacement would incur extra costs and likely require additional time to complete if telecommunication conduits were located in the City’s mains.
Recommendation 33. Prepare an analysis of unfilled positions to identify opportunities to eliminate budgeted positions and implement dynamic staffing models.
Response: The Finance and Human Resources Departments support this recommendation.
As a matter of practice, positions are continuously evaluated in the context of availability of funds against the needs and demands of our operating departments to deliver programs and services and adjusts accordingly. Many positions that are vacant now are due to the extremely tight labor market. It is difficult in a rules-driven employment process to quickly and efficiently fill positions.
170
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
In addition, it is important to note that the 376 career vacancies (as of March 27, 2019) identified on page 141 of the report did not account for positions that had been alternately filled (position held vacant while non-budgeted position was filled) and that many of the identified positions outside of sworn safety positions are tied to required reimbursements/revenue activities. Consequently, elimination of these positions will not result in savings. Also, of the 376 identified in the report, 149.5 are safety recruits or sworn safety positions. Elimination of the safety positions would significantly affect service levels in both the Police and Fire Departments.
As of February 25, 2020, there are 197 career vacancies. Currently, 99 positions have been filled or in active recruitment, 79.3 positions held vacant are associated with reimbursements/revenues leaving a net 2.5 positions that could be eliminated, creating savings.
Response: The Human Resources Department supports this recommendation. The City will work within the limits of negotiation requirements and the law to provide as much flexibility as possible relative to flexible staffing. In addition, keeping in mind the legislation that went into effect January 1, AB5, which dictates who can be classified as a contractor.
Response: The Human Resources Department supports this recommendation. The City has made improvements to the overtime calculation by excluding sick leave from the calculation.
This will remain on the list for negotiations for all units.
Recommendation 36. Conduct a program-by-program review to determine which non- essential services should be continued and how the level of General Fund support can be reduced or eliminated.
Response: The Finance Department supports this recommendation and works with departments annually to align department budgets with program/service level needs. There is a complete inventory, Program Oriented Development, tied to the budget for all programs/services provided and the resources (positions and dollars) required to run these programs/services. Prior policy decisions have been to continue funding these programs/services.
171
Howard Chan
City Manager
City Hall
915 I Street, Fifth Floor
Sacramento, CA 95814-2604
916-808-5704
Response: The Fire Department supports the evaluation of a subscription program. However, the department strongly disagrees with the financial estimates provided by the consultant ($1-
1.5 million annually). The department estimates that the additional annual revenue is closer to $500K.
Further complicating the implementation of this type of program is that the ambulance transport program in Sacramento County is a borderless system with the closest ambulance dispatched, regardless of the changes made to the City’s Fire Department. The department believes that a subscription program may be more successful if it is implemented by all four fire agencies (Sacramento, Sacramento Metro, Folsom, and Cosumnes). Implementation of a city- only program will require the development and implementation of countywide policy for ambulance transport by a non-city ambulance.
Recommendation 38. Pursue legislation that allows the City to collect payments to the General Fund from SMUD, similar to what private organizations pay.
Response: This recommendation was also included in the previous Management Partners report. At that time, the City Council was not supportive of pursuing this legislative change, which likely would result in increased rates.
Response: This recommendation along with any City Charter amendment requires direction from the City Council.
172
City of Sacramento
Law and Legislation Committee Report
915 I Street Sacramento, CA 95814
www.cityofsacramento.org
File ID: 2023-01252 10/3/2023 Discussion Item 3.
Business Operations Tax Modernization
File ID: 2023-01252
Location: Citywide
Recommendation: 1) Receive a report on options to modernize the City’s Business Operations Tax (BOT); and 2) Pass a Motion directing staff to draft a BOT modernization ballot measure for Council consideration.
Contact: Pete Coletto, Director of Finance (916) 808-5416, [email protected]; Jackie Rice, Finance Manager (916) 808-5844, [email protected]; Bryan Howard, Program Manager (916) 808-4847, [email protected], Department of Finance Presenter: Pete Coletto, Director of Finance, (916) 808-5416, [email protected]; Jackie Rice, Finance Manager, (916) 808-5844, [email protected], Department of Finance Attachments:
1-Description/Analysis
2-Business Operation Tax Modernization
3-Resolution 2017-0078
Additional Description/Analysis
Issue Detail: The City’s BOT was enacted by Ordinance in 1975 and, for non-cannabis businesses, was last updated in 1991. Minimum payment, maximum payment, and gross receipts thresholds have not been adjusted for inflation since 1991. In 2010 and again in 2020 Management Partners recommended modernization of the City’s BOT as a strategy to enhance revenue. The City’s 5-year forecast in the Fiscal Year (FY) 2023/24 Approved Budget projects a structural deficit with ongoing expense growth outpacing revenue growth over the term of the forecast. In 2010 Council considered placing a measure on the ballot but ultimately did not move forward. During the FY 2023/24 budget hearings, Council directed staff to explore options to modernize the City’s BOT.
City staff has examined practices in similarly sized cities in California to develop options for updating BOT policies and rates (Attachment 1). Staff findings include the need to adjust for
File ID: 2023-01252 10/3/2023 Discussion Item 3.
previous and future inflation, the need to increase the maximum annual payment cap, and opportunities to standardize rules to make the BOT easier to understand and administer. Based on these findings staff developed three options for consideration to modernize the City’s BOT.
Option 1 - Inflation Adjustment
· Inflation adjustments for gross receipt tax businesses based on Consumer Price Index (CPI) growth from 1991 to 2023:
· Gross Receipts minimum threshold from $10,000 to $22,810; · Minimum payment from $30 to $68;
· No change to 0.04% rate
· Inflation adjustment of flat fee for all professionals to $684 and per employee rate to $68.
· Inflation adjustment of flat fee for all rentals/hotels to $114 and per room/unit rate to $2.85.
· Add an annual inflation adjustment tied to CPI.
· Increase maximum annual payment cap from $5,000 to $11,405.
Staff estimates that Option 1 would result in additional revenue of approximately $3.0 million in the first full fiscal year.
Option 2 - Higher Rate/Remove Cap
· Inflation adjustments for gross receipt tax businesses:
· Gross Receipts minimum threshold from $10,000 to $22,810; · Minimum payment from $30 to $68;
· Increase rate from 0.04% rate to 0.06%
· Inflation adjustment of flat fee for all professionals to $684 and per employee rate to $68.
· Inflation adjustment of flat fee for all rentals/hotels to $114 and per room/unit rate to $2.85.
· Add an annual inflation adjustment tied to CPI.
· Remove maximum annual payment cap.
Staff estimates that Option 2 would result in additional revenue of approximately $17.2 million in the first full fiscal year.
Option 3 - Staff Recommendation
· Inflation adjustments for gross receipt tax businesses:
· Gross Receipts minimum threshold from $10,000 to $50,000; · Minimum payment from $30 to $50;
· No change to 0.04% rate
· Inflation adjustment of flat fee for all professionals to $684 and per employee rate to $68.
File ID: 2023-01252 10/3/2023 Discussion Item 3.
· Inflation adjustment of flat fee for all rentals/hotels to $114 and per room/unit rate to $2.85.
· Add an annual inflation adjustment tied to CPI.
· Increase annual maximum payment cap from $5,000 to $150,000.
Staff estimates that Option 3 would result in additional revenue of approximately $6.6 million in the first full fiscal year.
There are pros and cons associated with each of the three options:
Staff is recommending Option 3 as it strikes the best balance between raising revenue and impacting business while having a minimal impact on businesses grossing under $12.5 million per year.
In order to meet deadlines for the March 2024 ballot, the Committee must pass a motion directing staff to draft a BOT modernization measure for Council consideration on October 31, 2023.
Council would then need to take additional action on November 14, 2023 to put the item on the March 2024 ballot.
Policy Considerations: Modernization of the BOT is consistent with council adopted Core Budget Policies and Guidelines adopted February 14, 2017 (Resolution 2017-0078, Attachment 2). These policies call for one-time resources only be used for one-time costs; ongoing expenditures should be matched with ongoing financing sources and reserves are to be used in a planned and strategic manner. The City's BOT has not been updated since 1991 and since that time City expenses have increased, while the $5,000 annual BOT payment cap has not increased, nor have minimum BOT
File ID: 2023-01252 10/3/2023 Discussion Item 3.
payments. The City Budget is forecast to be in structural deficit with expense growth outpacing revenue growth.
In addition, the City’s low maximum annual BOT payment cap creates a regressive tax rate structure.
When considering adjustments to the BOT, it is important to recognize that a gross receipts tax is a ‘top line’ tax that does not consider business expenses and can have a larger impact on low margin businesses. The City must also take into consideration that some businesses with high gross receipts may also be large sales tax generators, and a high BOT rate could cause those firms to move or close, negatively impacting other general purpose revenues.
Economic Impacts: The economic impact of a BOT modernization would be dependent on the modernization strategy pursued. However, the increased tax burden will support and help offset the increased cost of essential City services, which also serve local businesses.
Environmental Considerations: Not applicable.
Sustainability: Not applicable.
Commission/Committee Action: Not applicable.
Rationale for Recommendation: During the FY 2023/24 Budget Hearings, Council directed staff to explore modernization options for the City’s BOT. Given best practices in similarly situated jurisdictions and consideration of impact to local businesses, staff is recommending Option 3 as it balances the goal of modernization with minimizing the impact on businesses grossing under $12.5 million per year.
Financial Considerations: The City's FY2023/24 Budget projects a structural deficit with the City facing increased cost growth. Staff revenue estimates were based on FY2022/23 BOT data.
Increased revenues from the three options presented by staff range from $3.0 million per year to $17.2 million per year. Adjusting annually for inflation would increase revenues in subsequent years.
In addition, the City has substantial unfunded pension and capital infrastructure liabilities.
Modernizing the BOT and raising general purpose revenue is an important step in improving the City’s fiscal position.
Local Business Enterprise (LBE): Not applicable.
BUSINESS OPERATIONS TAX
MODERNIZATION
BUSINESS OPERATIONS TAX MODERNIZATION
• During the Fiscal Year 2023-24 Budget Hearings, Council directed staff to explore modernization options for Business Operations Tax (BOT). • The BOT on non-cannabis businesses has not been updated since 1991, and the limits established in 1991 have not been adjusted for inflation. • In 2010, Council considered a recommendation to increase the gross receipts rate and the maximum payment cap, but did not advance it to the ballot • Proposal was to increase BOT rate from 0.04% to 0.064% over 3 years and increase the maximum payment cap to $30,000
• As the voters have recently acted on the Business Operations Tax for cannabis businesses, the following presentation is to present options for updating the BOT for non-cannabis businesses.
CURRENT SACRAMENTO BOT
• Established in 1975 and last updated in 1991.
• The maximum BOT payment cap is $5,000 per year for all businesses. • Charitable and non-profit organizations that are exempt under State or Federal law are exempt from payment of the City’s BOT.
• Landlords renting 3 or fewer units are exempt from BOT. • Accountants, Architects, Attorneys, Doctors, Engineers etc • Flat rate based on # years with license up to $300 plus $30 per licensed employeeProfessional Business Owners • Real Estate Broker, Insurance Broker, or Stock Broker • Flat rate of $100 for primary broker plus $30 per licensed employeeProfessional Brokers •Flat rate of $50 for hotel/motel/short term rental plus $0.75 for each unit in excess of 4 •If renting 4 or more residential units, $25 flat fee + $1.75 per each unit in excess of 4Housing & Shelter •Gross receipts equivalent amount determined by expenses in the City or by building permit cost. •0.04% of gross receipts equivalent ($0.40 tax for every $1,000 in gross receipts) for gross receipts over $10,000
Construction / Manufacturing /
Admin Headquarters
• 0.04% of gross receipts ($0.40 tax for every $1,000 in gross receipts) for gross receipts over $10,000. All Other Businesses
BOT REVENUES BY FISCAL YEAR EXCLUDING CANNABIS (MILLIONS) $8.2
$9.3
$10.0
$7.3
$8.0
$8.9
$8.1
$9.1
$8.5
$9.7
$8.9
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 BOT REVENUE BY CATEGORY FY 2022-23 (MILLIONS)
Professional Owner
$0.6
7%
Professional Broker
$0.1
1%
Residential Rental
$0.1
1%
Hotel/Motel/Short-
T erm Rental
$0.1
1%
Gross Reciepts Based
$7.5
84%
Construction /
Manufacturing /
Admin
$0.5
6%
BOT BUSINESS PROFILE – FY 2022-23
Annual Gross Receipts FY 23 # Businesses T otal BOT
Revenue
Effective BOT
Rate
$0 - $10,000 6,433 $0.3 0.869%*
$10,001 - $100,000 5,872 $0.3 0.125%
$100,001 - $1,000,000 5,306 $1.0 0.051%
$1,000,000 - $5,000,000 2,310 $2.1 0.042%
$5,000,001 - $12,500,000 569 $1.8 0.040%
$12,500,001 - $25,000,000 201 $1.0 0.029%
$25,000,001 - $50,000,000 96 $0.5 0.014%
$50,000,001 - $100,000,001 54 $0.3 0.008%
$100,000,000+ 37 $0.2 0.001%
Total – Gross Receipts Businesses 20,878 $7.5M 0.020%
Total Professionals 1,859 $0.7M
Total Rentals 1,735 $0.2M
Total Other 155* $0.5M
Grand T otal 24,627 $8.9M
*Excludes count of construction businesses (associated revenue is included)
COUNCIL REQUEST METHODOLOGY
T o examine BOT modernization options, staff considered the following:
• Practices in peer city jurisdictions to examine best practices among similarly sized California cities.
• Generally accepted criteria for a good tax system:
• Adequacy – provides enough revenue to meet demand for public services; • Administrative Ease – rules are well known and fairly simple; the taxing authority can tell if taxes are paid correctly and on-time, and the taxing authority can conduct audits in a fair & efficient manner;
• Efficiency – minimize economic distortions of a tax;
• Fairness/Equity – similarly situated taxpayers pay similar amounts & differing ability to pay taken into account;
• Simplicity - taxpayers can easily calculate how much they owe; and • Transparency – taxpayers can easily find information about the tax system & how tax dollars are spent.
PEER JURISDICTIONS (EXCLUDING CANNABIS)
Jurisdiction Min Max
Gross
Receipts
Threshold
T ax Rate Other Info
Bakersfield $25 None None 0.03% then lower at higher GR levels Folsom $40 None None Varies based on level of GR with high of
0.125% and low of 0.005%
Indexed to inflation
For certain businesses
flat fee plus per
employee or per sq ft
charge
Fresno
Some
businesses
assessed flat
fee
$21,200 $5,000 ($1,250 per
quarter)
0.09% to 0.28% (lower rate at higher
GR level)
Long Beach $272 None N/A Per employee charge ranging from $11 to $34 per employee
Some businesses have
flat rate plus per
vehicle, per space etc
charge
Oakland $60 None Varies from $17k to
$120k
0.05% to 0.5% based on business type &
GR levels
Property rentals
1.395%
San Francisco None None None 0.09% to 0.94% based on business type & GR levels
San Jose $213 $176,439 N/A Per employee tax ranging from $35 to $71 per employee Indexed to inflation
FINDINGS
• Inflation – The $5,000 maximum established in 1991 would equate to over $11,000 in 2023 dollars. City operating costs have also experienced inflation. A modernized BOT should adjust for inflation & contain a mechanism for future inflationary adjustments.
• Peer Jurisdictions – Many peer jurisdictions do not have a cap on annual BOT payments. Those with a cap have it set significantly higher than the current $5,000 cap in the City of Sacramento.
• Administrative Factors – Standardizing rules where possible makes the tax easier to understand and administer.
MODERNIZATION OPTIONS
Based on the findings, staff developed 3 modernization options for consideration:
Option 1 – Inflation Adjustment
Option 2 – Increase Rate / Remove Annual Cap
Option 3 – Staff Recommendation (Maintain Rate / Higher Annual Cap) In each of the options, staff is recommending other modernizations such as indexing any caps or thresholds to inflation, standardizing flat & per employee rates for brokers & professionals, standardizing flat rate and per unit rate for rentals and hotels, and lowering the exemption for rentals to fewer than 2 units.
OPTION 1 – INFLATION ADJUSTMENT
Assumptions:
Gross receipts tax:
Gross Receipts minimum threshold from $10,000 to $22,810; Minimum payment from $30 to $68; and
No change to 0.04% rate.
Flat fee for all professionals to $684 & Per Employee Rate to $68 to account for inflation. Flat fee for all rentals/hotels to $114 and per room/unit rate to $2.85 to account for inflation. Annual inflation adjustment going forward tied to Consumer Price Index. Increase annual maximum payment cap from $5,000 to $11,405.
Revenue Impact:
~$3.0M in the first full Fiscal Year with increases in future Fiscal Years OPTION 2 – INCREASE RATE / REMOVE CAP
Assumptions:
Gross receipts tax:
Gross receipts minimum threshold from $10,000 to $22,810 Minimum payment from $30 to $68
Increase rate from 0.04% to 0.06%.
Flat fee for all professionals to $684 & Per Employee Rate to $68 to account for inflation. Flat fee for all rentals/hotels to $114 and per room/unit rate to $2.85 to account for inflation. Annual inflation adjustment going forward tied to Consumer Price Index. Remove annual maximum payment cap.
Revenue Impact:
~$17.2M in the first full Fiscal Year with increases in future Fiscal Years OPTION 3 – STAFF RECOMMENDATION
Assumptions:
Gross receipts tax:
Gross receipts minimum threshold from $10,000 to $50,000; Minimum payment from $30 to $50; and
No change to 0.04% rate.
Flat fee for all professionals to $684 & Per Employee Rate to $68 to account for inflation. Flat fee for all rentals/hotels to $114 and per room/unit rate to $2.85 to account for inflation. Annual inflation adjustment going forward tied to Consumer Price Index. Increase annual maximum payment cap from $5,000 to $150,000.
Revenue Impact:
~$6.6M in the first full Fiscal Year with increases in future Fiscal Years
OPTIONS REVENUE IMPACT BY BUSINESS SIZE
Annual Gross Receipts
FY 23
#
Businesses
Option
1 Option
2 Option
3 $0 - $10,000 6,433 $0.14 $0.14 $0.03
$10,001 - $100,000 5,872 $0.13 $0.16 ($0.01)
$100,001 - $1,000,000 5,306 $0.08 $0.46 ($0.07)
$1,000,000 - $5,000,000 2,310 $0.04 $1.05 ($0.03)
$5,000,001 - $12,500,000 569 $0.01 $0.89 ($0.00)
$12,500,001 - $25,000,000 201 $0.41 $1.11 $0.41
$25,000,001 - $50,000,000 96 $0.60 $1.54 $0.87
$50,000,001 - $100,000,001 54 $0.34 $1.93 $1.19
$100,000,000+ 37 $0.24 $8.76 $3.11
T otal – Gross Receipts 20,878 $2.00 $16.05 $5.49
T otal Other Categories 3,749* $1.00 $1.13 $1.07
T otal 24,627 $3.0 $17.2 $6.6
Revenue Impact vs Current BOT ($ millions)
*Excludes count of construction businesses (associated revenue is included)
GROSS RECEIPTS EFFECTIVE TAX RATE BY BUSINESS SIZE
Annual Gross Receipts
FY 23
#
Businesses Current Option
1 Option
2 Option
3 $0 - $10,000 6,433 0.869%* 1.486%* 1.486%* 1.093%*
$10,001 - $100,000 5,872 0.125% 0.176% 0.186% 0.121%
$100,001 - $1,000,000 5,306 0.051% 0.056% 0.074% 0.048% $1,000,000 - $5,000,000 2,310 0.042% 0.043% 0.062% 0.041% $5,000,001 - $12,500,000 569 0.040% 0.041% 0.061% 0.040% $12,500,001 - $25,000,000 201 0.029% 0.040% 0.060% 0.040% $25,000,001 - $50,000,000 96 0.014% 0.032% 0.060% 0.040% $50,000,001 - $100,000,001 54 0.008% 0.017% 0.060% 0.040% $100,000,000+ 37 0.001% 0.003% 0.060% 0.022%
T otal 0.020% 0.026% 0.063% 0.035%
*Excludes businesses with zero reported gross receipts
MODERNIZATION OPTION SUMMARY
Option 1 – Inflation
Adjustment
• Adjusts all levels for inflation
• Maintains 0.04% rate
• Standardizes
professional/rental rates &
adjusts for inflation
• Future inflation adjustments
• Maintains more regressive
structure
• $3M/year revenue impact
Option 2 – Higher Rate /
Remove Cap
• Adjusts all levels for inflation
• Increases rate from 0.04% to
0.06%
• Standardizes
professional/rental rates &
adjusts for inflation
• Future inflation adjustments
• Removes annual payment cap
• $17.2M/year revenue impact
Option 3 – Staff
Recommendation
• Smaller adjustment to
minimum payment & raises
gross receipts threshold
• Maintains 0.04% rate
• Standardizes
professional/rental rates &
adjusts for inflation
• Future inflation adjustments
• Maximum annual cap to
$150k
• Businesses under $12.5M per
year in gross receipts
generally see reduction in
BOT
• $6.6M/year revenue impact
MODERNIZATION OPTION IMPACTS
Option 1 –
Inflation Adj
Pros
•Lowest impact on businesses
•Accounts for inflation in future
years
Cons
•Lowest revenue increase
•Maintains regressive tax rate
structure
Option 2 – Raise
Rate / Remove
Cap
Pros
• Largest revenue impact
• Accounts for inflation in future
years
• More progressive tax structure
Cons
• Largest impact on business
• Larger share of revenue reliant on
smaller number of businesses
• Potential impact on sales tax
revenue
Option 3 – Staff
Recommendation
Pros
• Significant revenue impact
• Firms with GR under $12.5M see
net decrease
• Accounts for inflation in future
years
Cons
• Lower revenue than Option 2
• Higher impact on business than
Option 1
OTHER CONSIDERATIONS
• Projected structural budget deficit
• BOT limits unchanged since 1991 & not indexed to inflation • City expense growth outpacing revenue growth
• Impact on businesses
• Low $5k current tax creates regressive effective tax rate structure on businesses • Gross receipts tax is ‘top line’ tax and can have larger impact on lower margin businesses • Large gross receipts businesses may also be large sales tax generators & too large of a BOT could cause firms to close or leave
• Increases could be phased in to help mitigate impact on businesses • Timing of ballot measure & budget development process
NEXT STEPS
Earliest opportunity to put on the ballot would be the March 2024 primary. T o make March 2024 ballot deadlines, the City would need to follow the timeline below:
Oct 3, 2023 - Law & Leg Committee to provide direction and/or advance recommendation to Council
Oct 31, 2023 – Council considers BOT Modernization Ordinance Nov 14, 2023 – Council acts to put item on March 2024 Primary Election
QUESTIONS & DISCUSSION
RESOLUTION NO. 2017-0078Adopted by the Sacramento City Council February 14, 2017 APPROVING FY2017/18 BUDGET DEVELOPMENT PRINCIPLES BACKGROUNDA. The City Manager is required to present a balance budget to the Mayor and City Council no less than 60 days prior to the beginning of each fiscal year pursuant to Article 9, Section 111 of the City Charter. B. Establishing and adopting budget development principles by the Council at the beginning of the annual budget process provides direction to the City Manager and establishes a framework for developing and discussing the City’s proposed budget for next fiscal year. C. The City of Sacramento, through the leadership and direction of the Mayor and City Council, has maintained a sustainable budget philosophy. Given this concept of fiscal sustainability, the Council adopted Core Budget Policies on March 17, 2015 (Motion No. 2015-0059) and modified them on March 1, 2016 (Motion No. 2016-00265), for the development of an annual budget. BASED ON THE FACTS SET FORTH IN THE BACKGROUND, THE CITY COUNCIL RESOLVES AS FOLLOWS:Section 1. The FY2017/18 Proposed Budget shall be based on the following core budget policies: 1. City Council must adopt a balanced budget. 2. Funding decisions should be consistent with Council adopted policies. 3. The Economic Uncertainty Reserve shall be maintained at a minimum of 10% of budgeted General Fund revenues. Resources shall be added to maintain this level through the budget and midyear processes as necessary. Resolution 2017-0078 February 14, 2017 Page 1 of 3 Section 2. The FY2017/18 Proposed Budget shall be developed and managed based on the following budget guidelines: 1. Maintain a fiscally sustainable, balance budget. 2. The Mayor and Council’s priorities, based on community input, should drive the budget creation. 3. Continue a community-based budget process where city residents are engaged and educated on budget processes and provide feedback on budget priorities. 4. Look for ways to grow the reserve beyond its current goal. 5. All budget actions must be considered in a five-year context, with new revenues not counted or spent until realized. One-time resources should be used for one-time needs, not ongoing expenses. 6. Do not make spending decisions in isolation. Avoid spending money on one-off projects or without looking at the big picture. Understand long-term consequences and opportunity costs. 7. Keep Council informed on the fiscal condition of the City and conduct continuous evaluations for efficiencies and effectiveness. 8. The City must consistently look for opportunities to proactively grow revenues instead of simply being reactive. 9. Make every effort to identify private financing or federal and state grant opportunities before using City resources. Pursue new and enhance existing revenue sources. 10. Before new expenditures are made, identify return on investments and impacts; fiscal and social benefits. 11. Address unfunded long-term liabilities. 12. Remain a full-service City. Resolution 2017-0078 February 14, 2017 Page 2 of 3 Adopted by the City of Sacramento City Council on February 14, 2017, by the following vote:Ayes: Members Ashby, Carr, Guerra, Hansen, Harris, Jennings, Schenirer, Warren and Mayor Steinberg Noes: None Abstain: None Absent: None Attest:The presence of an electronic signature certifies that the foregoing is a true and correct copy as approved by the Sacramento City Council.
Resolution 2017-0078 February 14, 2017 Page 3 of 3
e-Signed by Shirley Concolino on 2017-03-16 17:41:53 GMTCity Clerk, MMCMarch 16, 2017