March 28, 2005
Mr. Cal Horton
Town of Chapel Hill
300 North Columbia Street
Chapel Hill, NC 27516
Dear Mr. Horton:
MAXIMUS, INC. is pleased to present a proposal to the Town of Chapel Hill for the following a full study of revenue enhancement and fees, in response to your request last week. In addition, we have incorporated a proposal to conduct an A-87 cost allocation plan and a full cost allocation plan.
The following proposal details the proposed services MAXIMUS can provide to the Town.
The Town provides many fee-related services to its citizens and, in some cases, non-residents. In many cases these fees are outdated and have little or no relationship to the cost of providing these services. Subsidization of these services results from not updating the fee schedules. The Town understands that the costs for some of these services should be recovered at full cost. Other services should only have partial cost recoveries.
The Town needs to diversify and increase its revenue base in order to maintain or enhance the service levels it provides to its citizenry. Therefore, the Town is interested in analyzing the cost of service and revenue relationships that exits among the various fee for service activities. The results of this analysis will provide the tool for understanding the current service levels, the cost and demand for those services, and what fees for service can and should be charged.
The Town recognizes the benefit from using outside professional expertise to assist in this engagement. Town staff could not complete this work in-house without jeopardizing current responsibilities. Furthermore, without qualified outside professional assistance, the Town could not successfully implement a comprehensive program within the immediate timeframe. Based on our firm’s experience in other jurisdictions, we can produce the comprehensive results the Town desires. We believe that with our assistance, the Town of Chapel Hill will have the knowledge and ability to maximize its revenue equitably between all service users.
SCOPE OF SERVICES
MAXIMUS proposes to complete the following scope of service for the Town of Chapel Hill:
· The focus of the fee element of this project will be on the Town’s land development and regulation systems. It excludes all other fee activities.
· Develop a schedule of current fees and charges that identifies to whom the service is provided and the basis for the current fee.
· Determine the full cost of providing the service to the outside user. Cost will include not only the direct department cost, but an allocation of administrative and overhead costs.
· Analyze revenue potential in service areas not currently charging a user fee.
· Identify new and/or increased fees and projected revenue increases for possible implementation.
· Identify factors that might affect a decision to implement a fee structure based on recovery of full costs.
· Prepare a draft report on the fee analysis summarizing the results of the fee study and projecting revenues.
· Prepare a final report of the fee analysis.
· Develop and present a presentation package, prepared in conjunction with Town staff, which will present the data and explain the costing structure to Town officials and Town Council at a regularly scheduled Council meeting.
· Assist staff, as needed, in developing implementation recommendations for adjusted fees/fee structures.
· Prepare an A-87 and full cost plan for all Town activities. The Town’s central service costs (administrative and overhead) must be included when determining the cost of services for this user fee study. A central services cost allocation plan will accomplish this objective by determining indirect costs at the department level. MAXIMUS offers the Town a scope of work that includes the completion of a fully documented cost allocation plan that is prepared using “full cost” guidelines. Since our approach for gathering this information for a fee study and our methodology for cost plan analyses are essentially the same, we can provide this added value without increasing the overall project cost.
Revenue and User Fee Study
The work program to provide the Revenue and User Fee Study for the general fund departments is divided into two phases and a total of eight (8) tasks. The first phase is concerned with the development of the Cost of Services Analysis itself. The second phase is concerned with the presentation of the results to the Department staff, Town officials, and interested third parties. Following are descriptions of the eight tasks required for the completion of this study.
Phase I - Development of the Cost of Services Analysis
MAXIMUS will conduct a cost/revenue analysis to determine the full cost of services. Following is a breakdown of the first five tasks.
Task 1. Initiate User Fee Project.
A. Establish Town's Priorities and Goals. An initial meeting is held with the Town's management staff to determine the exact parameters of the engagement. MAXIMUS staff understand the general goals going into the engagement; however, having an initial meeting to set and determine goals ensure that the final product will meet all of the Town's expectations.
B. Engagement Briefing. MAXIMUS will present a briefing to the departments concerning the goals of the engagement, the steps to complete the goals, the time frame the departments can expect, the requests we will place on the departments and the benefits of the engagement. MAXIMUS staff is completely responsible for the gathering of information and statistics.
The purpose of this meeting is to attain the cooperation and support of the departments by informing them fully. This can be accomplished as a group or with each department individually.
C. Establish Contact Individual. The appointment of an individual within the Town's Finance Department is imperative for the smooth flow of any engagement. This person's involvement is limited to the scheduling of interviews with key department personnel as deemed necessary by the consultants, as well as to direct the MAXIMUS staff to the appropriate location of documents and data required throughout the engagement. At this point in the engagement, a contact person for each department should be established.
D. Review Organizational Structure. A complete organizational staffing schedule is crucial to determining operating costs, including management, supervisory, clerical and line employees.
E. Review Accounting System. This is a crucial step necessary in order for MAXIMUS staff to understand the proper treatment for all expense items. This step also allows the consultants to familiarize themselves with the statistics available.
Task 2. Analysis of Potential Fees. The scope of this effort will be the fees charged by the Town for its land management and regulation activities. This will include, but is not necessarily limited to, activities such as planning, building code enforcement, building and code inspections, fire inspections, engineering plan review and inspections, and other related activities.
Task 3. Schedule of Current Fees and Charges. Current fees and charges will be identified and documented. This involves surveying all departments to determine which are land management and regulation related revenue producers for the Town. In addition, the survey further identifies which groups are impacted by fees and what the current cost of service is based on (e.g., cost, arbitrary assumption of cost, etc.). This information is used as an aid in identifying the areas of greatest potential cost recovery. It should be noted that it is not our objective within this study to restructure existing fee schedules that may be based on a sliding scale or tiered structure, or to structure fees in areas that a fee does not currently exist. Our analysis consists of a cost/revenue match-up.
Task 4. Cost/Revenue Analysis of Services.
A. Interview Process. Within this process, each department is analyzed and functionalized to reflect the various activities being performed within it. This step is conducted through interviews with key department personnel as well as in-depth review of documentation of job duties. This procedure also helps to determine the proper allocation basis for each of the functions identified within any given department. Narratives utilized within the cost of service study are produced through this phase.
For each activity that is being reviewed and analyzed, the actual expenditures must be identified for the period being studied. Any costs directly billed or charged back must also be considered at this point within the engagement. At the conclusion of this step, the department expenses are entered into the software program.
B. Select Per Unit Basis. Each activity must have a per unit basis (i.e. number of permits, hours etc.). In completing this task, the following criteria serve as a guideline in our selection process.
a. The basis must be accurate.
b. The basis must be defensible.
c. The basis must conform to generally accepted allocation and unit cost standards.
d. The basis must be consistently applied.
The results of this segment of our engagement are input as allocation units within the software program and also contribute to the development of the user fee narratives.
C. Incorporate the Townwide Central Service Costs. The purpose of this task is to increase the allocations of unallocated and central service dollars to Town agencies to support determinations of costs for fees and user charges.
When comparing the cost of providing a service with the revenue received from the charges, the costs need to include not only the expenditures contained in a department's budget, but the department's share of central service costs (e.g., payroll, purchasing, data processing, janitorial, etc.). A Townwide cost allocation plan, identifies each department's share of central service costs. These central service costs (indirect costs) will be added to the department's costs (direct costs) when analyzing the cost of each service area or activity. If the Town does not currently have a Townwide cost allocation plan, a Townwide indirect cost rate will be developed.
D. Select Most Appropriate Costing Approach. Depending on the availability of data, type of service and needs of the Town, MAXIMUS utilizes either the Cost Pool Method (i.e., top down approach) or the Unit Cost Method (i.e., bottom up approach) of costing. Both methods are further explained below.
Cost Pool Method - "Top Down Approach". This costing method identifies comparable revenue and cost pools within a department. The cost pool is taken down to the lowest level at which valid cost and/or revenue data are available. An example would be Building Permits where cost, revenue, and number of permits can be identified at the "total" Building Permit level; whereas, it may not be possible to identify the cost, revenue and number of permits for a Building Permit for Storage Facilities with an area between 2,001 and 5,000 square feet. Thus, although the cost to issue a particular permit is not identified, the direct cost of the total service is known. When the other costs are added to the direct costs, the full cost of the service is identified. This full cost can then be compared with the revenue generated with any necessary fee increases identified. To develop a unit cost figure, the full cost of the service is then divided by the total number of service units.
Unit Cost Method - "Bottom Up Approach". This costing method identifies the cost at the unit activity level where the effort of individuals by activity is identified. The time spent for a fee activity is determined for each individual or position with the hourly rate based on using the individuals productive hours. Productive hours are total hours (usually 2,080) less vacation, holidays, sick leave, administrative time, etc. With the overhead cost added to the individual's salary and other direct costs and this full cost divided by productive hours, a fully loaded hourly rate is determined. This rate is then multiplied by the time necessary to perform the activity. The resulting cost can then be compared to the actual fee schedule.
Task 5. Process Cost of Services Study. Utilizing the knowledge and data obtained through the prior four tasks, the various department fee analyses are now prepared. A computer run is completed which produces a draft report. A User Fee Summary schedule is produced by the software, which presents the cost/revenue analysis on a clear single schedule such that the review process by Town staff can begin.
Phase II - Presentation of Results to the Town
The presentation phase is critical to the success of the overall engagement. It involves three distinct stages. The initial stage is the review of findings and recommendations with each of the departments. Once the departments are aware of the methodology and have reviewed our findings for their individual department, we proceed to the second stage. This stage is the presentation of the overall study to Town management for their review and concurrence. When this second stage is completed, then the final stage is the presentation of the results to the Town officials for their consideration. MAXIMUS will assist the Town with this presentation. MAXIMUS staff members are fully cognizant of the importance of making a thorough and understandable presentation to Town officials. Our presentation has always met with praise by Town officials.
Task 6. Department Review of Initial Study. This segment of the engagement involves conducting secondary interviews with department representatives to review the initial results of the Cost of Services/Revenue Analysis and discuss the revenues and associated costs of each service area. Comments received at this time are incorporated in the review process.
Task 7. Town Management Review of Study. We then present the "draft" report to the Town Finance and Town Manager’s Office. Together, we will review our assumptions and the results. Invariably, there are certain changes in the study that the client requests. After a full discussion of the issues we will enter the agreed upon changes into the program and finalize the study.
Task 8. Presentation of Results to Town Officials. The objective of this final step is to present a very succinct, straightforward executive summary document that clearly summarizes the results of the engagement. Because of this fact, graphic representations are commonly used within the report.
MAXIMUS is heavily committed to the full and complete understanding and satisfaction of any client's management regarding the results of our engagement. As such, we commonly present the results to the governing body of our client or provide support during any presentation made by our client to individuals within its own organization.
These two phases and eight tasks complete the Cost of Service/Revenue Study.
Full Cost Allocation Plan Preparation
The Town’s central service costs (administrative and overhead) must be included when determining the cost of services for this user fee study. A central services cost allocation plan will accomplish this objective by determining indirect costs at the department level. MAXIMUS offers the Town a scope of work that includes the completion of a fully documented cost allocation plan that is prepared using “full cost” guidelines. This section of the proposal identifies the tasks needed to complete this analysis.
When an organization desires to examine the cost of services to third parties, utility fund rate structuring, internal service costing, administrative cost transfers from enterprise funds, and management information for budgeting, it requires identifying the total indirect costs identifiable with direct services. In these cases one must prepare a plan that identifies and allocates not only administrative overhead costs acceptable for federal program purposes, but also those that, while valid, are excluded for federal purposes. This total allocation is accomplished through preparation of a full cost allocation plan that provides a complete overhead cost accounting system for the Town of Chapel Hill.
The following list includes some of the more significant costs that can be distributed under a full costing system.
· The Town Council and related legislative expenses.
· The Mayor's office and related executive expenses not identifiable with federal programs.
· Costs of executive and legislative functions that can be allocated to other administrative functions such as accounting, personnel, purchasing, etc.
· All administrative expenses supporting both the legislative and executive functions.
· Costs of tax and fee collection at various levels within the Town organization.
· Advertising, association dues, entertainment, contributions, and donations.
Further, under full costing, greater flexibility exists in the application of accounting principles. For example, the Town may elect to expense capital outlays in the period of acquisition rather than account for them through depreciation or use charges as required by OMB Circular A-87.
The technical methodology proposed to be used is one which develops the true and full overhead costs associated with all Town services, both line and staff, or, synonymously, direct and indirect. The task plan necessary to complete the full cost plan is detailed below.
The work program to develop a detailed cost allocation plan contains a total of eight tasks. The specific tasks are as follows:
Task 1. Determine Available Financial Information. This task involves identifying the sources of financial information to be used. At a minimum, the annual financial report for the previous fiscal year, the current operating budget and a Town-wide organization chart are required. Additional financial reports issued by the Town may be used if available.
Task 2. Classify all Town Departments, Commissions, Boards, etc. After updating the latest organization chart, all Town organizational units are classified as executive, legislative, or judicial. This is required to determine which costs can be allocated through the plan.
Task 3. Inventory all Federal, Enterprise and Other Political Subdivision Funds Administered by the Town. This involves surveying all departments to determine what outside funds are being received, for which programs, and the extent of recovery of administrative costs. Enterprise funds will be included in this inventory. This information is used as an aid in identifying the areas of greatest potential for cost recovery.
Task 4. Determine Administrative Departments. This task focuses on identifying those departments (normally executive departments) with responsibility for providing services to other Town departments. These are typically performing such services as data processing, accounting, auditing, personnel, and purchasing.
Task 5. Determine Allocation Bases for Allocating Services to Benefiting Departments. This task is critical to insure that administrative costs are allocated fairly and accurately. Substantial leeway exists in selecting allocation bases. However, they must be defensible to third parties.
Task 6. Develop Allocation Data for Each Basis. The services provided each user department must be measurable in specific units of service. For example, the payroll section provides payroll services to all other departments that have employees to be paid. Therefore, the number of personnel each department has on its payroll measures payroll services, and data must be collected on the percentage of payroll checks issued to each department.
Task 7. Prepare Cost Allocation Worksheet. For each administrative department, a work sheet showing the expenditures of the department during the fiscal period is prepared. Any disallowed expenditures are eliminated, and building and equipment charges are added back. The resulting amount is allowable to benefiting departments. Based upon units of service identified in Tasks 5 and 6, the portion of allowable costs to each department is calculated.
Task 8. Summarize Costs by Benefiting Department. Costs are summarized in the cost allocation plan for each department that receives services from other departments. This final plan, including the cost allocation worksheets, is documented in presentation format for the Town and third parties.
These tasks complete the support that is provided for the Full Cost Allocation Plan.
A-87 Cost Allocation Plan Preparation
The work program to develop a detailed cost allocation plan that complies with the provisions of OMB Circular A-87 is divided into two phases and a total of thirteen tasks. The first phase is concerned with the development of the cost allocation plan itself and the second with the use of those costs to develop, submit, and secure approval for claims based on them. The specific phases and tasks are as follows:
Phase I - Development of a Detailed Cost Allocation Plan
This phase is concerned only with those tasks necessary to develop the cost allocation plan. During this phase, the full costs of Town departments are clearly identified and an enhanced cost accounting capability initiated. The tasks are as follows:
Task 1. Determine available financial information. This task involves identifying the sources of financial information to be used. At a minimum, the annual financial report for the appropriate fiscal year and a Town-wide organization chart are required. Additional financial reports issued by the Town may be used if available.
Task 2. Classify all Town departments, commissions, boards, etc. After updating the latest organization chart, all Town organizational units are classified as executive, legislative, or judicial. This is required because most legislative costs are not allowable for recovery of Federal grants.
Task 3. Inventory all Federal and enterprise funds administered by the Town. This involves surveying all departments to determine what Federal funds are being received, for which programs, administered by which Federal agency, and the extent of recovery of administrative costs. Enterprise funds will be included in this inventory. This information is used as an aid in identifying the areas of greatest potential for cost recovery.
Task 4. Determine administrative departments. This task focuses on identifying those departments (normally executive departments) with responsibility for providing services to other Town departments. These are typically performing such services as data processing, accounting, auditing, personnel, and purchasing.
Task 5. Determine allocation bases for allocating services to benefiting departments. This task is critical to insure that administrative costs are allocated fairly and accurately. OMB Circular A-87 provides substantial leeway in selecting allocation bases but they must be defensible during negotiations.
Task 6. Develop allocation data for each basis. The services provided each user department must be measurable in specific units of service. For example, the payroll section provides payroll services to all other departments that have employees to be paid. Therefore, the number of personnel each department has on its payroll measures payroll services, and data must be collected on the percentage of payroll checks issued to each department.
Task 7. Prepare cost allocation worksheet. For each administrative department, a work sheet showing the expenditures of the department during the prior fiscal year is prepared. Any disallowed expenditures under OMB Circular A-87 guidelines are eliminated, and building and equipment charges are added back. The resulting amount is allowable to benefiting departments. Based upon units of service identified in Tasks 5 and 6, the portion of allowable costs to each department is calculated.
Task 8. Summarize costs by benefiting department. Costs are summarized in the cost allocation plan for each department that receives services from other departments. This final plan, including the cost allocation worksheets, is documented in presentation format for the Town and negotiators.
Phase II - Development of Departmental Claims and Negotiation for Approval
This second phase is much more easily accomplished from a cost accounting perspective than the first. It is far more sensitive, however, for it centers on the essential requirement of insuring that expenditures of the Town for administrative costs are actually recovered. This phase further contributes to the objective of enhancing the Town's ability to apply cost accounting techniques to governmental operations and developing the ongoing expertise to perform those studies in the future. The five tasks of this phase are as follows:
Task 9. Collect data for each operating program identified in Task 3. From the inventory prepared in Task 3, each operating program is identified and its costs of operations determined. The organizational relationship each program has to the department is also determined.
Task 10. Prepare Department Indirect Cost Rate. The amount of identified indirect costs must be allocated to each program within the department on a yearly basis. The resulting percentage that each administrative dollar is to each program dollar provides the basis for recovery of indirect costs. These costs, spread to each program, can be applied to each claim where allowable.
Task 11. Formalize plan and present to the Town and Federal negotiators. The cost allocation plan and Department indirect cost rate are documented in a formal report for submission to negotiators. The cost allocation plan will be completed and submitted to the cognizant Federal agency where necessary. Prior to submission of the plan to the cognizant Federal agency, the Town will review the plan with any agreed upon changes incorporated into the plan.
Task 12. Negotiate final plan and secure approval. After Federal and State negotiators have reviewed the plan, negotiations on certain classifications of costs begin. Representatives of MAXIMUS act as your advocates to secure the fairest plan to all concerned, consistent with the principles of OMB Circular A-87.
Task 13. Provide indoctrination session for assigned personnel. To ensure the perpetuation of the plans in subsequent years, guidance is provided to a member of your staff. This individual should be designated at the commencement of the engagement. They will be exposed to all facets of our work as their time permits. In addition to providing access to financial information and liaison with Town Departments, the staff person will work primarily on tasks 3,4,6,7,9, and 10.
These tasks complete the process for preparing and submitting the Town of Chapel Hill’s OMB Circular A-87 Cost Allocation Plans.
FEES AND PROJECT SCHEDULE
The table on the following page summarizes the cost proposal to complete the services identified above:
Recognizing the Town’s time constraint, we are prepared to begin this work immediately, with completion scheduled for mid-June 2005.
MAXIMUS looks forward to assisting the Town of Chapel Hill in analyzing its costs and preparing indirect cost plans designed to enhance General Fund revenues. Please call me with any comments regarding this proposal.
Very truly yours,
Kenneth R. Murray