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HomeMy WebLinkAbout12 - BA-009 - Management of Income Producing AgreementsCITY OF NEWPORT BEACH CITY COUNCIL STAFF REPORT Council Agenda Item No. 12 October 14, 2003 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Administrative Services Department Dennis Danner, Administrative Services Director, 644 -3123, ddanner@city.newport-beach.ca.us SUBJECT: Management of Income Producing Agreements ISSUE: Should the City improve management of income producing agreements, and if so, what is the most effective way of doing so? RECOMMENDATION: Staff recommends Council direct staff to complete an analysis (abstract) of leases, franchises, rentals, and other income producing agreements using in -house resources, create a new position responsible for management of income producing agreements and approve the attached proposed budget amendment to fund same. DISCUSSION: Executive Overview. The action recommended by this Staff Report grew out of an analysis of the City's handling of revenue generating leases and agreements that followed the discovery of losses of potential revenue from some of these agreements. These agreements cover a variety of relationships, and their respective structures are largely lacking in consistency of format. Some of them also lack essential provisions and /or have other substantive shortcomings. The City receives more than $10 million annually from approximately 130 different leases (mostly real estate), franchises, and other income producing agreements. These agreements collectively generate a cash flow constituting the City's third largest revenue source, but it is a revenue source that is unique in several ways. Management of Income Producing Agreements October 14, 2003 Page 2 • The agreements originated at different times and for different reasons. • They are (mostly) within the exclusive purview of the City, as opposed to involving shared authority with other government entities, as is the case with property tax and sales tax. • The formats and contents of the agreements are inconsistent, and many of them are quite complex. Examples of the variables to be tracked are available if desired. • Many contain provisions that require the City to perform certain administrative functions; and most contain CPI, insurance coverage, or other adjustment provisions. • They each need to be re- negotiated periodically. The City's handling of these agreements has varied over the years, but it has been largely decentralized. Various aspects of the function have been the additional responsibility of several staff members, but the overall program has never been the primary responsibility of any one person or office. The opportunity for errors and oversights in this situation is unacceptably high, and staff has discovered omissions that have resulted in potential and actual revenue to the City being lost. In addition, the staff time required to correct problems of this type after the fact is often substantial. In short, this aspect of the City's affairs is of sufficient magnitude and complexity to require more structured management focus than it has received in the past. Background. For division of labor purposes, there are two separate aspects to managing these agreements: a) the policy setting and negotiation level; and b) the day - to -day administration level. The negotiations come up much less frequently, and they require the input/supervision of senior staff members for whom any one agreement is not a major part of their respective responsibilities. The day -to -day administration involves contract monitoring, compliance enforcement, and initiation of required adjustments /changes. This is generally done within the Revenue Division, but that has not always been the case. Here is some information to help put the current situation in historical perspective. • Responsibility for negotiation and compliance management of most of the City's income agreements previously fell within the scope of duties of an Assistant City Manager position, but that position was left vacant for a time in the mid - nineties; then subsequently re- established and restructured. • At the same time, some of the management responsibility for these agreements resided (and still resides) within individual operating departments. Management of Income Producing Agreements October 14, 2003 Page 3 Another fairly recent change is that the more mundane aspects of month -to- month billing activity and clerical administration of the agreements were consolidated from various City Departments into the Revenue Division of Administrative Services a few years ago. In short, to the extent that responsibilities for management of income agreements were previously connected to specific staff positions, those connections were lost during the reductions and reorganizations of the nineties, especially with regard to the previous Assistant City Manager position. Current Situation. Things have now evolved to where the administration of income generating leases and other agreements can best be described as being not -too- clearly- defined additional duties for several different staff members. No one really has "ownership" of the overall program. Coordination of effort and management of the detailed requirements of these agreements is lacking, and mistakes are being made. Once executed, many of the income agreements are fixed, straightforward, and require little attention (e.g. the Girl Scout Hut). Most, however, are dynamic and complex, requiring significantly more oversight (e.g. the Balboa Bay Club lease). Moreover, many of the income agreements are of types and formats that have not been incorporated into the City's financial management systems, making confirmation of most provisions of these agreements (e.g. timely and accurate payments) very difficult. Revelations relative to the Newport Pier concession agreement, as well as issues that have arisen regarding the Harbor Island and Beacon Bay leases, demonstrate the need to increase management attention to these revenue - generating agreements. Once the problem was identified, the consensus among those involved was that the Administrative Services Department should coordinate the staff effort to re- establish appropriate administrative control of this overall program. A preliminary working document developed during this initial analysis that lists the various agreements at issue and the fields of information to be abstracted, in summary form, is available if desired. After this preliminary analysis, the Revenue Division initially proposed a supplemental budget item to fund a new position that would have responsibility for compliance management and overall coordination of the City's income property related agreements. Although there was no disagreement that improved oversight of these income producing agreements was necessary, the City Manager directed that the Department obtain cost comparisons for outsourcing the proposed work as a possibly less costly and more efficient alternative. Two companies, Bendetti Management Group (the City's management company for Marina Park) and Jefferson Wells International provided proposals to produce an analysis of each agreement (abstract), and conduct ongoing compliance review /management of approximately 130 income property agreements. Management of Income Producing Agreements October 14, 2003 Page 4 Proposed Scope of Services. Following several meetings with both companies, a proposed scope of services and cost estimate was eventually submitted by each of them. Both were provided details on the desired nature of work, a listing of income agreements, and copies of several of them. Both companies represented that a thorough analysis (abstract) of each agreement would be an essential element of the project. At the City's request, each of their cost estimates separated pricing for the abstract work and pricing for management of the agreements. Bendetti included a preliminary abstract of the Balboa Bay Club lease with their proposal. This abstract, when compared to the previous abstract efforts conducted by a variety of clerical and temporary City staff over the years, was far more comprehensive. Moreover, it highlighted the complexities of the agreements, clarifying both lessee and lessor obligations and rights. It also evidenced the need for a more current and thorough abstract effort. Staff is convinced that a similar one -time abstracting of all the leases, franchises, and agreements, would provide uniform information valuable in ensuring compliance by all parties to these agreements. This task should be undertaken regardless of the decision regarding ongoing management of the agreements. This process has begun with the assistance of the City Attorney's Office. After abstracting the agreements, both the Jefferson Wells and Bendetti proposals include providing the following services: • Generation of statements • Collection of payments • Accounting of all financial transactions • Maintenance of insurance and bond documentation • Financial and performance auditing • Enforcement of lessee obligations • Facilitation or satisfaction of City obligations One of the problems this list of services highlighted is that the City has not done well in some areas, but it is quite proficient in providing most of them. The shortcoming is with regard to administration and oversight of the leases themselves, but our capability to efficiently generate statements and post payments that interface with the City's general ledger, create dunning notices, perform financial audits, and manage accounts in collection is well established. We discussed with Bendetti and Jefferson Wells the merits of the City providing those services we currently perform and contracting for just those services that need to be supplemented. Both firms indicated that splitting the tasks along any conceivable lines would not be a practical solution for either the City or the consultant. So the contracting out issue essentially comes down to an all or nothing decision with regard to the above list. Management of Income Producing Agreements October 14, 2003 Page 5 Costs. Bendetti has proposed to provide an abstract of each agreement at a cost of $140 per hour. The estimated cost for Bendetti to abstract the 130 agreements is approximately $55,000. Bendetti also proposed the annual cost of providing the management described above for the income agreements would be 5% of the gross revenues derived from the agreements. That cost, based on fiscal year 2001 -02 income agreement revenues, would be $438,746. (This figure is actually low, since the figure reflects the temporary loss of revenue due to the Balboa Bay Club renovation.) Jefferson Wells estimated the costs for abstracting the income agreements at $64,000 plus travel, lodging, and administrative expenses. Thereafter, their estimate for providing the ongoing agreement management is $325,000. Copies of the Bendetti and Jefferson Wells proposals, which are fairly lengthy, are available from Administrative Services if /as requested. Outsource vs. In- house. As previously indicated, the Administrative Services Department currently performs many of the processes proposed by the two private contractors offering proposals. Outsourcing the billing and administrative work specific to these activities would not generate a sufficient reduction of in -house effort to enable elimination of a staff position to help offset the additional consultant costs of outsourcing. In fact, outsourcing the billing and related activities might actually increase the workload in coordinating receivables, payables, and fund accounting activities with an outside contractor. A survey of about a dozen California cities with property management related positions revealed that cities with fewer properties and less related revenue than Newport Beach have full -time positions dedicated to this work. The average annual base salary with benefits for those cities surveyed ranged from $74,114 to $95,840. Staff believes that a paralegal or similar orientation is called for since the responsibilities of this position are more contract administration and enforcement oriented, than property management oriented. With regard to the initial abstracting project, the City Attorney's Office has a part-time attorney who is extremely well qualified for this type of work, and she has already provided examples of her abilities. We estimate that the in -house cost of abstracting the agreements at issue would be about $30,000. Also, Mayor pro -tem Ridgeway and Council Member Heffernan have suggested a variety of property management software that would be well suited to assist in the management of these agreements. It is estimated that the cost for such software and training will be $10,000. With these figures in mind, the total first -year (12 months from approval) estimated cost for performing the proposed income property management work in -house is $136,000. During subsequent years, after the initial abstracts and other start-up work is completed, Management of Income Producing Agreements October 14, 2003 Page 6 the cost will be limited to additional employee compensation of approximately $96,000 (top step, salary and benefits). The Finance Committee has reviewed and provided direction on the subject of income agreement management at three prior Finance Committee meetings. At the most recent Finance Committee meeting on October 1, Finance Committee members unanimously recommended the creation of an Income Contract Administrator position and directed staff to bring this item to Council for approval. Expanded Income Property Opportunities. Although it is unlikely that the City will want to take advantage of all of them, opportunities to expand revenue generated by City owned property come up fairly frequently. Siting of telecommunications facilities, beach vehicle marketing, sole vendor sponsorships, and potential franchising changes are a few of these. A staff member designated as the point of contact and coordinator /administrator (though not the policy setter or major decision maker) for all such functions would enhance consistency and continuity. Conclusion. The City's handling of Income Producing Agreements needs more managerial attention than it is currently getting. It is more appropriate (and affordable) for this attention to be provided by in -house staff than by an outside contractor, for the following reasons: • It will be less costly. • The broad scope of work proposed by Bendetti and Jefferson Wells does not fit efficiently with the way the City is currently structured to accomplish several aspects of the function. In light of the nature of their respective businesses, both vendors expressed reservations about defining a more restricted scope of work, due to concerns about delineating and coordinating overall program responsibility. Staff shares those reservations. • The function itself is of sufficient significance that staff should be giving it more direct attention, as is the case in several other Cities with similar levels of activity in this area. The job description for the proposed new Income Contract Administrator position, a sample listing of income agreements aspects, examples of abstracted agreements, a draft form of the working document being established to identify and track income producing agreements and the variable provisions of each is available from Administrative Services if /as requested. Management of Income Producing Agreements October 14, 2003 Page 7 Funding Availability: Unappropriated fund balance and /or unanticipated revenue. Based on what we have learned to date, staff believes that prevention of revenue losses as well as reducing the time spent by the City Attorney and City Manager Offices, and other City staff in resolving the results of failings in this area will more than cover the additional expenditures for program management. Alternatives: 1. Make no changes and attempt to improve performance with existing resources. 2. Outsource both the development of the abstracts and ongoing management of broader aspects of the program. 3. (Recommended) Use in -house staff time (mostly part-time attorney) to complete the abstract work. Create a new paralegal /contract management position responsible for ongoing program management. Prepared by: eaz_V rroad Revenue Manager Richard Kurth Deputy Administrative Services Director Attachments: Budget Amendment Submitted by: D nnis Danner Administrative Services Director City of Newport Beach NO. BA- 009 BUDGET AMENDMENT 2003 -04 AMOUNT: $x7,711.50 EFFECT ON BUDGETARY FUND BALANCE: Increase Revenue Estimates Increase in Budgetary Fund Balance Increase Expenditure Appropriations AND X Decrease in Budgetary Fund Balance Transfer Budget Appropriations No effect on Budgetary Fund Balance SOURCE: from existing budget appropriations from additional estimated revenues PX from unappropriated fund balance EXPLANATION: This budget amendment is requested to provide for the following: To increase expenditure appropriations related to the management of income producing agreements. ACCOUNTING ENTRY: BUDGETARY FUND BALANCE Fund Account 010 3605 REVENUE ESTIMATES (3601) Fund /Division Account EXPENDITURE APPROPRIATIONS (3603) Amount Description Debit Credit General Fund Balance $87.711.50 Description Description Division Number 0640 Administrative Services - Revenue Account Number 7000 Salaries - Misc $39,000.00 Account Number 7020 Salaries - Part -Tme $28,517.11 Account Number 7210 Health /Dental/Vision Insurance $2,985.00 Account Number 7224 Post Employment Medical Reserve $120.00 Account Number 7225 Post Employment Medical Coverage $450.00 Account Number 7290 Life Insurance $57.00 Account Number 7295 Employee Assistance Program $12.50 Account Number 7373 Compensated Absences $1,170.00 Account Number 7425 Medicare $979.00 Account Number 7439 PERS $2,864.00 Account Number 7460 Retirement - Part-time $1,069.39 Account Number 7461 Supplemental Retirement Plan $487.50 Account Number 8141 Supplies - Computer Software $10,000.00 ' Automatic System Entry. Signed: Financial Approval: Administrative Services Director Date Signed: Administrative Approval: City Manager Date Signed: City Council Approval: City Clerk Date