ISF Workshop Presenters: Auditor – Controller / Treasurer – Tax Collector Information Technology Services General Servic

1. ISF WorkshopPresenters:Auditor – Controller / Treasurer – Tax CollectorInformation Technology ServicesGeneral ServicesRisk ManagementCentral Warehouse

2. Internal Service Funds What is an Internal Service Fund (ISF)? A governmental centralized service that provides services or products on a cost-reimbursement basis to other governmental units or external users with a break-even motive. To qualify as an ISF the predominant users of the services or products must be the government itself.

3. Internal Service Funds ISF vs. Central Service Department The ISF is a central service department that recovers costs via cost reimbursement as services and/or products are provided via invoicing or direct billing. The non-ISF central service department recoups costs via direct billing and via the Cost Plan (A-87) for non-billed costs for services and/or products allocated to departments based upon the level of service provided to each department.

4. Internal Service Funds • General Methodology The Internal Service Fund accumulates all costs related to operating the ISF and allocates those costs over the number of productive units (goods or services) to be provided to determine a per unit cost of production. Total Costs/Service Units = Cost per unit

5. Internal Service Funds • How are ISF rates calculated I. Service Level • Determine the appropriate service level necessary to meet the projected demands of user departments Example: • Number of vehicles required to meet transportation demand of user departments

6. Internal Service Funds • How are ISF rates calculated (cont’d) II. What elements are included in the rates? A. Operational Costs - Salary and benefits of ISF Personnel - Operational Expenses – service and supplies - Allowable Indirect Costs (department) - Allowance for Replacement Costs - A-87 Costs (other central service department costs) - Working Capital / Operating Reserve – 60 day avg) B. Retained Earnings from Prior Year - Unreserved surplus or deficit from the prior year (Note: Retained Earnings reserved for a specific purpose are not included in the rates, i.e. replacement vehicles, building improvements)

7. Internal Service Funds • How are ISF rates calculated (cont’d)

8. Internal Service Funds • Application of ISF Rate The ISF will charge the users for their services and/or products the calculated ISF rate by either invoicing the user or preparing a journal voucher billing for the service and/or product.

9. Internal Service Funds • Mid-Year Rate Review/Adjustment The ISF should review their current level of activity to determine if their activity level is above or below the estimates used to calculate the ISF rates. The ISF rates should be adjusted at mid-year if the activity level is materially different from the estimates.

10. Internal Service Funds • Why adjust ISF rates at Mid-year? A. Service activity > Service Estimates The ISF will be collecting more revenue than estimated and the rates should be adjusted to reflect this additional revenue. The additional revenue should create additional net income that should be used to adjust rates downward to reflect the reduced cost of service on a per unit basis.

11. Internal Service Funds • Why adjust rates at Mid-year? (cont’d) B. Service Activity < Service Estimates The ISF will be collecting less revenue than estimated and the rates should be adjusted to reflect this lower than anticipated revenue. The reduction in revenue should cause a net loss and rates should be adjusted upward to offset the lost revenue that reflects an increased cost of service on a per unit basis.

12. Internal Service Funds

13. Internal Service Funds

14. Internal Service Funds • Why adjust rates at Mid-year? (cont’d) A. Authoritative Guidelines • A-87, Cost Principles for State, Local, and Indian Tribal Governments recommends that ISF rates be reviewed semi-annually and adjusted as necessary. • California State Controller’s Office “Handbook of Cost Plan Procedures for California Counties” states that ISF’s should prepare and examine its financial condition at least midway through each fiscal year and if a material profit or loss is projected the billing rates should be adjusted.

15. Internal Service Funds • Why adjust rates at Mid-year? (cont’d) 3. California State Controller’s Office “Accounting Standards and Procedures for Counties” states that if the ISF’s mid-year results indicate either a substantial income or loss for the year rates should be adjusted at that time. 4. Current year rates do not reflect prior year actual “net income” or “net loss”

16. Internal Service Funds • ISF Reserves (Fund Balance / Retained Earnings) vs. Cash A. Reserves 1. Operating Reserve Provides for 60-day cash liquidity to complete the revenue earning process from providing the service and/or product to collection of payment. 2. Designated Reserve A designation for a specific purpose of the ISF such as replacing equipment, vehicles or building remodels.

17. Internal Service Funds • ISF Reserves (Fund Balance / Retained Earnings) vs. Cash 3. Operating Reserve = Working Capital Reserve

18. Internal Service Funds • ISF Reserves (Fund Balance / Retained Earnings) vs. Cash B. Cash • The most liquid asset held by the ISF Does not correlate to fund balance on a 1:1 basis as fund balance can be represented by inventory, equipment, and so forth. C. Fund Balance formula Assets – Liabilities = Fund Balance

19. Internal Service Funds • ISF Reserves (Fund Balance / Retained Earnings) vs. Cash D. ISF Loans

20. Internal Service Funds • Considerations for using an ISF A. Transparency The rate development process should openly disclose the projected units of service and/or product to be provided with the projected expenditures (type and dollar amount) necessary to provide the service and/or product.

21. Internal Service Funds • Considerations for using an ISF (cont’d) B. Efficient use of Resources The use of an ISF segregates financial reporting for ISF operations from the rest of the Central Service Departments that should enhance responsiveness to changes in demand.

22. Internal Service Funds • Considerations for using an ISF (cont’d) C. Requires Long-Term Planning The ISF should consider the cost of repairing and/or replacing equipment in the development of rates. Allows the operation to plan for retirement of ISF assets.

23. Internal Service Funds • Considerations for using an ISF (cont’d) D. Better Management and Control The development of rates provides a tool to compare ISF rates to comparable services provided by the private sector for competitive analysis. E. Aids management in identifying where operational inefficiencies may be: - inefficient output per unit of input - cost effectiveness of inputs to generate output - cost structure of inputs

24. Internal Service Funds • Potential Limitations of using an ISF A. Lack of Flexibility The ISF may not be able to adjust rates timely to reflect changes in demand - demand nature of users (in tight budgetary times users may postpone use of services and/or products until later in the budget year thus giving a “false” demand reading at mid-year)

25. Internal Service Funds • Potential Limitations of using an ISF (cont’d) B. User uncertainty about ISF Rates The user department is unable to estimate ISF rates from year to year for their budgeting/planning purposes as many ISF input variables are not readily available or projectable: - salary and benefits changes - ISF staffing level - reserve level - demand from other users

26. Internal Service Funds • Potential Limitations of using an ISF (cont’d) C. Potential for “excess reserves” The management of the ISF may develop rates with an aggressive replacement/repair program but not spend the reserves in accordance with program terms thereby accumulating reserves in excess of what is required to operate the ISF. The users of the ISF would have then been overcharged for the services and/or products received.

27. Internal Service Funds • Potential Limitation for using an ISF (cont’d) D. Lacks economy of scale The ISF may be unable to provide competitive rates as compared to the private sector due to a smaller customer base and/or product volume.

28. Internal Service Funds • Review of ISF rates • Auditor-Controller/Treasurer-Tax Collector (ACTTC) • Review the rates for reasonableness of: - input costs - output estimates - methodology used to allocate costs

29. Internal Service Funds • Review of ISF rates (cont’d) B. Cost of review The cost of each review depends on the complexity and accuracy of the rate study prepared by the ISF. The ISF can assist with an efficient review by: 1. Preparing a thorough work document that: • states the assumptions used to allocate overhead • identifies the input costs with assumptions • identifies the projected service and/or product level with assumptions • prepares support documents that are properly cross-referenced and tickmarked • formulas in spreadsheets should be documented and easy to follow 2. Respond to questions timely

30. Internal Service Funds • Review of ISF rates (cont’d) C. ACTTC vs. External Auditor 1. Review Process The review process will be essentially the same as the cost accounting principles that underlie rate development are standardized 2. Cost Effectiveness The cost effectiveness will depend upon: a. experience of reviewer b. cost structure of reviewer’s entity c. adequacy of the ISF work documents

31. ISF WorkshopInformation Technology Services Department Voice Communications Information Technology ITSD Wireless (Radio Shop) PeopleSoft Operations

32. ITSD – Fund Composition • Three separate Internal Service Funds (ISF) • Four distinguishable services: • Fund 1020 – IT Services and Network Operations • Fund 1030 – PeopleSoft Operations • Fund 1080 – Telecommunications – Radio Operations (ITSD Wireless) Each fund will be presented separately

33. ITSD – Fund 1020Basic Services Provided • Institutional network with secure government to government connections. • Enterprise applications – email and internet. • Secure Desktop environment . • Application hosting and database support. • Secure Data storage, backup and recovery. • Consultant services – analysis, programming, application design, technology planning and project management. • Security services and appropriate use investigations. • HIPAA security administration.

34. ITSD – Fund 1020Service Metrics Service metrics for last year: 10,228 calls for PC support 436 printers repaired 7,938 Security requests Completed HIPAA, Medi-Cal and CERTNA audits 121 PC forensic investigations completed 3,529 application support requests completed 8.2 million transactions are processed on the network each day 6,000 connections are blocked by our Firewalls each minute 5.2 million emails are processed monthly 4.5 million spam emails blocked each month 120,000 virus or malware instances were blocked each month

35. ITSD – Fund 1020How are service levels determined? • Service Level Agreements. • Customer requests for specific services. • Mandated requirements either for a single customer or countywide. • Downtime avoidance. • Risk avoidance. • Technology driven changes. • Ability of the customer to fund services.

36. ITSD – Fund 1020 Types of Costs • Rate Recovered Costs (89%): • Those costs specific to the production of a service or function which can be purchased by a customer. • Direct Costs (11%): • Those costs which are charged directly back to a customer. No overhead is added to direct costs. Most common direct costs are for hardware or software requested by the customer.

37. ITSD – Fund 1020 How are rates calculated? • Cost Estimation: • Historical costs are reviewed. • New estimates are obtained where costs are not set contractually. • License levels are reviewed and adjusted based on input from customers. • Costs are accumulated in cost centers that represent specific services. • New functions or changes are estimated with a cost benefit completed for 1(+) useful life cycle.

38. ITSD – Fund 1020 How are rates calculated? (cont.) • Rate Calculation: • Costs are accumulated in Cost Centers. • Indirect costs are added to the Cost Center based on the percentage of overall cost in that Cost Center. • Resultant total cost within a Cost Center is divided by the metric associated with the service that Cost Center represents calculating the rate for that Cost Center.

39. ITSD – Fund 1020What are rate metrics? With each service is associated a cost center and a rate metric. Rate metrics are relative to the service and indicate a measure of how costs are incurred. Customers can determine how many of a rate metric they wish to purchase each month, thus providing some control of their IT costs. The simplest example is an I-Net login.

40. ITSD – Fund 1020Rate Example I-Net login - $4.85 / person / month Recovers costs for 1 security position, 1 help desk position, related software and 2% of ITSD indirect costs. Costs associated with establishing and maintaining logins total $369,397 for FY 09/10. 6,348 logins times 12 months is 76,176 per year. $369,397 divided by 76,176 is $4.85 / month.

41. ITSD – Fund 1020 Why are historical costs used to calculate the rates? Historical costs and metrics in addition to projected costs are the basis for overall budget and cost recovery rate development. Historical costs are adjusted by changes to policy or practices, new quotes from vendors, changes in the type of services and other various influencing factors. Historical costs on their own are not a strong enough base for accurate cost recovery.

42. ITSD – Fund 1020Cost Allocation to Customers Direct Costs are fully allocated to the customer without additional overhead or processing charge – pass through costs. Rated costs are allocated based on the rate metrics used by the Department. All costs are billed monthly in arrears unless it is a one time annual payment. Each month reflects the changes customers requested in the previous month.

43. ITSD – Fund 1020Cost Containment Return On Investment (ROI) analysis at each acquisition / replacement milestone. Lease / Purchase to spread costs across useful life. Useful life analysis to avoid high repair costs and emergency replacement costs. Energy efficient equipment and facilities. Aggressive negotiations with software vendors. Monitor expenses and revenues closely.

44. ITSD – Fund 1020Cost Containment (continued) Work closely with customers to eliminate unnecessary licenses, features. Leverage Open Source tools to replace commercial software where risk allows. Plan beyond the budgetary cycle and include long range goals that coincide with industry directions. Avoid “Bleeding Edge” technology and the “WOW Factor” – trust the numbers instead.

45. ITSD – Fund 1020Cost Containment (continued) • Fixed cost challenges: • Rent • Power • Software Applications • Labor • Variable cost challenges: • Software Licenses • Hardware costs • Rental personal computers

46. ITSD – Fund 1020Overview of reserves held by ISF? Reserves for Fund 1020 as of August 12, 2009 = $5,927,031 Allocated as follows: $ 950,000 excess retained earnings. $1,300,000 designated for Data Center Infrastructure upgrades. $ 431,468 designated for replacement UPS, Data Center and 21st Floor. $3,245,563 operating capital reserve. $5,927,031 Total • Target for 60 day operating capital reserve: $3,616,438 • This analysis is based on actual cash available as of August 12th. • Cash is monitored daily and depending on payments in process and relationship to billing cycle, total on hand will vary.

47. ITSD – Fund 1020 How are reserves managed by the ISF? Excess reserves are returned through rate reductions and any shortage in reserves are collected through rate increases. Designations should be used for major capital expenditures with the replacement cost collected over the useful life of the capital asset. Cash on hand is monitored daily to detect trends that result in negative end of year balances. Early action is imperative to offset revenue shortfalls or expense overages.

48. PeopleSoft Operations - Fund 1030 Basic Services Provided Operates and Maintains the enterprise wide Human Resources and Financial Management System. Human Resources system provides payroll and employee benefits support. Financial system processes all financial transactions for the County and some non-County organizations.

49. PeopleSoft Operations - Fund 1030 Basic Services Provided FY 09 • 205,238 paychecks. • 890,535 Financial transactions (journal, voucher, & deposits). • 7,548 employee benefit statements. • Upgraded HR system from 8.9 to 9.0 • Archived oldest three years of selected HR data. • New self service functions (address, phone and contact info). • New drill-down functionality for selected reports. • Clean-up of old asset data and improved asset reporting. • Implemented automated interfaces with all employees benefit providers.

50. PeopleSoft Operations - Fund 1030 Basic Services Provided FY 09 (cont.) • Provided support for pending legal actions. • Eliminated centralized printing of PeopleSoft reports. • Automated distribution of financial system reports to outside entities via email. • Support for the FY10 Budgeting process. • Implemented automated support and reporting for mandatory and voluntary furlough, etc. • Implemented a new leave plan. • Improved data security for outside interfaces.