Read the executive summary on this page and download the pdf for the full report.
The County uses internal service funds (ISFs) to centrally account for providing support services to its departments on a cost-reimbursement basis. The County uses five ISFs but our audit focused on the Facilities Management (FM) and Information Technology (IT) ISFs because these account for 90% of ISF resources managed by the Department of County Assets (DCA). We also looked at Fleet asset replacement reserves.
The primary objectives of our audit were to:
- Identify key principles the County can use to develop internal service fund policy and procedures.
- Determine whether the FM, IT and Fleet ISFs are recovering the full cost of their services.
With regards to the first objective, we found the County lacked written policy and procedures to help prevent or resolve departments’ concerns. Once strong policy and procedures are in place, the DCA Budget Unit will be better equipped to administer a stable, well-defined cost allocation process regardless of staffing changes or any pressure from departments. Likewise, departments will have better defined expectations and constructive recourse to resolve any concerns.
Based on our research of internal service fund literature and practices in other jurisdictions, we developed a principle-driven framework the County can use to improve ISF policy and establish administrative procedures. This report discusses some current ISF issues within the context of this framework.
Addressing the second objective, ISFs should recover their costs and have sufficient reserves to operate from one billing cycle to the next (working capital reserves) and to make sure that funds will be available to purchase assets (asset replacement reserves) when needed. Over the last four years, the FM ISF did not recover its costs and its working capital reserves were well below reasonable levels. In contrast, the IT ISF did recover its costs and had sufficient working capital and asset replacement reserves.
We could not determine whether the Fleet ISF recovered its costs because the DCA Budget Unit was working to determine the amount of asset replacement reserves on hand. Until this is resolved, the Fleet ISF is at risk of having insufficient reserves to replace vehicles. There is also a risk that the Fleet ISF spent replacement funds on operations.
During the time of our audit, the DCA Budget Unit was making positive changes to internal service funds. For example, the Budget Unit recently analyzed existing FM ISF processes and made changes where needed. Departments received cost driver information earlier and the Budget Unit communicated better during last year’s budget development. The DCA Budget Unit is also working to document the finer details of ISF allocation models.
Based upon the results of our work we recommend the County establish a work group to develop principle-based ISF policy and administrative procedures using the framework in this report as a guide. In addition, the DCA Budget Unit needs to determine the amount of Fleet ISF asset replacement reserves that should be on hand before making a planned transfer of the reserves to a new, separate Fleet Asset Replacement ISF.