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AUTHORIZE THE CITY MANAGER TO EXECUTE AGREEMENTS FOR REVENUE AUDIT AND CONSULTING SERVICES
recommended action
RECOMMENDATION
It is recommended that the City Council approve a motion to:
1. Authorize the City Manager to execute a five-year agreement between the City and Hinderliter, de Llamas & Associates (HdL) to provide the revenue audit and consulting services for the City’s Sales and Use and Transaction and Use Taxes.
2. Authorize the City Manager to execute a five-year agreement between the City and HdL Software, LLC to provide the revenue audit and consulting services for the City’s Business License Tax and Transient Occupancy Tax.
3. Authorize the City Manager to execute a five-year agreement between the City and HdL Coren & Cone to provide the revenue audit and consulting services for Property Tax.
4. Authorize the City Manager to execute a five-year agreement with MuniServices, LLC (MuniServices) to provide the revenue audit and consulting services for the City’s Utility User Tax.
5. Authorize the City Manager to execute a five-year agreement with MuniServices, LLC to provide the revenue audit and consulting services for the City’s Franchise fees.
6. Approve findings pursuant to Stockton Municipal Code section 3.68.070 in support of an exception to the competitive bidding process.
It is also recommended Council adopt a resolution appointing the City Manager, or his designee, to represent the City with authority to examine sales tax and transaction and use tax records, and further designating Hinderliter, de Llamas & Associates as the City’s consultant representative with authority to examine sales and use tax and transactions and use tax records, receive allocation and/or registration information, and identify uses of that data for specific governmental functions of the City.
It is further recommended that the City Manager be authorized to take appropriate and necessary actions to carry out the purpose and intent of this motion.
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Summary
Sales and use tax, transaction and use tax, business license tax, transient occupancy tax, property tax, utility users tax, and franchise fees are significant sources of revenue for the City’s General Fund. These revenues are needed to provide critical City services such as police, fire, libraries, parks, etc. It is crucial for the City to perform revenue audits to protect these revenue sources proactively. These audit services generally generate approximately $2.75 million in additional revenue to the City annually.
Staff issued a Request for Proposals for these services and recommends awarding the contracts listed above to HdL and MuniServices because these firms can provide all of the revenue consulting and audit services the City requires at fees similar to the current levels.
DISCUSSION
Background
The City began contracting with outside vendors in 1994 for Sales and Use Tax auditing and consulting services to enhance revenue. Since then, the City has expanded its auditing and consulting services contracts to include Transactions and Use Tax, Business License Tax, Transient Occupancy Tax, Property Tax, Utility User Tax, and Franchise Fees.
The City's primary revenue enhancement services goals to be attained by the firms are:
• To ensure the proper and accurate remittance of taxes and fees due to the City.
• To educate business operators on the proper collection and remittance of respective taxes and fees.
• To provide City staff information and analysis on tax and fee revenue trends.
• To acquire and disseminate information about new or proposed legislation that could affect the City’s tax and fee revenue.
Present Situation
Staff issued a Request for Proposals for Revenue Audit and Consulting Services on February 22, 2018. On March 15, 2018, the City received proposals from three firms: 1) Hinderliter de Llamas & Associates, located in Diamond Bar, California 2) MuniServices, LLC, located in Fresno California, and 3) RSM US LLP, located in Los Angeles, California. All three firms met the minimum qualifications, however, the City only invited the top two ranked firms (HdL and MuniServices) for interviews since there was a large difference in scoring between RSM and the two top ranked firms. Interview performance was based on:
• Quality of service
• Overall presentation
• Review of the City’s current revenue streams
• Strategies to optimize audit and discovery services for reporting and revenue projections and pricing
The objective of the RFP was to ensure fair, competitive procurement and to select firms that demonstrated their ability to provide all of the revenue audits and consulting services the City requires.
After reviewing the proposals submitted and interviewing the top two firms, City staff recommend HdL and MuniServices to provide the services listed above. The contracts provide all the audit and recovery services the City is currently utilizing, with the addition of Short-Term Rental Management Services, and includes new ways to enhance recovery methods along with enhanced reporting, and revenue projections for the City’s annual budget.
Hinderliter de Llamas and Associates, HdL Software, LLC, and HdL Coren & Cone are affiliates and operate as a single, coordinated unit providing over 400 agencies with a variety of integrated services and software products. The City has worked with HdL for more than ten years and find the staff to be very well qualified, and the work provided is excellent.
MuniServices has worked with the City for over 20 years and has been providing revenue audit and consulting services to public sector clients for 40 years. MuniServices understands the critical need to maximize local tax revenues and has worked well with City staff over the years.
Findings
SMC section 3.68.070 provides an exception to the competitive bidding process in cases where the City Council has approved findings which support and justify this action.
The following findings support and justify an exception to the competitive bidding process:
1. The City does not have the staff, technology, resources or capacity required to perform specialized audits.
2. Use of the RFP process is appropriate for these Professional Services Agreements because it relies on the evaluation of professional qualifications and performance as the basis for selection of a vendor. Use of these criteria helps ensure selection of a vendor that will provide the highest quality professional service which is in the public interest.
3. The City negotiated contracts following the solicitation of competitive proposals in accordance with SMC section 3.68.070.A.3.
FINANCIAL SUMMARY
The fee structure for most of the contracts includes a component based on a percentage of revenue recovered on behalf of the City. Revenue recoveries will vary from year to year during the five year term. The annual estimated cost for the five contracts is approximately $242,550 per year, which is similar to what the City currently pays. Over the five year terms of the contracts, the total compensation would be approximately $1.2 million. The annual amount includes:
• $131,300 for Hinderliter, de Llamas & Associates (HdL Companies) to provide revenue audit and consulting services for Sales and Use Tax, Transaction and Use Tax, Property Tax, Business License Fees, and Transit Occupancy Tax services.
• $111,250 for MuniServices LLC to provide revenue audit and consulting services for the City’s Utility User Tax and Franchise Fees.
Audit fees will be expensed from the same City fund as the revenues recovered through these services. Since most of the targeted City revenues are deposited in the General Fund, approximately $220,000 of the estimated annual cost will be paid from the General Fund Tax Collection & Election budget in account number 010-0131-510. The property tax services will also benefit the Successor Agency revenues and the transaction and use tax services will benefit the Measure W and Measure M revenues. Property Tax consultant service costs of $25,000 annually will be split equally between the General Fund and the Successor Agency Administration account 633-7310-510. Approximately $3,200 each will be charged to Measure W (081 fund) and Strong Communities (083 fund) annually for audit and consulting services related to the transaction and use tax revenues. The FY 2018-19 Proposed Annual Budget includes sufficient appropriation for the estimated annual contract costs. Since the total cost will be a combination of fixed fees and contingency fees (based on how much revenue the vendors recover for the City), staff cannot definitively state the actual cost of each contract. Any fees in excess of existing appropriations will be supported by the collection of additional City revenue.
The table below shows how staff calculated the estimated contract costs.
|
Revenue Source |
Annual City Revenue |
Vendor |
Annual Flat Fee |
Revenue Recovery Rate |
Estimated Contingency Amount |
Total Annual Estimated Cost |
Total Estimated Contract Cost |
|
Property Tax |
55,932,451 |
HdL |
25,000 |
25% |
10,000 |
35,000 |
175,000 |
|
Sales and Use Tax |
46,318,695 |
HdL |
10,200 |
15% |
40,000 |
50,200 |
251,000 |
|
Transaction and Use Tax |
51,776,086 |
HdL |
3,600 |
25% |
6,000 |
9,600 |
48,000 |
|
Utility Users Tax |
34,665,282 |
MuniServices |
95,000 |
0% |
- |
95,000 |
475,000 |
|
Franchise Tax |
13,014,077 |
MuniServices |
- |
25% |
16,250 |
16,250 |
81,250 |
|
Business License |
11,110,255 |
HdL |
- |
25%-35% |
17,000 |
17,000 |
85,000 |
|
Hotel/Motel (TOT) |
3,242,000 |
HdL |
19,500 |
0% |
- |
19,500 |
97,500 |
|
|
216,058,846 |
|
|
|
|
242,550 |
1,212,750 |
Attachment A - Agreement with Hinderliter, de Llamas & Associates
Attachment B - Agreement with HdL Software, LLC
Attachment C - Agreement with HdL Coren & Cone
Attachment D - Agreement with MuniServices, LLC - Utility User Tax Services
Attachment E - Agreement with MuniServices, LLC - Franchise Fee Services