· Funds are the accounting instruments by which governmental entities record financial activities and resources. A governmental entity may have many funds to separate disparate activities and restricted resources. Sound financial management and governmental accounting practices prescribe that funds be kept to the minimum number necessary to prevent unwarranted complexity and inflexibility. Accordingly, the Controller's Office has structured the financial accounting framework so funds are comprised of numerous sub-funds, which are the level at which the Controller records financial activities and resources that are segregated for specific uses.

· Historical records on the creation of sub-funds have not been maintained by the Controller's Office. Accordingly, for any given sub-fund, there is limited documentation on the purpose, source of revenue, authorization, and department(s) responsible for the sub-fund. A review of selected special funds maintained by the Controller's Office has identified sub-funds that are not necessary. Some funds are not legally required. Other funds are required by the City and County of San Francisco Code, but do not appear to otherwise meet the criteria for a separate fund. These activities may be accounted for and separately tracked in the General Fund or other primary operating fund. Further, financial activities are not necessarily monitored at the sub-fund level. For example, a number of sub-funds had inappropriate deficit or residual fund balances. Other sub-funds should be closed due to lack of activity as required by Administrative Code Section 10.100-1 and the Annual Appropriation Ordinance.

· The Controller's Office should review all sub-funds, closing those that have not had activity or those for which activity is not required to be recorded separately. The Controller's Office should also establish comprehensive written policies and procedures for the establishment, maintenance, and monitoring of sub-funds. Internal and external policies and procedures should be developed, clearly defining the roles and responsibilities of the departments as well as of the Controller's Office.

· This review identified approximately $2,193,114 in funds that can potentially be transferred to the primary operating funds of the City, including the General Fund. Some, but not all of these funds may continue to be restricted for certain activities. The remaining special and fiduciary sub-funds that have not been reviewed would almost certainly have additional monies that could be transferred to the primary operating funds of the City, including the General Fund. A thorough analysis is required to address the issues discussed in this review and would identify additional fund balances available to support General Fund or other primary operating fund activities. In addition to identifying available resources, operational and financial management efficiencies would be realized.

Fund Accounting

Generally Accepted Accounting Principles (GAAP) dictate that governmental entities use fund accounting. GAAP defines funds and fund accounting as follows:

"A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations."¹

While there is no limit on the number of funds that a governmental entity may use, GAAP stipulates that governmental entities should maintain the fewest number possible:

"Governmental units should establish and maintain those funds required by law and sound financial administration. Only the minimum number of funds consistent with legal and operating requirements should be established, however, since unnecessary funds result in inflexibility, undue complexity, and inefficient financial administration."²

GAAP has separated funds into eleven fund types and categorized them into three groups as noted in Table 6.1.

Table 6.1

Fund Types and Fund Groups

Governmental Funds	Proprietary Funds	Fiduciary Funds
General fund	Enterprise	Pension trust
Special revenue	Internal service	Investment trust
Debt service		Private-purpose trust
Capital projects		Agency
Permanent

All of the eleven fund types, except for the General Fund, can be comprised of multiple funds. The Controller has taken the reporting of fund activity one step further by recording disparate financial activity and resources at the sub-fund level.

The Controller's Office simplified and consolidated the City's special funds in FY 2000-2001 by creating a standardized categorization system. The categorization system details how the funds are to be administered, including whether 1) interest accrues to the fund, 2) funds are automatically appropriated, and 3) the fund balance carries forward. The Controller reports closing funds and sub-funds at that time and conducting a major revision of the Administrative Code to reflect the consolidation and categorization of special funds.

The Controller's Office reports that the review of funds and sub-funds is an ongoing process. For external financial reporting purposes, funds are reconciled annually. According to the Controller's Office, the extent to which sub-funds are reviewed and reconciled is based on priority and available staff resources. Further, the Controller reports that there are working groups of high level Controller staff that review and approve the creation of funds and sub-funds. However, the Controller does not have comprehensive written or formal policies and procedures guiding the creation, maintenance and monitoring of funds and sub-funds.

Review of Existing Sub-Funds

Because discretion is used more frequently in the establishment of special revenue funds and fiduciary funds, detail was requested on these funds and their respective sub-funds. The Controller reported 25 special revenue funds and 16 fiduciary funds. These funds are comprised of 185 special revenue sub-funds and 78 fiduciary sub-funds. The following table provides cash and fund balances for these funds:

Table 6.2

Special Revenue Funds and Trust Funds

Cash and Fund Balances

As of 6/30/02	Special Revenue Funds	Fiduciary Funds (1)
Fund Count	25	15
Sub-Fund Count	185	77
Cash Balance	$364.4 million	$490.9 million
Fund Balance	$356.2 million	$243.3 million

(1) Fiduciary Funds reported in the table exclude the Employees' Retirement System which has a total cash balance of $11.0 billion and a fund balance of $10.4 billion.

The Controller maintains limited historical documentation on these funds. Of a sample of 65 special revenue sub-funds, no central file existed for 22 sub-funds, excluding 12 grant sub-funds, which are not managed at the sub-fund level, but at the grant level. Of the remaining 31 sub-funds for which files were located, the extent of documentation varied substantially, with many of the files only containing financial reports from the reconciliation that occurred in FY 2000-2001. No historical files are maintained for fiduciary funds. The Controller's Office reports that it intends to place the type of information typically contained in historical files, such as legal authorization, purpose and source of funds, in FAMIS and available for on-line review.

Departments were then contacted to gather data and information on the use of 18 special revenue sub-funds. Of the 18 special revenue sub-funds, several did not appear to be administratively necessary or legally required outside of the Administrative Code. Other funds were identified that should be closed. Several funds had unreconciled activity, including residual or negative fund balances.

Funds Not Required by GAAP

As noted earlier, GAAP stipulates that a minimum number of funds be maintained. While GAAP indicates that "sound financial administration" may be cause for establishing a separate fund, oftentimes, financial accounting systems are sophisticated enough to monitor and track financial activity in a multitude of ways, rendering the need for a separate fund obsolete.

The Board of Supervisors may request funds that do not specifically meet the definition of a fund, as defined by GAAP. In order to stem the proliferation of funds and sub-funds, the Controller reports that he has worked with the City Attorney's Office and individual Supervisors to develop language in any proposed legislation requiring a separate accounting for activity to be segregated into either a special fund or account. Therefore, the activity can be effectively tracked and monitored in the General Fund or other primary operating fund.

Our review identified the following sub-funds that are not administratively necessary or legally required outside of the Administrative Code, and where the financial activity and resources can be accounted for in the primary operating fund, which is most often the General Fund.

General Services Special Revenue Fund - Civil Service Special Revenue Sub-Fund

According to Controller files, this sub-fund is to record revenues received from the lease of examination material and the provision of consulting services for the purpose of examination research and development. Additionally, according to the Controller's files, the Administrative Code requires amounts in excess of $10,000 to be transferred to the General Fund. Further, Controller staff asserted that this fund is used to reimburse Civil Service Commission expenditures in the General Fund. As of June 30, 2003, the fund balance was $1,441.

The Civil Service Commission was unaware of this fund and believed that fund management might be the responsibility of the Department of Human Resources (DHR). However, DHR stated that the fund is not in their purview, and noted that the only activity in the sub-fund was posted by the Controller's Office. However, according to Controller staff, this sub-fund is the responsibility of the Civil Service Commission. The activity purported to be recorded in this fund does not necessitate a separate fund and should be recorded in the General Fund.

General Services Special Revenue Fund - Tenants Overtime Sub-Fund

This sub-fund is used by the Fine Arts Museum to record overtime incurred for guards and other Museum personnel when the Museum is rented for special events. These expenses are reimbursed by the parties renting the facilities. According to Controller files, the Recreation and Parks Department and County Agriculture used this sub-fund for the same purpose, but both departments ceased using this sub-fund in 1999. At June 30, 2003, this sub-fund recorded a fund balance of $150,129. Given that these funds are to reimburse already incurred overtime expenditures, these funds are due to the General Fund where the expenditures were initially recorded. Given the ability to record and monitor these expenditures in the General Fund, as other departments do, and given the lack of any legal requirement, there is no clear reason why this sub-fund is required for financial administration purposes.

Off-Street Parking Fund - Annual Projects Sub-Fund and Continuing Projects Sub-Fund

When the Department of Parking and Traffic was merged with the Municipal Transit Agency (MTA), most of the Department's financial activity was transferred to the MTA enterprise fund. These two sub-funds, however, were not merged. According to the Department, these funds will remain open until the projects or activities have been completed. However, if the Department has been merged with MTA creating one reporting entity, all of its financial activity, even if it relates to prior year appropriations, should be merged and these sub-funds should be closed.

Public Works, Transportation and Commerce Special Revenue Fund - DPW Personnel Sub-Fund

According to the Department of Public Works (DPW), this sub-fund is DPW's "homebase errors fund." As such, this sub-fund records the salaries and fringe benefits expenditures of employees who inaccurately bill their time to a job that does not match an appropriate project account. Accordingly, this sub-fund works like a suspense account, where errors or unidentified activity is recorded until the appropriate accounting is determined. By isolating these expenditures in another fund, actual salaries and fringe benefits expenditures are understated in the initiating fund and are not monitored against appropriations until a reconciliation occurs and errors are corrected.

Public Works, Transportation and Commerce Special Revenue Fund - Citywide Waste Disposal Sub-Fund

This sub-fund has been recently created to account for DPW's payment of City departments' garbage bills. According to the DPW, the Mayor's Office recommended this fund during the budget process and the Controller created the sub-fund in the financial accounting system. It should be noted that it is Controller's responsibility to authorize and control the chart of accounts and funds in accordance with GAAP requirements and sound financial management practices and not the Mayor's Office responsibility.

According to DPW, this activity could be accounted for in the General Fund. For administrative ease, DPW prefers a separate fund. Given the ability to record and monitor these types of expenditures in the General Fund as other departments do and given the lack of any legal requirement, there is no clear reason why a sub-fund is required for financial administration purposes.

Public Works, Transportation and Commerce Special Revenue Fund - Service to Outside Agencies Sub-Fund

DPW accounts for services performed for non-City agencies, such as Caltrans, by establishing projects in this sub-fund. However, DPW is unaware of any reason as to why these activities have been accounted for in this sub-fund and suggested that it is because it has always been done that way. Given there is no legal requirement that this type of activity be recorded in a separate fund, there is no reason why projects for these purposes cannot be established or monitored in DPW's other operating funds.

Inactive Funds and Sub-Funds

Pursuant to Administrative Code Section 10.100-1(d) and the Annual Appropriation Ordinance:

"...if there has been no expenditure activity for the past two fiscal years, a special fund should be closed and repealed. The Controller is hereby authorized and directed to close such funds, consistent with the budgetary and fiscal provisions of the Charter."³ (Emphasis added)

The following sub-funds were identified during our review as having no activity for at least a two year period.

General Services Special Revenue Fund - Wages - Voting Tabulation Sub-Fund

According to a memorandum in the Controller's files, the Registrar of Voters requested this sub-fund be closed in May, 1999. At that time, the Registrar reported that the fund had not been active for over 10 years. The sub-fund has recorded the same fund balance of $7,453 for at least the last three years. Subsequent communication with the Registrar indicated that the Department continues to want the sub-fund closed.

Public Protection Special Revenue Fund - Sheriff Management Assistance Sub-Fund

According to the Sheriff's Department, the sub-fund was closed when the Controller completed its reconciliation in FY 2000-2001. While there has been no fund balance for at least the last three years, FAMIS reports balances in budgetary accounts in FY 2002-2003. So, while the sub-fund may have been closed, the appropriate accounting entries were not recorded to close out all sub-fund activity and balances.

Off-Street Parking Fund - Continuing Projects Sub-Fund

This sub-fund has shown the same fund balance of $1,544,422 for the last three fiscal years ending June 30, 2000, 2001, and 2002. While the sub-fund has no fund balance and has been closed as of June 30, 2003, more than two years elapsed before the fund was reconciled and closed.

The Controller reports that this sub-fund can only be reviewed in conjunction with other sub-funds within the Off-Street Parking Fund because the department was not managing its activities at the sub-fund level. However, if this sub-fund did not have activity for over two years, it was incumbent upon the Controller's Office to identify that there had been no activity and at that time a reconciliation should have occurred and the sub-fund either closed or corrected to reflect accurate departmental activity and balances.

Fund Reconciliation and Other Financial Management Issues

Sound financial management practices require that funds and sub-funds be regularly reconciled to identify any irregular or erroneous fund activity. Reconciliation includes analysis of whether fund balances are appropriate and all activity has been appropriately recorded. For example, if the special revenue fund records activity that is reimbursed, there should not be a positive fund balance because any revenues would be paying for expenditures already incurred.

General Services Special Revenue Fund - Tenants Overtime Sub-Fund

As noted previously, this sub-fund is used by the Fine Arts Museum to record overtime incurred for guards and other Museum personnel when the Museum is rented for special events. These expenses are reimbursed by the parties renting the facilities. For the last three fiscal years from June 30, 2000 through June 30, 2002, the fund has recorded a fund balance at year end of $156,024, $235,898, and $222,720. Given that these funds are to reimburse already incurred overtime expenditures, at year end, these funds should either be transferred to the fund where the expenditures and liabilities are initially recorded or a liability should be recorded in the sub-fund at year end.

General Services Special Revenue Fund - Dispute Resolution Program Sub-Fund

Pursuant to Administrative Code Section 10.100-295: "The Board of Supervisors hereby authorizes payment to the General Fund of the City from the Dispute Resolution Program Fund of an amount not to exceed 10 percent of the total amount of said fund for any necessary and reasonable administrative costs incurred..." According to the Mayor's Office of Criminal Justice (MOCJ) and Superior Court, which administered the sub-fund from 1997 to 2002, this transfer has not occurred. In fact, Superior Court was not even aware of such a stipulation in the Administrative Code. Prior to Superior Court, the Mayor's Office of Community Development administered the fund.

According to MOCJ, 10 percent of funding in FY 2002-2003 is $37,505. However, according to MOCJ, there is no requirement that administrative costs be reimbursed by the program. Given the inclusion of such a clause in the Administrative Code, it appears that the intent of the Board of Supervisors was to recover administrative costs incurred by the General Fund. If $37,505 is representative of historical administrative costs, the General Fund has absorbed approximately $262,535 in costs since 1997. While the Controller cannot ensure that every appropriate transaction is completed, the Controller has the responsibility to ensure that funds are adequately managed, including compliance with Administrative Code, especially when funds are transferred between departments and general City accounts.

Public Works, Transportation and Commerce Special Revenue Fund - DPW Personnel Fund

As noted above, this fund is used to account for errors made by DPW employees when billing projects. The year end fund balance for FYs 1999-2000, 2000-2001, and 2001-2002 of this sub-fund was a negative $569,480. According to DPW, this negative balance was created in the conversion to on-line FAMIS in FY 1995-1996. Otherwise, DPW does not know the source of the negative balance. According to DPW, the Controller asked DPW to recover these funds through charging for these costs through DPW's overhead account. However, according to DPW, the Department has forgotten to do this and the negative fund balance remains. In accordance with the Controller's direction, DPW should resolve this negative fund balance in FY 2003-2004.

Fiduciary Funds

According to Controller staff, individual departments or outside agencies, such as the Community College District, are responsible for the maintenance and reconciliation of fiduciary funds. Accordingly, inquiries were made to several departments regarding fiduciary funds. In several instances, departments did not have any information on the fiduciary funds that seemed to correlate with the department. For example, Administrative Services was unaware of the Administrative Services - Department of Consumer Assurance Fund (with a negative fund balance of $564), the Department of Public Health was unaware of the Public Health Miscellaneous Trust Fund (with a fund balance of $37,332), and DPW's Deposits Fund is being used by the Department of Building Inspection.

To the extent that the City is responsible for the administration of the assets held in a fiduciary capacity, such as funds held on deposit, any subsidiary accounting or tracking system should be reconciled to the City's financial accounting system, FAMIS. One fiduciary sub-fund that was reviewed during the course of the audit, the Sheriff Deposits Fund, is not reconciled back to FAMIS. In fact, according to the Sheriff's Department, the subsidiary system cannot even provide a fund balance for the accounts that it is tracking. Another fiduciary sub-fund, the Social Services Assistance Program Fund, is not reconciled by the Department of Human Services (DHS). In fact, DHS could only identify approximately $340,000 of a total fund balance of $1,047,000. DHS could not associate the remaining $707,000 with any specific program or activity. According to the Controller's Office, the residual fund balance in this sub-fund was also created in the conversion to on-line FAMIS in FY 1995-1996.

Another fiduciary fund managed by DHS, the Social Service Building Trust Fund, accounted for excess revenues derived from the bond issuance for the construction of a DHS building at 170 Otis. Per the bond covenants, these funds are restricted for project costs, which DHS has interpreted as including building maintenance and rental costs. According to DHS, while these funds could have been used in prior years to subvent General Fund costs for these purposes, they were not always used. DHS anticipates and has appropriated to use in FY 2003-2004 the remaining $291,859 fund balance as of August 27, 2003, along with anticipated final project revenues of approximately $470,000.

Gift and Bequest Funds

The Controller has established a gift fund and a bequest fund to track donations to the City. For these funds, the Controller has not established separate sub-funds for each gift or bequest. Instead, gifts and bequests are tracked in the financial accounting system by grant numbers. As of August 8, 2003, the gift fund had 241 grants for a total of $6,048,718. The bequest fund had 9 grants as of August 8 and totaled $5,573,946.

Of the 241 grants in the gift fund, 21 had balances less than $1.00 and 15 had balances less than $100.00. Therefore, 36 funds, or 14.9 percent of funds, had balances less that $100.00, indicating that a significant number of gift funds are inactive and should be closed. 28 gift funds had a negative fund balance totaling $1,243,759. Given the nature of gifts and bequests, a negative fund balance typically indicates that either departments have not appropriately accounted for gift activity or have over-expended gift funds.

Additionally, there are two grants in the gift fund titled "Unallocated Grant," for which there is no clear responsible department and which total $698,526. In the bequest fund, one unallocated grant totaled $15,623. In total, unallocated grants amount to $714,149. According to the Controller's Office, these grants were created in 1996 when FAMIS was upgraded to consolidate small inactive grants. According to the Controller, these monies might be used to "offset" negative balances, essentially covering gift expenditures when departments have overspent.

Correspondence with select departments identified the following examples of inappropriate use of or balances in the gift fund:

· DPH has a number of gifts from the mid-1980s that the Department is currently working with the Controller to close out.

· The Police Department reports that most of the existing gift funds are from prior to 1998 and are inactive. Police gift funds total approximately $46,486.

· The gift fund includes $776,065 from unknown sources in an account entitled OES Command Center Project - Earthquake Relief.

· The gift fund includes 2 grants that total approximately $87,685 in fines and forfeitures that DPW uses for the Adopt a Tree Program.

· The gift fund includes approximately $191,075 in insurance settlements for earthquake damaged art. According to the Fine Arts Museum, the repair and replacement of art to be paid for with the funds has already occurred.

· Although the project is complete, gift funds totaling $6,838 remain for the Doggie Diner Head Repair.

Conclusions

The Controller does not provide adequate oversight or control over the establishment or maintenance of sub-funds. Accordingly, existing sub-funds are not necessarily required by legal provisions or for financial administration purposes as stipulated by GAAP. These activities can be recorded in the General Fund or other primary operating funds. The lack of monitoring and oversight has also resulted in unexplained and unreconciled financial activity, which has produced among other issues, negative or residual fund balances. Our review of 35 sub-funds identified $2,193,114 that can likely be transferred to the primary operating funds of the City, including the General Fund. While some of these funds may be restricted for certain activities, many of these funds are not restricted or can be used to subvent General Fund subsidies of the specified activity. Certainly, the remaining 227 special and fiduciary sub-funds would have additional monies that could be transferred to the primary operating funds of the City, including the General Fund.

Recommendations

The Controller should:

6.1 Establish formal policies, procedures and criteria for the establishment of special revenue and fiduciary funds and sub-funds, in accordance with Generally Accepted Accounting Principles, and develop specific criteria for funds that are necessary to meet "sound financial administration" principles;

6.2 Conduct a thorough review and reconciliation of special revenue and fiduciary funds and sub-funds by June 30, 2004, including an analysis of departments' subsidiary financial accounting systems that record detail on special revenue or fiduciary fund activities;

6.3 Conduct a review and reconciliation by June 30, 2004 of all gift and bequest funds, identifying monies where:

(a) Recording in the gift or bequest fund is not warranted and the resources/activity can be recorded in the primary operating fund; and

(b) Gift purpose has been achieved and residual gift balances must be disposed.

6.4 Close and transfer any residual fund balances for those funds and sub-funds that do not meet the criteria established by Recommendation 6.1, above, and for which the activity can be sufficiently tracked and monitored in the primary operating fund;

6.5 Resolve or dispose of any inappropriate residual or deficit fund balances identified by the reviews performed pursuant to Recommendation 6.2 and 6.3 above; and

6.6 Establish periodic and year-end procedures for the reconciliation and review of all special revenue and fiduciary funds and sub-funds.

The Board of Supervisors should:

6.7 Consider the use of special accounts rather than special funds as an acceptable and preferable mechanism by which activities can be segregated, tracked and monitored.

Costs and Benefits

While the recommendations above will require both one-time and limited on-going resources, the costs will be significantly exceeded by the identification of available recourses resulting from 1) residual balances identified by the Controller's review which can be returned or escheated to the General Fund and 2) operational and financial management efficiencies. A minimum of approximately $2,193,114 in funds can likely be transferred to the primary operating funds of the City, including the General Fund. Review of the remaining 227 special and fiduciary sub-funds almost certainly will identify additional funds. While some of these funds may be restricted for certain activities, many of these funds are not restricted or can be used to subvent General Fund subsidies of the specified activity.

¹ National Council on Governmental Accounting (NCGA) Statement 1, Governmental Accounting and Financial Reporting Principles, paragraph 2.

² NCGA Statement 1, paragraph 4.

³ City and County of San Francisco, Consolidated Budget and Annual Appropriation Ordinance, Fiscal Year Ending June 30, 2004.eading2">