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2007-061 Auditor's Report on Village Purchasing Procedures• RESOLUTION 2007-61 A RESOLUTION OF THE VILLAGE COUNCIL OF THE VILLAGE OF NORTH PALM BEACH, FLORIDA, ACCEPTING THE REPORT PREPARED BY CALER, DONTEN, LEVINE, DRUKER, PORTER & VEIL, P.A. CONCERNING ITS REVIEW AND EVALUATION OF THE VILLAGE'S PURCHASING AND CASH DISBURSEMENT POLICIES; AND PROVIDING FOR AN EFFECTIVE DATE. • r~ WHEREAS, the Village retained the firm of Caler, Donten, Levine, Druker, Porter & Veil, P.A. ("Cater Donten") to provide consulting services and to review and evaluate the Village's purchasing and cash disbursement policies; and WHEREAS, the Village Council wishes to formally accept Cater Donten's report on behalf o f the Village. NOW, THEREFORE, BE IT RESOLVED BY THE VILLAGE COUNCIL OF NORTH PALM BEACH, FLORIDA as follows: Section 1. The Village Council hereby accepts the report prepared by Cater Donten concerning its review and evaluation of the Village's purchasing and cash disbursement policies. The report shall be utilized by the Village Administration, the Village Audit Committee and the Village Council as a guide to strengthen internal controls and make the Village purchasing system more effective and efficient. Section 2 This resolution shall take effect immediately upon adoption. PASSED AND ADOPTED THIS 24th DAY OF MAY, 2007. ..~ ~~, . ,Village Seal) ~~ ,~ ~,, ~, AT1'ES i .`~~ ~'`~,,. . .i.1. ~\I\\\. ~~~~ VILLAGE CLERK CALER, DONTEN, LEVINE, _., DRUI~R, PORTER 8i VEIL, P.A. WII T iAM K. CALER. JR„ CPA LOUiS M. COHEN, CPA IOHN C. COURTNEY. CPA, 7D DAVID S. DONTEN. CPA SCOTT D. DRUKER, CPA, 7D JAMES B. HUTCHISON, CPA JOEL H. LEVINE, CPA JAMES A MULLEN, IV, CPA THOMAS A. PENCE, JR., CPA SCOTT L. PORTER, CPA MARK D. VEIL, CPA CERTIFIER PUBLIC ACCOUNTANTS 505 SOUTH FLAGLER DRIVE; SUITE 900 WEST PALM BEACH, F(.33401-5948 TELEPHONE (561) 832-9292 FAX (561) 832-9455 infoQedlcpa.com MEMBERS AMERICAN INSTII'U7E OF CERTIFIED PUBLIC ACCOUNTANTS FLORIDA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS To the Honorable Mayor and Village Council Village of North Palm Beach 501 U.S. Highway One North Palm Beach, Fl. 33408 We are pleased to have the opportunity to assist you in the review and evaluation of the Village's purchasing policies. This report has been prepared to offer recommendations to management, the Audit Committee and the Village Council for ways to strengthen internal control and make the purchasing system more effective and efficient, where possible. As part of our engagement we gathered data by reviewing the existing purchasing policies, interviewing Village staff including the Village Manager, Finance staff, Department heads, and administrative staff responsible for procurement. We also reviewed the internal control questionnaire completed by the Finance Director. Based on our discussions, it appears that there have been a number of positive changes made in the purchasing system over the past several months. Where changes have already been instituted, we did not consider or test items under the old systems. Our evaluation focused on opportunities to gain efficiencies and strengthen internal controls over the purchasing system in light of current trends and the processes used by similarly sized local governments. The following are our observations and recommendations for your consideration. Purchase Orders Based on our discussions with various Village staff members, it appears that there is some confusion over the use of purchase orders. Generally, most departments are obtaining $1,000 purchase orders for each vendor for each budget line item. Some departments may have several purchase orders to the same vendor because each is for a different line item. They draw on these purchase orders until the $1,000 is expended and then they obtain another $1,000 purchase order and repeat the process. Likewise, if an item falls within the $1,000 to $10,000 range a similar sequence of events occurs. Often times, a department ends up with a significant amount of outstanding purchase orders that are unused, as well as an appearance that funds have been encumbered, when in fact they have not. In some instances, this methodology creates a significant amount of paperwork with no real benefit. In other instances, the intent of the purchasing policy is being unintentionally avoided because multiple purchases under certain dollar thresholds may, on a cumulative basis, exceed the next higher purchasing threshold requirement. Finally, there appears to be a perception that there is a backlog in issuing purchase orders. Some departments indicated that it takes 3 to 5 days to obtain a purchase order, while others indicated it could take up to two weeks. The Finance Department maintains that they issue purchase orders daily, such that by the end of each day they have issued all purchase orders ready for processing. The Finance Department believes that delays occur when it takes time to circulate the requisition through a given department for approvals or when a requisition is incomplete. The Finance Department has also committed to move occasional rush purchase orders through the system as necessary. Management should consider having an educational session with all key department purchasing personnel to thoroughly explain the purchasing system, as well as any future changes that will be instituted. Blanket Purchase Orders The Village's current purchasing policy provides for blanket purchase orders. These are to be used for small, daily purchases from a vendor. Examples would be office supplies, hardware store purchases, etc. Blanket purchase orders would be used when the Village has an ongoing relationship with a vendor and regularly makes a number of relatively small purchases during a set time period. The blanket purchase order would not contain specific item information, is not to be used for single or large purchases and is not limited to a specific budget line item. We recommend that blanket purchase orders be issued for the types of items described above. Consideration should be given to increasing the current $1,000 dollar purchase order threshold amount to $2,500. The dollar limit on blanket purchase orders should be reevaluated periodically in light of purchasing needs. Invoices for items purchased on blanket purchase orders would be coded by the line item to be charged and they would be forwarded to the Finance Department for posting and payment. Such a system places added responsibility on the user departments to monitor actual expenditures versus the budget on a monthly basis. Unfortunately, the Village's accounting software does not allow for the use of blanket purchase orders in an efficient manner. It is our understanding that the Village's accounting software has the capability to issue blanket purchase orders, but the system is somewhat inflexible because it requires the blanket purchase order to be issued against general ledger line items where the ultimate expenditures will be charged. Furthermore, while it is possible to subsequently reallocate the blanket purchase order line items, the effort involved leads staff back to their existing policy of issuing line item purchase orders. Given these software limitations, we recommend that purchasing cards (see discussion below) or open accounts at certain vendors be used for blanket purchase order type purchases. This would eliminate a significant amount of internal paperwork. Purchase Order Generally, purchase orders should be used for the purchase of a single, larger dollar item that is not purchased on a regular basis. This would include all purchases not covered by a blanket purchase order. In addition, all recurring monthly bills for payment of utilities, health insurance, pre-approved maintenance and service type contracts, etc. would not require purchase orders. We would recommend that the purchasing order threshold be increased from $1,000 to $2,500. In addition, management should consider increasing the capitalization threshold for capital assets from $1,000 to $2,500. All purchases that are budgeted to exceed $10,000 on an annual basis would exceed the Village's bid threshold and should be bid prior to the beginning of the fiscal year. For example, the golf course requires a significant amount of fertilizer throughout the fiscal year. Currently, the golf course maintenance department obtains three written quotes and generally purchases fertilizer in amounts between $1,000 and $10,000. However, over the course of the fiscal year, the department purchases well in excess of $10,000 of fertilizer. We believe this type of item should be subject to the Village's bidding requirements and one bid accepted for the entire year's needs. This may also allow the Village to take advantage of larger quantity discounts and would eliminate the staff time and paperwork associated with multiple quotes and purchases. Likewise, other purchases should be aggregated for the year to determine whether three written quotes - - -- -are-required or whether competitive-bidding-is-required: -------- - - -- -- --- Copies of all approved maintenance agreements should be submitted to the Finance Department at the beginning of each fiscal year. An annual purchase order would be issued for the fiscal year, if required by the vendor. None of these purchase orders would be allowed to exceed one year. One item brought to our attention related to repairs for items such as air conditioning or plumbing backups. It is our understanding that most of these repairs are handled by the facilities department under public works. If there are regularly occurring repairs that the facilities personnel do not handle, consideration should be given to setting these purchases up on blanket purchase orders. The other option is to treat them as emergency purchases and have them authorized by the Village Manager Purchasing Cards One issue that came up during our discussions with many of the departments was that many times when they are making travel and lodging arrangements for conferences or purchasing items over the Internet, they must use their own credit card to make the purchase. Many local governmental organizations have obtained purchasing cards or credit cards for use in such instances. Purchasing cards are used in varying degrees in different organizations and in general, the cards allow for more timely purchases with a reduced amount of paperwork, since one check is written to the credit card company instead of many checks to different vendors and employees for reimbursement. The purchasing cards also eliminate questions concerning the payment of State sales tax. Consideration should be given to obtaining a limited number of purchasing cards to be used for specific types of purchases. It is our understanding that limits can be placed on these cards such that only certain types of items may be purchased, as well as dollar spending limits per day and per month. Initially, the purchasing cards might be held by the Finance Department with other Departments having the ability to sign them out for specific uses. The purchasing policy should address the allowable uses of the purchasing cards. It should also be understood that all of the normal purchasing requirements, documentation and required approvals still apply.. In addition, there should be strong penalties for abuse of the cards. Management should closely monitor the use of the cards over time and if effective, consider more possible uses for the purchasing card system. Sole Source Purchases The Village's purchasing policy briefly addresses sole source purchases. Consideration should be give to expanding the purchasing policy definition to include language similar to the following: "Sole source purchases are the acquisition of goods and services -that-for- all-practical purposes can -only be--obtained -from a -single-vendor,-usually because of limiting technology, technological compatibility with existing systems, goods or services already in use by the Village or other unique qualities of the goods or services that preclude a competitor's price comparison." In addition, all sole source purchases should be documented by a memo from a Department Head justifying why the purchase is sole source. According to the Village's policy, the Village Manager must approve all sole source purchases and any such purchases in excess of $10,000 must also be approved by the Village Council. Contract Change Orders The Village's existing purchasing policy does not address the procedures to follow for contract change orders. However, management is in the process of developing a new policy that will address some of the change order issues. It is our understanding that the Village Manager has been reviewing and approving all contract change orders prior to payment. For example, we reviewed seven change orders to QGS Development for the golf course renovation totaling approximately $358,000, which were approved by the Village Manager. The Village's purchasing policy should be amended to address the required procedures for change orders. We recommend that all proposed change orders be approved by the Village engineer (if involved in the project), the Department Head overseeing the project and the Village Manager. Consideration should be given to setting some cumulative threshold, whereby the Village Manager can approve smaller change orders for expediency purposes, although the Village Council would still be notified of any such change orders. This threshold might be set at the lower of some percentage of the total project (maybe 10%) or some dollar amount (maybe $10,000), subject to the change being within the original scope of the project and such that the change order amount would not exceed the original budget line item for the project. All other change orders would be approved by the Village Council. "Piggyback" Bids The Village's purchasing policy allows management to "piggyback" on other state and local government contracts for labor and materials. There are instances when these contracts are not necessarily the least expensive way to purchase an item. We recommend that the Village obtain one verbal quote when using the "piggyback" purchasing provision to see if the "piggyback" quote is reasonable. If the verbal quote is significantly lower, staff should go through the normal purchasing/bidding procedures. The verbal quote should be documented and included as part of the backup for the purchase. This would ensure that the Village is making the best use of its money. Purchasing Director ---- We--have--been--asked on several -occasions-whether- we felt -there- was- aneed-for the Village to hire a purchasing director. While there are advantages and disadvantages to having a centralized purchasing department within an organization, the most important consideration is whether the benefit to having such a person or department would exceed the corresponding costs. Considering the current size of the Village, we do not believe that a purchasing director would be cost beneficial at this time. This report is intended solely for the information of the Village Council, Audit Committee and management of the Village of North Palm Beach, Florida and is not intended to be and should not be used by anyone other than these specified parties. In closing, we would like to thank the Village staff that assisted with the development of this report. We sincerely appreciate this opportunity to be of service to you. ~, , ems,, ~..~, /~,Pit/'TNt.C,~ ~ ~/.u.C, PA, Apri126, 2007