SR-CC/RA-3 (2)
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Council Meetlng: september 8, 1992 Santa Monica, California
TO: Mayor and city Council
Redevelopment Agency Members
FROM: City staff
SUBJECT: RECOMMENDATION TO AMEND AGREEMENT WITH MUNICIPAL
RESOURCE CONSULTANTS (MRC) TO CONDUCT PROPERTY TAX,
REAL PROPERTY TRANSFER TAX, UTILITY USER'S TAX AND
FRANCHISE TAX REVENUE RECEIPT AUDITS
Introduction
This is to recommend that the City Council authorize negotiation
and execution of an amendment to the city'S agreement with
Munlclpal Resource Consultants (MRC) for Sales Tax Audits to also
include performing Property Tax, Real Property Transfer Tax,
Utillty User's Tax and Franchise Tax revenue receipt audits. The
purpose of these additlonal audlts is to ensure that the General
Fund and the Redevelopment Agency Fund are receiving all income
from these revenue sources which they are legally entitled to
receive, and to provide related detalled statistical data for
flnanClal plann~ng purposes.
Background
Many cities do not receive all of the tax revenue to which they
are legally entitled due to administrative errors and omissions
by both taxpayers and the entities (state, County and utility
companles) that are responsible for collecting and distributing
taxes. These errors and omissions may result from human error,
the complex nature of the state and/or local tax systems, and
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possibly fraud. It ~s especially important that all tax revenues
legally due a Clty are received during difficult financial times.
Since 1987, City staff have been conducting Business License Tax
audits and audits of Transient Occupancy Tax payments because
these payments are made directly to the city by local enter-
prlses and these tax structures are relatively slmple. However,
it has not been possible to institute slmilar audit programs for
the Property Tax (for payments made to the General Fund and the
Redevelopment Agency Fund) , Real Property Transfer Tax, utility
User's Tax, and Franchise Taxes paid by Southern California
Edison, Southern Call.fornia Gas, and Century Southwest Cable.
This is because staff does not have sufficient technical ex-
pertise to deal w~th these more complex tax structures, and
these tax revenues are collected and distributed to the city by
third parties which further complicate the implementation of an
audit program.
These tax sources constitute approximately 35% of all on-going
General Fund revenues. In the absence of these additional
revenue recelpt audits, staff believes there may be tax payment
deficiencies which will continue to go undetected and un-
corrected.
Discussion
For over SlX months, staff have been in discussions with and have
been reviewing proposals from firms that have the ability to
perform revenue receipt audits for some or all of these revenue
sources. As a result of this review and evaluation process,
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staff recommends that Municipal Resource Consultants (MRC) be
selected to conduct these additional revenue receipt audits as
MRC best meets the city's needs.
On September 27, 1988, the City authorized MRC to conduct Sales
Tax revenue receipt audits in order to detect and correct point
of sale distribution errors and thereby generate new Sales Tax
revenue which would not otherwise have been realized by the city,
and to provlde related detail Sales Tax statistlcal data for the
City and its maJor commercial areas.
By the end of calendar year 1991, MRC had identified 53
businesses from which the City had not been receiving the Sales
Tax revenue to which it was entitled. The amount of new Sales
Tax revenue subsequently paid to the city (net of MRC's
compensatlon) has been approximately $563,000 through CY 1991.
In the future, the City will receive approximately $400,000 per
year of on-going Sales Tax revenue from these Sales Tax payees.
since 1988, MRC has expanded its revenue receipt audit services
and possesses the technical expertise necessary to audit all of
the sources of tax revenue WhlCh are not being audited by city
staff.
In addition, MRC wlll provide total City and geographically based
reports for these additional tax sources similar to those now
provided for the Sales Tax. ThlS additional data will enable the
City to monitor and analyze the economic status of any specific
area in the City, assist in producing more informed revenue
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forecasts, and provide information to the business community for
their planning purposes.
Finally, amendlng the city's current agreement with MRC and
thereby dealing with one service provider will ensure that staff
maintains proper control over the audit process.
BUdget/Financial Impact
Staff has discussed an arrangement with MRC so that compensation
to MRC for these revenue receipt audits and statistical data
services would be contingent on audit results. MRC' s
compensation would be 25% of one-time additional retroactive
revenues received by the City, and 25% for twelve consecutive
calendar quarters of additional on-going revenues identified as a
result of the audits.
Recommendatlon
It is recommended that the city Council authorize the City
Manager and the Redevelopment Agency Executive Director to
negotiate and execute an amendment to the city's agreement with
Municipal Resource Consultants to conduct additional revenue
receipt audits and provide associated detalled statistical data
for the Property Tax, Real Property Transfer Tax, Utility User's
Tax and Franchise Taxes due to the city.
Prepared by: Mike Dennis, Director of Finance
Ralph Bursey, City Treasurer/Revenue Manager
David Carr, Assistant City Treasurer
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