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SR-CC/RA-3 (2) ~ (!~/'A-3 , SEP ~ "", 'Q..... -.:~ ! j::;L FD:CMD:br/racamrc 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 t' t' /~A.-j - 1 - SED - ~, ~ '""'1'~ , 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, - 2 - , 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 - 3 - . , 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 - 4 -