HomeMy WebLinkAboutStaff Report 404-09TO: HONORABLE CITY COUNCIL
ATTENTION: FINANCE COMMITTEE
FROM: CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE: OCTOBER 20, 2009 CMR: 404:09
SUBJECT: Update on the Telephone Audit and Direction to Pursue the CalNet Contract
for Telephone Services
RECOMMENDATION
Staff recommends that the Finance Committee recommend to Council to direct staff to pursue a
CalNet 2 contract for telephone services and return to Council for approval of the contract.
BACKGROUND
At the September 8 Finance Committee meeting the City Auditor presented a report on the
review of City Telephone Rates and Charges (Attachment A). The key finding in the report was
that the City could save approximately $235,000 each year if it had more competitive rates for
landline telephone service. Several other findings were identified that were the result of a lack of
oversight by the Information Technology Division of the Administrative Services Department
(ASD). The report's findings were grouped in three recommendations: 1) ASD should obtain a
phone service contract with competitive billing rates; 2) ASD should obtain consolidated billing
from the selected provider and develop a process to review bill payments for accuracy and
appropriateness; and 3) ASD should review the current telephone oversight policies and
procedures and ensure that employees are provided with accurate information when they
reimburse the City for personal calls.
The City Manager's response is included in this report as Attachment A. The Administrative
Services Department assisted in preparing the response and agrees with the Auditor's
recommendations. This report includes a recommendation that would direct staff to pursue a
CalNet contract for telephones services that would address the Auditor's recommendation
number one.
The Finance Committee directed staff to follow-up on a number of issues. This report also
provides a status report on the Finance Committee's direction.
CMR: 404:09 Page 1 of 5
DISCUSSION
As directed by the Finance Committee on September 8, staff immediately contacted AT&T to
discuss possible options for reducing the City's telephone charges. AT&T responded by
immediately reducing long-distance rates from an average of $0.26 per minute to $0.06 per
minute. The City averages 178 hours of long distance per month or $2,792 under the old rates
and $644 under the new rates. Reducing the long-distance rates will result in a savings for the
City of approximately $2,000 a month, however the majority of costs the City incurs is for local
telephone service. In addition, AT&T made the rates effective retroactive to August 2009
resulting in a credit to the City of $10,814. The new long distance rates will be in place until the
CalNet rates for long distance take effect once such a contract is in place, pending Council
direction and approval.
The majority of the City's telephone charges are for local calling. In this area AT&T was not
willing to immediately adjust rates and they did not provide a credit. AT&T claimed that it was
not within the company's ability to immediately adjust rates due to inflexibility within the
regulatory system. A new contract must be in place for new rates to take effect. AT&T claimed
that new rates take up to three months to put in place. Staff is exploring administrative action
against AT&T that would result in the filing of a claim with the California Public Utilities
Commission to obtain further credit for these overpayments.
In order to get a contract in place, the City immediately began to pursue a CalNet contract.
Pending Council direction staff would expect to return to the Council with a CalNet contract for
approval by mid November.
One of the questions raised by the Finance Committee was what other local jurisdictions utilized
the CalNet contract for telephone services. A list of other local jurisdictions on CalNet is below:
Town of Atherton
City of Burlingame
City of Campbell
City of Cupertino
City of East Palo Alto
City of Los Altos
City of Milpitas
City of Mountain View
Redwood City
City of San Jose
City of San Mateo
City of Saratoga
City of Sunnyvale
State-wide there are 303 cities and an estimated 1,800 agencies in total utilizing the CalNet
contract.
Another follow-up step that staff completed was the identification and termination of a
residential line. The total amount of long distance charges to this line, as confirmed by AT&T,
was approximately $100 over eight years. The line was terminated in October.
Another follow-up step involved confirming that all the City's lines are indeed in use and needed
in the future. This inventory has been started. It is anticipated that when this review is
completed within three months and the City will be able to eliminate a number of lines that are
CMR: 404:09 Page 2 of 5
currently not in use. In most cases these will be lines that were used by modems or fax machines
that are no longer in use due to technology advancements.
As stated in the City Manager's response (Attachment B) ASD staff will implement
organizational changes to ensure proper oversight of telephone services going forward. These
include the assignment of telephone service monitoring to a staff person and oversight of all
telephone services and contracts to a manager. Specific oversight steps include:
• Ensuring that bills are distributed to departments monthly for their review
• Holding biennial meetings with AT&T to ensure that the contract is current
• Ensure continuing competitiveness of rates and review of other vendors
• Reviewing telephone line inventory annually to identify any unused lines
• Review requests for addition lines
Below is an action plan and timeline for accomplishing the objectives of new rates and greater
oversight of the City's telephone services. Some of these steps have been completed, many are
in progress and others will be completed in 2010 once a new contract is fully implemented. A
status report on the results of completing the action plan will occur in mid 2010.
Task
Date
Status
Implement new oversight
structure for telephone charges
8/09
Staff implemented a new oversight structure
that includes staff and supervisor oversight.
Immediately achieve reduced
rates without a new contract
9/10/09
Completed for long-distance rates. Reduced
rates for local service will be completed with a
new contract.
Confirm CalNet cities
9/16/09
Complete.
Research available alternatives
to AT&T
10/5/09
Staff contacted two major telephone services
providers and they cannot fulfill the City's
needs. Staff is awaiting a response from one
company.
Researched and canceled
residential line
10/9/09
Complete.
Meet with AT&T and discuss
credit and contract options
10/13/09
Staff met with AT&T on three occasions. Staff
is awaiting a final response from AT&T
regarding a possible credit for local service and
to confirm the timeline for implementing a
CalNet 2 contract.
Initiate CalNet 2 contract
process
10/13/09
Staff has initiated the preparation phase of the
CalNet 2 contract process. Pending Council
direction staff is prepared to complete the
process and provide Council with a contract for
approval in November.
Revise policies
11/10/09
Staff is in the process of revising the telephone
reimbursement policy, the telephone usage
policy and the new line and service policy.
CMR: 404:09
Page 3 of 5
Staff expects to complete this task in
November.
Implement CalNet 2 contract
(pending Council approval)
12/1/09
(target)
Pending Council approval in November staff
would expect to implement the CalNet 2
contract in December.
Complete inventory of existing
lines and cancel unused lines
1/4/09
(target)
Staff expects to complete the inventory of lines
and the cancellation of unused lines by
December.
Start realizing new rates for
local service under the CalNet 2
contract
3/1/09
(target)
Once the CalNet 2 contract is in place it will
take AT&T approximately three months to
implement the new rates into the City's
charges.
Implement bill consolidation
4/1/09
(target)
After the inventory of lines and the transition
to CalNet is complete bill consolidation can be
initiated.
Status report
6/09
After several months on the CalNet 2 contract
staff will evaluate the new rates and other
changes to ensure expectations have been met.
Ongoing oversight
Ongoing
Under the new oversight structure staff will
closely monitor telephone services to ensure
compliance with the new rates and policy
changes.
RESOURCE IMPACT
Immediate savings on long-distance charges will be realized by reduced rates that are now in
effect. The estimated monthly savings is $2,000. A one-time credit of $10,814 has been realized
by the City. Going forward, the City expects to save approximately $235,000 annually once a
new CalNet contract is implemented with AT&T, pending Council approval.
POLICY IMPLICATIONS
Approval of this contract is consistent with existing City policies.
ENVIRONMENTAL REVIEW
This is not a project under CEQA.
ATTACHMENTS
Attachment A: Auditor's report
Attachment B: City Manager's response
CMR: 404:09 Page 4 of 5
PREPARED BY: �....�G�
DAVID RAMBERG
Assistant Director, Administrative Services
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
LAL
Director, Ad
inistrative Services
CMR: 404:09 Page 5 of 5
ATTACHMENT A
CITY OF PALO ALTO
OFFICE OF THE CITY AUDITOR
September 8, 2009
Honorable City Council
Attn: Finance Committee
Palo Alto, California
Auditor's Office Review of City Telephone Rates and Charges
Executive Summary
We estimate the City could save approximately $235,000 each year if it had more competitive rates
for landline telephone service and telecommunication lines and improved oversight of its landline
telephone service. A number of issues with the City's current oversight were identified, including:
the lack of a contract with its service provider; a cumbersome billing process; potentially
inappropriate and unnecessary charges; and an inaccurate and incomplete internal call accounting
system for seeking employee reimbursement of personal calls.
Introduction
We initiated this review in accordance with Article IV, Section 12 of the City Charter and added it to
the fiscal year 2009 work plan through our quarterly reporting process. We conducted this review in
accordance with generally accepted government auditing standards. These standards require that
we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our audit
objectives.
Background
In fiscal year 2009, the City paid AT&T approximately $545,000 for landline telephone service and
associated telecommunication lines. According to Administrative Services Department (ASD) staff,
the City's telephone system consists of a combination of 1) City -owned telephone lines and 2) lines
owned by the City's service provider, AT&T. The telephone system is structured as a private branch
exchange (PBX) with some off -premise extensions and business lines. According to information
provided by ASD staff, the City telephone system has approximately 1,400 telephone extensions
and 550 business lines. The City's Information Technology Services Division, part of ASD, manages
the telephone system.
Objective, Scope and Methodology
The objective of this review was to assess the overall cost effectiveness of the City's landline
telephone rates and charges. This review does not include cellular telephone rates and charges.
The scope of our review covered local and long distance billing and call accounting data for the
period of January through April 2009. We also reviewed telephone charges for fiscal years 2004 -
Review of Telephone Rate and Charges
Page 1 September 8, 2009
2009 to evaluate historical trends in telephone charges. We selected a sample of telephone calls
from the City's internal call accounting system and compared those calls to the City's actual bills to
ensure the call accounting system reports were appropriately generated.
To evaluate the appropriateness of the City's telephone rates, we compared the City's local and
long-distance rates to the rates of other local jurisdictions, including Redwood City, the cities of San
Jose, Milpitas, San Mateo, Santa Clara and Berkeley, as well as the counties of Santa Cruz and
Santa Clara.
Finding 1: The City should seek more competitive telephone rates
Based on our review, the City could save approximately $19,600 each month or $235,000 a year by
obtaining a more competitive rate structure .for its telephone service. The City's telephone bills
currently detail rates based on monthly service charges, per minute usage rates, and additional
miscellaneous charges. The City pays approximately 3 cents per minute for local calls,
approximately 18 cents per minute for in -state long-distance, and approximately 32 cents per
minute for out-of-state long distance calls. These rates are more than 2 to 13 times higher than
rates paid by other jurisdictions we reviewed. The following example is a comparison of the City's
average per minute rates compared to the rates of jurisdictions we contacted.
Exhibit 1: Per Minute Rate Comparison
Average rate for surveyed
jurisdictions (per minute)
Palo Alto's
average rate (per minute)
Local Calls
$.011
$.028
In -state Long Distance
$.022
$.182
State -to -state Long
Distance
$.024
$.321
Source: one bills and information obtained from surveyed jurisdictions
We estimate that if the City obtained similar per minute rates it could save more than $80,000 per
year. Most of the jurisdictions we surveyed participate in the statewide CALNET
telecommunications contract which provides government entities in the state with significant cost
savings on telecommunications service. For example, the City pays monthly service charges that
are more than two times higher than the monthly service rates offered by the CALNET contract. If
the City obtained monthly rates similar to those offered under the CALNET contract, it could also
save an estimated $155,000 a year.
According to ASD staff, the City does not have a contract with its provider. The lack of a contract for
phone service may weaken provider accountability and protection for the City against future rate
increases. If the City were able to utilize the CALNET contract or obtain similar contract terms, the
City would have additional protection against rate increases. In response to our findings, ASD staff
reported they are currently evaluating options to secure a competitive contract and rate structure for
telecommunications service.
Review of Telephone Rate and Charges Page 2 September 8, 2009
Finding 2: The City should enhance its oversight of telephone charges
and use
In our opinion, the current telephone billing process is inefficient and prevents a thorough review of
phone charges. Although the City provides some limited oversight of landline telephone charges, it
does not monitor several key aspects of the service and should take steps to enhance its oversight.
The City should consolidate its telephone billing
Our review found that the City's telephone bills are disaggregated, labor-intensive, and difficult to
reconcile. The City paid an average of 97 telephone bills each month during the period we
reviewed. The City receives separate bills for local and long-distance calling, resulting in multiple
bills each month for many phone lines. In addition, some extensions are billed under different billing
account numbers for local and long-distance calling, making reconciliation difficult.
The City should review telephone bills to prevent inappropriate and unnecessary
charges
Our review of the City's telephone bills identified a number of potentially inappropriate or
unnecessary charges. For instance, we identified more than 200 extensions without usage charges
during the April billing period. While some of these extensions serve legitimate purposes, such as
fire alarms or receiving in -bound calls, our analysis found that the oversight of these lines could be
improved.
We also identified additional charges that could be reduced or prevented through better oversight.
For instance, the City paid more than $100 each month in directory assistance calls during the
period we reviewed, even though there are several free directory assistance services available. In
addition, the City repeatedly paid minimum long distance charges of $20.95 per month on several
extensions even though long distance services were used infrequently on these lines. We also
identified a telephone number on the City's bill that appears to belong to a private residence. ASD
staff was not able to identify a legitimate business use for this number.
The City's internal call accounting system should be improved
The City uses an internal call accounting system, called TeleMate, to document employee calls for
the purpose of requesting reimbursement from employees for their personal calls. However, we
found this system is configured with an inaccurate rate structure and does not capture all of the
City's phone calls. As a result, the City may not be able to effectively oversee telephone use.
Although the City's policy requires employees to reimburse the City for personal calls', according to
ASD staff, because of technical issues with the system, it has been about two years since the City
last produced the TeleMate report to request reimbursement from employees for personal calls. In
May 2009, ASD sent the report to City departments covering calls made between January and
March 2009. If an employee reimbursed the City based on the data provided to them by the call
accounting system in May 2009, they may have overpaid the City for the three month period. The
1 The City's Telephone Use Policy, issued in 1996, requires employees to reimburse the City for personal
calls that were not authorized for communicating work schedules, emergency situations, or other work -
related information.
Review of Telephone Rate and Charges Page 3 September 8, 2009
following examples are a comparison of the City's actual rates compared to the rates reported in the
internal call accounting system.
Exhibit 2: Comparison of City's Actual Rates and
City's Internal Call Accounting System Rates
Type of Call
Actual Average Rate
(per minute)
Internal Cali Accounting
System (per minute)
International
$2.14
$11.59
International
$1.20
$3.82
State -to -state long-distance
$.321
$1.39
In -state long-distance
$.182
$.30
Source: Phone bills and TeleMate data for
Thirteen reimbursements have been
submitting telephone reimbursements
For example, one employee reimbursed
and March, although the actual cost
In conclusion, we recommend the
Recommendation 1: ASD should
Recommendation 2: ASD should
develop a process to review bill payments
Recommendation 3: ASD should
and ensure that employees are provided
personal calls.
The City Auditor's Office would like
Information Technology Services Division
Respectfully submitted,
oytylce,e1..624b(Y346/k6hozik.
Lynda Flores Brouchoud
City Auditor
Audit staff: Ian Hagerman, Senior
Attachment: City Manager Response
January through April 2009.
filed during the period we reviewed2. However, employees
would have paid the incorrect rates in the TeleMate report.
the City $39.60 for personal calls made between January
for those calls was only $22.44.
following:
obtain a phone service contract with competitive billing rates.
obtain consolidated billing from the selected provider and
for accuracy and appropriateness.
review the current telephone oversight policies and procedures
with accurate information when they reimburse the City for
to thank the staff of the Administrative Services Department and
for their cooperation and assistance during our review
Auditor
if any of these reimbursements were for cellular phone use.
Page 4 September 8, 2009
2 The City's documentation did not specify
Review of Telephone Rate and Charges
Attachment
ATTACHMENT B
Date:
From:
Prepared by:
Subject:
Memorandum
September 8, 2009
James Keene, City Manager
Lalo Perez, Administrative Services Director
City Manager Response to the Audit of City Telephone Rates
Background:
Over the past 4 months, the City Auditor's Office performed an audit of City Telephone
Rates. The Auditor began a review of the telephone charges when Information Technology
reinitiated sending phone statements to departments. The City Manager raised simultaneous
concerns after seeing some of the statements and supported the Auditor's review, The
objective of this review was to assess the overall cost effectiveness of the City's landline
telephone rates. This review only addressed local and long-distance rates for landline
telephone service and does not include cellular or international rates and charges. It is
acknowledged there was not sufficient oversight for telecommunication services. This was
due to staff reductions, including a frozen IT Manager position, and oversight responsibilities
were not reassigned. The Information Technology Division is now taking measures to
remedy the situation as detailed below. Information Technology would like to thank the
Auditor's Office for identifying areas where improvements can be made.
Overview:
The City of Palo Alto receives various telecommunication services from AT&T. The City's
telephone system is structured as a private branch exchange (PBX) with some off premise
extensions and business lines. It should also be noted that many staff utilize cell phones in
lieu of landline telephones. The following are an example of some of the landline telephone
services and features that AT&T provides:
Type
Business Access Lines (1MB,
IML)
— Quantity Comments
550
Extensions/PBX Trunks:
Direct Inward Dialing (DID)
Blocks
1400
These lines are used for:
faxes, alarm systems, credit
card machines, and
sprinkler systems. Call
details are provided in
AT&T billing.
AT&T provides the trunk
line, the City provides the
extension. A flat rate is
charged for the trunk and
usage is billed on top of
that. Ca11 details are not
provided by AT&T;
instead, must use internal
call accounting system.
These lines bill to a 0318 or
2311 line.
Long Distance
180 hours
This includes both In State
and Out of State.
Additionally, AT&T provides communication services (not reviewed in this audit) such as:
Type Quantity Comments
ADN Circuit Mileage
T1 Circuit Mileage
20
These are monthly flat rates
These are monthly flat rates
26
All of the above services are billed to the City by AT&T through numerous bills that totaled
approximately $540,000 for the 08/09 fiscal year.
Recommendation 1: ASD should obtain a phone service contract with competitive billing
rates.
Staff agrees with this recommendation.
To address the need for obtaining more competitive billing rates, staff is researching the
ability to utilize a State contract, "CALNET 2." This contract has aggressively negotiated
rates that went through a competitive bid process and extends to other Public Sector entities.
The contract was awarded in January 2007 and is a 5 year contract with (2) two (1) year
extensions. The Palo Alto Municipal Code stipulates, in Section 2.30.360, J, 2, in order to
utilize the CALNET 2 contract, the contract must have been awarded within twelve months
of the date the city contracts for the goods and/or services. However, staff is currently
working with the Attorney's office and Purchasing Division to execute the contract as the
original intent of the contract was for all public agencies to utilize regardless of the time
frame. Staff expects to have the CALNET 2 contract on the Council agenda by October
2009.
Recommendation 2. ASD should obtain consolidated billing from the selected provider and
develop a process to review bill payments for accuracy and appropriateness.
Staff agrees with this recommendation.
Staff is working with AT&T to develop an appropriate billing structure for the multiple
services in the State CALNET 2 contract. To identify an appropriate billing structure, staff
will first inventory all services that AT&T provides. This includes identifying each line,
2
Attachment
what it is used for, and by whom. Once the inventory is complete, staff will then group all
like services for billing. Billing groups might consist of the following:
■ All business access lines (1MB, IML)
• All communication lines (T1 Circuits)
• All Long Distance Charges
By grouping services, fewer bills will need to be processed and information will be properly
organized. This will also result in easier bill review and less administrative processing.
Recommendation 3: ASD should review the current telephone oversight policies and
procedures and ensure that employees are provided with accurate information when they
reimburse the City for personal calls.
Staff agrees with this recommendation.
Once the CALNET 2 contract is executed, the new rates will be entered into the Internal Call
Accounting system. This will then allow IT to disperse monthly call details to departments,
with accurate rates, and will allow departments to review call details for appropriate use and
reimbursements. Staff is also reviewing the existing Telephone Use Policy and updating if
needed. For any previous reimbursements, staff is following up with individuals to
determine if appropriate amounts were reimbursed and resolving any inaccuracies;
In addition to the Auditor's Recommendations, IT is also implementing:
• New Management Oversight of the Billing
IT will distribute call details and charges monthly to departments for departmental scrutiny
of telephone usage. The expectation is that employees will review their phone bills and
reimburse the City for any non work -related phone calls. Managers will also review for any
non work -related usage. Additionally, IT has assigned an IT Manager along with a Sr.
Technologist to provide more oversight over the telecommunications billing.
• Telecommunication Contract
IT will ensure a contract is executed and maintained for all telecommunication services to
ensure rates are always competitive and negotiated. This includes communicating with the
State to ensure the City of Palo Alto participates with any future State contracts as economies
of scale yield more competitive rates.
• Telecom Assessment RFP
IT is in the process of executing a contract that will address evaluating the current state of the
telecommunication system, performing a needs assessment, recommendations on
3
technologies to use, and approximate budget requirements necessary to implement. This
assessment is expected to begin November 2009.
• Cellular Phones
Cellular phones are currently under contract and rates are reviewed annually. In April 2009,
IT staff performed an audit and usage review that resulted in rate plan changes and the
elimination of any unused devices.
4