Report 2014-108 All Recommendation Responses

Report 2014-108: State Board of Equalization Building: Despite Ongoing Health and Safety Concerns, the State Has Not Thoroughly Analyzed the Costs and Benefits of Relocating Employees (Release Date: September 2014)

Recommendation #1 To: Equalization, Board of

To more clearly demonstrate its case for a new facility, BOE should ensure that it has a supportable rationale for the assumptions underlying its analysis of the costs and benefits of moving to a new consolidated facility.

Annual Follow-Up Agency Response From October 2016

Contracts with HGA Architects and Engineers and Sixth Dimension to conduct an Efficiency and Process Improvement Study (study) were executed on May 15, 2015, and June 18, 2015, respectively. The Preliminary Final Report study was completed on December 18, 2015 and presented to the BOE Board on January 26, 2016.

The Process Improvement Study shows that there is a supportable rationale for the BOE to not have its operations in a high-rise building. Many of the Process Improvements identified in this study cannot be implemented effectively in the 450 N Street building due to its configuration and limited opportunities for expansion. The 450 N Street facility does not support the BOE's current and future operations, as well as a consolidated campus due to inefficiencies in Return Processing functionality, and the fragmentation of staff within departments and across multiple locations. Ongoing growth will force the BOE to lease additional annex facilities over the next ten years, in the event a new campus is not constructed, further exacerbating the inefficiencies created by fragmented operations. With the goal of achieving the most optimal physical design, the consultants determined that consolidation and centralization of the BOE's headquarters revenue generating processes is cost effective and evaluated the benefit of a low-rise campus versus a high-rise building.

The BOE has been identified in the Department of General Services (DGS) 10-year plan and will continue to work closely with them as they determine the short-term and long-term solutions for the 450 N Street Building.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

We performed a limited review of the December 2015 study and found that it adequately addresses our recommendations.

1-Year Agency Response

Contracts with HGA Architects and Engineers and Sixth Dimension to conduct an Efficiency and Process Improvement Study (study) were executed on May 15, 2015, and June 18, 2015, respectively. This study will examine the BOE's revenue generating processes to identify process improvements within the current headquarters building, once renovated, and in alternative facilities. With this data, process options will be developed and evaluated according to costs, improved quality and speed of delivery, reduced risks, and increased satisfaction.

With the goal of achieving the most optimal physical design, the consultants will determine whether consolidation and centralization of the BOE's headquarters revenue generating processes is cost effective and evaluate the benefit of a low-rise campus versus a high-rise building. HGA's Architects and Engineers and Sixth Dimension will present their findings and recommendations to the BOE and Department of General Services (DGS) in December 2015. The consultant's findings and recommendations will identify potential business process improvements that will assist in the preparation of a cost-benefit analysis regarding the desired consolidation of the BOE's headquarters operations at 450 N Street.

California State Auditor's Assessment of 1-Year Status: Pending

6-Month Agency Response

The BOE recognizes the importance of preparing a thorough analysis and, accordingly, is taking steps to evaluate the work processes of the BOE's headquarters operations. The BOE, in concert with the Department of General Services (DGS), is executing a contract with an independent contractor to conduct a Time-In-Motion study to examine the work processes of the BOE's headquarters operations and to collect the data required to determine whether consolidation and centralization of business processes is cost effective. Additionally, the Time-In-Motion study will recommend the optimal physical design for efficient work space and process flow of tax collection activities. This analysis will provide the basis for a cost-benefit analysis regarding the desired consolidation of the BOE's headquarters operations.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

The BOE is producing a comprehensive, cohensive analysis of its headquarters' relocation costs and benefits to determine whether business process consolidation and centralization proves cost-effective.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #2 To: Equalization, Board of

To more clearly demonstrate its case for a new facility, BOE should continue its plans to conduct a study to identify inefficiencies in its current spatial configuration and how its operations could improve with a new consolidated facility.

Annual Follow-Up Agency Response From September 2017

Prior to July 1, 2017, the State Board of Equalization (BOE) administered various tax and fee programs including the Sales and Use tax, adopted rules and regulations to clarify tax laws, acted as an appellate body for the review of property, business and income tax assessments, assessed and allocated the property values of railroads and specified utilities and businesses, and oversaw the property tax assessment practices of all 58 county assessors.

Effective July 1, 2017, legislation enacted as part of the 2017 Budget Act recast the BOE as the California Department of Tax and Fee Administration (CDTFA). The CDTFA will perform those statutory duties formerly assigned to the BOE, except for tax appeals. The BOE will continue in existence, but will handle only those duties assigned to it by the California Constitution, namely the assessment and allocation of the property values of railroads and specified utilities and businesses, and the oversight of the property tax assessment practices of all 58 county assessors.

As provided in previous responses, a Process Improvement Study (Study) was performed and concluded that a supportable rationale existed for the BOE to not have its operations in a high-rise building. The CDTFA is now responsible for the majority of these operations and is located in the same building. The 450 N Street building has configuration limitations that prevent the implementation of all improvements identified in the Study to support current operations and future growth.

CDTFA is working with the Department of General Services to identify office space that will meet its organizational needs and allow for future growth. The estimated timeframe to relocate CDTFA operations is approximately four to five years.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

Because of the reorganization that will result from the July 2017 legislation described in BOE's response, and the need to work with the Department of General Services to identify new office space, BOE indicated that this recommendation was not fully implemented. However, our stated recommendation was that BOE complete a study of how a move to a new facility would improve operations. BOE provided us with this completed study, and we believe it fully implements our recommendation.

Annual Follow-Up Agency Response From October 2016

Contracts with HGA Architects and Engineers and Sixth Dimension to conduct an Efficiency and Process Improvement Study (study) were executed on May 15, 2015, and June 18, 2015, respectively. The Preliminary Final Report study was completed on December 18, 2015 and presented to the BOE Board on January 26, 2016.

The Process Improvement Study shows that there is a supportable rationale for the BOE to not have its operations in a high-rise building. Many of the Process Improvements identified in this study cannot be implemented effectively in the 450 N Street building due to its configuration and limited opportunities for expansion. The 450 N Street facility does not support the BOE's current and future operations, as well as a consolidated campus due to inefficiencies in Return Processing functionality, and the fragmentation of staff within departments and across multiple locations. Ongoing growth will force the BOE to lease additional annex facilities over the next ten years, in the event a new campus is not constructed, further exacerbating the inefficiencies created by fragmented operations. With the goal of achieving the most optimal physical design, the consultants determined that consolidation and centralization of the BOE's headquarters revenue generating processes is cost effective and evaluated the benefit of a low-rise campus versus a high-rise building.

The BOE has been identified in the Department of General Services (DGS) 10-year plan and will continue to work closely with them as they determine the short-term and long-term solutions for the 450 N Street Building.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

We performed a limited review of the December 2015 study and found that it adequately addresses our recommendations.

1-Year Agency Response

Contracts with HGA Architects and Engineers and Sixth Dimension to conduct an Efficiency and Process Improvement Study (study) were executed on May 15, 2015, and June 18, 2015, respectively. This study will examine the BOE's revenue generating processes to identify process improvements within the current headquarters building, once renovated, and in alternative facilities. With this data, process options will be developed and evaluated according to costs, improved quality and speed of delivery, reduced risks, and increased satisfaction.

With the goal of achieving the most optimal physical design, the consultants will determine whether consolidation and centralization of the BOE's headquarters revenue generating processes is cost effective and evaluate the benefit of a low-rise campus versus a high-rise building. HGA's Architects and Engineers and Sixth Dimension will present their findings and recommendations to the BOE and Department of General Services (DGS) in December 2015. The consultant's findings and recommendations will identify potential business process improvements that will assist in the preparation of a cost-benefit analysis regarding the desired consolidation of the BOE's headquarters operations at 450 N Street.

California State Auditor's Assessment of 1-Year Status: Pending

60-Day Agency Response

The BOE is producing a comprehensive, cohesive analysis of its headquarters' relocation costs and benefits to determinine whether business process consolidation and centralization proves cost-effective.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #3 To: Equalization, Board of

To more clearly demonstrate its case for a new facility, BOE should incorporate staffing growth into its analysis of costs and benefits, using projections based on long-term historical data.

Annual Follow-Up Agency Response From October 2016

Staffing Growth:

The BOE continues to project a three-percent annual staffing growth rate over a ten-year average, and will provide an update each fiscal year. As stated in the BOE's initial response on November 24, 2014, the BOE must allow for adjustments to this staffing growth rate based on existing mandates, e.g.: Fire Prevention Fee, Pre-Paid Mobile Telephony Service Surcharge, Hazardous Materials Fee (Rail Transportation) and potential new legislative mandates that will likely impact staffing, including administration of a new program to regulate medical cannabis related businesses.

Rental Escalation Factor:

The projections the BOE previously provided to the CSA are consistent and have been verified with DGS rent escalation values, which are realistic for long-term planning. As stated in the BOE's six-month response, the DGS will provide all future rent estimates to the CSA.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

The BOE's contracted for Efficiency and Process Improvement Study (referenced in recommendations 1 and 2) includes an analysis of staffing growth during the periods from 1995 through 2006 and from 2005 through 2016, which concludes that a ten-year look-back of the BOE's headcount history is appropriate based on several disruptive forces described in the study. This study helps substantiate the BOE's use of a 3 percent annual staffing growth rate, which was not clearly supported by the BOE at the time of our audit.

1-Year Agency Response

Staffing Growth:

The BOE continues to project a three-percent annual staffing growth rate over a ten-year average, and will update each fiscal year. As stated in the BOE's six-month response, the BOE must allow for adjustments to this staffing growth rate based on existing mandates, e.g.: Fire Prevention Fee and Pre-Paid Mobile Telephony Service Surcharge, Hazardous Materials Fee (Rail Transportation) and potential new legislative mandates that will likely impact staffing, including administration of a new program to regulate medical cannabis related businesses.

Rental Escalation Factor:

The projections the BOE previously provided to the CSA are consistent and have been verified with DGS rent escalation values, which are realistic for long-term planning. As stated in the BOE's six-month response, the DGS will provide all future rent estimates to the CSA.

California State Auditor's Assessment of 1-Year Status: Pending

60-Day Agency Response

The BOE has chosen to develop and implement a 10-year average growth factor for use in any and all staffing growth analysis projections.

California State Auditor's Assessment of 60-Day Status: Pending

We do not believe BOE's choice to use ten years of data, instead of the many more years of data that is imminently available, is correct. Specifically, as we state on page 22 of our report, BOE's filled positions declined by more than 4 percent from fiscal years 2002-03 through 2003-04, because of the condition of the state budget at the time. As a result of not using a longer time period for its analysis, BOE's starting point of its analysis is at the trough of the position reductions it experienced roughly ten years ago. Consequently, we believe its 10-year average growth factor is a particularly aggressive view of future staffing growth.

Recommendation #4 To: Equalization, Board of

To ensure that it can accurately estimate any shifts in worker productivity and state revenue, BOE should strengthen its current methodology by analyzing the productivity and revenue collection of its employees and by monitoring those metrics at least semiannually. Additionally, BOE should support its methodology with documentation.

Annual Follow-Up Agency Response From September 2018

The methodology used in creating the LAO report analyzing the productivity and revenue collection of CDTFA team members has been documented and is monitored. Any changes to the methodology will be updated and documented.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

The California Department of Tax and Fee Administration (CDTFA)--the agency that handles most of the taxes and fees previously collected by the BOE--provided us with its procedures and instructions for how it prepares what it refers to as "Consumer Use Tax Section's Legislative Analysis Office (LAO) annual reports." These reports tabulate the revenue generated by its various units and compare the revenue totals to the cost of associated activities.

The department annually reports to a legislative committee the benefit-to-cost ratio of the audits and other compliance-related activities performed by its revenue-generating units. Although this process appears to be annual, rather than semiannual as we recommended, we believe CDTFA's efforts to document how it prepares these calculations are sufficient to deem this recommendation fully implemented.

Annual Follow-Up Agency Response From November 2017

Effective July 1, 2017, legislation enacted as part of the 2017 Budget Act recast the BOE as the California Department of Tax and Fee Administration (CDTFA).

The Centralized Revenue Opportunity System (CROS) project is an information technology modernization effort designed to expand tax and fee payer services while improving the efficiency and effectiveness of CDTFA's operations. The new system will provide the Department with increased access to real-time data, enabling more robust monitoring of the productivity and revenue collection of CDTFA employees.

The CROS information technology modernization effort, which will implement defined processes associated with Sales and Use Tax accounts, as well as certain associated Special Taxes accounts is being rolled out in phases. The go live date for Rollout 2 is May 2018 when the majority of CDTFA staff will be utilizing the system. The remaining Special Taxes accounts not in Rollout 2 are scheduled to be implemented in two subsequent rollouts scheduled through mid-2020.

In addition, the Department is centralizing many of its finance and data functions under a new Chief Financial Officer structure. This new organizational model will facilitate the increased use of data to measure more precisely the effectiveness of CDTFA's various programs and activities.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Annual Follow-Up Agency Response From September 2017

Effective July 1, 2017, legislation enacted as part of the 2017 Budget Act recast the BOE as the California Department of Tax and Fee Administration (CDTFA). The Centralized Revenue Opportunity System (CROS) project is an information technology modernization effort designed to expand tax and fee payer services, improve the efficiency and effectiveness of CDTFA's operations, enhance its ability to generate increased revenues and provide taxpayers expanded on-line services with which to conduct business with CDTFA.

The CROS information technology modernization effort, which will implement defined processes associated with Sales and Use Tax accounts, as well as certain associated Special Taxes accounts is being rolled out in phases. The go live date for Rollout 2 is May 2018. The remaining Special Taxes accounts not in Rollout 2 are scheduled to be implemented in two subsequent rollouts scheduled through mid-2020.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Annual Follow-Up Agency Response From October 2016

The BOE's Board approved the CROS contract at its August 30, 2016 meeting. The CROS project is an information technology modernization effort designed to expand tax and fee payer services, improve the efficiency and effectiveness of the BOE's operations, and enhance its ability to generate increased revenues reducing the tax gap. The contract is expected to take approximately 53 months, beginning in October 2016.

The new system will assist BOE to accurately estimate shifts in worker productivity and revenue for the entire agency, due to a concentrated effort to report revenue and associated positions by program across the agency.

With the activity based cost analysis, the BOE's estimate of revenue per employee will be available to assist in calculating and documenting the anticipated revenue loss associated with an employee being unable to work and the estimate revenue loss related to the Efficiency and Process Improvement Study. The BOE is committed to the results of the study that present a strong business case to consolidate its headquarters operations as part of its ongoing commitment to fair and efficient tax administration.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

1-Year Agency Response

The BOE has strengthened the methodology used to estimate revenue per employee for the Sales and Use Tax Department's Audit and Collection programs. The BOE will be able to accurately estimate shifts in worker productivity and revenue for the entire agency, due to a concentrated effort to report revenue and associated positions by program across the agency. The proposed allocation of revenue and positions has been reviewed and changes have been recommended. These changes are being incorporated into an agency-wide activity based costs analysis that will track revenue per personnel year beginning with the section level and summarized at the department and agency level.

With the activity based costs analysis, the BOE's estimate of revenue per employee will be available to assist in calculating and documenting the anticipated revenue loss associated with an employee being unable to work and the estimated revenue loss related to the Efficiency and Process Improvement Study.

California State Auditor's Assessment of 1-Year Status: Pending

6-Month Agency Response

The BOE has strengthened the methodology used to estimate revenue per employee for the Sales and Use Tax Department's Audit and Collection programs over the past few years. The BOE will be able to accurately estimate shifts in worker productivity and revenue for the entire agency, due to a concentrated effort to report revenue and associated positions by program across the agency. A draft of the proposed allocation of revenue and positions is currently under review. The BOE plans to complete these reports with supporting documentation by fiscal year end.

Once complete, the BOE's estimate of revenue per employee will be available to help calculate anticipated revenue loss if an employee is unable to work, as well as estimated revenue loss related to the Time-In-Motion study.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

The BOE will be strengthening its worker productivity and revenue collection methodology. We will also be monitoring metrics semiannually. While this does not have an estimated completion date, we have begun and will continue to collect more data in preparation for the cost-benefit analysis.

California State Auditor's Assessment of 60-Day Status: Pending

Recommendation #5 To: General Services, Department of

To ensure that resources are spent wisely, General Services should seek the funding and approval needed to analyze whether keeping or selling the BOE building would be in the State's best financial interest. As part of that analysis, General Services should conduct, or contract for, appraisals to assess the value of the building with and without the repairs to determine whether making the repairs is in the best interest of the State. If continued ownership of the building appears to be prudent, General Services should evaluate potential productive uses for the building should BOE move to a new facility. General Services should report the results of its analysis to the Legislature no later than September 2015.

Annual Follow-Up Agency Response From March 2016

In February 2016, DGS completed and submitted to the Legislature its analysis conducted to determine whether keeping or selling the BOE building is in the state's best interest. As part of that analysis, DGS contracted with an appraisal firm to assess the value of the BOE building.

As reported to the Legislature, the appraisal results for the BOE Headquarters Building demonstrate that continued state ownership and occupancy, including completing the immediate repairs, is a sound financial decision. Further, the appraiser's economic analysis reveals that based on existing market rent levels, the highest and best use of the site is its current use as an office building; with the parking garage recommended to remain as an interim use until market conditions support additional development on the site's excess land.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

1-Year Agency Response

DGS is actively conducting an analysis to determine whether keeping or selling the BOE building is in the state's best interest. As part of that process, DGS contracted with an architectural and engineering services consulting firm to perform facility condition assessments of its Sacramento region state-owned building portfolio, including the BOE building. In a July 2015 report, BOE's building ranked 16 of 29 buildings based on the need for renovation, repair or replacement. The assessment results are providing critical information in valuing the asset as part of the appraisal discussed below.

In June 2015, as recommended by the State Auditor, DGS contracted with an appraisal firm to assess the value of the BOE building. The appraisal, which is in-progress, is a complex endeavor that includes valuing a high-rise building under various appraisal scenarios. Although not the sole source for a decision, the final appraisal report will contain information and value conclusions that are relevant in analyzing keeping or selling the building.

Currently, DGS estimates that the keep or sell analysis will be completed in February 2016.

California State Auditor's Assessment of 1-Year Status: Pending

6-Month Agency Response

DGS has begun its analysis to determine whether keeping or selling the BOE building is in the state's best interest. As part of that process, DGS contracted with an architectural and engineering services consulting firm to perform facility condition assessments of its building portfolio, including the BOE building. The assessment process involves reviewing a facility's condition and validating special repair and recurring maintenance needs, as well as anticipating capital outlay requirements and identifying the useful life expectancy of each building system component and/or asset. The building assessments are being conducted as part of the development of a comprehensive long range plan for managing DGS' portfolio of office buildings. The plan is scheduled for completion by June 30, 2015.

The assessment results for the BOE building will provide critical information in valuing that asset under various appraisal scenarios. DGS has identified funding for the appraisal activity and is in the early stages of performing the appraisal contracting process, including developing a scope of work.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

DGS has begun its analysis to determine whether keeping or selling the BOE building is in the state's best interest. Specifically, DGS has contracted with an architectural and engineering services consulting firm to perform facility condition assessments of its building portfolio, including the BOE building. The assessment process involves reviewing a facility's condition and validating special repair and recurring maintenance needs, as well as anticipating capital outlay requirements and identifying the useful life expectancy of each building system component and/or asset. The assessment results for the BOE building will provide critical information in valuing that asset under various appraisal scenarios. The building assessments are expected to be completed in the first quarter of 2015. DGS has also initiated discussions with the Department of Finance to identify funding for the appraisal process.

In addition, if the state continues to own the 450 N Street building and BOE is approved to move to a new facility, DGS will fully evaluate potential uses for the building including backfilling the space with other state tenants.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2014-108

Agency responses received are posted verbatim.