HD4 - Working Capital Funds in Virginia


Executive Summary:
Working capital funds are used to finance and account for support services provided by one State agency to other agencies and institutions. Five working capital funds are currently in use in State government, Computer Services, Systems Development, Telecommunications, Central Warehouse, and Graphic Communications.

The Joint Legislative Audit and Review Commission has certain oversight responsibilities for working capital funds (Code of Virginia, § 2.1-196.1). The Commission has the authority to authorize new working capital funds and to discontinue those no longer needed. It can also authorize the transfer of excessive retained earnings to the general fund. The Commission reviews the activities of the working capital funds on a periodic basis.

Introduction (pp. 1-9)

The review of working capital funds included evaluations of each of the five funds now in use in Virginia. In addition to the unique issues of the individual funds, several areas of common concern have been addressed. These include the financial condition of the funds, the appropriateness of an agency's designation as a working capital fund agency, the staffing in each agency, and the satisfaction of customers with the services provided.

Financial Condition. Because working capital funds operate in a nonprofit, governmental setting, they must take care not to incur large surpluses or deficits. Rather, revenues should just cover the cost of providing services.

At the close of FY 1981, the level of excessive retained earnings in two agencies appeared unnecessarily high. The Systems Development fund balance was $151,518, and the Central Warehouse fund balance was $351,349.

Recommendation (1). The Commission should review fund balances for June 30, 1982 and transfer any excess amounts to the general fund. A recommendation on the amount that can be so transferred for each fund will be forthcoming at the close of this fiscal year.

Appropriateness of Virginia's Working Capital Funds. Working capital funds should be used when a central agency is supplying support services to other agencies and it is possible to identify the level of support services provided in measurable units. Current funds appear appropriate with the exception of several functions at the Department of Telecommunications. Two other service agencies meet the criteria established for working capital funds, the Central Garage and correctional industries.

Recommendation (2). The Central Garage and correctional industries might be redesignated as working capital funds.

Staffing. The staffing of working capital fund agencies has grown steadily in recent years. This growth has resulted from continued demand from agencies for more services and an increase in the number of agencies served. Given the rapid increase in staffing and the General Assembly's desire to monitor growth in State government, JLARC will schedule regular staffing reviews in conjunction with biennial budget requests.

Fund Redesignation. The National Council of Governmental Accounting recommends the use of the term "internal service" fund rather than "working capital" fund. Changing the current designation would bring Virginia in line with nationally accepted terminology.

Recommendation (3). The Code of Virginia might be amended to replace the term "working capital" fund with "internal service" fund. The comptroller should be requested to determine the impact of such a change on the operation of all funds.

Department of Computer Services (pp.11-25)

Staffing and Productivity. In FY 1981 four job classifications had turnover rates in excess of 25 percent. Computer operator turnover has been about 36 percent. Vacancy rates are also high. DCS employees appear to receive somewhat lower salaries than those in the private sector, they do not receive a shift differential, and they have a lesser chance for advancement within DCS.

Recommendation (4). A standing list of available candidates should be developed to expedite recruitment for high turnover positions.

Pricing and Billing. Under current DCS procedures, revenues generated by the billing formula in excess of the actual cost are returned to customer agencies in the form of rebates. The current level of rebates indicates that DCS rates are higher than necessary to recover costs. In FY 1981, rebates amounted to $3.9 million, or about 23.5 percent of gross revenues. Because some customer agencies use federal funds, federal approval of a change in rates is required.

Recommendation (5). The Secretary of Administration and Finance should take the necessary action to facilitate prompt federal approval of the DCS cost allocation plan. The plan should be implemented as soon after approval as possible.

Adequacy of the Billing Formula. The billing formula currently in use appears to adequately recover costs. However, there is no direct charge for tape storage, for which much valuable space has been allocated in the computer centers.

Recommendation (6). In order to ensure that agencies directly reimburse DCS for the costs of services, plans for implementing a tape storage charge should be accelerated. The charge should be made as soon as possible after federal approval.

Accuracy and Timeliness of Billings. While DCS billings are accurate and timely, there is still some confusion among some agencies as to the meaning of billing information. Sixteen percent of agencies surveyed had difficulty in understanding the charges and how they were calculated.

Recommendation (7). DCS may wish to reconsider the way in which it reports billing information to customer agencies. An improved format and the use of management-oriented information, such as the cost per transaction or specific item produced, could prove useful to customers. DCS should intensify education of agency management personnel in the billing system.

Lack of State ADP Plan. At a time when data processing is becoming an increasingly important resource, the State is without a current, comprehensive plan which would help to manage that resource. The six year ADP plan prepared by DCS sets forth the goals and objectives for DCS only, and was never intended to be a master plan for managing ADP resources.

Recommendation (8). Under the direction of the Secretary of Administration and Finance, DCS and the Department of Management Analysis and Systems Development (MASD) should prepare an ADP program plan for State government. The new plan should go beyond the scope of previous systems development and six year plans prepared by MASD and DCS, and should include a policy for on-line systems, an analysis of systems’ needs, an analysis of resources required, and a protocol for management of automated information.

Proposed Consolidation of DCS Facilities. Consolidating DCS computer centers in a single facility could solve many of the problems now experienced by the centers. It would be feasible to provide for an uninterruptable power supply, proper fire protection systems, and backup computer capability for on-line systems.

DCS has submitted plans for the consolidated center to the director of the Division of Engineering and Buildings, and the Secretary of Administration and Finance has approved the consolidation project. However, DCS has not adequately explored and documented the options for implementing the consolidation.

Recommendation (9). While consolidation of DCS operations appears appropriate, DCS and DEB should carefully review all options for acquiring a computer facility, including construction and leasing. The results of such review should be provided to the administration and the General Assembly prior to a capital funding decision. In ·addition, the comprehensive ADP program plan should be available at the same time.

Systems Development Division (pp. 27-40)

Staffing and Workload. SDD's staff has more than doubled in the past three years. Workload has generally been driven by the demand for systems development services by State agencies and has increased substantially in recent years. The measures SDD currently uses for estimating future revenues and converting workload to staffing needs have not been accurate. This inaccuracy in turn can cause rates to be improperly set.

Recommendation (10). In order to improve estimates of staffing needs and rates, SDD should revise its method of estimating future revenues. If estimates are to be based on budget requests from agencies, SDD should determine the extent to which those budgets have reflected actual expenditures in the past, and should revise its estimate accordingly.

Project Planning and User Satisfaction. In 59 percent of development projects active in FY 1981, project costs exceeded the original estimate given to the customer agencies by more than 10 percent. Agencies surveyed by JLARC staff expressed a general dissatisfaction with SDD's management of projects. As a result, 32 percent of the agencies reported they discontinued some services from SDD.

Recommendation (11). SDD needs to develop improved estimates of project cost and time. A first step might be to require agencies to better define the needs to be met by a proposed system. SDD should provide agencies with guidelines to be used in defining requirements of the system. SDD should also be required to stay within both time and cost estimates for the projects it develops and to document any changes in requirements that occur after agreements have been reached. If a private vendor is rejected, SDD should be prepared to provide equal services at an equal cost. If SDD is unable to accomplish this objective, the Secretary of Administration and Finance may wish to reconsider the requirement that SDD be given the right of first refusal for all systems development work.

Recommendation (12). In order to improve its communications with customer agencies, SDD should explore the possibility of establishing a systems development users' council.

Billings. More than 85 percent of the agencies surveyed by JLARC staff felt that billings were accurate. Several agencies reported problems with SDD billings, however. Agencies having problems with SDD billings tended to be the large users with many on-going SDD activities. One agency, for example, identified 180 hours of time erroneously charged by SDD.

Recommendation (13). SDD should review its procedures for documenting time expended on projects. Discrepancies in billings should be explained to agencies and corrected.

Department of Telecommunications (pp. 41-53)

Funding of DOT. Two of the three divisions in DOT do not meet the criteria for working capital funds and should not be funded through the Telecommunications Working Capital Fund. The services provided by these divisions are not provided in measurable units and are currently subsidized from charges on telephone services.

Recommendation (14). The legislature may wish to consider funding the Research and Planning and the Public Telecommunications divisions with general fund appropriations.

Staffing. The near total consolidation of the State telephone system along with policy changes requiring agencies to contact DOT for all changes in service has increased DOT's responsibilities. Providing services to all State agencies, however, appears to be beyond the existing capacity of the communications engineering section. According to DOT, the staff works overtime and often at odd hours to insure minimal disruption of agency office time when supervising an installation.

The need for CENTREX operators has declined without a corresponding reduction in staff. The CENTREX operators are often used for duties beyond the normal range of reasonable responsibility.

Recommendation (15). The Telephone Engineering staff of the Communications Engineering, Planning and Analysis section should keep better time sheets to indicate what types of services are being provided, length of backlogs, and hours of overtime. This information should be used to determine the need for additional staff to meet increasing workloads.

Recommendation (16). DOT should close CENTREX operations in Williamsburg, Lynchburg, and Staunton and reduce its operator positions accordingly. The need for additional staff in other divisions could be met by reclassifying some of these positions.

Reduction of Rates. A SCATS surcharge of 12 percent was established for FY 1982, based on FY 1981 rates and usage. This rate has resulted in much larger surpluses than DOT had expected. The current surplus on operations is a result of increased telephone use by agencies and a rate increase by C&P Telephone. Also, DOT charges a flat rate for CENTREX, but has not received approval for the charge from the commission.

Recommendation (17). The Commission should approve the flat charge to CENTREX users to recover the salaries of switchboard operators, and should set the maximum SCATS surcharge at 10 percent.

Billing Problems. DOT does not provide agencies with an itemized bill of all calls and surcharges. Agencies cannot, therefore, exercise management control over telephone use and budget for telephone expenses.

Recommendation (18). DOT should work closely with telephone coordinators to devise alternative methods of controlling SCATS abuse.

Procurement of Phone Systems. Although the DOT has updated and distributed its policies and procedures regarding the use of competitive procurement, some agencies are unaware of the policy and contact vendors directly.

Recommendation (19). DOT needs to better communicate changes in telephone procurement policy to State agencies. It may also need to supplement its staff with technically qualified personnel and develop guidelines for preparing specifications which are fully competitive.

Short- and Long-Term Planning. Significant advances have been made in telephone communications in recent years that improve efficiency, quality, and versatility of services. The integration of computers with telephones has opened an almost unlimited variety of uses for the phone beyond traditional voice communications.

Recommendation (20). DOT should develop short- and long-term plans which identify demands for telephone services and solutions for meeting those demands. The plans should address the advisability of continuing to rely on vendor-provided services. Other items that should be considered include equipment inventory controls, maintenance, and financing of anticipated equipment purchase.

Central Ware house (pp. 55-65)

Inventory Accuracy. Although error rates in the quarterly inventories appear high, they have nonetheless resulted in acceptably low adjustments to the value of the inventory. The warehouse staff makes an extensive effort to understand large errors, but it currently has no guidelines for determining what value of errors justifies such efforts.

Recommendation (21). The Central Warehouse should establish guidelines for following up errors identified during routine inventories. Guidelines should require that shortages in excess of $150 be thoroughly investigated by warehouse staff.

Automated Inventory System. While the automated inventory system should improve warehouse efficiency, current plans for implementing the system do not allow adequate transition time to the new system. Plans call for the automated system to be operated in parallel with the manual system only between May and August 1982. Staff of the Auditor of Public Accounts suggests that both systems should be operated in parallel until warehouse management is confident in the accuracy of the new system.

Recommendation (22). The Central Warehouse should plan on operating the automated inventory and manual Kardex file in parallel until the accuracy of the automated system is established. Accuracy of the system should be gauged by consistent achievement of specific performance criteria, such as an acceptable level of discrepancies between the two systems, for three consecutive months.

System Funding. The development of the automated inventory system for the warehouse—a working capital fund agency—has been inappropriately funded from the general fund. Total cost to develop the system is estimated at $221,000. An initial repayment of $105,084 to the general fund has been made.

Recommendation (23). The repayment schedule suggested by the Division of Purchases and Supply to cover development of the automated inventory system should be followed. According to the schedule, the division is to repay $105,084.24 to the general fund for expenses incurred by MASD through February 1982, and to repay up to $10,000 per month to the general fund until all the development costs are covered.

Staffing. Several changes in the workload of warehouse staff appear imminent, yet there is currently no staffing plan which ties such workload shifts to staff size.

Recommendation (24). A staffing plan should be developed for the Central Warehouse. The plan should be based on an assessment of tasks that will be performed under the automated inventory system, and should specify how changes in sales volume will affect staffing.

Deliveries. The chief complaint of customer agencies concerning warehouse operations was the delayed delivery of orders. These delays are usually a result of the warehouse practice of making deliveries only when a 40-foot trailer is full and ready for shipment. However, the needs of customers must be balanced with the need to recover delivery cost, which is $1.10 per mile from Richmond.

Recommendation (25). The Central Warehouse should consider the several options for improving deliveries to smaller customers. One option is to add a surcharge for delivering smaller loads, so that small customers willing to pay extra for quicker or more definite deliveries could be accommodated. Warehouse staff could continue to encourage small customers in neighboring areas to consolidate their orders to facilitate delivery.

Unfilled Orders. Fifty-nine percent of customer agencies reported minor problems with orders that are incompletely filled. The usual warehouse procedure is to back-order these items, but this appears to be done inconsistently.

Recommendation (26). Warehouse staff should consistently back-order items for all customers.

Catalog. The warehouse catalog does not reflect current prices and items available because it is issued only once a year.

Recommendation (27). The Central Warehouse catalog should be issued in loose-leaf form with periodic price and item updates. Additional information should be included to assist customers in making efficient use of the warehouse.

Quality of Goods. Ninety-three percent of the customer agencies who purchase foodstuffs from the warehouse were satisfied with the items provided. The warehouse staff works closely with food service directors at State agencies and institutions to ensure adequate quality of foodstuffs. A similar method is not used for non-food items, although it appears to be needed. Several customer agencies mentioned specific products which were not of adequate quality and indicated a willingness to pay a higher price for better quality items.

Recommendation (28). The Division of Purchases and Supply should consider a feedback mechanism to monitor the quality and other aspects of non-food items. A questionnaire sent to customers on a regular basis may be preferable to a special committee on such non-food items.

Office of Graphic Communications (pp. 87-71)

Financial Viability. OGC has been in operation for only 16 months, an insufficient period for determining its financial viability. Although the fund was showing a small loss by February 1982, additional work expected in the balance of the year could generate a year-end surplus. It would appear reasonable to provide additional time for the office to demonstrate its financial viability.

Recommendation (29). The graphics fund and OGC should be given additional time to demonstrate financial viability. If OGC has not shown that it can regularly recover its costs by that time, it should be discontinued.

Need for Better Utilization of OGC. Some State agencies are not currently utilizing OGC, although OGC prices are competitive with or lower than those of the private sector according to 73 percent of the respondents to JLARC's user survey. None of four agencies with vacant graphic artist positions was using OGC. Two of the agencies reported they were unaware of OGC's operation. Several actions can lead to additional sales volume for OGC and significant savings for agencies.

Recommendation (30). The Secretary of Administration and Finance should direct State agencies to consider using OGC before filling graphics vacancies or using private vendors for graphics services.

Recommendation (31). The OGC director should contact State agencies with vacant graphics artist positions to inform the agencies of services available from OGC.

Recommendation (32). Printing requisitions handled by the Division of Purchases and Supply should be systematically screened for graphics work and referred to OGC for bids.