Audit Reports - Public - Report No. 2020-003 Development Agreements Process Audit Report - 10/14/2020C
Glendale
A R I Z O N A
October 14, 2020
Mayor Weiers and Members of Glendale City Council:
Independent Internal Audit Program (IIAP) is pleased to present the City-wide
Development Agreements process audit report. This audit began in May 2020 and
concluded in July 2020. The audit covered a representative sample of all development
agreements between the City and various developers, that were active as of April 30, 2020.
During the audit, we noted that internal controls that guide development agreement
process were generally adequate and both the City and Developers complied with
provisions stipulated in the agreements. We identified three areas where opportunities exist
to improve the City's administration of all contracts, which include development
agreements.
The report was reviewed and accepted by the Council -appointed Audit Committee at its
October 8, 2020 meeting.
HAP would like to thank the City management and staff for their corporation and support
during the audit.
Should you have any questions regarding this report, please don't hesitate to contact me at
623-930-2103 or via email at eoautu@alendaleaz.com
Respectfully Submitted,
ffgutu, CIA, CFE
Internal Audit Program Manager
Distribution:
Kevin Phelps, City Manager
Michael Bailey, City Attorney
Vicki Rios, Assistant City Manager
Jack Friedline, Assistant City Manager
Brian Friedman, Director, Economic Development
Jean Moreno, Director, Community Services
Lisette Camacho, Director, Budget and Finance
Irene Avalos, Audit Committee Member
Rusty Simmons, Audit Committee Member
C
Glendale
A R 17 0 N A
Development Agreement Process
Audit Report
October 14, 2020
Independent Internal Audit Program
Table of Contents
Executive Summary 2
A. Introduction 3
B. Background 3
C. Objective 4
D. Key Outcomes 4
E. Audit Results and Recommendations 5
E1. City should create a Development Agreements Policy 5
E2. Development Agreements deliberations should be documented 6
E3. Monitoring Activities Need strengthening 7
F. Audit Scope and Methodology
G. Data Reliability
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7
1
Independent Internal Audit Program Development Agreements
Executive Summary
As part of our FY 2020 Audit Plan approved by the City Council, we conducted an audit
of Development Agreement process. The audit was performed to evaluate the City's
Management of development agreements.
Audit Objectives:
1) To determine if internal controls regarding execution, oversight and management
of DA are adequate and effective to mitigate associated risks.
2) To determine if all parties complied (or are complying) with provisions stipulated in
the agreements, City rules and regulations and general best practice standards.
Audit Conclusions:
Effective contract administration is crucial to the success of the public contracting process
because without it, significant public funds may be wasted or lost. This audit sought to
determine the adequacy of controls over the contract management process with a specific
focus on development agreements. The audit procedures were designed to help in
assessing the effectiveness and adequacy of controls related to the management of
development agreements. Since the scope of the audit was narrowly focused on the
development agreements process, a random sample of six development agreements'
spread across various departments was selected. IIAP noted departments have varying
processes in place to manage their respective agreements. Although not uniform, the
procedures and testing performed indicated that internal controls regarding oversight and
management of development agreements are generally adequate. Furthermore, the
processes appeared sufficient to provide reasonable assurance that the City is managing
its development agreements in accordance with the terms and conditions stipulated in
those agreements. However, the audit noted three areas of potential risk that require
additional improvement in order to ensure the process of contract administration in the
management of development agreements is properly coordinated, efficient and supported
by adequate procedures. These are highlighted below:
1) Moderate Risk: City Manager's Office (CMO) should develop a centralized policy
and procedures on contract administration to guide departments and all
stakeholders involved in the contract administration process. This will ensure that
all departments and individuals involved in contract management follow and use a
standardized process that will improve efficiency and effectiveness in all phases
of contract administration.
2) Moderate Risk: City Manager's office should ensure deliberations that take place
in meetings among City departments which are coordinating development
agreements are always documented or kept in some record to remove confusion
regarding responsibilities and duties related to administration of development
1 Sample selected from a list of development agreements extracted from Laserfiche software used by the City to
manage records.
Independent Internal Audit Program Development Agreements
agreements. This will ensure the discussion and resolution of all key issues is
recorded and available for future reference.
3) City Manager's Office should strengthen monitoring of developers'
performance during the period of implementation of the agreements to ensure any
issues that arise are escalated and resolved in a timely manner. It will also ensure
developers adhere to the terms and conditions stipulated in the agreements.
A. Introduction
Independent Internal Audit Program (IIAP) conducted a city-wide audit of the
Development agreement process in May 2020. The audit was included as part of IIAP's
FY20 Annual Audit Plan. The purpose of this audit was to determine if the City complied
with relevant policies, rules, and regulations in entering into and implementing
development agreements; and, whether the controls in the development agreement
process are adequate and effective. The audit covered a random sample of all active
development agreements as of April 30, 2020.
Glendale City Code Section 28-136 establishes the general requirements that guide
development agreements including provisions regarding development impact fees,
development impact fee credits, and/or disbursement of revenues from development
impact fee accounts. Section 28-136 (a) — (i) provides specific provisions for development
agreements including fee waivers, credit allocation, fee waivers, use of reimbursements,
among others.
Economic Developmentz agreements form
between the City and developers. The
development program designed to attract
wage occupations. Projects that general
enhance the quality of life for our resident
are one of the methods the City uses to s
within the City.
most of the development agreements entered
City has established a robust economic
and retain quality companies offering higher
new revenue to the city of Glendale and
are encouraged3. Development agreements
wr, encourage and support economic activity
B. Background
Arizona Statues permit Cities to enter into development agreements consistent with their
general plan or specific plan, if any, as defined by the statutes, applicable to the property
on the date the development agreements are executed. Development agreements
provide the City a way to address public needs through comprehensive planning and give
developers the assurance that if there are any changes in zoning laws during the term of
the agreement, the changes will not change the originally approved plan that is part of the
development agreement.
50% of the development agreements we sampled for review were economic development agreements.
' Glendale Plan 2016 "Envision Glendale 2040"
Independent Internal Audit Program Development Agreements
Depending on the size of the company and its investment activities in Glendale, the City
may award incentives and waivers to developers. The incentives are usually conditional
upon meeting specific agreed-upon requirements. The City provides such incentives to
encourage development projects that will, among other things:
• Result in the creation of new full-time jobs to City of Glendale residents;
• Result in development with little or no additional cost to the City, while creating a
positive and long-term economic impact to the City and its citizens;
• Have a positive impact on Glendale companies; and
• Promote quality, affordable housing and/or mixed income development.
The Economic Vitality theme of the City of Glendale General Plan contains three critical
elements that drive the City's economic development and result in improved quality of life
for its citizens through sound economic policies that will result in an improved, sustainable
and strong local economy, coupled with prudent deployment, and management of fiscal
and other resources4.
C. Objective
IIAP conducted this audit to address the following objectives:
1) To determine if internal controls regarding execution, oversight and management
of development agreements are adequate and effective to mitigate associated
risks.
2) To determine if all parties to selected agreements complied with the provisions
stipulated in the agreements, City's rules and regulations, and leading standards
and practices.
D. Key Outcomes
IIAP confirmed that internal controls for governing development agreements are generally
adequate. Both the City and Developers complied with the provisions stipulated the
development agreements. IIAP also identified several areas for improvement in order to
make process more effective and enhance performance. The audit was not designed or
intended to be a detailed study of every relevant system, procedure, and transaction as
they relate to development agreement or general contracting process. Accordingly, the
Opportunities for Improvement section presented in this report may not be all-inclusive of
areas where improvement might be needed. Management is in a unique position to best
understand their operations and may be able to identify more efficient and effective
approaches to the following recommendations:
4 Envision Glendale 2040 "Glendale General Plan"
Il
WU
Independent Internal Audit Program Development Agreements
E. Audit Results and Recommendations
E1. City should create a Development Agreements Policy
The City's Administrative Policy No. 4 provides guidance on procedures City staff should
follow for processing, signing and filing of contractual documents. Specifically, all
contracts of more than $50,000 must be approved by the City Council, unless the contract
qualifies for the administrative award process5. Upon execution of a contract, in most
cases, a departmental liaison is designated and serves as the City's representative for
the duration of the contract. This person is the primary contact for developers in case the
contract is a development agreement.
Condition
The City does not have a city-wide policy that documents and defines the process for
contract administration. Activities related to management of contracts with developers are
spread throughout City departments. Specifically;
a) There is no city-wide guidance to address accountability for contract administration
among City departments;
b) Contract administration responsibilities are not clearly defined. For instance, there
was confusion on which department was responsible for at least one development
agreement sampled.
c) Management controls were not in place to assess if contract administration was
adequately performed.
d) HAP could not determine if City representatives underwent any training in contract
administration and there is no requirement by the City for such training.
Criteria
Creating a policy that includes guidelines for all phases of the Development Agreement
Process is a critical component of a strong and effective internal control system which
requires that Policies and Procedures are written to document routine or repetitive
activities followed by an organization. The development and use of Policies and
Procedures are an integral part of a successful quality system as it provides individuals
with the information and guidance to perform a job properly.
Cause
Responsibility for development agreements is spread across departments and each
department has its own processes for managing contracts under them. The City had a
Contracts Administrator whose role included leading this process but due to the departure
of this individual, a comprehensive contract administration policy, that includes
development agreements was not developed.
5 Contracts for goods and services of $50,000 or less which do not obligate the City other than to pay for the goods
and services as received are authorized through the administrative process.
Independent Internal Audit Program Development Agreements
Effect
Lack of a city-wide policy and procedures on contract administration may result in
confusion and non-compliance with existing rules. It may also impact the City's ability to
effectively select, negotiate, process and implement contracts, develop clear
performance metrics and effectively monitor contract performance.
Recommendation
City Manager's Office (CMO) should create policies and procedures for contract
administration staff, including training and other tools and techniques for acquiring the
know-how to properly administer all contracts.
Management's Response:
Management Agreement
Owner
I Target Completion Date
Concur
Vicki Rios, Asst. City
Manager
June 30,2021
Action Plan: Create a comprehensive contract administration policy. Develop
contract administration training.
E2. Development Agreements deliberations should be documented
During the initial stage of a development agreement process, those involved in the review
and negotiations with potential developers hold several meetings to consider options,
review proposals and sign off on projects with developers. HAP noted that these
deliberations are not always documented as they do not follow any specific format. For
instance, for the three economic development agreements we reviewed, there were no
records of the review meetings held during review process up to and including the review
where decisions are made to move forward with a potential developer and approve the
development. Additionally, the Finance Department did not appear to be involved in this
process in spite of its critical role in the City's financial management process.
Criteria
Per GFOA Coordinating Economic Development and Capital Planning, best practice,
"The finance officer should be involved in the formation of capital planning and
economic development policies and the attendant decision-making process from the
outset, well before commitments are made. Proposed investments should be evaluated
using tools such as cost/benefit and debt affordability analysis. These analyses should
be incorporated into capital plan development and updated on a regular basis".
Cause
Independent Internal Audit Program Development Agreements
Lack of clarity of roles and responsibilities over management and oversight of
development agreement process at the outset.
Effect
Failure to document/record deliberations and analyses including finance related
analysis may negatively impact achievement of objectives.
Recommendation
Key deliberations and analyses that take place during contract negotiation, and review
should be documented and kept as part of the records related to the contract. This will
ensure responsibilities are properly assigned, effectively coordinated and records are
available for future reference in case those involved left employment with the City.
Management's Response:
Management Agreement
Owner
I Target Completion Date
Concur
Vicki Rios, Asst City
Mana er
June 30, 2021
Action Plan: Contract administration policy will contain guidelines for proper
documentation of deliberations.
E3. Monitoring Activities Need strengthening
Condition
One of the three economic development agreements we sampled outlines terms and
conditions that must be met for incentives to be paid by the City. Additionally, several
activities that developers are required to comply with are stipulated in the agreements.
HAP noted that the monitoring needs to be strengthened to ensure developers comply
with the terms and conditions of the agreements. The table below shows details.
Developer Name
Issue
Bechtel Corporation
Percentage of Full-time employees identified as Glendale
residents was below 20% for all quarters between
December 2018 and June 2020. Reports were not
submitted to the city on a periodic basis. IIAP only obtained
this report during the audit.
C+D LLC
It was not possible to determine if the developer conducted
monthly events as stipulated in the agreement and some
of the monthly reports were not available.
Independent Internal Audit Program Development Agreements
Criteria
Government Finance Officers Association (GFOA) Best Practice, "Monitoring Economic
Development Performance dated February 2009 states, For the purposes of consistency,
transparency, and accountability, a clearly defined monitoring process should be a part
of every economic development policy. Objectives of the monitoring process should
include periodic evaluations of individual project performance by incentive and an
evaluation of the cumulative costs, benefits, and degree of goal attainment of the
jurisdictions overall program.
Cause
City staff did not always monitor developers' compliance with the terms of the agreement.
Effect
Consistent and coordinated monitoring of developers' performance strengthens
compliance with terms and conditions and ensures any issues that arise are addressed
in a timely manner. It also helps the City to have information that can be used to guide
future development planning and execution.
Recommendation
The City Manager's Office should develop a standardized process across the City that
ensures consistent, coordinated and continuous monitoring of developers' performance.
Additionally, all City representatives on various contracts should undergo training on
contract management to include planning, administration, monitoring, among others.
Management's Response:
Mara � *merit A reeme f
Owner
.Tar .et7Corn 'le`t on Date
Concur
Vicki Rios, Asst City
Mana er
June 30, 2021
Action Plan: Policies and Procedures for effective monitoring of contracts will be
included in the contract management policy.
F. Audit Scope and Methodology
The audit covered development agreements that were active as of April 30, 2020. HAP
selected a random sample of five agreements from all the active agreements which we
extracted from Laserfiche system.6 The sample included three economic development
agreements, one agreement for parking spaces at the Westgate Entertainment District
and one agreement related to community development housing support.
6 City's database of records and contracts.
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Independent Internal Audit Program Development Agreements
To adequately address the audit objectives and to describe the scope of work on internal
controls, HAP:
• Conducted interviews with the relevant departments regarding accountability and
management of development agreements and contracts in general.
• Read relevant provisions of state laws, City of Glendale's rules and regulations
that govern contracting process.
• Reviewed leading practices on contract administration as well as contracting
policies of other counterparts7.
• Reviewed compliance with specific provisions of selected agreements for
compliance and verified compliance through interviews, evaluation of records and
other information and analysis.
HAP conducted this audit in accordance with Generally Accepted Government Auditing
Standards as well as the professional standards for the practice of internal auditing.
Those standards require that we plan and perform the audit to obtain enough, 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.
G. Data Reliability
The primary data utilized for the work performed in this audit was obtained directly from
the Laserfiche application. IIAP also used financial data obtained directly from Tyler Munis
Simplicity System, the City's financial system of record to perform several components of
the audit. Munis data reliability is reviewed annually during the audit of the City's financial
reports and the Comprehensive Annual Financial Report (CAFR) performed by the City's
external auditor. HAP therefore relied on the work done by the independent auditor and
determined that the data utilized in processing financial procedures and reports related
to development agreements, was appropriate$ given its intended use.
Policies of other Cities within the State.
a Sufficient, reliable and relevant
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Independent Internal Audit Program Development Agreements
Appendix I
Definitions of Audit Findings Rankings
We assigned the risk rankings based on our professional judgment. A qualitative
assessment of high, medium or low helps to prioritize implementation of corrective
action as shown in the table below.
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Independent Internal Audit Program Development Agreements
Critical control weaknesses that exposes the City to a high degree of combined risks.
Recommendations from High risk findings should be implemented immediately
(preferably within 3 months) , so as to address areas with most significant impact or
highest likelihood of loss, misapproriation or damage related to the City assets.
Represents less than critical weaknesses that exposes the City to a moderate degree of
Moderate
combined risks. Recommendations arising from moderate risk findings should be
mple mented in a timely manner (preferably within 6 months), to address moderate risks
and strengthen or enhance efficiency in internal controls on areas with moderate impact
and likelihood of exposure.
Represents low risk or control weaknesses and the exposure is not likely to expose the
Low
City and its assets to signficant losses. However, they should be addressed in order to
improve efficiency and effectiveness of oprations. Recommendations arising from low
risk findings should be impelemented within 12 months.
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Independent Internal Audit Program Development Agreements