Title
Recommendation to Authorize the City Manager to Execute an Agreement for Full Business License Tax Administration, Including Business Discovery, Collections, and Audit with Hinderliter De Llamas & Associates (HdL) for an Initial Three-Year Term with Two One-Year Extensions, for a Total Agreement Amount Not-to-Exceed $800,000. (Finance 10024056)
Body
To: Honorable Mayor and Members of the City Council
From: Jennifer Ott, City Manager
EXECUTIVE SUMMARY
Staff recommends that City Council authorize the City Manager to enter into a service agreement (Agreement) with Hinderliter De Llamas & Associates (HdL) for full business license tax administration, including discovery, collections, and audits. The agreement will transfer the processing of new business license accounts and renewals, payment processing, online services, business support, collection services, discovery, audits, and all other services specified in the Scope of Services (Exhibit 1) to HdL.
BACKGROUND
The City of Alameda (City) currently collects and processes over 8,000 current and active business license accounts, generating approximately $2.8 million in annual tax revenue. The City's current contract with HdL only provides business license management software, and the process is currently managed by City staff. The City does not engage HdL for discovery of unregistered businesses, collections, or audits. The City uses an older version of the software provided by HdL and pays annual licensing fees of $18,900.
The Finance department recently conducted a compliance audit, identified delinquent business licenses, and spearheaded various special projects to rectify these delinquencies. This process successfully resolved many accounts, bringing businesses into compliance and resulting in collected revenue that otherwise would have been lost. However, it is crucial to note that this requires a high level of experience and expertise, which the Finance Department currently lacks. These processes should be done periodically to ensure the City's financial health. Additionally, the Finance Department does not have the in-house expertise or tools to manage a business discovery or audit program, which are standard practices completed by most large public entities that assess business taxes.
On June 20, 2023, City Council approved the Finance Department's recommendation to implement a new business license collection system due to the need to increase the rate of collections, the discovery of new businesses, and business tax audits. As part of City Council's June 20, 2023 action, Finance staff was decreased by 0.20 full-time equivalent, as this position would no longer be necessary.
DISCUSSION
As part of the proposed Agreement, HdL will provide customer support and a service center where the business community can obtain assistance Monday through Friday from 8 AM to 5 PM. This will give our business community one extra day each week than current service hours, ensuring all inquiries are handled promptly and without delay. HdL will give local businesses multiple options for registering, renewing, and making payments. Business owners can do all this online, by mail, and, in certain instances, over the phone. HdL offers expedited business license services by phone to state-licensed contractors applying for building permits. HdL will answer all general licensing inquiries by mail, email, or phone.
The City and its business community will continue to benefit from the enhanced online functionality of HdL’s operations management program. The City will retain access to various services, such as real-time reporting and account look-up. HdL’s online portals allow businesses to file license applications, update information, make payments, receive their business license certificates, correspond with tax specialists, and receive assistance for their business license questions, all electronically.
As a part of the proposed agreement, HdL will identify unregistered and misclassified businesses and work with those businesses to achieve compliance. HdL will use various methodologies, databases, and sources to proactively find these businesses, something the City currently needs to improve. This compliance program would reduce the number of delinquent businesses and avoid potential lost revenue. The result will be increased business license revenues and cost savings for the City. Additionally, HdL has a staff of experienced business tax auditors who will perform audits to ensure businesses pay the correct amount of taxes owed.
Staff negotiated a discounted HdL processing rate of $17 per account renewal with a Consumer Price Index (CPI) increase for each year of the three-year agreement, with the option for additional two one-year terms. This is the rate at which HdL charges the City for each new account and renewal processed. For the compliance services, discovery, and audits, these services have no direct cost. Instead, HdL will receive a portion of the total revenue collected by each process. For newly discovered unregistered businesses, HdL will charge 25% of the total revenues collected as a direct result of the compliance services, as well as 40% of the revenue generated and collected for newly discovered accounts, and 40% of revenues identified from the audits of business licenses. The total cost for the five-year contract is estimated at $680,000, with contingency fees calculated at $120,000. These contingency fees are an estimate of the revenue likely to be recovered based on the percentages provided. They are calculated on a “recovery basis”, meaning the fees are not paid until funds are recovered. Should the Term of this Agreement need to be extended, it can be done by amendment without returning to City Council.
The current annual fee for the software is approximately $18,900. The annual fee will be reduced to $5,000, utilizing HdL’s newer version of the software and its management services. The cost savings are estimated at $41,700 for the three years. This will also free up the time of existing staff, approximately 75% of the Account Clerk and 10% of the Senior Financial Analyst. The staff time savings would be used to pursue other uncollected debts, such as, but not limited to, collection action on delinquent property transfer tax, code enforcement violations, and fire prevention billing. Some of these other taxes and fees are large amounts and secured by properties, making them easier to collect. Due to this reason, staff recommends making the Agreement with HdL effective July 1, 2024, to achieve savings and allow staff to shift their focus to other areas of compliance and revenue collection.
Staff reached out to two similar communities, San Leandro and Walnut Creek, that have shifted their full business administration, discovery, collections, and audits to HdL. Despite encountering their own set of challenges, both communities have successful business license operations, thanks in part to community outreach and public notices. The proposed pricing for Alameda is similar to that of San Leandro and Walnut Creek when adjusted for annual CPI increases and raising costs of employment. Although the negotiated recovery fees for discovery and audits are slightly higher, the benefits to the City are well worth it. In the long run, these services will identify new revenue and collect it much earlier, resulting in improved cash flow and better forecasting and financial planning.
|
City |
San Leandro |
Walnut Creek |
Alameda |
|
Year |
2021 |
2022 |
2024 |
|
Business License Administration |
$13/account |
$16/processed account |
$17/processed account |
|
Discovery |
35% |
35% |
40% |
|
Collections |
25% |
25% |
25% |
|
Audit |
35% |
35% |
40% |
In March, the City moved all utility user tax (UUT) remittances and payments online. This has streamlined the process, eliminating the need for time-consuming data entry and microfiche scanning. Ninety five percent of service providers now renew and file their UUT payments online, and the feedback has been positive. This has set the stage for the proposed changes in our business tax systems and processes as our community increasingly expects and demands these online services.
In June 2024, the City began notifying taxpayers about the upcoming changes to their business license renewals. The Finance Department posted an announcement on the City’s website and business license web page, sent email notifications, and mailed notices to the business community to inform them about the transition. The renewal deadline has also been extended to August 31, 2024.
ALTERNATIVES
• Approve the proposed agreement. This would ensure the City continues offering the community convenience and innovations and adds due process regarding collections, discovery, and auditing of business licenses.
• Do not approve the proposed agreement, which would decrease the revenue collected and limit the City’s collections, discovery, and auditing processes, potentially resulting in the loss of uncollected debts.
FINANCIAL IMPACT
The initial term of the three-year Agreement with HdL will be effective July 1, 2024, and end on June 30, 2027, and contains two one-year renewal options for a total 5-year Agreement amount not-to-exceed $800,000. The newly adopted $27 processing fee in the 2024-25 Master Fee Schedule is sufficient to cover the annual costs associated with this new service agreement. This processing fee is the charge the City applies to taxpayers for processing new accounts and renewals. The fee will cover the full cost of the proposed agreement.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This action is in conformance with the Alameda Municipal Code and all policy documents. This action is subject to the Levine Act.
Receiving this report is in alignment with the City’s FY 2023-26 Strategic Plan under the priority to Practice Fiscally Responsible, Equitable, and Inclusive Governance.
ENVIRONMENTAL REVIEW
This action does not constitute a “project” as defined in California Environmental Quality Act (CEQA) Guidelines Section 15378 and therefore no further CEQA analysis is required.
CLIMATE IMPACT
There are no climate impacts associated with this action. City Council may provide direction to staff on funding priorities for implementation of the Climate Action and Resiliency Plan as part of the budget workshops.
RECOMMENDATION
Authorize the City Manager to execute an agreement with HdL for full business license tax administration, including business discovery, collections, and audit for an Initial three-year term with two one-year extensions, for a total Agreement amount not-to-exceed $800,000.
Respectfully submitted,
Margaret L. O’Brien, Finance Director
By,
Carlos Figueroa, Senior Financial Analyst
Financial Impact section reviewed,
Margaret O’Brien, Finance Director
Exhibits:
1. Scope of services HdL
2. Agreement