Monopoles April 2015 EXECUTIVE SUMMARY BACKGROUND. Office of Internal Audit

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1 Monopoles April 2015 Office of Internal Audit EXECUTIVE SUMMARY The Office of Internal Audit reviewed the monopole program to determine if amounts received were in compliance with contractual agreements and to verify the work performed by the Department of Financial Services (FS) during their review for control improvements over monopole processes. The audit noted the following: Rent received by Fairfax County Public Schools (FCPS) was appropriate The bi-annual (15%) rent distribution to site schools was calculated and disbursed correctly The rent retained (85%) was used for emergency preparation technology by the Office of Safety and Security (OSS), Department of Information Technology (DIT) projects, and administrative technology devices We concur with the March 2014 FS report titled Review of Procedures to Collect and Distribute Monopole Receipts (Cell Tower Program). While the audit found that controls over the monopole program were adequate, there were several areas that could be strengthened to increase accountability and transparency as follows: Establish consistent commencement dates Calculate rent receivables as of the first of the month Record receipts and budget transfers in a dedicated account Establish a fiscal year financial planning process for the use of monopole funds Capitalize assets in accordance with GASB 34 Evaluate the use of the FOCUS accounts receivable module BACKGROUND At the inception of the audit, there were 15 monopoles located on FCPS property with 41 carriers using those monopoles. Nine of those towers were owned by FCPS. As of March 25, 2014, there were 31 monopoles at 25 FCPS properties. Nine towers were still owned by FCPS. The other 22 monopoles were owned by either Crown Castle USA, Inc. or Milestone Tower Limited Partnership III. Several reports were provided by the Department of Facilities and Transportation Services (FTS) and reviewed by the Office of Internal Audit to establish the history surrounding the monopole program. The monopole program has been subjected to numerous reviews by outside parties, as follows: Fairfax County Comprehensive Plan, 2007 Edition Public Facilities, Amended through January 10, 2005 (Fairfax County) FCPS Report on Agreed-Upon Procedures Monopole Revenues and Expenditures July 1, 2009 through June 30, 2010 (Robinson, Farmer, Cox) Fairfax County School District Cell Tower Leasing Analysis October 6, 2010 (Steel in the Air, Inc.) Fairfax County Wireless Facility Lease Assessment November 30, 2011 (Alvarez & Marsal Real Estate Advisory Services, LLC)

2 Fairfax County Office of Financial & Program Audit Wireless Facility Leases on County- Owned Property (Monopoles) January 2011 A number of FCPS documents exist that address the monopoles: FCPS Financial Management Procedures Manual Section Monopole 12/17/2012 FCPS Monopole Program at a glance Regulation Procedures for Seeking Approval of Telecommunications Facilities Policy Wireless Telecommunications Facilities In order to install a monopole on a FCPS site, an application must be completed by the applicant, referred to as the telecommunication carrier, and submitted to the Fairfax County Department of Planning and Zoning. If the application is approved, it is forwarded to the FCPS Department of FTS to be reviewed and deemed feasible. At this point, the Superintendent and the School Board are notified that there is a pending application. The principal and PTSA of the school site are also notified. The applicant is then asked to prepare a Form 2232 application by the Fairfax County Department of Planning and Zoning whose staff will also prepare a report for the Fairfax County Planning Commission. The Fairfax County Planning Commission reviews the report, holds a public hearing, and then votes on the planned monopole. New monopoles are owned by either Crown Castle USA, Inc. or Milestone Tower Limited Partnership III. They are known as the contract telecommunication company. The telecommunication carrier issues a $25,000 initial payment to FTS which is deposited and posted in FOCUS by the Office of the Comptroller. The Office of the Comptroller then processes a payment to the host school for $25,000. The $25,000 must be deposited into the administrative account per Regulation School Activity Funds effective September 29, The money can no longer be deposited in the Educational Contingency Account (ECA). Once monthly rent has been calculated based upon the actual lease, the telecommunication carrier prepares a check for the rent and forwards the check to the contract telecommunication company. Sixty percent of the monthly rent is kept by the contract telecommunication company for managing the carrier leases and maintaining the monopole. Forty percent is paid to FCPS and remitted to FTS. FTS sends the check to the Office of the Comptroller to be deposited and recorded in FOCUS. FCPS owns nine monopoles as of March 25, FCPS does not intend to own any additional monopoles in the future. Once the monthly contract rent has been determined, a check is sent to FTS from the telecommunication carrier. The check is then sent to the Office of the Comptroller to be deposited and recorded in FOCUS. A service management fee of ten percent of the monthly rent is sent to the contract telecommunication management company for managing the carrier leases and maintaining the monopole. Twice a year 15% of the rent received for each monopole is paid to the host school. These payments are calculated by FTS and processed by the Office of the Comptroller. Payments are made to the host schools via ACH and posted to the administrative account, not the ECA account. Eighty-five percent of the rent received is retained and used for emergency preparation technology by OSS, DIT projects, and administrative technology devices. In March 2014, FS issued Review of Procedures to Collect and Distribute Monopole Receipts (Cell Tower Program). We concur with this review. Effective September 1, 2014, a summary of changes to the regulation for the ECA was issued. Monopole revenue received by the school Page 2 of 6

3 sites is not allowed to be deposited in the ECA account as noted in the Review of Procedures to Collect and Distribute Monopole Receipts (Cell Tower Program). It must be deposited into the administrative account per Regulation School Activity Funds, effective September 29, SCOPE AND OBJECTIVES This audit was an approved addition to the FY2013 audit plan at the request of FTS. Due to organizational changes and other activities, as described in the methodology section below, the audit was carried over to the FY2014 and FY2015 audit plans. The audit was conducted in accordance with generally accepted government auditing standards, except for peer review. The original scope of the audit was to: Assess the overall management of the program Determine if revenues due are received and processed in a timely manner Determine if revenues are spent for their intended purposes Ensure that controls exist to avoid and prevent wasteful, careless, or inefficient practices This scope entailed a review to determine: The accuracy of revenue received from the monopole leases The accuracy of the management fees paid The use of the 85% of revenue retained by FCPS The accuracy and timeliness of the bi-annual 15% of revenue transferred to respective schools The adequacy of controls in place over revenue collection and incurred expenditures The scope of the audit was modified following the postponement of the audit due to changes being implemented. The updated scope was to determine if amounts received were in compliance with contractual agreements and to verify the work performed by FS during their review for control improvements over monopole processes. METHODOLOGY The audit entailed the research, documentation, and analysis of available directives and guidance. In addition, interviews were conducted with the staff responsible for monopole related activities in the FS and FTS. All FCPS School Board minutes from April 6, 1995 to May 6, 2010 were reviewed for monopole related discussions. A detailed review of each monopole lease was completed and a schedule was prepared to include the term of the lease, extension terms, site lease term, site fee, advance site payment, site rent, and site security deposit. The anticipated annual revenue for each lease was calculated based on the terms of the lease. The next step would have been to determine that the appropriate revenue was received and to verify the disposition of such revenue. However, FS and FTS were discussing the restructuring of monopole responsibilities and staff in FS were assigned to perform a review of the monopole processes to determine what control improvements were needed. Therefore, to avoid the duplication of efforts, the audit was put on hold pending completion of these processes. The Office of Internal Audit restarted the audit process in the fall of 2014 to begin with a verification of the work completed by FS. We found that many of the FS recommendations were duplicative of what Internal Audit had documented as part of the initial review process. This report serves to summarize these recommendations. Page 3 of 6

4 The FCPS Office of Internal Audit is free from organizational impairments to independence in our reporting as defined by government auditing standards. The office reports directly to the School Board Audit Committee. We report the results of our audits to the Audit Committee and the reports are made available to the public via the FCPS website. AUDIT RESULTS, RECOMMENDATIONS, AND MANAGEMENT RESPONSE The Office of Internal Audit concurs with the findings and recommendations made by FS in their Review of Procedures to Collect and Distribute Monopole Receipts (Cell Tower Program). Those recommendations are detailed below. 1. Commencement date FTS should implement a consistent criteria for a commencement date upon which rent is due to FCPS. The lease service date and subsequent amendments vary because the commencement date on monopole towers is either the date of substantial completion, the date the contract was signed, or the issue date of building permits. The variation in the service dates results in discrepancies when calculating rent receivable. Management Response: With regards to a consistent rent commencement date, the planned actions stated below will vary depending on the monopole ownership entity (FCPS, Milestone or Crown Castle) and the current lease obligations for each entity. Further, the implementation period for some of these entities could be years based on lease renewal schedules. Details are as follows: For FCPS-owned monopole sites, rent(s) will start on the 1 st day of the month after the date of execution for new leases and/or amendments. For Milestone-owned new and existing sites the following lease commencement date protocols will be implemented: Newly Constructed Monopoles: For newly constructed and owned monopoles, rent(s) will start on the 1 st day of the month following the Lease Commencement date. The Lease Commencement Date is defined as that date which is the first to occur of: (1) the 1 st day of the month following sixty (60) calendar days after the construction is complete and a Notice of Substantial Completion is provided, or (2) the 1 st day of the month following the start of Cell Carrier s equipment installation. Cell Carrier Co-locations to Existing Monopoles: For cell carrier co-locations to existing monopoles, Milestone has agreed to start rent(s) on the 1 st day of the month after the date of lease execution. For Crown Castle-owned sites, FCPS is in the process of reaching out to request that for new leases and/or amendments, rent(s) will start on the 1 st day of the month after the date of lease execution. Page 4 of 6

5 2. Rent receivable Rent receivable should be calculated as of the first of the month and prorated for the number of remaining days in the month. The rent start date, which is based on the commencement date, varies by lease. This variation causes discrepancies when calculating the annual escalation rate. The inconsistent timing of rent start dates compounds the variance between the anticipated rent receivable and the actual rent received. Management Response: Going forward on new leases, renewals and/or amendments the start date will be on the first date of the applicable month. 3. Accounting for disbursements One specific account should be used to record rent receipts and budget transfers should be made to FTS, OSS, and DIT for expenditures. The remaining account balance would then reflect the actual disbursements to site schools. All monopole related transactions have been recorded in the Other Equipment Noncaptialized account resulting in a lack of transparency for these funds. Management Response: Beginning July 1, 2015 (FY 2016), cost center SNF FT D&C Telecom Lease will be used to record revenue and post expenditures. Currently, the monopole program s internal order tracks to D&C s operating fund s cost center, SNF Funds will be appropriated to: Expenditure GL Other Equipment (Non-Capitalized) for Monopole Host Site s recurring carrier lease revenue (15% of FCPS s gross lease revenue for the site) and one-time fees for site specific work. Expenditure GL Other Professional Services for FTS (D&C & OSS) and DIT authorized expenditures from monopole revenue proceeds. 4. Financial planning At the start of the fiscal year, a financial plan on how to use monopole funds should be established and agreed upon between FTS, OSS, and DIT. This agreed upon financial plan should be the basis of fixed budget transfers between the three departments giving transparency to how monopole funds are distributed. There appears to be a lack of financial planning regarding the use of monopole funds because disbursements are posted only when a request is received. Management Response: In February 2015, a line item budget was developed for the Monopole Program. The budget includes funding for the operation and maintenance of the Monopole Program, other FCPS infrastructure programs (School cell phones, emergency radios, CCTV and other safety and security systems) and lease proceeds disbursements to hosting schools of monopole sites. A long-range ( ) financial forecast model has also been developed. Page 5 of 6

6 5. Capital assets Monopole towers owned by FCPS should be recognized in accordance with GASB 34. Monopoles owned by FCPS are not recorded as capital assets. FCPS capital assets, therefore, appear to be understated in the financial statements. Management Response: FTS has reported to FCPS Risk Management via the Annual Statement of Values (SOV) process the number of FCPS-owned monopoles (8), the estimated replacement costs of each ($300,000) and the total replacement value of the entire FCPS-owned monopole inventory ($2.4M). FTS will defer to the Accounting and Financial Reporting Group in the Office of the Comptroller to make the final determination on whether these monopoles should be recorded as capital assets in accordance with GASB FOCUS accounts receivable Evaluate how to utilize FOCUS accounts receivable module to record anticipated rent receivable. The FTS rent roll schedule is maintained in Excel and is being used to track anticipated rent receivable. The information is posted to FOCUS only as a year-end accrual instead of monthly. Management Response: FTS (D&C) and FS have been working together to record monthly revenue receivable accruals. Page 6 of 6