November 22, 2005
SUBJECT: Authorization to Extend Existing Contracts for Banking and Investment Custody Services
REPORT IN BRIEF
Approval is requested for a one-year extension of two existing contracts with Union Bank of California N. A.: one for banking services and one for investment custody services.
BACKGROUND
The City contracts for banking services in order to have an account into which it can deposit revenues and from which it can pay employees (i.e. payroll) and the general obligations of the City (i.e. supplier invoices). The City has a premium interest checking account tied to this account into which funds are swept to earn interest until the funds are needed to pay operating expenses. The City also maintains eleven petty cash accounts which are used to reimburse City employees for incidental, work-related purchases, such as mileage reimbursement and miscellaneous supplies, and two imprest accounts that are used by the City’s third party administrators to pay worker’s compensation and City-owned property management expenses.
The City also requires custody services for our investment portfolio from a banking institution. Custody services include holding securities owned by the City for safekeeping. State law requires delivery of securities by book entry, physical delivery, or by third-party custodial agreement. The bank, being an expert in the delivery of securities, settles the City’s investment purchases and sales or maturities on behalf of the City, ensures the protection of the City’s interests, and provides reports to simplify the reconciliation process.
The existing contract with Union Bank is the result of a competitive proposal process and was awarded by Council on January 30, 2001 (RTC 01-028). The current contracts with Union Bank will expire on December 31, 2005.
During Fiscal Year 2004/2005, staff was working on several major projects (Parks and Recreation registration software, conversion of the Business License Tax to a two year cycle, payroll conversion project, etc.). These workload issues made changing banks on January 1, 2006 infeasible. Converting banks in the middle of the payroll project could be problematic since electronic payroll disbursement is a bank function. Staff recommends a one-year extension of both contracts, and the issuance of a Request for Proposals for each contract next year. The services provided by Union Bank have been satisfactory and Union Bank has agreed to a one-year extension.
DISCUSSION
The banking contract has two main fee components: banking fees and credit card processing fees. If Council approves extension of the banking contract, Union Bank has agreed to reduce current pricing on the banking fees and will guarantee the new reduced contract prices for the contract extension. It is anticipated that there will be approximately $6,000 in savings over the one-year contract extension in banking fees, based on the current services and volume. If Council approves extension of the custody contract, there will be no change from current pricing; and pricing will remain firm throughout the contract extension. The new expiration date of the extended contracts will be December 31, 2006.
The contract terms and conditions for the requested extension of the banking contract will be substantially the same as the existing contract with the following three exceptions:
- The existing banking services contract requires that Union Bank provide a provisional credit to the City for any billing discrepancies that appear on the bank’s monthly bill (analysis statement). If provisional credit is not provided, then interest must be paid by the bank. The intent of the interest provision was to ensure that the bank addressed all billing errors in a timely manner. The bank agrees to provide written notification of any adjustments within seven business days upon receipt of a dispute from the City, which City staff believes is timely. Therefore, the interest provision is not necessary. Staff recommends that the contract be amended to remove the interest provision.
- Currently, the City is able to order banking supplies with no additional markup charged by the bank. The existing contract is silent on shipping and sales tax charges. This amendment would allow the bank to pass on shipping and sales tax but that the bank can not charge any additional markup on items ordered.
- Currently, the City pays banking fees quarterly. The bank would like to modify the City’s payment schedule to a monthly basis. Since analysis statements are issued by the bank and reviewed for accuracy by City staff monthly, staff supports this modification.
FISCAL IMPACT
Annual fees for banking and credit card processing have averaged approximately $195,000 in recent years. The City pays approximately $50,000 for banking fees and $145,000 for credit card processing fees.
The City has several locations accepting credit cards. The departments that process the highest volume of payments are Parks and Recreation, Community Development, and Finance. The approximate fees incurred by these three departments annually are shown below:
· Parks and Recreation $100,000
· Community Development $ 25,000
· Finance $ 10,000
Since fees are activity-based, it is impossible to predict future annual fees. For example, fees would be lower if the Parks and Recreation Department cut the number of its recreation classes in half because that department would be depositing less cash and fewer checks and processing fewer credit card payments. Likewise, fees would be higher if the number of recreation classes doubled. Also, if the City increases the number of locations accepting credit cards or changes the manner in which credit cards are processed, fees will increase. Credit card fees are partially based on how the credit card is processed (in person, through the mail, over the phone, via the Internet, etc.) and the least expensive way to process a credit card is to have the credit card present.
Nevertheless, assuming no significant change in activity, the City will realize a net decrease in banking fees of approximately $6,000 over the one-year extension due to the new lower fee structure. Staff has surveyed other cities and has determined that Union Bank’s pricing is competitive.
Union Bank has agreed to provide investment custody services throughout the one-year extension with no fee increase. The current fee for custody services is $3,500 per year.
RECOMMENDATION
Staff recommends that Council: