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HomeMy WebLinkAbout2003 07 14 Regular F Purchasing Card Program COMMISSION AGENDA ITEM F CONSENT INFORMATIONAL PUBLIC HEARING REGULAR X July 14, 2003 Meeting MGR r /DEPT -fj Authorization REQUEST: The Commission Consider Information on Implementing a Purchasing Card Program and Provide Direction. PURPOSE: The Commission previously requested that staff research Purchasing Cards. This agenda item provides information regarding a Purchasing Card Program and requests further direction. CONSIDERATIONS: Purchasing Cards - General The Purchasing Card is considered a way to streamline the purchase order and payment processes for small dollar and high volume repetitive transactions. A Purchasing Card Program is designed as an alternative to the traditional purchasing process and can result in a reduction in the volume of purchase orders, invoices and check requests. Companies normally "supplement" their traditional system with the Purchasing Card Program versus replace it. Purchasing cards may be issued in an employee's name with the government's name clearly indicated on the card as the buyer of goods and services. Individual card limits can be established to include the number of transactions in a given cycle, the $ limits per or in a given cycle and vendors or types of (commodity code) purchases. Purchasing Cards can be used with any vendor that accepts credit cards. Purchasing Cards are similar to credit cards and have the same advantages and disadvantages of them. Advantages include convenience and the disadvantages include the risk of abuse and budgetary overspending. The Purchasing Card may become a liability of the governmental entity. Some banks provide liability insurance for improper use. It is important to be aware of the risks related to their use and develop plans to address those risks including establishing the proper limits on the cards on the front-end and a commitment to monitoring their use on the back-end. In essence, certain employees are issued Purchasing Cards with various limits imposed on them. Purchases are made by the employees at vendors that accept credit cards. The employees don't need to get pre-approval through the purchase requisition and order system. This lack of pre-approval expedites the purchasing process for the employee. The purchases for all City employees are reflected on a monthly statement. The corporate statement by employee is received by the City via hardcopy or electronic. The statement would be distributed to the employees. They would attach their supporting documentation/receipts to the statement and give it to their Departments administrative assistant who would code the general ledger expense number on the statement. As an alternative some purchases can be restricted to only one type of general ledger expense account number like office supplies. The statement would then be given to the Department head to review and approve. The approved statement would be forwarded to Accounts Payable for entry into the general ledger system. However, Accounts Payable would not cut a check to the bank, instead, the bank automatically will take the money out of our bank account in one lump sum and forward it to the various vendors that we purchased from. There are many alternatives in tenns of set-up. Some systems will allow you to tie the vendor and commodity code purchase to your general ledger account system and in turn provide an electronic interface with the accounting system eliminating the need for coding the statement's purchases and entering them into the system. Strategic Implementation of a Purchasing Card Program 1) Dedicated Personnel- clearly, there is a considerable amount of up front work necessary to establish a Purchasing Card Program. One must establish "where" (what purchases, from whom and by whom and in what amount) the benefit is in the use of the card and tailor the card controls to encompass the amounts, types of purchases and users. Policies/Procedures/Users Manuals/Training must be developed, administered and monitored. There must be a dedicated professional resource to start-up and then manage and monitor a Purchasing Card Program. This requires a Professional Purchasing Manager - not a clerk. In lieu of a dedicated Purchasing Manager perhaps the General Services Director once hired as they are responsible for the Purchasing function. In addition, a cross-functional team will need to be developed with Finance to ensure the appropriate general ledger coding and payment procedures. 2) Review the Cities Purchasing Habits (Volume, Amount and Type of Goods) - it is important to be able to establish, based on our Cities spending habits, whether the cards will truly result in a net savings in time and money taking into account the new level of back-end monitoring and management. If this determination is favorable then... 3) Issue an RFP - a competitive process should be used to select a provider. Card Issuers (providers) work with organizations to set up a Purchasing Card Program, issue cards, and provide an electronic invoice. Many fmancial institutions are Card Issuers. For instance, our bank, Bank of America, is.a provider. The Card Issuers use a "network" to process card issuance, provide authorization and provide data such as Visa, MasterCard and American Express. Ultimately there will need to be written agreements with the chosen bank, which includes fee schedules and processing procedures. 4) Create Policies and Procedures - an organization needs to establish and maintain appropriate controls to ensure the success of a Purchasing Card Program such as: . written policies and procedures for internal staff . instructions on employee responsibility and written acknowledgments signed by the employee . spending and transaction limits for each cardholder both per transaction and on a monthly basis . written requests for higher spending limits . recordkeeping requirements, including review and approval processes . clear guidelines on the appropriates uses of purchasing cards, including approved and unapproved merchant category codes (MCC) . guidelines for making purchases by telephone and fax or over the Internet . . periodic audits for card activity and retention of sales receipts and documentation of purchases . procedures for handling disputes and unauthorized purchases . procedures for card issuance and cancellation, lost or stolen cards, and employee termination . segregation of duties for payments, accounting, and reconciliation's 5) Train Users - a designated employee must be knowledgeable in all aspects of the Purchasing Card Program and be responsible for training all users on the use of the card and the cardholder responsibilities. 6) Pilot the Program - it is suggested that only a small group of employees first use the program and provide feedback for both control and improvement purposes. 7) Monitor Use & ResultslRefine Processes Based on Data - the Purchasing Manager should monitor the use of the cards, gather feedback from users, determine if the desired results of the program are being achieved and refine the process if necessary. If the program is determined to be a success... 8) Roll Out Program to Additional Users - on an incremental basis. Monitor results at each step of the way. Advantages and Disadvantages of a Purchasing Card Program Advantages ~ Potential $ Savings - studies show that the full cost to process a payment the traditional way is more than if Purchasing Cards are used because Purchasing Cards eliminate time spent in the purchase requisition and order process and reduce the number of vendor checks Accounts Payable issues. Direct savings are seen due to the ability of some organizations to reduce Accounts Payable personnel. ~ Convenience - eliminates the need for a purchase requisition and purchase order, which expedites the purchase. ~ Reduced Paperwork - eliminates the need for a purchase requisition and purchase order. ~ Increased Management Information on Purchasing Histories - some banks have web based systems that allow you to manage the purchasing data via queries and reports. Disadvantages ~ Potential for Abuse - if the system is not set up with the appropriate controls to limit abuse and continuously and timely monitored for abuse, inappropriate purchases could occur, the City would be liable and we are in the position of "chasing" down a personal reimbursement. ~ Chasing Receipts - obtaining receipts and general ledger coding after the fact will likely result in some chasing. The City will be required to make payment at a predetermined date or be charged interest. There is the potential for having to make payment on the due date but not having the statements/receipts with general ledger coding and approval back from the Departments. This scenario is a familiar one as it relates to credit cards. Non- Compliance must result in a loss of privileges. ~ Encumbrances - budgetary control is established through the encumbrance system. Purchasing Cards circumvent the encumbrance system. A potential for overspending the budget exists without the use of an encumbrance system. A possible mitigating control would be to encumber funds for a given account for the total amount of the Purchasing Cards given out in a department; however, this would require opening and closing out purchase orders and is difficult to manage on a line by line item budget. FUNDING: Various research shows that banks provide purchasing cards free. Preliminary verbal discussions with one potential provider, Bank of America, revealed that there would be a $5,500 start-up fee that is normally paid by the company; however, they stated that they would absorb that for us. Bank of America did state that there was a $25 monthly maintenance fee. ATTACHMENTS: None. RECOMMENDATION: Staff recommends that further analysis regarding the potential benefits/costs of implementing a purchasing card program be delayed until the General Services Director is hired as the General Services Director is responsible for Purchasing, Human Resources, Risk Management and Facilities. COMMISSION ACTION: