The State Auditor’s Office offered suggestions for improvement as the results of an audit into the city’s overhead charging practices that was made public Monday.

The audit is the culmination of more than a year’s worth of effort by the office, which focused on determining if overhead costs between the general fund and utility funds were distributed according to leading practices and state law. Overhead costs deal primarily with administrative services, or even materials, that support the utility. The audit did not look at operational costs such as pay for employees of the city’s Public Works Department.

“The City of Bainbridge Island is pleased to receive the results of the audit,” said City Manager Brenda Bauer. “We continue to work towards using all best practices in choosing a proxy for our allocations.”

The audit report noted that in the past some cities have overcharged their utilities in order to pay for overhead costs that should be paid for through tax dollars. This audit was designed to determine if practices are in place to provide fair and legal distribution of funds.

While the City did exhibit room for improvement, since 2009, the year on which the auditors concentrated, there have already been changes implemented to update the city’s practices.

State auditors looked into how the city allocated money in 2009 to various departments from its utilities and the general fund according to leading practices and state law. The results of the audit suggests that the city should improve in three of the seven leading practices, including:

• Being up to date and having detailed the basis for overhead charges.

• The use of allocation factors that equitably allocate overhead to each fund and department.

• The allocation of overhead to all benefitting funds and departments, or charge the general fund for any overhead the city chooses not to charge to some benefiting funds and departments.

While the city was found to be lacking in the first two leading practices, the final practice was cited as not having adequate enough documentation to make a determination.

The results also indicated that the city needs to use better documentation to support the money it allocates across departments. The city was shown to have “no support” for staff time in accounting, budget, payroll, human resources, IT services, legal, purchasing, and accounts payable.

“If they had used time that was recorded we would say that was sufficient,” said Chris Cortines, principal auditor for Local Government Performance Audits. “But instead they were based on estimates.”

Bainbridge Island did not have an overhead allocation plan prior to the audit, which is recommended by the state. However, the report said that the city allocated overhead in a “logical fashion.” The City was commended for having developed a plan that incorporates many of the leading practices since the audit began.

“Since 2009, the city has moved to more allocations based on leading practices,” Bauer said. “…In addition, some staff members use work orders, which allows the allocation of their time to be based on actual experience.”

With the help of a consultant, the city developed a cost allocation plan in 2009 that integrates new leading practices. The plan was presented to the council in 2010, but has yet to be adopted. State auditors recommended that the time city employees use on the utilities should be better documented to support the charge to the utilities.

When the city pays for overhead costs associated with utilities, such as electricity or the support from the IT department, it gets paid from the general fund. The general fund recovers this money by charging the utilities. The audit found that there were additional charges to the utility that the city wasn’t making use of, such as janitorial and maintenance, or electricity costs. This leads to the city’s ability to charge the utilities more.

“(The auditors) think it’s a good plan,” Cortines said. “It would likely result in more overhead costs to the utilities, but it would support those charges and how those amounts are determined… the charges could go higher than what they were in 2009.”

Bainbridge Island was one of eight Washington cities audited. The audit was at no cost to the city.