OFFICE OF THE CITY AUDITOR
Roland E. Smith, CPA
City Auditor

March 16, 2004

TO: President De La Fuente and Members of the City Council

A RESOLUTION AUTHORIZING THE CITY MANAGER OR HIS/HER DESIGNEE TO NEGOTIATE AND EXECUTE A SEVEN YEAR CONTRACT FOR THE LEASE OF TELEPHONE EQUIPMENT AND SERVICES WITH SHORELINE COMMUNICATIONS INC., FOR AN AMOUNT NOT TO EXCEED $600,000 ANNUALLY OR $3,600,000 OVER THE TERM OF THE CONTRACT WITHOUT RETURN TO COUNCIL.

PURPOSE AND SCOPE

In accordance with the Measure H Charter Amendment, which was passed by the voters at the General election of November 5, 1996, we have made an impartial financial analysis of the accompanying Council Agenda Report and Proposed Resolution. In making our analysis we obtained from Agency staff copies of the Request for Information (RFI) that was sent to potential suppliers of the needed equipment and services, as well as reports that staff made regarding visits to sites where potential suppliers' systems were installed and operational.

Since the Measure H Charter Amendment specifies that our impartial financial analysis is for informational purposes only, we did not apply Generally Accepted Government Auditing Standards as issued by the Comptroller General of the United States. Moreover, the scope of our analysis was impaired by Administrative Instruction Number 137, effective May 21, 1997, which provides only one (1) week for us to plan, perform and report on our analysis. Due to this time constraint and our overall workload, we did not verify cost-savings projections that were referenced in the Agenda Report.

SUMMARY

The City of Oakland relies on two main technologies to communicate internally and with the citizens of Oakland: (1) voice and data [telephone], and (2) network [computer]. Failure of either of these technologies can disrupt the City's daily operations. The Finance and Management Agency proposes to replace the City's aging telephone equipment, voice mail system, and network infrastructure with a more modern and cost-effective system called Voice Over Internet Protocol, whereby telephones utilize the same network as computers.

This Proposed Resolution is a companion to another Proposed Resolution entitled:

RESOLUTION AUTHORIZING THE CITY MANAGER OR HIS/HER DESIGNEE TO NEGOTIATE AND EXECUTE A SEVEN YEAR CONTRACT FOR THE LEASE OF NETWORK EQUIPMENT AND SERVICE WITH CISCO SYSTEMS INC., FOR AN AMOUNT NOT TO EXCEED $360,000 ANNUALLY OR $2,520,000 OVER THE TERM OF THE CONTRACT WITHOUT RETURN TO COUNCIL

The project is dependant upon approval of both resolutions. Accordingly, they need to be evaluated jointly, and in conjunction with our report No. 04095, dated March 23, 2004.

FISCAL IMPACT

The two contracts will total $ 6,120,000 over the lives of the leases, as summarized below:

Contractor Purpose Amount

Shoreline Communications Telephone equipment
and services $ 3,600,000

Cisco Systems Network equipment
and services 2,520,000

Total $ 6,120,000

According to cost-savings studies, by implementing the Voice Over Internet Protocol the City will be able to reduce its SBC Centrex charges (currently $2,400,000 per year) by almost $1,000,000 per year. Moreover, the City will realize additional savings when a new phone line is installed, moved or changed -- the costs and labor associated with these items will be reduced to less than 10 percent of their present costs.

While preparing the FY 2003-2005 budget request, staff reduced maintenance costs by $500,000 in anticipation of savings to be realized through the Voice Over Internet Protocol. In order to bridge the period between the time that costs will be incurred under the leases and savings will be realized, the City Council approved $500,000 in Capital Improvement Funds. In order to allow the City to realize savings prior to the first lease payment, Shoreline Communications has agreed to permit the City to make six annual payments of $600,000 over the seven years of the lease, deferring the first payment until the second year. The alternative would have been for the City to make seven annual payments of $514,286.

Staff also evaluated the feasibility of maintaining the existing telephone and network systems, and not making any changes. If this were to be done, additional funds would need to be allocated in the FY 2004-2005 budget.

CONTRACTOR SELECTION PROCESS FOR
TELEPHONE EQUIPMENT AND SERVICES

Based on a study of the needs of City departments for telephone service, on September 10, 2003 OIT staff issued a Request for Information (RFI) to eighteen (18) suppliers of Voice Over Internet Protocol equipment and services, and ten suppliers (10) responded. Through a process of rating the suppliers and making site visits to observe their systems in operation, OIT staff concluded that Shoreline Communications, Inc. appears to be best able to provide the City with the necessary telephone equipment and services.

CONCLUSION

Based on our analysis of data as presented in the Agenda Report, the Proposed Resolution appears to be reasonable.

Prepared by: Issued by:

Jack McGinity, CPA Roland E. Smith, CPA, CFS
City Auditor
Report completion date:
February 27, 2004