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Board Report: 2014-IT-B-018 October 30, 2014

The Board Can Better Coordinate Its Contingency Planning and Continuity of Operations Program

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Other Matters for Managementís Consideration

Hotel Contracts Do Not Guarantee Room Availability

We found that the Board's contracts with hotels near the alternate work site do not adequately ensure that rooms will be available to Board employees who need to relocate to the alternate work site. In the event the Board's COOP is activated, Board employees with COOP responsibilities are expected to relocate to the Board's alternate work site to support the performance of the Board's Mission-essential Functions. The Board's COOP assumes that these employees will live in hotel rooms near the alternate work site and may be accompanied by their families. As such, the Board has taken steps to identify specific hotels in the area within close proximity to the alternate work site and has established contractual arrangements with these hotels to provide rooms to Board personnel. These contracts, however, are largely symbolic.

The Board pays the hotels consideration of approximately $1 per contract to establish an arrangement to provide housing for personnel. These contracts generally state that the hotels will agree to provide the Board with "all available rooms up to the Board's requirement upon notification from the Board that the contract is being enforced." However, these contracts do not ensure that rooms will be available; the contracts state that "as rooms occupied by hotel guests not affiliated with the Board are vacated, those rooms shall also be offered to the Board" until the Board's requirement is satisfied.

We were informed that these hotels generally maintain an 80 percent to 90 percent occupancy rate, which means that rooms may not be readily available for Board employees. Further, since the Board sublets space at its alternate work site to other agencies, the COOPs of these other agencies may direct their employees to relocate to the same alternate work site as the Board, potentially reducing further the amount of readily available hotel space.

FCD-1 notes that all agencies must identify and prepare alternate operating facilities as part of their COOPs and prepare their personnel for the possibility of unannounced relocation of essential functions or COOP personnel to these facilities. The Board has made efforts to secure hotel space through contracts with various hotels near the alternate work site; however, the Board did not ensure that these contracts will guarantee that rooms will be available for Board employees and their families. As such, sufficient and timely space may not be available for Board employees and their families during a COOP event, which may hinder the Board's ability to quickly resume operations in the event of a disaster and could delay the resumption of the Board's Mission-essential Functions.

We suggest that the Director of the Management Division assess other approaches to ensuring that living accommodations for critical Board employees and their families who are required to relocate to the alternate work site will be available.

In response to our observation, the Director of the Management Division stated that the division is not averse to researching other approaches to providing living arrangements for employees who are relocated to the alternative work site. In the near future, it will begin assessing residence alternatives for employees.

Board Divisions Do Not Use Specific Line Items or Accounting Codes to Track Board-Related COOP Costs

The Board does not separately identify COOP-related costs; therefore, data to identify potential areas for cost savings are not readily available. Further, without knowing the true costs of its COOP, there is a risk that the Board may not be allocating resources for COOP-related activities in the most efficient manner.

In April 2014, we provided initial observations to the Director of the Management Division related to tracking COOP-related costs. Specifically, we found that Board divisions do not separately identify their COOP-related costs. The majority of the divisions' COOP-related costs are accounted for in high-level IT budgets within the applicable division, with no separate line item or accounting code to break out the components that make up the COOP-related costs. In addition, divisions do not identify budget resources associated with semiannual contingency testing.

We also noted that the ICCP is divided into three functions (Contingency, Communications, and Intelligence Information & Analysis) but has only one cost center and does not separately identify costs for different COOP-related activities.

The Division of IT determines chargeback amounts for the Board divisions based on space needed and the hours associated with administering division-specific applications. With the exception of mainframe equipment or other capitalized expenses, the Division of IT does not differentiate costs between contingency equipment and other equipment.

In response our observation, the Directors of the Management Division and the Division of Financial Management stated that they had separated the COOP and intelligence functions into discrete cost centers at the start of 2014. The Directors also stated that they would work with the Division of IT to ensure that existing codes are used consistently and to determine whether additional tracking is warranted from a decisionmaking or cost-analysis perspective. We will continue to monitor the Board's progress to track COOP-related costs during future audit work.

The Board Has Not Analyzed Its Alternate Work Site Leasing Expenses or Rental Income From Subtenants

We found that the Board has not compared the rental rates it pays for its alternate work site and the rental rates it charges its subtenants with market rates of similar properties located within the area in which the contingency site is located. Such a comparison would help the Board determine whether the costs charged by the Reserve Bank and the costs billed to the subtenants are appropriate and reasonable based on market rates.

In April 2014, we also provided initial observations to the Director of the Management Division related to analyzing lease expenses and rental income. The Board's designated space in the alternate work site includes the entire fifth and sixth floors, along with a small portion of the fourth floor. The Board's leasing expenses are based on the proportion of the entire operation and maintenance cost of the building allocated to the Board and includes, but is not limited to, depreciation on Reserve BankĖpurchased furniture and equipment, utilities, and building maintenance. The expenses fluctuate from year to year and are based on the operating costs from the prior year.

The Board does not occupy all of its allocated space and has contracts in place with five federal agency subtenants; these subtenants lease approximately 29 percent of the Board's designated floor space. These subtenants are responsible for their specific expenses, such as furniture, build-outs, and circuit connections, and common-space costs based on the percentage of space they use, in addition to the annual base rent based on the square footage they occupy. On an annual basis, the Board can increase the subtenants' base rent to cover a prorated portion of any rental increase it receives from the Reserve Bank and to cover any additional shared expenses the Board may have in connection with the Reserve Bank.

The Reserve Bank provides the Board with an official e-mail each year that indicates its new rent amount for the coming year. This amount is based on the prior year's operating expenses. The Board then must determine which rent costs to bill to its subtenants and issues a memorandum to each subtenant notifying it of its rent for the coming year. From 2005 to 2013, the Board's base rent and overall leasing expenses increased at a higher overall rate than its rental income.

The Board's base rent is a percentage of the overall operating costs for the entire building as determined by the Reserve Bank; however, the Board has not analyzed leasing expenses or conducted a market analysis to determine whether the costs charged by the Reserve Bank and the costs billed to the subtenants are appropriate and reasonable in comparison to market rates. Management Division officials noted that a market analysis was not initially conducted because the Board determined that leasing from the Reserve Bank provided particular benefits, such as security controls, that met the Board's contingency site requirements.

In April 2014, the Directors of the Management Division and the Division of Financial Management stated that they have analyzed the Reserve Bank's annual assessments and which of these expenses should be passed on to the Board's subtenants. The Directors provided an analysis of the leasing expense data, which included depreciation, communication, IT, and miscellaneous expenses. They also provided results from a study conducted by a third-party commercial real estate firm of office space rates in the surrounding area.

We suggest that the Management Division and the Division of Financial Management continue to analyze leasing expenses and rental income from subtenants against market rates to identify any potential cost savings.

In response to our observation, the Director of the Management Division stated that at this time, the division will not be conducting a market analysis on office rates in the area but will revisit this issue in the future. It will continue administrating its lease duties and monitoring and reviewing expenses and rental income to ensure tenants are paying their fair share for the spaces and services.