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HomeMy WebLinkAbout07.a. Action regarding administrative overhead percentageCentral Contra Costa Sanitary District ' BOARD OF DIRECTORS POSITION PAPER Board Meeting Date: April 3, 2014 Subject: • APPROVE CHANGE IN METHODOLOGY FOR CALCULATING ADMINISTRATIVE OVERHEAD PERCENTAGE, • APPROVE ADMINISTRATIVE OVERHEAD PERCENTAGE FOR FISCAL YEAR 2014 -15, • ADOPT THREE -YEAR SMOOTHING METHODOLOGY GOING FORWARD Submitted By. Thea Vassa /lo, CPA%CMA Initiating Dept. /Div.: Thea Vassallo, CPA, CMA Administration /Finance & Accounting Finance Manager REVIEWED AND RECOMMENDED FOR BOARD ACTION: \4 .A.) 0 '%a Roger S. Bailey General Manager ISSUE: Board approval is needed to revise the annually updated administrative overhead percentage in order to recover the full cost of the indirect services provided by the District. RECOMMENDATION: Approve: A change /clarification in methodology for calculating the District's administrative overhead percentage, commencing with Fiscal Year (FY) 2014 -15 as follows: •. Use audited benefits for the Benefits component of the calculation • Allocate the Other Post - Employment Benefits (OPEB) contribution for active employees and retirees to their respective departments, and include only the administrative portion in the administrative component • Continue to treat retiree premiums as indirect and include them in the administrative overhead component • Allocate any additional Unfunded Actuarial Accrued Liability (UAAL) payments to their respective departments, and include only the administrative portion in the administrative overhead component. 2. A single administrative overhead percentage of 194% for FY 2014 -15 to be used for billing outside agencies, calculating the annual Environmental and Page 1 of 4 74. POSITION PAPER Board Meeting Date: April 3, 2014 Subject: • APPROVE CHANGE IN METHODOLOGY FOR CALCULATING ADMINISTRATIVE OVERHEAD PERCENTAGE, • APPROVE ADMINISTRATIVE OVERHEAD PERCENTAGE FOR FISCAL YEAR 2014 -15, • ADOPT THREE -YEAR SMOOTHING METHODOLOGY GOING FORWARD Development - Related Rates and Charges, and for internal use in charging to Capital Projects (administrative and non -work hours percentages used); and 3. Adoption of a single -rate, three -year smoothing methodology going forward, using FY 2014 -15 as the base year. FINANCIAL IMPACTS: Minimal impact to revenues. ALTERNATIVES /CONSIDERATIONS: Continue to use a two -tier rate, as used for FY 2013 -14. Using that same methodology would produce an administrative overhead percentage for FY 2014 -15 of 229 %, and 214% for the three -year average smoothing rate for billing outside agencies and calculating the annual Environmental and Development - Related Rates and Charges. Consider an overhead rate increase other than the current method or the three -year average. BACKGROUND: In prior years, the purpose of calculating administrative overhead, employee benefits, and non -work hours rates was to follow the Board's direction for the District to recover the full cost of the indirect services it provides. See summary of Administrative Overhead Methodologies in Attachment 1. Administrative overhead consists.of all administrative indirect costs for the entire District that are incurred for a common purpose benefiting more than one task. This rate is the largest component of the District's overhead rate and includes OPEB contributions for active and retired employees, OPEB Trust contributions, and any additional UAAL payments ($5- $10 million). Employee benefits consists of costs associated with retirement pension payments, medical premiums, deferred compensation contributions in lieu of social security, and other similar benefits expressed as a percent of salaries. Non -work hours consists of the value of vacation, sick leave, administrative leave, birthday holiday, and earned overtime expressed as a percentage of annual work hours. The FY 2013 -14 administrative overhead rate of 220% was approved by the Board at the January 10, 2013 Board Meeting. Subsequently, at the February 19, 2013 Budget and Finance Committee meeting, Environmental Services staff discussed how the approved overhead rate would affect the Environmental and Development - Related N:\ADMINSUP\ADMIN \DIST- SEC \Position Papers\2014 \4 -3 -14 OH rate 14 -15 - after consultant report FINAL.doc POSITION PAPER Board Meeting Date: April 3, 2014 Subject . APPROVE CHANGE IN METHODOLOGY FOR CALCULATING ADMINISTRATIVE OVERHEAD PERCENTAGE, • APPROVE ADMINISTRATIVE OVERHEAD PERCENTAGE FOR FISCAL YEAR 2014 -15, ADOPT THREE -YEAR SMOOTHING METHODOLOGY GOING FORWARD Rates and Charges. The Committee requested additional information, including a five - year history of the District's overhead, which it received at the March 4, 2013 Committee meeting. On March 18, 2013, the Committee concurred with staff's recommendation that a two -tier rate be implemented, using a revised rate of 196% (three -year average rate) for billing outside agencies and in calculating the annual Environmental and Development - Related Rates and Charges, and the previously approved rate of 220% using the administrative and non -work hours component percentages for charging to Capital Projects. On April 4, 2013, the Board approved the two- tiered overhead rate for FY 2013 -14 only. At that meeting, it was also suggested by several Board Members that staff conduct further analysis as to the District's methodology for calculating the administrative overhead percentage prior to presenting the matter for consideration for FY 2014 -15. During 2013, District staff in conjunction with Matrix Consulting Group (Matrix), further reviewed the current methodology used by the District and analyzed other allowable methods used to calculate overhead. Matrix issued its draft report on March 5, 2014. Matrix reported that the methodology that the District currently uses is compliant with state and federal guidelines, and is consistent with other agencies and jurisdictions, so there is no immediate need for change. The District is currently in the process of considering new financial software and will continue to consider changes as needed. District staff, with the help of Matrix, has proposed a slightly different methodology for calculating the administrative overhead percentage for FY 2014 -15 and beyond. The four main items deliberated by District staff and the consultant included the following: • Use of audited or budgeted benefits for the Benefits component • Treatment of OPEB contribution for active employees and retirees • Treatment of retiree premiums • Treatment of additional UAAL payments See Attachment 1 for a summary of overhead rates and pros and cons of the four items mentioned above. Attachment 2 is the "Draft Report on the Overhead Rate Evaluation Study" prepared by Matrix which was provided to all Board Members on March 11, 2014. COMMITTEE RECOMMENDATION: The Finance Committee reviewed the overhead methodology and "Draft Report on the Overhead Rate Evaluation Study" prepared by Matrix Consulting Group at its meeting held March 24, 2014. The Committee N:\ADMINSUP\ADMIN \DIST- SEC \Position Papers\2014 \4 -3 -14 OH rate 14 -15 - after consultant report FINAL.doc POSITION PAPER Board Meeting Date: April 3, 2014 Subject: • APPROVE CHANGE IN METHODOLOGY FOR CALCULATING ADMINISTRATIVE OVERHEAD PERCENTAGE, • APPROVE ADMINISTRATIVE OVERHEAD PERCENTAGE FOR FISCAL YEAR 2014 -15, • ADOPT THREE -YEAR SMOOTHING METHODOLOGY GOING FORWARD recommended a single administrative overhead rate of 194% be used for FY 2014 -15 using the modified calculation method as proposed by staff and the consultant. The Committee further recommended that, going forward, the District should smooth the rate over a three -year period, using FY 2014 -15 as the base year, to adjust for volatility in the rate. The rate for FY 2015 -16 would be based on two years and it would not be until FY 2016 -17 that an actual three -year smoothing would be able to be utilized. RECOMMENDED BOARD ACTION: As follows: Approve a change /clarification in methodology for calculating the District's administrative overhead percentage, commencing with FY 2014 -15 as follows: • Use audited benefits for the Benefits component of the calculation • Allocate the OPEB contribution for active employees and retirees to their respective departments, and include only the administrative portion in the administrative component • Continue to treat retiree premiums as indirect, and include them in the administrative overhead component • Allocate any additional UAAL payments to their respective departments, and include only the administrative portion in the administrative overhead component. 2. Approve a single administrative overhead percentage of 194% for FY 2014 -15 to be used for billing outside agencies, calculating the annual Environmental and Development - Related Rates and Charges, and for internal use in charging to Capital Projects (administrative and non -work hours percentages used); and 3. Adopt a single -rate, three -year smoothing methodology going forward, using FY 2014 -15 as the base year. Attached Supporting Documents: 1. Administrative Overhead Methodologies 2. Draft Report on the Overhead Rate Evaluation Study N:\ADMINSUP\ADMIN\DIST- SEC \Position Papers\2014\4 -3 -14 OH rate 14 -15 - after consultant report FINAL.doc Central Contra Costa Sanitary District Administrative Overhead Methodologies Regular Calculation Admin Overhead Benefits Non -Work Hours Change From 2013 -14 Source: Admin Overhead Source: Benefits 3 -Year Smoothing Admin Overhead Benefits Non -Work Hours Full -Cost Recovery using Matrix Prior Year Current Method For 2013 -14 For 2014 -15 117% 111% 85% 100% 18% 18% 220% 229% 9% 11/12 Audit 12/13 Budget Prior Year For 2013 -14 12/13 Audit 13/14 Budget Current Year For 2014 -15 105% 111% 73% 85% 18% 18% 196% 214% ATTACHMENT 1 Recommended by Staff & MCG For 2014 -2015 ** 95% 81% 18% 194% -26% 12/13 Audit 12/13 Audit ** Criteria for this method: 1. Audited financials used rather than budgeted numbers for the Benefits piece of overhead Pros: consistency in component calculations for admin O/H and benefits lowers O/H rate have an actual source document to refer to as support (most recent audited financials) eliminates charge for budgeted salaries that are vacant and associated operating expenses Cons: a lag in capturing full cost for big ticket items such as CCCERA pension and healthcare increases 2. OPEB contribution for active employees and retirees allocated to respective departments Pros: allocates expenses to original depts where employees worked fair and equitable allocation lowers O/H rate have an actual source document to refer to as support (most recent audited financials) Cons: doesn't capture 100% of today's cost 3. Retiree premiums portion of OPEB to remain as part of Admin Overhead calculation Pros: reflects today's cost of retirees (Kaiser, HealthNet, Delta Dental, Life Insurance, etc.) current budget is already structured as an indirect cost Cons: an argument could be made that a majority of the expense is also direct and should not be in the O/H calculation a more complex calculation required to spread actual individual premiums to depts where employees worked 4. Additional UAAL payments of $5.0 to $10 million allocated to respective departments Pros: reflects only the indirect admin portion in the Admin O/H rate, the remaining is considered direct costs Cons: an expense the District has already incurred and has chosen to accelerate the payment, leading to a slightly higher Admin O/H expense now and slightly lower rate later N:\A000UNTING \GMTEMP1\Admin Overhead \Consensus after March 17, 2014 meeting with MCG and Roger ATTACHMENT 2 Central Contra Costa Sanitary District March 10, 2014 TO: FINANCE COMMITTEE FROM: THEA VASSALLO, FINANCE MANAGER VIA: ROGER BAILEY, GENERAL MANAGER n 1 SUBJECT: MATRIX CONSULTING GROUP DRAFT OVERHEAD REPORT Attached is a copy of the current draft overhead report prepared by Matrix Consulting Group and the original scope of work. The report will be discussed at the March 24, 2014 Finance Committee meeting. Central Contra Costa Sanitary District November 1, 2013 TO: MATRIX CONSULTING GROUP FROM: THEA VASSALLO, FINANCE MANAGER SUBJECT: ADMINISTRATIVE OVERHEAD CONSULTANT REVIEW- REVISED Staff is proceeding with the Board's request to hire an outside firm to review the District's administrative overhead methodology. The District is consulting with Matrix Consulting Group to audit the District's current method and provide suggestions for improvement with the goal of having a streamlined and less complex administrative overhead model. Staff - Recommended Goal and Scope of Work Goal • Easy to calculate and understand annual model for in -house staff calculation of administrative overhead Scope of Work for Outside Firm: • Review and audit the District's current matrix (full cost recovery model) and make suggestions for improvements • Ensure that items included in the District's calculation meet Generally Accepted Accounting Principles (GAAP), Governmental Accounting Standards Board (GASB), and Office of Management and Budget (OMB -A87) allowable items • Provide an itemized list of allowable and unallowable expenses under Federal and State grant programs • Provide direction for staff to prepare an alternative model that is compliant with all relevant standards, including grants • Provide recommendations and alternatives on how to account for hot -topic items • Retiree premiums • Other Post - Employment Benefits (OP'EB) • Active employees • Retired employees • Depreciation o Vehicle maintenance • Debt service • Non - mandatory items such as $5.OM CCCERA (pension) UAAL pay down • Discuss pros and cons of using multiple administrative overhead rates • District currently uses three -year phase -in percent for external billings • Full cost recovery percent for internal charges to capital projects • Prepare a comparison of the District's overhead rate to our two main customers Contra Costa County and the City of Concord • Provide sample calculations and comparisons of recommended methods NAADMINSUMADMINTINANCE MANAGEMBudget and Finance Committee\Overhead \Overhead consultant memo BFC 11 -1 -13 revised.docx 3/10/2014 Draft Report on the Overhead Rate Evaluation Study CENTRAL CONTRA COSTA SANITARY DISTRICT March 5, 2014 TABLE OF CONTENTS Page 1. EXECUTIVE SUMMARY 1 2. CURRENT METHODOLOGY, COMPONENTS, AND RATES 9 3. ANALYSIS OF CURRENT METHODOLOGY 15 4. MULTIPLE VS. SINGLE OVERHEAD RATES 22 5. ALTERNATIVE OVERHEAD RATES CALCULATIONS & RECOMMENDATIONS 25 6. COMPARATIVE SURVEY 31 EXHIBIT — OMB A -87 REQUIREMENTS 33 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study 1. EXECUTIVE SUMMARY The report, which follows, presents the results of the Overhead Rate Evaluation Study conducted by the Matrix Consulting Group for the Central Contra Costa Sanitary District. 1. PROJECT BACKGROUND AND SCOPE OF WORK The Matrix Consulting Group assessed the District's administrative overhead rate, which consists of three main components: administrative, employee benefits, and non- work hours. The results of this Study provide the District and its board with a tool for understanding the current overhead rate methodology, how it compares to other jurisdictions, and opportunities for improving methodology or application. 2. GENERAL PROJECT APPRAOCH AND METHODOLOGY The Matrix Consulting Group reviewed the District's administrative overhead rate methodology to ensure it complies with general accounting principles, and state and federal standards. The District's current method is in compliance with these standards. The project team then looked at alternative overhead rate methodologies, and assessed their potential impact to the District. 3. SUMMARY OF RESULTS The District's current method of calculating the Overhead Rate complies with the standards and guidelines set by GAAP, GASB, and OMB A -87 by including allowable cost items in its calculation of the overhead rate. The following sub - sections provide a brief summary of the analysis of the District's current methodology, as well as some potential alternative methodologies to calculate overhead rates for the District. Matrix Consulting Group Page 1 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Studv (3.1) Current Methodology is in Compliance With State and Federal Guidelines The District's current methodology, which utilizes a matrix to identify direct and indirect costs, is a standardized process, which distributes indirect costs to District Divisions. The identified allowable indirect costs that are included in the calculation of the overhead rate are allowable under OMB A -87 Guidelines, and comply with Generally Accepted Accounting Principles, and GASB. The following table provides an overview of the types of costs that can and cannot be included in overhead rates according to OMB A -87 guidelines. Allowable Unallowable • Direct Costs • One time expenditures • Administrative Overhead (HR, Payroll, etc.) • Lobbying costs • Building Depreciation • General legal services • Equipment Depreciation • Marketing / sales • IT Services Hardware / Software • Bad Debt While costs included in indirect rate calculations are not always directly related to a project, they must be proven to be indirectly relatable. Exhibit 1 in the Appendix contains a more detailed list of all allowable expenses. (3.2) Inclusion of Hot Topic Items Complies with State and Federal Guidelines The District had some concerns regarding several specific items due to the high costs associated with them annually. These costs include: Retiree Premiums, Other Post Employment Benefits (OPEB), Depreciation, Vehicle Maintenance, Debt Service, and CCCERA UAAL payments. Typically all of these cost items are included in the calculation of indirect rates and are allowable under most standards and guidelines. The District's current practice is to include all costs associated with these hot topic items. However, the District is currently considering including only the Administrative Division's portion of the OPEB and the CCCERA UAAL payments, rather Matrix Consulting Group Page 2 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study than a 100% of these District -wide payments as indirect costs. This option has the potential to drastically reduce the Administrative Rate component of the District's overhead rate, and depending on the method chosen, the total overhead percentage decrease is estimated to vary between 19% - 54 %. (3.3) Use of Multiple Overhead Rates is Consistent With Other Jurisdictions In the last fiscal year, the District utilized two different overhead rates; it applied a three -year phase -in percentage for external billings and used the full cost recovery percentage for internal charges to capital projects. The District utilized the three -year average for external billings, because the full cost recovery percentage varies greatly from year to year, and a three -year average represented a stabilized percentage. It is not an uncommon practice to calculate multiple and single overhead rates and apply them at the discretion of the jurisdiction or in accordance with project requirements. In that manner, the District is comparable to other Sanitary Districts, and to even its primary customers — Contra Costa County and the City of Concord. Depending upon the nature of the projects and the billings, the District can continue to use and apply multiple overhead rates. The following table lists some of the major pros and cons associated with single and multiple overhead rates. Matrix Consulting Group Page 3 Pros Cons Single Rate • Standard rate that incorporates • Doesn't account for all allowable indirect costs. general overhead costs. • Can unfairly apportion costs to projects. • One rate applies to all projects • Customized rates that • Requires multiple calculations by Finance staff. incorporate specific overhead • A more time consuming and complex process. Multiple Rates costs. • Can be burdensome incorporating into current • Each rate reflects specific Financial software and future Financial software services provided / received. may not have the capability to incorporate these rates. Matrix Consulting Group Page 3 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study The District's current practice of calculating a single rate, which is then smoothed for external customer billings, does not conflict with any state or federal guidelines. In fact, it is a common practice for jurisdictions to establish fully loaded rates and then adjust them for various internal or external reasons. (3.4) Comparison to Other Jurisdictions Contra Costa County and the City of Concord are the District's two primary customers, and the indirect rates currently utilized by the District impact them the most. Since these two jurisdictions calculate indirect rates for their services as well, the District wanted to know how it's rate calculation methodology compared to their calculation methodology. While the City of Concord used a Cost Allocation Plan to derive its multiple overhead rates, Contra Costa County used a variety of methods including a Cost Allocation Plan or Grant requirements to arrive at its multiple overhead rates. Both jurisdictions calculated citywide and countywide overhead rates, but also departmental, divisional, and program -level overhead rates. The following table provides a comparison of the methodologies used to calculate rates, as well as the various rate types used by Contra Costa County, the City of Concord, and the District. Matrix Consulting Group Page 4 Calculation Methodology Single Rate Multiple Rates Departmental and County Rate derived Divisional rates Contra Costa County Cost Allocation Plan through Cost Allocation developed through Cost Grant Requirements Plan Allocation Plan, as well as calculation of grant specific rates Citywide Rate derived Departmental and City of Concord Cost Allocation Plan through Cost Allocation Divisional rates developed through Cost Plan Allocation Plan Combine three Calculated Components CCC Sanitary District Internal Calculation components to derive can be utilized individually as separate one rate rates Matrix Consulting Group Page 4 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study While the comparison mainly focused on the City of Concord and Contra Costa County, the project team noted that various agencies and jurisdictions, including other Sanitary districts, utilize varying methodologies for calculating overhead rates. Additionally, the use of single rates versus multiple rates varies widely, depending on the needs and missions of the jurisdiction. (3.5) Indirect Rate Methodology Options, Advantages, and Disadvantages There are several different defensible methods used to calculate overhead rates and the District is currently employing one of these methodologies. The District has the option of also developing a Cost Allocation Plan or an Hourly Rates Plan for each of its employees to account for District Overhead. The following provide a brief description of three methodology options: • Component Methodology — The District's current rate methodology utilizes calculation of three components: Administrative Rate, Employee Benefits Rate, and Non Work Hours. This rate enables the District to recover overhead from its projects, or apply the components separately as needed. • Cost Allocation Plan Methodology — A cost allocation plan methodology would allow the District to distribute its costs to receiving Divisions based on relevant allocation bases associated with those costs. It also would allow the District to choose its indirect cost rate base, either salaries or salaries and benefits, and calculate a District -wide overhead rate, along with Divisional overhead rates. • Hourly Rates Methodology — An hourly rates methodology has the advantage of creating a distinct hourly rate associated with each District employee. This hourly rate reflects all of the direct and indirect costs associated directly with that employee. If there are District costs that are not relevant or applicable to a specific employee those costs will not be included for that employee's hourly rate. Each of the different methodologies provides distinct advantages for the District. The table on the following page provides a look at both the advantages and disadvantages associated with each of the above overhead rate methodologies. Matrix Consulting Group Page 5 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study The District's current methodology is compliant with state and federal guidelines, and consistent with other jurisdictions, so there is no immediate need for change. Should the District decide it wants to develop rates which reflect both the District as a whole, as well as specific Divisions, the Cost Allocation Plan methodology would require extensive staff time up front but the least amount of staff time on a continual basis, as it would not require significant input from Finance staff on an ongoing basis. The Hourly Rate methodology would require extensive Finance staff support for initial rate calculations, and staff would need to incorporate these rates into the District's current or future financial software, to be applied to all staff whose services are being billed to projects. When looking to assess indirect rate methodologies, advantages and disadvantages should not be the only determining factor. While one method may be more time consuming or complex, the end result could be more streamlined or defensible. Additionally, while no methodology is more or less appropriate than another Matrix Consulting Group Page 6 Advantages Disadvantages Component Method • Familiar methodology Can lead to dramatic rate (District's current method) • Compatible with current fluctuations. financial software. • Provides District and Requires the District to Divisional rates. develop a Cost Allocation Cost Allocation Plan Method • Incorporates administrative Plan. and specific divisional costs • Annual updates would be in rates. more time intensive for staff. • Rates are reflective of • Requires development of specific staff assigned to an Hourly Rate Model. Hourly Rate Method projects. • Rates can fluctuate dramatically between employees and from year to year. The District's current methodology is compliant with state and federal guidelines, and consistent with other jurisdictions, so there is no immediate need for change. Should the District decide it wants to develop rates which reflect both the District as a whole, as well as specific Divisions, the Cost Allocation Plan methodology would require extensive staff time up front but the least amount of staff time on a continual basis, as it would not require significant input from Finance staff on an ongoing basis. The Hourly Rate methodology would require extensive Finance staff support for initial rate calculations, and staff would need to incorporate these rates into the District's current or future financial software, to be applied to all staff whose services are being billed to projects. When looking to assess indirect rate methodologies, advantages and disadvantages should not be the only determining factor. While one method may be more time consuming or complex, the end result could be more streamlined or defensible. Additionally, while no methodology is more or less appropriate than another Matrix Consulting Group Page 6 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study in terms of compliance with state or federal guidelines, they can provide widely different rate outcomes. The following table provides a brief comparison of the administrative rate component percentage associated with the District's current methodology and the Cost Allocation Plan methodology: Method Administrative Rate Component only) Overhead Percentage Full Cost Recovery District Current 111.36% Full Cost Recovery OPEB and CCCERA Admin only) 75.64% Three -Year Average District Current 111.00% Cost Allocation Plan Salaries as cost basis 111.36% Hourly Rate Varies by employee As the table above shows the lowest Administrative rate for the District is associated with OPEB and CCCERA costs being distributed to the Administrative Division only, while the highest rates are associated with the Full Cost Recovery and Cost Allocation Plan. The rates for these two methods are the same, as the costs included and the cost basis used to calculate the rates are the same. While the District looks at the three -year average in order to stabilize dramatic fluctuations in OPEB and CCCERA costs, the difference between the two overhead rates is minimal. The table above does not show the overhead percentage associated with the Hourly Rate Methodology because it calculates different rates for each position incorporating different types of costs. To determine the best methodology for calculating an overhead rate, the District needs to determine its goal associated with the Administrative Rate. Overall, the District's current methodology is familiar to staff and it distributes indirect and administrative costs in a standardized and acceptable manner to calculate an overhead rate. The District is also in the process of purchasing new financial software, and as such any overhead rate calculation methodology changes would have to be compatible with the new financial software. However, depending on the District's Matrix Consulting Group Page 7 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study projects, customers, and grant requirements the District has the option of using alternative methods such as a Cost Allocation Plan or Hourly Rate calculation. The District should consider the application of its overhead rate in determining which methodology accounts for its indirect costs most appropriately. Matrix Consulting Group Page 8 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study 2. CURRENT METHODOLOGY, COMPONENTS, AND RATES Currently the District calculates overhead rates consisting of three different components: administrative, employee benefits, and non -work hours. The following sections discuss in detail each of the components, the costs included in those components, the cost basis for calculating the rate, and an overall summary of the rates. 1. ADMINISTRATIVE RATE The Administrative rate is the largest component of the District's overhead rate. This rate distributes the administrative or indirect costs associated with managing the District including: employee management, salaries, and utilities, to the remaining Divisions of the District. The following subsections detail the costs included in the numerator of the rate, and the cost basis used for the denominator to calculate the administrative rate. (1.1) Costs Included The Administrative Rate includes administrative costs for the entire District. The most common cost categories are: salaries and wages, employee benefits (all benefits including OPEB), fees and expenses associated with the Director, utilities, equipment repair / maintenance, legal services, office equipment, public information (at 50 %), and election expenses. In addition to these general expenses, the District also includes adjusted indirect costs such as vehicle costs, building and equipment depreciation, HOB maintenance, net self- insurance, and other specific programs. The District is allocating only expenses associated with the Administrative Division for these cost categories. For certain categories such as salaries and wages Matrix Consulting Group Page 9 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study the District has allocated expenses associated with management staff from the District's other Divisions. In cost categories such as legal services or repairs and maintenance, costs associated with the Engineering Division have also been allocated. The District includes all costs that directly affect the management of the District, including personnel, buildings, and all relevant equipment, in the calculation of this rate. (1.2) Administrative Rate Cost Basis The cost basis used to calculate the Administrative Rate is total adjusted salaries. The total adjusted salaries comprise of all the operating, management, and capital salaries for the District, excluding salaries relating to the Administrative Division as well as Division / Department heads within the other Divisions of the District. (1.3) Administrative Rate Summary The Administrative Rate is currently calculated by taking all the current audited admin and other Division's director's and support staff costs allocated to the different divisions as discussed earlier in this section and dividing it by the total adjusted salaries for the District. The Administrative Rate fluctuates greatly from year to year depending on the total adjusted salaries and the different cost categories that are included in the numerator. This rate can be applied to any project that allows recovery of indirect overhead. 2. EMPLOYEE BENEFITS RATE The Employee Benefits rate is the second component of the District's overhead rate. This rate calculates the average current year budgeted benefits cost associated with employees of the District as a proportion of the total budgeted employee salaries of the District. The following subsections detail the costs included in the numerator of the Matrix Consulting Group Page 10 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study rate, and the cost basis used for the denominator to calculate the employee benefits rate. (2.1) Costs Included The Employee Benefits Rate includes all costs associated with current budgeted employee benefits, which are charged directly through Payroll such as Workers' Compensation, Unemployment, Medical, Dental, Life Insurance, Retirement, etc. This rate excludes all benefits that are administered by the Administrative Division, such as Accrued Compensation, Other Post Employment Benefits, Retiree Premiums, and other such benefits, as those costs are already accounted for in the Administrative Rate. (2.2) Employee Benefits Rate Cost Basis The cost basis used to calculate the Employee Benefits Rate is the total current budgeted district -wide salaries. Since the purpose of the Employee Benefits Rate is to calculate an average rate for the entire District, the total budgeted salaries for the District (including Administrative Division) are included as part of the cost basis for the rate. (2.3) Employee Benefits Rate Summary The Employee Benefits Rate is currently calculated by taking all current budgeted benefit costs administered through payroll and dividing it by the total budgeted salaries for the District. The Employee Benefits Rate naturally varies from year to year, however, that variance is mostly affected by changes in District retirement contributions and healthcare premiums. Matrix Consulting Group Page 11 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study 3. NON -WORK HOURS RATE The Non -Work Hours Rate accounts for the District staff's actual available work hours in a year compared to the total work hours in a year. Available work hours are calculated by taking the total work hours in a year and subtracting hours for which work cannot be conducted such as vacation, sick, compensated time off, etc. The following subsections detail the non -work hours rate components, the calculation of the weighted percentage used to calculate the non -work hours rate. (3.1) Non -Work Hours Rate Components The Non -Work Hours rate consists of several different components. The following points provide a brief description of the various components: • Vacation Hours: Vacation days are dependent on employee seniority, and every year the District calculates the number of employees that fall into the different years of service categories. The total number of vacation days are determined for each employee based on hiring dates. • Sick Leave: With the exception of three district employees, all other employees have the same amount of sick leave or days available each year. • Holidays: The District uses the standard of 13 holiday days per year for every employee. • Administrative Leave & Birthdays: Employees receive 1 to 5 days depending on the Bargaining Group. • Compensated Time Off: The District uses a certain number of hours each year as compensated time off, which is applicable to the majority of employees. These five different components are the basis of calculating the non -work hours rate. Some of the non -work hour components require calculations to be conducted on a yearly basis, while other components are yearly standards that can be applied annually. Matrix Consulting Group Page 12 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Studv (3.2) Non -Work Hours Rate Weighted Percentage Calculation The District calculates a weighted percentage for each of the components discussed in the previous sub - section. The weighted percentage is calculated by adding the total number of hours for each component, and dividing that by the total number of work hours for the District. (3.3) Non -Work Hours Rate Summary Once the District has determined the numerator and denominator for each of the components the District calculates a weighted percentage for each category. The District sums the weighted percentages for each of the components to arrive at the overall Non -Work Hours Rate or Percentage. The Non -Work Hours Rate varies minimally from year to year; as for the majority of the categories the calculation should be the same on an annual basis. The potential for variance usually arises based on employees gaining vacation days when they move from one service category to another based on years of service. 4. DISTRICT OVERHEAD RATE After the District has calculated all of the aforementioned components of the overhead rate: Administrative Rate, Employee Benefits rate, and Non -Work Hours rate, the District sums all of these components to arrive at a single District Overhead Rate. The District Overhead Rate fluctuates significantly from year to year primarily due to the fluctuation in the Administrative Rate and the Employee Benefits Rate. The Non- Work Hours Rate remains fairly consistent throughout the years. As previously discussed, the variance in the Administrative Rate stems from the large differences in the types of costs or the amount of costs included as part of the Administrative Rate Matrix Consulting Group Page 13 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study (primarily OPEB), and the variance in the Employee Benefits rate is largely due to the changing costs associated with retirement contributions and healthcare premiums. Therefore, it is extremely important to analyze in detail not only the types of costs included in the Administrative and Employee Benefits Rate, but also the proportion or amount of those costs included within the rate. Matrix Consulting Group Page 14 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Studv 3. ANALYSIS OF CURRENT METHODOLOGY (SUMMARIZES USE OF ADMIN OVERHEAD - DIRECT / INDIRECT MATRIX) As the previous section already discussed, the District calculates its overhead rate through three different components: Administrative, Employee Benefits, and Non- Work Hours. Among these components, the Administrative and Employee Benefits rates are the most volatile and fluctuate drastically annually. The following section evaluates in detail the costs included in calculating the different rates and whether these costs are allowable within the confines of the various accounting standards. 1. CURRENT COSTS INCLUDED The Overhead rate distributes a variety of costs to the District's Divisions. The following subsections detail the different cost categories included within this rate. (1.1) Salaries & Wages There are several different types of salaries and wages costs that are distributed to the Divisions within the District. Currently, in this category the District allocates all Management salaries within the Administrative Division and Directors' and support staff salaries from other Divisions, non - management salaries from the Administrative Division, Compensated Absence Time off from the Administrative Division, and any Administrative Division overtime. (1.2) Benefits Since the District charges some of its employee benefits directly through the Payroll system, these benefits are not included in the calculation of the administrative rate component. Only the benefits that are not charged directly through payroll such as Matrix Consulting Group Page 15 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study Other Post Employment Benefits (OPEB) are included in this category. The District currently includes OPEB and CCCERA UAAL costs for all divisions, and not just the costs associated with the Administrative Division employees. (1.3) Operating Costs As part of the costs distributed to the District's Divisions, the District also allocates costs associated with its operating and maintenance costs. The following points detail which cost categories are included or excluded in the rate calculation: • Included Expenses: The District currently includes all expenditures associated with Director fees and expenses. Additionally Administration and Engineering Division costs associated with Utilities, Repairs and Maintenance, Professional and Legal Services, Outside Services, Self Insurance Expense, Materials and Supplies, and other expenses are also included. • Excluded Expenses: The District does not include any expenditures associated with Utilities, Chemicals, Hauling and Disposal, or Repairs and Maintenance for Collection System Operations (CSO), Plant Operations (POD), and Pump Station (PS) divisions, as these costs are considered direct, and where applicable are applied directly to projects. As the points above detail, the District only includes indirect expenses associated with the Administrative and Engineering Division in the calculation of the overhead rate, and excludes direct expenses related to any other divisions. (1.4) Other Adjustments The last category of costs included in the calculation of the overhead rate is other adjustments. The costs are calculated annually and include expenses such as pool vehicle costs and depreciation for the Administration and Engineering Divisions, HOB maintenance, self- insurance costs less revenue, HOB building depreciation, and furniture / equipment depreciation. In these adjustments certain costs have also been subtracted from the overall adjustments, including: pollution prevention from the Matrix Consulting Group Page 16 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Studv Administrative Division, and recycled water and source control non -labor costs from the Engineering Division. (1.5) Costs Included Summary Overall, the District currently sums up each of the different cost categories of salaries and wages, benefits, operating expenses, and other adjustments to arrive at the total amount of indirect costs associated with the District. The indirect costs are then divided by the cost basis of total adjusted salaries for the Engineering, Collection Systems Operation, Plant Operations, and Pump Stations to derive the Administrative Rate. 2. ALLOWABLE ITEMS As part of the review of the overhead rate, the District asked the Matrix Consulting Group to review costs that are set by the Governmental Accounting Standards Board (GASB) through Generally Accepted Accounting Principles (GAAP) and the Office of Management and Budget (OMB A -87). The following subsections detail the costs allowed by GAAP and OMB A -87. (2.1) GAAP Allowable Items The General Accounting Standards Board sets the Generally Accepted Accounting Principles (GAAP) for the United States. According to GAAP US standards there are four basic assumptions, four basic principles, and four basic constraints. Since the purpose of this section is to focus on the allowable items, this section will detail the constraints applied by the GAAP standards. The following points detail the different constraints applicable to companies and organizations: Matrix Consulting Group Page 17 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study Objectivity Principle: This constraint states that any financial statement produced by the organization must be based on objective calculations. Currently, the District uses the last complete fiscal year's actual expenditures to estimate the overhead rate for the current fiscal year. Typically, this is a two -year lag for the District, but the audited actual expenditures are based on objective calculations and meet this constraint of the GAAP. Materiality Principle: This constraint states that if an expenditure or item affects the decision or decisions of individuals within the organization or entity then the significance of that item should be recorded. The District currently follows this principle by accounting for all significant items in the audited actuals and only distributing significant indirect items. Consistency Principle: This constraint states that an organization should remain consistent in recording and reporting its costs between the different periods. The District currently meets this principle as it reports all of the costs consistently on an annual basis. The volatility in the rate comes from the fluctuation in the actual costs of the items and not the item categories. Conservatism Principle: This constraint states that if the organization needs to choose between two options or methods of reporting and including costs, it should choose the more conservative option. The District is currently including all costs associated with Other Post Employment Benefit (OPEB) and CCCERA UAAL in the calculation of the overhead rate. To meet the requirements of this principle, the District is considering only including OPEB and CCCERA UAAL costs associated with the Administrative Division in the calculation of the rate. Including only a portion of these costs would reduce the overhead rate by approximately 54 %. As the four constraint principle points detail, the District is meeting all of the constraints set by the GAAP in the costs that are being included in the calculation of the overhead rate. While the District currently has two options between including all costs associated with items such as OPEB, retiree premiums, and depreciation, in the spirit of the conservatism principle, the District can choose to only include costs associated with those items from the Administrative Division rather than all Divisions. (2.2) OMB A -87 Allowable Items The Office of Management and Budget has issued a circular known as OMB -A87, which describes in detail the allowable costs depending on the type of institution. This Matrix Consulting Group Page 18 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study circular details allowable items for State, Local, & Indian Tribal Governments, Educational Institutions, and Non - Profit Organizations. Exhibit 1 in the Appendix provides a complete listing of all of the allowable and unallowable items associated with State, Local, and Indian Tribal Governments. Based on Exhibit 1, it can be seen that even though many of the cost categories or items are allowable, there are some restrictions or qualifications associated with those categories. The District does not currently include any costs that are considered unallowable based on the OMB A -87 Circular in Exhibit 1. However, the District does include some costs from the exhibit that are allowable but with some restrictions. The following points detail the OMB A -87 allowable cost categories with certain restrictions that the District includes in its calculation of the overhead rate: • Advertising and Public Relations / Public Information Costs: This item is allowed with restriction; the District recognizes this and currently includes only 50% of costs associated with Public Information. • Advisory Councils: This cost for the District would include any costs associated with the District's Board. Currently, the District includes all costs associated with the Board. • Compensation for personal services — severance pay: This cost item category for the District relates to costs associated with retiree premiums. • Depreciation and Use Allowance: This cost item category for the District relates to costs associated with building and equipment depreciation. Currently, the District includes depreciation costs associated with its main building, equipment, and pool vehicles. • Employee morale, health, and welfare costs: This cost item category for the District relates to costs associated with employee benefits. Currently, the District includes benefits costs primarily associated with the Administrative Division, but also includes all employee benefits costs associated with OPEB and CCCERA UAAL. • Insurance and indemnification: This cost item category for the District relates to self- insurance costs. Currently, the District includes these costs. Matrix Consulting Group Page 19 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study • Maintenance and Repair Costs: This cost item category for the District relates to the maintenance and repair cost category within the operating expenditures. Currently, the District includes these costs associated with the Administrative and Engineering Divisions only. • Meetings and Conferences Costs: This cost item category for the District relates to the Directors Fees and Expenses cost category, which includes expenses associated with director meetings. Currently, the District includes these costs, which are allowed. • Memberships, Subscriptions, and Professional Activity Costs: This cost item category for the District is part of the Other Expenses cost category. Currently, the District includes these costs but only those that are associated with the Administrative and Engineering Divisions. • Professional Services Costs: This cost item category for the District is part of the Professional and Legal Services cost category. Currently, the District includes all of these costs. • Recruiting Costs: This cost item category for the District is part of the Outside Services cost category. Currently, the District includes all recruitment costs associated within the HR function in the Administrative Division. • Rental Cost of Buildings & Equipment: This cost item category for the District is part of the Other Expenses cost category. Currently, the District only includes these costs associated with the Administrative and Engineering Divisions. • Training Costs: This cost item category for the District is part of the Other Expenses cost category. The District currently only includes these costs associated with the Administrative and Engineering Divisions. • Travel Costs: This cost item category for the District is part of the Other Expenses cost category, and include items such as Mileage Reimbursement. Currently, the District only includes these costs associated with the Administrative and Engineering Divisions. As the points above detail, the District is including costs that are considered allowable under OMB A -87 guidelines. However, it is important to note that not all of the costs in these categories can be included, as there are restrictions associated with many cost types. These restrictions typically relate to the District's ability to show how Matrix Consulting Group Page 20 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study relevant these costs are for the District's administration and as the above detail points out, the District recognizes and adheres to these restrictions. 3. ALLOWABLE ITEMS SUMMARY Overall, the District includes salaries and wages, benefits, operating expenses, and other adjustments to calculate its overhead rate. Based on the standards set by GASB through GAAP and the OMB A -87 circular, the District is including all allowable costs. There are certain costs that while allowable do have some restriction associated with them. For those costs it is important to make sure that those restrictions are being followed, such as only including 50% of Public Information costs. Matrix Consulting Group Page 21 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study 4. MULTIPLE VS. SINGLE OVERHEAD RATE(S) The District currently calculates a single overhead rate, but last year the District calculated multiple overhead rates. Last year the District calculated a single overhead rate using the three components and also an additional rate derived from a three -year average of the overhead rate. The District applied these rates differently to different customers. The following sections discuss in detail the application of multiple overhead rates in comparison to a single overhead rate. 1. MULTIPLE OVERHEAD RATES The purpose of calculating multiple overhead rates is to create rates that represent different overhead costs, which can be applied in different situations. The District currently calculates multiple overhead rates depending upon the projects or customers to which the rate is applied. The District applied its current year overhead rate to internal clients such as Capital Projects, which includes actual salaries and benefits, administrative overhead, and the non -work hours rate. The District charged the three -year average to external customers (household hazardous waste and clean water customer billings) to show a stabilized overhead rate. It is not uncommon to see Capital Projects charged for the full cost of providing services, while costs charged to external customers are often adjusted in order to stabilize monthly or annual charges. The comparative survey shows that Contra Costa County and the City of Concord both utilize multiple overhead rates. Both of these customers provide a wide array of services in comparison to the Sanitary District. However, their multiple overhead rates are not categorized as administrative or employee benefits, but rather at Matrix Consulting Group Page 22 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study the departmental, divisional, and program level. Additionally, in the comparative survey that the District conducted of other Sanitary or Special Districts, various rate types and calculations are used. The District could continue using their current multiple rates, which provide them with the flexibility to recover various overhead - related costs. If the District were to use multiple rates at the divisional level, as many other jurisdictions do, then it would be able to recover overhead costs specific to the Division providing project support. 2. SINGLE OVERHEAD RATE A single overhead rate is calculated for the purpose of incorporating all indirect costs associated with an organization. Currently, the District combines its multiple overhead components to arrive at a single overhead rate, which is meant to account for District -wide overhead. In prior years, the District applied this single overhead rate to internal and external customers. The comparative survey conducted by the District of other Sanitation or Special Districts shows that many of these Districts only use a single overhead rate. The benefit of using a single overhead rate is that it encompasses all indirect costs into one rate and standardizes the rate applied to all projects. While the District currently has the option to add its multiple components to create a single overhead rate, it can also develop a single overhead rate by incorporating all of its costs into one calculation. 3. MULTIPLE RATES VS. SINGLE OVERHEAD RATE SUMMARY Single overhead rates standardize the overhead apportioned to projects or services, while multiple rates allow for a more customized application of jurisdictional Matrix Consulting Group Page 23 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study overhead. The District is currently utilizing multiple components and summing those rates to create a single rate, as allowable by GAAP, GASB, and OMB A -87 standards. The District does not always apply these rates consistently among its customers, for example where the overhead rate calculation is specified by contracts with those customers. For FY 12 -13 external customers, such as Clean Water and Household Hazardous Waste, the District calculated and applied a three -year average of the Administrative, Employee Benefits, and Non -Work Hours rate, while internal projects were assessed the original calculated non - average overhead rate. While this process helps stabilize the rate charged to external customers, it does not always accurately reflect the support being provided to those customers. By calculating and applying divisional overhead rates for the specific divisions involved in providing project services, the District would be able to apply these multiple overhead rates more equitably to recover the costs associated with those services. However, the calculation of these divisional rates would require additional calculations and each project would have to be assessed to determine which rates should be applied to it. It is not uncommon to calculate multiple and single overhead rates and apply them at the discretion of the jurisdiction or in accordance with project requirements. The District is comparable to other Sanitary Districts, Contra Costa County, and the City of Concord in terms of utilizing both single and multiple overhead rates. Matrix Consulting Group Page 24 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study 5. ALTERNATIVE OVERHEAD RATE CALCULATIONS & RECOMMENDATIONS There are several different methodologies that can be used to calculate overhead rates, one of which the District is already employing (summing components to arrive at a single overhead rate). The following sections detail the two other most common overhead rate calculation methods: Cost Allocation Plan and Hourly Rates Calculation. 1. COST ALLOCATION PLAN (CAP) The purpose of a Cost Allocation Plan or CAP is to redistribute administrative costs associated with salaries, benefits, operation, maintenance, and depreciation costs to the divisions that are receiving those types of services from Administrative Divisions or sections. The costs that are distributed through this plan are similar to the costs that the District includes in its calculation of the Administrative Rate and the Benefits Rate. A Cost Allocation Plan distributes Administrative Costs by identifying the functions or services that the Administrative Division is providing to other Divisions within the jurisdiction or organization. After identifying the function, the plan determines the best method of allocating the costs associated with that function. For example, if the Administrative Division identifies Human Resources as one of its primary functions then those costs are allocated based on the number of personnel per each Division, while a function such as Budget Support may be allocated based on the total number of expenditures per Division. Therefore, a Cost Allocation Plan provides a much more tailored approach to allocating and distributing indirect costs to the District's Divisions. Another advantage to using a Cost Allocation Plan to allocate administrative costs is that the plan will not only generate a District -wide overhead rate, but it will also Matrix Consulting Group Page 25 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Studv calculate divisional overhead rates. As discussed in the previous chapter, these divisional overhead rates can be applied to projects that are specifically utilizing only one division. The Matrix Consulting Group calculated sample indirect rates for the District through a simple Cost Allocation Plan. This method allocated the Administrative Division and other indirect costs that the District currently includes in its calculation of its overhead rate (including OPEB, retiree premiums, depreciation, etc.) to the two primary divisions Engineering and Operations (which incorporate Collections System Operations, Plant Operations, and Pump Stations) based on expenditures and staffing per Division. The following table shows the sample indirect rates calculated through this methodology: Division Overhead Rate Engineering 100% Operations 118% District -Wide Overhead 111% The District is also considering pro- rating certain costs included in the calculation of its overhead rates such as OPEB, Retiree Premiums, etc. The following table shows the sample indirect rates calculated through a Cost Allocation Plan if those costs are adjusted at the level the District is moving towards: Division Overhead Rate Engineering 68% Operations 80% District -Wide Overhead 76% As the tables above show there are two different types of rates depending on the costs included. If the District were to include all Administrative costs, then the District- Wide overhead percentage would be 111 %, however, if only the Administrative portions of OPEB, retiree premiums, and accrued compensation were included the District -Wide Matrix Consulting Group Page 26 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study overhead percentage would be 76 %. These alternate scenarios illustrate how adjusting the costs associated with certain benefits that are currently being distributed show how the percentage associated with District overhead will decrease dramatically (by an estimated 35 %). The District is considering reclassifying these large amounts associated with benefits to distribute the costs associated with those benefits directly to the Divisions, which would help reduce the year -to -year volatility associated with annual overhead rates. As the Cost Allocation Plan allocates the same administrative costs, and utilizes the same cost rate basis as the District, the overhead rate calculated through each method is the same. 2. HOURLY RATES Another method that can be used to account for indirect and administrative costs is through the calculation of hourly rates for all District employees. This method results in hourly rates that include indirect costs, benefits costs, and also account for the available work hours of all District employees. This methodology involves calculating straight hourly rates, or the hourly rate based on 2,080 hours for all of the District employees. This will be the base hourly rate. To calculate the actual hourly rate, the total available hours for each employee will be calculated, which can vary from employee to employee. Based on these new available hours, a new loaded hourly rate will be generated, which will be based on the actual hours available. On top of this loaded hourly rate, benefits costs associated with those employees are included. This ensures that only benefits associated with that employee are accounted for in that employee's hourly rate. Following the benefits component, Matrix Consulting Group Page 27 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study administrative costs such as operating costs are also layered on to the hourly rate. Once these individual components are added onto the loaded hourly rate there is a final fully burdened hourly rate for each position. This fully burdened hourly rate includes all of the indirect components, but is different for each position. The advantages associated with this methodology are that the District will be able to charge the hourly rate for the individuals working on the project and that hourly rate will already incorporate all of the indirect costs. The calculation of this rate ensures that costs are distributed or layered upon those individuals that are actually receiving the benefit associated with those indirect services. For example, if an individual does not receive a specific benefit then that benefit cost is not included in that individual's hourly rate. However, The District's current methodology already accounts for this direct connection between an individual employee and their respective benefits. This methodology involves distributing District administrative costs to all District staff and then distributing divisional operation costs to division employees. Therefore, without developing the complete hourly rates model, sample hourly rates for District employees cannot be calculated. Additionally, the administrative overhead percentage that is applied to the hourly rate is not comparable to the administrative overhead percentage the District currently calculates or that is calculated by the Cost Allocation Plan Method. 3. RECOMMENDATIONS The Cost Allocation Plan and the Hourly Rates model are alternative methods for the District to distribute its overhead costs among the District's Divisions. These methodologies present several different advantages for the District. Matrix Consulting Group Page 28 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study (3.1) Cost Allocation Plan Methodology Through the Cost Allocation Plan the District will allocate its costs directly based on the types of services and support being received by the Divisions. While for the purposes of the sample calculation, only expenditures and the number of filled positions were used, a more comprehensive Cost Allocation Plan will allocate costs based on additional and more relevant statistics. Additionally, the Cost Allocation Plan allows the District to charge external and internal customers Divisional overhead rates. As the sample calculations indicate, certain Divisions have extremely high overhead rates and instead of charging clients based on a District -wide overhead rate, if the clients are utilizing a specific Division, that Division's overhead rate can be charged. (3.2) Hourly Rates Method Through the Hourly Rates methodology the District will allocate indirect and benefits costs associated with each employee directly to the relevant employee. In that manner, only employees that receive certain benefits or certain indirect support will have those costs associated with them, rather than all employees having all costs associated with them. The District already currently allows for this as salaries and benefits associated with Capital Projects are charged directly to the projects. (3.3) Summary While both of these methodologies provide different advantages for the District, they each pose implementation challenges. The Cost Allocation Plan methodology would require extensive Finance and Divisional staff time in order to develop a fair and accurate model, and would need to be updated annually. The Hourly Rate methodology would also require extensive Finance staff support for initial rate calculations. Staff Matrix Consulting Group Page 29 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Studv would then need to incorporate these rates into the District's current or future financial software, to be applied to all staff whose services are being billed to projects. Both of these methodologies allow the District to calculate multiple and single overhead rates, but it is dependent on the District and which rates are more applicable for its projects. If the District tends to have many clients or projects that are Divisional based, it might be more beneficial for the District to utilize a Cost Allocation Plan to develop Divisional Overhead Rates. However, if the District tends to do projects on a personnel by personnel basis and certain employees spend an inordinate amount of time working on special projects it might be more beneficial for the District to consider utilizing the Hourly Rates calculation to determine the appropriate hourly rate that should be charged for those District employees. Along with reviewing which rates are most appropriate for recovering indirect costs, the District should also consider the staff time involved in developing and implementing new methodologies. Matrix Consulting Group Page 30 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Studv 6. COMPARATIVE SURVEY As part of the Matrix Consulting Group's review of the District's administrative overhead methodology, the firm conducted a comparative survey of overhead rate methodologies used by the District's two primary customers: Contra Costa County and the City of Concord. The following table provides a brief summary of the comparative survey: Question Contra Costa County City of Concord 1. Does the County / City use or have an Yes Yes overhead rate? 2. How does the County / City calculate this Multiple Methods Cost Allocation Plan rate(s)? 3. Are there multiple rates? Yes Yes 3a. At what level are these rates? Departmental, Divisional, Departmental, Divisional, and Programs, Grants Program Level 4. What is the cost basis used for calculating Multiple (e.g. Salary, Salary & Benefits these rates? Salary & Benefits As the table above shows, both customers of the District use an overhead rate; however, while the City of Concord calculates its multiple rates through a Cost Allocation Plan, Contra Costa County uses a variety of methods. The County uses different methods for its different rates, and uses the Cost Allocation Plan for the Departmental, Divisional, and Program overhead rates. However, in the case of Grants, certain Grants specify the methodology that must be used in calculating the overhead rate, including which costs can and cannot be included, or certain Grants specify a predetermined overhead percentage. The County must follow those conditions in order to apply the overhead rate to the Grant. Similar to the calculation methodology, it can be seen that while the City of Concord uses salary and benefits as the cost basis for calculating its indirect or overhead rates, the County uses multiple cost bases. For rates calculated through the Matrix Consulting Group Page 31 CENTRAL CONTRA COSTA SANITARY DISTRICT Draft Overhead Rate Evaluation Study County's Cost Allocation Plan the County typically uses salary and benefits as the basis, but for Grant - related overhead rates the cost basis is usually specified by the Grant and therefore it can vary. Overall, both Contra Costa County and the City of Concord use overhead rates, but depending on what the rate is being applied to, different methodologies and costs can be included in the administrative, indirect, or overhead rate. Both of these jurisdictions also calculate multiple rates as they provide a variety of services and these rates can be applied at different levels within the County or the City. Matrix Consulting Group Page 32 EXHIBIT 1 OMB A -87 Allowable Items EXHIBIT 1 OMB A -87 ALLOWABLE ITEMS The guidelines laid out in OMB circular A -87 are extensive and complex. The following exhibit lists the cost categories addressed in OMB A -87, and a simplified discussion of whether or not these costs are allowable. For many of these categories, costs are allowable "with restrictions ". Typically, the restrictions implied by these guidelines reference a need to show a direct correlation between the cost and the service being provided. Matrix Consulting Group Page 33 EXHIBIT 1 OMB A -87 Allowable Items Selected Cost Item OMB Circular A -87, Attachment B State, Local, & Indian Tribal Gov'ts Advertising and public relations costs 1 Allowable with restrictions Advisory councils 2 Allowable with restrictions Alcoholic beverages (3)- Unallowable Audit costs and related services (4)- Allowable with restrictions and as addressed in OMB Circular A -133 Bad debts (5)- Unallowable Bonding costs (6)- Allowable with restrictions Communication costs (7)- Allowable Compensation for personal services (8)- Unique criteria for support Compensation for personal services - organization- furnished automobile Not specifically addressed Compensation for personal services - sabbatical leave costs Not specifically addressed Compensation for personal services - severance pay (8)- Allowable with restrictions Contingency provisions (9)- Unallowable with exceptions Defense and prosecution of criminal and civil proceedings and claims (10)- Allowable with restrictions Depreciation and use allowances (11)- Allowable with qualifications Donations and contributions (12)- Unallowable (made by recipient); not reimbursable but value may be used as cost sharing or matching (made to recipient) Employee morale, health, and welfare costs (13)- Allowable with restrictions Entertainment costs (14)- Unallowable Equipment and other capital expenditures (15)- Allowability based on specific requirements Fines and penalties (16)- Unallowable with exception Fundraising and investment management costs (17)- Unallowable with exceptions Gains and losses on depreciable assets (18)- Allowable with restrictions (Gains and losses on disposition of depreciable property and other capital assets and substantial relocation of Federal programs) General government expenses (19)- Unallowable with exceptions Goods or services for personal use (20) Unallowable Housing and personal living expenses Not specifically addressed Idle facilities and idle capacity (21) -Idle facilities - unallowable with exceptions; idle capacity - allowable with restrictions Insurance and indemnification (22)- Allowable with restrictions Interest (23)- Allowable with restrictions Interest - substantial relocation Not specifically addressed Page 34 EXHIBIT 1 OMB A -87 Allowable Items Selected Cost Item OMB Circular A -87, Attachment B State, Local, & Indian Tribal Gov'ts Labor relations costs Not specifically addressed Lobbying (24)- Unallowable Lobbying - executive lobbying costs (24.b)- Unallowable Losses on other sponsored agreements or contracts Not specifically addressed Maintenance and repair costs (25)- Allowable with restrictions (Maintenance, operations, and repairs) Materials and supplies costs (26)- Allowable with restrictions Meetings and conferences (27)- Allowable with restrictions Memberships, subscriptions, and professional activity costs (28)- Allowable as a direct cost for civic, community and social organizations with Federal approval; unallowable for lobbying organizations. Organization costs Not specifically addressed Page charges in professional journals (34.b)- Allowable with restrictions (addressed under "Publication and printing costs ") Participant support costs Not specifically addressed Patent costs (29)- Allowable with restrictions Plant and homeland security costs (30)- Allowable with restrictions Pre - agreement costs (31)- Allowable with restrictions (Pre -award costs) Professional service costs (32)- Allowable with restrictions Proposal costs (33)- Allowable with restrictions Publication and printing costs (34)- Allowable with restrictions Rearrangement and alteration costs (35)- Allowable (ordinary and normal); allowable with Federal prior approval (special) Reconversion costs (36)- Allowable with restrictions Recruiting costs (1.c)- Allowable with restrictions (addresses costs of advertising only) Relocation costs Not specifically addressed Rental cost of buildings and equipment (37)- Allowable with restrictions Royalties and other costs for use of patents (38)- Allowable with restrictions Selling and marketing costs (39)- Unallowable with exceptions Specialized service facilities Not specifically addressed Taxes (40)- Allowable with restrictions Termination costs applicable to sponsored agreements (41)- Allowable with restrictions Training costs (42)- Allowable for employee development Transportation costs Not specifically addressed Travel costs (43)- Allowable with restrictions Page 35