HomeMy WebLinkAbout04. Multi-Year Budgeting' Central Contra Costa Sanitary District (CCCSD)
White Paper on Budget Cycles and Budget Adjustments •
(Finance Committee: Parking lot item on multi -year budgeting)
April 7, 2014
Fifteen wastewater agencies (including CCCSD) were asked about their budget cycles
and if they perform budget adjustments to the original budget.
Budget Cycles Survey Results
• 7 agencies perform annual budgets (one switched back from multi -year)
• 7 agencies perform a 2 -year budget
• 1 agency performs a 3 -year Operations and Maintenance (O &M) budget
Annual Budget Cycle Pros and Cons
The benefits cited for annual budgets were as follows:
• More accurate budget because large expenses such as pension, healthcare and
energy are volatile; therefore, the second -year costs are a guess
• Allows changes in Board direction to be reflected in the budget
• Current needs can be addressed on an annual basis
• Takes into account actual results of the prior year making budget projections
more accurate
• Ability to focus on one year at a time — also uses a 10 -year forecast model in
addition to the budget to plan ahead and for rate - setting
Downsides of annual budgets stated were as follows:
• Multi -year budgets save staff time for budget preparation in the second year
• Time - consuming
Multi -Year Budget Cycle Pros and Cons
The benefits cited for multi -year budgets were as follows:
• Easier for rate - setting — less staff time overall — sets things for 2 years
• Longer term budget planning — managers try to get a longer contract with
healthcare providers and vendors to allow for shorter budget preparation /revision
in the 2nd and 3rd year
• Saves on Prop 218 noticing for agencies that don't set multi -year rates without a
budget document
• Can save staff -time depending on what is required from the Board in the second
year
• Staff needs to recognize that things change and need to be prepared to make
adjustments or explain the differences
Downsides of multi -year budgets stated were as follows:
• The outlying years are hard to predict, and there can be a number of budget
amendments that need to be reported on and justified
• When using prior two -year budget cycle, staff time was always necessary to re-
do the numbers in the second year, since different issues crop up every year —
no time savings
• Difficulty in estimating specific needs 2 years out
• Very time - consuming
Gmtempl /budget/White Paper on budget cycles and budget adjustments
Central Contra Costa Sanitary District (CCCSD)
White Paper on Budget Cycles and Budget Adjustments
(Finance Committee: Parking lot item on multi -year budgeting)
April 7, 2014
Are there Cost Savings for Multi -Year Budgets?
As part of the survey, one question specifically asked for tangible staff time savings.
Agencies were asked for the number of staff hours saved or used for another purpose in
the second year. One agency said that it saves almost 100% of the time in the second
year. It still conducts a review, which it would have done regardless. Another agency is
able to use some budget staff members for other functions in the second year. The
other 7 agencies who perform a multi -year budget responded that it seemed like there
was less work overall in the second (or third) year but could not quantify it. In all cases,
a review of the budget is done in the second (or third) year, and budget adjustments are
necessary for the second (or third) year.
District Practice and Rationale: The District has always performed annual budgets.
The 10 -Year Capital Improvement Plan incorporates 10 years of projections along with
the annual budget. The subject of multi -year budgets has come up before and the
current SunGard software can accommodate the change; however, the system cannot
accommodate mid -year budget adjustments due to financial statement software
modifications. Accounting staff has been willing to change budget cycles and has
proposed the option in the past in the hopes of saving on staff time District wide, but the
proposal never received full acceptance. Intuitively, it seems like there should be
significant time - savings in the second year, but this depends on Board direction as to
what is expected in the second year.
In addition to an annual budget, the District performs a detailed 10 -Year Financial Plan.
The annual budgets more closely mirror what is presented in the 10 -Year Financial
Plan. A mid -year budget review is prepared for both O &M and Capital, and actual
annual results are discussed after the fiscal year has closed.
Budget Adjustments
• Of the 7 annual- budget agencies, 4 do budget adjustments for significant
changes only
• Of the 8 multi -year budget agencies, 7 perform budget adjustments, many at a
set time such as in the Fall or mid -year, some for only large unexpected items,
and one only once due to extreme drought conditions and associated impacts
Comments on Budget Adjustments were as follows:
• Automatically done after mid -year review if necessary. Outside of mid -year staff
can request Board approval to adjust the budget
• Budget adjustments are made during the year for material changes only
• There are two separate Enterprise Funds and adjustments can be made between
organizational units, activities, and /or line items
• Typically have two budget amendments each year, once around September and
another one in April or May
• Only used for very large and unusual items that sometimes occur
Gmtempl /budgetMhite Paper on budget cycles and budget adjustments 2
Central Contra Costa Sanitary District (CCCSD)
White Paper on Budget Cycles and Budget Adjustments
(Finance Committee: Parking lot item on multi -year budgeting)
April 7, 2014
• Could do it but typically do not (This agency does multi -year budgets and also
does not make budget adjustments in the second budget year)
District Practice and Rationale: Budget adjustments to individual capital projects are
performed throughout the year. Budget dollars are transferred from program budgets to
the projects. Unused budget dollars are transferred back to the capital programs when
a project closes. However, the total Capital Improvement Plan (CIP) annual budget is
not adjusted. Capital expenditures can fluctuate significantly from year -to -year for a
number of reasons, but looking at the past 5 years, actual annual capital expenditures
averaged 8.2% or $2.6 million lower than budget.
O &M budget adjustments do not occur. This is due to several reasons. Because
variances between actual and budget are reported to the Board monthly, budget
adjustments have not been necessary. Budget to actual is also reviewed mid -year and
after year -end. Operating expenses over the last 5 years averaged 3.9 %, or $2.4
million lower than budget.
Total District expenses over the last 5 years averaged 5% or $4.9 million lower than
budget. Because the Board approves the original budgets, and actual results stay
below the approved amount in most years, budget adjustments are not necessary.
Budget variances are documented in the mid -year reviews, audit workpapers, and final
year -end results presented to the Board.
Budget adjustments can be made, but there are significant consequences. First, staff
would need a system in place to track the changes. Second, budget documents would
need to be reissued adding staff time and costs. Third, the current software causes
errors in the District's financial statements if a budget adjustment is posted in the O &M
sub -fund. Additional software modifications would be needed in order to make
adjustments to the District's financial statements which may add costs, including staff
time for checking, reviewing and verifying that the financial statements contain accurate
information. Also, using the District's current software, budget adjustments would allow
the year -end results to be very close to budget, but the accurate historical information
that allows staff to track actual budget performance would be lost. Variances are
documented and explained.
If a two -year budget was implemented, it would be expected that the budget numbers
would need to be adjusted for the second budget year. Depending on how this is done,
the financial statements may need to be modified by SunGard. If the second -year
budget is adjusted using the SunGard budget module, and then the adjusted budget is
transferred to the General Ledger, staff can accommodate a 2 -year budget without
software modifications. Staff would still recommend against mid -year budget
adjustments for the reasons stated above.
Staff believes that some agencies that use encumbrances would need budget
adjustments during the year or they would max -out the budget in individual accounts
Gmtempl /budget/white Paper on budget cycles and budget adjustments 3
Central Contra Costa Sanitary District (CCCSD)
White Paper on Budget Cycles and Budget Adjustments
(Finance Committee: Parking lot item on multi -year budgeting)
April 7, 2014
and could not make payments on some line items (depending on how their software
works). Alternatively, staff may make purchases using incorrect account numbers to
circumvent the fully encumbered account. Staff currently uses the District's budget as a
planning tool, and individual accounts may be overspent so long as the District remains
at or below budget on a District level. This allows users flexibility and use of the correct
expense accounts and preserves true historical costs by correct expense category that
are used to project future budgets.
Summary
Implementing a 2 -year budget may be advantageous. It can be tried and if it doesn't
provide desired results, the budget cycle can return to an annual basis. However, it is
not prudent to incur costs with the District's current financial system in place, and again
with the new financial software. A significant cost will be reprogramming SunGard
financial reports and initial implementation staff time. If budget adjustments are added
to this for mid -year or as needed, additional staff time and printing costs will be required.
The biggest unknown variable as to whether a 2 -year budget will produce staff savings
is the amount of work that the Board will require in the second budget year and it is
important to have a majority Board opinion on what that may be.
Budget adjustments give the governing body control over significant changes to the
budget, allow actual expenses to more closely match the budget, which may be good
for public scrutiny. On the downside, budget adjustments require more staff time
because it would be an implementation of a new task, will cost more due to printing
costs of the revised budget, will require changes to the District's software by SunGard at
a cost to the District, and based on the current software, staff would lose its ability to
monitor how well staff is budgeting by looking at annual results.
Staff Recommendation: Because of the added costs involved and the unknown
potential of any staff savings in the second year of a multi -year budget cycle,
Finance and Accounting staff recommend considering a 2 -year budget cycle in
conjunction with the new financial software implementation. Additionally, the
cost -of- service study consultant may be able to address pros and cons in that
process and the ability to do multi -year budgets and budget adjustments should
also be included in the District's financial software requirements in the IT Master
Plan.
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