HomeMy WebLinkAbout03.b. Draft Fiscal Reserve Policy3.1.
Central Contra Costa Sanitary District
BOARD OF DIRECTORS
IRS
POSITION PAPER
Board Meeting Date: January 20, 2015
Subject: DRAFT FISCAL RESERVE POLICY
Submitted By: Initiating Dept. /Div.:
David Heath, Director of Administration Administration / Finance
REVIEWED AND RECOMMENDED FOR BOARD ACTION: 6
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Kent Alm Roger S. Bai!ey
Counsel for the District General Manager
ISSUE: As part of the cost of service study staff has been surveying and evaluating
fiscal reserve policies of comparable utility districts to ascertain best practices in
determining appropriate reserve levels.
RECOMMENDATION: A draft Fiscal Reserve Policy, based on Board input received at
the November 17, 2014 Board workshop, is attached for Board review and feedback.
FINANCIAL IMPACTS: The financial impacts of implementing a fiscal reserve policy
depend on the final Board adopted policy direction and rate adjustment model
scenarios, taking into account the operational and capital requirements of the District.
ALTERNATIVES / CONSIDERATIONS: Staff will present rate model alternatives to
achieve reserve targets over time as part of the ten -year rate setting process.
BACKGROUND: Staff discussed the need to establish a reserve policy as part of the
cost of service study presentation at the November 17, 2014 Board workshop. The
Board directed staff to consider operating reserves at five months of annual budgeted
operating expenditures, capital reserves at 50% of annual capital improvement program
budgeted expenditures or capped at $25 million, emergency reserves at $5 million, and
liability insurance reserves at $1.5 million to cover three losses at a $500,000 self -
insured retention per occurrence.
At the beginning of the current fiscal year the District's total cash balance was $57.9
million. The insurance fund balance was $4.5 million and staff is recommending
increasing that balance to $6.5 million to fully fund the emergency and liability insurance
reserves targeted by the Board.
Staff is also recommending fully funding the operating fund reserve of five months or
$36.8 million. In modeling the current Fiscal Year (FY) 2014 -15 operating fund activity
through November, assuming a beginning balance of $36.8 million, it was determined
that the cash balance in the operating fund would have declined to $2 million at the end
of November 2014, prior to receiving the first revenue installment from the County
C: \Users\dheath \Documents \Position- Paper- Fiscal Reserve Policy.docx
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POSITION PAPER
Board Meeting Date: January 20, 2015
subject: DRAFT FISCAL RESERVE POLICY
Assessor in December. Current projections forecast a cash balance of $34.4 million in
the operating fund at the end of the current fiscal year.
The remaining cash balance of $14.7 million, after funding the operating fund,
emergency and liability insurance reserves, is assigned to the sewer construction
(capital) fund which is $1.8 million below the capital budget carryforward from FY 2013-
14 of $16.5 million. Current projections anticipate an ending balance of $12.6 million at
the end of FY 2014 -15.
The District began the current fiscal year with adequate fiscal reserves to meet the
targets identified at the November 17, 2014 Board workshop. However, the combined
current year operating, capital and insurance fund budgets assumed a drawdown of
$4.6 million in reserves. Staff is working with Raftelis Financial Consultants, Inc. on
modeling scenarios aimed at achieving reserve targets going forward in a prudent
manner and with the objective of minimizing rate adjustment impacts.
COMMITTEE RECOMMENDATION: This matter was reviewed with the Administration
Committee on January 13, 2015. The Committee recommended forwarding the draft
policy to the full Board for consideration at the Cost of Service Workshop on January
20th.
RECOMMENDED BOARD ACTION: No action required at this time. Staff is soliciting
feedback from Board Members and will bring forward a recommended policy for
approval at a future Board meeting.
Attached Suoporting Documents;
1. Draft Fiscal Reserve Policy
2. Graphic Slides
C:\ Users \dheath \Documents \Position - Paper- Fiscal Reserve Policy.docx
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Number: BP 017
Authority: Board of Directors
Effective: July 1, 2015
Revised:
Reviewed:
Initiating Dept. /Div.: Administration
BOARD POLICY
FISCAL RESERVES
PURPOSE
Central Contra Costa
Sanitary District
To set forth the District's policy for establishing and maintaining fund reserve targets for
each of the District's reserve funds. Fiscal reserves provide working capital for
operations and maintenance activities, funding for long -term capital improvement
requirements, fulfillment of legal and contractual obligations and mitigation of risk and
liability exposures.
POLICY
This policy is intended to ensure that the District has sufficient cash flow to meet current
and future needs and provide transparency to its ratepayers by establishing fund
reserve targets for each of the District's reserve funds. Reserve funds are needed to
provide funding for planned and unplanned events. Planned events include, but are not
limited to, accumulating balances to fund operating needs, capital improvement
program needs, debt service obligations, and providing funds to mitigate cash flow
variances throughout the fiscal year. Unplanned events include accounting for revenue
shortfalls, unanticipated expenses, and paying for unforeseen emergency events.
The established targets provide guidance for long -term financial planning and
maintaining the District's long -term financial health. Adequate fund reserves:
1) provide working capital to fund operating needs, 2) provide working capital to fund
capital improvement program needs, and, 3) provide a financial cushion for dealing with
unanticipated financial needs and emergencies, 4) are a component of achieving
favorable credit ratings which can help to minimize the costs of issuing debt.
This policy designates specific reserve accounts and establishes certain balances that
the Board of Directors has determined to be in the best interest of the District.
Number: BP 017
FISCAL RESERVES
Page 2 of 4
Reserve Fund Targets
The District maintains a number of reserve funds. All funds are designated or restricted
for specific purposes. Each year the District should review its actual and recommended
reserve targets and replenish each designated reserve fund as needed. Remaining
reserves, if any, can be retained in the Sewer Construction Fund.
Definitions:
A. Designated Reserves
Established and designated for specific purposes. These funds are utilized to
fund such things as operations and maintenance, future capital facilities, repair
and replacement of existing assets, economic uncertainties, local disasters and
other financial hardships.
B. Restricted Reserves
Restrictions on the use of these funds are imposed by an outside source such as
creditors, grantors, contributors, laws or regulations governing use.
Achieving Fund Reserve Targets
The District will update its 10 -year rate model each year in order to determine
appropriate rate and fee adjustments. Rate and fee adjustments should be adopted to
achieve and maintain the District's minimum fund reserve targets over the 10 -year
planning period. This can include phasing in a series of rate increases to gradually
restore reserves to target levels over a number of years. For financial planning
purposes, it is acceptable for reserves to drop below their target level on a temporary
basis, as long as the District takes action to achieve the target over the planning period.
Types of Reserves
A. Running Expense Operating Fund — Working Capital Reserves (Designated)
The running expense fund provides for the general operations, maintenance and
administration of the District. Sewer Service Charge revenues are collected by
the Contra Cost County Tax Assessor's Office and remitted to the District in two
major installments in April and December of each year. In order for the District to
pay its ongoing expenses throughout the year it reserves five months (41.7 %) of
gross operating expenditures at the start of each fiscal year.
B. Sewer Construction Capital Improvement Project Fund — Working Capital
Reserves (Designated)
Number: BP 017
FISCAL RESERVES
Page 3of4
The sewer construction capital projects fund provides for treatment plant and
collection system asset renewal and replacement expenditures as well as office
facilities renewal, vehicle and equipment replacement, information systems
replacement and miscellaneous capital needs. Property Tax and Sewer Service
Charge revenues, which comprise a significant portion of annual capital project
revenues, are also collected by the Contra Cost County Tax Assessor's Office
and remitted to the District in two major installments in April and December of
each year. In order to meet the cash flow needs of the capital projects program
the District, at a minimum, reserves 50% of the annual capital projects budget at
the start of each fiscal year.
C. Liability Insurance Fund Reserves (Designated)
The District is self- insured up to $500,000 per occurrence for its general and
automobile liability program. The selected deductible of $500,000 reduces the
amount of premiums incurred by the District. In order to provide for an event that
is either not covered by insurance or under the deductible amount, the District
reserves three times the annual deductible, based on claim history.
D. Emergency Reserves (Designated)
In order to help mitigate the financial impacts and maintain uninterrupted service
in the event of an emergency or catastrophic event the District maintains an
Emergency Fund Reserve balance of $5 million.
E. Debt Service Reserves (Restricted)
The District has the capacity to finance capital projects through the issuance of
bonds and various types of debt financing. A requirement of a loan is the
establishment and maintenance of a contingency reserve that is defined in the
loan documents. The fund balance will be set at the amount required in the loan
documents, typically one annual payment per loan.
F. GASB 45 Trust (Designated)
The District has negotiated a retiree post employment health care benefit (OPEB)
for employees that meet certain criteria. Periodically the District updates funding
requirements needed to provide these benefits by conducting an actuarial study.
While the GASB 45 trust is not a District reserve, the District's funding intent is to
perform biennial actuarial studies and deposit into the trust the recommended
Annual Required Contribution (ARC).
Number: BP 017
FISCAL RESERVES
Page 4 of 4
Management Responsibility
The General Manager is authorized to establish and implement procedures to support
this policy. Management will ensure that these funds and reserves are reviewed during
the annual budget cycle and are adjusted as necessary to remain within the guidelines
outlined in this document.
Investing Reserve Funds
Reserve Funds will be invested according to the District's Statement of Investment
Policy, BP 005.
(Original Retained by the Secretary of the District)
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
July 1, 2014 Cash Allocation By Fund Per Audited Financial Statement
($000's)
Ooeratine Fund Capital Fund Insurance Fund Total 1
$60,000
$30,000
$20,000
$10,000
$0
Recommended Cash Allocation By Fund July 1, 2014
($000's)
Operating Fund
$14,673
Capital Fund
$57,923
Insurance Fund Total
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
Operating Fund Cash Flow FY14 -15
($O0O's)
SeQ
Revenue
Expenditures
Cash Balance
$20,000
$18,000
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
Sewer Construction Fund Cash Flow FY14 -15
($OOO's)
-'T -,
40 I�J �,�
Revenue
Expenditures
-Cash Balance
4
A
Jy�
e e�t
-'T -,
40 I�J �,�
Revenue
Expenditures
-Cash Balance
4
District Revenue FY 2014 -15
Operating Revenues $86.2 Million
City of HHW Other
Concord $895` $2,390
$13,500 I 1
Sewer
Service
Charges
$69,447
Capital Revenues $27.8 Million
Sewer
Service
Charg
$3,71
City of
Concord
$3,305
Other
$1,142
1
Capacity
Fees
$5,890
Ad
Valorem
Tax
$13,695