HomeMy WebLinkAbout04. Draft PP to approve and adopt the Fiscal Reserve PolicyCentral Contra Costa Sanitary District 40
' BOARD OF DIRECTORS
D o
POSITION PAPER Q c
Board Meeting Date: September 17, 2015
Subject: APPROVE AND ADOPT THE FISCAL RESERVE POLICY
Submitted By: Initiating Dept. /Div.:
David Heath, Director of Administration Administration / Finance
REVIEWED AND RECOMMENDED FOR BOARD ACTION:
Thea Vassallo — Finance Manager
Kent Alm Roger S. Bailey
Counsel for the District General Manager
ISSUE: Both the California Special Districts Association and the Governmental Finance
Officers Association recommend the adoption of a Fiscal Reserve Policy as a best
financial management practice of a public agency. Staff surveyed and evaluated fiscal
reserve policies of comparable utility districts to ascertain best practices in determining
appropriate reserve levels and presented a draft Fiscal Reserve Policy recommendation
to the Board for consideration at the January 20, 2015 Board meeting.
BACKGROUND: One of the Board's stated strategic goals is to ensure long -term
financial stability and one of the initiatives in the District's strategic plan is to adopt a
reserve policy. In the interest of achieving this initiative staff provided an outline for a
recommended reserve policy as part of the cost of service study presentation at the
November 17, 2014 Board workshop. After much discussion and deliberation the Board
directed staff to target operating reserves at five months of annual budgeted operating
expenditures, capital reserves at 50% of annual capital improvement program budgeted
expenditures, 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 unrestricted cash balance
was $60.7 million which was well above budgeted projections due to lower than
expected spending in both the operations and maintenance and capital project funds.
The targeted operating fund reserve of five months or $36.5 was fully funded to start the
current fiscal year as was the self- insurance fund with a balance of $6.5 million. The
opening capital fund balance was $17.7 million which was $2.3 million in excess of the
target of $15.4 million. The capital fund balance is projected to end the current fiscal
year with a balance of $15.9 million which would be $2.1 million short of the expected
target for FY16 -17 ($18 million or 50% of the currently projected $36.1 million capital
budget forecasted for FY16 -17).
ALTERNATIVES / CONSIDERATIONS: Staff will provide rate model alternatives
relative to achieving reserve targets over time as part of the ten year planning process
for Board consideration in future budget meetings.
Page 1 of 2
POSITION PAPER
Board Meeting Date: September 17, 2015
subject: APPROVE AND ADOPT THE FISCAL RESERVE POLICY
FINANCIAL IMPACTS: Future financial forecasting and rate making scenarios will
provide for meeting reserve targets over a five to ten year horizon dependent primarily
on capital renewal and replacement requirements.
COMMITTEE RECOMMENDATION: Staff presented the recommendations to the
Administration Committee on September 10, 2015 and the Fiscal Reserve Policy is
recommended for approval by the Committee.
RECOMMENDED BOARD ACTION: Approve the attached Fiscal Reserve Policy,
based on board input received at both the November 17, 2014 Board workshop and
January 20, 2015 Board meeting.
Attached Supporting Documents:
1. Draft Fiscal Reserve Policy
2. Graphic Slides
HAReserve Policy \9 -17 -15 draft - Final Fiscal Reserve Policy.docx
Page 2 of 2
Number: BP 017
Authority: Board of Directors
Effective: September 17, 2015
Revised:
Reviewed:
Initiating Dept. /Div.: Administration
BOARD POLICY
FISCAL RESERVES
PURPOSE
ATTACHMENT 1
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, regulatory 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 for capacity expansion and renewal and replacement of existing assets,
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 reserve targets defined herein 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 reduce the costs of issuing debt.
This policy designates specific reserve accounts and establishes certain targets that the
Board of Directors has determined to be in the best interest of the District. It also
establishes the authority of the Board and staff for the implementation and maintenance
of the reserve fund targets defined herein.
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 and are independent of one another. Each year the District Board
should review its actual and recommended reserve targets and replenish each
designated reserve fund as needed.
Definitions-
A. Designated Reserves
Established and designated for specific purposes. These funds are to be utilized
to fund such things as operations and maintenance, future capital facilities, repair
and replacement of existing assets, economic uncertainties, regulatory
requirements, 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. Operations and Maintenance Fund — Working Capital Reserves
(Designated)
The operations and maintenance 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 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.
Number: BP 017
FISCAL RESERVES
Page 3 of 4
B. Capital Improvement Project Fund — Working Capital Reserves (Designated)
The 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 installments in April and December of each year. In order to meet
the cash flow needs of the capital projects program the District, , reserves 50% of
the annual capital projects budget at the start of each fiscal year.
C. Self Insurance Fund Reserves (Designated)
The District is self- insured up to $500,000 per occurrence for its general and
automobile liability program. The current 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 in the self- insurance fund.
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. Biannually 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.
Number: BP 017
FISCAL RESERVES
Page 4 of 4
Management Responsibilitv
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]
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
ATTACHMENT 2
July 1, 2015 Cash Allocation By Fund
($000's)
Ooeratine Fund Capital Fund Insurance Fund Total
$50,000
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
Operating Fund Cash Flow FY15 -16
($000"s)
��c �e� Jai Jai sir Q�� jai J��
ee ec°
y�Q O Z p4' oP, �2
Revenue
Expenditures
—Cash Balance
$25,000
$20,000
$15,000
$10,000
$5,000
Sewer Construction Fund Cash Flow FY15 -16
($OOO'Fs)
oe J�J J5`' et e� et ac to � r c� aJ oa
�e��
4 0 Oa Q
— Revenue
Expenditures
—Cash Balance