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HomeMy WebLinkAbout10.a. Adopt new Board Policy No. BP 017 - Fiscal ReservesCentral Contra Costa Sanitary District /0-40 ~� BOARD OF DIRECTORS POSITION PAPER Board Meeting Date: September 17, 2015 Subject. APPROVE AND ADOPT NEW BOARD POLICY NO. BP 017 -FISCAL RESERVES Submitted By. Initiating Dept. /Div.: David Heath, Director of Administration Administration / Finance REVIEWED AND RECOMMENDED FOR BOARD ACTION: -0 1 " Thea Vassallo — Finance Manager Roger S. Bailey 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 Cost of Service Study Board Workshops held November 17, 2014 and January 20, 2015. On the March 5, 2015 Financial Planning and Policy Workshop, the Board confirmed the reserve levels as recommended at the January 20 Workshop. 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 million, 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 Fiscal Year (FY) 2016 -17 ($18 million or 50% of the currently projected $36.1 million capital budget forecasted for FY 2016 -17). Page 1 of 2 POSITION PAPER Board Meeting Date: September 17, 2015 subject: APPROVE AND ADOPT NEW BOARD POLICY NO. BP 017 -FISCAL RESERVES ALTERNATIVES I 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. 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 Committee recommended Board approval. RECOMMENDED BOARD ACTION: Approve the attached new Board Policy No. BP 017 - Fiscal Reserves, based on Board input received at both the November 17, 2014 and January 20, 2015 Board workshops and the March 5, 2015 Financial Planning and Policy Workshop. Attached Supporting Documents: 1. Draft Fiscal Reserve Policy 2. PowerPoint Presentation N:\ ADMINSUPWDMIN \DIST- SEC\Position Papers\2015 \PP- NewFinal 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 s www.centralsan.org 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 Taraets 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. Tvpes 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 4of4 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]