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HomeMy WebLinkAbout08. Review Operations and Maintenance portion of draft Fiscal Year 2017-18 Budget (Draft Position Paper) Central San 80 BOARD OF DIRECTORS nD POSITION PAPER Board Meeting Date: June 1, 2017 Subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE Submitted By: Initiating Dept./Div.: Phil Leiber, Director of Finance & Administration/Finance Administration REVIEWED AND RECOMMENDED FOR BOARD ACTION: Ann Sasaki, Deputy General Manager Kent Alm Roger S.Bailey Counsel for the District General Manager ISSUE: It is Central San's practice to hold a public hearing to receive comment on the budget for the following funds: Operations and Maintenance (O&M), Capital Improvement, Self-Insurance, and Debt Service. BACKGROUND: The proposed Fiscal Year (FY) 2017-18 Budget was presented as a combined budget which incorporates into one document the O&M Fund, Sewer Construction Fund (for capital improvements), Self-Insurance Fund and Debt Service Fund. The document was delivered at the May 4, 2017, Board meeting and a detailed presentation was made on May 18, 2017 covering all four funds. The Budget incorporates Central San's Strategic Plan Goals and Initiatives and provides the resources necessary to implement the initiatives and meet the challenges Central San faces as it strives to increase service quality and minimize costs to our customers. At the same time, the Budget allows Central San to accomplish its mission in a cost-effective manner that will ensure best value. The Budget also assumes that the rate adjustment approved by the Board on April 20, 2017 will go into effect on July 1, 2017. The Budget includes a separate Recycled Water Program Budget with enhanced detail regarding revenues and expenses. The Budget has been developed in the context of the 10-year financial plan for forecasted revenues, expenses and fund balances. The financial planning model assists Central San in setting and projecting Sewer Service Charge (SSC) rates. The budget and financial plan have as a foundation the 2015 Cost of Service Study by Raftelis Financial Consultants, Inc., to assess Central San's overall staffing needs and analyze Central San's rate structure. The Cost of Service Study resulted in changes to staffing alignment and implementation of a revised rate structure to better comply with Page 1 of 11 POSITION PAPER Board Meeting Date: June 1 ' 2017 subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE Proposition 218. In April 2017, the Board adopted increases in the annual SSC for residential and non-residential customers for the next two fiscal years as follows: FY 2016-17 FY 2017-18 Annual SSC Increase Annual SSC Single Family Residences $503 $27 $530 Multi-Family Residences $487 $26 $513 Effective Date July 1, 2016 July 1, 2017 (Residential rates shown in dollars per residential unit.) The proposed FY 2017-18 total Budget is $137.2 million, an increase of $5.9 million or 4.5% over the FY 2016-17 Budget of $131.4 million. FY 2016-17 FY 2017-18 Variance Percent Budget Budget Variance Operations&Maintenance $89,810,918 $899713,587 $(97,331) -0.1% Sewer Construction $36,8082756 $42,774,000 $59965,244 16.2% Debt Service $31790,807 $3,819,099 $28,292 0.7% Self-Insurance $9489000 $936,500 $(119500) -1.2% Total Budget $131,358,481 $137,243,186 $5,8841705 4.5% This position paper focuses on variances between the proposed FY 2017-18 Budget and the FY 2016-17 Budget. O&M Budget The proposed FY 2017-18 O&M Budget includes the allocation of $7.5 million from the O&M Fund towards the unfunded liability associated with Governmental Accounting Standards Board (GASB) 45 post-employment healthcare benefits and current year retiree premiums. This amount is based on the most recently completed two-year actuarial study by Bartel Associates. The $7.5 million includes an approximate payment of $5.9 million for retiree medical, dental and life insurance premiums annually and $1.6 million to be deposited in a GASB 45 Public Agency Retirement Services investment trust to fund future retiree benefit costs. C:\Users\CGranzella\Desktop\Finance\Budget 2017-18 PP revised.docx Page 2 of 11 POSITION PAPER Board Meeting Date: June 1 2017 Subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE O&M Revenue: The following table compares revenues for FY 2017-18 to FY 2016-17. FY 2016-17 FY 2017-18 Variance Percent Budget Budget Variance Sewer Service Charge(O&M) $71,100,000 75,220,700 41120,700 5.8% City of Concord 1497902000 15,200,000 4109000 2.8% All Other 31927,200 412382000 310,800 7.9% Total Revenue 89,817,200 94,658,700 498419500 5.4% Total Central San O&M Revenue for FY 2017-18 is projected at $94.7 million compared to the FY 2016-17 budgeted amount of $89.8 million, an increase of $4.8 million or 5.4%. This is due to the following: • While the SSC rates are increasing, the O&M allocation of SSC is decreasing from 85.8% to 84.3%. The net result of these changes is an increase in total O&M SSC revenue of $4.1 million or 5.8%. • The City of Concord primarily shares a flow portion of Treatment Plant, Environmental and Regulatory Compliance, and Environmental Compliance expenses and is charged administrative overhead and a finance charge. City of Concord revenue is expected to be $0.4 million, or 2.8%, more than FY 2016-17 due to an overall flat O&M budget for FY 2017-18, with costs allocated to Concord increasing slightly based on anticipated flows.' C:\Users\CGranzella\Desktop\Finance\Budget 2017-18 PP revised.docx Page 3 of 11 POSITION PAPER Board Meeting Date: June 1, 2017 Subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE O&M Expense: The following table compares expenses for FY 2017-18 to FY 2016-17. FY 2016-17 FY 2017-18 Budget to Percent Budget Budget Projected Variance Variance Salaries&Wages 33,1589707 341797,628 1,638,921 4.9% Benefits&Cap O/H Credit 14,163,311 12,655,155 (11508,156) -10.6% Salary&Benefits 479322,018 479452,783 130,765 0.3% Active Employees) Benefits(Retirees) 51362,300 51946,000 583,700 10.9% Retirement UAAL 11,741,700 11,679,261 62,439 -0.5% Additional UAAL 21500,000 21500,000 - 0.0% Total UAAL 14,241,700 14,1799261 (629439) -0.4% Total Labor Related Costs 66,926,018 67,5789044 652,026 1.0% Chemicals 11920,000 11482,000 (438,000) -22.8% Utilities 413150790 41639,790 324,000 7.5% Repair&Maintenance 51222,852 51299,754 76,902 1.5% Hauling&Disposal 9419050 11023,975 82,925 8.8% Professional&Legal Fees 630,750 807,600 176,850 28.0% Outside Services 31980,175 39452,717 (527,458) -13.3% Self-Insurance Fund 920,000 585,000 (335,000) -36.4% Materials&Supplies 2,100,025 21059,325 (40,700) -1.9% Other Expenses 21854,258 21785,382 (68,876) -2.4% Total Other O&M 229884,900 229135,543 (749,357) -3.3% Total Expenditures 8998109918 8997139587 (979331) -0.1% Contribution to Reserve prior to transfers to 69282 4,9459113 499389831 other funds The total O&M expenses are projected to be $89.7 million in FY 2017-18 compared to $89.8 million in FY 2016-17. This reflects a decrease of $0.1 million or 0.1%. Variances are discussed in detail below. O&M Salaries: Central San's O&M salaries are projected to be $34.8 million in FY 2017-18 compared to a budget of $33.2 million in FY 2016-17. This is an increase of $1.6 million or 4.9%. This increase is due to several factors, including: a 4.4% salary adjustment consistent with the bargaining unit Memorandum of Understanding inclusive C:\Users\CGranzella\Desktop\Finance\Budget 2017-18 PP revised.docx Page 4 of 11 POSITION PAPER Board Meeting Date: June 1 2017 Subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE of the Cost of Living Allowance plus an additional 1%; merit increases and personnel advancements for recently-hired and current employees. Benefits Including Capitalized Administrative Overhead Credit (excluding Retirement UAAL : Central San's O&M benefits, including the capitalized administrative overhead credit for FY 2017-18, are projected to be $18.6 million compared to a budget of $19.5 million in FY 2016-17, resulting in a decrease of $0.9 million or 4.7%. The primary benefit rate assumptions are as follows: • Kaiser - Decrease of 4.0%. • Health Net - Increase of 10.0%. • Contra Costa County'Employees' Retirement Association - Retirement rate decreasing 7.6% for legacy employees and 11.2% for Public Employees Pension Reform Act employees, offset by higher pensionable wages. An additional $2.5 million is to be paid towards the unfunded liability in retirement and/or Other Post-Employment Benefits Trust. • Delta Dental - Decrease of 3.0%. • Long-Term Disability - No rate increase. • Employee Assistance Program - Increase of 3.0%. • Workers' Compensation - Estimated 10% rate increase. • Life Insurance - No rate increase. All Other O&M Expenses: The remaining O&M non-labor expenses total $22.1 million in FY 2017-18, compared to a budget of $22.9 million in FY 2016-17. This is a decrease of $0.7 million or 3.3%. Additional information is included in the individual Division budgets. The areas of most significant changes include: • Chemicals - This expense was reduced 22.8% due to lower usage of chemicals in the Treatment Plant and Pumping Stations. • Utilities - This expense increased 7.5% due to higher use of electricity from Pacific Gas and Electric as the Cogeneration System meets the emissions limitations. • Repairs & Maintenance - This expense increased 1.5% overall due to higher software license renewals fees and higher pump repair expenses. • Hauling & Disposal: - This expense increased 8.8% overall due to higher household hazardous waste disposal rates and for increases in janitorial services. • Professional & Legal Fees - This expense increased 28% due to budgeting for internal audits and for the new contract for legal services. C:\Users\CGranzella\Desktop\Finance\Budget 2017-18 PP revised.docx Page 5 of 11 POSITION PAPER Board Meeting Date: June 1 2017 subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE • Outside Services - This expense was reduced 13.3% due to less need for temporary services as vacancies are filled, agenda software purchased in FY 2016-17 that is not in the FY 2017-18 budget, and Bay Area Clean Water Agencies-related expenses moving to Other Expenses. • Self-Insurance Expense - This expense was reduced 36.4%, and funds the requirements for the payment of premiums and estimated losses based on historical trends. • Materials & Supplies: - This expense was reduced 1.9% due in part to fewer purchases of emergency equipment and supplies. • Other Expenses - This expense was reduced by 23.6% due to the removal of one- time expenses in FY 2016-17 related to Comprehensive Wastewater Master Plan outreach, mailing of Proposition 218 notices, and the Fall 2016 Board Election. Offsetting these reductions was the transfer of Bay Area Clean Water Agencies- related expenses to this category. o Conferences - This expense is a subset of the Other Expenses category. Central San wide conferences presented in the budget book in FY 2016-17 represented out-of-state conferences; FY 2017-18 will also include in-state conferences. The out-of-state and Board conferences expense was reduced 10% from $116,000 in FY 2016-17 to $104,450 in FY 2017-18 due to a reduction in travel and the number of conferences. FY 2016-17 FY 2017-18 Variance Percent Budget Budget Variance Board Conferences 50,000 45,000 (51000) -10% Central San Wide Conferences, Out- of-State* $66,350 $5%450 ($6,900) -10% Central San Wide Conferences, In- State not specified $1701675 n/a n/a Total $1169350 $2759125 n/a n/a Reporting on out of state conference attendance by staff will continue in the new fiscal year as has been provided to date. Capital Improvement Budget (Sewer Construction Fund) Sewer Construction Fund revenues increase $4.4 million from $34.9 million in FY 2016-17 to $39.3 million in FY 2017-18. This increase was due primarily to an increase in SSCs of $2.1 million as a result of user rate increases and an increase in C:\Users\CGranzella\Desktop\Finance\Budget 2017-18 PP revised.docx Page 6 of 11 POSITION PAPER Board Meeting Date: June 1 2017 Subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS:. OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE the overall allocation of SSC to the Sewer Construction Fund. Capital expenditures for FY 2017-18 are projected to be $42.8 million, a $6.0 million increase over the FY 2016-17 Budget of $36.8 million. Self-Insurance Budget Central San currently self-insures general and auto liability risks up to $500,000 per occurrence and purchases a $15 million excess liability insurance policy above that retention. The Self-Insurance Revenue for FY 2017-18 is $0.7 million; expenses are $0.9 million, and the ending reserve balance is $6.5 million. SUB-FUND A: Actuarially-Based Risks. Sub-fund A is used to pay claims and expenses within Central San's self-insured liability retention. Claims in excess of this retention are covered by the excess insurance policy that renews annually on July 1. Staff projects excess liability renewal premiums of up to $370,000. Since insurance renewal quotes are not yet available, staff recommends that the Board authorize the General Manager to renew the excess liability insurance up to this projected amount along with its approval of the FY 2017-18 Self-Insurance Budget. Under the requirements of GASB-10, risks that can be actuarially studied must be funded based on an actuarial study performed at least every two years. General liability and automobile liability risks are readily studied throughout the insurance and self- insurance industry to project funding levels for future losses. Central San obtained an actuarial review of its self-insured general liability and automobile liability risks in October 2016. The next actuarial report will be performed in August 2018 using loss data through June 30, 2018. The Board established a policy to maintain the Sub-fund A reserve at three times the amount of Central San's self-insured retention. The current $500,000 retention requires a $1.5 million reserve. This reserve is used to pay claims and expenses throughout the year and is replenished the following fiscal year. SUB-FUND B: Sub-Fund B has been retired and all reserves for these risks were transferred to Sub-Fund C in FY 2015-16. SUB-FUND Q Non-GASB-10 Risks. This Sub-Fund C has historically covered Risk Management program expenses including insurance premiums, self-insured property losses, potential losses from uninsurable risks, and the costs of initiating claims and lawsuits against others. As noted above, this fund now includes reserves for non-GASB 10 risks and catastrophic losses. C:\Users\CGranzella\Desktop\Finance\Budget 2017-18 PP revised.docx Page 7 of 11 POSITION PAPER Board Meeting Date: June 1 2017 subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE The Board established a policy to maintain this reserve at $5 million. This reserve is used to pay claims and expenses throughout the year and is replenished the following fiscal year. This fund also receives the annual O&M contribution and then re-allocates funds needed to maintain the required reserve in Sub-Fund A. Staff projects property insurance renewal premiums of up to $150,000. Since insurance renewal quotes are not yet available, staff recommends that the Board authorize the General Manager to renew the property insurance up to this projected amount along with its approval of the FY 2017-18 Self-Insurance Budget. Debt Service Budget Currently Central San is repaying a State of California Water Reclamation Loan and 2009 Revenue Bonds. The revenues and expenditures for the FY 2017-18 Debt Service Budget are $3,819,099, nearly unchanged from the FY 2016-17 amount of $3)790,807. Fiscal Reserves The Board has established Board Policy No. BP 017 - Fiscal Reserves setting targets for each of Central San'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. For the O&M Fund —Working Capital Reserves, the Board has set a target of five months (41.7%) of gross operating expenses at the start.of each fiscal year. For the Sewer Construction Fund (Capital Improvement) —Working Capital Reserves, the Board has set a target of 50% of the annual capital projects budget at the start of each fiscal year. For the Self-Insurance Fund Reserves, the Board has set a target of three times the annual deductible, which in this case is $1.5 million. In addition, to help mitigate financial impacts and maintain uninterrupted service in the event of an emergency or catastrophic event, Central San maintains an Emergency Fund Reserve balance of $5 million in the Self-Insurance Fund. C:\Users\CGranzella\Desktop\Finance\Budget 2017-18 PP revised.docx Page 8 of 11 POSITION PAPER Board Meeting Date: June 1 2017 subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE The projected reserve balance compared to the required policy level is shown in the table below. Sewer Self O&M Fund Construction Insurance Totals Fund (Capital) Fund Projected Balance as of $39,.223,.778 $25,.135,597 $6.,500,000 $70,859,375 June 30,2017 Change in Reserve prior $4.,945.,113 3 446 200) ($209.,500) $ to Transfers Transfers ($3,.990.,644) $3..990,644 $0 Projected Balance as of $40..178,247 $25..680,.041 $6,290.,500 $72.,148,788 June 30, 2018 Reserve Policy Target $37..380,.661 $21.387,1060 $6..500..000 $65,267,.721 end of June 30, 2017 Variance from Policy $1,.843,,117 3 748 537 0 $5..591,.654 Target at June 30,2017 The reasons that the projected reserve balances exceed the policy levels are as follows: • For Capital, there is a significant ramp-up in capital spending by FY 2019-20, and the reserve balance is being gradually brought up to this new higher required level. • For O&M, the financial plan requires a transfer of funds from the O&M (Running Expense) fund to the Capital Fund; this transfer amount is estimated at $3.99 million in FY 2017-18, and is shown in the table above. California Environmental Quality Act (CEQA): Staff has evaluated the FY 2017-18 Budget and concluded that it is exempt from the CEQA under Central San CEQA Guidelines Section 15301, since it funds the operation, repair, maintenance, permitting, leasing, licensing, or minor alteration of existing public or private structures, facilities, mechanical equipment, or topographical features, involving negligible or no expansion of use beyond that existing at the time of the lead agency's determination. Furthermore, the FY 2017-18 Budget is exempt under Central San CEQA Guidelines Section 15262, since it is a planning study for possible future actions which Central San has not approved, adopted, or funded, and the outcome of these tasks will not have a legally binding effect on later activities. Approval of the FY 2017-18 Budget will establish the Board of Directors' independent finding that this document is exempt from CEQA. The Board further finds that, although the Capital Improvement Program Budget will authorize amounts of individual capital improvement project spending, the adoption of C:\Users\CGranzella\Desktop\Finance\Budget 2017-18 PP revised.docx Page 9 of 11 POSITION PAPER Board Meeting Date: June 1 2017 Subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE the Budget does not authorize construction of any project requiring CEQA compliance documentation. Central San either has or will produce appropriate CEQA compliance documentation prior to undertaking any "project" identified in these documents. FINANCIAL IMPACTS: The FY 2017-18 Budget was prepared using the Board- approved annual SSC rate increases of $27 for single family(S) and $26 for multi-family (M). The $530S/$513M SSC in FY 2017-18 is allocated as follows: O&M 84.3%; Capital 15.7%. The FY 2017-18 O&M Budget results in a $0.95 million increase in O&M ending reserves, and total O&M reserves are projected to be $40.2 million at the end of FY 2017-18. The financial plan for FY 2018-19 projects an O&M Budget of $95.6 million, which would result in a reserve target of $39.8 million. The FY 2017-18 Sewer Construction Budget results in a $0.5 million increase in reserves, and total Capital reserves are projected to be $25.7 million at the end of FY 2017-18. ALTERNATIVES/CONSIDERATIONS: The Board has considered during FY 2017-18 numerous financial planning alternatives and assumptions culminating in the April 20, 2017 rate decision. This budget reflects the policy direction provided in areas including the composition and level of the capital budget in the context of the Comprehensive Wastewater Master Plan, paying down unfunded liabilities, maintaining staffing at the level specified in the 2015 staffing study, and overall guidance- regarding the need for fiscal discipline and cost control. COMMITTEE RECOMMENDATION: The Finance Committee received an overview of the FY 2017-18 O&M Budget,Self-Insurance, and Debt Service Budget on May 15, 2017. The Engineering and Operations Committee reviewed the Capital Improvement Budget on May 9, 2017. Changes to the draft budget book distributed to the Board on May 4, 2017 reflective of Committee feedback and guidance have been reflected in the revised budget book. C:\Users\CGranzella\Desktop\Finance\Budget 2017-18 PP revised.docx Page 10 of 11 POSITION PAPER Board Meeting Date: June 1 2017 subject: CONDUCT A PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2017-18 BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE RECOMMENDED BOARD ACTION: Conduct a public hearing and.: 1. Approve and adopt those portions of the FY 2017-18 Operations and Maintenance Budget related to Bay Area Clean Water Agencies, specifically, the cost of $605,816; 2. Approve and adopt the remainder of the FY 2017-18 District Budget including the: a. Operations and Maintenance Budget b. Capital Improvement Budget C. Self-Insurance Budget d. Debt Service Budget 3. Make the findings that the FY 2017-18 Budget is exempt from CEQA; 4. Authorize the General Manager to renew the Central San's expiring: a. Excess liability insurance for a premium not to exceed $370,000; and b. Property insurance for a premium not to exceed $150,000. Attached Supporting Documents: • PowerPoint Presentation • (Final) Draft FY 2017-18 District Budget C:\Users\CGranzella\Desktop\Finance\Budget 2017-18 PP revised.docx Page 11 of 11