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Home My WebLink About10.a. Receive Fiscal Year 2016-17 Pre-Audit Year-End Financial Statement Summary Report and Recommended Variance Alternatives. Reviewed by Finance CommitteePage 1 of 13 Item 10.a. POSITION PAPER iCENTRAL SAN BOARD OF DIRECTORS MEETING DATE: SEPTEMBER 21, 2017 SUBJECT: RECEIVE FISCAL YEAR 2016-17 PRE -AUDIT YEAR-END FINANCIAL STATEMENT SUMMARY REPORT AND RECOMMENDED VARIANCE ALTERNATIVES. REVIEWED BY FI NANCE COMMITTEE. SUBMITTED BY: INITIATING DEPARTMENT: THEA VASSALLO, FINANCE MANAGER ADMI NI STRATI ON -FI NANCE REVIEWED BY: PHIL LEI BER, DIRECTOR OF FINANCE AND ADMINISTRATION ANN SASAKI, DEPUTY GENERAL MANAGER Roger S. Bailey General Manager ISSUE The Board of Directors approves the Operations and Maintenance (O&M), Capital Improvement (CIB), Self Insurance, and Debt Service budgets on an annual basis. At Fiscal Year (FY) end, staff reviews and compares the final revenues and expenditures, based on the pre -audit financial reports, to update the Board on the budget versus actual activity. BACKGROUND A public hearing was held on June 2, 2016, after which the Board adopted the FY 2016-17 budgets. The proposed revenue and estimated expenditures within the adopted FY 2016-17 budgets, actuals, variances, and year-end adjustments are summarized in Attachments 1 and 2. ALT ERNATIVES/CONSIDERATIONS Attachment 3 summarizes alternative uses for the combined O&M favorable variances for both revenues and expenditures for FY 2016-17. September 21, 2017 Regular Board Meeting Agenda Packet - Page 57 of 91 Page 2 of 13 FINANCIAL IM PACTS Due to the FY 2016-17 favorable variances in the O&M and Cl B Budgets, the District's beginning cash balances for FY 2017-18 are higher than projected. COMMITTEE RECOMMENDATION The Finance Committee reviewed this subject at its August 29, 2017 meeting and recommended receipt of the Pre -Audit Year End (YE) Financial Statement Summary Report and the recommended variance alternatives. RECOMMENDED BOARD ACTION Receive the FY 2016-17 Pre -Audit YE Financial Statement Summary Report and recommended variance alternatives. Strategic Plan re -In GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility Strategy 1 - Conduct Long -Range Financial Planning, Strategy 2 - Manage Costs ATTACHMENTS: 1. FY 2016-17 Pre -Audit Variance Analysis Summary and Variance Overview 2. FY 2016-17 Pre -Audit Variance Analysis Operations and Maintenance 3. FY 2016-17 Pre -Audit Variance Alternatives - Use of O&M Budget 4. PowerPoint Presentation September 21, 2017 Regular Board Meeting Agenda Packet - Page 58 of 91 Page 3 of 13 Ooerations & Maintenance Revenues Expenses Total Sewer Construction Revenues Expenses Total District Totals (4 Funds) Revenues Expenses/Debt Principal Total ATTACHMENT 1 Pre -Audit - June 2017 Financial Statement Summary and Variance Overview Budget Actual FY 2016-17 FY 2016-17 Variance Favorable/Unfavorable 89,817,200 89,810,918 6,282 34,905,400 36,808,756 91,983,043 85,489,792 6,493,251 37,083,804 36,696,049 (11903,356) 3871755 129,518,782 133,902,694 131,343,455 126,867,710 (11824,673) 71034,984 21165,843 F See Attachment 2 (41321,126) F See Attachment 2 6,486,969 21178,404 F Capacity $307k, Property Taxes $1.5M (112,707) F 212911111 * 4,383,912 F Favorable (4,475,745) F Favorable 81859,657 ** * Budget including FY 2016-17 carryforward amount is $39.9M, and the Sewer Construction variance would be $6.8M. This money remains in the Sewer Construction fund at year end and is not considered as a variance here. ** Total is higher by $4.5M when including the unspent FY 2016-17 carryforward. September 21, 2017 Regular Board Meeting Agenda Packet - Page 59 of 91 Page 4 of 13 ATTACHMENT 2 Pre -Audit - June 2017 Financial Statement Summary Operations and Maintenance Variance Analysis ($000) September 21, 2017 Regular Board Meeting Agenda Packet - Page 60 of 91 + Favorable Budget Actual Variance % Explanation Implications for future budgeting Revenues SSC - County $ 69,885 $ 71,438 $ 1,553 2% RUE growth, best estimate of water conservation and drought impact SSC - Direct 11100 11,705 605 55% Higher than anticipated development Conservative assumptions for growth are used City of Concord 14,790 13,851 (939) -6% Lower Central San expenses Permit/Application Fees 400 616 216 54% Higher than anticipated development Conservative assumptions for growth are used; but 3 year average will pick up higher FY 2016-17 and FY 2017-18 experience Side Sewer Inspection 820 11,192 372 45% Higher than anticipated development Conservative assumptions for growth are used; but 3 year average will pick up higher FY 2016-17 and FY 2017-18 experience Recycled Water 100 350 250 250% RE & SC combined variance $13k due to mid -year FY 2017-18 budget was adjusted for RW, tracking changes and O&M expenses are covered 1st and accordingly variance for that and future years should be smaller Annexation Charges 55 232 177 322% Higher than anticipated development Conservative assumptions for growth are used; but 3 year average will pick up higher FY 2016-17 and FY 2017-18 experience All Other 2,667 2,600 -68 -3% Includes septic/overtime inspections, industrial permits, lease revenue, pre-treatment, household hazardous waste, storm water and interest income. Total Revenues 89,817 91,983 21166 2% Favorable variance Expenditures Salaries & Benefits $ 66,926 $ 64,842 $ 2,084 3% Comprised of $1,364 salaries (unfilled vacancies Will provide somewhat higher vacancy offset by less charged to capital), and $849 benefits factor in the FY 2018-19 budget than the (about 2/3 retirement, 1/3 healthcare and worker's 2% of salaries and 3% of benefits used comp insurance) for FY 2016-17 Chemicals 1,920 11#426 494 26% Sodium hydroxide budgeted due to anticipated Removed from the budget for FY 2017 - regulation changes, but not needed, saving $420k 18, so not a recurring issue Utilities 4,316 4,681 (365) -8% Higher electrical use due to Cogen emissions limits Repairs & Maintenance 5,223 4,664 559 11% POD saving General and Outside Repairs & Maintenance $433k, also $105k in computer repairs & maintenance savings Outside Services 3,980 3,244 736 18% Less spent on various Technical Services - including: At times, items are not needed due to (1) RW opportunity study/satellite SWRF $150k; (2) changed circumstances or delays RW Process support services & Survey consultant $95k; (3) Legislative Analysis $50k; (4) Radio fee for county -deferred. $70k; (5) IT temp services $25k; (6) Virtual Desktop Infrastructure IT $70k; (7) Records mgmt $160k; (8) Security guards $30k; (9) emergency mgmt/safety. Other 71,446 6,633 813 11% $168k Public information $52k Outside organization fees $200k Election expense vs. $400k budgeted (fewer candidates/assessment from County) $48k Technical training & conferences $116k Tuition & professional reimbursement Total Expenses 89,811 85,490 4,321 5% Total under spent - Favorable Net 6 6,493 6,487 Favorable variance available for disposition September 21, 2017 Regular Board Meeting Agenda Packet - Page 60 of 91 $80,000 $69,885 $71,438 $70,000 $60,000 - $50,000 $40,000 $30,000 $20,000 $10,000 SSC - County $80,000 $66,926 $70,000 $64,842 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 Salaries & Benefits ATTACHMENT 2 Pre -Audit - June 2017 Financial Statement Summary Operations and Maintenance Variance Analysis ($000) FY 2016-17 O&M Revenue Variances 14,790 13,851 1,100 400 820 100 232 1,705 616 1,192 350 55 SSC - Direct City of Concord Permit/Application Side Sewer Inspection Recycled Water Annexation Charges Fees ■ Budget ■ Actual FY 2016-17 O&M Expense Variances 4,316 5,223 1,920 4,681 4,664 1,426 Chemicals Utilities Repairs & Maintenance ■ Budget ■ Actual 3,980 3,244 Outside Services Page 5 of 13 2,600 2,667 M M All Other 7,446 6,633 Other September 21, 2017 Regular Board Meeting Agenda Packet - Page 61 of 91 Page 6 of 13 ATTACHMENT 3 Pre -Audit - June 2017 Financial Statement Summary Use of O&M FY 2016-17 Budget Variances (Revenues and Expenditures) # Item Description Tentative Staff Recommendation 1a Restore Reserves to The financial plan used as the basis for setting rates in FY 2017-18 and FY 2018-19 $1,359,753 Level Originally contemplated 7% increases in both years. Assuming no change to the level of O&M Anticipated with 7% spending and with the FY 2017-18 adopted rate increase of 5.37% (equivalent to $530 rate adjustment for annual SSC for a SFR), the Sewer Construction Fund will have $1,359,753 less in funding FY2017-18. ($5,839,431 additional revenue at 7% less $4,479,678 additional revenue at 5.37%). This would be a recurring shortfall based on projected O&M expenses in the original financial plan. However, it is anticipated that O&M budget reductions can be identified in future years to offset that revenue loss. Applying funds for this item results in an increase (restoring) the level of the Sewer Construction fund balance to the amount assumed in the Financial plan. Mechanically, Running Expense reserve is fully funded first, then the sewer construction reserve. So, any reduction in O&M revenues or increase in O&M expenses ultimately impacts the Sewer Contruction Fund. 1b Further Bolster This is the default position. Without further action, the O&M savings [and revenue $3,127,254 Sewer Construction variance] will be retained by the Sewer Construction sub -fund. Such monies will be in sub -fund reserve excess of the targeted reserve balance at the end of FY 2017-18, and would reduce any FY balance above level 2018-19 borrowing requirements that were otherwise anticipated for CIP needs. With this anticipated in credit, staff believe a borrowing originally contemplated to partially fund FY 2018-19 CIP Financial Plan and requirements could be deferred until FY 2019-20. reduce future year's borrowing requirements 2 Pay down employee PFM previously advised Central San on the advantages of applying available funds towards $2,000,000 related liabilities employee related liabilities. Applying funds towards these liabilities can save Central San the assumed actuarial cost of these programs; for pension, this is 7.0%. Actual savings would depend on the actual market returns of the invested funds, but are targeted at the assumed actuarial return. Funds could be: a. Remitted directly to CCCERA. Not advised due to concerns about "superfunding" and once remitted the funds are not available to reduce future year's contributions. (Funding status at 12-31-16 valuation is 78.1%.) b. Deposited in the GASB 45 Trust (Projected funding status at 7-1-17 is 47.5%.) c. Deposited in the Section 115 Pension Prefunding Trust (recommended) The last option provides maximum flexibility to Central San as the funds would be available to offset future REQUIRED contributions to CCCERA. Therefore, these funds could be used to mitigate near term rate pressures that might arise from unplanned increases in CCCERA pension expenses. Total accounted for $6,487,007 Total available savings $6,487,007 Remaining $0 Additional UAAL - Budgeted FY 2017-18 - OPEB Trust 1 $2,500,000 September 21, 2017 Regular Board Meeting Agenda Packet - Page 62 of 91 RESERVE FUND FLOWS AND STATUS PHIL EIBER, DIR. FIN &ADMIN. Septem SEPTEMBER 7, 2017 BUDGETAN VARIANCES AND THE FISCAL RESERVES • Good news: Favorable variances in FY 2016-1 7 O&M and Sewer Construction Funds ➢What happens? Board can direct a portion of the funds to the Pension and OPEB discretionary reserves, or let the flow of funds operate automatically. O&M BUDGET VARIANCE - RESERVE FUND IMPACT Funds from Favorable O&M Variance $6.5 million for FY 2016-17 � O&M Reserve 1. O&M Reserve is funded first; � `dr (5/1z of this happens automatically. 1 Budgeted O&M) t h 2. Board Decision Ret uired Optional & Discretionary: I r r S r Fund Pension i � I and OPEB � p n r r � Trusts O&M BUDGET VARIANCE - RESERVE FUND IMPACT Funds from Favorable nR,rxA Xhnrmitnnr%o 1. O&M Reserve is funded first; this happens automatically. $6.5 million for FY 2016-17 2. Board Decision Required O&M Reserve (5/12 of i l Budgeted O&M) rA `t = Optional & Discretionary: Fund Pension p and OPEB r� I Trusts STAFF RECOMMENDATION $2 million in Pension Trust CIB VARIANCE - RESERVE FUND IMPACT Funds from Favorable CIB Variance $2.3 million for FY2016-17 (*) 1. Funds stay in Sewer Constructioi Sewer Construction Reserve at least 50% of cash funded CIB * Does not consider carryforwards or spending variances (consideration of $500,000 supplemental appropriation for project 8420) BUDGETED $2.5 MILLION TOWARDS FUNDING :MPLOYEF RELATED LIABILITIES • Additional funding towards employee liabilities (pension or OPEB) was included in the FY2017-1 8 budget, with the Board to decide where to apply funds is Given the recommendation to use $2 million from the FY2016- 17 budget savings to fund the Section 115 Pension Prefunding Trust this year, we advise applying the budgeted Fy2017- 18 amount of $2.5 million to R. the OPEB Trust. Fund Pension Trust: $2 million Fund OPEB Trust: $2.5 million (budgeted) - PanP 68 of Al t t` Projected Balance Sewer Construction Running Expense OPEB Trust Pension Trust RESERVE STATUS With Current Proposed Board Action M&&=E&&ML. Fully Funded + $8.8 million Fully Funded $52.3 million + $2.5 million budgeted _ $55.5 million (at 6/30/17) (47.5% projected funded at 7/1/17 as of Bartel Valuation 7/1/16; excludes the $2.5 million funded in Feb 2017) Fully Funded + $6.8 million ($8.8 less $Z million ) Fully Funded $52.3 million + $2.5 million budgeted = $55.5 million (47.5% projected funded as of Bartel Valuation 7/1/16; excludes the $2.5 million funded in Feb 2017) $3.359 million $3.359 million plus $2 million $5.359 million (CCCERA obligation was 78.1% funded as of Dec 2016.) (CCCERA obligation was 78.1% W/ Trust: 79% funded as of Dec 2016). W/ Trust: 79% 3W W.A IVA kT-S VA JMW v