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Home My WebLink About10. Review alternatives for utilizing $8.8 million Fiscal Year (FY) 2016-17 favorable budget variances and provide direction as to their allocationPage 1 of 12 Item 10. CENTRAL SAN BOARD OF DIRECTORS ' POSITION PAPER MEETING DATE: DECEMBER 7, 2017 SUBJECT: REVIEW ALTERNATIVES FOR UTILIZING $8.8 MILLION FISCAL YEAR (FY) 2016-17 FAVORABLE BUDGET VARIANCES AND PROVIDE DIRECTION AS TO THEIR ALLOCATION, AND DETERMINE HOW TO ALLOCATE THE $2.5 MILLION BUDGETED TOWARD UNFUNDED LIABILITIES IN FY2017-18. REVIEWED BYFINANCE COMMITTEE. SUBMITTED BY: INITIATING DEPARTMENT: PHILIP R. LEIBER, DIRECTOR OF FINANCE ADMINISTRATION -FINANCE AND ADMINISTRATION REVIEWED BY: TODD SMITHEY, FINANCE ADMINISTRATOR THEAVASSALLO, FINANCE MANAGER ANN SASAKI, DEPUTY GENERAL MANAGER Roger S. Bailey General Manager ISSUE Staff indicated at the September 21, 2017 Board meeting that favorable budget variances of $8.8 million were achieved for FY 2016-17, and that those funds could be directed to one or more uses that would benefit ratepayers. Additionally, $2.5 million of funding towards unfunded liabilities is included in the FY 2017-18 budget. Board direction is requested on the disposition of these funds. BACKGROUND Favorable budget variances for FY 2016-17 were $6.5 million for Operations & Maintenance (O&M) and $2.3 million for Sewer Construction (SC)/Capital Improvement Budget (Cl B), totaling $8.8 million. The attached PowerPoint presentation provides additional information requested by the Board December 7, 2017 Regular Board Meeting Agenda Packet - Page 171 of 240 Page 2 of 12 during the September 21, 2017 presentation titled "Receive FY 2016-17 Pre -Audit Financial Summary and Variance Alternatives." The staff recommendation as to the disposition of the favorable variance remains unchanged, which is that $6.8 million be allocated toward the SC Fund, and $2.0 million be directed toward the Pension Prefunding Trust held with PARS. Staff also requests direction from the Board as to allocation of the $2.5 million budgeted for unfunded liabilities in FY 2017-18. ALTERNATIVES/CONSIDERATIONS FY 2016-17 O&M & SC Budget Variances Funds from the O&M variance are first used to fully fund the O&M reserve as specified in Board Policy No. BP 017 - Fiscal Reserves specifically, 5/12 of the following year's O&M budget. The O&M budget variance, totaling $6.5 million, can be directed to another use, or without specific guidance provided would automatically remain in the SC Fund. Staff recommends directing $2.0 million of the $6.5 million favorable O&M variance to the Pension Prefunding Trust, leaving the remaining balance of $4.5 million to the SC Fund. The advantages to directing funds to the SC Fund include reducing future debt burden and issuance of debt financing, and avoiding anticipated related interest costs of 3.5% to 4.5% and related issuance costs. The SC $2.3 million favorable variance from FY 2016-17 would also remain in the SC Fund. Alternatively, all of the O&M and SC combined FY 2016-17 favorable variances of $8.8 million could be directed to the SC Fund. FY 2017-18 Budgeted for Unfunded Liabilities Staff recommends allocating the entire $2.5 million to the OPEB Trust. This provides an opportunity to earn a targeted return on OPEB funds of 6.25% and further pay down the unfunded actuarial accrued liability (UAAL). The latest Bartel projection of the OPEB funding status is approximately 50.3°/x, whereas, the overall pension funding status is approximately 80%. Other alternatives include allocating the funds to CCCERA pension liabilities or Pension Prefunding Trust held with PARS. These alternatives are not as favorable because the combined pension funding status is approximately 80%. FINANCIAL IMPACTS The availability of the favorable budget variance benefits ratepayers and reduces future Sewer Service Charge rate pressures regardless of whether it is used to offset the need for future borrowing, or to paydown the UAAL for OPEB and pension liabilities. Directing a portion of the funds towards the OPEB trust, which is likely to earn a targeted return of 6.25% versus an avoided borrowing cost of 3.5% to 4.5%, could provide a financial advantage to the ratepayers. COMMITTEE RECOMMENDATION The Finance Committee reviewed this subject at its August 29, 2017 meeting and recommended receipt of the Pre -Audit Year End Financial Statement Summary Report and the recommended variance alternatives. No decision was made on the disposition of the overall variance and this was put forward for discussion by the full Board at the September 21, 2017 Board meeting. December 7, 2017 Regular Board Meeting Agenda Packet - Page 172 of 240 Page 3 of 12 RECOMMENDED BOARD ACTION Direct the General Manager as follows: FY 2016-17 O&M and SC Budget Variances • Leave $6.8 million in the Sewer Construction Fund • Allocate $2.0 million to the Pension Prefunding Trust FY 2017-18 Budgeted for Unfunded Liabilities • Allocate $2.5 million to the OPEB Trust Stratedc Plan Tie -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. PowerPoint Presentation December 7, 2017 Regular Board Meeting Agenda Packet - Page 173 of 240 LLOCATION of $8.8M FY 2016-17 BUDGET VARIANCES AND $2.5M FY 2017-1 8 BUDGETED FOR UNFUNDED LIABILITIES PHILIP R. LUBER 'DIRECTOR OF FINANCE 8c ADMINISTRATION DECEMBER 7, 2017 5 . December 7, a. Board McPtinn AnPnrta Parket- NOVEMBER 1O, 2016 WORKSHOP FINANCIAL ALTERNATIVES FOR EXCESS RESERVES PFM's Review of Excess Fund Alternatives: I . Pay down CCCERA UAAL 2. Pay down OPEB and shorten amort period (22 years to 18 years - done) 3. Set up IRS S115 Pension Prefunding Trust Allocate to CIB program Use to cover 0% rate increase FY 17-18 PFM's Recommendation and Direction Given by the Board: Allocate all currently available dollars to reduce District's Pension URAL and OPEB liability. $2.5M budgeted in FY16-17 toward OPEB Trust (February 2017) Unanimous $3.359M initial funding of Pension Prefunding Trust using FY15-16 variances (August 2017) Majority r PFM's Recommendation and Direction Given by the Board: Allocate all currently available dollars to reduce District's Pension URAL and OPEB liability. $2.5M budgeted in FY16-17 toward OPEB Trust (February 2017) Unanimous $3.359M initial funding of Pension Prefunding Trust using FY15-16 variances (August 2017) Majority BUDGET VARIANCES AND FISCAL RESERVE ALTERNATIV Good news: Favorable variances in FY 2016-17 Operations &Maintenance (O&M) Sewer Construction (SC)/ Capital Improvement Budget (CIB) Alternatives: Board can direct the funds to the following: Pension and OPEB Trusts Capital Program RECOMMENDED ALLOCATIONS Recommended Allocation of Funds: Year -End 16-17 Variances - O&M 16-17 Variances - SC Total Budgeted 17-18 UAAL Liabilities ($ MILLIONS 5 1 - 5 - - Fully Fully Following Estimated Funded Ratio % Funded Funded Slide 1.5% 78.1% 79.6% (1) Funding status per staff estimate using CCCERA December 31, 2016 valuation ($3.359M + $2.OM)/$373,076,401). (2) Funding status per CCCERA December 31, 2016 valuation. < , * Pension O&M SC-CIB OPEB Prefunding CCCERA Total Reserve Reserve Trust Trust (1) Trust (2) 6.5 - 4.5 - 2.0 - 2.3 - 2.3 - - - $8.8 - $6.8 - $2.0 - 5 1 - 5 - - Fully Fully Following Estimated Funded Ratio % Funded Funded Slide 1.5% 78.1% 79.6% (1) Funding status per staff estimate using CCCERA December 31, 2016 valuation ($3.359M + $2.OM)/$373,076,401). (2) Funding status per CCCERA December 31, 2016 valuation. < , * RESERVE STATUS Target Reserves at YE 16-17 CIB Carryforward 16-17 O&M & SC YE Variances All Other Pre -Audit Reserves 6-30-17 ($ MILLIONS O&M SC-CIB Pension Reserve Reserve OPEB Prefunding (5/12) (50% CIB) Trust (1) Trust (2) $37.4 $21.4 4.5 8.8 0.7 0.8 Assets in CCCERA Trust (3) $38.1 $35.5 1 $52.3 $0.0 $291.5 (1) Balance and amounts are at market value. (2) Pension Prefunding Trust was initially funded in August 2017 with $3.359M. pp (3) Allocation of valuation of assets as of December 31, 2016 CCCERA valuation. i r HISTORY of OPEP Actuarial Value of Assets* Per Bartel 2 year Valuation ($ MILLIONS Est % Funded % by moving to Assets Funded CalPERS Medical *** 7/1/2012 $22.5 22.4% - 7/1/2014 33.7 32.4% - 7/1/2016 43.8 44.0% - 7/1 /2017 Projected 48.9 47.5% - 7/11/16 rolled forward to 6/30/17** 51.8 50.3% 59.3% - 67.0% Roll forward with recommended addt'I $2.5M (FY 17-18 Budgeted) 54.3 52.7% 62.2% - 70.3% * Per Bartel & Associates, Actuarial Value of Assets (AVA) which includes smoothing. Report dated July 1, 2016 (for use in FY 17-18 and FY 18-19). ** Subsequent to the September 21, 2017 Board presentation, Bartel updated and rolled forward the July 1, 2016 actuary report to June 30, 2017. The revised funding ratio includes the $2.5M additional contribution made in February 2017 and the $52.3M Market Value of Assets (MVA) at June 30, 2017. *** Ranqe shown as funding % will vary depending on level of vesting. HISTORY OF ADDITIONAL UAAL PAYMENTS Fiscal Date of Year Pavment 13-14 3.4 2.0 Dec 2013 14-15 $5.4 Dec 2014 15-16 Dec 2015 16-17 Feb 2017 16-17 Aug 2017 Subtotal 17-18 Pending (Recommended) Total ($ MILLIONS) Pension CCCERA OPEB Prefunding Trust Trust Trust $5.0 5.0 2.5 $2.5 $3.4 Source of Funds Budgeted Budgeted Budgeted Budgeted Funded by FY 15-16 variances 12.5 2.5 2.5 3.4 2.0 18. 4.5 $12.5 $5.0 $5.4 $22.9 L�*Cw,. RECOMMENDED MOTION Direct General Manager as follows: FY 2016-17 O&M & SC Budget Variances Leave $6.8 million in the Sewer Construction Fund Allocate $2.0 million to the Pension Prefunding Trust FY 2017-18 Budgeted for Unfunded Liabilities Allocate $2.5 million to the OPEB Trust QUESTIONS? [,*Cw,.