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HomeMy WebLinkAbout04. Adopt updated BP 017-Fiscal Reserves, and establish a separate County LAIF investment sub-accountPage 1 of 25 Item 4. ' CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER MEETING DATE: DECEMBER 21, 2017 SUBJECT: ADOPT UPDATED BOARD POLICY NO. BP 017 - FISCAL RESERVES, AND AUTHORIZE THE GENERAL MANAGER TO ESTABLISH WITH CONTRA COSTA COUNTYA SEPARATE LOCALAGENCY INVESTMENT FUND (LAIF)/INVESTMENT SUB -ACCOUNT UNDER THE OPERATIONS AND MAINTENANCE (O&M) SUB -FUND. APPROVAL RECOMMENDED BY ADMINISTRATION COMMITTEE. SUBMITTED BY: INITIATING DEPARTMENT: PHILIP R. LEIBER, DIRECTOR OF FINANCE ADMINISTRATION -FINANCE AND ADMINISTRATION REVIEWED BY: THEAVASSALLO, FINANCE MANAGER ANN SASAKI, DEPUTY GENERAL MANAGER Roger S. Bailey General Manager ISSUE On September 17, 2015, the Board adopted a Fiscal Reserve Policy entitled BP 017 — Fiscal Reserves. The policy is being brought forward for consideration as part of the biennial review process and includes additional recommended changes. The changes primarily reflect the additions of the Section 115 Pension Prefunding Trust, additional language on the funding and use of the specified reserves, and other clarifications. n addition, staff proposes establishing a new sub -account for the District's Operations and Maintenance (O&M) fund with the Contra Costa County (the County) to allow for better tracking of balances in that O&M fund. Historically, the O&M investments have been maintained in the Sewer Construction, Local Agency Investment Fund (LAI F)/investment sub -fund and transferred as needed. December 21, 2017 Regular Board Meeting Agenda Packet - Page 37 of 107 Page 2 of 25 Staff is asking for Board direction at this time since the Committees will possibly be changing January 1, 2018 and if either of the two policy alternatives presented below are elected, changes may need to be incorporated into the rate setting model. The next Board Workshop is scheduled for March 2018 to discuss rate setting for Fiscal Year's (FY) 2018-19, FY 2019-20, and projections thereafter. BACKGROUND Fiscal Reserve Policy Background and Recommended Changes As part of the Board's strategic goal to ensure long-term financial stability, the Board adopted a fiscal reserve policy in 2015. BP 017 —Fiscal Reserves includes the following targets: 1. Operating reserves at five months of annual budgeted operating expenditures, 2. Sewer Construction or capital reserves at 50% of annual Capital Improvement Program (CIP) budgeted expenditures, 3. Emergency reserves at $5.0 million, and 4. Liability insurance reserves at $1.5 million to cover three losses at $500,000 self-insured retention per occurrence. The policy also addressed restricted reserves including the Governmental Accounting Standards Board (GASB) 45 Other Post -Employment Benefits (OPEB) Trust, and the debt service reserve. In August 2017, the newly established Section 115 Pension Prefunding Trust was initially funded with $3.359 million of favorable budget variances from FY 2015-16. Language that recognizes creation of the Pension Prefunding Trust has been incorporated into the proposed revisions reflected in the attached revised BP 017 - Fiscal Reserves policy. In general, the status of the designated and restricted reserves are as follows: Designated Reserves • O&M fund reserve of five months, or $37.4 million: Fully funded • SC/CIP fund reserve of six months, or $21.4 million: Fully funded • Self -Insurance Emergency fund reserves with a balance of $6.5 million: Fully funded Restricted Reserves • Debt Service with a balance of $4.9 million: Fully funded • GASB 45 OPEB Trust: Balance of $52.3 million • Section 115 Pension Prefunding Trust: Balance of $3.4 million Staff presented its recommended reserve policy changes to the Administration Committee on October 16, 2017. The Administration Committee at that time provided feedback but did not recommend advancing the proposed revisions to the full Board to allow staff to develop further alternatives for considerations. Staff is recommending certain changes to the reserve policy as indicated below, which are unchanged from the initial proposal: 1. Additional commentary regarding use of reserves, which essentially memorializes current practices. The Fiscal Reserve policy, as adopted in 2015, does not contain significant discussion regarding the use of the reserves. In this current proposed update, staff recommends additional languages regarding the use of the funds, including the circumstances during which funds can be added or drawn from the reserves, and the notifications or approvals that would be required. While somewhat detailed, this information is intended to be helpful to the Board, staff, and others to provide December 21, 2017 Regular Board Meeting Agenda Packet - Page 38 of 107 Page 3 of 25 transparency and specificity about the conditions and processes surrounding the use of the funds. A section entitled "Provisions Regarding Usage" has been added to the description of each reserve. 2. Various updates shown below which include mention of the newly established reserves and inter -sub fund borrowings and several other miscellaneous necessary changes: Recognizing the creation of the Section 115 Pension Prefunding Trust during FY 2017-18. Specifying that the capital reserve is to be funded with 50% of next year's non -bond funded expenditures. Adding a section to address inter sub -fund borrowings and transfers of reserve funds. This recognizes current practices rather than authorizing a new practice of borrowings between funds for cash management purposes. Two additional alternatives are put forward for consideration only; these are labeled alternatives 1 and 2 in the ALTERNATIVES section of this position paper. These are not "recommended" by staff but are listed for consideration. Recommended Additional Investment Sub -Account with Contra Costa County The County currently serves as the District's Treasurer. The District currently maintains "Finance Funds" (Investment accounts) with the County for two of the District's four sub -funds as follows: • SC/CIP Fund (Finance Fund 3407), and • Self -Insurance Emergency fund (Finance Fund 3405) These County finance funds are linked to a single LAI F account for the District. Each agency is limited to only one LAI F account at the County. Presently, the O&M and Sewer Construction/Capital Improvement fund investments are maintained by the County in a single investment account in Sewer Construction, but are accounted for separately by the District. However, to improve and emphasize the separateness of these funds, District staff has contacted the County to inquire about establishing a separate investment sub -account for O&M. The County is prepared to establish a new LAI F sub -account (Finance Fund 3406) for the District's O&M fund, and staff would proceed with this request upon consent of the Board. This step is recommended to allow for better tracking of cash/investment balances in the future and it would provide improved data for staff to assess the adequacy of the O&M and Capital reserves in the future. ALT ERNAT IVES/CONSIDERAT IONS Two reserve policy alternatives are outlined: 1. The O&M Working Capital Reserve Fund could be increased from five months to six months of budgeted O&M spending to provide greater resiliency to the O&M sub -fund. The O&M reserve was created as a working capital fund, not a true reserve that is only utilized upon the occurrence of specified triggers. Presently, with the timing of receipt of the Sewer Service Charge (SSC) from the County, occurring only twice per year, the balance in the O&M fund can be drawn to near zero, requiring borrowing from other sub -funds. Increasing the targeted O&M reserve level to six months of O&M spending would mitigate shortfalls, and would provide for a greater degree of segmentation of funds between O&M and SC sub -funds. While temporary borrowing between the funds will still be permitted and occasionally necessary, increasing the O&M working capital reserve level will reduce the frequency of these events. Attachment 3 provides a five-year history of combined balances for O&M and SC working capital reserve funds. Because the District has maintained a separate account at the County for the O&M reserve, and December 21, 2017 Regular Board Meeting Agenda Packet - Page 39 of 107 Page 4 of 25 transfers funds from the Sewer Construction LAIF/Investment account as needed, and in accordance with the budget, staff recalculates the O&M reserve balance at year-end as part of the annual audit. Consequently, the District reports the reserve balances at year-end based on the reserve requirements with any excess remaining in Sewer Construction. With the information that is available, the combined balance shows that: • Actual balances during the year are below the "targeted" year-end level for much of the year. This is to be expected, as the reserve is labeled as and intended to be a "working capital" reserve. • Apart from FY 2014-15, cash/investment balances have not dropped below $19 million for the five years indicated. • In the past three completed FYs, the minimum cash/investment balances have increased from $13.7 million to $19.0 million to $26.7 million. • The intra -year pattern is consistent for the five years analyzed. The policy goal is met at year-end, while a cash/investment balance low point is reached in November prior to the receipt of the first installment from the County in December. Additional spending from January to March reduces the balance until replenishment from the second tax installment in April brings the balance above the policy target. Immediately after year-end in July, payments for retirement obligations to the Contra Costa County Employees' Retirement Association (CCCERA) reduce the balance significantly. 2. The O&M and Sewer Construction working capital reserve funds could be segmented into working capital components, and "true reserve" components that are only used upon the occurrence of specified events. There could be a single working capital fund for both O&M and Sewer Construction with separate reserve funds for O&M and Sewer Construction, for a total of four funds: (a) O&M working capital; (b) O&M reserve; (c) sewer construction working capital; (d) sewer construction reserve. Segmenting the O&M and Capital funds into working capital and true reserve components is not recommended. Additionally, it is unclear what advantage such separation would provide in the normal circumstances of spending that is within the approved budgets. If an extraordinary event arises that requires spending above the approved budgets, this situation would require Board discussion and approval. FINANCIAL IMPACTS Most of the proposed changes to Board Policy No. BP 017 - Fiscal Reserves, do not have a financial impact, but are, in general, clarifications of existing practice. The addition in the policy of the Section 115 Pension Prefunding Trust recognizes an action already taken by the Board. Alternative 1 above increases the O&M reserve from five months to six months of budgeted O&M over a five-year period and would require another $7.5 million of funding based on the current size of the O&M budget. This could be funded by contributions of $1.5 million per year over five years or this could come from additional revenues received that exceed budgeted amounts, recognized O&M budget savings each year, capital spending under -runs, or through rate adjustments. Alternative 2 above would not have financial impacts if existing balances were merely separated into working capital and true reserves. There would be a financial impact if the true reserve level is set at a higher level than is provided for under the current policy (i.e. if the true capital and O&M reserves were targeted at a level higher than about $19.0 million). COMMITTEE RECOMMENDATION Staff first presented recommendations to the Administration Committee on October 16, 2017. The Committee at that time provided feedback but did not recommend advancing the proposed revisions to the full Board to allow staff to include further alternatives and considerations which have been noted above. The policy was reviewed a second time at its December 12, 2017 meeting, at which the Committee recommended that the Board adopt the recommended changes to the BP 017, as attached, December 21, 2017 Regular Board Meeting Agenda Packet - Page 40 of 107 Page 5 of 25 as well as establish a separate LAI F/investment sub -fund in the O&M account. The Committee did not support the two policy alternatives noted above. RECOMMENDED BOARD ACTION Review and approve the updated Board Policy No. BP 017 - Fiscal Reserves and authorize the General Manager to establish with Contra Costa County a separate LAI F/investment sub -account under the O&M sub -fund. Strategic 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. BP 017 Fiscal Reserves Final 2. BP 017 Fiscal Reserves (Strike Out) 3. Cash -Investment Balances December 21, 2017 Regular Board Meeting Agenda Packet - Page 41 of 107 Number: BP 017 Authority: Board of Directors Effective: December 21, 2017 Revised: Reviewed: Initiating Dept./Div.: Administration BOARD POLICY FISCAL RESERVES P1JRPnSF Page 6 of 25 Central Contra Posta 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, • providing funds to mitigate cash flow variances throughout the fiscal year, and • funding for employee related pension and other post -employment benefits Unplanned events include: accounting for revenue shortfalls unanticipated expenses 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 are of value to: 1) provide working capital to fund operating needs; 2) provide working capital to fund capital improvement program needs; 3) provide a financial cushion for dealing with unanticipated financial needs and emergencies; and 4) are a component of achieving favorable credit ratings which can help to reduce the costs of issuing debt. December 21, 2017 Regular Board Meeting Agenda Packet - Page 42 of 107 Page 7 of 25 Number: BP 017 FISCAL RESERVES Page 2 of 9 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. For each reserve, this policy specifies a targeted level (if applicable), the conditions and procedures for the use or replenishment of the reserve, and authorities for the General Manager (GM) related to such. 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 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 Each Designated reserve has been set at a targeted level by the Board through this Policy. 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 and as otherwise specified in this policy for each reserve. December 21, 2017 Regular Board Meeting Agenda Packet - Page 43 of 107 Page 8 of 25 Number: BP 017 FISCAL RESERVES Page 3 of 9 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 (SSC) 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 a specified percentage of prospective budgeted gross operating expenditures at the start of each fiscal year. The specified percentage is 41.7% (representing 5 months of annual expenses)'. This fund is used in the normal course of District operations. Provisions Regarding Usage: Calculation of the Reserve: Projections of the reserve are made in connection with financial planning and rate setting, where rates may be set to achieve a targeted reserve level. The year-end reserve amount is re -calculated annually in connection with the annual financial statement closing and audit, and compared to the required reserve level. Any variance from the required level would be taken into account when rates and budgets are set for the subsequent year. Draws from the Reserve: Reductions can be made to cover normal O&M spending up to the overall total O&M budget amount, consistent with the GM delegation of authority. Any O&M spending in excess of the overall approved O&M budget would require a budget amendment by the Board. Additions to the Reserve: The Reserve balance would increase with the receipt of revenues. Overall net additions are made annually through planned net income. The ending reserve balance is calculated as part of the annual financial close process. 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, general improvements, and recycled water, as well as office facilities renewal, vehicle and equipment replacement, information systems replacement and miscellaneous capital needs. Property Tax and SSC revenues, which comprise a significant portion of annual capital project revenues, are also collected by the Contra Cost County Tax Assessor's Office ALTERNATIVE 1 would replace this sentence with: "The specified percentage will increase from 41.7% (representing 5 months of annual expenses) to 50% (six months of annual expenses) from FY 2017-18 to FY 2022-23, with the increase to be funded through available funds from prior year Operations and Maintenance (O&M) budget savings, or through rate adjustments over this period." December 21, 2017 Regular Board Meeting Agenda Packet - Page 44 of 107 Page 9 of 25 Number: BP 017 FISCAL RESERVES Page 4 of 9 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 improvements program, the District reserves 50% of the annual non -bond funded capital projects budget at the start of each fiscal year (i.e. the 50% requirement excludes projects anticipated to be funded with available bond proceeds in that fiscal year). Provisions Regarding Usage: This fund is used in the normal course of District operations. Funds are drawn down on a routine basis through capital project spending, and replenished through the receipt of revenues. In addition: Draws from the Reserve: The reserve would be drawn down through capital project spending. On a planned basis (in advance of the subject year), the reserve can be drawn down if the reserve balance is higher than the required/targeted level. This would be done by setting rates such that contributions to the fund are less than expenditures. Such reductions are implicitly approved when the Board sets rates, and represent underlying assumptions in the financial plan. A forecast of the reserve, including any draw down, is included in the budget book provided to and adopted by the Board. The reserve is also drawn down during a fiscal year related to timing of SSC and ad valorem tax collections; capital expenditures can occur in advance of such revenues. No specific authorization is required related to this normal use of this reserve. The reserve may also be drawn down during the year due to: (1) Planned capital expenditures that exceed the total approved capital budget (which includes the current year CIB plus prior year carryforward). This would generally be possible if there were additional funds from an unallocated prior year variance or revenues have surpassed the current year's projection. (2) Planned capital expenditures due to construction contracts awarded by the Board that exceed the project budget for the subject year; whereas funds are available for that project in the subsequent year's budget, and funds are not otherwise available to be transferred from the CIB contingency account or another project(s)2. 2 This is a "timing issue", where it is recommended that the GM have some authority to accelerate funds from the upcoming year to the current year in order to meet the contract commitment. It is also recommended that the GM Delegation of Authority be amended to include the same provision under the transfer authority between projects or use of contingency. December 21, 2017 Regular Board Meeting Agenda Packet - Page 45 of 107 Page 10 of 25 Number: BP 017 FISCAL RESERVES Page 5 of 9 Board/Committee approval of such draws described in items (1) and (2) would be required, unless provided for in the GM Delegation of Authority. Additions to the Reserve: The Reserve balance would increase with the receipt of revenues. Overall net additions to the Reserve are made when sewer construction fund revenues (including planned transfers) exceed expenses over the course of a year. This can occur on a planned or unplanned basis. On a planned basis, rates would be set to provide additions to the reserve when the reserve balance is below the targeted level. On an unplanned basis, additions to the reserve occur through favorable O&M or capital budget variances. C. Self -Insurance Fund Reserves (Designated) The Self -Insurance Fund (SIF) was established in 1986 to allow the District to self -insure a portion of its risks. This reduces the cost of insurance premiums and gives the District greater control over its retained losses. The Board establishes the amount of risk retained and reviews the self-insured retention periodically to align it with the Board's risk tolerance, the District's loss experience, and insurance market conditions. Government Accounting Standards Board Statement No. 10 (GASB -10) established requirements on how public agencies must fund their self-insured risks. To comply with GASB -10, reserves for certain types of liability risks were segregated into a sub -fund that must be actuarially reviewed at least every two years. In order to fund GASB -10 retained risks this sub -fund ("A") shall maintain a minimum reserve of at least three times the amount of the District's self-insured retention, which is currently $500,000, and accordingly the fund presently has a targeted level of $1,500,000. Provisions Regarding Usage: Draws from the Reserve: Reserve funds are used to pay claims and claims expenses within the self-insured retention during the fiscal year. Individual payments are reported to the Finance Committee in the monthly expenditures report and to the Administration Committee in Risk Management Reports. Total fund expenditures are reported to the Board in the Risk Management Annual Report. Payments are governed by the limits set in the GM Delegation of Authority. Additions to the Reserve: Annually, upon the Board's adoption of the SIF and O&M budgets, this reserve is replenished with O&M funds in an amount needed to meet the minimum reserve requirements stated above. December 21, 2017 Regular Board Meeting Agenda Packet - Page 46 of 107 Page 11 of 25 Number: BP 017 FISCAL RESERVES Page 6 of 9 D. Self -Insurance Emergency Reserves (Designated) In order to mitigate the financial impacts and maintain uninterrupted service in the event of an emergency or catastrophic event the, District maintains an Emergency Reserve balance of $5 million in the SIF. This reserve (housed in the SIF (Sub Fund C)), holds funds for the following purposes: 1. Insurance premium payments and related expenses 2. Claims settlements and expenses for self-insured losses not governed by GASB 10 3. Costs to initiate claims against others 4. Funds reserved to respond to emergency conditions as determined by the Director of Emergency Services. Provisions Regarding Usage: Draws from the Reserve: • Draws for items 1, 2, and 3 shall be made in accordance with the GM's authority outlined in Resolution 2016-046 or updates thereto. • Draws for item 4 shall be made in accordance with the authority granted to the Director of Emergency Services as outlined in Resolution 2010-089 or updates thereto. Additions to the Reserve: This fund is replenished annually upon the Board's adoption of the SIF Budget. O&M funds are transferred in the amount needed to maintain a reserve of $5 million. E. Debt Service Reserves "Bond Reserve" (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. Changes to the reserve amount typically only occur due to: (1) additional debt being issued; (2) the required reserve amount changes due to normal amortization and repayment of debt; and (3) the debt is fully amortized and the reserve is extinguished. Provisions Regarding Usage: Draws from the Reserve: Use of the reserve to pay debt service would occur if the funding requirement decreased, in this case, excess funds would be applied to next required debt payment; or funds were otherwise unavailable to pay debt service and would only occur in extraordinary situations. In such circumstances, the GM would notify the Board of the December 21, 2017 Regular Board Meeting Agenda Packet - Page 47 of 107 Page 12 of 25 Number: BP 017 FISCAL RESERVES Page 7 of 9 planned use of the reserve, and report via GM written announcement at a subsequent next upcoming Board meeting. Additions to the Reserve: are made in connection with a Board approved bond issuance during the bond closing process. F. GASB 45 OPEB Trust (Restricted) The District has negotiated and provides Other Post Employment Health Care Benefits (OPEB) for retired employees that meet certain criteria. Biannually, the District updates funding requirements needed to provide these benefits by conducting an actuarial study. While the OPEB Trust is not a District reserve, the District's funding intent is to perform biennial actuarial studies and deposit into the trust the recommended actuarially determined contribution. The investments in the OPEB Trust are managed by an investment advisor with oversight by District staff and the Board Finance Committee. Provisions Regarding Usage: Draws from the Trust: A planned draw from the OPEB Trust may be included in a Board adopted budget and executed by the GM. Only premiums, claims, and/or administrative costs for OPEB related expenses paid for by the District for the current year or one year back are eligible for reimbursement or distribution through the OPEB Trust. Health care costs or other premiums for current active employees are not eligible. Additions to the Trust: An amount may be included in a Board adopted budget to pay down unfunded employee related liabilities for pension or OPEB obligations. If specifically designated for OPEB, the GM may direct such funds be deposited into the OPEB Trust. The Board may also direct that other funds, such as those available from favorable budget variances are also directed to the OPEB Trust. G. Section 115 Pension Prefunding Trust (Restricted) The District has established an IRS Code Section 115 Pension Prefunding Trust to allow for voluntary contributions toward pension obligations. The name of the Trust per the resolution is the "Public Agencies Post -Employment Benefits Trust", which is a multi-employer trust administered by PARS. This Pension Prefunding Trust allows contributions to count toward the unfunded liability (and as a result the funded ratio) while not placing the contributions with the Contra Costa County Employee's Retirement Association (CCCERA). Only premiums, claims, and/or administrative costs for pension related expenses paid for by the District for the current year or one year back are eligible for transfer, payment, or reimbursement from the Prefunding Pension Trust. December 21, 2017 Regular Board Meeting Agenda Packet - Page 48 of 107 Page 13 of 25 Number: BP 017 FISCAL RESERVES Page 8 of 9 The Pension Prefunding Trust may be withdrawn by the District and contributed to CCCERA at a time convenient for the District. Uses for this Trust may include mitigating rate volatility, or to offset normal cost expenses that are required even when all liabilities have been met. The District may make budgeted and planned contributions to the Pension Prefunding Trust, or may make contributions based on the availability of funds from favorable budget variances in either case, subject to Board approval. The investments in the Pension Prefunding Trust are managed by an investment advisor with oversight by District staff and the Board Finance Committee. The Section 115 Pension Prefunding Trust is not a District reserve. Provisions Regarding Usage: Draws from the Trust: A planned draw from the Pension Prefunding Trust may be included in a Board adopted budget to pay required CCCERA pension contributions, and withdrawals up to that amount may be executed by the GM. Withdrawals in excess of that amount would require additional Board authorization. Transfers, payment and reimbursement from the Pension Trust are allowed for the following: • Transfer to a Qualified Trust for employer contribution (e.g. retirement system); • Distribution directly to insurer, third party administrator, service provider or other entities providing services in connection with determining the employer's pension obligation; and • Reimbursement to the employer for employer contributions made to a Qualified Trust and/or related pension administrative costs paid by the employer. Additions to the Trust: An amount may be included in a Board adopted budget to pay down unfunded employee related liabilities for pension or OPEB obligations. If specifically designed for pension liabilities, the GM may direct such funds be deposited into the Pension Prefunding Trust. The Board may also direct that other funds, such as those available from favorable budget variances are also directed to the Pension Prefunding Trust. Management Responsibility The GM 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. Management will report on the use of the reserve funds as required above, and through recurring financial reporting mechanisms. December 21, 2017 Regular Board Meeting Agenda Packet - Page 49 of 107 Page 14 of 25 Number: BP 017 FISCAL RESERVES Page 9 of 9 Investing Reserve Funds Reserve Funds will be invested according to the District's Statement of Investment Policy, BP 005. Furthermore, the Restricted fund investments are managed by Public Agency Retirement Services (PARS) the Trust Administrator, Highmark Capital Management is the Investment Manager, and US Bank is the Trustee Custodian of assets. Inter Sub -Fund Borrowings and Transfers of Reserve Funds Temporary borrowings: transfers of cash or investments between sub -funds (Running Expense, Sewer Construction, and Self -Insurance) on an interim basis for cash management purposes may be effectuated by the GM consistent with the GM delegation of authority. Such temporary borrowings are recorded as a due to/due from in each sub -fund and are typically cleared when monies are available in the recipient sub -fund. Permanent transfers: transfers between sub -funds on a permanent basis may be specified in the District's financial plan and budget, and would be approved by the Board through the adoption of the annual budget or rates. [Original Retained by the Secretary of the District] December 21, 2017 Regular Board Meeting Agenda Packet - Page 50 of 107 Number: BP 017 Authority: Board of Directors Effective: September 17, 2015 Revised: Page 15 of 25 Central Contra Costa Sanitary District 1 Reviewed: Initiating Dept./Div.: Administration BOARD POLICY FISCAL RESERVES PURPOSE 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, a44d-providing funds to mitigate cash flow variances throughout the fiscal year and- fundina for emDlovee related Dension and other post-emDlovment benefits Unplanned events include -accounting for revenue shortfalls, unanticipated expenses -,4P4 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 are of value to: 1) provide working capital to fund operating needs- 2) provide working capital to fund capital improvement program needs- 3) provide a financial cushion for dealing with unanticipated financial needs and emergencies; and- 4) are a component of achieving favorable credit ratings which can help to reduce the costs of issuing debt. December 21, 2017 Regular Board Meeting Agenda Packet - Page 51 of 107 Page 16 of 25 Number: BP 017 FISCAL RESERVES Page 2 of 10 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. For each reserve, this policy specifies a targeted level (if applicable), the conditions and procedures for the use or replenishment of the reserve, and authorities for the General Manager (GM) related to such. 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 n'�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. Achievina Fund Reserve Taraets tacn uesignated reserve has been set at a targeted level by the Board through this policy 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 and as otherwise specified in this policy for each reserve. December 21, 2017 Regular Board Meeting Agenda Packet - Page 52 of 107 Page 17 of 25 Number: BP 017 FISCAL RESERVES Page 3 of 10 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 (SSC) 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 a specified percentage of prospective budgeted five menths (4 7%) of gross operating expenditures at the start of each fiscal year. The specified percentage is 41.7% (representing 5 months of annual expenses)'. This fund is used in the normal course of District operations. Provisions Regarding Usage: Calculation of the Reserve: Projections of the reserve are made in connection with financial planning and rate setting, where rates may be set to achieve a targeted reserve level. The year-end reserve amount is re -calculated annually connection with the annual financial statement closing and audit and compared to the required reserve level.. Any variance from the required level would be taken into account when rates and budgets are set for the subsequent year. Draws from the Reserve: Reductions can be made to cover normal O&M spending up to the overall total O&M budget amount, consistent with the GM delegation of authority. Any O&M spending in excess of the overall approved O&M budget would require a budget amendment by the Board. Additions to the Reserve: The Reserve balance would increase with the receipt of revenues. Overall net additions are made annually through planned net income. The ending reserve balance is calculated as part of the annual financial close process. 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, general improvements, and recycled water, as well as office facilities renewal, vehicle and equipment replacement, information systems replacement and miscellaneous capital needs. Property Tax ALTERNATIVE 1 would replace this sentence with: "The specified percentage will increase from 41.7% (representing 5 months of annual expenses) to 50% (six months of annual expenses) from FY 2017-18 to FY 2022-23, with the increase to be funded through available funds from prior year Operations and Maintenance (O&M) budget savings, or through rate adjustments over this period." December 21, 2017 Regular Board Meeting Agenda Packet - Page 53 of 107 Page 18 of 25 Number: BP 017 FISCAL RESERVES Page 4 of 10 and SSC 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 prejec#s-improvements program the District reserves 50% of the annual non -bond funded capital projects budget at the start of each fiscal year, (i.e. the 50% requirement excludes Droiects anticiDated to be funded with available bond Droceeds in that fiscal year). Provisions Regarding Usage: This fund is used in the normal course of District operations. Funds are drawn down on a routine basis through capital project spending, and replenished through the receipt of revenues. In addition: Draws from the Reserve: The reserve would be drawn down through capital project spending. On a planned basis (in advance of the subject rte), the reserve can be drawn down if the reserve balance is higher than the required/targeted level. This would be done b,, setting rates such that contributions to the fund are less than expenditures. Such reductions are implicitly approved when the Board sets rates, and represent underlying assumptions in the financial plan. A forecast of the reserve, including any draw down, is included in the budget book provided to and adopted by the Board. The reserve is also drawn down during a fiscal year related to timing of SSC and ad valorem tax collections; capital expenditures can occur in advance of such revenues. No specific authorization is required related to this normal use of this reserve. The reserve may also be drawn down during the year due to: (1) Planned capital expenditures that exceed the total approved capital budget (which includes the current year CIB plus prior year carryforward). This would generally be possible if there were additional funds from an unallocated prior year variance or revenues have surpassed the current year's prosection. (2) Planned capital expenditures due to construction contracts awarded by the Board that exceed the project budget for the subject year; whereas funds are available for that prosect in the subsequent year's budget, and funds are not otherwise available to December 21, 2017 Regular Board Meeting Agenda Packet - Page 54 of 107 Page 19 of 25 Number: BP 017 FISCAL RESERVES Page 5 of 10 be transferred from the CIB contingency account or another prolect(s)2. Board/Committee approval of such draws described in items (1) and (2) would be required, unless provided for in the GM Delegation of Authority. Additions to the Reserve: The Reserve balance would increase with the receipt of revenues. Overall net additions to the Reserve are made when sewer construction fund revenues (including planned transfers) exceed expenses over the course of a year. This can occur on a planned or unplanned basis. On a planned basis, rates would be set to provide additions to the reserve when the reserve balance is below the targeted level. On an unplanned basis, additions to the reserve occur through favorable O&M or capital budget variances. C. Self --Insurance Fund Reserves (Designated) The Self -Insurance Fund (SIF) was established in 1986 to allow the District to self -insure a portion of its risks. This reduces the cost of insurance premiums and gives the District greater control over its retained losses. The Board establishes the amount of risk retained and reviews the self-insured retention Periodically to align it with the Board's risk tolerance, the District's loss experience. and insurance market conditions. Government Accounting Standards Board Statement No. 10 (GASB -10) established requirements on how public agencies must fund their self-insured risks. To comply with GASB -10, reserves for certain types of liability risks were segregated into a sub -fund that must be actuarially reviewed at least every two years. In order to fund GASB -10 retained risks this sub -fund ("A") shall maintain a minimum reserve of at least three times the amount of the District's self-insured retention, which is currently $500,000, and accordingly the fund presently has a targeted level of $1,500,000. 2 This is a "timing issue", where it is recommended that the GM have some authority to accelerate funds from the upcoming year to the current year in order to meet the contract commitment. It is also recommended that the GM Delegation of Authority be amended to include the same provision under the transfer authoritv between Droiects or use of continaencv. December 21, 2017 Regular Board Meeting Agenda Packet - Page 55 of 107 . ......... ■ I 10 1112 1 1111 W 111 21 ■ The Self -Insurance Fund (SIF) was established in 1986 to allow the District to self -insure a portion of its risks. This reduces the cost of insurance premiums and gives the District greater control over its retained losses. The Board establishes the amount of risk retained and reviews the self-insured retention Periodically to align it with the Board's risk tolerance, the District's loss experience. and insurance market conditions. Government Accounting Standards Board Statement No. 10 (GASB -10) established requirements on how public agencies must fund their self-insured risks. To comply with GASB -10, reserves for certain types of liability risks were segregated into a sub -fund that must be actuarially reviewed at least every two years. In order to fund GASB -10 retained risks this sub -fund ("A") shall maintain a minimum reserve of at least three times the amount of the District's self-insured retention, which is currently $500,000, and accordingly the fund presently has a targeted level of $1,500,000. 2 This is a "timing issue", where it is recommended that the GM have some authority to accelerate funds from the upcoming year to the current year in order to meet the contract commitment. It is also recommended that the GM Delegation of Authority be amended to include the same provision under the transfer authoritv between Droiects or use of continaencv. December 21, 2017 Regular Board Meeting Agenda Packet - Page 55 of 107 Page 20 of 25 Number: BP 017 FISCAL RESERVES Page 6 of 10 Provisions Regarding Usage: Draws from the Reserve: Reserve funds are used to pay claims and claims expenses within the self-insured retention during the fiscal Individual payments are reported to the Finance Committee in the monthly expenditures report and to the Administration Committee in Risk Management Reports. Total fund expenditures are reported to the Board in the Risk Management Annual Report. Payments are governed by the limits set in the GM Delegation of Authority. Additions to the Reserve: Annually, upon the Board's adoption of the SIF and O&M budgets, this reserve is replenished with O&M funds in an amount needed to meet the minimum reserve requirements stated above. D. Self -Insurance Emergency Reserves (Designated) In order to mitigate the financial impacts and maintain uninterrupted service in the event of an emergency or catastrophic event they District maintains an Emergency €ted Reserve balance of $5 million in the self_;nsuraRGe fi iRdSIF. This reserve (housed in the SIF (Sub Fund Q, holds funds for the followin purposes: 1. Insurance premium payments and related expenses 2. Claims settlements and expenses for self-insured losses not governed by GASB 10 3. Costs to initiate claims against others 4. Funds reserved to respond to emergency conditions as determined by the Director of Emergency Services. Provisions Regarding Usage: Draws from the Reserve: • Draws for items 1, 2, and 3 shall be made in accordance with the GM's authority outlined in Resolution 2016-046 or updates thereto. • Draws for item 4 shall be made in accordance with the authority granted to the Director of Emergency Services as outlined in Resolution 2010-089 or updates thereto. Additions to the Reserve: This fund is replenished annuallv upon the Board's adoption of the SIF Budget. O&M funds are transferred in the amount needed to maintain a reserve of $5 million. December 21, 2017 Regular Board Meeting Agenda Packet - Page 56 of 107 Page 21 of 25 Number: BP 017 FISCAL RESERVES Page 7 of 10 E. Debt Service Reserves "Bond Reserve" (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. Changes to the reserve amount typically only occur due to: (1) additional debt being issued; (2) the required reserve amount changes due to normal amortization and repayment of debt; and (3) the debt is fully amortized and the reserve is extinguished. Provisions Regarding Usage: Draws from the Reserve: Use of the reserve to pay debt service would occur if the funding requirement decreased, in this case, excess funds would be applied to next required debt payment; or funds were otherwise unavailable to pay debt service and would only occur in extraordinary situations. In such circumstances, the GM would notify the Board of the Dlanned use of the reserve. and resort via GM written announcement at a subsequent next upcoming Board meeting. Additions to the Reserve: are made in connection with a Board approved bond issuance during the bond closing process. F. GASB 45 OPEB Trust (Des ig Rated Restricted) The District has negotiated and provides a—retiree Other _E -post Eemployment Hhealth Cc -are Bbenefits (OPEB) for retired employees that meet certain criteria. Biannually, the District updates funding requirements needed to provide these benefits by conducting an actuarial study. While the OPEB G"�TTtrust is not a District reserve, the District's funding intent is to perform biennial actuarial studies and deposit into the trust the recommended A,RRwal Required Centro actuarially determined contribution. The investments in the OPEB Trust are managed by an investment advisor with oversight by District staff and the Board Finance Committee. Provisions Regarding Usage: Draws from the Trust: A planned draw from the OPEB Trust may be included in a Board adopted budget and executed by the GM. Only premiums, claims, and/or administrative costs for OPEB related expenses paid for by the District for the current year or one year back are eligible for December 21, 2017 Regular Board Meeting Agenda Packet - Page 57 of 107 Page 22 of 25 Number: BP 017 FISCAL RESERVES Page 8 of 10 reimbursement or distribution through the OPEB Trust. Health care costs or other premiums for current active employees are not eligible. Additions to the Trust: An amount may be included in a Board adopted budget to pay down unfunded employee related liabilities for pension or OPEB obligations. If specifically designated for OPEB, the GM may direct such funds be deposited into the OPEB Trust. The Board may also direct that other funds, such as those available from favorable budget variances are also directed to the OPEB Trust. G. Section 115 Pension Prefunding Trust (Restricted) The District has established an IRS Code Section 115 Pension Prefundina Trust to allow for voluntary contributions toward pension obligations. The name of the Trust per the resolution is the "Public Agencies Post -Employment Benefits Trust", which is a multi-employer trust administered by PARS. This Pension Prefunding Trust allows contributions to count toward the unfunded liability (and as a result the funded ratio) while not placing the contributions with the Contra Costa County Employee's Retirement Association (CCCERA). Only premiums, claims, and/or administrative costs for pension related expenses paid for by the District for the current year or one year back are eligible for transfer, payment, or reimbursement from the Prefunding Pension Trust. The Pension Prefunding Trust may be withdrawn by the District and contributed to CCCERA at a time convenient for the District. Uses for this Trust may include mitigating rate volatility, or to offset normal cost expenses that are required even when all liabilities have been met. The District may make budgeted and planned contributions to the Pension Prefunding Trust, or may make contributions based on the availability of funds from favorable budget variances in either case, subject to Board approval. The investments in the Pension Prefunding Trust are managed by an investment advisor with oversight by District staff and the Board Finance Committee. The Section 115 Pension Prefunding Trust is not a District reserve. Provisions Regarding Usage: Draws from the Trust: A planned draw from the Pension Prefunding Trust may be included in a Board adopted budget to pay required CCCERA pension contributions, and withdrawals up to that amount may be executed by the GM. Withdrawals in excess of that amount would require additional Board authorization. Transfers, payment and reimbursement from the Pension Trust are allowed for the following: December 21, 2017 Regular Board Meeting Agenda Packet - Page 58 of 107 Page 23 of 25 Number: BP 017 FISCAL RESERVES Page 9 of 10 • Transfer to a Qualified Trust for employer contribution (e.g. retirement system); • Distribution directly to insurer, third party administrator, service provider or other entities providing services in connection with determining the employer's pension obligation; and • Reimbursement to the employer for employer contributions made to a Qualified Trust and/or related pension administrative costs paid by the employer. Additions to the Trust: An amount may be included in a Board adopted budget to pay down unfunded employee related liabilities for pension or OPEB obligations. If specifically designed for pension liabilities, the GM may direct such funds be deposited into the Pension Prefunding Trust. The Board may also direct that other funds, such as those available from favorable budget variances are also directed to the Pension Prefunding Trust_ Management Responsibility 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. Manaaement will report on the use of the reserve funds as required above, and mrough recurring financial reporting mechanisms. Investing Reserve Funds Reserve Funds will be invested according to the District's Statement of Investment Policy, BP 005. Furthermore, the Restricted fund investments are managed by Public Agency Retirement Services (PARS) the Trust Administrator, Highmark Capital Manaaement is the Investment Manaaer. and US Bank is the Trustee Custodian of assets. Inter Sub -Fund Borrowings and Transfers of Reserve Funds • Temporary borrowings: transfers of cash or investments between sub -funds (Running Expense, Sewer Construction, and Self -Insurance) on an interim basis for cash management purposes may be effectuated by the GM consistent with the GM delegation of authority. Such temporary borrowings are recorded as a due to/due from in each sub -fund and are typically cleared when monies are available in the recipient sub -fund. December 21, 2017 Regular Board Meeting Agenda Packet - Page 59 of 107 Page 24 of 25 Number: BP 017 FISCAL RESERVES Page 10 of 10 • Permanent transfers: transfers between sub -funds on a permanent basis may be specified in the District's financial plan and budget, and would be approved by the Board through the adoption of the annual budget or rates. [Original Retained by the Secretary of the District] December 21, 2017 Regular Board Meeting Agenda Packet - Page 60 of 107 $90,000,000 $80,000,000 — $70,000,000 $60,000,000 $50,000,000 - $40,000,000 $30,000,000 $20,000,000 $10,000,000 Page 25 of 25 Attachment 3: Combined O&M and Capital Reserve Cash and Investment Balances m 0 o''o 'o wO Z o - O Zo o 9 0 Z o - O Z o 0Z o - � ¢ � FY 2012-13 FY 2013-14 FY 2014-15 FY 2015-16 FY 2016-17 —Cash and Investment Balance —Policy Working Capital Reserve Level (5/12 0&M, 50°% of CIP) OMeasurement date for compliance with targeted fiscal reserve balance. December 21, 2017 Regular Board Meeting Agenda Packet - Page 61 of 107