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Home My WebLink About03. Approve updated Administrative Overhead Percentage of 219% for Fiscal Year 2018-19 Page 1 of 4 Item 3. CENTRAL SAN BOARD OF DIRECTORS ' POSITION PAPER MEETING DATE: FEBRUARY 1, 2018 SUBJECT: APPROVE UPDATED ADMINISTRATIVE OVERHEAD PERCENTAGE OF 219% FOR FISCAL YEAR 2018-19.APPROVAL RECOMMENDED BY FINANCE COMMITTEE. SUBMITTED BY: INITIATING DEPARTMENT: THEAVASSALLO, FINANCE MANAGER ADMINISTRATION-FINANCE REVIEWED BY: CHRIS THOMAS, FINANCE ADMINISTRATOR PHILIP R. LEI BER, DIRECTOR OF FINANCEAND ADMINISTRATI ON ANN SASAKI, DEPUTY GENERAL MANAGER ROGER S. BAILEY GENERAL MANAGER Ann Sasaki Deputy General Manager ISSUE Board approval is needed to revise the annually updated administrative overhead percentage in order to recover the full cost of the indirect services provided by Central San. This overhead rate is used for several purposes including billing outside agencies, calculating certain customer rates and charges, and for internal use in charging overhead to capital projects. BACKGROUND In prior years, the purpose of calculating administrative overhead, employee benefits, and non-work hours rates was to follow the Board's direction for Central San to recover the full cost of the indirect services it provides. I n an effort to set the rate early enough to be used for calculating rates and charges and the February 1, 2018 Regular Board Meeting Agenda Packet- Page 51 of 148 Page 2 of 4 negotiation of the Clean Water Program contract, staff brings the annual updated percentage to the Board every January. Administrative overhead consists of all administrative indirect costs for Central San that are incurred for a common purpose benefiting more than one task. This rate includes Administration Department staff salaries, retirement costs, administration portion of Other Post-Employment Benefits (OPEB)trust contributions for active and retired employees, and any additional Unfunded Actuarial Accrued Liability (UAAL) payments allocated to administration. Employee benefits consist of costs associated with retirement pension payments, medical premiums, deferred compensation contribution in lieu of social security, and other similar benefits expressed as a percent of salaries. Non-work hours consist of the value of vacation, sick leave, administrative leave, birthday holiday, and earned overtime expressed as a percentage of annual work hours. During 2013, Central San's staff, in conjunction with Matrix Consulting Group (Matrix), reviewed the methodology used by Central San and analyzed other allowable methods used to calculate overhead. Matrix issued its report in March 2014, which stated that the methodology that Central San previously used was compliant with State and Federal guidelines, and was generally consistent with other agencies and jurisdictions, so there was no immediate need for change. It was suggested by several Board members that staff conduct further analysis as to Central San's methodology for calculating the administrative overhead percentage prior to presenting the matter for consideration for Fiscal Year(FY) 2014-15. Consequently, Central San staff, with the help of Matrix, had proposed and recommended a slightly different methodology for calculating the administrative overhead percentage for FY 2014-15 and beyond. The four main items addressed by Central San staff and the consultant included the treatment of the following: • Use of audited or budgeted benefit amounts for the employee benefits component • OPEB contributions for active employees and retirees • Retiree premiums • Additional UAAL payments On April 3, 2014 the Board approved the following: 1. A change/clarification in methodology for calculating Central San's administrative overhead percentage, commencing with FY 2014-15 as follows: • Use audited cost of benefits for the benefits component of the calculation • Allocate the OPEB contribution for active employees and retirees to their respective departments, and include only the administrative portion in the administrative component • Continue to treat retiree premiums as indirect, and include them in the administrative overhead component • Allocate any additional UAAL payments to their respective departments, and include only the administrative portion in the administrative overhead component 2. A single administrative overhead percentage is to be used for billing outside agencies, calculating the annual Environmental and Development Rates and Charges, and for internal use in charging to capital projects (administrative and non-work hours percentages used); and 3. A three-year smoothing methodology going forward to adjust for volatility in the rate, using FY 2014-15 as the base year. The rate for FY 2015-16 would be based on two years and it would not be until FY 2016-17 that an actual three-year smoothing would be able to be utilized. February 1, 2018 Regular Board Meeting Agenda Packet- Page 52 of 148 Page 3 of 4 For FY 2018-19, the largest contributors to the net change in the total administrative overhead rate (three- year smoothed)were: • Employee benefits retirement costs decreased (numerator), and salaries increased due to Memorandum of Understanding (MOU) - specified cost of living (COLA) and other salary changes (denominator), resulting in a net decrease • Administrative overhead expenses were relatively flat the last 2 years (numerator), and salaries increased (denominator), resulting in a net decrease • The effects of three-year smoothing results in an overall net decrease Central San's rate for FY 2018-19 decreased to 219% from 225% in FY 2017-18. See Attachment 1 for a summary of the rates for FYs 2018-19, 2017-18, and 2016-17. ALTERNATIVES/CONSIDERATIONS The administrative overhead calculation methodology could be modified resulting in an increased or reduced percentage. It is not recommended to modify the method again as the new method was approved by the Board in April 2014. FINANCIAL IMPACTS The administrative overhead percentage is calculated annually for the purpose of recovering administrative overhead and employee benefit costs when charging to capital projects, recovering full costs for services provided to another agency, company or developer, and for customer billings involving labor costs. COMMITTEE RECOMMENDATION The proposed three-year smoothed administrative overhead percentage of 219% for FY 2018-19 was reviewed by the Finance Committee at its January 23, 2018 meeting. The Committee recommended Board approval. RECOMMENDED BOARD ACTION Approve the use of the administrative overhead percentage of 219% for Fiscal Year 2018-19. GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility Strategy 1 - Conduct Long-Range Financial Planning, Strategy 2- Manage Costs ATTACHMENTS: 1. Administrative Overhead Calculation Summary for Fiscal Year 2018-19 February 1, 2018 Regular Board Meeting Agenda Packet- Page 53 of 148 ATTACHMENT 1 Central Contra Costa Sanitary District Administrative Overhead Summary For the 2018-19 Budget - Calculated using 2016-2017 Audited Financial Statements Current Year 3 Year Calculation Last Year's Two Years ago Smoothed Unsmoothed Unsmoothed Unsmoothed Year 2018-2019 2018-2019 2017-2018 2016-2017 Employee Benefits 95.21% 80.63% 91.52% 113.04% Administrative Overhead 106.10% 102.29% 109.37% 106.63% Non-work Hours 18.02% 18.06% 18.04% 18.12% 219.33% 200.98% 218.93% 237.79% Smoothed Rate 219% 219% 225% 216% Years in Smooth Rate 3 yr 3 yr 3 yr 3 yr Comparison of Rate Before Smoothing 2017-2018 2016-2017 Decrease Employee Benefits 81% 92% -11% Administrative Overhead Page 4 of 4 102% 109% -7% Non-work Hours 18% 18% 0% Total 201% 219% -18% Summary of Increases (Decreases) Employee Benefits: Total adjusted benefits (numerator) decreased by 6.3%, and total salaries (denominator) increased by 6.4%, causing -11% the overall decrease FY 2016-17 FY 2015-16 Difference Benefits (numerator) $28.0 $29.9 ($1.9) Salaries (denominator) 34.7 32.6 2.1 Admin Overhead: Total adjusted indirect costs (numerator) decreased by less than 1%, but total direct salaries (denominator) increased by 6.2%, causing the overall decrease -7% FY 2016-17 FY 2015-16 Difference Indirect costs (numerator) $29.0 $29.2 ($0.2) Direct salaries (denominator) 28.4 26.7 1.7 01/16/18 11:57 AM Summary 1819 Page 1 February 1, 2018 Regular Board Meeting Agenda Packet- Page 54 of 148