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HomeMy WebLinkAbout11. Public hearing re adoption of FY 2018-19 District Budget Pagel of 264 Item 11. CENTRAL SAN BOARD OF DIRECTORS ' POSITION PAPER MEETING DATE: JUNE 7, 2018 SUBJECT: CONDUCT PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONS IDER ADOPTING THE FISCAL YEAR (FY) 2018-19 DISTRICT BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE (O&M), CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE SUBMITTED BY: INITIATING DEPARTMENT: THEAVASSALLO, FINANCE MANAGER ADMINISTRATION-FINANCE REVIEWED BY: TODD SMITHEY, FINANCE ADMINISTRATOR PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ANN SASAKI, DEPUTY GENERAL MANAGER ROGER S. BAILEY, 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, Capital Improvement, Self-I nsurance, and Debt Service. BACKGROUND The proposed Fiscal Year(FY) 2018-19 Budget was presented as a combined budget which incorporates into one document the Operations and Maintenance Fund (O&M), Sewer Construction Fund (for capital improvements), Self-I nsurance Fund and Debt Service Fund. The document was delivered at the May 3, 2018, Board meeting and a detailed presentation was made on May 17, 2018, 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 Board confirmed the second year rate increase at its April 26, 2018 Board meeting which will go into effect on July 1, 2018. 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 June 7, 2018 Regular Board Meeting Agenda Packet- Page 120 of 446 Page 2 of 264 Service Study(COSS) by Raftelis Financial Consultants, Inc., to assess Central San's overall staffing needs and analyze Central San's rate structure. 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 2017-18 FY 2018-19 Annual SSC Increase Annual SSC Single Family $530 $37 $567 Residences Multi-Family Residences $513 $36 $549 Effective Date July 1, 2017 July 1, 2018 (Residential rates shown in dollars per residential unit.) As shown in the Proposition 218 Notice mailed in Non Commercial: February 2017 to property owners and the Wastewater Cost of Service Study dated May 21, 2015. The Board validated the factors supporting the need for the FY 2018-19 rate increase on April 26, 2018. The proposed FY 2018-19 total Budget is $139.6 million, an increase of$2.3 million or 1.7% over the FY 2017-18 Budget of$137.2 million. FY 2017-18 FY 2018-19 Variance Percent Budget Budget Variance Operations & o Maintenance $89,713,587 $89,720,456 $6,869 0.0/o Sewer Construction $42,774,000 $45,319,000 $2,545,000 5.9% Debt Service $3,819,099 $3,611,038 $(208,061) -5.4% Self-Insurance $936,500 $924,500 $(12,000) -1.3% Total Budget $137,243,186 1 $139,574,994 $2,331,808 1.7% This position paper focuses on variances between the proposed FY 2018-19 Budget and the FY 2017-18 Budget. O&M Budget O&M Revenue: The following table compares revenues for FY 2018-19 to FY 2017-18. FY 2017-18 FY 2018-19 Variance Percent Budget Budget Variance Sewer Service Charge (O&M) $75,220,700 $67,073,732 $(8,146,968) -10.8% City of Concord $15,200,000 $14,800,000 $(400,000) -2.6% All Other $4,238,000 $5,052,000 $814,000 19.2% Total Revenue $94,658,700 $86,925,732 $(7,732,968) -8.2% Total Central San O&M Revenue for FY 2018-19 is projected at$86.9 million compared to the FY 2017- 18 budgeted amount of$94.7 million, a decrease of$7.7 million or 8.2%. This is due to the following: • While the SSC rates are increasing, the O&M allocation of SSC is decreasing from 84.3% to 70.6% due to higher allocation of SSC transferred to the Capital I mprovement Budget in FY 2018-19. The net result of these changes is a decrease in total O&M SSC of$8.1 million or 10.8%. • 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 $14.8 million, $0.4 million, or 2.6%, less than FY 2017-18 due to an overall flat O&M budget for FY 2018-19 and projected expenses in FY 2017-18 being lower than budgeted. • A draw from reserves of$2.8 million is used to fund expenditures not covered by the above revenues. However, the projected reserve balance as of June 30, 2018, is above the targeted level. June 7, 2018 Regular Board Meeting Agenda Packet- Page 121 of 446 Page 3 of 264 O&M Expense: The following table compares expenses for FY 2018-19 to FY 2017-18. Budget to FY 2017-18 FY 2018-19 Budget Percent Budget Budget Variance Variance Salaries&Wages 34,797,628 35,571,037 773,409 2.2% Benefits&Cap O/H Credit 12,655,155 12,655,572 417 0.0% Salary&Benefits(Active Employees) 47,452,783 48,226,609 773,826 1.6% Benefits(Retirees) 5,946,000 5,941,200 (4,800) -0.1% Retirement UAAL 11,679,261 10,720,478 (958,783) -8.2% Additional UAAL 2,500,000 2,500,000 - 0.0% Total UAAL 14,179,261 13,220,478 (958,783) -6.8% Total Labor Related Costs 67,578,044 67,388,287 (189,757) -0.3% Chemicals 1,482,000 1,459,000 (23,000) -1.6% Utilities 4,639,790 4,142,550 (497,240) -10.7% Repair&Maintenance 5,299,754 5,414,644 114,890 2.2% Hauling&Disposal 1,023,975 1,126,475 102,500 10.0% Professional&Legal Fees 807,600 845,300 37,700 4.7% Outside Services 3,452,717 3,510,822 58,105 1.7% Self Insurance Fund 585,000 779,500 194,500 33.2% Materials&Supplies 2,059,325 2,108,126 48,801 2.4% Other Expenses 1 2,785,382 2,945,752 160,370 5.8% Total Other O&M 22,135,543 1 22,332,169 196,626 0.9% Total Expenditures 89,713,587 89,720,456 6,869 0.0% Contribution to Reserve 4,945,113 (2,794,724) (7,739,837) -156.5% The total O&M expenses are projected to be $89.7 million in FY 2018-19, unchanged from the $89.7 million in FY 2017-18. Variances are discussed in detail below. O&M Salaries: Central San's budgeted salaries are $35.6 million in FY 2018-19, compared to $34.8 million in FY 2017-18, representing an increase of$0.8 million, or 2.2%. The primary driver of this is an assumed salary adjustment effective May 2018 (based on the Bay Area consumer price index change from February 2017 to February 2018), and step increases for newer employees. These additional costs are offset by an increase in the vacancy factor and the assumption that vacant positions will be filled by lower paid employees. Benefits Including Capitalized Administrative Overhead Credit (excluding Retirement UAA.Q: Central San benefits for the O&M budget are $18.7 million in FY 2018-19 compared to $18.6 million in FY 2017-18 an increase of $0.1 million or 0.3%. Given the timing of the budget process, assumptions were made on program costs pending the availability of actual announced changes by the providers. These assumed cost changes for budget purposes, and the actual cost changes subsequently announced by the carriers are discussed in the bullet points below. The primary benefit rate assumptions are as follows: • Kaiser- The budget assumes a $306,000 reduction. In late April 2018, after the budget assumption was made, the carrier announced a 4.9% premium decrease compared to the rates paid in FY 2017- 18 (representing a $260,000 reduction). As the majority of employees receive Kaiser healthcare, these cost savings will help offset the increase in Heath Net rates (reflected in the following bullet). • Health Net- No rate change was assumed for budget purposes. Subsequently, the carrier announced a 16% rate increase from the levels charged in FY 2017-18. As noted above, savings from the Kaiser decrease will help absorb a portion of this increase. Overall, healthcare costs for the existing Kaiser and Healthnet plans will increase by about$492,000 from the rates paid in FY 2017- June 7, 2018 Regular Board Meeting Agenda Packet- Page 122 of 446 Page 4 of 264 18. Savings from other benefit plans, savings from the transition to the CaIPERs plans, or other budget savings can help address this now known variance. • CCCERA—The retirement rate is decreasing 2.9%for legacy employees and 4.9%for PEPRA employees, offset by higher pensionable wages. This is compared to a 7.6% decrease and 11.2% decrease for legacy and PEPRA employees, respectively, in FY 2017-18. • Delta Dental —A 4% rate increase is assumed for budget purposes. Subsequently, the carrier announced that rates are to be held flat. • Long-Term Disability—A 3% rate increase is assumed for budget purposes. Subsequently, the carrier announced that rates are to be held flat. • Employee Assistance Program —A 3% rate increase is assumed for budget purposes. Subsequently, the carrier announced that rates are to be decreased 5.1%from the rates paid in FY 2017-18. • Workers' Compensation—The budget assumes an estimated 10.0% rate increase. • Life Insurance —A 3% rate increase is assumed for budget purposes. Subsequently, the carrier announced that rates are to be held flat. The proposed FY 2018-19 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 other post-employment benefits (OPEB) 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 the OPEB Public Agency Retirement Services (PARS) investment trust to fund future retiree benefit costs. All Other O&M Expenses: The remaining O&M non-labor expenses total $22.3 million in FY 2018-19, compared to a budget of$22.1 million in FY 2017-18. This is an increase of$0.2 million or 0.9%. Additional information is included in the individual division budgets. The areas of most significant changes include the following: • Chemicals — This expense was reduced by$23K, or 1.6%, due to lower usage of chemicals in the Pumping Stations. • Utilities—This expense decreased $497K or 10.7%, due to lower use of electricity from Pacific Gas and Electric (PG&E) due to Cogeneration System improvement and the lower cost of pre-purchased natural gas. • Repairs and Maintenance—This expense increased $115K, or 2.2%, due to increased mechanical repair expenses offset by the elimination of bypass pumping expense. • Hauling and Disposal —This expense increased $103K, or 10%, due to higher household hazardous waste disposal rates and the new screens at the Headworks facilities at the Treatment Plant. • Professional and Legal Fees — This expense increased $38K, or 4.7%, due to legal review of updates to policies and procedures budgeted in the Office of the Secretary of District. • Outside Services—This expense increased by$58K, or 1.7%, due to non-capital security improvement, increased recruitment expense and increased cost-of-service consultant spending offset somewhat by a net reduction in outside temporary help. • Self-Insurance Expense — This expense increased by$195K, or 33%, and funds the requirements for the payment of premiums and estimated losses based on historical trends. • Materials and Supplies — This expense increased $49K, or 2.4%, due to small budgetary increases across many divisions. • Other Expenses —This expense increased by$160K, or 5.8%, due to Proposition 218 notice expenses and the fall 2018 Board election. • Conferences—This expense is included in the Other Expenses category. The table below shows that overall spending on conferences remains essentially flat from the current year budget to FY 2018-19 compared to FY 2017-18. FY 2017-18 FY 2018-19 Percent Budget Budget Variance Variance Board Conferences $45,000 $45,000 $0 0% June 7, 2018 Regular Board Meeting Agenda Packet- Page 123 of 446 Page 5 of 264 District-Wide Conferences, Out-of-State* $59,450 $82,500 $23,050 39% District-Wide Conferences, In- State $170,675 $148,900 ($21,775) -13% Total $275,125 $276,400 $1,275 0% Capital Improvement Budget(Sewer Construction Fund) Sewer Construction Fund revenues are projected to increase by$16.6 million, from $39.3 million in FY 2017-18 to $55.9 million in FY 2018-19. This increase is to cover an extensive capital improvement program and will be generated primarily through an increase in sewer service charges of$14.0 million, resulting from $5.8 million of additional revenue available from the 7% rate increase effective July 1, 2018, as well as $8.1 million SSC reallocated from O&M. The City of Concord reimbursement increased $1.2 million due to higher flows and increased cost-based reimbursement, and Ad Valorem Tax increase of$1.2 million. Budgeted capital expenditures for FY2018-19 are $45.3 million, a $2.5 million increase over the FY 2017-18 budget of$42.7 million (excludes any carry forward). I n FY 2018-19, $10.6 million is contributed to reserves, making funding available to offset future years borrowing. 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-I nsurance Revenue for FY 2017-18 is $1.0 million; expenses are $0.9 million, and the ending reserve balance is $6.7 million. Changes from the current year budget includes a$0.2 million higher revenue allocation from O&M. 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. Under the requirements of GASB-10, risks that can be actuarially studied must be funded based on an actuarialstudy 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 C: 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. Staff projects excess liability and property insurance renewal premiums of up to $420,000, and $150,000 respectively, based on the latest communications available with the insurance broker. Since insurance renewal quotes are not yet available, staff recommends that the Board authorize the General Manager to renew the excess liability and property insurance up to this projected amount along with its approval of the FY 2018-19 Self-Insurance Budget. 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. Debt Service Budget Debt Service for FY 2018-19, includes payments on the 2009 bonds, or the replacement debt from refinancing these bonds. Debt Service for FY 2018-19 is $3.6 million, a reduction from $3.8 million in FY June 7, 2018 Regular Board Meeting Agenda Packet- Page 124 of 446 Page 6 of 264 2017-18 due to the repayment of the outstanding State of California Water Reclamation Loan in FY 2017- 18. 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 Operations and Maintenance 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 cash funded, capital projects budget at the start of each fiscal year. For the Self-I nsurance 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. The projected reserve balance compared to the required policy level is shown in the next table. Sewer Self Construction I nsurance O&M Fund Fund (Capital) Fund Totals Projected Balance as of June 30, 2018 $40,265,845 $29,053,312 $6,516,933 $75,836,090 Projected Balance as of June 30, 2019 $37,471,121 $39,623,580 $6,552,683 $83,647,384 Change Year Over Year $(2,794,724) $10,570,268 $35,750 $7,811,294 Reserve Policy Target end of June 30, 2018 $37,383,523 $22,659,500 $6,500,000 $66,543,023 Projected Balance Minus Reserve Policy Target at June 30, 2018 $2,882,322 $6,393,812 $16,933 $9,293,067 Reserve Policy Target end of June 30, 2019 $37,271,483 $30,379,000 $6,500,000 $74,150,483 Projected Balance Minus Reserve Policy Target at June 30, 2019 $199,638 $9,244,580 $52,683 $9,496,901 This table presents a summary of Central San's current reserve balance projections compared to the Board Policy targets. The reserve levels are projected to be above the policy-required levels at June 30, 2018 and 2019. The FY 2018-19 revenue requirement funds a projected $7.8 million increase in the reserve balances. While the FY 2019-20 capital budget and funding combination is yet to be finalized, the current projection anticipates $9.2 million of funding above the targeted level, providing for the ability to June 7, 2018 Regular Board Meeting Agenda Packet- Page 125 of 446 Page 7 of 264 reduce the proportion of the capital improvement budget that would otherwise be financed with bonds. The amounts are subject to change based on actual financial results for the current and next fiscal years. CEQA: Staff has evaluated the FY 2018-19 Operation and Maintenance, Self-I nsurance, Debt Service and Capital Improvement Budgets and concludes the adoption of these budgets are not projects, or ministerial in nature, are exempt from the California Environmental Quality Act (CEQA) under Central San's CEQA Guidelines Section 15301, since each funds the ongoing operations of Central San and the Capital Improvement Budget 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 present time. Approval of the FY 2018-19 Budgets will establish the Board of Directors' independent finding that these budget documents are 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 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. ALTERNATIVES/CONSIDERATIONS The Board has considered during FY 2017-18 numerous financial planning alternatives and assumptions culminating in the April 26, 2018 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. FINANCIAL IMPACTS The FY 2018-19 Budget was prepared using the Board-approved annual SSC rate increases of$37 for single family(S) and $36 for multi-family (M). The $567S/$549M SSC in FY 2018-19 is allocated as follows: O&M 70.6%; Capital 29.4%. The FY 2018-19 O&M Budget results in a $2.8 million decrease in O&M ending reserves, and total O&M reserves are projected to be $37.5 million at the end of FY 2018- 19. The FY 2018-19 Sewer Construction Budget results in a $10.6 million increase in reserves, and total Capital reserves are projected to be $39.6 million at the end of FY 2018-19. COMMITTEE RECOMMENDATION The Finance Committee received an overview of the FY 2018-19 O&M Budget, Self-I nsurance, and Debt Service Budget on May 21, 2018. The Engineering and Operations Committee reviewed the Capital Improvement Budget on May 7, 2018. RECOMMENDED BOARD ACTION Conduct a public hearing and adopt the FY 2018-19 Central San Budget as follows: 1. Find that the FY 2018-19 Budget is exempt from CEQA; 2. Adopt those portions of the FY 2018-19 Operations and Maintenance Budget related to Bay Area Clean Water Agencies (BACWA), specifically, the cost of$462,000; 3. Adopt the remaining portion of the FY 2018-19 Operations and Maintenance Budget apart from the BACWA costs; 4. Adopt the FY 2018-19 Capital Improvement Budget; 5. Adopt the FY 2018-19 Self-Insurance Budget; 6. Adopt the FY 2018-19 Debt Service Budget; 7. Authorize the General Manager to renew the District's expiring: a. Excess liability insurance for a premium not to exceed $420,000; and June 7, 2018 Regular Board Meeting Agenda Packet- Page 126 of 446 Page 8 of 264 b. Property insurance for a premium not to exceed $150,000. 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. Final Draft FY2018-19 District Budget 2. Errata Sheet June 7, 2018 Regular Board Meeting Agenda Packet- Page 127 of 446