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Home My WebLink About08.a. Receive FY 2017-18 Pre-Audit Year-End Finance Statement Summary Report and Potential Variance Alternatives Page 1 of 7 Item 8.a. CENTRAL SAN CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER MEETING DATE: SEPTEMBER 20, 2018 SUBJECT: RECEIVE FISCAL YEAR 2017-18 PRE-AUDIT YEAR-END FINANCIAL STATEMENT SUMMARY REPORT AND POTENTIAL VARIANCE ALTERNATIVES SUBMITTED BY: INITIATING DEPARTMENT: PHIL LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION-FINANCE ADMINISTRATION REVIEWED BY: ANN SASAKI, DEPUTY GENERAL MANAGER Roger S. Bailey General Manager ISSUE The Board of Directors approves the Operations and Maintenance (O&M), Capital Improvement (CIB), Self Insurance, and Debt Service budgets on an annual basis. At Fiscal Year (FY) end, staff reviews and compares the final revenues and expenditures, based on the pre-audit financial reports, to update the Board on the budget versus actual activity. BACKGROUND A public hearing was held on June 1, 2017, after which the Board adopted the FY 2017-18 budgets. The proposed revenue and estimated expenditures within the adopted FY 2017-18 budgets, actuals, variances, and year-end adjustments are summarized in Attachments 1 and 2. Attachment 1 summarizes the revenue and expense variances by Sub-Fund. It should be noted that the Sewer Construction Fund expenditures variance of $6.97 million is merely a timing issue; this amount has been added to the FY 2018-19 spending plan as a carry-forward. Additionally, the $633,881 favorable variance in Self Insurance will be addressed during the FY 2019-20 budget process through the allocation of O&M funds to Self- September 20, 2018 Regular Board Meeting Agenda Packet- Page 78 of 134 Page 2 of 7 Insurance.A lower allocation will be required due to the favorable variance. With those adjustments set aside, the amount of funds to be considered for allocation to various potential uses is therefore $11,733,029. Potential alternative uses for these funds are listed in Attachment 3. Staff recommend applying the $11.7 million to the Sewer Construction fund to reduce the need for borrowing. I n terms of context, with respect to the Sewer Construction Fund, the most recent outlook for borrowing in the financial model called for debt issuances of$50 million in FY 2019-20 and $135 million two years later. Three recent developments have already reduced the need for borrowing: 1. The interest savings from the recent refunding of the 2009 bonds. 2. Other adjustments in the forecast including a stronger ad valorem tax collection outlook; Concord related adjustments and other savings due to timing of the proposed bond offerings (a one year deferral). 3. The proposed application of the $11.7 million variance towards Sewer Construction. The need for borrowing inclusive of all these factors is affected as follows: Previous Forecast Current Forecast FY2019-20 $50M $77M FY2020-21 - - FY2021-22 $135M $77M FY2022-23 - - ---------- --------- Total Borrowing $185M $154M Further reductions may be possible if Central San successfully applies for and receives funds from the State Revolving Fund or other sources, which can provide for lower interest costs than the currently assumed use of Revenue Bonds. These matters will be discussed in more detail at the October 18, 2018 Debt Financial Planning Board Workshop. ALTERNATIVES/CONSIDERATIONS Absent specific Board action, the favorable variances would, through operation of the fiscal reserve policies and mechanics of the financial plan, be automatically applied to the Sewer Construction Fund. Staff recommend that course of action. Alternatively, the Board could elect to direct a portion of the variance toward the pay-down of employee related liabilities. The FY 2018-19 budget provides for$2.5 million in funding as an additional payment towards either Other Post-Employment Benefits (OPEB) or pension related liabilities. That amount could, for example, be dedicated toward the Pension Prefunding Trust, while a similar amount of the $11.7 million variance could be directed toward the GASB 45/OPEB Trust. FINANCIAL IMPACTS Due to the FY 2017-18 favorable variances in the O&M and CI B Budgets, the District's beginning cash balances for FY 2018-19 are higher than projected. September 20, 2018 Regular Board Meeting Agenda Packet- Page 79 of 134 Page 3 of 7 COMMITTEE RECOMMENDATION The Finance Committee reviewed this subject at its August 21, 2018 meeting and recommended receipt of the Pre-Audit Year-End Financial Statement Summary Report and the recommended variance alternatives. RECOMMENDED BOARD ACTION Receive the FY 2017-18 Pre-Audit Year-End Financial Statement Summary Report and potential variance alternatives. Strategic Plan re-In GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility Strategy 1 - Conduct long-range financial planning, Strategy 2- Manage costs ATTACHMENTS: 1. Variance Summary 2. O&M Variance and Charts 3, Options for Use of Variance September 20, 2018 Regular Board Meeting Agenda Packet- Page 80 of 134 Page 4 of 7 ATTACHMENT 1 Pre-Audit-June 2018 Financial Statement Summary and Variance Overview Budget Actual FY 2017-18 FY 2017-18 Variance Favorable/Unfavorable Operations&Maintenance Revenues $94,658,700 $95,997,227 $1,338,527 F See Attachment 2 Expenses 89,713,587 84,841,385 (4,872,202) F See Attachment 2 Total $4,945,113 $11,155,842 $6,210,729 Sewer Construction Revenues $39,327,800 $44,850,100 $5,522,300 F Capacity$1.8M from Dry Creek Sr.Housing Proj. Expenses 46,477,628 39,504,606 (6,973,022) F Total ($7,149,828) $5,345,494 $12,495,322 Self Insurance Revenues 727,000 1,213,070 486,070 F Receipt of FEMA reimbursements-2017 storm damage Expenses 936,500 788,689 (147,811) F Total (209,500) 424,381 633,881 Debt Revenues 3,819,099 3,818,057 (1,042) U Expenses 1,231,722 1,230,680 (1,042) F Principal PMT 2,592,119 2,592,119 Total (4,742) (4,742) 0 District Totals(4 Funds) Revenues $138,532,599 $145,878,454 $7,345,855 F Favorable Expenses/Debt Principal 140,951,556 128,957,479 (11,994,077) F Favorable Total ($2,418,957) $16,920,975 $19,339,932 Exclude: Sewer Construction Spending Variance due to Timing ($6,973,022) (Carried Forward to FY 2018-19 Budget) Exclude: Self Insurance variance that is addressed in FY 2019-20 $633,881 Budget Process through 0&M allocation to Self-Insurance Variance to be addressed $11,733,029 September 20, 2018 Regular Board Meeting Agenda Packet- Page 81 of 134 Page 5 of 7 ATTACHMENT 2 Pre-Audit-June 2018 Financial Statement Summary Operations and Maintenance Variance Analysis ($000) +Favorable Budget Actual Variance % Explanation Implications for future budgeting Revenues SSC-County $ 73,981 $ 73,899 $ (81) 0% N/A-Variance is below 1% SSC-Direct 1,096 1,476 380 35% Higher than anticipated development Conservative assumptions for growth are used City of Concord 15,200 14,974 (226) -1% N/A-Variance is below 1% Permit/Application Fees 420 630 210 50% Higher than anticipated development Conservative assumptions for growth are used;but 3 year average will pick up higher FY 2017-18 and FY 2018-19 experience Side Sewer Inspection 1,080 1,230 150 14% Higher than anticipated development Conservative assumptions for growth are used;but 3 year average will pick up higher FY 2017-18 and FY 2018-19 experience Recycled Water 335 467 132 39% RE&SC combined variance$93k due to higher than FY 2018-19 budget was increased for RW and all anticipated usage;ReW O&M expenses exceeded revenue is assumed to stay in RE subfund revenue,thus no excess revenue was transferred over to SC Annexation Charges 75 204 129 172% Higher than anticipated development Conservative assumptions for growth are used;but 3 year average will pick up higher FY 2017-18 and FY 2018-19 experience All Other 2.472 3.117 645 26% Includes seotic/overtime inspections.industrial Total Revenues $ 94,659 $ 95,997 $ 1,339 1% Favorable variance Expenditures Salaries&Benefits $ 67,579 $ 66,362 $ 1,217 2% Comprised of$950k salaries(unfilled vacancies in Will provide somewhat higher vacancy factor in the excess of vacancy factor)and$900k benefits(largely FY 2018-19 budget than the 2%of salaries and 3% retirement and medical insurance),offset by$635k in of benefits used for FY 2017-18,and capital work capitalized admin OH due to less capital work than by each employee was reexamined budgeted Chemicals 1,482 1,025 457 31% The commodity price for Lime is less expensive than Reduced budget in FY 2018-19 to reflect current what was budgeted. Other Chemicals usage has been pricing and usage. reduced through more accurate pump control. Utilities 4,640 4,349 291 6% Contiuned decrease in natural and landfill gas prices Reduced budget in FY 2018-19 to reflect current versus commodity price increases projected by US pricing. Energy Information Administration(EIS)during budgeting process. Repairs&Maintenance 5,300 4,429 871 16% Expense for repair of Miner Rd in Orinda budgeted, but not incurred saving$300K. Additional savings from a delay in completion of CSO CCTV. Outside Services 3,453 2,325 1,128 33% Less spent on various Technical Services-including: At times,items are not needed due to changed (1)HR District-wide training postponed to FY19-20 circumstances or delays $175K;(2)Emergency radio service$501K;(3)Cost of Service Consultant$1501K;(4)Treatment Plant Planning Support$92K;(5)SWRF Contracts$50K;(6)IT Consultants/Support$41K;(7)Air Source Testing 5117K-(RI Rprvrlpd WatPr nnnnrtunitipc Studv S1 nnK Other 7,260 6,351 909 13% $55K Public information savings $150K Internal audits budgeted in Professional Svcs, but actual expense incurred through payroll(Theresa Nidetz) $300K Nutrient Studies budgeted,but not incurred $150K savings from delay of BAAQMD Health Risk Assessment $43K Technical training&conferences savings $120K Professional reimbursement savings Total Expenses $ 89,714 $ 84,841 $ 4,873 5% Total under spent-Favorable Net $ 4,945 $ 11,156 $ 6,212 Favorable variance available for disposition September 20, 2018 Regular Board Meeting Agenda Packet- Page 82 of 134 N:\Accounting\GMTEMPI\Financials and Closing\2018 Financials\Attachment 2-0&M Variance and Charts 08/22/18 Page 6 of 7 ATTACHMENT 2 Pre-Audit-June 2018 Financial Statement Summary Operations and Maintenance Variance Analysis ($000) FY 2017-18 O&M Revenue Variances $73,981 $80,000 $73,899 $70,000 $60,000 $50,000 $40,000 $30,000 15,200 $20,000 14,974 $10,000 1,096 1,080 335 204 2,472 3,117 14.76 630 \ 1=30 467 75 SSC-County SSC-Direct City of Concord Permit/Application Fees Side Sewer Inspection Recycled Water Annexation Charges All Other ■Budget ■Actual FY 2017-18 O&M Expense Variances $80,000 $67,579 $70,000 $66,362 $60,000 $50,000 $40,000 $30,000 $20,000 4,640 5,300 7,260 $10,000 4,349 3,453 4,429 6,351 1=25 � 2,325 . 1i Salaries&Benefits Chemicals Utilities Repairs&Maintenance Outside Services Other ■Budget ■Actual September 20, 2018 Regular Board Meeting Agenda Packet- Page 83 of 134 N:\Accounting\GMTEMPI\Financials and Closing\2018 Financials\Attachment 2-O&M Variance and Charts 08/22/18 Page 7 of 7 ATTACHMENT 3 Pre-Audit-June 2018 Financial Statement Summary Options for Use of FY 2017-18 Budget Variances(O&M Revenues and Expenditures and Capital Revenues) # Item Description Alternatives 1 Further Bolster This is the default position. Without further action,the variances will be directed to(or $11,733,029 Sewer Construction retained by)the Sewer Construction sub-fund. Such monies will be in excess of the sub-fund reserve targeted reserve balance at the end of FY 2017-18,and would reduce any future year balance above level borrowing requirements that were otherwise anticipated for CIP needs. anticipated in Financial Plan and reduce future year's borrowing requirements 2 Pay down employee PFM previously advised Central San on the advantages of applying available funds towards TBD related liabilities employee related liabilities. Applying funds towards these liabilities can save Central San the assumed actuarial cost of these programs;for pension,this is 7.0%. Actual savings would depend on the actual market returns of the invested funds,but are targeted at the assumed actuarial return. Funds could be: a. Remitted directly to CCCERA. Not advised due to concerns about"superfunding"and once remitted the funds are not available to reduce future year's contributions. (Funding status at 12-31-16 valuation is 78.1%,and at 12-31-17 valuation is 81.1%excluding balance in Pension Prefunding Trust) b. Deposited in the GASB 45 OPEB Trust(Projected funding status at 7-1-17 is 47.5%,and in the mid-50s percentage range at 7-1-18. Funded ratio would be higher upon move to CalPERS health.) c. Deposited in the Section 115 Pension Prefunding Trust. With the current balance in the Pension Prefunding Trust,the Pension funding status rises from 81.1%to 82.4%. Total accounted for $11,733,029 Total available savings $11,733,029 Remaining $0 Additional Budgeted FY 2018-19 Funded for Pension or OPEB Trust $2,500,000 September 20, 2018 Regular Board Meeting Agenda Packet- Page 84 of 134