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Home My WebLink About03.c. Review draft Position Paper to approve updated administrative overhead percentrage of 203% for Fiscal Year 2019-20, a decline from the prior year rate of 219% Page 1 of 4 Item 3.c. BOARD OF DIRECTORS ' POSITION PAPER DRAFT MEETING DATE: JANUARY28, 2019 SUBJECT: REVIEW DRAFT POSITION PAPER TO APPROVE UPDATED ADMINISTRATIVE OVERHEAD PERCENTAGE OF 203% FOR FISCAL YEAR 2019-20, A DECLINE FROM THE PRIOR YEAR RATE OF 219% SUBMITTED BY: INITIATING DEPARTMENT: CHRIS THOMAS, FINANCE ADMINISTRATOR ADMINISTRATION-FINANCE REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION 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 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. January 28, 2019 Special FINANCE Committee Meeting Agenda Packet- Page 117 of 126 Page 2 of 4 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. The rates for the upcoming year (FY2019-20) have been calculated in accordance with the above. Central San's rate (three-year smoothed)for FY 2019-20 decreased to 203% from 219% in FY 2018-19. This is the result of the continued decline in annual rates for each of the past four years (rounded): FY2019-20 FY2018-19 FY2017-18 FY2016-17 190% 201% 219% 238% FY2019-20 Rate {-----------Smoothed 3 year rate of 203%-----------} FY2018-19 Rate {-----------Smoothed 3 year rate of 219%----------} The largest contributors to the 11% decrease in the unsmoothed administrative overhead rate from 201% to 190% were: January 28, 2019 Special FINANCE Committee Meeting Agenda Packet- Page 118 of 126 Page 3 of 4 • 5.3% decrease resulting from: Employee benefits retirement costs decreased (numerator), while the denominator of the equation, salaries, increased due to Memorandum of Understanding (MOU) - specified cost of living (COLA) and other salary changes (denominator), resulting in a net decrease • 5.6% decrease resulting from: Administrative overhead expenses were flat for the last 2 years (numerator), while salaries increased (denominator).The effects of three-year smoothing results in an overall net decrease See Attachment 1 for a summary of the rates for FYs 2019-20, 2018-19, and 2017-18. ALTERNATIVES/CONSIDERATIONS The administrative overhead calculation methodology could be modified resulting in an increased or reduced percentage. Staff have been exploring various modifications to the overhead rate that could be applicable to certain situations, but have are not recommending changes at this time. 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 203% for FY 2019-20 will be reviewed by the Finance Committee at its January 28, 2019 meeting. The Committee's recommendation will be announced at the January 31, 2018 Board meeting. RECOMMENDED BOARD ACTION Approve the use of the administrative overhead percentage of 203% for Fiscal Year 2019-20. 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.Administrative Overhead Rate Calculation for Fiscal Year 2019-20 January 28, 2019 Special FINANCE Committee Meeting Agenda Packet- Page 119 of 126 Page 4 of 4 ATTACHMENT Central Contra Costa Sanitary District Administrative Overhead Summary For the 2019-20 Budget-Calculated using 2017-2018 Audited Financial Statements Current Year 3 Year Calculation Last Year's Two Years ago Smoothed Unsmoothed Unsmoothed Unsmoothed Year 2019-2020 2019-2020 2018-2019 2017-2018 Employee Benefits 82.6% 75.3% 80.6% 91.5% Administrative Overhead 102.7% 96.7% 102.3% 109.4% Non-work Hours 18.1% 18.2% 18.1% 18.0% 203.4% 190.2% 201.0% 218.9% Smoothed Rate 219% 225% Years in Smooth Rate Y1 3 yr 3 yr Comparison of Rate Before Smoothing 2019-2020 2018-2019 Decrease Employee Benefits 75% 81% -5.3% Administrative Overhead 97% 102% -5.6% Non-work Hours 18% 18% 0% Total 190% 201% -10.8% Summary of Increases(Decreases) Employee Benefits: Total adjusted benefits(numerator)decreased by 2.0%,and total salaries(denominator)increased by 5.0%,causing -5.3% the overall decrease FY 2017-18 FY 2016-17 Difference % Adjusted Benefits(numerator) $27.4 $28.0 ($0.6) -2.0% Salaries(denominator) $36.4 $34.7 $1.7 5.0% Admin Overhead: Total adjusted indirect costs(numerator)decreased by about 0.1%,but total direct salaries(denominator)increased by 5.7%,causing the overall decrease -5.6% FY 2017-18 FY 2016-17 Difference % Indirect costs(numerator) $29.0 $29.0 ($0.0) -0.1% Direct salaries(denominator) $30.0 $28.4 $1.6 5.7% 01/22/19 08:54 AM Summary Page 1 January 28, 2019 Special FINANCE Committee Meeting Agenda Packet- Page 120 of 126