HomeMy WebLinkAbout03.d. Review draft Position Paper to receive Fiscal Year 2018-19 Pre-Audit Year-End Financial Statement Summary Report; consider alternatives for allocation of (1) $9.78 million FY 2018-19 favorable budget variance, and (2) $1.25 million budgeted in FY 2 Page 1 of 11
Item 3.d.
BOARD OF DIRECTORS
' POSITION PAPER
DRAFT
MEETING DATE: SEPTEMBER 24, 2019
SUBJECT: REVIEW DRAFT POSITION PAPER TO RECEIVE FISCAL YEAR 2018-19
PRE-AUDIT YEAR-END FINANCIAL STATEMENT SUMMARY REPORT;
CONSIDER ALTERNATIVES FOR ALLOCATI ON OF (1) $9.78 MILLION FY
2018-19 FAVORABLE BUDGET VARIANCE, AND (2) $1.25 MILLION
BUDGETED IN FY 2019-20 TOWARD EMPLOYEE-RELATED UNFUNDED
LIABILITIES
SUBMITTED BY: INITIATING DEPARTMENT:
KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE
PHILIP LEIBER, DIRECTOR OF FINANCE AND
ADMINISTRATION
REVIEWED BY: ANN SASAKI, DEPUTY GENERAL MANAGER
ISSUE
The Board of Directors approves the Operations and Maintenance (O&M), Capital Improvement (CIB),
Self-I nsurance, 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 and provides an
update to the Board on the budget-versus-actual activity. If there is a favorable budget variance, staff
typically provides alternatives for the Board's consideration for allocating the unspent funds. Finally, the FY
2019-20 budget provides for the payment of $1.25 million to be used toward employee-related unfunded
liabilities. The Board also will be asked to consider staff's recommendation for allocation of these funds.
BACKGROUND
A public hearing was held on J une 7, 2018, after which the Board adopted the FY 2018-19 budget. The
proposed revenue and estimated expenditures within the adopted FY 2018-19 budget, 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 $1.524 million is merely a timing issue; this amount has been added to the FY 2019-20
spending plan as a carry-forward. Additionally, the variance in the Self-I nsurance Fund is reconciled as
part of the budgeting process and will be resolved in the FY 2020-21 budget proposal.
With those adjustments, the amount of funds to be considered for allocation to various potential uses is
therefore $9.78 million, as detailed in Attachment 1.
Relevant Principles
I n terms of proposing an optimal recommendation, the following four principles are relevant for
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consideration.
1. Maintain adequate funding availability to ensure reliable operations;
2. Keep long-term Sewer Service Charge (SSC) rates as low as possible;
3. Provide SSC rate stability by minimizing significant unplanned fluctuations year to year; and
4. Minimize reliance on borrowing.
FY2018-19 Favorable Budget Variance
Keeping the above principles in mind, staff recommends the following as viable, balanced alternatives for
use of the $9.78 million favorable budget variance for FY 2018-19:
• Supplement Sewer Construction Fund: $5.92 million (Principle 4 above)
Bolstering the Sewer Construction Fund will reduce borrowing needs currently anticipated for FY
2022-23.
• Restore CIB contingency: $1.61 million (Principle 1 above)
Restoring the FY 2019-20 Cl B contingency back to $2 million through the following additions:
* $1.11 million -- In June 2019, $1.11 million of CIB contingency funding was directed to District
Project 8250 (Enterprise Resource Planning system). Restoring the CIB with this amount would
allow for funding other unforeseen projects or overages as needed in FY 2019-20.
$500,000 -- Increasing the Cl B contingency fund by an additional $500,000 would allow
funding, if needed, for power resiliency projects to ensure continuity of power for critical
operations in the event of a PG&E fire/weather related outage in conjunction with its
Public Safety Power Shutoff (PSPS) program.
• Deposit to Pension Prefunding Trust: $1.25 million (Principle 2 above)
The pay-down of unfunded actuarial accrued liabilities (UAAL)for pension and other post-employment
benefit (OPEB) obligations was recommended in 2016 by Central San's financial consultant, PFM.
Applying funds toward these liabilities can save Central San the assumed actuarial cost of these
programs; for pension, this is 7.0%. Actual savings would depend on actual market returns of the invested
funds but are targeted at the assumed actuarial return. Staff recommends that$1.25 million of the FY
2018-19 favorable budget variance be allocated toward the pension obligations.
• Increase in Self-Insurance Reserve: $1 million (Principles 1 and 3 above)
Last year the Finance Committee requested that staff consider increasing this reserve. A portion of
the FY 2018-19 variance could be directed toward the Self-I nsurance/Emergency reserve, with the
aim of bolstering the balance in the fund from $5 million to $10 million over the next several years, as
variance funding of this type becomes available. (Board Policy No. BP 017 — Fiscal Reserves is
scheduled for its biennial review this fall.) Having adequate funding available to restore operations in
the event of a natural disaster affecting the physical infrastructure is important to ensuring ongoing reliable
operations, and helps avoid the need for unplanned and significant rate adjustments.
FY 2019-20 Funds Allocated Toward UAAL
Staff is also seeking the Board's direction regarding the $1.25 million budgeted in FY 2019-20 for paying
down unfunded OPEB or pension-related liabilities. Staff recommends that this year's budgeted amount
be dedicated toward the GASB 45/OPEB Trust.
ALTERNATIVES/CONSIDERATIONS
The Board may elect to allocate the favorable FY 2018-19 budget variance toward the staff-recommended
alternatives proposed above or may elect to fund these choices at different levels.
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Absent specific Board action, the entire favorable budget variance would, through operation of the fiscal
reserve policies and mechanics of the financial plan, be applied to the Sewer Construction Fund.
FINANCIAL IMPACTS
Due to the FY 2018-19 favorable variances in the O&M and Cl B Budgets, the District's beginning cash
balances for FY 2019-20 are higher than projected when rates were established in April 2019 and
contemplated during the FY 2019-20 budget process. The variance of$9.78 million can be directed
toward multiple beneficial uses as described above. The financial impact is favorable to District
ratepayers regardless of which option is chosen, as there will be decreased future upward pressure on the
Sewer Service Charge.
COMMITTEE RECOMMENDATION
The Finance Committee reviewed this subject at its September 24, 2019 meeting
and recommended receipt of the Pre-Audit Year-End Financial Statement Summary Report and
supported the staff recommended budget allocations.
RECOMMENDED BOARD ACTION
Receive the FY 2018-19 Pre-Audit Year-End Financial Statement Summary Report and direct staff to:
1. Make the following allocations for utilization of the $9.775 FY 2018-19 favorable budget variance:
$5.92 million to the Sewer Construction Fund
$1.61 million to the Capital Improvement Budget contingency
$1.25 million to the Pension Prefunding Trust
$1.00 million to the Self-Insurance Reserve
$9.78 million
2. Allocate the $1.25 million additional UAAL contribution included in the FY 2019-20 budget to Central San's
GASB 45/OPEB Trust.
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. Variance Summary
2. Variance Detail and Charts
3. Presentation
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ATTACHMENT 1
Pre-Audit-June 2019
Financial Statement Summary
and Variance Overview
Budget Actual
FY 2018-19 FY 2018-19 Variance Favorable/Unfavorable
Operations&Maintenance
Revenues $ 86,925,732 $ 90,377,103 $ 3,451,371 F See Attachment 2
Expenses 89,720,456 85,342,786 4,377,670 F See Attachment 2
Total (2,794,724) 5,034,317 7,829,041
Sewer Construction
Higher than budgeted ad Valorem Property
Taxes as well as$1.31M Capacity Fee from
Revenues 55,889,268 60,899,723 5,010,455 F Viamonte Senior Living project
Expenses 45,319,000 43,794,306 1,524,694 F
Total 10,570,268 17,105,417 6,535,149
Self Insurance
Revenues 960,250 1,036,330 76,080 F
Expenses 924,500 1,125,404 (200,904) U
Total 35,750 (89,074) (124,824)
Debt
Revenues 3,611,038 3,505,005 (106,033) U
Expenses 1,135,780 1,025,005 110,775 F
Principal PMT 2,480,000 2,480,000 -
Total (4,742) - 4,742
District Totals(4 Funds)
Revenues 147,386,288 155,818,161 8,431,873 F Favorable
Expenses/Debt Principal 139,579,736 133,767,501 5,812,235 F Favorable
Total $ 7,806,552 $ 22,050,660 14,244,108
Exclude:
1.Sewer Construction Spending Variance due to Timing (1,524,694) (Included in Sewer Construction expenses)
(Carried Forward to FY 2019-20 Budget)
2.Pension Contribution to 115 Trust in FY 2018-19 (2,500,000) (Included in O&M expenses)
(Payment to trust not reflected as expenditure per GASB 68,accordingly
C&M expense savings are overstated)
3.FY 2018-19 Interest earnings in Pension 115 Trust (561,816) (Included in O&M revenues)
(Restricted to addressing pension obligations)
4.Self Insurance variance that is addressed in FY 2020-21 124,824 (Included in Self Insurance)
Budget Process through O&M allocation to Self-Insurance
5.Debt Service variance that is addressed in FY 2020-21 (4,742) (Included in Debt Service)
Budget Process
Net variance to be considered $ 9,777,680
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ATTACHMENT 2
Pre-Audit-June 2019
Financial Statement Summary
Operations and Maintenance Variance Analysis
($in thousands)
+Favorable
Budget Actual Variance % Explanation Implications for future budgeting
Revenues
SSC-County $ 65,874 $ 67,349 1,475 2.2% Higher than anticipated development Conservative assumptions for growth used
SSC-Direct 1,200 1,308 108 9.0% Higher than anticipated flow levels following post-drought Spike to be considered non-recurring and
conditions. conservative assumptions for growth used
City of Concord 14,800 15,205 405 2.7% Greater than anticipated treatment plant operating and Budget based on expected flow and estimated
maintenance costs shared by Concord treatment plant expenditures
Permit/Application Fees 480 679 199 41.5% Greater than anticipated development Conservative assumptions for growth are used;3
year average will pick up higher than budgeted
experiences
Side Sewer Inspection 1,080 1,385 305 28.2% More private lateral inspections than anticipated in budget Conservative assumptions for growth are used;3
year average will pick up higher than budgeted
experiences
Recycled Water 420 430 10 2.4% Higher than anticipated usage;Recycled Water 0&M expenses RW revenue was flat lined in FY 2019-20 budget and
continued to exceed revenue,so no excess revenue was all revenue is assumed to stay in RE subfund
transferred to SC subfund
Annexation Charges 120 164 44 36.7% Higher than anticipated development Conservative assumptions for growth are used;3
year average will pick up higher than budgeted
experiences
All Other 2,952 3,857 905 30.7% Large share of variance(62%)attributable to unbudgeted and
restricted Section 115 Pension Trust fund investment earnings.
Also includes variances for septic/overtime inspections,
industrial permits,lease revenue,pre-treatment,household
hazardous waste,storm water and interest income.
Total Revenues $ 86,926 $ 90,377 $ 3,451 4.0% Favorable variance
Expenditures
Salaries&Benefits $ 52,585 $ 52,283 $ 302 0.6% N/A-Variance is below 1%
Chemicals 1,459 1,353 106 7.3% Lower than budgeted in Maintenance Division due to on Increase in budget as savings realized in from
continuous improvement efforts and optimizing usage based process improvement expected to be offset by
on operational demand. polymer price increases in FY 2019-20.
Utilities 4,143 4,370 (227) -5.5% Higher than budgeted for Maintenance Division due to Cogen Increased budget in FY 2019-20 to reflect higher
outages and price structure of new LFG contract;Increase in projected utility rates although Cogen outages not
PG&E consumption and utility rates higher than budgeted for expected to recur.
buffer properties in the District's right-of-way.
Repairs&Maintenance 5,415 4,725 690 12.7% Continuous improvement practices by maintenance staff to Due to maintenance improvements and efficiencies
responsibly extend time between repair,overhaul and noted in FY 2018-19,District incorporated slight
replacement of assets resulting in savings in pump station and reduction(3.2%)in total O&M Fund Repairs&
collection system operations. Maintenance budget in FY 2019-20.
Outside Services 3,511 2,512 999 28.5% Savings realized on various budgeted technical services costs At times,items are not needed due to changed
including:(1)purchase of interoperable radios being delayed circumstances or delays. FY 2019-20 reflects modest
until early FY 2019-20;(2)budgeted purchase of a drone being increase in this line item(3.7%)based on latest
pushed into FY 2019-20 due to FAA clearance delays;(3) divisional needs and circumstances.
printing services savings realized by CIR Division through
discounts and credits;(4)deferment of hiring a training
consultant by HR and taking certain training programs in-
house during FY 2018-19;(5)unanticipated savings by CSO in
construction and field operations for trench paving,concrete
work,rock hauling and CCN contracted services.
Other 22,607 20,100 2,508 11.1% Variance attributable to FY 2018-19$2.5M contribution to
Section 115 Pension Trust fund reported as balance sheet only
transaction due to GASB 68 and not reported as expenditure.
Staff exploring option of establishing new internal fund in FY
2019-20 to track Section 115 Trust contributions as
expenditures.
Total Expenses $ 89,720 $ 85,343 $ 4,378 4.9% Favorable variance
Net Increase(Decrease) $ (2,795) $ 5,034 $ 7,829 Unadjusted favorable 0&M subfund variance
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ATTACHMENT 2
Pre-Audit-June 2019
Financial Statement Summary
Operations and Maintenance Variance Analysis
($000)
FY 2018-19 O&M Revenue Variances
$80,000
$65,874
$70,000 $67,349
$60,000
$50,000
$40,000
$30,000
14,800
$20,000 15,205
3 857
$10,000 1,200 480 1,080 q20 164
i I 2,952
1$_ _L=08 L 679 L 1,385
_ 430 12L _
SSC-County SSC-Direct City of Concord Permit/Application Fees Side Sewer Inspection Recycled Water Annexation Charges All Other
■Budget ■Actual
FY 2018-19 C&M Expense Variances
$60,000 $52,585
$52,283
$50,000
$40,000
$30,000
22,607
20,100
$20,000
5,415
$10,000 4,143 3,511
4,370
4,725 2,512
� 2_
1,459 1,353
Salaries&Benefits Chemicals Utilities Repairs&Maintenance Outside Services Other
■Budget ■Actual
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Attachment 3
UTILIZATION OF FY 2018-19
�w VARIANCE FUNDS
�II =
AND USE OF BUDGETED $1 .25 MILLION
FOR EMPLOYEE-RELATED LIABILITIES
PHILIP R.LEIBER
DIRECTOR OF FINANCE&ADMINISTRATION
SEPTEMBER 24,2019
NOVEMBER 10, 2016 WORKSHOP
FINANCIAL ALTERNATIVES FOR EXCESS RESERVES
PFM's Review of Excess PFM's Recommendation and
Fund Alternatives: Direction Given by the Board:
1. Pay down CCCERA unfunded Allocate all currently available dollars
pension liabilities(UAAL) to reduce pension UAAL and OPEB
2. Pay down other post- liability.
employment benefits(OPEB)
unfunded liabilities and shorten $2.5M budgeted in FY 2016-17
amortization period from oto toward OPEB Trust(done Feb.
18 years(done) 2017 by unanimous vote)
3. Set up and fund IRS Sec 115 . $3.359M initial funding of Pension
Pension Prefunding Trust(done) Prefunding Trust using FY 2015-16
4. Allocate to CIB program budget variances(done Aug. 2017
5. Use to cover 0% rate increase by majority vote)
FY 2017-18
2
1
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BUDGET VARIANCES
AND FISCAL RESERVE ALTERNATIVES
Good news: $9.78 million in favorable variances in FY
2018-19
• $4.77 million from Operations & Maintenance (O&M) fund:
Lower spending ($1.88 million) and higher revenues ($2.89
million)
• $5.01 million for Sewer Construction (SC)/Capital Improvement
Budget (CIB) higher revenues
Recommendation: Direct Funds toward Multiple Purposes
(see next page)
Additional variance from self-insurance will be addressed in FY 2020-21 budget process,
and$8.5 million underspending variance for Capital Improvement Program will be carried
forward to FY 2019-20
RECOMMENDED ALLOCATIONS
($MILLIONS)
Pension
Recommended O&M SC-CIB Sc- OPEB Prefunding CCCERA Self-
Allocation of Funds: Total Reserve Reserve Contingency Trust Trust(1) Trust(2) Insurance
Year-End
2018-19 Variances-O&M $4.77 $2.52 - $1.25 $1
2018-19 Variances-SC 5.01 3.40 $1.61 -
Total $9.78 $5.92 1.61 $1.25 1
Budgeted
2019-20 UAAL Liabilities 1.25 $1.25
Fully Fully Following
Estimated Funded Ratio% Funded Funded Slide 2.5% 81.1%
83.5%Pro-Forma
(1)Funding status per staff calculation using PARS Pension Trust June 30,2019 statement and CCCERA December 31,2017
valuation($8.42M+$1.25M proposed)/$391,297,351).
(2)Funding status per CCCERA December 31,2017 valuation.2018 valuation expected on 10/2/2019.
4
2
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RESERVE STATUS
($MILLIONS)
O&M SC-CIB Pension Assets in
Reserve Reserve Self OPEB Prefunding CCCERA
5/12 50%CIB Insurance Trust 0) Trust(2) Trust(3)
Target Reserves at Year End $36.5 $33.1 $6.5
2018-19 CIB Carryforward (5) 8.5
2018-19 O&M&SC YE Variances 5.92 $1 $1.25
(from prior page)
1.61
All Other (4) $0.13
Pre-Audit Reserves with Proposed
Adjustments:Pro Forma 6-30-19 $36.5 $49.13 7.37 65.76 $9.64 $317.2
Pending FY2019-20
Budgeted Contribution $1.25
Total
(1) Balance and amounts are at market value.
(2) Pension Prefunding Trust had a balance of$8.39M as of 6/30/19
(3) Allocation of valuation of assets as of December 31,2017 CCCERA valuation.2018 Valuation available
10/2/2019
(4) Consisting of($0.125)self insurance that will be addressed in upcoming budget process.
5; (5) From 2017-18 carryforward and FY 2018-19 underspend.
5 AMU
HISTORY OF OPEB
($MILLIONS)
Actuarial Value of Assets %
Per Bartel 2-year Valuation Assets Funded
7/1/2012 $22.5 22.4%
7/1/2014 33.7 32.4%
7/1/2016 43.8 44.0%
7/1/2018 59.4 56.3%
CaIPERS Medical
Transition
7/1/2019 65.80) 82.7%(2)
7/1/2019 estimate if add'I$1.25M went to
OPEB 67.0 84.3%
(1) PARS OPEB Trust assets as of June 30,2019
(2) Calculated using PARS OPEB Trust June 30,2019 assets over accrued liabilities
calculated by Bartel Associates in letter dated February 8,2019
6 '
3
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HISTORY OF ADDITIONAL UAAL PAYMENTS
($MILLIONS)
Pension
Fiscal Date of CCCERA Prefunding OPEB
Year Payment Trust Trust Trust Total Source of Funds
2013-14 Dec 2013 $5.0 Budgeted
2014-15 Dec 2014 5.0 Budgeted
2015-16 Dec 2015 2.5
Budgeted-Board Decision
2016-17 Feb 2017 $2.5
Funded by FY 2015-16 variances
2017-18 Aug 2017 $3.4
Budgeted-Board Decision
2017-18 Various 2.5
Funded by FY 2016-17 variances
2017-18 Various 2.0
2018-19 Various 2.5 Budgeted-Board Decision
Subtotal 12.5 7.9 5.0 25.4
2018-19 Pending 1.25 1.25 2.5 Recommendation:Budgeted$1.25M goes to OPEB
Trust,and$1.25M variance goes to Pension
Prefunding Trust
tal $12.5 $9.1 $6.3 $27.9 Totals 7
1
ADDITIONAL UAAL PAYMENTS HAVE
HELPED REDUCE THE UAAL
COMPONENTS OF THE CCCERA PENSION UAAL$74 MILLION AS OF 2017
m
C Assumption Change
U J
J Q
"O Q
Actuarial Gains(2014 forward)
y
O t77
.- Additional UAAL Prepayment
QSubsequent Actuarial Losses
M
N
Y Restart of Amortization
U
ro Discount Rate from 7.75%to 7.25%
W
U
C
Depooling Implementation
O
u
ty Actuarial Losses from 2008
(30,000,000)(20,000,000)(10,000,000) 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000
Notes:
Pension Pre-Funding Trust assets of$8.4 million are available to further reduce UAAL indicated above
1
4
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RECOMMENDATION
• Direct $1 .25 million budgeted in FY 2019-20 for
employee-related unfunded liabilities to OPEB Trust
• Would result in 84.3% funded ratio (pro-forma) as of
6/30/2019
• Rationale: balanced additional contributions to OPEB
and Pension Prefunding Trust as both are comparable in
overall funding status
s 8
QUESTIONS?
a� 9
5
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