HomeMy WebLinkAbout04.c. Review draft Position Paper to approve updated administrative overhead percentage of 190% for Fiscal Year 2019-20, or consider alternative rate of 185% which incorporates one year of CalPERS Healthcare savingsItem 4.c.
BOARD OF DI RECTORS
POSIT ION PA PER
DRAFT
M E E T ING D AT E:J A NUA RY 28, 2020
S UB J E C T: R E V I E W D R A F T P O S I T I O N PA P E R TO A P P R O V E UP D AT E D
A D MI NI S T R AT I V E O V E R HE A D P E R C E NTA G E O F 190% F O R F I S C A L
YE A R 2019-20, O R C O NS I D E R A LT E R NAT I V E R AT E O F 185% W HI C H
I NC O R P O R AT E S O NE YE A R O F C A L P E R S HE A LT HC A R E S AV I NG S
S UB M I T T E D B Y:
K E V I N MI Z UNO, F I NA NC E MA NA G E R
I NI T I AT I NG D E PART M E NT:
A D MI NI S T R AT I O N-F I NA NC E
RE V IE WE D B Y:P HI L I P L E I B E R , D I R E C TO R O F F I NA NC E A ND A D MI NI S T R AT I O N
A NN S A S A K I , D E P UT Y G E NE R A L MA NA G E R
R O G E R S. B A I L E Y, G E NE R A L MA NA G E R
IS S UE
Board approval is needed to revise the annually updated administrative overhead percentage in order to
recover the full cost of the indirect support services provided by C entral San. T his 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.
B AC K G RO UND
Pursuant to long-standing B oard policy direction, the purpose of calculating administrative overhead,
employee benefits, and non-work hours rates has been for C entral San to recover the full cost, including
indirect costs, of the services it provides to various users. I n an ef f ort to set the rate early enough to be
used f or calculating rates and charges and the negotiation of the Clean Water Program contract, staf f
brings the annual updated percentage to the Board every J anuary. T he administrative overhead rate is
comprised of three sub-components capturing the f ollowing:
1. Administrative overhead consists of all administrative indirect costs f or Central S an that are incurred
for a common purpose benefiting more than one task. T his rate includes A dministration D epartment
staf f salaries, retirement costs, the administration portion of Other P ost-E mployment B enef its
(O P E B) trust contributions for active and retired employees, and any additional Unfunded A ctuarial
Accrued L iability (UA A L ) payments allocated to administration.
2. Employee benefits consist of costs associated with retirement pension payments, medical
premiums, deferred compensation contribution in lieu of social security, and other similar benef its
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expressed as a percent of salaries.
3. Non-work hours consist of the value of compensated leave (i.e. vacation, sick leave, administrative
leave, birthday holiday) and earned overtime expressed as a percentage of annual work hours.
Change in Methodology Adopted in 2014
During 2013, 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, 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 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 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.
Proposed Rate for FY 2020-21
The proposed administrative overhead recovery rate for FY 2020-21 has now been calculated in
accordance with the methodology approved by the Board as outlined. The proposed rate (three-year
smoothed)for FY 2020-21 is 190%, reflecting a noteworthy decline of 13% from the approved FY 2019-
20 rate of 203%. This is the result of the continued decline in annual rates (the inputs to the 3 year
smoothed rates)for each of the past four years:
FY 2017-18 FY 2018-19 FY 2019-20 FY 2020-21
219% 201% 190% 178%
FY 2020-21 Rate {-----------Smoothed 3 year rate of 190%-----------}
FY 2019-20 Rate {-----------Smoothed 3 year rate of 203%-----------}
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T he 12% decrease in the un-smoothed administrative overhead rate f rom F Y 2019-20 to F Y 2020-21 from
190% to 178% is attributable to the f ollowing factors:
1. Employee Benefits Rate Component - 4% of the 12% decrease is caused by a slight decrease in
employee benefits costs (numerator), while the denominator of the equation, salaries, increased.
T he slight reduction in benef it costs overall was primarily driven by a reduction in the required
employer retirement contributions made to C C C E R A towards the UA A L . T he increase in salaries,
the denominator, is attributed to the labor agreements specifying cost of living adjustments and other
salary adjustments (i.e. longevity, step increases f or eligible employees, etc.).
2. Admi nistrative Overhead Rate Component - 8% of the 12% decrease is caused by significant
decreases in indirect overhead costs (numerator), while the salaries increased overall (denominator).
Noteworthy decreases in indirect costs were evident f or several variables including: indirect salaries
& wages, benefits charged through payroll, and net self -insurance costs. T he increase in salaries,
the denominator, is attributable to prevailing labor agreements specifying cost of living adjustments
and other salary adjustments (i.e. longevity, step increases f or eligible employees, etc.).
R efer to the attached F Y 2020-21 A dministrative Overhead Summary (Attachment 1) f or additional
highlights of the proposed F Y 2020-21 rate compared to the rates adopted by the B oard for the previous
two fiscal years.
ALT E RNAT I V E S /C O NS I D E RAT IO NS
F ollowing the B oard's approval of the F Y 2019-20 administrative overhead rate, F inance C ommittee
members expressed interest in revisiting the F Y 2019-20 administrative overhead rate to potentially
incorporate the significant budgetary savings (estimated at $5.46 million) realized f rom Central S an's
transition to CalP E R S Healthcare. Upon revisiting this concept at the October 22, 2019 C ommittee
meeting, the Committee members did not support making revisions to the administrative overhead rate
already in place. A lternatively, the Committee recommended staff provide an alternative rate incorporating
the af orementioned budgetary savings f or the Board to consider in the annual review of the administrative
overhead rate f or next year (F Y 2020-21). Accordingly, as an alternative to adopting the F Y 2020-21
administrative overhead rate proposed by staff employing the method approved by the Board, staf f has
calculated a revised rate incorporating the estimated savings f rom the transition to CalP E R S Healthcare
(Attachment 2). T his revised calculation methodology results in a F Y 2020-21 administrative overhead
recovery rate of 185%, as opposed to the recommended rate of 190%. T his approach continues the 3
year smoothing approach, but uses a lower overhead rate of 164% f or F Y 2020-21 (based on F Y 2018-19
financial data, adjusted for C alP E R S Healthcare savings) compared to the 178% rate f or that year that
does not adjust for the CalP E R S Heathcare savings.
Recommended: Without C alP E RS Healthcare S avings Adjust
F Y 2017-18 F Y 2018-19 F Y 2019-20 F Y 2020-21
219% 201% 190% 178%
F Y 2020-21 Rate {-----------Smoothed 3 year rate of 190%-----------}
Alternative : With CalPE R S Healthcare Sav ings Adjustme nt
F Y 2017-18 F Y 2018-19 F Y 2019-20 F Y 2020-21
219% 201% 190% 164%
F Y 2020-21 Rate {-----------Smoothed 3 year rate of 185%-----------}
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Staff does not currently recommend this alternative as it deviates from the current Board-approved calculation
methodology which relies on audited information only. A full year of actual audited cost information for FY 2019-
20 is not yet available, and while the estimate of projected savings arising from the transition to CalPE R S
Healthcare is still considered reliable, it is still an estimate which deviates from the administrative overhead
calculation methodology most recently approved by the Board and reviewed by an independent specialist
(Matrix). Following the approved calculation methodology, the soonest the CalPE R S savings would be
available for use in the administrative overhead rate calculation would be for F Y 2021-22, once the audit of FY
2019-20 financial statements has been completed. Given this time lag, the Board could reconsider its previous
policy direction and direct staff to change the calculation methodology to allow for un-audited estimates in
extraordinary circumstances. However, despite this time lag, staff believes it would be beneficial to maintain the
current approach for the following reasons:
1. Using rates based on historical actual information allows Central S an to eventually recover the f ull
actual overhead costs over the medium term, ensuring that the various classes of users of Central
San’s services pay the f ully allocated cost of the services they have used. S hif ting the approach
prematurely could result in under-recovery of costs from the classes of users paying f ees that
include the calculated overhead rate (such as the fee schedules applicable to developers and others
maintained by P lanning and Development), and over-recovery from customers paying the S ewer
Service C harge (as revenues otherwise assessed and collected from other parties would have to be
made up by higher S S C charges). P rematurely inserting the F Y 2019-20 estimated savings into F Y
2018-19 results used in the overhead calculation for F Y 2020-21 may result in not recapturing the full
costs incurred in F Y 2018-19, thereby creating "winners" and "losers" in such a shift in approach.
Accordingly, despite a time lag, the current approach is most consistent with the District's f ull-cost
recovery goal f rom various customer classes.
2. C ontinuing to use audited inf ormation and a three-year smoothing method is in line with best
practices and may also help to mitigate volatility in overhead rates that could be introduced by using
estimates f or F Y 2020-21 and in f uture years.
3. As referenced by Matrix Consulting's 2014 study, using actual audited benef it cost information allows
C entral San to meet the "objectivity" and "consistency" principles of the Government Accounting
Standards Board (G A S B ) in determining overhead recovery rates. T he use of estimates, and the
need for subsequent "true-up" mechanisms is avoided.
F I NANC IAL I M PAC T S
T he administrative overhead percentage is calculated annually f or the purpose of recovering administrative
overhead and employee benefit costs when charging to capital projects, recovering f ull costs f or services
provided to other agencies, companies or developers, and for customer billings involving labor costs.
C O M M I T T E E RE C O M M E ND AT IO N
T he proposed three-year smoothed administrative overhead percentage of 190% for F Y 2020-21 was
reviewed by the F inance C ommittee at its J anuary 28, 2020 meeting. T he C ommittee recommended
_____________.
RE C O M M E ND E D B O ARD AC T I O N
Approve the use of the administrative overhead percentage of 190% for F iscal Year 2020-21.
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Strategic Plan Tie-I n
G O A L TH R EE: Be a Fiscally Sound and Effective Water Sector Utility
Strategy 1 - Conduct long-range financial planning, Strategy 2 - Manage costs
AT TAC HM E NT S :
D escription
1. Administrative Overhead Rate Calculation f or F iscal Year 2020-21
2. Alternative A dministrative Overhead R ate C alculation for F iscal Year 2020-21
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ATTACHMENT 1
3 Year
Smoothed
Current Year
Calculation
Unsmoothed
Last Year's
Unsmoothed
Two Years Ago
Unsmoothed
Year 2020-2021 2020-2021 2019-2020 2018-2019
Employee Benefits 75.72%71.24%75.30%80.63%
Administrative Overhead 95.87%88.62%96.71% 102.29%
Non-work Hours 18.11%18.09%18.18%18.06%
189.71%177.95% 190.20% 200.98%
Smoothed Rate 190%190%203%219%
Years in Smooth Rate 3 yr 3 yr 3 yr 3 yr
Comparison of Rate Before Smoothing 2020-2021 2019-2020 Decrease
Employee Benefits 71% 75% -4%
Administrative Overhead 89%97%-8%
Non-work Hours 18%18%0%
Total 178%190%-12%
Summary of Increases (Decreases)
Employee Benefits:
Total adjusted benefits (numerator) decreased by 0.1%, and total salaries (denominator) increased by 5.0%, causing -4%
the overall decrease
FY 2018-19 FY 2017-18 Difference
Benefits (numerator) $27.2 $27.4 ($0.2)
Salaries (denominator) 38.2 36.4 1.8
Admin Overhead:
Total adjusted indirect costs (numerator) decreased by 4.2%, and total direct salaries (denominator) increased
by 4.6%, causing the overall decrease -8%
FY 2018-19 FY 2017-18 Difference
Indirect costs (numerator) $27.8 $29.0 ($1.2)
Direct salaries (denominator) 31.4 30.0 1.4
Central Contra Costa Sanitary District
Administrative Overhead Summary (Alternative 1)
For the 2020-21 Budget - Calculated using 2018-2019 Audited Financial Statements
1/22/2020 9:49 AM N:\Accounting\GMTEMP1\Admin Overhead\Admin OH 2020-21\Admin overhead summary 2020-2021 using matrix.xlsb Summary
Administrative Overhead Rate Calculation for FY 2020-21
January 28, 2020 Regular FINANCE Committee Meeting Agenda Packet - Page 119 of 124
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ATTACHMENT 2
3 Year
Smoothed
Current Year
Calculation
Unsmoothed
Last Year's
Unsmoothed
Two Years Ago
Unsmoothed
Year 2020-2021 2020-2021 2019-2020 2018-2019
Employee Benefits 70.96%56.96%75.30%80.63%
Administrative Overhead 95.87%88.62%96.71%102.29%
Non-work Hours 18.11%18.09%18.18%18.06%
184.95%163.67% 190.20% 200.98%
Smoothed Rate 185%185%203%219%
Years in Smooth Rate 3 yr 3 yr 3 yr 3 yr
Comparison of Rate Before Smoothing 2020-2021 2019-2020 Decrease
Employee Benefits 57% 75% -18%
Administrative Overhead 89% 97% -8%
Non-work Hours 18% 18% 0%
Total 164% 190% -27%
Summary of Increases (Decreases)
Employee Benefits:
Total adjusted benefits (numerator) decreased by 20.4%, and total salaries (denominator) increased by 5.0%, causing -18%
the overall decrease
FY 2018-19 FY 2017-18 Difference
Benefits (numerator) $21.8 $27.4 ($5.6)
Salaries (denominator) 38.2 36.4 1.8
Admin Overhead:
Total adjusted indirect costs (numerator) decreased by 4.2%, and total direct salaries (denominator) increased
by 4.6%, causing the overall decrease -8%
FY 2018-19 FY 2017-18 Difference
Indirect costs (numerator) $27.8 $29.0 ($1.2)
Direct salaries (denominator) 31.4 30.0 1.4
Central Contra Costa Sanitary District
Administrative Overhead Summary (Alternative 2)
For the 2020-21 Budget - Calculated using 2018-2019 Audited Financial Statements with Adjustments for CalPERS Healthcare Cost
1/22/2020 11:56 AM Summary Page 1
Alternative Administrative Overhead Rate Calculation for FY 2020-21
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