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HomeMy WebLinkAbout06. Adopt resoluions establishing new Rate Stabilization Fund Reserve Account, and two funds for Pension Prefunding Trust and OPEB Trust Page 1 of 11 Item 6. CENTRAL SAN BOARD OF DIRECTORS vie . , Hill. , , . . POSITION PAPER MEETING DATE: FEBRUARY20, 2020 SUBJECT: ADOPT RESOLUTION NOS. 2020-005 THROUGH 2020-007, ESTABLISHING A RATE STABILIZATION FUND RESERVE ACCOUNT, AND TWO SEPARATE FUNDS FOR THE PENSION PREFUNDING TRUSTAND THE OTHER POST-EMPLOYMENT BENEFITS (OPEB) TRUST PURSUANT TO DISTRICT CODE SECTION 2.28.010 SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ANN SASAKI, DEPUTY GENERAL MANAGER Roger S. Bailey Kenton L. Alm General Manager District Counsel ISSUE On October 3, 2019, the Board directed staff to allocate portions of the Fiscal Year 2018-19 favorable budget variance to a new rate stabilization fund ($2,610,000) and the existing Section 115 Pension Prefunding Trust ($1.25 million). The Board also directed staff to allocate $1.25 million budgeted in FY 2019-20 to the existing GASB 45 OPEB Trust. In accordance with District Code Section 2.28.010, the Board may establish funds by resolution as it considers necessary or convenient BACKGROUND Hierarchy of Central San Fund Types As noted previously, on October 3, 2019, the Board directed staff to allocate portions of the Running Expense February 20, 2020 Regular Board Meeting Agenda Packet- Page 58 of 161 Page 2 of 11 Fund and Sewer Construction Fund Fiscal Year 2018-19 favorable budget variances to a new rate stabilization fund ($2,610,000) and the existing Section 115 Pension Prefunding Trust ($1.25 million). Although the Board's direction was clear, staff is recommending the Board consider approving the creation of additional "sub-funds" for improved accounting and budget reporting purposes. Furthermore, in complying with the Board's direction, additional research of the Sanitary Act of 1923 (the "Act") has identified some inconsistencies in the definition of a "fund" in the statute as compared to that of the Government Accounting Standards Board (GASB) as well as language used internally by Central San in the annual budget document. These inconsistencies are critical to understand as staff is both bound by the language in the Act as well as the rules of the GASB, which is the authoritative source of generally accepted accounting principles for US municipal governments. These conflicting definitions are unsurprising considering the section of the Act addressing funds was last amended by the state legislature in 1939, which is 60 years prior to the issuance of GASB Statement No. 34 in 1999, providing guidance on fund accounting and considered to be the most significant change to occur in the history of government financial reporting. Given these varying definitions of the term"fund", staff has prepared an illustration summarizing the hierarchy of fund categories (Attachment 1)to help clarify the definition differences the impact of the action being proposed in this position paper. As outlined in Attachment 1, at the highest level, as a stand-alone business-type entity Central San is reported in the CAFR as a single enterprise fund pursuant to GASB Statement No. 34. Accordingly, Central San's independent auditors only render an opinion on the single consolidated reporting fund, and not on its sub-fund components (i.e. Running Expense Fund, Sewer Construction Fund, etc.). Moving down to the next level, the Act specifies that Sanitary Districts shall only have three funds: Running Expense Fund, Sewer Construction Fund, and Bond Fund. These are considered internally to be "sub-funds"of the single Central San enterprise fund entity. Thereafter, at the lowest level, there currently exists a Self-Insurance Fund, which is legally considered a sub-fund of the Running Expense fund as it is entirely financed by non-capital operating monies and investment earnings generated on the sub-fund's reserves. Similar to this already existing Self-Insurance Fund, staff is proposing the creation of two additional sub-funds of the Running Expense Fund to improve the internal accounting for the Pension Prefunding Trust and OPEB Trust Funds. Rate Stabilization Fund Reserve Account The 2018 Bond Indenture of Trust authorizes the creation of a Rate Stabilization Fund (RSF). Accordingly, the Board Policy on Fiscal Reserves (BP 017)was recently amended authorizing the creation of an RSF reserve establishing its purpose and use restrictions. Once established, monies in the RSF reserve may be used to meet debt service coverage requirements, to stabilize and limit volatility of sewer service charges in an economic downturn or other similar fiscal challenge, or any other legal purpose permitted by the 2018 Bond Indenture. As specified by the Bond Indenture, deposits into the RS F reserve will reduce the calculated debt service coverage metric in the year funds are deposited, and any withdrawals would increase the debt service coverage metric. Transfers in and out of the RSF reserve, other than interest earnings, would require Board authorization. While the creation of new funds is permitted pursuant to Central San District Code Section 2.28.010, staff recommends the creation of a restricted RSF reserve "account" within the existing Running Expense and Sewer Construction funds rather than the creation of a separate "sub-fund" for accounting purposes. Unlike monies in the Running Expense Fund, monies placed in the Sewer Construction are restricted to paying capital project costs and may only be transferred to another fund specified by the Act after the purpose for which the monies were collected has been fulfilled (Califomia Health & Safety Code section 6797). Given these strict purpose restrictions, the establishment of a single RSF for both Running Expense and Sewer Construction purposes would complicate the subsequent accounting, necessitating additional sub-funds or sub-accounts as well as additional accounting procedures to clearly distinguish RSF monies restricted for capital purposes. Accordingly, the creation of an account rather than separate fund for the RS F reserve is considered most appropriate. By adopting the attached proposed resolution, a new Rate Stabilization Fund Reserve Account will be established within the existing Running Expense Fund and Sewer Construction Fund. February 20, 2020 Regular Board Meeting Agenda Packet- Page 59 of 161 Page 3 of 11 Pension Prefunding Trust and OPEB Trusts The GASB 45 OPEB Trust was established in 2008, and the Pension Prefunding Trust was established in 2017. BP 017 — Fiscal Reserves details the use of these two separate restricted-use trust funds. While the legally-restricted OPEB trust fund has been reported as a separate fund for reporting purposes in the District's Comprehensive Annual Financial Report (CAFR) in accordance with GASB accounting pronouncements, this was a separate fund on paper only as a separate sub-fund in the District's accounting records had not been authorized pursuant to District Code Section 2.28.010B. Somewhat similarly, the legally-restricted Pension Prefunding Trust fund has been reported within the Running Expense fund as a restricted asset as the creation of a separate sub-fund in the District's accounting system had also not yet been authorized. As these are both entirely funded by contributions from the Running Expense Fund, the creation of separate Running Expense sub-funds in accordance with District Code Section 2.28.010B will allow for improved internal tracking of financial transactions and improved budgetary presentation. As the Pension Prefunding Trust is considered a"secondary" pension trust, with the Contra Costa County Employees' Retirement Association (CCCERA) acting as the primary pension trust, the Pension Prefunding Trust fund is required to be consolidated into the District's single enterprise fund in the CAFR for reporting purposes pursuant to GASB pronouncements. In contrast, the GASB 45 OPEB trust will continue to be reported as a separate fiduciary fund, distinct and separate from the District's enterprise fund, for CAFR financial reporting purposes as this serves as the District's only trust for OPEB obligations. Regardless of CAFR presentation requirements, the establishment of two separate Running Expense sub-funds allows for improved budgetary transparency. Four Existing Funds and Two Proposed Sub-Funds Central San currently has four funds used for accounting and financial reporting purposes, as outlined in District Code Section 2.28.010. As it is entirely funded by contributions from the Running Expense Fund, the Self-Insurance Fund is considered a sub-fund of the Running Expense Fund. Funds currently used in Central San's accounting system include the following: 1. Running expense fund; 2. Sewer construction fund; 3. Self-insurance fund; 4. Debt and bond fund; The above-referenced District Code Section also allows the Board to establish such other funds by resolution as it considers necessary or convenient. By adopting the attached proposed resolutions, the following two new sub-funds of the Running Expense Fund will be established: • Pension Prefunding Trust sub-fund, and • OPEB Trust sub-fund. It is timely to establish the funds given the development of the chart of account structure of the new Enterprise Resource Planning (ERP) system that is being implemented this year. ALTERNATIVES/CONSIDERATIONS The Board could decide not to create the proposed funds/account, but that is not recommended. FINANCIAL IMPACTS The adoption of the attached resolutions to create two new funds and two new accounts for financial reporting and accounting purposes has no direct fiscal impact to Central San. The transfer of FY 2018-19 February 20, 2020 Regular Board Meeting Agenda Packet- Page 60 of 161 Page 4 of 11 positive budget variance monies from the Running Expense and Sewer Construction Funds into a rate stabilization fund reserve was already approved by the Board in a separate and prior action on October 3, 2019. COMMITTEE RECOMMENDATION This matter was reviewed by the Finance Committee on November 26, 2019. The Finance Committee recommended adoption of the three proposed resolutions, with the minor change of specifying the Rate Stabilization reserve as accounts rather than a separate fund madesubsequent to that, based on advice of counsel. RECOMMENDED BOARD ACTION 1. Adopt a proposed resolution establishing a Rate Stabilization Fund Reserve Account within the Running Expense Fund and the Sewer Construction Fund to be used as outlined in the Fiscal Reserves Policy (BP 017); and 2. Adopt two proposed resolutions establishing two new sub-funds of the Running Expense Fund: • Section 115 Pension Prefunding Trust sub-fund, and • GASB 45 Other Post-Employment Benefits (OPE B) Trust sub-fund, both in accordance with District Code Section 2.28.010, as additional funds alongside the current four funds used for accounting and financial reporting purposes. 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. Hierarchy of Funds Categories 2. Proposed resolution establishing Rate Stabilization Fund Reserve Account 3. Proposed resolution establishing Pension Prefunding Trust Fund 4. Proposed resolution establishing OPEB Trust Fund February 20, 2020 Regular Board Meeting Agenda Packet- Page 61 of 161 Attachment 1 Central Contra Costa Sanitary District Fund Accounting Structure 1. Single Fund Reporting Entity per Single Government Accounting Standards Enterprise Board (GASB) Statement No. 34 Fund I 2. Funds Authorized the Sanitary Act of 1923 Chapter 7 Article 7 ("Sub- Running Sewer Expense Construction Bond Fund 2 Funds" of single enterprise fund Fund' Fund reporting entity) I 3. "Sub-Funds" used for internal Pension Rate Rate Insurance •. accounting and budgeting purposesFund Trust Fund • Reserve 1 Referred to as the "Operations& Maintenance Fund" in annual budget. z Referred to as the "Debt Service Fund" in annual budget. 3 New sub-funds of Running Expense fund proposed for improved accounting and budgetary tracking purposes. 4Accounted for as a separate restricted asset account residing within the Running Expense and Sewer Construction funds. February 20, 2020 Regular Board Meeting Agenda Packet- Page 62 of 161 Page 6 of 11 ATTACHMENT 2 RESOLUTION NO. 2020-005 A RESOLUTION OF THE CENTRAL CONTRA COSTA SANITARY DISTRICT ESTABLISHING A NEW RATE STABILIZATION FUND RESERVE ACCOUNT IN THE RUNNING EXPENSE AND SEWER CONSTRUCTION FUNDS IN ACCORDANCE WITH DISTRICT CODE SECTION 2.28.010 WHEREAS, the September 2018 Series A and B Revenue Bonds Indenture of Trust permits the establishment of a Rate Stabilization Fund; and WHEREAS, the Board of Directors on October 3, 2019 directed that a total of $2,610,000 from the FY 2018-19 favorable budget variance be transferred from the Running Expense Fund and Sewer Construction Fund to a newly established Rate Stabilization Fund in the amount of $1,610,000 and $1 ,000,000 respectively; and WHEREAS, Board Policy No. BP 017 — Fiscal Reserves specifies the operation of the Rate Stabilization Fund, including deposits into and withdrawals from such; and. WHEREAS, the establishment of an internally restricted-use Rate Stabilization Fund Reserve Account within the Running Expense Fund and the Sewer Construction Fund rather than a separate stand-alone fund is in compliance with the provisions of the Sanitary District Act of 1923. NOW, THEREFORE, BE IT RESOLVED by the Board of Directors of the Central Contra Costa Sanitary District (Central San) as follows: 1. THAT a Rate Stabilization Fund Reserve Account is hereby established, to be treated as a separate restricted-use account within the existing Running Expense and Sewer Construction funds for accounting and financial reporting purposes, with usage as specified in Board Policy No. BP 017 — Fiscal Reserves and relevant Bond Indentures; and 2. THAT the above-mentioned Rate Stabilization Reserve Accounts are to be maintained as separate restricted-use accounts in the District's financial system, not to be included the calculation of minimum working capital reserves specified in Board Policy No. BP 017. February 20, 2020 Regular Board Meeting Agenda Packet- Page 63 of 161 Page 7 of 11 Resolution No. 2020-005 Central Contra Costa Sanitary District Page 2 of 2 PASSED AND ADOPTED this 20th day of February 2020, by the Board of Directors of Central San by the following vote: AYES: Members: NOES: Members: ABSENT: Members: Michael R. McGill, P.E. President of the Board of Directors Central Contra Costa Sanitary District County of Contra Costa, State of California COUNTERSIGNED: Katie Young Secretary of the District Central Contra Costa Sanitary District County of Contra Costa, State of California Approved as to form: Kenton L. Alm, Esq. Counsel for the District February 20, 2020 Regular Board Meeting Agenda Packet- Page 64 of 161 Page 8 of 11 ATTACHMENT 3 RESOLUTION NO. 2020-006 A RESOLUTION OF THE CENTRAL CONTRA COSTA SANITARY DISTRICT ESTABLISHING A NEW SECTION 115 PENSION PREFUNDING TRUST FUND IN ACCORDANCE WITH DISTRICT CODE SECTION 2.28.010 WHEREAS, Section 2.28.010A of the District Code currently specifies the establishment and maintenance of four funds: 1 . Debt and bond fund; 2. Running expense fund; 3. Sewer construction fund; and 4. Self-insurance fund; and WHEREAS, Section 2.28.010B of the District Code indicates that the Board may establish by resolution other such funds as it considers necessary or convenient; and WHEREAS, the Board of Directors established a Section 115 Pension Prefunding Trust on July 20, 2017; and WHEREAS, Board Policy No. BP 017 — Fiscal Reserves details the restricted use of the funds in this Trust; and WHEREAS, Governmental Accounting Standards Board pronouncements direct specific financial statement presentation of transactions related to the Section 115 Pension Prefunding Trust that will be improved through the establishment and maintenance of this Trust as a separate fund permitted by section 2.28.010B of the District Code. NOW, THEREFORE, BE IT RESOLVED by the Board of Directors of the Central Contra Costa Sanitary District (Central San) as follows: 1. THAT the Section 115 Pension Prefunding Trust is hereby established, to be treated as a separate fund for accounting and financial reporting purposes, with usage as specified in Board Policy No. BP 017 — Fiscal Reserves; and 2. THAT the above-mentioned fund is to be maintained as a separate fund in the District's financial system in accordance with District Code Section 2.28.010. PASSED AND ADOPTED this 20th day of February 2020, by the Board of Directors of Central San by the following vote: AYES: Members: NOES: Members: ABSENT: Members: Michael R. McGill, P.E. President of the Board of Directors Central Contra Costa Sanitary District County of Contra Costa, State of California February 20, 2020 Regular Board Meeting Agenda Packet- Page 65 of 161 Page 9 of 11 Resolution No. 2020-006 Central Contra Costa Sanitary District Page 2 of 2 COUNTERSIGNED: Katie Young Secretary of the District Central Contra Costa Sanitary District County of Contra Costa, State of California Approved as to form: Kenton L. Alm, Esq. Counsel for the District February 20, 2020 Regular Board Meeting Agenda Packet- Page 66 of 161 Page 10 of 11 ATTACHMENT 4 RESOLUTION NO. 2020-007 A RESOLUTION OF THE CENTRAL CONTRA COSTA SANITARY DISTRICT ESTABLISHING A NEW GASB 45 OTHER POST-EMPLOYMENT BENEFITS (OPEB) TRUST SUB-FUND OF THE RUNNING EXPENSE FUND IN ACCORDANCE WITH DISTRICT CODE SECTION 2.28.010 WHEREAS, Section 2.28.010A of the District Code currently specifies the establishment and maintenance of four funds: 1 . Debt and bond fund; 2. Running expense fund; 3. Sewer construction fund; and 4. Self-insurance fund; and WHEREAS, Section 2.28.010B of the District Code indicates that the Board may establish by resolution other such funds as it considers necessary or convenient; and WHEREAS, the Board of Directors established a Governmental Accounting Standards Board (GASB) 45 Other Post-Employment Benefits (OPEB) Trust on May 1, 2008 and November 6, 2008; and WHEREAS, Board Policy No. BP 017 — Fiscal Reserves details the restricted use of the funds in this Trust; and WHEREAS, GASB pronouncements direct specific financial statement presentation of transactions related to the GASB 45 OPEB Trust that will be improved through the establishment and maintenance of this Trust as a separate fund permitted by Section 2.28.010B of the District Code. NOW, THEREFORE, BE IT RESOLVED by the Board of Directors of the Central Contra Costa Sanitary District (Central San) as follows: 1. THAT the GASB 45 OPEB Trust Fund is hereby established, to be treated as a separate sub-fund of the Running Expense Fund for accounting and financial reporting purposes, with usage as specified in Board Policy No. BP 017 — Fiscal Reserves; and 2. THAT the above-mentioned fund is to be maintained as a separate sub-fund in the District's financial system in accordance with District Code Section 2.28.010. February 20, 2020 Regular Board Meeting Agenda Packet- Page 67 of 161 Page 11 of 11 Resolution No. 2020-007 Central Contra Costa Sanitary District Page 2 of 2 PASSED AND ADOPTED this 20th day of February 2020, by the Board of Directors of Central San by the following vote: AYES: Members: NOES: Members: ABSENT: Members: Michael R. McGill, P.E. President of the Board of Directors Central Contra Costa Sanitary District County of Contra Costa, State of California COUNTERSIGNED: Katie Young Secretary of the District Central Contra Costa Sanitary District County of Contra Costa, State of California Approved as to form: Kenton L. Alm, Esq. Counsel for the District February 20, 2020 Regular Board Meeting Agenda Packet- Page 68 of 161