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HomeMy WebLinkAbout07. Public hearing to adopt FY 2020-21 District Budget Page 1 of 317 Item 7. CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER MEETING DATE: JUNE 4, 2020 SUBJECT: CONDUCT PUBLIC HEARING TO RECEIVE PUBLIC COMMENT AND CONSIDER ADOPTING THE FISCAL YEAR 2020-21 DISTRICT BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, CAPITAL IMPROVEMENT, SELF-INSURANCE, AND DEBT SERVICE SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE TODD SMITHEY FINANCE ADMINISTRATOR REVIEWED BY: EDGAR LOPEZ, CAPITAL PROJECTS DIVISION MANAGER PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION JEAN-MARC PETIT, DIRECTOR OF ENGINEERING AND TECHNICAL SERVICES ANN SASAKI, DEPUTY GENERAL MANAGER Roger S. Bailey General Manager ISSUE It is Central San's practice to hold a public hearing to receive comment on the budget for the following funds: Operations and Maintenance, Capital Improvement, Self-Insurance, and Debt Service. BACKGROUND An overview of the budgeted revenues and expenditures in the Operations and Maintenance, Capital Improvement, Self-I nsurance, and Debt Service is discuss in this section. The following table summarizes funding sources and uses in each of fund, and the net effect on the fiscal reserve for each fund. June 4, 2020 Regular Board Meeting Agenda Packet- Page 65 of 449 Page 2 of 317 Revenues & Contribution to FY 2020-21 Budget Loan Proceeds Expenses (Draw from) Reserve Operating & Maintenance $65,432,162 $90,666,338 ($25,234,176) Budget Sewer Construction $97,952,902 $88,024,000 $9,928,902 Self-I nsurance $582,050 $1,153,500 ($571,450) Debt Service $2,517,605 $2,517,605 $0 Total $166,484,719 $182,361,443 $15,876,724 Operating And Maintenance (O&M) Budget (Running Expense Fund) Budgeted O&M Revenues: Table 6 (pg. 55) in the attached budget book provides a summary of revenues for the O&M Fund, comparing the FY 2020-21 proposed budget to budgets, actuals, and projected actuals over the past two fiscal years. Total Central San O&M Revenue for FY 2020-21 is $65.4 million, a decrease of$24.1 million from the $89.6 million in FY 2019-20. This is due to the following: • While the SSC rates are the same as in FY 2019-20, the O&M allocation of SSC is decreasing from 68.2% to 44.0% due to higher proportion of SSC being transferred to the Capital Improvement Budget in FY 2020-21. The net result of these changes is a decrease in total O&M SSC of $24.6 million or-35.6%. The reduction is related to higher than policy-specified funding in the working capital reserve projections on June 30, 2020. This shift in allocation is illustrated in Table 5 (pg. 54) of the attached budget book, which also includes a detailed explanation. • The City of Concord pays a flow proportionate share of Treatment Plant, Environmental and Regulatory Compliance, and Environmental Compliance expenses and is charged administrative overhead and a finance charge. City of Concord revenue is expected to be $15.8 million, $1.2 million, or 8.2%, more than FY 2019-20. • A draw from reserves, reported in the "All Other" category of the prior table, of $25.2 million is related to higher than a policy-required funding level in the O&M working reserve fund as noted above, is used to fund the excess of O&M expenditures over revenue. Budgeted O&M Expenditures: Table 7 (pg. 57) in the attached budget book provides a summary of expenditures for the O&M Fund, comparing the FY 2020-21 proposed budget to budgets, actuals, and projected actuals over the past two fiscal years. Total O&M expenses are projected to be $90.7 million in FY 2020-21, an increase of$3.1 million or 3.5% from the $87.6 million in FY 2019-20. Significant variances are discussed below. • Salaries & Wages Expenditures- Central San's budgeted salaries are $39.5 million in FY 2020-21, compared to $38.6 million in FY 2019-20, representing an increase of$1.0 million, or 2.5%. The increase reflects the 2.9% salary adjustment effective April 2020, an assumed salary adjustment effective April 2021 of 3.75% (the actual adjustment will be based on the Bay Area Consumer Price I ndex change from February 2020 to February 2021), and step increases for eligible employees. The vacancy factor of 2.0% is unchanged from the prior year. • Benefits Expenditures- Total benefits for active employees includes the normal cost component of OPEB and is net of capitalized administrative overhead. This amount decreased from $12.0 million June 4, 2020 Regular Board Meeting Agenda Packet- Page 66 of 449 Page 3 of 317 in FY 2019-20 to $11.5 million in FY2020-21, which is summarized in Table 7a (pg. 59) of the attached budget book. Other changes in benefit costs for active employees assumptions, excluding costs attributable to unfunded actuarial accrued liabilities (UAAL) discussed separately, are listed below. • CalPERS Medical — No rate increase for the six months starting July 2020 and a 7.25% rate increase is assumed for the six months starting January 2021. • CCCERA— The retirement normal cost contribution rate is decreasing 6.7% for legacy employees and increasing 2.1% for Public Employees' Pension Reform Act employees. • Delta Dental — No rate increase for the six months starting July 2020 and a 3.75% rate increase is assumed for the six months starting January 2021. • Vision— No rate increase for the six months starting July 2020 and a 3% rate increase is assumed for the six months starting January 2021. • Long-Term Disability— No rate increase for the six months starting July 2020 and a 3% rate increase is assumed for the six months starting January 2021. • Employee Assistance Program — No rate increase for the six months starting July 2020 and a 3% rate increase is assumed for the six months starting January 2021. • Workers' Compensation—A 10% rate increase was assumed for budget purposes. The actual rates have not been finalized. No adjustments were made to the Experience Modification Factor that adjusts the gross rate of the collective pool to the member agency. • Life I nsurance — No rate increase for the six months starting J my 2020 and a 3% rate increase is assumed for the six months starting January 2021. The Capitalized Administrative Overhead rate, a credit given for capital work to the O&M Budget for non-work hours and overhead, changes from $4.4 million to $5.1 million in FY 2020-21, representing an increasing effort on internal labor allocated to the Capital Budget. UAAL Expenditures - Central San has agreements with its employees to provide pension and other post-employment benefits (OPEB) related to healthcare. Central San prefunds the pension/benefits in accordance with independently prepared actuarial calculations and reports that make certain economic and demographic assumptions. The goal is to grow these prefunded amounts into sufficient assets to cover the liabilities arising from pension/benefits obligations. An unfunded liability may occur when those economic/demographic assumptions are not met, those assumptions are changed, and/or the level of pension/benefits is adjusted. Overall contributions toward unfunded liabilities increase from $14.8 million in FY 2019-20 to $15.8 million in FY 2020-21, representing an increase of$1.0 million, or 7.1%. The UAAL cost component of OPEB increased from $2.3 million in FY 2019-20 to $2.4 million in FY 2020-21. On the pension side, the UAAL contribution due to CCCERA is projected to be $12.1 million in FY 2020-21, which, compared to the budget of $11.2 million in FY 2019-20, is an increase of$0.94 million, or 8.4%. Neither the OPEB nor the pension budgeted UAAL payments reflects any impact on pension assets that the market downturn of March 2020 may cause. If persisting through the December 2020 valuation, UAAL payments could be impacted in FY 2021-22. June 4, 2020 Regular Board Meeting Agenda Packet- Page 67 of 449 Page 4 of 317 The budget also includes $1.25 million to be paid toward the unfunded liabilities for either pension or OPEB obligations, to be determined by the Board during the fiscal year. This is a continuation of the discretionary$1.25 million additional UAAL contribution budgeted in FY 2019-20. To the extent that budget savings are available with the completion of both FY 2019-20 and FY 2020-21 beyond what was already anticipated in the budget, the Board may choose to direct part of the savings toward additional unfunded liabilities funding. • All Other Expenditures-The remaining O&M non-labor expenses increase by 6.7% to $23.8 million in FY 2020-21, compared to $22.3 million in FY 2019-20. Additional information is included in the individual division budgets. The areas of most significant change include the following: • Purchased Property Services— This expense category is reporting an increase of $1,850,833, or 41.3%, largely resulting from increases in repairs & maintenance and security services. Increases in repairs & maintenance were largely attributable to new support and licensing costs for the Oracle Cloud E RP system expected to "go live" in FY 2020-21, as well as security services being reclassified from the "Other Purchased Services" expense category pursuant to the new ERP's revised chart of accounts. Finally, greatly expanded on-site security measures will be necessary to counteract the significant increase in non-employee foot traffic on the treatment plant premises in conjunction with large scale treatment plant improvement projects planned next year. • Other Purchased Services—This expense decreased by$112,755, or 1.8%, due to costs for professional and technical services remaining steady overall with the increase in costs expected from the 2020 election largely being offset by reclassifying security services under the "Purchased Property Services" category pursuant to the new chart of accounts. • Supplies & Materials— This expense increased marginally by$144,000, or 1.5%. Despite increases in general supplies and utilities &fuel costs, these increases were largely offset by savings realized in chemicals costs through the elimination of sodium hypochlorite in the sewage treatment process. • Other Expenses— This expense decreased by$384,713, or 18.96%, primarily caused by a decreased allocation from the O&M fund to cover anticipated estimated loss payments, legal services, and insurance premiums. Technical Training, Conferences, and Meetings: These costs are a sub-category of Other Expenses and are budgeted to increase by$32,474, or 7%, due to increased technical training for both new hires and succession planning efforts with existing staff. Table 8 (pg. 62) in the budget book shows a breakdown of the budget in Technical Training, Conferences, & Meetings. Capital Improvement Budget(Sewer Construction Fund) Sewer Construction Fund revenues and loan proceeds are projected to increase by$32.4 million, from $65.6 million in FY 2019-20 to $97.95 million in FY 2020-21. This increase is to cover an extensive capital improvement program as identified in the Comprehensive Wastewater Master Plan, and provide $9.93 million towards future year's capital spending requirements. The City of Concord reimbursement increased $3.7 million due to increased cost-based reimbursement for projects related to the treatment plant. SSC revenue increased by$24.5 million due the increased allocation to the Sewer Construction Fund discussed previously. Ad valorem property taxes, prioritized for debt service obligations with any residual being allocated to the Sewer Construction Fund, are projected to increase by$1.4 million. Loan proceeds from the State Revolving Fund are $3 million. Budgeted capital expenditures for FY 2020-21 are $88.0 million, a$21.8 million increase over the FY 2019-20 budget of$66.2 million (excluding any carry forward, which will be calculated after June 30, 2020). June 4, 2020 Regular Board Meeting Agenda Packet- Page 68 of 449 Page 5 of 317 Self-Insurance Budget Central San currently self-insures general and auto liability risks up to $500,000 per occurrence and purchases a$15 million excess liability insurance policy above that retention. The Self-I nsurance Revenue for FY 2020-21 is $0.6 million; expenses are $1.2 million, with the ending reserve balance on June 30, 2021 projected to be $6.5 million. • Sub-Fund A (Actuarially-Based Risks: Sub-Fund A is used to pay claims and expenses within Central San's self-insured retention. Claims in excess of this retention are covered by the excess insurance policy that renews annually on July 1. Under the requirements of GASB-10, risks that can be actuarially studied must be funded based on an actuarial study performed at least every two years. General liability and automobile liability risks are readily studied throughout the insurance and self-insurance industry to project funding levels for future losses. Central San obtained an actuarial review of its self-insured general liability and automobile liability risks in October 2018. The next actuarial report will be performed in August 2020 using loss data through June 30, 2020. The Board established a policy to maintain the Sub-fund A reserve at three times the amount of Central San's self-insured retention. The current$500,000 retention requires a $1.5 million reserve. This reserve is used to pay claims and expenses throughout the year and is replenished the following fiscal year. • Sub-Fund B: Sub-Fund B was retired in FY 2015-16, with all reserves for these risks were transferred to Sub-Fund C. • Sub-Fund C (Non-GASB-10 Risks): This Sub-Fund C has historically covered Risk Management program expenses including insurance premiums, self-insured property losses, potential losses from uninsurable risks, and the costs of initiating claims and lawsuits against others. As noted above, this fund now includes reserves for non-GASB 10 risks and catastrophic losses. The Board established a policy to maintain this reserve at$5 million. This reserve is used to pay claims and expenses throughout the year and is replenished the following fiscal year. This fund also receives the annual O&M contribution and then re-allocates funds needed to maintain the required reserve in Sub-Fund A. Staff projects excess liability and property insurance renewal premiums of up to $450,000, and $200,000 respectively, based on the latest communications available with the insurance broker. Since insurance renewal quotes are not yet available, staff recommends that the Board authorize the General Manager to renew the excess liability and property insurance up to this projected amount along with its approval of the FY 2020-21 Self-I nsurance Budget. Debt Service Budget Debt Service is presently funded by ad valorem property taxes and interest income. Debt Service is projected at$2.5 million, a reduction from $3.0 million in FY 2019-20 due to a reduction in the principal repayment schedule for the 2018 refunding bonds. Fiscal Reserves The Board has established Board Policy No. BP 017 - Fiscal Reserves setting targets for each of Central San's reserve funds. Fiscal reserves provide working capital for operations and maintenance activities, funding for long-term capital improvement requirements, fulfillment of legal, regulatory and contractual obligations and mitigation of risk and liability exposures. • For the Operations and Maintenance Fund —Working Capital Reserves, the Board has set a target of five months (41.7%) of gross operating expenses at the start of each fiscal year. June 4, 2020 Regular Board Meeting Agenda Packet- Page 69 of 449 Page 6 of 317 • For the Sewer Construction Fund (Capital Improvement)—Working Capital Reserves, the Board has set a target of 50% of the annual cash funded capital projects budget at the start of each fiscal year. During FY 2019-20, staff completed an assessment of the calculation of the O&M and Sewer Construction Reserves and proposed certain adjustments which were reflected in an updated BP 017. Previously, the reserves were calculated simply as cash and investment balances. It was recognized that certain accrual related adjustments were necessary in certain instances to reflect a true reserve balance available for use. The revised definition of working capital reserves is used in the calculation of projected reserve balances compared to the required policy levels. This is illustrated in detail in Table 14 (pg. 72) of the attached budget book. Reserve levels are projected to be at or above the policy-required levels at June 30, 2020 and June 30, 2021. FY 2020-21 revenue and other funding sources results in a net$15.9 million decrease in the reserve balances, with an increase in the Sewer Construction Fund offset by a significant decrease in the O&M working capital reserve Fund. These effects are shown in Table 14 in the budget book. The FY 2020-21 capital budget and funding combination anticipates funding above the minimum targeted level per the fiscal reserves policy providing for the ability to reduce the proportion of the capital improvement budget that would otherwise be financed with bonds in future years. This is consistent with the 10-year financial plan. The amounts are subject to change based on actual financial results for the current and next fiscal years. CEQA: Staff has evaluated the FY 2020-21 Operation and Maintenance, Self-I nsurance, Debt Service and Capital Improvement Budgets and concludes the adoption of these budgets are not projects, are ministerial in nature, and are exempt from the California Environmental Quality Act (CEQA) under Central San's CEQA Guidelines Section 15301, since each funds the ongoing operations of Central San and the Capital Improvement Budget funds the operation, repair, maintenance, permitting, leasing, licensing, or minor alteration of existing public or private structures, facilities, mechanical equipment, or topographical features, involving negligible or no expansion of use beyond that existing at the present time.Approval of the FY 2020-21 Budgets will establish the Board of Directors' independent finding that these budget documents are exempt from CEQA. The Board further finds that, although the Capital Improvement Program Budget will authorize amounts of individual capital improvement project spending, the adoption of the Budget does not authorize construction of any project requiring CEQA compliance documentation. Central San either has or will produce appropriate CEQA compliance documentation prior to undertaking any"project" identified in these documents. ALTERNATIVES/CONSIDERATIONS During FY 2019-20, the Board has considered numerous financial planning alternatives and assumptions, most recently at the March 12, 2020 publicly held rate workshop. This budget reflects the policy direction provided in areas including the composition and level of the Capital Budget in the context of the Comprehensive Wastewater Master Plan, paying down unfunded liabilities, maintaining staffing at the level specified in the 2015 staffing study plus three board-approved additions, and overall guidance regarding the need for fiscal discipline and cost control. FINANCIAL IMPACTS The FY 2020-21 Budget was prepared using the SSC revenue assumptions per the adopted four-year rate plan, with the rate relief program adopted by the Board waiving the collection of the scheduled increase for FY 2020-21. The SSC in FY 2020-21 is proportioned as follows: O&M 44.0%; Capital June 4, 2020 Regular Board Meeting Agenda Packet- Page 70 of 449 Page 7 of 317 56.0%. The FY 2020-21 O&M Budget results in a$25.2 million decrease in O&M ending reserves, with O&M reserves projected to be $39.1 million at the end of FY 2020-21 meeting the policy required working capital reserve level of 5/12 of the following year's projected O&M spending. The FY 2020-21 Sewer Construction Budget results in a $9.9 million increase in reserves, with total Capital reserves projected to be $70.9 million at the end of FY 2020-21, well above the minimum working capital reserve policy requirements necessary for the expansion of the capital improvement program over the next few years and for rate stabilization purposes. Sewer Construction reserves are above the policy-required level of maintaining at least "50% of cash funded capital expenditures for the following year', and will help offset borrowing needs in the subsequent years. COMMITTEE RECOMMENDATION The Finance Committee received an overview of the FY 2020-21 O&M Budget, Self-I nsurance, and Debt Service Budget on May 18, 2020. The Engineering and Operations Committee reviewed the Capital Improvement Budget on May 12, 2020. RECOMMENDED BOARD ACTION Conduct a public hearing and adopt the FY 2020-21 Central San Budget as follows: 1. Find that the FY 2020-21 Budget is exempt from CEQA; 2. Adopt those portions of the FY 2020-21 Operations and Maintenance Budget related to Bay Area Clean Water Agencies (BACWA), specifically, the cost of$368,000 contained within the Environmental and Regulatory Compliance Division under the "Memberships" expense category; 3. Adopt the remaining portion of the FY 2020-21 Operations and Maintenance Budget apart from the BACWA costs; 4. Adopt the FY 2020-21 Capital Improvement Budget; 5. Adopt the FY 2020-21 Self-I nsurance Budget; 6. Adopt the FY 2020-21 Debt Service Budget; 7. Authorize the General Manager to renew the District's expiring: • Excess liability insurance for a premium not to exceed $450,000; and • Property insurance for a premium not to exceed $200,000. Strategic Plan Tie-In GOAL TWO: Strive to Meet Regulatory Requirements Strategy 3- Comply with all federal, state, and local regulations related to District administration GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility Strategy 1 - Conduct long-range financial planning, Strategy 2- Manage costs GOAL FOUR: Develop and retain a highly trained and innovative workforce Strategy 1 - Ensure adequate staffing and training to meet current and future operational levels GOAL FIVE: Maintain a Reliable Infrastructure Strategy 2- Facilitate long-term capital renewal and replacement, Strategy 3- Protect District personnel and assets from threats and emergencies ATTACHMENTS: 1. Final Draft Budget as of 05-29-20 2. Budget Revision Log June 4, 2020 Regular Board Meeting Agenda Packet- Page 71 of 449