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Home My WebLink About04.d. Review draft to approve updated administrative overhead and benefits rate of 177% for FY 2021-22 Page 1 of 5 Item 4.d. All" BOARD OF DIRECTORS i POSITION PAPER MEETING DATE: JANUARY26, 2021 SUBJECT: REVIEW DRAFT POSITION PAPER TO APPROVE UPDATED ADMINISTRATIVE OVERHEAD AND BENEFITS RATE OF 177% FOR F I SCAL YEAR 2021-22 SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ISSUE Board approval is needed to revise the annually updated administrative overhead and benefits rate in order to recover the full cost of the indirect support services provided by Central San. This overhead rate is used for several purposes, including billing outside agencies, calculating certain customer rates and charges, and internal use in billing labor costs to capital projects. BACKGROUND The purpose of calculating administrative overhead, employee benefits, and non-work hours rates has been for Central San to recover the full cost, including indirect costs, of the services it provides to various users. This has been consistent with long-standing Board policy on cost recovery. , Staff strives to bring the annual updated percentage to the Board early every calendar year, in 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. The administrative overhead rate is comprised of three sub-components capturing the following: 1. 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, the 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. 2. 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. 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. January 26, 2021 Regular FINANCE Committee Meeting Agenda Packet- Page 281 of 305 Page 2 of 5 Calculation Methodology The current administrative overhead and benefits rate calculation methodology was approved by the Board on April 3, 2014 and first employed in FY 2014-15. The calculation is supported by a study issued by Matrix Consulting Group, an independent consulting firm specializing in developing overhead rates for governmental agencies in conformance with prevailing laws and best practices. I n summary, the methodology currently used is based on the independent consultant's study and incorporates the following previously Board approved principles: 1. Standardizes the methodology for calculating the rate by: • Using the actual cost of benefits as reported in the independently audited financial statement for the benefits component of the calculation rather than budgeted estimates, o Allocates the OPEB contribution for active employees and retirees to their respective org units (i.e. departments and divisions), leaving only the administrative portion in the administrative component, o Continuing to treat retiree health and other premiums as indirect, and include them in the administrative overhead component of the rate, and o Allocating any additional UAAL payments to their respective org units, and including only the administrative portion in the administrative overhead component of the rate. 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 to adjust for volatility in the rate, initially using FY 2014-15 as the base year(with the rate for FY 2015-16 using two years of data, and finally FY 2016-17 fully using three-year smoothing). Proposed Rate for FY 2021-22 The proposed administrative overhead recovery rate for FY 2021-22 has been calculated in accordance with the methodology approved by the Board as outlined. The proposed rate (three-year smoothed)for FY 2021-22 is 177%, reflecting a noteworthy decline of 13% from the approved FY 2020-21 rate of 190%. This is the result of the continued decline in annual rates (the inputs to the three-year smoothed rates)for each of the past four years: FY 2018-19 FY 2019-20 FY 2020-21 FY 2021-22 201% 190% 178% 161% FY 2021-22 Rate {-----------Smoothed three-year rate of 177%-----------} FY 2020-21 Rate {-----------Smoothed three-year rate of 190%-----------} The 17% decrease in the un-smoothed administrative overhead rate from FY 2020-21 to FY 2021-22 from 178% to 161% is attributable to the following factors: 1. Employee Benefits Rate Component- 5% of the 17% decrease is caused by a slight decrease in employee benefits costs (numerator), while the denominator of the equation (salaries) increased. The slight reduction in benefit costs overall was primarily driven by a reduction in the required employer retirement contributions made to Contra Costa County Employees' Retirement Association (CCCERA)towards the UAAL. The increase in salaries (denominator) is attributed to the labor agreements specifying cost of living adjustments and other salary adjustments (i.e. longevity, step increases for eligible employees, etc.). 2. Administrative Overhead Rate Component- 11% of the 17% decrease is caused by significant decreases in indirect overhead costs (numerator), while the salaries increased overall (denominator). Noteworthy decreases in indirect costs were evident for several variables including: indirect salaries and wages, benefits charged through payroll, and retiree premiums. The increase in salaries January 26, 2021 Regular FINANCE Committee Meeting Agenda Packet- Page 282 of 305 Page 3 of 5 (denominator) is attributable to prevailing labor agreements specifying cost of living adjustments and other salary adjustments (i.e. longevity, step increases for eligible employees, etc.). Both rates were favorably affected by the decrease in medical costs from the switch to Ca1PERs for medical plans effective FY 2019-20. Refer to the attached FY 2021-22 Administrative Overhead Summary (Attachment 1)for additional highlights of the proposed FY 2021-22 rate compared to the rates adopted by the Board for the previous two fiscal years. ALTERNATIVES/CONSIDERATIONS No changes to the overall methodology presented are recommended; the approach is based on that recommended by the independent consultant in 2014. 1 n the prior year, in light of budgetary savings achieved by transitioning to CalPERS healthcare in FY 2019- 20, discussion was held by the Board of possibly deviating from the above described methodology to incorporate savings from the FY 2019-20 healthcare savings earlier than they otherwise would have been recognized. This would have entailed using budget estimates rather than actual audited figures. as well as departing from the three-year smoothing method and using a one-year rate. That alternative approach was not approved. At this time, as the FY 2019-20 healthcare savings have been reflected into and are reducing the rate year by year, and the rate will continue to be reduced as further year's actual results (FY 2020-21 and FY 2021-22) including those healthcare savings are included in the calculation, staff recommend continuing with this approach. 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 other agencies, companies or developers, and for customer billings involving labor costs. COMMITTEE RECOMMENDATION The proposed three-year smoothed administrative overhead percentage of 177% for FY 2021-22 was reviewed by the Finance Committee at its January 26, 2021 meeting. The Committee recommended RECOMMENDED BOARD ACTION Approve the use of the administrative overhead percentage of 177% for Fiscal Year 2021-22. Strategic Plan Tie-In GOAL THREE: Fiscal Responsibility Strategy 1—Maintain financial stability and sustainability, Strategy 2—Ensure integrity and transparency in financial management ATTACHMENTS: 1. Administrative Overhead and Benefits Rate Summary for Fiscal Year 2021-2022 2. Historical Trend of Rate January 26, 2021 Regular FINANCE Committee Meeting Agenda Packet- Page 283 of 305 Page 4 of 5 ATTACHMENT 1 Central Contra Costa Sanitary District Administrative Overhead and Benefit Rate Summary For Fiscal Year 2021-22 Current Year 3 Year Calculation Last Year's Two Years Ago Smoothed Unsmoothed Unsmoothed Unsmoothed Year 2021-2022 2021-2022 2010-2021 2019-2020 Employee Benefits 70.86% 66.04% 71.24% 75.30% Administrative Overhead 87.58% 77.41% 88.62% 96.71% Non-work Hours 18.06% 17.92% 18.09% 18.18% 176.51% 161.38% 177.95% 190.19% Smoothed Rate 177% 178% 190% 203% Years in Smooth Rate 3 yr 3 yr 3 yr 3 yr Comparison of Rate Before Smoothing 2021-2022 2010-2021 Decrease Employee Benefits 66% 71% -5% Administrative Overhead 77% 89% -11% Non-work Hours 18% 18% 0% Total 161% 178% -16% Summary of Increases(Decreases) Employee Benefits: Total adjusted benefits(numerator)decreased by 3.3%,and total salaries(denominator)increased by 4.5%,causing -5% the overall decrease FY 2019-20 FY 2018-19 Difference Benefits(numerator) $26.3 $27.2 ($0.9) Salaries(denominator) 39.9 38.2 1.7 Admin Overhead: Total adjusted indirect costs(numerator)decreased by 9.7%,and total direct salaries(denominator)increased by 3.5%,causing the overall decrease -11% FY 2019-20 FY 2018-19 Difference Indirect costs(numerator) $25.1 $27.8 ($2.7) Direct salaries(denominator) 32.5 31.4 1.1 January 26, 2021 Regular FINANCE Committee Meeting Agenda Packet- Page 284 of 305 Attachment 2 Historical Trend of Administrative Overhead and Benefits Rate 250% 240% — 230% 220% r1 210% CU CL1 -� 200% c� O 190% 180% 170% 160% 150% 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Fiscal Year 3 Year Smoothed Rate Single Year Rate January 26, 2021 Regular FINANCE Committee Meeting Agenda Packet- Page 285 of 305