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Home My WebLink About14. Consider adopting an amendment to the FY 2021-22 District Budget Page 1 of 11 Item 14. CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER MEETING DATE: SEPTEMBER 2, 2021 SUBJECT: CONSIDER ADOPTING AN AMENDMENT TO THE FISCAL YEAR (FY) 2021- 22 CENTRAL SAN BUDGET FOR THE FOLLOWING FUNDS: OPERATIONS AND MAINTENANCE, SEWER CONSTRUCTION, AND DEBT SERVICE SUBMITTED BY: INITIATING DEPARTMENT: PHILIP LEIBER, DIRECTOR OF FINANCEAND ADMINISTRATION-FINANCE ADMINISTRATION REVIEWED BY: KEVIN MIZUNO, FINANCE MANAGER Roger S. Bailey General Manager ISSUE Issuance of Certificates of Participation (COPs) in June 2021, and the pay-off of the Unfunded Actuarially Accrued Liability(UAAL)with CCCERA necessitates certain amendments to the FY 2021-22 budget adopted by the Board on June 3, 2021 BACKGROUND Central San's budget for the fiscal year ending June 30, 2022 (FY 2021-22), was adopted by the Board of Directors on June 3, 2021, at a regularly scheduled public meeting. This was prior to the issuance of COPs on June 24, 2021,and the transmission of funds to CCCERA on June 25, 2021. On July 14, 2021, the CCCERA Board adopted a revised UAAL pension contribution rate for Central San reflective of the UAAL pay-down of $70,763,669. The FY 2021-22 contribution rate for UAAL would have been 34.5% of covered payroll, prior to the pay-down. With the pay-down, the UAAL contribution rate falls to just 0.16% of covered payroll, a decrease of 34.34%. The 0.16% is reflective of a continuing administrative charge. The combined normal cost and UAAL employer contribution rates accordingly fall from: • 51.46% to 17.12% of covered payroll for non-PEPRA employees 45.74% to 11.4% of covered payroll for PEPRA employees September 2, 2021 Regular Board Meeting Agenda Packet- Page 117 of 199 Page 2 of 11 This change results in a significant reduction in the O&M budget, with originally budgeted pension UAAL contributions being nearly eliminated, decreasing by$11,475,067. Conversely, the debt service budget needs to increase by$10,379,832 to pay for the principal and interest payments due in FY 2021-22 on the new 2021 COPs. Changes to these budgets are shown in more detail in Attachment 1, which highlights changes to key tables in the published budget book. A summary of significant elements of the changes is provided below. O&M Budget(Running Expense Fund) The FY 2021-22 adopted O&M budget provided for expenditures of $90,974,103. Expenditures in the amended O&M budget would drop to $79,520,131, a reduction of $11,453,972, which consists of: • UAAL reduction: ($11,475,067) • Correction of formula in the newly-implemented Oracle Budget Module for Life Insurance: $6,032 • Correction of formula in the newly-implemented Oracle Budget Module for Board Health Benefits: $63 • Restoration of Board travel to $40,000, continuing at the level in the adopted FY 2020-21 budget: $15,000 With the reduction in expenditures, funding sources necessary to support the O&M budget would also drop. However, instead funding allocated to the O&M fund increases by$23,718,027, via an increase in Sewer Service Charges (SSC) allocated to O&M of$24,072,493 from $72,259,337 to $96,331,830. The reason more SSC is allocated to O&M is to restore the O&M fund to the policy required level by June 30, 2022, subsequent to the payment of the UAAL from the O&M Fund in June 2021. Concord O&M revenue decreases by$354,466 which represents a conservatively and preliminarily estimated 33% share of the net savings from the UAAL paydown transaction. The "net" refers to the UAAL reduction in O&M, offset in large part by the increased debt service on the COPs. Sewer Construction Fund Budget Expenditures would remain unchanged at$107,955,000. The funding sources for the Sewer Construction budget would change as shown below. Ad Valorem taxes are shifted to the Debt Service budget to cover debt service on the COPs. Sewer Service Charge (SSC)funds are shifted to the O&M budget as described previously. Backfilling these reductions are proceeds from the COPs (with the remaining balance of the $58,000,000 used to reimburse FY 2020-21 capital expenditures, in lieu of SSC which was directed to O&M). Adopted Amended Change Ad Valorem Taxes $17,320,000 $6,940,168 ($10,379,832) Sewer Service Charge $34,108,232 $10,035,739 ($24,072,493) Certificates of Participation $0 $10,379,832 $10,379,832 Certificates of Participation $0 $24,072,493 $24,072,493 Other Sources $49,387,514 $49,387,514 $0 Total $100,815,746 $100,815,746 $0 The use of the $58 million COPs proceeds is to fund capital expenditures in FY 2020-21 and FY 2021- 22. The FY 2020-21 usage is to fund a portion of March, and all of April-J une 2020 expenditures. Debt Service Fund Budget The adopted budget anticipated debt service on the 2018 Revenue Refunding bonds, at$2,511,227 for FY 2021-22. The amended budget would add $1,734,832 for interest and $8,645,000 for principal September 2, 2021 Regular Board Meeting Agenda Packet- Page 118 of 199 Page 3 of 11 repayments on the 2021 COPs. The amortization schedule for the bonds through maturity is shown in Attachment 1. To cover the additional debt service, the funding sources for the Debt Service fund would be revised as follows: Adopted Amended Ad Valorem Taxes $2,511,227 $12,891,059 Overall Allocation of Sever Service Charge Sewer service charge SSC revenues in the adopted FY 2021-22 budget are proportioned as follows: O&M 66.9%; Capital 31.6%; Self-I nsurance 1.5%. As a result of the proposed budget amendments to O&M and Debt service, the allocation of SSC would be reallocated as follows: O&M 89.2%; Capital 9.3%; Self-Insurance 1.5%. The reasons for the reallocation of SSC were described previously. ALTERNATIVES/CONSIDERATIONS The Board may opt not to amend the FY 2021-22 budget, which is not being recommended by staff. Given the significance of savings derived from the payoff of the UAAL, the originally adopted O&M budget would be materially higher than needed, given the lower spending level absent the UAAL payments. Furthermore, as UAAL savings are pervasive and spread throughout the many divisions of Central San, not amending and reducing divisional budgets would reduce the accuracy of interim financial reports, which are used by Management to monitor and control their budgets. Further, as debt service will be higher than in the adopted budget, Board authorization would be needed to make such payments at a level above the approved budget. FINANCIAL IMPACTS The overall expenditure budget drops from $202,725,330 to $201,651,190. The savings of$1,074,140 will result in higher than otherwise reserves, which could be used for multiple purposes such as: • Funding additional expenditures; • Reducing borrowing for capital expenditures; • Reducing the size of future rate adjustments. Note that this budget amendment does not reflect changes the FY 2021-22 Capital Improvement budget that may be necessary due to anticipated cost increases in the Solids Handling Facility Improvements Project (DP 7348). Such changes being assessed as of August 2021, and will be presented to the Board at a special workshop on August 26, 2021. COMMITTEE RECOMMENDATION The Finance Committee received a staff presentation for the proposed amendments to the FY 2021-22 O&M, Sewer Construction, and Debt Service fund budgets on August 24, 2021, and recommended Board approval. September 2, 2021 Regular Board Meeting Agenda Packet- Page 119 of 199 Page 4 of 11 RECOMMENDED BOARD ACTION Adopt amendments to the FY 2021-22 Central San budget as follows: 1. Adopt the amended FY 2021-22 Operations and Maintenance fund budget with revenue of $116,681,673 and expenditures of$79,520,131; 2. Adopt the amended FY 2021-22 Sewer Construction fund budget, with funding sources of $100,815,746 and expenditures excluding carryforward of$107,955,000; 3. Adopt the amended FY 2021-22 Debt Service fund budget with funding sources of$12,891,059 and expenditures of$12,891,059. 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. (Appendix 1) Summary of Key Budget Changes September 2, 2021 Regular Board Meeting Agenda Packet- Page 120 of 199 Page 5 of 11 Appendix 1 Summary of Key Budget Changes Page 45 of Budget Book Table 1-Total Budget REPW FY 2021-22 FY 2021-22 Budget(Adopted Bud.Funget • 6/3/21) (Amended) Percent Change Operations - Operations and Maintenance $ 90,974,103 $ 79,520,131 $ (11,453,972) -12.6% Sewer Construction $ 107,955,000 $ 107,955,000 $ - 0.0% Debt Service $ 2,511,227 $ 12,891,059 $ 10,379,832 413.3% Self-Insurance("SIF") $ 1,285,000 $ 1,285,000 $ - 0.0% Total Budget $ 202,725,330 $ 201,651,190 $ (1,074,140) -0.5% Explanation: • O&M Spending is reduced due to the reduction in the UAAL charge of$11,475,067, offset by two minor increases of$6,095 in benefits (Life/AD&D Insurance calculation update) and Board travel restoration of$15,000. • Debt Service increase of$10,379,832 represents principal and interest payments on 2021 Certificates of Participation. Page 1 September 2, 2021 Regular Board Meeting Agenda Packet- Page 121 of 199 Page 6 of 11 Appendix 1 Page 55 of Budget Book Table 5-Allocation of Sewer Service Charge 2021-221F •• 1 ,MWFBu Adopted Budget As 1 •-• To 0&M $72,259,337 66.9% $96,331,830 89.2% To Capital $34,108,232 31.6% $10,035,739 9.3% To Self-Insurance $1,576,419 1.5% $1,576,419 1.5% Total Collected $107,943,987 100.0% $107,943,987 100.0% Explanation: • Higher allocation of SSC to 0&M in FY 2021-22 to offset large increase in 0&M in FY 2020-21 due to UAAL payoff. This helps restore the O&M reserve level to the policy required balance (See Table 14). • Reduced allocation of SSC to Capital, made up from proceeds from the 2021 COP issuance. Page 2 September 2, 2021 Regular Board Meeting Agenda Packet- Page 122 of 199 Page 7 of 11 Appendix 1 Page 57 of Budget Book Table 6 Budgeted O&M Revenues FY 2021-22 FY 2021-22 Budget d. Account Description Adopted Amended Change $ Revenue: Sewer Service Charge 72,259,337 96,331,830 24,072,493 Concord SSC 15,800,000 15,445,534 (354,466) Permit& Inspection Fees 1,882,400 1,882,400 - Lease Rental Income 715,000 715,000 - HHW Reimbursement 977,000 977,000 - Stormwater/Pollution Prevention 390,000 390,000 - Interest Income 180,000 180,000 - Recycled Water 432,000 432,000 - Other 328,000 328,000 1 - Total Revenue 92,963,737 1 116,681,763 23,718,027 Explanation: • Higher allocation of SSC to O&M in FY 2021-22 to offset large increase in O&M in FY 2020-21 due to UAAL payoff. This helps restore the O&M reserve level to the policy required balance (See Table 14). • Reduced Concord SSC to provide Concord a conservatively and preliminarily estimated 33% proportionate share of the net savings (UAAL-debt service) of SSC to Capital. Calculated as $1,074,140*0.33 (see Table 1 above) Page 3 September 2, 2021 Regular Board Meeting Agenda Packet- Page 123 of 199 Page 8 of 11 Appendix 1 Page 59 of Budget Book Table 7- Budgeted O&M Expenditures and Contribution to Reserve IFY 2021-22 Budget As FY 2021-22 Adopted Budget As Account Description 6/3/2021 Amended Change $Salaries &Wages A. Salaries &Wages $39,711,391 $39,711,391 - Ranof B. Benefits &Cap 0/H Credit $12,682,629 $12,688,724 6,095 Salary& Benefits(Active Employees) 1 $52,394,0201 $52,400,1151 6,095 C.OPEES and Pension UAAL and Atclitional Contra C. OPEB UAAL $1,260,000 $1,260,000 - C. Pension UAAL $11,531,912 $56,845 (11,475,067) C. Additional UAAL Contributions $1,250,000 $1,250,000 - Total UAAL and Additional Contributions $2,566,845 $2,566,845 - Total Labor Related Costs(A+B+C) $66,435,932 $54,966,960 (11,468,972) FW. er O&M Expens D. Purchased Property Services $5,926,840 $5,926,840 D. Other Purchased Services $6,935,041 $6,935,041 D. Supplies & Materials $10,512,734 $10,512,734 - D. Other Expenses $1,163,556 $1,178,556 15,000 D. Other Expenses-Self Insurance $0 $0 - **Total Other O&M $24,538,171 $24,553,171 15,000 Total Expenditures $90,974,103.00 $79,520,130.96 (11,453,972) Contribution to(Draw From) Reserve $1,989,634 $37,161,632 35,171,999 Explanation: • O&M Spending is reduced due to the reduction in the UAAL charge of$11,475,067, offset by two minor increases of$6,095 in benefits (Life/AD&D Insurance calculation update) and Board travel restoration of$15,000. Page 4 September 2, 2021 Regular Board Meeting Agenda Packet- Page 124 of 199 Page 9 of 11 Appendix 1 Page 72 of Budget Book Table 13 -Sewer Construction Fund Revenues and Expenditures AdoptedFY 2021-22 FY 2021-22 Budget(as Budget As Revenue Capacity Fees-Gravity $5,799,000 $5,799,000 $0 Capacity Fees-Pumped Zone $151,000 $151,000 $0 Interest Income $319,000 $319,000 $0 Ad Valorem Taxes $17,320,000 $6,940,168 ($10,379,832) Sewer Service Charge $34,108,232 $10,035,739 ($24,072,493) Reimbursements City of Concord $8,700,914 $8,700,914 $0 Recycled Water Sales $0 $0 $0 Developer Fees&Charges&Other $297,600 $297,600 $0 Total Revenue $66,695,746 $32,243,421 ($34,452,325) Loan&Bond Proceeds State Revolving Fund Loan Proceeds $34,120,000 $34,120,000 $0 2021 COP Proceeds-Replacing Sewer Service $24,072,493 $24,072,493 Charge 2021 COP Proceeds-Replacing Ad Valorem $10,379,832 $10,379,832 Taxes Total Revenue and Loan Proceedsl $100,815,746 $100,815,746 $0 Expenditures Treatment Plant Program $45,230,000 $45,230,000 $0 Collection System Program $39,795,000 $39,795,000 $0 General Improvements Program $3,830,000 $3,830,000 $0 Recycled Water Program $16,600,000 $16,600,000 $0 Contingency $2,500,000 $2,500,000 $0 Total Expenditures $107,955,000 $107,955,000 $0 Sewer Construction Funds Available Projected Revenue and Loan Proceeds $100,815,746 $100,815,746 $0 Expenditures $107,955,000 $107,955,000 $0 Less:90%Spending Factor for FY 2021-22 ($10,795,500) ($10,795,500) $0 Contribution to Reserves $3,656,246 $3,656,246 $0 Anticipated Cash Funded Capital Expenditures 1 $66,451,500 1 $66,451,500 $0 Explanation: • $10,379,832 Ad Valorem Tax used for increased debt service (See subsequent debt service Table 1) • $24,072,493 Sewer Service Charge moved to 0&M to restore 0&M reserve to required level after O&M had to pay off the UAAL in June 2021. • $58,000,000 of COP proceeds was used to reimburse for FY 2020-21 expenditures ($23,547,675), and the balance of$34,452,325 used for FY 2021-22 capital expenditures, offsetting the reduction in SSC and Ad Valorem Taxes. Page 5 September 2, 2021 Regular Board Meeting Agenda Packet- Page 125 of 199 Page 10 of 11 Appendix 1 Budget Book Page 75 Table 13 - Reserve Projections Sewer Construction Self Insurance Primary Sub-Fu r6, • Totals Actual Balance as of June 30,2020 $65,959,541 $73,802,435 $6,758,581 1 $146,520,557 Projected Balance as of June 30,2021 $13,108,895 $58,264,111 $6,133,581 $77,506,586 Change in Reserve balances during FY 2021-22: Net Increase: $37,161,632 $3,656,246 $366,419 $41,184,297 Planned Transfers in FY 2021-22 ($5,169,332) $0 ($5,169,332) Projected Balance as of June 30,2022 $45,101,194 $61,920,356 $6,500,000 $113,521,551 Change year over year $31,992,300 $3,656,246 $366,419 $36,014,965 Reference: Table 7 Table 13 Self Insurance See Figure 3 Table 1 Precentage change year over year 244.1% 6.3% 6.0% 46.5% Explanation Ending balance at Funds were set aside 6/30/20 is above in policy level due to prior years to be used projected O&M toward the funding savings in FY 2019-20. of future year's Capital Budgets Policy Target 5/12 of following 50%of following 3 times annual year's O&M year's non-debt deductible of Budget funded Capital $500,000 plus$5 Budget million Reserve Policy Target end of June 30,2021 $33,133,388 $33,225,750 1 $6,500,000 $72,859,138 Projected Balance Minus Reserve Policy Target at lune 30,2021 ($20,024,493) $25,038,361 ($366,419) $4,647,448 Reserve Policy Target end of June 30,2022 $40,464,998 $32,506,441 $6,500,000 $79,471,439 Projected Balance Minus Reserve Policy Target at June 30,2022 $4,636,196 $29,413,915 ($0) $34,050,111 Projected Balance Minus Reserve Policy Target at June 30,2022(ADOPTED BUDGET) ($0) $32,755,070 [$0)1 $32,755,070 Change from Adopted Budget $1,295,041 Consisting of: Net Savings from lower net spending in FY 2021-22 $1,074,140 Higher than anticipated SSC in FY 2020-21 $575,367 Lower Concord Reimbursement for O&M in FY 2021-22. ($354,466) Page 6 September 2, 2021 Regular Board Meeting Agenda Packet- Page 126 of 199 Page 11 of 11 Appendix 1 Budget Book Page 299 Table 1 - Debt Service Fund Budget Summary FY 2021-22 Budget As FY 2021-22 Adopted Budget As Deb o -. -. .-. Change$ Debt Service Revenue: Reserve Account Bond Interest Income $0 $0 $0 Ad Valorem Tax(portion allocated to Debt Service) $2,511,2271 $12,891,0591 $10,379,832 Total Revenue $2,511,2271 $12,891,0591 $10,379,832 Debt Service Expense: 2018 Bond Interest Payment and Amortized Costs $706,227 $706,227 $0 2021 COP Interest Payment $0 $1,734,832 $1,734,832 SRF Loan Interest Payment $0 $0 $0 Total Interest Payment and Amortization Costs $706,227 $2,441,059 $1,734,832 2018 Bond Principal Payment $1,805,000 $1,805,000 $0 2021 COP Principal Payment $0 $8,645,000 $8,645,000 SRF Water Principal Payment $0 $0 $0 Total Principal Payments $1,805,000 $10,450,000 $8,645,000 Total Debt Service Interest,Amortized Cost and Principal Payments $2,511,227 $12,891,059 $10,379,832 nit Explanation: • $10,379,832 Ad Valorem Tax used for increased debt service (See subsequent debt service Table 1) • COP interest due in FY 2021-22 of$1,734,832 and Principal of$8,645,000. Debt service by year was shaped to match the UAAL payments which were nearly entirely eliminated, with the net savings of about$1.1 million in FY 2021-22. Page 7 September 2, 2021 Regular Board Meeting Agenda Packet- Page 127 of 199