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Home My WebLink About04.a. Receive update on question posted at November 22, 2021 Finance Committee meeting regarding Sewer Construction Fund interest earnings present in the Quarterly Financial Review Packet for the first quarterPage 1 of 3 Item 4.a. F__1_448�411C_S0 December 21, 2021 TO: FINANCE COMMITTEE FROM: KEVIN MIZUNO, FINANCE MANAGER REVIEWED BY: PHILIPLEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER SUBJECT: RECEIVE UPDATE ON QUESTION POSED AT NOVEMBER 22, 2021 FINANCE COMMITTEE MEETING REGARDING SEWER CONSTRUCTION FUND INTEREST EARNINGS PRESENTED IN THE QUARTERLY FINANCIAL REVIEW PACKET FOR THE FIRST QUARTER OF FISCAL YEAR (FY) 2021-22 During the Finance Committee's review of the quarterly financial report packet for the quarter ended September 30, 2021, the committee inquired why interest earnings were so low ($255) for the Sewer Construction fund. Upon inquiry with staff and inspection of internal cash flow projections, management has verified that the low return resulted from the bulk of sewer construction funds being held as liquid cash with the County Treasury following the issuance of the 2021 Certificates of Participation (COPs) on June 24, 2021. While the intent was to invest the funds in the Local Agency Investment Fund (LAI F) after the bond issuance, which had a low return rate of 0.24% for the first quarter of FY 2021-22, absences/turnover of two key staff (25% of the division workforce) during a particularly busy time resulted in the temporary under -investment of Sewer Construction excess liquidity. One of the Finance Division staff that went on long-term leave of absence commencing July 2021 was an Accountant that was responsible for day-to-day investment activity and cash flows. I n conjunction with the bond issuance on June 24, 2021, management had communicated to staff that the restricted 2021 COPs proceeds would be pooled with Sewer Construction fund reserves in the County Treasury's Sewer Construction account. Given the co -mingling of funds (bond proceeds and sewer construction reserves), management also communicated that the safest investment in the Sewer Construction fund was LAI F, as it is relatively liquid and an allowable investment per the bond documents as well as Central San's Investment Policy (BP 005). With the transition of investment duties to a Temporary Accountant in July 2021, the details of this plan were not relayed perfectly, and the plan was not executed. Rather, it appears that the communication was misconstrued that monies in the Sewer Construction fund should remain largely liquid until the remainder of restricted bond proceeds were spent, projected to occur in October to November 2021. Unfortunately, challenges such as addressing fiscal year-end close and the independent annual audit following the first year of the new Oracle ERP system, as well as addressing staff turnover paired with historically low investment yields resulted in investments being a given lesser priority, and this not being identified until the release of the FY 2021-22 First Quarter report. Upon discovering this situation, an investment of the excess liquidity in the sewer construction fund was addressed in November 2021. December 21, 2021 Regular FINANCE Committee Meeting Agenda Packet - Page 4 of 220 Page 2 of 3 Attachment 1 illustrates cash and investments balances from May 2021, the month immediately preceding the issuance of the 2021 COPs, through October 2021. As illustrated by the chart, in the months leading up to the issuance of the 2021 COPs, the bulk of Sewer Construction Fund reserves were invested. Thereafter, sewer construction funds were not invested until October 2021, due to the circumstances described previously. Using the LAI F quarterly apportionment rate for September 30, 2021, it is projected that the Sewer Construction fund could have earned approximately $26,000 (0.04% of FY 2021-22 Sewer Construction fund budgeted revenues, excluding debt proceeds) had the funds been invested in the first quarter. While it is unfortunate that more sewer construction funds were not invested, the following important contextual and corrective action items are noted: 1. Despite early challenges, staff has been working diligently with the independent auditors and expects an unmodified ("clean") audit opinion to be issued on Central San's FY 2020-21 financial statements shortly; 2. Finance hired a strong candidate for the vacant Accounting Supervisor position which has filled a critical void in operations and the tenured Accountant that was on leave and who is expected to return in early January 2022; 3. Finance has corrected the issue prospectively through the additional investment of $35 million in projected excess liquidity in the sewer construction fund and reemphasized for staff the importance of investing excess liquidity; 4. While not ideal, the missed investment earnings from holding the bond proceeds in cash with the County Treasury were small given historically low fixed income investment yield conditions, which was confirmed by the County Treasury; 5. Holding proceeds as "cash and cash equivalents" is permissible per the allowable investments specified in the bonds' Official Statements; and funds held in cash with the County's bank, Wells Fargo, are provided an earnings allowance of a net 0.1225% to offset banking fees. The credit accrues to the County but is not separately apportioned to pool participants such as Central San; and 6. Effective immediately, Finance has implemented improvements to the weekly internal cash flow documents to clearly distinguish the balance of liquid cash relative to investments and include a line requiring review and approval by the Finance Manager, or Director of Finance and Administration in his/her absence. Strategic Plan Tie -In GOAL THREE: Fiscal Responsibility Strategy 2 — Ensure integrity and transparency in financial management ATTACHMENTS: 1. Sewer Construction Fund Cash & Investments Balances for Past 6 Months December 21, 2021 Regular FINANCE Committee Meeting Agenda Packet - Page 5 of 220 Attachment 1 $80,000,000 $70,000,000 $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 ■ Investments ■ Cash Sewer Construction Fund Cash & Investment Balances - 6 Month Trend May-21 May-21 67,800,000.00 5,324,347.67 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 25,000,000.00 - - - 7,000,000.00 31,300,299.11 47,546,111.75 41,238,592.08 56,347,747.07 50,728,216.61 December 21, 2021 Regular FINANCE Committee Meeting Agenda Packet - Page 6 of 220