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HomeMy WebLinkAbout06.c. Hold discussion in consideration of a two-year budget processPage 1 of 7 Item 6.c. F__1_448�411C_S0 December 21, 2021 TO: FINANCE COMMITTEE FROM: PHI LIP LEI BER, DI RECTOR OF FINANCEAND ADMINISTRATI ON REVIEWED BY: KEVIN MIZUNO, FINANCE MANAGER ROGER S. BAILEY, GENERAL MANAGER SUBJECT: HOLD DISCUSSION IN CONSIDERATION OFATWO-YEAR BUDGET PROCESS Introduction Periodically, the Board of Directors (Board) have raised the concept of whether adoption of a two-year budgeting cycle would be beneficial to Central San. This memorandum provides an assessment of alternatives around a two-year budget. This topic is brought for immediate input by the Finance Committee in advance of the start of the budgeting process in early 2022. If support for an alternative direction exists, this could be codified in a Budget Policy document. Such a Budget Policy document covering other issues (not specifically a two-year budget) is already underway, with staff planning to present such a document for approval by the Board in early 2022. Background Currently, the budget document approved by the Board on an annual basis includes one year of proposed revenues and expenditures for the Operations and Maintenance (O&M), Self -Insurance, Debt Service, and Sewer Construction funds. Additional yearly context is provided for Sewer Construction showing future year's expenditures for each proposed project, as well as a 10-year projection by project called the 10-year Capital Improvement Plan (CIP). A move to biennial budgeting would provide a two-year projection window of revenues and expenditures for these funds. A list of selected advantages and disadvantages of biennial budgeting from the City of San Francisco's assessment of this issue conducted in 2002 included the following: Advantages of Biennial Budgets: 1. Long range planning: Biennial budgeting can improve long-range and strategic planning, as it requires forecasting expenditures and revenues up to 28 months in advance. 2. Opportunities for staff redeployment: Biennial budgeting frees some staff from annually preparing budget documents, time that could be spent improving financial management, conducting audits, and/or analyzing program effectiveness. The Board could also use the time in mid -cycle budget years to gather information, formulate policy, and test and evaluate programs. December 21, 2021 Regular FINANCE Committee Meeting Agenda Packet - Page 212 of 220 Page 2 of 7 3. Policy emphasis: Biennial budget cycles could allow the Board to move towards a longer -range, more policy -driven approach. Disadvantages of Biennial Budgets Opponents of biennial budgets point to the following disadvantages of converting to a biennial budget cycle: 1. Unforeseen events: The limited ability to project future economic and/or programmatic conditions and the inevitability of unforeseen events may lead to a budget process that is biennial in name only. For some volatile revenue sources (for city revenues such as hotel, property and sales taxes, a risk already present in the creation of annual budgets), the risk is compounded. A review of biennial budgets by the Government Finance Officers Association (GFOA), found that biennial budgets assume stability and therefore work best in times of economic growth or certainty. 2. Time savings: Depending on the strength of restrictions or willingness to avoid making significant technical or policy changes in the off-year, biennial budgeting may not lead to appreciable time savings for the policy makers and staff. While survey evidence from finance directors in smaller cities suggests that it takes no more time and frequently takes less time to create a biennial budget, there is no guarantee that converting to a biennial budget cycle will reduce the burden on elected officials or staff. 3. Software and Accounting Changes: Converting to a biennial budget can require changes to budgeting and accounting practices, adding potential additional costs. There are several variations possible beyond the core element of a "two-year budget". The primary alternative is whether adoption of a two-year budget would be a "once and done" process during that period, or whether the two-year budget outlook would be more akin to a rolling forecast with an annual update. If the latter, the two-year budget would require as much or more staff and Board time as compared to the current process. If the former, some efficiencies could be available. The options listed below start with the status quo, then the status quo with the addition of a ten-year O&M budget projection, and two-year budget options beyond that. Staff note that at a minimum, it will prospectively present a 10- Year O&M projection in future budgets, as this is now recommended per GFOA as a requirement for the Distinguished BudgetAward. For each listed below, other entities using that approach are shown. It is notable that there is clearly no "single" approach used at peer agencies. This is also true at the State level, where a National Council of State Legislatures indicates 31 states have annual budgets (including California), 15 states adopt a biennial budget and meet annually, while four states meet biennially and adopt a biennial budget. While staff could ultimately accommodate and deliver upon any of the options, staff recommend at this time the adoption of Option I.a. below, which is the single year budget with the addition of a 10-year schedule of projected O&M expenditures, which can be obtained from the long-term financial plan presented to the Board at the annual Financial Planning Workshop. The rationale for this is: While it is conceivable that some staff time could be saved ultimately with a two-year budget (such as Option II.a. below), this is not viewed as substantial enough to warrant a change immediately. • Newly hired staff (Accounting Supervisor) involved in the budgeting process should get up to speed with a "status quo" approach and then make potential changes later. • Need to focus limited resources on higher priority enhancements to Oracle Enterprise Resource Planning System, including the potential use of the Oracle budgeting module for capital December 21, 2021 Regular FINANCE Committee Meeting Agenda Packet - Page 213 of 220 Page 3 of 7 budgeting. • While our O&M costs are generally very predictable, the majority of our O&M costs are labor related and vary based on inflation factors that are only available immediately prior to the start of the fiscal year. There are numerous issues to be resolved in the transition to a two-year budget. When Central San transitioned from program to project budgets for capital expenditures, it took multiple years for many implementation details to be fully resolved. The same disruptions should reasonably be anticipated in a transition to a two-year budget as the new budget module (Oracle PBCS) just implemented for the first time for Fiscal Year (FY) 2021-22 would need to be again re -designed, tested, and implemented. • Limited value of a two-year budget projection for "planning" purposes beyond the information available presently. Multi -year rates are presently set based on the latest budget information and inflation factors by expense category. That is sufficient to set multi -year rates. Adoption of a two-year budget for FY 2022-23 and FY 2023-24 would not be synchronized with the Sewer Service Charge (SSC) rate adoption schedule. Currently, with a four-year schedule of adopted rates in place, FY 2021-22 is the third year of the four year schedule with FY 2022-23 being the final year. Adoption of a two-year budget in June of 2022 may necessitate assumptions as to what rates will be in FY 2023-24, and these discussions have not yet been held with the Board. With the significant uncertainty that exists at the present time on the cash flow schedule for the new direction on the Solids Handling Facility Improvements Project, information on FY 2023-24 capital expenditures may not yet be available by June 2022. If there is continued interest by the Board in a two-year budget, this topic could be brought back for additional consideration in 2023. Then, if a two-year budget is to be developed, it could coincide with the FY 2023-24 and FY 2024-25 strategic planning cycle, and it also seems likely that rates will have been established for potentially at least that two-year period, as noted below: Key Capital Year Budget Strategic Plan Rates Project Considerations FY 2020-21 and 2020-21 Single Year FY 2021-22 Year 2 of 4-Year Budget Plan Year 1 of 2 2021-22 Single Year Year 2 of 2 Year 3 of 4-Year Budget � Plan r2022-23 Single Year FY 2022-23 and Firmer Direction Budget FY 2023-24 Year 4 of 4-Year Likely for Solids (Proposed) Plan Handling Project Year 1 of 2 Path � ' Single Year New Single or 2023-24 Budget Year 2 of 2 Multi -Year Rate r(Proposed) FY 2024-25 and 2024-25 Two Year Budget FY 2025-26 New Single or Could Start Year Multi -Year Rate Year 1 of 2 December 21, 2021 Regular FINANCE Committee Meeting Agenda Packet - Page 214 of 220 Page 4 of 7 2025-26 Year 2 of 2 New Single or Multi -Year Rate I. Single Year Budget (Status Quo) Description: This is the status quo approach. An annual budget document is produced, with a one-year horizon for O&M budget and Cl P, and a 10-year forecast for Cl P. Advantages • Current approach, and common for many agencies. Disadvantages Does not provide a longer -term O&M cost outlook at a detailed level and provide multiple years of legal spending authority via adopted appropriations Does not meet next year's GFOA requirements for the Distinguished Budget Award Agencies that Use This Approach • Delta Diablo: (One year O&M and capital budget, with a five-year Cl P projection) • Union Sanitary District: (One-year O&M and capital budget, with a 20-year CI P projection; five single years and additional aggregate detail by five-year blocks for another 15 years.) • Ironhouse Sanitary District: (One year O&M and capital budget). Very simple budget document of six pages, no commentary, just account detail. • NapaSan: (One year O&M and capital budget, with a 10-year CI P projection) • Sacramento Regional San: (One year O&M and capital budget). Relatively short 40-page document. • Los Angeles County Sanitation Districts: (One year O&M and capital budget). Relatively short 3 to 4 page documents for each of 23 sub -districts. https://www.lacsd.org/services/wastewater- programs-permits/wastewater-revenue-program/financial-documents/-folder-160 I.a. Single Year Budget with 10-Year Forecast Shown in Budget Book Description: Same approach as current, where an annual budget document is produced. In addition, a 10-year forecast is provided in that budget document for O&M costs. The 10-year forecast is per the current 10-year Financial Plan. Advantages • Meets the new GFOA requirement to provide a 10-year forecast in the budget. • Consistent with how we already provide a 10-year forecast for Sewer Construction Expenditures (" C I P"). • Easily attainable with minimal disruption to established processes, systems, and employee workloads. • Necessitates an annual reassessment of current year achievements and plans/needs for the upcoming year at the divisional level. I n some ways similar to an annual zero -based budget approach. Most accurate budget results and regular self -reflection and planning at a more in- depth level can improve both accountability and results. December 21, 2021 Regular FINANCE Committee Meeting Agenda Packet - Page 215 of 220 Page 5 of 7 Disadvantages • Minimal. o Does not provide same level of discussion and granularity as the year one budget information for years 2-10, but is sufficient to provide an outlook. o Would require an update of the 10-year financial plan concurrent with the budget development for the prospective year, whereby the prospective years are updated using the proposed budget and assumed inflation factors. This would be an additional step in the budget process as the 10-year plan is not always updated in the same time -frame as the budget development, but typically after budget adoption. Agencies that Use This Approach • Likely this will be standard for agencies applying for the GFOA distinguished budget award. II. Two -Year Budget: Core Concept (variations shown subsequently) Description: Production of a two-year budget document. Advantages • Could potentially be sequenced to align with other related processes (strategic plan, rates) and avoid other interference with other annual Board events of significance (elections, other key matters of importance to Central San). • Potentially somewhat improved public visibility of future financial trends. • Potentially some reduced staff time related to production of annual budget book, if the book is only produced once during the two-year period. • May provide for greater ability to make capital project commitments and enhance project management. Disadvantages • Additional work (staff and currently unbudgeted ERP implementation consultant time) will be required to reconfigure the Oracle budget development and data collection system. With the development of the Oracle "EPM" module that was completed earlier in 2021, the general future ability to produce a multi -year budget were included in the requirements, but additional planning, design, implementation, and testing would be needed to effectuate such a transition. • Additional efforts to reconfigure the budget book including production of tables, and consideration of new commentary will be required. • Second year projected figures are less certain as key inputs/considerations will not be known. Staff salaries and labor have historically been 75% of the O&M budget. Cost of Living Adjustment (COLA) figures are not known until March preceding the budget year. Same for many assumptions related to benefit costs. • Challenge of sequencing the start of the two-year budget with strategic planning cycle, and rate adoption cycle. Il.a. Two -Year Budget: Asingle two-year budget document in each two-year period Description: Same as "Core Concept" in that production of a two-year budget document that would be approved concurrent with the two-year strategic plan. Further, the first year and second year budgets would not typically be revisited during the two-year period. December 21, 2021 Regular FINANCE Committee Meeting Agenda Packet - Page 216 of 220 Page 6 of 7 Advantages • Staff time related to production of budget book reduced from annual to once every two years. • Less Board time needed for budget review, discussion, and action. Disadvantages Second year budget will be less accurate in that assumptions about 1 1 /2 years out will be needed as to cost changes in labor, benefits, and other costs. Implication: second year budget will have more variances. For O&M, this is not viewed as a major issue as most of The District costs are still relatively stable. Agencies that Use This Approach • East Bay Municipal Utility District: Biennial budget prepared for even numbered years, and the following odd number year. • Fairfield/Suisun: (FY2021-22) has prepared two-year budgets since 2016 but moved most recently (on a one-time basis to a one year O&M and capital budget due to final year of the 4-year SSC rate plan as noticed by Proposition 218 SSC, with a 10 year financial plan projection). Relatively short 30 page document. Previously, two-year budgets and 10-year, long-term plan. • San Francisco Public Utilities Commission (SFPUC): Biennial budget prepared for even numbered years and the following odd numbered year. (Two years' O&M. Two years' capital budget presented in most discussions. Some tables with five years capital budget detail, within a 10-year CI P projection (five years detail, and one five-year aggregate period presented)). • San Diego County Water Authority: Biennial budget prepared for even numbered years and the following odd numbered year. (Two years O&M. Five years capital budget presented inmost discussions, with one column for beyond five years aggregate figures. • Inland Empire Utilities District: Biennial budget prepared for even numbered years and the following odd numbered year. (Two years O&M. Five capital years data presented and a column for the total 10-year Cl P). One amended budget presented for a second year (FY 2016-17) in the budget documents listed since FY 2012-13. • Vallejo Sanitation and Wastewater District: Biennial budget prepared for even numbered years and the following odd numbered year. CI P includes 10 years of expenditures by project. • West County Wastewater District: Biennial budget prepared for even numbered years and the following odd numbered year. For 5 budget years shown (2016-2021) on website, there are two "budget updates" (short resolutions); one for the first year of a two-year period, and another for the second year of a two-year biennial budget). Il.b. Two Year Budget: Two-year document, but with a routine annual update for year two Description: Same as "Option II" in that production of a two-year budget document that would be approved. However, unlike the "Core" option, the year two budget would revise in some manner near the end of year one. A short "budget update" document could be provided. Advantages • May save some time versus current process if the year two updated budget is abbreviated and focused only on significant/necessary changes. December 21, 2021 Regular FINANCE Committee Meeting Agenda Packet - Page 217 of 220 Page 7 of 7 Disadvantages Similar to "Once and Done" option, but the update for year two would provide for important "true - ups" to major cost items. Uncertain how much less staff time this "bridge year' re -assessment would require. Agencies that Use This Approach • Orange County Sanitation District: Biennial budget prepared for odd numbered years and the following even numbered year. Comprehensive document of 361 pages. Budget update provided for the second year prior to the start of that year. 96 page document. For C I P, just the two budget years are provided with another column for "Future Years". II.c. Two -Year Budget: Continuous two-year document prepared Description: Every year, a two-year budget document is produced. The second year of the budget is essentially shown as a forecast but is not "adopted" in the same manner as the first -year budget, but rather is "endorsed." After the completion of the first year, the "endorsed" budget for the second year is adopted, and another subsequent year's budget is presented as the "endorsed" budget. Per a 2002 document from the City of San Francisco, "Most commonly, governments enact a rolling biennial budget, where the legislative body passes a biennial financial plan but continues to appropriate the funds annually. According to recent surveys, 12 states, nine of the 35 largest U.S. counties, and 25 California cities currently enact rolling biennial budgets." From https://sfbos.org/legislative-analyst-report-biennial-budgeting-file-no- 021309 Advantages Would provide additional information for the readers of the budget book as to what financial changes may be on the horizon. Budget book likely to be longer (already 323 pages for FY 2021-22), unless significant streamlining is done along with the addition of the year two budget information. Disadvantages • Would not be less work for staff or Board than present process, in fact more. • Limited additional value for decision making. In the event multi -year rates are set (as has been the case recently), rates already reflect assumptions in the 10-year financial plan. Showing the second -year assumptions from the financial plan in the budget provides some insight but is not "necessary" from a rate setting perspective. Agencies that Use This Approach • City of Seattle (in 1985, the Washington State Legislature adopted the Municipal Biennial, or two- year, budget. The legislature granted the same authority to counties in 1995.) Strategic Plan Tie -In GOAL THREE: Fiscal Responsibility Strategy 1— Maintain financial stability and sustainability, , Strategy 2 — Ensure integrity and transparency in financial management December 21, 2021 Regular FINANCE Committee Meeting Agenda Packet - Page 218 of 220