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HomeMy WebLinkAbout07. Hold discussion in consideration of a two-year budget cycle process Page 1 of 13 Item 7. CENTRALSAN Jdf A- hom CENTRAL CONTRA COSTA SANITARY DISTRICT January 27, 2022 TO: HONORABLE BOARD OF DIRECTORS FROM: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION REVIEWED BY: KEVIN MIZUNO, FINANCE MANAGER ROGER S. BAILEY, GENERAL MANAGER SUBJECT: HOLD DISCUSSION IN CONSIDERATION OFATWO-YEAR BUDGET CYCLE 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 was brought to the Finance Committee on December 21, 2021, and members agreed with staff's recommendation to maintain a current annual budgeting process with the addition of a 10 year O&M forecast. This topic is brought forward for Board input as well, in advance of the budgeting process which commences 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-I nsurance, 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 (CI P). 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. 3. Policy emphasis: Biennial budget cycles could allow the Board to move towards a longer-range, more policy-driven approach. January 27, 2022 Special Board Meeting Agenda Packet- Page 49 of 84 Page 2 of 13 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 (G FOA), 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 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 updated for the second year. If the latter, the two-year budget could 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 Budget Award. For each alternative discussed below, other entities using that approach are listed. 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 accommodate and deliver upon any of the options, staff recommend at this time the adoption of Option La. 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 Il.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 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. January 27, 2022 Special Board Meeting Agenda Packet- Page 50 of 84 Page 3 of 13 • 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)just implemented for the first time for Fiscal Year(FY) 2021-22 would need to be again revisited and tested. • 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 Single Year FY 2022-23 and Firmer Direction 2022-23 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 (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 2025-26 Year 2 of 2 New Single or Multi-Year Rate January 27, 2022 Special Board Meeting Agenda Packet- Page 51 of 84 Page 4 of 13 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 C I P, and a 10-year forecast for C I 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 CI 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 La. Single Year Budget with 10-Year Forecast Shown in Budget Book Description: Same approach as current, where an annual budget document is produced. I n 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. 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. January 27, 2022 Special Board Meeting Agenda Packet- Page 52 of 84 Page 5 of 13 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. 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: (FY 2021-22) 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. January 27, 2022 Special Board Meeting Agenda Packet- Page 53 of 84 Page 6 of 13 • 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 Cl 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. • I nland 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. Cl 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 Alternative II in that production of a two-year budget document that would be approved. However, unlike the "Core" option, the year two budget would be revised near the end of year one. Ashort "budget update" document could be provided, or a more comprehensive document like the original two year budget could be produced. 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:Hsfbos.org/legislative-analyst-report- biennial-budgeting-file-no-021309 Advantages • Year 2 budget could be more accurate than with above alternative 2a. • May save some time versus current process if the year two updated budget is abbreviated and focused only on significant/necessary changes (such as labor& benefit cost assumptions). Disadvantages • Similar to "Once and Done" option, but the update for year two would provide for important "true- ups". This could be a more abbreviated process, or it could be detailed and be nearly as time consuming and comprehensive as the initial budget for the two years. • Would not likely be less work for staff or Board than present process. • Limited additional value for decision making. 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". • City of Seattle: I n 1985, the Washington State Legislature adopted the Municipal Biennial, or two- year, budget. The legislature granted the same authority to counties in 1995. The two year budget calls Year 1 "adopted" and Year 2 "endorsed". At the end of Year 1, the Year 2 budget is presented, trued up and becomes "adopted". January 27, 2022 Special Board Meeting Agenda Packet- Page 54 of 84 Page 7 of 13 For the presentation to the Finance Committee, an Option Il.c was discussed, but upon further reflection was determined to be essentially the same as alternative Option II.b above. Accordingly, it was consolidated with that alternative. Strategic Plan Tie-In GOAL THREE: Fiscal Responsibility Strategy 2—Ensure integrity and transparency in financial management ATTACHMENTS: 1. Presentation January 27, 2022 Special Board Meeting Agenda Packet- Page 55 of 84 Page 8 of 13 h 'j TWO YEAR BUDGET ALTERNATIVES Presented by Philip R. Leiber, A Director of Finance and Administration Special Board Meeting January 27, 2022 BACKGROUND • Two year budget concept occasionally raised by Board members. • Numerous other agencies do a two year budget. • Our costs are generally predictable and amenable to projection over a longer period. • Concept discussed with Finance Committee on December 21 2 January 27, 2022 Special Board Meeting Agenda Packet- Page 56 of 84 Page 9 of 13 CURRENT BUDGET, PLANNING, RATES PRACTICE • 1 year • 2 Year Planning Currently,4 prospective Horizon years of rates budget for have been O&M,debt • Quarterly and adopted,with service,self- Annual annual check- insurance and Progress ins capital Report improvement budget(CIB) • 10 year outlook(CIP) for capital BUDGET STRATEGIC RATES w PLAN 3 STATUS QUO: SINGLE YEAR BUDGET • Advantages: • Reflective of latest available cost estimates. • Labor costs largest element; CPI not available until March. Benefit inflation cost figures similar. • Internal procedures and systems/software well developed • Disadvantages: • Could be more work than a two year budget. • Entities: Delta Diablo, Ironhouse Sanitary District, Union Sanitary District, NapaSan, Sacramento Regional San, Los Angeles County Sanitation Districts 4 January 27, 2022 Special Board Meeting Agenda Packet- Page 57 of 84 Page 10 of 13 ALTERNATIVE 1A • Add higher level, longer term outlook to O&M budget. Source: 10 year financial plan • Advantages: • Information already available for years 2-10. • Could update those years based on final "year 1/budget' • Meet new GFOA distinguished budget award requirement • Disadvantages: • None that are significant. Information generally available. • Not as granular as year 1 budget. • Entities: Likely will be the approach used by entities currently presenting a single year budget and applying for the GFOA Distinguished Budget Award •'4 5 TWO YEAR BUDGET CONSIDERATIONS Likely Potential Advantages Drawbacks Policy Emphasis Long Rang Planning Staff Redeployment �v 6 January 27, 2022 Special Board Meeting Agenda Packet- Page 58 of 84 Page 11 of 13 ALTERNATIVE 2A: TWO YEAR BUDGET, NO UPDATE FOR YEAR 2 • A two year budget is produced. An update is not provided for year 2,unless extraordinary circumstances warrant it. • Advantages: • Potential to align with Strategic Plan,Rates periods. • Improved visibility of financial trends. • Greater ability to make capital project commitments and enhance project management. • 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: • Budget application,document,and process changes needed. • Second year budget will be less accurate, particularly in environment with significant inflation uncertainty. Entities: East Bay Municipal Utility District, Fairfield/Suisun, San Francisco Public Utilities 4 Commission(SFPUC),San Diego County Water Authority, Inland Empire Utilities District,Vallejo Sanitation and Wastewater District,West County Wastewater District ALTERNATIVE 213: TWO YEAR BUDGET, UPDATE FOR YEAR 2 • A two year budget is produced. Towards end of year 1, an update is developed for year 2. • Advantages: • Advantages as per Alternative 2a and Year 2 budget likely more accurate than in Alternative 2a. • Disadvantages: • Year two update could be time consuming, unless limited to key assumptions (such as COLA for labor costs, inflation for benefits) • Limited value in refinements unless significant `.: Entities: Oran e Count San� Cit y of Seattle Others. ;� g y '-1 8 January 27, 2022 Special Board Meeting Agenda Packet- Page 59 of 84 Page 12 of 13 SUMMARY COMPARISON la:Annual 013111!15R" lib: 2 Yea,Budget Budget w/10 No Update w/Update Year Forecast Incorporates latest assumptions for labor,benefit costs Complies w/GFOA O 0 (with addition of 0 (with addition of distinguished 10 year forecast) 10 year forecast) budget requirements Staff effort over a High High Medium High two year period Visibility of long- O 0 term prospective 0 w/10 yr forecast 0 w/10 yr forecast financial trends Avoid process and C software changes The right idea at the O • C • right time F &�, 9 RECOMMENDATION • Alternative 1a. Single year adopted budget, with addition of 10 year higher level forecast/projection for O&M (as with Sewer Construction) • Rationale: • Limited time savings foreseen for transition to 2 year budget. • Transitional issues not to be minimized. Software &processes. • New staff concerns. • Oracle ERP project priorities. • Labor and benefit inflation factors only available immediately prior to the start of the fiscal year. • Limited value of a two-year budget projection for"planning" purposes beyond the information available presently. Need to synchronize with strategic plan AND rates process. FY 23-24 may be better from a rates standpoint. '-1 10 January 27, 2022 Special Board Meeting Agenda Packet- Page 60 of 84 Page 13 of 13 QUESTIONS January 27, 2022 Special Board Meeting Agenda Packet- Page 61 of 84