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Home My WebLink About03. Approve updated administrative overhead and benefits rates for FY 2022-23 Page 1 of 6 Item 3. CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER MEETING DATE: MARCH 3, 2022 SUBJECT: APPROVE UPDATED ADMINISTRATIVE OVERHEAD AND BENEFITS RATE OF 169% FOR FISCAL YEAR (FY) 2022-23 SUBMITTED BY: INITIATING DEPARTMENT: CHRISTOPHER THOMAS, ACCOUNTING ADMINISTRATION-FINANCE SUPERVISOR KEVIN MIZUNO, FINANCE MANAGER REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER Roger S. Bailey General Manager 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 and benefits 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 including all Executive Governance March 3, 2022 Regular Board Meeting Agenda Packet- Page 17 of 165 Page 2 of 6 and Administration Department costs, and the bulk of costs reported in the Engineering & Technical Services Department. 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. 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, • Allocates other post-employment benefits (OPEB)trust contributions in excess of pay-as-you- go costs for active employees and retirees to their respective organization units (i.e. departments and divisions), leaving only the administrative portion in the administrative component, • Continuing to treat retiree health and other premiums as indirect, and include them in the administrative overhead component of the rate, and • Allocating any additional Unfunded Actuarial Accrued Liability(UAAL) payments to their respective organization 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 2022-23 The proposed administrative overhead recovery rate for FY 2022-23 has been calculated in accordance with the methodology approved by the Board as outlined. The proposed rate (three-year smoothed)for FY 2022-23 is 169%, reflecting a decline of 8% from the approved FY 2021-22 rate of 177%. This is the result of the overall decline in annual rates (the inputs to the three-year smoothed rates) over four of the past five years as illustrated in Attachment 2. While the three-year smoothed rate is declining, there was a 5.7% increase in the un-smoothed one-year rate from the fiscal year from 161.4% (FY 2021-22)to 167.1% (FY 2022-23)which is attributable to the following factors: 1. Employee Benefits Rate Component-This component remained unchanged in all material respects. Only 0.1% of the 5.7% increase overall is due to the increase in employee benefits costs (numerator) slightly outpacing the proportional increase in the denominator of the equation (salaries). The slight increase in benefit costs was primarily driven by an increase in benefit premium rates March 3, 2022 Regular Board Meeting Agenda Packet- Page 18 of 165 Page 3 of 6 overall in FY 2022-21, following significant savings realized in FY 2019-20, with the transition to the CaIPERS Healthcare program. 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, etc.). 2. Administrative Overhead Rate Component- The increase in this rate component ultimately drove the increase in the single year administrative overhead and benefits rate. 5.6% of the overall 5.7% increase is caused by the proportional increase in indirect overhead costs (numerator)well outpacing the proportional increase in direct salaries costs (denominator). The increases in indirect costs were most evident in the following areas: overall increases indirect salaries and wages attributable to the labor agreements specifying cost of living adjustments and other salary adjustments (i.e., longevity, step increases, etc.) as well as an increase in non-labor support costs in FY 2020-21 most visible in the Information Technology and Human Resources functions. The increase in direct salaries (denominator) is attributable to prevailing labor agreements and other salary adjustments mentioned previously. Refer to the attached Administrative Overhead and Benefits Rate Summary (Attachment 1)for additional highlights of the proposed FY 2022-23 rate compared to the rates adopted by the Board for the previous two fiscal years. ALTERNATIVES/CONSIDERATIONS No changes are recommended to the overall methodology presented at this time. The methodology used to calculate the FY 2022-23 administrative overhead and benefits rate is consistent with the previously Board-approved method which was reviewed by an independent consultant in 2014. FINANCIAL IMPACTS The administrative overhead and benefits rate is calculated annually for the purpose of recovering administrative overhead and employee benefit costs when charging to capital projects and developing fees for the full recovery of costs incurred for services provided to customers, including residents, other agencies, businesses, and developers/contractors. COMMITTEE RECOMMENDATION The proposed three-year smoothed administrative overhead percentage of 169% for FY 2022-23 was reviewed by the Finance Committee at its February 22, 2022 meeting. The Committee recommended Board approval. RECOMMENDED BOARD ACTION Approve the use of the administrative overhead and benefits rate of 169% for Fiscal Year 2022-23. Strategic Plan Tie-In GOAL THREE: Fiscal Responsibility Strategy 1—Maintain financial stability and sustainability, Strategy 2—Ensure integrity and transparency in financial management March 3, 2022 Regular Board Meeting Agenda Packet- Page 19 of 165 Page 4 of 6 ATTACHMENTS: 1.Administrative Overhead and Benefits Rate Summary for Fiscal Year 2022-23 2. Historical Trend of Administrative Overhead and Benefits Rate March 3, 2022 Regular Board Meeting Agenda Packet- Page 20 of 165 Page 5 of 6 ATTACHMENT Central Contra Costa Sanitary District Administrative Overhead and Benefit Rate Summary For the 2022-23 Budget-Calculated using 2020-2021 Audited Financial Statements Current Year 3 Year Calculation Last Year's Two Years Ago Smoothed Unsmoothed Unsmoothed Unsmoothed Year 2022-2023 2022-2023 2021-2022 2020-2021 Employee Benefits 67.82% 66.17% 66.04% 71.24% Administrative Overhead 83.03% 83.05% 77.41% 88.62% Non-work Hours 17.97% 17.90% 17.92% 18.09% 168.81% 167.12% 161.37% 177.95% Smoothed Rate 169% 169% 177°1190% Years in Smooth Rate 3 yr 3 yr 3 yr 3 yr Comparison of Rate Before Smoothing 2022-2023 2021-2022 Change Employee Benefits 66.2% 66.0% 0.1% Administrative Overhead 83.1% 77.4% 5.6% Non-work Hours 17.9% 17.9% 0.0% Total 167.1% 161.4% 5.7% Summary of Increases(Decreases) Employee Benefits: Total adjusted benefits(numerator)increased by 3.24%,and total salaries(denominator)also increased by 3.05%,causing 0.1% the overall increase of less than 1% FY 2020-21 FY 2019-20 Difference Benefits(numerator) $27.2 $26.3 $0.9 Salaries(denominator) 41.1 39.9 1.2 Admin Overhead: Total adjusted indirect costs(numerator)increased by 8.39%,and total direct salaries(denominator)increase( by 1.03%,causing the overall increase 5.6% FY 2020-21 FY 2019-20 Difference Indirect costs(numerator) $27.2 $25.1 $2.1 Direct salaries(denominator) 32.8 32.5 0.3 March 3, 2022 Regular Board Meeting Agenda Packet- Page 21 of 165 Attachment 2 Historical Trend of Administrative Overhead and Benefits Rate 250% 240% — 230% a� 220% ti 210% a� -z 200% �a O 190% 180% 170% 160% 150% 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 3 Year Smoothed Rate 206% 228% 225% 219% 203% 190% 177% 169% Single Year Rate 217% 238% 219% 201% 190% 178% 161% 167% Fiscal Year 3 Year Smoothed Rate Single Year Rate March 3, 2022 Regular Board Meeting Agenda Packet- Page 22 of 165