HomeMy WebLinkAbout03. Hold discussion to consider a new Board Policy regarding Budget (BP 048) Page 1 of 10 Item 3. CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER MEETING DATE: MARCH 24, 2022 SUBJECT: HOLD DISCUSSION TO CONSIDER ANEW BOARD POLICY, BP 048 - BUDGET SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER Roger S. Bailey General Manager ISSUE A new Board policy required approval of the Board of Directors. Staff is proposing adoption of a new policy establishing policy objectives and rules for the development, adoption, monitoring, and amendment of Central San's budget. BACKGROUND With the turnover of key staff in the Finance function over the past several years as well as the recent implementation of a new system for budget development and monitoring, it is prudent to develop a formal budget policy document (Attachment 1) outlining important policies and objectives and related to the budgeting process. Specific processes considered in the scope of this newly proposed policy include the development, adoption, monitoring, and amendment of the budget. While many of the components of this proposed budget policy are largely a formalization of long-standing practices at Central San, incorporating these rules into a written policy document will enhance the transparency of important budget policies for the Board, staff, and the public. Development of this proposed budget policy involved 1.) internal reviews with key staff involved in the budget process, 2.) a review of example budget policies from other California municipalities (i.e., Orange County Sanitation District, City of San Diego, and Contra Costa County), and 3.) surveying other March 24, 2022 Special Board Meeting Agenda Packet- Page 55 of 64 Page 2 of 10 neighboring Bay Area wastewater agencies on their current budget practices. Key Central San staff included in the budget review process that were solicited for feedback included the General Manager, Director of Finance and Administration, Finance Division Manager, Capital Projects Division Manager, and the Planning and Development Division Manager. While the results of this research showed that not every public agency has a formal budget policy, the development of one is in line with best practices issued by Government Finance Officers Association as well as Central San's existing practice to establish formal Board policies on important processes such as budgeting. Of the twenty-four neighboring Bay Area wastewater districts surveyed, Central San received sixteen responses, or 66.7 percent. Only five multiple choice questions were asked in the survey in an effort to keep it brief to promote timely responses. A list of the responding municipalities and their responses is summarized in Attachment 2. In addition to incorporating feedback from key internal budget development participants, and results from the review of example policies as described previously, the proposed Budget Policy was also designed to reflect"the norm" per the budget survey. The only exception to this was in relation to encumbrances, where the results of the survey indicated an even 50/50 split between those using and not using encumbrance accounting to monitor budgetary spending. While the proposed Budget Policy includes a requirement to monitor commitments for compliance with budgetary restrictions and long-range financial planning, the topic of encumbrance accounting was deemed to be a procedural matter better addressed through an internal procedures document rather than a Board Policy. To ensure a discussion was held on the concept of a two-year budget prior to the presentation of draft Budget Policy, on January 27, 2022, staff provided a presentation to the Board covering the potential pros and cons of transitioning to a two-year budget versus remaining with the status quo one-year budget approach. At the conclusion of the presentation, it was the recommendation of staff to remain with a single year budget approach for the time being, but emphasized the concept of a two-year budget could be discussed in the future following the completion of the upcoming fiscal year's budget for Fiscal Year 2022- 23. Board Members held a brief dialogue on the topic, but ultimately did not direct staff to depart from the status quo approach. Accordingly, the attached draft Budget Policy formally establishes the budget and fiscal year period as the one year time frame from July 1 st to June 30th. As with all Board policies, this policy will be subject to periodic review, where the budget duration can once again be reconsidered at a later date. ALTERNATIVES/CONSIDERATIONS The Board may elect not to adopt the proposed Budget Policy, and rely on existing informal protocols for the development, adoption, monitoring and amendment of the budget. This is not recommended, however, as establishing formal rules for budgeting will enhance transparency and improve the clarity of important budget policies and restrictions. The Board may alternatively adopt a Budget Policy similar to the one being proposed by staff, but with some modifications. Should changes be requested, it is recommended that the Board, via motion, direct specific changes to be made to the attached draft policy document. FINANCIAL IMPACTS Adoption of this proposed policy does not have any immediate or direct fiscal impacts to Central San. The proposed Board Policy formalizes protocols that have been in practice at Central San for several years (i.e., rollover of unspent C I B appropriations, budget timeframe)while also establishing formal guidelines for topics that were previously unaddressed (i.e., method of amendment, legal level of budgetary control). March 24, 2022 Special Board Meeting Agenda Packet- Page 56 of 64 Page 3 of 10 COMMITTEE RECOMMENDATION The Administration Committee reviewed the draft Budget Policy at its February 22, 2022 meeting, recommending a few revisions and that staff present an updated policy to the full Board for discussion and possible adoption at the March 2022 Financial Planning Workshop. The following is a summary of feedback provided to staff at that meeting and the impacts, if any, to the proposed Budget Policy being presented today. Flat Budget- It was pointed out that the policy did not mention the topic of a "flat budget" and suggested that the Board and staff should consider whether this should be included considering past discussions on the matter. After further internal discussion on the matter, while staff agrees that trying to maintain a flat budget is a goal staff should strive for annually, this endeavor should remain a "goal" rather than a mandatory requirement spelled out in the policy document. As projected in Central San's most recent financial plan presented to the Board, given unavoidable anticipated long- term cost increases related to energy, chemicals, labor, and other budgetary costs, it is unrealistic that the budget policy include requirements to develop and adopt a flat budget. However, accordance with GFOA best practice recommendations, the policy document does include provisions on maintaining a "balanced budget" stating that "Central San shall strive to achieve a long-term structurally balanced budget." Public Involvement - It was inquired whether the policy should include a requirement clarifying that the adoption of the budget shall require a public hearing. To-date, while it has been the past practice of Central San to conduct a public hearing prior to the adoption of the budget, this is not a legal requirement nor is required in any other formal policy or document. Staff is in agreement and has updated the budget policy to require a public hearing as part of the budget adoption process. Legal Level of Budgetary Control - It was inquired whether there was a CI B program cap in addition to the fund- and project-level budgetary controls specified in the draft policy. Staff has confirmed that there is not a program level cap and that the high-level spending limitations specified in the policy at the fund- and project-levels are not contradictory to existing controls specified in the separate existing BP 037 - General Manager Delegation ofAuthority Policy. However, staff did update the draft policy to make reference to BP 037. 10-Year Rolling Timeframe - It was suggested that the draft policy should be revised to include O&M results in the long-term planning forecast to be included in the budget. Staff is in agreement with this recommendation, which is also consistent with the newly revised GFOA checklist for the Distinguished BudgetAward Program to include an O&M ten year projection in the budget document. The draft policy has been updated to include this. O&M Savings Directed to Reserves First- It was questioned whether it should be Central San's policy that any O&M fund savings first go to replenishing reserves. Following an internal discussion on this matter, staff did not revise the draft policy to include this requirement as O&M fund working capital reserves are always replenished annually through the split of sewer service charges between operations as specified in Central San's long-term financial model. However, as the assessment reserves is imperative to the budget process, and a separate policy already exists addressing the matter(BP 015 - Fiscal Reserves), the policy was updated to make reference to this document. Review of Assumptions - It was suggested that staff include a new section in the policy stating that all core assumptions of the budget must be disclosed and approved by the Board. Staff agrees with this suggestion. While there already exists a section in the budget book that discloses core assumptions (i.e., cost of living adjustment, premium increases, vacancy factor, etc.), staff is in agreement that this requirement should be incorporated into the budget policy and has updated the document accordingly. March 24, 2022 Special Board Meeting Agenda Packet- Page 57 of 64 Page 4 of 10 Mid-Year Review- I t was brought up that Central San previously did a mid-year budget review several years ago, and whether the draft policy should be updated to include this. I n addition to interim budget-to-actual reports and a pre-audit year-end review that are referred to in the policy and now formalized as mandatory reports, staff historically includes a mid-year update in the annual Budget and Rates Board Workshop that occurs annually prior to the budget presentation and adoption process. Accordingly, the budget policy was updated to make reference to this exercise stating that"projections of current year spending are compiled and reported on as part of the budget development process." CIB Project Transfers - It was questioned whether a section in the budget policy discussing the General Manager's authority for project transfers is accurate and consistent with the existing Board Policy No. BP 037. Finance staff reviewed BP 037 and conferred with the Capital Projects division and verified that the limitations included in the budget policy were not inconsistent with other existing policies or practices. However, the policy document was updated to make reference to BP 037 for additional details on the mechanics of approvals for CI B project budget amendments and transfers. RECOMMENDED BOARD ACTION It is recommended the Board adopt the proposed new Board Policy No. BP 048 - Budget, as it would formalize important policy rules and objectives concerning the budget process. 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. Proposed Board Policy BP 048 2. Budget Survey Responses March 24, 2022 Special Board Meeting Agenda Packet- Page 58 of 64 Page 5 of 10 Attachment 1 DRAFT Number: BP 048 Authority: Board of Directors Z10 Effective: TBD Revised: Reviewed: March 1, 2022 CENTRALSAN Initiating Dept./Div.: Administration/Finance BOARD POLICY BUDGET PURPOSE To set forth a budget policy for Central San consistent with current and future goals as they pertain to fiscal responsibility, accountability, transparency, and sustainability. POLICY 1. Central San recognizes the importance of the budgeting process to document resource needs, provide the foundation for effective financial management, and demonstrate that cost matters in the provision of service at responsible rates. 2. Transparency shall be a key goal in the preparation of the annual budget document, with key assumptions documented, and commentary provided on relevant financial policies and the proposed budget's relation to the long- term financial plan. 3. Budgets shall be presented to and adopted by the Board for each fiscal year (FY), which starts July 1 and ends June 30. 4. Public involvement shall be encouraged in the annual budget development and adoption process, which shall include presentation to Board Committee(s), the Board, and shall include a public hearing. Outreach to key agencies affected by Central San's proposed budget shall be conducted. 5. The annual Budget is prepared in the context of other key planning processes including strategic planning, long-term financial planning, and rate setting. Board input shall be obtained to shape the development of the proposed budget through these and other processes to ensure appropriate alignment and consistency. 6. Budgets shall incorporate strategic plan goals and strive to provide the resources necessary for achieving them. 7. Central San shall strive to achieve a long-term structurally balanced budget. March 24, 2022 Special Board Meeting Agenda Packet- Page 59 of 64 Page 6 of 10 Number: BP 048 [Draft] BUDGET Page 2 of 3 8. The development of the annual budget shall be a collaborative District-wide effort. 9. The legal level of budgetary control (i.e., the level at which expenditures may not exceed appropriations) shall be at the fund level on a FY basis. 10. A secondary legal level of budgetary control for the Capital Improvement Budget (CIB) shall be at the total project level, which may overlap multiple FYs. Detailed parameters relating to the financial administration of capital projects is specified in other documents, including BP 037 - General Manager Delegation of Authority, and as outlined in the annual budget document. 11. The budget shall include a 10-year rolling forecast for long-range financial planning. 12. At the close of each FY, any unspent CIB appropriations for active projects shall automatically rollover for reappropriation in the following FY's CIB. 13. Any savings from closed capital projects or unused contingency in the CIB shall remain in the sewer construction fund. 14. Central San shall monitor its contractual commitments to ensure budgetary compliance and alignment with its long-range financial plan. REPORTING AND ACCOUNTABILITY Staff shall be accountable for monitoring and controlling their respective operational and project budgets. Finance shall develop and present budget-to-actual reports to the Finance Committee and Board, not less than quarterly, to demonstrate budgetary control, fiscal accountability, and compliance, where applicable. Projections of current year spending are compiled and reported on as part of the budget development process. Following the close of the FY, a report of year-end results shall be provided to the Board for disposition of overall favorable or unfavorable budget variances, and impacts on reserve requirements as specified in BP 015 - Fiscal Reserves. This annual report shall also specify the amount of CIB rollover appropriations as previously described. AUTHORITY The General Manager has the authority to approve line-item transfers within funds between organizational units (i.e., departments or divisions) and/or accounts. Furthermore, the General Manager has the authority to approve inter-project budget transfers in the CIB up to the maximum threshold specified in BP 037. Inter-project budget transfers above this authority level must be approved by the Board. March 24, 2022 Special Board Meeting Agenda Packet- Page 60 of 64 Page 7 of 10 Number: BP 048 [Draft] BUDGET Page 3 of 3 Any spending above total fund appropriations specified in the adopted budgets must be accompanied by a budget amendment authorized by the Board. In the CIB, any increases to individual project budgets not covered by inter-project budgetary transfers are considered budget amendments, thereby requiring Board authorization. For purposes of this policy, Board approval of a budget amendment shall be demonstrated by a motion passed via simple majority. POLICY REVIEW This policy shall be reviewed on an annual basis to reflect the highest standards of fiscal management and Central San's budgetary goals. Any changes must be approved by the Board after review by the Administration Committee. [Original Retained by the Secretary of the District] March 24, 2022 Special Board Meeting Agenda Packet- Page 61 of 64 Page 8 of 10 Attachment 2 Budget Policy Survey • List of Neighboring Municipal Wastewater Utility Responses: 1. Central Marin Sanitation Agency 2. Delta Diablo 3. Dublin San Ramon Services District 4. East Bay Dischargers Authority 5. Fairfield Suisun Sewer District 6. Monterey One Water 7. Mountain View Sanitary District 8. North Marin Water District 9. Novato Sanitary District 10. Oro Loma Sanitary District 11. Ross Valley Sanitary District 12. Sanitary District No. 5 of Marin County 13. Tamalpais Community Services District 14. West Bay Sanitary District 15. West County Wastewater District 16. West Valley Sanitation District • Survey Questions and Responses: 1. How often do you publish formal interim budget-to-actual financial reports for your governing body? H-Dnthiy 37.5496 Quarterly 43.75% Mir4yeerpcint 12.50% Other{pIR,rle 6.25% specify} fM 1COA 20xc WIA 40% 50% 60% 70% &G% 904n 10ON 1 March 24, 2022 Special Board Meeting Agenda Packet- Page 62 of 64 Page 9 of 10 Attachment 2 2. What is your agency's legal level of budgetary control? Fund-Level a 54.0096 QepartmeWDivi 45,049G sion-level Account-Level 6.25% NotappLicabLe M 12,50'%6 Other(pl+aaE , 62596 specify) 0% 10'la 40% 30%6 40% 50%6 60% 70% 3045 90% 100% 3. What specifies your legal level of budgetary control? Policy [approved by--- GACarnernment 6.25% Code Other CA Law NotapplicabLe 31.25% Other(please specify) 0% 10%6 2096 30%6 4096 50%6 90% 70% M% 9096 100% 2 March 24, 2022 Special Board Meeting Agenda Packet- Page 63 of 64 Page 10 of 10 Attachment 2 4. Does your organization use encumbrance accounting? dd 50.00% sa,6a9s 1M 20N 30% 44% 5M &Y% 70% N% 80% 100% 5. What approval mechanism is used for budget amendments? :1vealution - - Minute motion f E. Notappliaable Other{please 25.0OD 96 specify) ()% 1090 20% 30% 40% 5030 60% 70% 30% 50% 100% 3 March 24, 2022 Special Board Meeting Agenda Packet- Page 64 of 64