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
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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).
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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.
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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
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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.
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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.
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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]
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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
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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
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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
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