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HomeMy WebLinkAbout04.c. Review assessment of Central San's current treasury function and exploration of alternatives Page 1 of 14 Item 4.c. All" BOARD OF DIRECTORS ' POSITION PAPER MEETING DATE: AUGUST23, 2022 SUBJECT: REVI EW ASSESSMENT OF CENTRAL SAN'S CURRENT TREASURY FUNCTION AND EXPLORATION OF ALTERNATIVES SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ISSUE Receive an assessment of Central San's current treasury function and provide direction to staff on next steps. BACKGROUND At the July 21, 2022 Board meeting, Central San's Internal Auditor, Mr. Benjamin Johnson, provided a presentation on the results of his internal audit over Central San's accounts payable function. Overall, while the report supported internal controls over the accounts payable function appear to be designed, implemented and operating effectively in the new Oracle Enterprise Resource Planning (ERP) system, there was one finding that highlighted operational inefficiencies associated with the long-standing treasury relationship. The finding also elaborated that certain modern ERP and banking technology solutions that the new ERP offers were not able to be implemented due to the non-industry standard treasury arrangement. Following Mr. Benjamin's presentation, the Board expressed concern with this matter. The General Manager responded that staff would conduct internal reviews of the issue and return at a future date with additional information and a recommendation for the Board. Since its inception as an independent Special District in 1946, Central San has been a voluntary pool participant with Contra Costa County(the County)for investment and banking services. For several years, staff closely involved with daily treasury related tasks have has expressed some frustration about adhering to certain strict County deadlines and procedures. Some minor adjustments have been provided for by the County to reflect Central San concerns. In recent years, limited progress has been made in pursuing these matters, given County requirements, as well as other priorities at Central San including the substantial time and effort needed to implement and learn the new Oracle Cloud Fusion ERP system as well as the on-boarding of anew Finance Manager in July 2019. Furthermore, disruption caused by the pandemic in the Spring of 2020 further delayed any progress on reassessing Central San's treasury function for potential optimizations or restructuring, with the need to focus on other more urgent matters. Following the publication of the aforementioned internal audit finding, management is in agreement that the reassessment of the treasury function should now be a key priority for Finance to explore further and report August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 69 of 146 Page 2 of 14 back to the Board. The attached presentation provides a synopsis of the issues associated with Central San continuing to operate as a voluntary pooled participant with the County, including an assessment of foregone capabilities in the new ERP system due to the non-industry standard treasury arrangement. As part of its research, staff obtained a list of sewer agencies from the California Association of Sanitation Agencies (CASA) and surveyed agencies similar to Central San in regards to budget size and operational structure (i.e., other "non-captive" agencies functioning autonomously without administrative support from a city or county). Staff also included a few other relevant agencies in the survey that although did not operate in the same industry or are smaller in size to Central San, were deemed by staff to be of interest to the Board for comparison purposes (i.e., City of Concord and I ronhouse Sanitary District). The results of this survey provide evidence that it is not typical for an agency of Central San's size that operates autonomously to bank and invest through a county. The presentation further highlights pros and cons associated with alternative investment management options as well as Treasurer appointment options for the Board's consideration. It should be emphasized that County staff have made several process and policy accommodations and have been helpful and responsive to Central San staff over the years. Being responsible for such a large and diverse portfolio of restricted funds, it is understandable that so many strict deadlines, procedures, and policies must be enforced by the County to ensure the security of funds held in the pool and accuracy of underlying financial records. However, Central San staff is of the view that this "one size fits all" approach is no longer the best option for Central San. Implementing a more traditional banking arrangement will hand more control back to Central San, allowing staff to more quickly respond to changes, implement ERP process optimizations, and ultimately improve the speed and accuracy of record keeping and reporting, all the while maintaining simpler and effective internal controls. ALTERNATIVES/CONSIDERATIONS The Board may elect not to pursue this matter further. This would continue the status quo approach to treasury services, but is not recommended as staff would need to design an alternative means of responding to the July 2022 internal audit finding and operational inefficiencies resulting from the under- utilization of Oracle capabilities and need to comply with county deadlines and processes would persist for the foreseeable future. Following extensive inter-agency surveying, research on the matter, and past experiences of Central San's Finance Manager and Director of Finance and Administration, staff expects that a transition from the County as provider of treasury services is the appropriate way to respond to the issue at hand. FINANCIAL IMPACTS The recommended Board action may result in staff obtaining the services of an independent consultant to assist with an internal controls risk assessment associated with a hypothetical "to be" treasury arrangement as well as assisting with designing an implementation plan (i.e., timeline, RFPs, policy development, etc.). Staff anticipates that the cost for these professional services, which is unknown at this time, will be covered by appropriations already included in the FY 2022-23 Board-approved budget. Therefore no additional budgetary action is necessary at this time. COMMITTEE RECOMMENDATION The Finance Committee this matter at its August 23, 2022 meeting, and recommended Board approval to direct staff to carry out exploration of Treasury alternatives as specified. August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 70 of 146 Page 3 of 14 RECOMMENDED BOARD ACTION Adopt a motion to direct staff to begin exploring banking and investment management alternatives for treasury services currently provided by the County, and return to the Board at a future date with a more specific treasury arrangement proposal, a "to-be" internal control risk assessment, a draft banking/treasury policy, and an implementation plan. Strategic Plan Tie-In GOAL FOUR: Governance and Fiscal Responsibility Strategy 3- Maintain financial stability and sustainability GOAL SEVEN:Innovation and Agility Strategy 1 - Leverage data analytics to become a more efficient utility, Strategy 2- Implement organization-wide optimization, Strategy 3- Be adaptable, resilient, and responsive ATTACHMENTS: 1. Presentation August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 71 of 146 Page 4 of 14 August 23,2022 Treasury Function Assessment Finance Committee -..nom-•,. T. Kevin Mizuno Finance Manager 1 1 Table of Contents 1. Background - 11W 2. Assessment of Current Issues Modern Banking& ERP Solutions Agency Benchmarking and Assessment of Alternatives 5. Internal Control Risk Assessment 6. Recommendation& Next Steps 7. Questions& Discussion 1 2 August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 72 of 146 1 Page 5 of 14 Background ii Since its establishment, the District has used the County Treasury to act as the District's Treasurer, managing banking and investment activities. Per the County Treasury, participants in County pool must be 'all in"or"all out . Unusual arran ement for mid/large autonomous Ks� ("non-captive") and self-sufficient public agencies like Central San (Cities and Districts). Bound by County policy and protocol No legal requirement and the District is Considered to have "opted in"voluntarily since inception. r Recent payables internal audit highlighted this �f as an area of inefficiency for Central San % /( 3 Recent Internal Audit Findings Recent internal audit finding presented to Board highlighted process inefficiencies in current treasury arrangement / "While Central San has had a Treasury relationship with Contra Costa ; County since the Agency's inception, it is not clear that this relationship adds value around the payment process." "The involvement of[the County]does not appear to effectively lower the risks associated with making payments." r "In addition, the District can set up vendors in Oracle and make electronic payments, which would substantially improve efficiency and better meet the business needs of vendors." "This would also allow for better use of standard functionality in the Oracle system's cash management module, including streamlined integrated bank reconciliations, which were not enabled due to the non-standard situation of a 31 party involved in the Agency's treasury function." 4 August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 73 of 146 2 Page 6 of 14 Assessment of Status Quo Advantages Disadvantages Minimal fees Some inefficiencies and redundancies Perception of greater internal control in administrative processes Unnecessarily difficult bank reconciliations Does not optimize modern banking and new ERP technology Uncommon arrangement compared to other like agencies (i.e., self-sufficient and autonomous) 1 } 5 Current Challenges Intuitive,accurate, and timely bank reconciliations are critical to catching errors and ensuring completeness of recordings Due to shared nature of account, must claim revenues even after deposit Staff time incurred on extra processes could be redirected to Physical delivery of enhanced analytics and improved checks and journals to ji reporting the County Staff has been informed physical delivery of checks and journal vouchers is necessary 1 6 August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 74 of 146 3 Page 7 of 14 Solutions Applied to Alleviate Difficulties Solution Residual Issue Remote deposits were implemented Must continue to claim funds deposited during the pandemic for live checks into shared account Intranet access provided to see live- Access is limited and challenging for time cash balance staff Expanded use of restricted stand-alone Restricted only to normal recurring account payroll obligations, not supply chain vendors 1 7 Optimizing Modern VendorCustomer payments Technology Solutions ACH payments for core suppliers Having an external treasurer makes it challenging, if not impossible, to implement many modern integrated banking-ERP solutions —ppFAutomated check clearing Partners at County have been i Reliability Integrated deposits accommodating where possible, but structural and policy limitations exist Improved • Pooled cash structure Structure • Better bank reconciliations 1 8 August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 75 of 146 4 Page 8 of 14 Survey of Peer Agencies AS Sister I Agency Iden i Source Data Obtained list from CASA with agency names, budget sizes, contact info Narrowed down list to 11 similar agencies O with Used budget ranges in CASA list targeted Focused "non-captive"agencies, excluding L questions City/County utility enterprise funds To maximize likelihood of responses, asked only four(4) questions related to treasury management Determine the"norm" for like sister agencies 1 9 © District List of Agencies I Delta Diablo Employees Surveyed 2 East Bay Municipal Utility District(EBMUD) 1,900 3 Eastern Municipal Water District 640 4 Elsinore Valley Municipal Water District 171 Overall, 16 agencies surveyed, 11 "like" agencies and 5 "other similar 5 Inland Empire Utilities Agency 290 relevant"agencies Agencies ies 6 Irvine Ranch Water District 400 g 4 neighboring agencies added 7 LasVirgenes Municipal Water District 118 to survey otherwise out of 8 Monterey One Water 90 scope in budget size or type, 9 Silicon Valley Clean Water 90 but still relevant for purpose of 10 Union Sanitary District 144 survey L I I Vallejo Flood and Wastewater District 95 Orange County Sanitation 12 Ironhouse Sanitary District 27 District most relatable large Other 13 Contra Costa Water District 299 sewer agency with O&M Relevant 14 City of Concord 422 budget>$100M Agencies 15 City of Lafayette 45 16 Orange County Sanitation District 640 1 10 August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 76 of 146 5 Page 9 of 14 S u rve "Does your District/Agency have its own bank yaccount(s) or do you use the County or City Question #1 Treasury Services?" 6.3% 15 responded they have their own bank account. Monterey One is a voluntary pooled participant, but the County provides administrative services (i.e., payroll, benefits, etc.) Delta Diablo responded "own account" although they are a voluntary County pool participant — unique legal circumstances 938% apply ■Own bank account ■County I 11 "If you have your own bank account,who do you Survey bank with?" Question #2 12.5% The majority of respondents (7) reported they currently 18.8% 43.8% bank with Wells Fargo,who Contra Costa County currently banks with. Runner up was Bank of America (3) "Other" category included Citizens Business Bank, US 25.0% Bank, West America Bank, and -WellsFargo -Other ■Bank of America -UnionBank Banc of California 1 12 August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 77 of 146 6 Page 10 of 14 Survey "How do you manage your investments?" Question #3 6.7% 13.3 Over half of all agencies surveyed contract for investment management services using PFM (6) or Chandler Asset Mgt (4). 3 respondents conduct 20.0% investment management in- 66.7% house 2 respondents only invest in LAIF or CAMP, both liquid and secure investment vehicles. ■Managed Account ■In-House ■LAIF/CAMP Only ■Broker(Non-advisory) 1 13 Investment Management Alternatives Pros Most common arrangement for • Generally,no fees • No fees as investment trading agencies our size(medium/large) • Simplicity of arrangement managed in house • Professional compliance monitoring • Common for smaller public • Maximum control over • Returns likely expected to beat LAIF agencies investment portfolio • Professionals&customer service • Can continue to use LAIF for • Can direct bulk of liquidity into • Reasonable fees liquidity LAIF with remainder in low- Varying levels of service risk investments • Can continue to use LAIF Cons Higher than minimal fee charged by • Non-advisory • Retain risk for non-compliance County(however higher investment • No compliance monitoring and losses returns expected to more than offset results in increased retained risk • Must purchase investment increase in fees) • Non-managed account will likely tracking system result in lower yields • Uncommon for small/medium agencies gnaws 1 � 14 August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 78 of 146 7 Page 11 of 14 Survey "Who is your agency's appointed Treasurer?" Question #4 6.7% Ma* rity of respondents (7) replied 'Director of Finance" or "CFO" 46.7% Board appointments generally include associated action to appoint a Deputy Treasury to 20.0% handle daily duties (i.e., CFO, Director, etc.) Delta Diablo replied "General Manager" as in-house Treasurer, however legally 20.0% County is Treasurer being a voluntary pool participant ■Director of Finance/CFO 0 Board Member ■Other Employee ■County Treasurer ■Citizen 1 15 Treasurer Appointment Alternatives Board Member General Manager Other Employee Pros • Increased public Maximum control for Highest level of control as Most common arrangement involvement Board Central San employee (Finance Director/CFO) • Can delegate day-to-day Can delegate day-to-day Current Director of duties to"Deputy duties to"Deputy Finance&Administration Treasurer"employee Treasurer'employee has held this role before and is qualified • Segregation of duties can be retained Cons May be difficult to track Adds to an already Less common arrangement Must overcome perception down as non-employee large/broad responsibility Adds to an already (not reality)of increased • Uncommon list large/broad responsibility internal control risk from arrangement for agency May overly involve Board list status quo of our size member in administrative function � 1 16 August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 79 of 146 8 Page 12 of 14 Regional San,Sacramento What have other � - invreserves in 2021 estment REGIONALSAN agencies done? �■■�■ Agency Agencies mentioned previously have long r- Zone 7 Water Agency,Livermore had own banking&investment relationships PONE WATER �� AGENCYreserves in 2021 Outreach conducted to find agencies with Agency relies on county for certain support function - recent success implementing own banking and investing services Alameda County Mosquito Abatement Case study: Four agencies responded with District,Hayward different experiences Full transition from county after nearly 90 yrs.in 2018 Two agencies were unable to fully transition L General Manager satisfied with transition today due to certain administrative dependencies (i.e.,payroll and benefits processing) Two agencies that fully transitioned expressed high degree of satisfaction T 1 17 Internal Controls Risk - - Assessment Risk assessment over treasury function "as is"versus "to be"should be completed Policies and procedures would be needed over treasury/banking Given staff size and long-standing administrative autonomy from County, management is confident risks can be mitigated mow. Current Director of Finance&Administration and Finance Manager have experience managing treasury at public agencies independent from county Internal control designs will incorporate the following: Segregation of duties Preventative, detective and corrective aspects Availability of modern banking/ERP technology FLA Retai�7 Inherent Internal Risk L Risks Controls L: 18 August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 80 of 146 9 Staff Recommendation Direct staff to begin exploring banking and investment management alternatives and return to the Board at a future date with a more specific treasury arrangement proposal, a "to-be" internal control risk assessment, a draft banking/treasury policy, and an implementation plan. Staff would likely retain the services of a qualified, reputable, and independent consultant such as the Government Finance Officer's Association (GFOA) RkNext Steps �� �w ■ � I neededRisk assessment to . -• . •- /I A Resolution will need ALI to be drafted opting out of current - - arrangement with County Treasury • specifying a separationdate. Treasurer must be appointed with powers granted. Bank to be recommended and selected through a formal RFP process An investment management strategy • agent must •- selected. � � Complete ERP Adopt Appoint RFP forRFP for Risk Changes Resolution Treasurer Bank Investment a\` Assessment Agent I Page 14 of 14 Questions, Feedback & Discussion :,. r , 21 August 23, 2022 Regular FINANCE Committee Meeting Agenda Packet- Page 82 of 146 11