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HomeMy WebLinkAbout12. Hold discussion to review Central San's Treasury Function Page 1 of 14 Item 12. CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER MEETING DATE: SEPTEMBER 15, 2022 SUBJECT: REVIEW ASSESSMENT AND HOLD DISCUSSION 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 Roger S. Bailey General Manager 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 Central San's long- standing treasury structure. 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. Johnson'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 shared with management some administrative September 15, 2022 Regular Board Meeting Agenda Packet- Page 63 of 104 Page 2 of 14 challenges associated with adhering to certain strict County deadlines and procedures. While certain accommodations have been provided for by the County to address the concerns of Central San staff, residual difficulties still remain. While these concerns over the treasury function were known, limited progress has been towards the implementation of a more broad/global solution over the past few years given the prevalence of other operational priorities including the on-boarding of a new Finance Manager, the implementation of a new ERP system, and redesigning processes to respond to the risks associated with the COVI D-19 pandemic. Following the recent 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 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, I ronhouse Sanitary District, etc.). 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 with their 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 return more control back to Central San, allowing staff to more quickly respond to a dynamic environment, 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. Itis also anticipated that the cost of the professional services needed for this project will fall well within the the contracting authority September 15, 2022 Regular Board Meeting Agenda Packet- Page 64 of 104 Page 3 of 14 delegated to the General Manager(less than $100,000). 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. 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 the following: (1) a more specific treasury arrangement proposal, (2) a "to-be" internal control risk assessment, (3) a draft banking/treasury policy, and (4) 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 2- Implement organization-wide optimization, Strategy 3- Be adaptable, resilient, and responsive ATTACHMENTS: 1. Presentation September 15, 2022 Regular Board Meeting Agenda Packet- Page 65 of 104 Page 4 of 14 September 15,2022 Treasury .,, Function Assessment Board Presentation T. Kevin Mizuno Finance Manager 1 ol1 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 September 15, 2022 Regular Board Meeting Agenda Packet- Page 66 of 104 1 Page 5 of 14 Background 's 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 °i must be"all in"or"all out". Bound by County policy and protocol No legal requirement and the District is Considered J to have"opted in"voluntarily since inception. /r ` Unusual arrangement for mid/large autonomous ("non-captive") and self-sufficient public agencies �/ e like Central San (Cities and Districts). Recent payables internal audit highlighted this as an area of inefficiency for Central San / Presented to Finance Committee August 2311 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 September 15, 2022 Regular Board Meeting Agenda Packet- Page 67 of 104 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 has been informed physical delivery of checks and journal Physical delivery of vouchers is necessary checks and journals to Staff time incurred on extra the County processes could be redirected to enhanced analytics and improved reporting 1 � 6 September 15, 2022 Regular Board Meeting Agenda Packet- Page 68 of 104 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 September 15, 2022 Regular Board Meeting Agenda Packet- Page 69 of 104 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 September 15, 2022 Regular Board Meeting Agenda Packet- Page 70 of 104 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 1 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 September 15, 2022 Regular Board Meeting Agenda Packet- Page 71 of 104 6 Page 10 of 14 Survey "How do you manage your investments?" Question #3 6.3% 12.5% Over half of all agencies surveyed contract for investment management services using PFM (6) or Chandler Asset Mgt (4). 18.8% 3 respondents conduct 62.5% investment management in- 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 from a professionally active results in increased retained risk • Must purchase investment managed account may offset the • Non-managed account will likely tracking system increase in fees) result in lower yields • Uncommon for small/medium agencies 1 14 September 15, 2022 Regular Board Meeting Agenda Packet- Page 72 of 104 7 Page 11 of 14 Survey "Who is your agency's appointed Treasurer?" Question #4 6.3% 12.5% Majority of respondents (7) replied 'Director of Finance" or 43.si "CFO" Board appointments generally include associated action to 18.8% appoint a Deputy Treasury to handle daily duties (i.e., CFO, Director, etc.) Delta Diablo replied "General 188% Manager" as in-house Treasurer, however legally ■Director ofFinance/CFO ■Board Member ■Other Employee County is Treasurer being a ■County Treasurer ■Citizen voluntary pool participant 1 15 Treasurer Appointment Alternatives CFO Board Member General Manager Pros Most common Maximum control for Board Highest level of control as Increased public arrangement(Finance Can delegate day-to-day Central San employee involvement Director/CFO) duties to"Deputy Can delegate day-to-day • Current Director of Treasurer'employee duties to"Deputy Finance&Administration Treasurer"employee has held this role before and is qualified • Segregation of duties can be retained Cons Must overcome perception Adds to an already Less common arrangement May be difficult to (not reality)of increased large/broad responsibility Adds to an already track down as non- internal control risk from list large/broad responsibility list employee status quo May overly involve Board Uncommon member in administrative arrangement for function agency of our size 1 16 September 15, 2022 Regular Board Meeting Agenda Packet- Page 73 of 104 8 Page 12 of 14 Regional San,Sacramento What have other � - invreserves in 2021 estment REGIONALSAN agenciesdone? �■■�■ Agency relies on county for certain support functions Agencies mentioned previously have long r- Zone 7 Water Agency,Livermore had own banking&investment relationships t AGENCYreserves 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 EFull transition from county after nearly 90 yrs.in 2018 F' 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 ,no9E 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 September 15, 2022 Regular Board Meeting Agenda Packet- Page 74 of 104 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) StepsRk Next i Risk assessment needed to outline how risks are mitigated in . be" environment. A Resolution will need to be drafted opting out of current arrangement with County Treasury and specifying a separation date. 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. #s+1 i Complete AdoW- ,AZW, RFP for Risk Board Action ERP ChangesResoluRFP for Bank Investment - Assessment Agent r Page 14 of 14 Questions, Feedback & Discussion :,. r , 21 September 15, 2022 Regular Board Meeting Agenda Packet- Page 76 of 104 11