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HomeMy WebLinkAbout06.b. Review Draft Position Paper to Consider Revisions to the Expenditure and Contracts Review Process Conducted by the Finance Committee - Affirm or Amend Current ProcessPage 1 of 4 Item 6.b. MEETING DATE: SUBJECT SUBMITTED BY: BOARD OF DIRECTORS POSITION PAPER JANUARY 24, 2023 REVIEW DRAFT POSITION PAPER TO CONSIDER REVISIONS TO THE EXPENDITURE AND CONTRACTS REVIEW PROCESS CONDUCTED BY THE FINANCE COMMITTEE AND PROVIDE RECOMMENDATIONS TO EITHER AFFIRM OR AMEND THE CURRENT PROCESS INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION -FINANCE PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION REVIEWED BY: ROGER S. BAILEY, GENERAL MANAGER ISSUE Presently, California Health & Safety Code Section 6794 requires the Board to approve expenditures of funds by the Treasurer (currently Contra Costa County) on behalf of Central San. The Finance Committee currently reviews and recommends the expenditure report for approval by the Board. Potential changes to this process, and how contracts are monitored and reported are outlined in this Position Paper. BACKGROUND California Health & Safety Code (HSC) Section 6794 governing the operation of Sanitary Districts requires that the County Treasurer pay out Central San's money only upon written order of the Board, signed by the president and secretary: The treasurer shall pay out money of the district only upon the written order of the board, signed by the president and countersigned by the secretary. The order shall specify the name of the person to whom the money is to be paid, the fund from which it is to be paid, and shall state generally the purpose for which the payment is to be made. The order shall be entered in the minutes of the board. With this requirement in mind, the long-standing practice at Central San has been to provide the Finance Committee with a list of expenditures for their review and recommendation to the Board for approval. The Committee signs the expenditures cover sheet to indicate their review that is then provided to the Finance staff. The Board has then adopted the list as a Consent agenda item based on the same packet of material provided to the Finance Committee. This has taken place after the expenditures were disbursed by the County, which has served as Central San's treasurer. As noted above, staff has provided the Finance Committee with an expenditure listing at scheduled Finance Committee meetings. The extent of review of the expenditures has varied depending on Finance Committee composition; at times questions have been asked about individual January 24, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 77 of 87 Page 2 of 4 expenditures in advance of the meeting, and questions have also been asked at the meeting. The effectiveness of this practice in mitigating the likelihood of waste, fraud or abuse is uncertain. There have been no instances in past several years (or any known instances previously) where inappropriate expenditures have been uncovered during these reviews although minor errors on the fund and/or account charged have been identified and corrected in the past. I n the past, and at present, Board members have asked whether this process is necessary and whether alternatives could be adopted. Two alternative paths are possible if changes to current practice are to be made. The first potential path would be actively working with the State legislature to amend HSC section 6794 which has language that requires Board approval of the expenditures. Similar questions have been raised regarding the usefulness of check reviews by California cities in the past. After some successful mobilization and lobbying efforts in 1986, California cities were successful in getting the California Government Code amended to provide an alternative to City Councils having to formally review and approve expenditures. Ultimately, the revised law now states that budgeted payrolls and demands paid by warrants or checks would be considered ratified and approved by a city's governing body through the form of an annual audited financial report. Unfortunately, that language was not extended to Special Districts (including Sanitary Districts) as the code section that was amended only pertained expenditure reviews for California cities. Beyond the provisions that California cities must comply with, it is helpful to consider the expenditure review process that other non -sanitary special districts must comply with regarding expenditure reviews. Central San District Counsel compiled the provisions governing check issuance from the California Code for a variety of entities such as Municipal Water Districts, County Sanitation Districts, Community Service Districts. From this review, it was noted that provisions for all were different, but that the provision for Municipal Water Districts was more flexible and could serve appropriate language by which to update HSC Section 6794. This language states: Water Code 71361. The treasurer, or such other person or persons as may be authorized by the board, shall draw checks or warrants to pay demands when such demands have been audited and approved in the manner prescribed by the board. Updating HSC 6794 to drop in this language would require a legislative effort. To that end, in December 2022, staff began the process by reaching out to the California Association of Sanitation Agencies (CASA) legislative committee to propose a legislative change and was advised that a change would need to be set forth in a standalone bill as it is a "transparency" matter and current Assembly practice that would not allow it to be a simple "add -on" to another bill, or in an "omnibus" bill. Staff met with the CASA legislative committee on December 9, 2022 and intends to continue the discussion at the January 2023 meeting after other CASA members have had the opportunity to discuss internally their agency's views of the matter. Additionally, Central San staff met on January 9th with staff from a local California Senator about potentially carrying the bill, and this was a positive meeting. This path seems to be promising at this time and is the recommended path that Central San pursue. Staff has been advised this effort has the highest likelihood of success as language is being used in other existing code language to replace current language in HSC 6794 rather than using other proposed language which may require further vetting. The second potential path to revising the current practice should the legislative path not be successful and/or desired, would be to modify the current practice while remaining arguably within the existing HSC requirement. The Board would still need to adopt an expenditure listing, but the steps leading to that could change. Some combination of the following could be the following alternatives: • The Finance Committee could be provided with the full list of expenditures and/or an exception list of January 24, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 78 of 87 Page 3 of 4 expenditures that met specified criteria. These criteria could be objective or system generated (such as payments above a specified amount, payments to a new vendor, etc.), or include more subjective factors (payments which in the opinion of management may appear "out of the ordinary course of business", or which are otherwise deemed to warrant separate disclosure or discussion). Compiling this list would require some effort to modify the Enterprise Resource Planning (ERP) system for an objective report, as well as additional ongoing staff time to compile a "subjective" list. Such an exception list could potentially assist the Finance Committee in recommending the full check register to the Board for approval without exercising the same level of review over the full expenditures list. While this may reduce the time spent by Board members in the expenditure review process, the exception list approach would not be line with how the governing bodies of California municipalities (i.e., cities, counties, special districts) review and approve ordinary business expenditures. Presently, the Board does not approve all contracts, but instead generally approves construction and professional service contracts above the General Manager's delegated authority level of $200,000. Board approval of contracts could be extended to cover "all" contracts above the $200,000 threshold (or another level). This would bring in for Board review those Operations and Maintenance (O&M) contracts (i.e., services, commodities) that are not presently approved by the Board. This alternative was considered by the Board recently (including June 2021), but not adopted. However, it was discussed that requiring O&M contracts in excess of a certain amount obtain Board approval would provide for greater transparency in the procurement process and bring Central San more in -line with peer agencies, it was ultimately determined that the additional administrative burden placed on the Board and staff to prepare and review additional Board Position Papers and the potential delay to procurement efforts outweighed the benefit. Accordingly, no changes were made to the existing General Manager (GM) Delegation of Authority Board Policy (BP 047) and the status quo was maintained. I n light of this new discussion on procedural changes, it is acknowledged that adding a Board approval threshold (i.e., $200,000) for all contracts, including O&M contracts would provide additional Board involvement and awareness on the "front-end" of the procure to pay cycle, potentially lessening the need for the same level of Board involvement with expenditures. Should this approach be adopted, staff would need to report back on details such as how the $200,000 would be measured (only new contracts; additions to existing contracts, etc.) and other matters such as whether contract extensions involving term only would be brought for Board approval. Other details for consideration include: • The form of the approval required for such O&M contracts (i.e., whether a separate Position Paper for each, or some form of summary report); • What, if any, exceptions would be allowed for time -sensitive matters; • Ascertaining if there is a need for periodic reports on contracts (i.e., expiring contracts, new contracts, contract amendments, etc.). This Position Paper is put forward for Committee and Board discussion of the specifics of either path described previously. With approval of a change in approach, staff would work to modify the existing approach as quickly as possible. ALTERNATIVES/CONSIDERATIONS As an alternative to the recommended action of pursuing changes to existing California Code language and adopting changes to the expenditure review process permissible under the new language, some other alternatives the Board could consider are the following: 1. Continue the current expenditure review process and not pursue changes to existing California law; or January 24, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 79 of 87 Page 4 of 4 2. Adopt a modified expenditure review process without pursuing a change to existing California Code language. Given the initial sense that the legislative approach appears realistic at this time and would help reduce the administrative burden of expenditure reviews on the Board and staff while maintaining adequate internal controls, these alternatives are not recommended at this time. FINANCIAL IMPACTS The financial impact to Central San would be based on what alternative is adopted by the Board. The process to pursue changes to the State Code language addressing expenditures would have minor costs; mainly staff time. The extent of time associated with the ongoing process will vary depending on the language adopted. If the language of Water Code 71361 is adopted, it requires that the expenditures are "audited and approved in the manner prescribed by the Board." There is no incremental financial impact to continuing with the status quo process, beyond staff and Board member time involved in the preparation, review, and approval of expenditure agenda items. A revised process for the review of expenditures would require some consulting costs for the ERP support vendor to develop exception reports related to expenditures (estimated at perhaps $5,000- $15,000), and ongoing staff time to prepare reports related to the revised process. If O&M contracts are also brought to the Board for approval, there will be additional staff time incurred in preparing Position Papers for these contracts. The extent of this staff time will vary depending on thresholds for required Board approval of such contracts. COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its meeting on January 24, 2023 and recommended RECOMMENDED BOARD ACTION Direct staff to pursue amendments to existing State Code language to be consistent with the requirements for California cities and municipal water districts allowing for greater flexibility and less governing body involvement in the expenditure approval process. Status quo protocols over the expenditure approval process shall continue until such time the State Code is successfully amended and Board adopts a revised policy for expenditure approvals. Strategic Plan re -In GOAL FOUR: Governance and Fiscal Responsibility Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility GOAL SEVEN: Innovation and Agility Strategy 2 - Implement organization -wide optimization January 24, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 80 of 87