HomeMy WebLinkAbout03.c. Review Draft Position Paper to Assess Risk, Draft Policies and Procedures and a Project Implementation Plan Related to the Proposed Transition to An In-House Treasury StructurePage 1 of 38 Item 3.c. MEETING DATE: SUBJECT SUBMITTED BY: BOARD OF DIRECTORS POSITION PAPER J ULY 18, 2023 REVIEW DRAFT POSITION PAPER TO ASSESS RISK, DRAFT POLICIES AND PROCEDURES AND A PROJECT IMPLEMENTATION PLAN RELATED TO THE PROPOSED TRANSITION TO AN IN-HOUSE TREASURY STRUCTURE INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION -FINANCE REVIEWED BY: PHILIPLEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER ISSUE Following receipt of an internal audit report identifying inefficiencies and an assessment of how similar local government agencies handle their treasury function, Central San is considering the implementation of an in-house treasury function. Consistent with prior Board direction, staff has returned with additional information to support a decision regarding which treasury structure is most suitable for Central San. The Board is now being asked to consider the information provided and authorize staff to begin the planning and design steps for a specific in-house treasury structure. BACKGROUND At the July 21, 2022, Board meeting, Central San's internal auditor provided a presentation on the results of an internal audit over Central San's accounts payable function. Overall, while the report supported internal controls over the accounts payable function appeared to be appropriately designed and implemented, as well as operating effectively in the new enterprise resource planning (ERP) system, there was one finding that highlighted an internal operational inefficiency that is associated with Central San's treasury arrangement as a voluntary pooled participant in the Contra Costa County Treasury Pool. The finding also elaborated that certain modules within Central San's ERP were not able to be implemented due to the non -industry standard treasury arrangement. Following the presentation by Central San's Internal Auditor, the Board expressed concern with this matter. The General Manager responded that staff would assess the issue and return at a future date with additional information and a recommendation for the Board. Thereafter, on September 15, 2022, staff provided a presentation assessing Central San's treasury function to the Board. This assessment provided a background and pros -cons analysis of Central San's longtime arrangement as a "voluntary pooled participant" of the Contra Costa County Treasury Pool. The July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 82 of 123 Page 2 of 38 assessment outlined the advantages to implementing an in-house treasury function outweighed the disadvantages in several areas, providing both short-term operational and long-term strategic benefits. Furthermore, the assessment conveyed that the relevant experience and qualifications of Central San's staff, paired with the sufficiency of the existing staff size, would allow Central San to maintain strong internal controls if treasury were transitioned in-house with no adverse impacts to workload or requiring an increase in existing headcount. Following the presentation and discussion, Central San's Board voted unanimously directing staff to pursue the matter further. Specifically, the Board directed staff to conduct the following: 1. Assess banking and investment management alternatives and return to the Board with a proposed alternative treasury structure; 2. Develop and present a risk assessment over the proposed "to be" treasury structure; 3. Develop and propose a draft banking/treasury policies and procedures; and 4. Develop an implementation plan (including RFP development/ issuance/ assessments and ERP implementation/ modifications). On May 4, 2023, staff informed the Board of their efforts to retain the services of an outside, independent certified public accountant (CPA) firm or agency to assist with this initiative. Eide Bailly, a professional CPA firm providing both audit and consulting services, was selected given their expertise and experience evaluating public agencies' internal control structures and familiarity with Oracle Cloud Fusion banking/treasury functionality. With the assistance of Eide Bailly, project milestones 1 through 4 outlined previously have been completed. Proposed Treasury Structure At the September 15, 2022, Board meeting, staff presented the results of a survey of on how several California cities and special districts similar in size to Central San structure their treasury functions. This survey provided a sense of the most common treasury structure for similar public agencies. Most importantly, the survey showed that most of the public agencies surveyed (15 of 16, or 93.8%) have their own bank account rather than operate as a voluntary pooled participant with another agency, such as a city or county. Two important structural topics that were more varied in their responses pertained to who each agency's Treasurer was and how investment services were managed. Given the variability in responses, these two areas required further assessment by staff. Appointment of a Treasurer Regarding the role of the Treasurer, the survey results showed that the most common position holding this role was either the Chief Financial Officer (CFO) or Director of Finance at 43.8% (7 of 16). Tied with the second most common arrangements were either member of the governing body (City Council or Board Member) or an "other employee" (not CFO or Director of Finance) each at 18.8% (3 of 16). Other less common arrangements included either a citizen or the County Treasurer serving as the agency's treasurer. I n consultation with Eide Bailly, it is now the recommendation of staff that the Deputy General Manager of Administration (formerly Director of Finance & Administration) be appointed Treasurer in Central San's proposed "to be" treasury structure. This is largely in line with the majority of similar public agency's surveyed (62.6%, or 10 of 16), where an executive level employee other than the City Manager or General Manager served as Treasurer. Furthermore, Central San's incumbent Deputy General Manager of Administration possess both the experience and skillset to serve as Treasurer, having served as the Treasurer for other large public agencies prior to joining Central San and maintain both an active Certified Public Accountant (CPA) license and Certified Treasury Professional designation. Beyond being in line with arrangements for peer agencies, another key benefit of appointing a Treasurer at the Executive Management staff level is the ability for Central San to manage its day-to-day treasury operations more July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 83 of 123 Page 3 of 38 efficiently by not needing to regularly involve a member of the governing body on administrative matters. Staff also recommends the Board appoint the Finance Manager as Deputy Treasurer to handle lesser, more administrative treasury matters, and serve as a backup in the absence of the Treasurer. To ensure checks and balances on each position, the proposed responsibilities and powers of the Board, General Manager, Treasurer, and Deputy Treasurer are outlined in a draft Banking & Cash Management Board Policy (Attachment 2) and Administrative Procedures (Attachment 3). Management of Investments Management of investments was another area where the survey yielded somewhat differing results, warranting a more in-depth assessment by staff to ascertain the most suitable option for Central San. While the bulk of agencies surveyed (62.6%, or 10 of 16) responded they utilize an investment advisor through a managed account, the remaining had various other responses including: managing investments entirely in-house (18.8%), investing in highly liquid government investment pools only (12.5%), and utilizing a non -advisory broker (6.3%). Upon further consideration of these results, as well as that of Central San's current Finance function (i.e., staff size, experience, skillset, and certifications), and consultation with Eide Bailly, it is the recommendation of staff for Central San to utilize an investment manager, under the direction of Central San management, that specializes in supporting public agencies should the treasury function be taken in-house. While some incremental cost would be associated with utilizing an investment manager, this arrangement would benefit Central San in several ways, which is likely why it is the most common investment arrangement of the agencies surveyed. Contracting an investment manager will allow Central San to evolve its long-standing investment strategy from a primarily passive approach to a far more active one. A professionally managed active investing approach would allow Central San to better align the maturity of investments with anticipated cash flow needs and more confidently capitalize on the most opportune times to trade/sell investments based on market conditions. While there are no guarantees that higher investment returns will be realized by transitioning to an investments manager, somewhat higher yields can reasonably be expected when transitioning from a passive to an active investments approach with the support of investment advisory services. PFM Asset Management (PFMAM), a firm Central San has previously worked with, conducted an analysis to assess the potential incremental increase in investment management costs as well as income had an investment management firm been utilized. Using a proposed fee schedule from PFMAM it is estimated that Central San would have paid approximately $80 thousand in annual investment management fees, compared to only approximately $6 thousand in annual fees paid to the County for quarterly interest apportionment charges custodian fees. PFMAM then compared the total return performance of a proxy for Central San's current portfolio strategy to the performance of a more diversified investment strategy (a strategy in compliance with California Government Code) for the 10 years ended May 31, 2023. Based on this analysis, PFMAM estimates that Central San could have generated an estimated incremental annual investment income of $169 thousand on a gross of fee bases (an estimated incremental annual investment income of $89 thousand on a net of investment management fee basis), for the more diversified investment strategy that could be implemented with the assistance of an outside investment management firm. While this a modest increase over actual investment income recognized in that timeframe, it still results in a net benefit to Central San, exceeding the cost of the underlying investment management services. It should also be mentioned that over the past year, yields of shorter duration fixed income investments have been remarkably comparable to longer duration options. This atypical "inverted yield curve" phenomenon is a result of the rapidly rising interest rate environment from near -zero levels over the past year. Historically, longer duration investments have generally yielded quite higher returns than shorter term investments. Should the investment market return to more normal conditions in the future, Central San would reasonably expect to benefit even greater from an active investment management strategy by taking advantage of longer durations through a systematic laddered approach. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 84 of 123 Page 4 of 38 Beyond benefiting Central San from a revenue/cost perspective, utilizing an investment management firm is expected to benefit Central San in other ways. Current investment -related responsibilities of staff include the following: directing the County on investment purchases and maturities; developing cash flow forecasts for investing purposes; monitoring liquidity; recording transactions into the ledger; and preparing quarterly investment portfolio reports. While Central San staff would continue to be involved in many of these responsibilities in some capacity, having an investments manager for this important responsibility would allow staff to spend more time on other operational needs, including projects and new initiatives. Contracting with a professional investments manager may also have the positive effect of increasing public confidence that investments are being managed prudently and in accordance with policy and the law, something of particular importance given market turmoil experienced in 2022 and the subsequent high profile banking institution failures. Lastly, investment reports and presentations from the investments manager may allow the Board to fulfill their fiduciary role over Central San's investment portfolio more confidently. Risk Assessment for Proposed "To Be" Treasury Structure Prior to this meeting, Eide Bailly completed their risk assessment of Central San's Finance Division (Attachment 1), developing an understanding of whether inherent business risks associated with maintaining an in-house treasury function can be mitigated to an acceptable level. Their understanding was developed through inquiry with Finance Division staff at recurring project meetings as well as an all -day on - site visit in May 2023. Beyond inquiry, Eide Bailly staff have had an opportunity to observe business processes and review various relevant fiscal policies (i.e., investments, cash receipts, accounts payable, etc.). Their completed risk assessment compares current and proposed "to be" processes in the following four treasury cycle categories: 1. Depository Banking and Investment Services, 2. Payment Processing (Cash Disbursements), 3. Cash Receipts, and 4. Bank Reconciliations. Immediately following the process descriptions, each section includes Eide Bailly's synopsis of "Required Changes, Associated Risks, and Steps to Address Risk". Ultimately, in the report's "Summary and Conclusions" section, Eide Bailly concluded that following their fact-finding procedures, Central San should be able to transition to and maintain an in-house treasury function with an acceptable internal control environment that mitigates inherent business risks to an acceptable level. This is in consideration of their knowledge of Oracle cloud fusion ERP functionalities (particularly the Cash Management, Payables and Receivables modules) as well as other like public agencies of similar and even smaller size. Draft Banking & Treasury Policy and Administrative Procedures At the onset of the consulting engagement, it was acknowledged that Central San would need to design and implement additional policies and procedures over the cash management and banking as a precursor to implementing an in-house treasury function. While Central San already had other longstanding policies and procedures covering various treasury processes (i.e., investments, payables, receipts, payroll), there was nothing in place that addressed banking given that those matters have were historically the responsibility of the County Treasurer with Central San being a voluntary pooled participant. Accordingly, staff, with feedback from Eide Bailly, developed a draft Banking & Cash Management Board Policy and underlying Administrative Procedure. These documents, in addition to direction from key Central San's staff involved in treasury functions were essential for Eide Bailly to complete their risk assessment report, helping outline a framework of what the proposed "to be" treasury structure would look like. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 85 of 123 Page 5 of 38 These policies would require Central San's adoption in conjunction with the implementation of an in-house treasury function. While the proposed Board Policy would require the Board's adoption, the Administrative Procedures document would be executed and enforced by the General Manager, with both policies being reviewed and amended, as needed, periodically (either annually or biennially). Proposed Project Implementation Plan Working closely with Eide Bailly, staff has developed a project implementation plan for transitioning to an in-house Treasury function, which is illustrated in the attached project implementation plan (Attachment 4) using a GANTT chart format. This proposed project implementation plan divides the project into several core phases highlighting key deliverables as follows: 1. Project discovery 2. Risk assessment and Board direction/action on treasury structure 3. Policy development 4. Request for proposals for banking services 5. Request for proposal for investment management services 6. ERP implementation and configuration changes 7. Withdrawal from County pool Each of these seven phases have already or are expected to have some level of Board involvement. Assuming each of the milestones are met without unanticipated obstructions, the soonest staff anticipates Central San can transition to an in-house treasury function is April 1, 2024. ALTERNATIVES/CONSIDERATIONS The Board may elect not to implement an in-house treasury structure and continue operating with its status quo treasury arrangement as a voluntary pooled participant of the Country Treasury. This is not the recommended action by staff as several operational process inefficiencies would persist, and Central San would continue to lack the control over its treasury function necessary to implement swift changes when unforeseen circumstances and emergencies arise. Redundant, time consuming, and overly complex processes associated with continuing to operate as a voluntary pooled participant not only impact the efficiency of Central San's operations, but also adversely impact the morale of Finance division staff having to execute those procedures. The Board may opt to proceed with implementing an in-house treasury function but recommend an alternative structure. For instance, rather than the Deputy General Manager of Administration (DGM) being appointed as Treasurer, the presiding Board President may serve as Treasurer, with the Board taking action to appoint the DGM as Deputy Treasurer, handling the day-to-day administrative activities. While certain municipalities do have this structure, it is a less common arrangement amongst similar agencies surveyed. While having a Board member serve as Treasurer would allow the Board to maintain more control over the treasury function, it may also result in Board members becoming overly involved in administrative matters rather than remaining at the policy -level. Furthermore, a Board policy can be adopted limiting the Treasurer's authority by requiring Board approval for certain key actions such as opening new bank accounts and entering into custodial banking agreements. The proposed treasury structure establishes such a policy retaining some control at the Board level. Regarding the investment management approach, the Board may elect not to retain an investment management firm, but either conduct investment activities in-house. This structure would maximize the amount of control Central San has over its investment function and result in minor savings to Central San. This is not the recommended structure as it results in Central San retaining the most risk of all scenarios and increases the level of effort needed over investment activities with limited net gains. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 86 of 123 Page 6 of 38 Rather than staff being able to spend more time on operational priorities and new initiatives, a higher amount of staff time would be spent on investment administration activities such as monitoring credit ratings, developing, and revising cash flows, and administering investment calls and maturities. FINANCIAL IMPACTS As noted previously, the transition to an in-house treasury function is expected to result in some minor incremental costs over the status quo arrangement. The County, possibly benefitting nominally from economies of scale investing perspective, charges minimal fees for holding Central San's cash deposits. The incremental costs of utilizing an investment management firm are estimated to be approximately $74 thousand, although this cost is reasonably expected to be offset by higher investment yields. The services associated with opening and maintaining a commercial bank account are also expected to result in some incremental costs, which are not currently known. Based on staff's familiarity with commercial banking agreements with public agencies, these incremental costs are expected to be largely if not entirely offset by credits from the bank for maintaining a minimum uninvested deposit balance. No additional staffing costs are expected from transitioning to an in-house treasury function, as Central San currently has the staff expertise and staff size necessary to do so, as supported by Eide Bailly's risk assessment conclusion. COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its meeting on July 18, 2023 and recommended RECOMMENDED BOARD ACTION Direct staff to proceed with designing and implementing an In-house Treasury Function for Central San consistent with the draft banking and cash management policy and procedures and project implementation plan presented by staff. Strategic Plan Tie -In GOAL FOUR: Governance and Fiscal Responsibility Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, 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. In -House Treasury Risk Assessment 2. Banking & Cash Management Board Policy (Draft) 3. Banking & Cash Management Administrative Procedure (Draft) 4. Project Implementation Timeline (GANTT Chart) 5. Presentation July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 87 of 123 Page 7 of 38 Attachment 1 July 18, 2023 Treasury Implementation Risk Assessment Central Contra Costa Sanitary District Submitted By: Eide Bailly LLP 2151 River Plaza Drive, Suite 308 James Ramsey, CPA, CFE Sacramento, California 95833 Partner 916.999.8511 jramsey@eidebailly.com July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 88 of 123 Page 8 of 38 Attachment 1 On July 21, 2022, Central Contra Costa Sanitary District's (Central Sans) Internal Auditor presented the results of an internal audit over Central San's accounts payable function to ascertain whether Central San had the appropriate elements of internal control in place after the implementation of a new cloud -based Enterprise Resource Planning (ERP) system. The audit report and underlying presentation highlighted that while internal controls over Central San's accounts payable function appeared to be appropriately designed and implemented, as well as operating effectively, there were operational inefficiencies associated with Central San's treasury arrangement as a voluntary pooled participant of Contra Costa County (County). In response, Management conducted an internal assessment of the treasury function by examining processes and policies as well as by gathering feedback from knowledgeable staff and conducting a survey of how other similarly sized independent municipalities (i.e., cities, special districts, utilities. etc.) handled their treasury functions. This assessment yielded results consistent with the internal audit report, identifying several operational inefficiencies and strategic risks associated with Central San's operating as a voluntary pooled participant of the County. The results of this assessment were presented to Central San's Board of Directors (Board) on September 15, 2022. An outcome of the assessment included a recommendation from staff to explore banking and investment management alternatives, establish an appropriate internal control framework to mitigate risk, draft a banking/treasury policy, and create an implementation plan. To assist with the risk assessment, policy development, and implementation process, Central San engaged Eide Bailly LLP (Fide Bailly), an independent accounting firm of licensed certified public accountants (CPA) specializing in providing audit and consulting services for public agencies, with a sizeable client -base in California. To develop a plan for assessing the risks and recommending steps to address those risks, Eide Bailly interviewed key personnel and reviewed various policies and procedures to gain an understanding of the current process of Central San. To get the "full picture", Eide Bailly obtained an understanding of the following business cycles/processes: 1) treasury (including investment and bank reconciliations); 2) accounts payable; 3) payroll; and 4) cash receipts. The information gained from document inspection, interviews, and process observations was then used to create a comparative analysis of the "current" versus "proposed" future treasury structures related to banking and treasury as well as to identify risks associated with required changes, and outline steps needed to mitigate those risks. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 89 of 123 Page 9 of 38 Attachment 1 Current Proposed Central San's cash and investments are held within Contra Central San will withdraw its cash and investments from the Costa County's (County) pooled investment fund. The County's pool and will obtain and maintain a banking County's Depository Banking services are provided by relationship with a Central San selected financial institution. Wells Fargo. Central San will maintain its own cash and investments A majority of Central San's investments are managed by the County in a separate account, with specific investments purchased and held by the County at the direction of Central San using investment request forms and based on the investment guidelines detailed in board policy 005 — statement of investment policy (BP005). Liquid funds are held in the County's pooled account for immediate use. Remaining funds are invested in LAIF. independently without the County's involvement. Central San will continue to purchase investments based on the investment guidelines in BP005 and will leverage the expertise of an investment advisor to ensure investments follow adopted policies and applicable government code, whichever is more restrictive. The custody of these investments will be with Central San's bank of choice. Central San will continue to use their existing LAIF account as an additional route for investing and will maintain adequate liquid funds within its self -managed checking account. The County and Central San currently share t Central San will have sole responsibility for tracking cash and responsibility for tracking cash balances, monitNthe investment balances and for ensuring that they have sufficient investment maturities and ratings, and ensurinlo pay for obligations as they become due. San has adequate funds to pay for expenses as become due. The County charges a small fee for this service, which is Central San will be solely responsible for all costs associated charged to Central San during the allocation of interest on with depository banking and investment advisory services. funds invested in LAIF. r% July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 90 of 123 Page 10 of 38 Attachment 1 Risk: Service interruption risk - modifying Central San's banking structure by withdrawing from the County pool may result in Central San's inability to continue operations as they are performed in the current environment. Risk: Financial institution credit risk - the potential that a borrower or counterparty will fail to perform on an obligation. Steps to address risks: Central San should solicit and procure the services of a financial institution prior to its separation from the County's investment pool. During the solicitation process, Central San should ensure that the institution selected is an authorized financial institution to hold public agency deposits under the government code, can meet its operational needs, and provide services at a reasonable cost. The appropriate financial institution should, at a minimum, provide the following services to meet the various operational and strategic needs of Central San: • Depository services with multiple accounts, including at a minimum, a main operating account, a sweep account, and zero balance accounts for payroll and accounts payable. • A robust online portal which includes detailed and summary reporting that can be extracted and used for analysis and reconciliation. Data extracted should be able to interface with Central San's Oracle Fusion Cloud ERP system. Online services should be protected with a strong control structure which should include, at a minimum, dual - factor authentication and strong segregation of duties requirements to protect Central San's data and assets. • End -to -end merchant services. • Check payments with payee positive pay. • Wire transfer, securities transactions, transfers, and ACH transaction capability. • A dedicated support team to respond to Central San needs and provide troubleshooting for issues on a timely basis. • Collateralization of public funds for all accounts to ensure that all funds deposited are safeguarded, irrespective of the traditional FDIC insurance limits. Central San should issue a request for proposals (RFP) for banking services to ensure that a qualified financial institution is selected at competitive rates. If needed, Central San can conduct interviews of qualified institutions and select the institution that best meets its needs, and that can provide services at a reasonable cost to limit the fiscal and operational impact of the new banking relationship on Central San. Risk: Interest rate risk - the risk to earnings arising from movements in interest rates. Risk: Liquidity risk - the risk that Central San will be unable to meet its obligations when they come due. Risk: Price risk - the risk to earnings arising from changes in the value of individual investments prior to purchase. Steps to address risks: Central San should review its investment policy to ensure that it has appropriate policies and procedures for the safety, liquidity, and yield of its investment pool. This should include an evaluation of its targeted average duration, primary liquidity, and investment mix. Any updates to these policies should be vetted by a qualified investment advisor and approved by its Treasurer and its Board. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 91 of 123 Page 11 of 38 Attachment 1 Central San should also solicit and procure the services of an investment advisor/manager to handle the selection and purchase of investments in accordance with Central San's investment policy and to maximize earnings on portfolio investments while maintaining safety of its assets to protect principal and providing liquidity to meet Central San's ongoing cash flow needs. Central San should issue an RFP for investment advisory and management services to ensure a qualified investment advisor is selected. If needed, Central San can conduct interviews of qualified advisors and select the candidate that best meets its needs, and that can provide services at a reasonable cost to limit the fiscal impact of the new investment advisor relationship on Central San. The selected investment advisor should have expertise with similar government entities to ensure that investments purchased will comply with Central San's investment policy, and all applicable laws and regulations. Additionally, the investment advisor should have the ability to direct Central San's investments as to rates, diversity, and duration to maximize investment return while still safeguarding the assets of Central San, and so that the maturity of such investments would allow Central San to meet its obligations as they become due without the need to sell securities prior to their maturity. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 92 of 123 Page 12 of 38 Attachment 1 Current Central San staff are responsible for payment processing for Central San. Central San's payroll staff, which is part of the human resources division, processes timesheets for all employees. Central San has a two -week pay period. Pay dates fall on Fridays following the end of the pay period, and in order to meet this date, Central San must upload the ACH file in Wells Fargo by 6:00 PM on Thursday. Central San is required to prefund their payroll account before each pay period is paid, which generally must be done two business days prior to the pay date. Additional details related to this process can be found in the bi- weekly payroll funding process defined in Administrative Procedure AP 107. Accounts payable transactions are both entered and processed by Central San staff. After the data entry portion of the accounts payable process has been completed, excel and PDF copies of the register organized by fund are emailed to the County. Staff has to wait for county email confirmation of accepted files before driving to the county to finalize the A/P run. Central San relies on the County for a portion of its check run process. Although Central San is able to print its own checks, they must be driven to the County for counter - counter -signature and then returned to Central San's office for delivery. Payments to vendors are via check. Proposed Central San staff will maintain responsibility for all payment processing for Central San. The payroll process will remain unchanged from its current structure with the exception of which financial institution will receive the uploaded ACH file and timing of the ACH file upload. Upon completion of the previously mentioned banking request for proposal process, Central San will have sole responsibility for ensuring the accuracy of the payment information sent to the bank for payment, and for ensuring there is sufficient cash on hand to cover its payments. Additionally, there will not be a need to "prefund" the payroll account as it is expected that the payroll checking account to be structured as a "zero -balance" account and function only as a clearing account. Central San will be solely responsible for processing all accounts payable transactions. A designated treasurer or designee will be responsible for signing checks. Central San may choose to either manually sign its checks or adopt a magnetic ink character recognition (MICR) printing process which includes micro -text signature printing. Central San will adopt a "payee -positive pay" procedure to ensure that payments are not made in error and that the payee name or payment amount have not been altered. This will occur through a daily process by which payment exceptions which are identified by the bank as payments are processed and either validated or rejected by Central San staff. The Finance Manager reviews and signs a paper printout Central San will no longer require paper review of its accounts of all accounts payable transactions. He also reviews payable transactions. Electronic workflow in Oracle, check transaction support in more detail for all transactions printing controls, proper segregation of duties, and controls above $5,000. put in place by Central San's bank will provide an environment which will reasonably prevent error or fraud. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 93 of 123 Page 13 of 38 Attachment 1 Risk: Improper payments will be processed, or payments will be improperly rejected. Risk: Central San's ongoing cash balance will not be available to cover payments. With the inception of a new stand-alone baking relationship, Central San would have sole responsibility for payment processing, liquidity, and security of its resources. The removal of the County's co -signature requirement from payment processing would allow Central San to significantly improve the efficiency of its wire transfer, ACH, and physical check processes. Central San's bi-weekly payroll funding policy and accounts payable policy would be modified to allow Central San to more immediately respond to its cash needs through account transfers. Central San would ensure that adequate funds are available for payments as they are made, and that the maturity of investments are aligned with large cash outflows to mitigate the risk of Central San having to sell investments at a loss to cover its obligations. This will be accomplished through a daily cash flow analysis, investment purchases with durations which align with large cash outflows, and through consultation with their investment advisors. Central San should adopt a policy for monitoring positive pay exceptions and assign qualified individuals to monitor this process who understand how to differentiate between exceptions which should be approved for payment, and those which arise from error or fraud and should be rejected. Daily cut-off for processing positive pay exceptions occurs each morning. To ensure someone is always available to monitor these exceptions, Central San should evaluate the impacts of its employees' schedules and each employee's unique skills, knowledge, and experience when assigning this duty. Central San should assign, at a minimum, one primary and two (2) back-ups to this task to ensure that there is sufficient coverage for scheduled days off, vacations, and sick time. Central San should ensure these individuals sufficiently understand this process by implementing a training program for positive pay which will be required at the inception of the positive pay process, and each time a new person is assigned to this task. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 94 of 123 Page 14 of 38 Attachment 1 Current Central San has three primary cash receipt locations HHW, permits, and Oracle accounts receivables. Central San employs an online remote deposit process where checks can be scanned remotely and deposited electronically, reducing the need to transfer physical documents to the bank or County. All checks over $5,000,000 must be driven to the bank to be deposited in - person. This threshold is set by the County and is for individual transactions, not in aggregate. Central San staff must pull daily bank statements from Wells Fargo to record ACH receipt and credit card fees. These transactions must be entered both into Oracle and into the County's ERP system. Central San staff can process transactions in Oracle, but must use an electronic deposit permit, which is an online form submitted to the County to request the recording of all receivable transactions that would not otherwise go through the general ledger. Cash is collected in small amounts by Central San. This cash is accumulated and stored in a safe until $1,000 is accumulated. This cash is then driven to the bank for deposit. Central San's permitting workgroup uses PayPal to collect payments electronically. Electronic payments are not accepted for any other transaction type. Proposed Central San's primary cash receipt locations will continue to be HHW, permits, and Oracle accounts receivables. Central San will continue to use online remote deposit for processing check payments remotely. Central San will eliminate or set an appropriate limit for transactions processed to maximize efficiency and maintain adequate security over its assets. Central San will also be able to accept wire transfers in lieu of checks for large payments. Central San staff will continue to use daily bank statements to record ACH transactions and credit card fees. Central San will increase its use of the ACH process to minimize the need for processing transactions individually and increase efficiency. Interaction with the County using electronic deposit permits will cease as the need for the County to record cash balances for Central San will no longer be required. Cash collections will continue as they do currently. Cash on hand will be stored in a safe until driven to the bank for deposit. Central San will implement the cash management module in Oracle Fusion Cloud ERP to generate invoices and will be able to provide payment instruction on the invoices they provide to their customers, which should eliminate the need for processing payments through PayPal. Central San will set up invoice templates, reducing the data entry requirement of routine invoice types. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 95 of 123 Page 15 of 38 Attachment 1 Risk: Improper implementation of the Oracle Cloud cash management module. Risk: Reconciliation errors will cause inaccurate data recorded to the general ledger. Most of the cash receipt processes would remain unchanged. The most significant process changes that are needed will only involve removal of interaction of the County from the process, creating operational efficiencies. The implementation of the cash management module in Oracle would create another point of data entry and reconciliation within Central San's ERP system. To ensure that transactions recorded in Central San's cash management module are accurate, and that information is properly sent to the general ledger, Central San should engage an implementation consultant with knowledge of Oracle sufficient to properly design and implement the new module. Central San should focus on module integration, data integrity, and integration with existing modules of the ERP system. Central San should adopt best practices and change its policies and procedures to the extent practicable throughout this process. Central San should analyze the cost of implementing the additional module when preparing future budgets and analyze adopted budgets and process budget adjustments when necessary. The implementation of the cash management module in Oracle will also have budget implications, due to both the cost of implementation and the ongoing cost of subscription. To reduce the risk of errors, Central San should analyze its processes and adopt a training program to ensure that all employees interacting with the new cash management module fully understand their new roles and responsibilities. Central San should also analyze its control environment and segregation of duties to ensure that proper reviews are performed, and that one person does not have the ability to initiate and post transactions in isolation. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 96 of 123 Page 16 of 38 Attachment 1 Current Central San performs a weekly cashflow analysis as well as a monthly bank reconciliation. Information necessary to complete these processes necessitates data be obtained from the County's bank, the County's ERP system, and Central San's ERP system. The purpose of the weekly cash review is to ensure that sufficient funds are available to make upcoming payments, as the County will not allow Central San to process payments if their fund's cash balance is insufficient, despite there being a positive cash balance in total in the cash pool. Proposed The weekly cash review will continue to be performed to analyze the cash flow needs of Central San, however this process will be modified to pull information solely from Oracle and Central San's bank. Central San staff pulls cash balances from Oracle and the cash Weekly cash flow analysis will be used to ensure balances and warrants payable balances from the County's ERP sufficient funds are available to make upcoming system to come up with an available cash balance. This is t payments. Insufficient cash balances can be remedied compared to weekly check run totals to ensure there is through the maturity of investments, or through sufficient cash. Central San staff will initiate a transfer from V s between accounts. LAIF if it is determined that there is not eno ash to cover the week's payments. Bank reconciliations are currently done as a three-way Central San staff will pull check run and cash balances reconciliation. The amount per GL includes both cash balan rom Oracle to come up with the available cash balance. from Oracle and Workday, and these two are compared to %the"Central San will compare this balance to the weekly bank balance. Any discrepancies are reduced by deposits in n totals to ensure there is sufficient cash. transit and outstanding checks, and the remaining balance must be determined through missing transactions or erran entries to arrive at a reconciled end of month balance where the GL and bank balances agree. Differences are posted to the general ledger through journal entries. Central San does not have a policy for the treatment of unreconcilable transactions, such as errant transactions, bad debt, or other non -timing related differences. Upon implementation of the cash management module in Oracle, Central San will be able to perform a portion of the monthly bank reconciliation with the automated reconciliation process available in Oracle. This process will complete most of the transaction matching process, allowing Central San to focus on timing differences between their bank balance and GL balance. The updated bank reconciliation process will reconcile the bank to the GL with zero unreconcilable differences, considering all deposits in transit and outstanding checks. During the reconciliation process, differences identified from errant transactions, bad debt, or other differences which are not present due to a timing difference will be considered for write-off monthly. Central San will implement a formalized write-off policy with approval limits to ensure that write-offs are handled properly and with the appropriate level of transparency. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 97 of 123 Page 17 of 38 Attachment 1 Risk: Inadequate segregation of duties. Central San's new banking relationship could allow for the elimination of its current three-way bank reconciliation process. A bank -to -general ledger reconciliation will improve efficiency by removing one system of record from its reconciliation and reducing the research required to identify differences and correcting entries. However, with the removal of the County's ledger and the control environment it provides, Central San would be solely responsible for safeguarding its assets and properly accounting for its cash and investments. To ensure cash and investments are adequately safeguarded and accounted for properly, Central San should continue to perform the weekly cash review process to monitor its cash needs. Additionally, the reconciliation process should be performed monthly and reconciled with no reconciling differences each time. This reconciliation should be performed by an individual who does not have the ability to modify Central San's vendor master file, sign checks, or process check runs. This will create adequate segregation of duties and prevent one individual from controlling one transaction from start to finish. Additionally, the bank reconciliation should be reviewed by an individual who does not initiate transactions, and ideally also does not have the ability to do so. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 98 of 123 Page 18 of 38 Attachment 1 Central San initiated the process of separating from the County pool due to concerns over inefficient processes and lack of control of financial assets which are currently impacting operations. All transactions require interaction with the County, and sometimes even requires Central San to drive to the County office for the delivery of physical documents, or for obtaining physical signatures. After identifying the need to separate from the County, Central San determined that staff had the ability to oversee and lead the separation, and that systems in place could either be used as -is or be modified or replaced to handle the change in operations. With a new banking relationship Central San could improve efficiency and gain additional control over their processes and financial assets. Eide Bailly was engaged to assist Central San with this process. We have completed an assessment of Central San's key and impacted processes. Procedures included reviewing various policies, obtaining an understanding of procedures currently in place, , having in-depth conversations with Central San employees about their roles and responsibilities as well as their background and knowledge, observations of Central San staff performing the tasks in all the previously discussed transaction cycles, as well as reviewing board meeting minutes. Eide Bailly then evaluated these against best practices in internal controls for the specific transaction cycles. Eide Bailly noted, based on the procedures noted above, that Central San has the capability (operational and human capital) to adjust their internal control environment and activities to address the risks noted above to facilitate the movement of the treasury function from a voluntary participant in the County pool to a self -managed treasury function. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 99 of 123 Attachment 2 Page 19 of 38 Number: BP 049 Central Contra Costa Sanitary District Authority: Board of Directors Effective: XX/XX/2023 Revised: Not applicable Reviewed: Not applicable Initiating Dept./Div.: Administration/Finance BOARD POLICY BANKING & CASH MANAGEMENT PURPOSE To set forth policy direction for banking and cash mana2tnt at Central San. POLICY 2 The Board recognizes the strategic value of as it relates to improved operational control, to change (i.e., emergencies, disasteAbj&w Management shall establish and and cash management fun ' range of internal controls uId detective, as well as cor 've.� 3. The Deputy Gen with specific aul 4. Custodial service AUTHORITY prng an in-house treasury function s efficiencies, and responsiveness Ltions, programs, etc.). PFPM fd internal controls over the banking and Central San's liquid assets. A wide gyred including those that are preventative, ministration shall serve as Central San's Treasurer internal administrative procedures. king agreements must be authorized by the Board. The General Manager has the authority to execute all custodial service and other agreements once the necessary Board authority to proceed is obtained. The General Manager shall establish, implement, and enforce administrative procedures to support this policy. POLICY REVIEW This policy shall be reviewed at least biennially to ensure alignment with current strategic priorities set by the Board. Any changes must be approved by the Board following initial review by the Administration Committee. [Original Retained by the Secretary of the District] July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 100 of 123 Page 20 of 38 Attachment 3 Number: AP 10X Related Board Policy: N/A Authority: General Manager Effective: Revised: Reviewed: Initiating Dept/Div: Administration/Finance Date Signed: Philip Leiber, Deputy General Manager, Administration Roger S. Bailey, General Manager ADMINISTRATIVE R --Y_1 ill I:11 0 To set forth administrative p functions establishing req accounts and cash balance this policy shall also o F covering operation L ve entral San's banking and cash management op .ng, closing, updating, and managing bank athe security of Central San's monetary assets, Is to ensure Central San maintains adequate liquidity for iLidle cash for utilization in the investment portfolio. The policies in this doZ shall apply to all employees involved in the banking and cash management function. EWuded from the scope of this administrative procedure are many policy requirements associated with Central San's investments, accounts payable, payroll, and cash receipts processes as those are covered in separate related policies listed hereafter. 3. RELATED POLICIES This policy focuses on the administrative procedures associated with banking protocols. Other administrative procedures covering protocols associated with cash management include the following: a. Investments (BP 005) b. Petty Cash Reimbursements (AP 103) c. Cash Receipts Handling (AP 105) d. Bi-weekly Payroll Funding (AP 107) e. Accounts Payable (AP 108) July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 101 of 123 Page 21 of 38 Attachment 3 Number: AP 1OX BANKING & CASH MANAGEMENT Page 2 of 11 C! 5 BACKGROUND Central San's Banking & Cash Management Administrative Procedures were developed in preparation for its transition from being a voluntary pooled participant with the Contra Costa County Treasurer Tax Collector's Office to taking the treasury function (i.e., banking and cash management) in-house. Following several months of deliberation and planning involving peer agency benchmarking, risk assessment analysis, best practice research, independent professional consultations, and public discussions with the Board, it was concluded that a transition to an in-house treasury function was in the strategic best interest of Central San. As a prerequisite to this move, the Board took action to appoint a Treasurer and adopt these Banking & Cash Management Administrative Procedures, with the purpose of establishing clear policy and process guidelines, roles, and responsibilities for staff, as well as establishing a framework for developing internal controls to protect thoseAnetary assets. DEFINITIONS a. ACH Credit — Equivalent to a digital the written" by payer that instructs the ACH network to transfer funds from their oun a payee account. An ACH credit transaction is completely electronic, elim n e need for a written paper check and visit to the bank. The most common type o H credit transactions are payroll direct deposits. Often referred to as " trans ns, ACH credits typically take 1-2 business days to process. b. ACH Debit — Initiated ay receiver, an ACH debit is the most common type of ACH transfer. o kn n as "pull" transaction, the receiver is "pulling" funds from the payer. Pe tion a Clearing House (NACHA) rules, ACH debits must be completed e s day. c. Automate leari om(ACH) — The primary system that agencies use for electron i ds trans ith ACH, funds are electronically deposited in financial institutions, payme are made online. d. Bank Account and all bank and investment accounts with financial institutions including but not li ited to checking, savings, money market, certificates of deposits (CDs), mutual funds, and investment accounts. e. Cash — coins and currency and all negotiable instruments with monetary value (including but not limited to checks, money orders, ACH transactions, etc.), that can be deposited into a bank account. f. Check - A written, dated, and signed instrument that directs a bank to pay a specific sum of money to the bearer. The person or entity writing the check is known as the payor or drawer, while the person to whom the check is written is the payee. g. Collateralization of Deposits — Process by which a bank or financial institution pledges securities, or other deposits for the purpose of securing the repayment of deposited funds. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 102 of 123 Number: AP 1OX Page 22 of 38 Attachment 3 BANKING & CASH MANAGEMENT Page 3 of 11 R 7 h. Custodial Agreement — An arrangement wherein one holds an asset or property on behalf of the actual owner (beneficiary). This may include cash, stock certificates, bonds, and other financial instruments. The custodian is responsible for safeguarding these types of assets, usually held at one of the custodian's premises, a sub -custodian facility, or an outside depository. k. Electronic Funds Transfer (EFT) - This encompasses Automated Clearing House (ACH) debits, ACH credits (e.g., direct deposit) and wire transfers. Positive Pay - A common automated cash service that helps banks detect fraud by matching a company's issued check with the check presented for payment. The dollar amount, check number and account number must allmatch, or the check is flagged and sent back to the issuer for review. Win ban4 sen( trans SEGREGA- that is administered by ire transfers involve a the party initiating the As an underlying principle, cash managY ssMshould be developed such that no individual is able to complete a transacto finish. This entails segregating the core transactional duties of r e, ability to record the transaction in the accounting system), custody h o blank check stock or ability to initiate an ACH credit or wire transf and (i.e., signing a check or releasing a wire transfer) between different as work groups) when practical. Alternatively, compensating intern Is Id be implemented where full segregation of duties is not feasible. General a co i enting an internal control (i.e., number of employees, staff time, techn etc.) sh Id n t exceed its benefit. Individuals with the a rity instruct a bank to make positive pay exceptions cannot have any responsibility for p ing the bank reconciliation of that bank account. Individuals assigned by the Finance anager to reconcile the account shall not be the same individuals who are authorized to sign checks or approve EFTs on the account. ROLES AND RESPONSIBILITIES The following are the core parties involved in the cash management and banking function and associated roles and responsibilities: a. Board of Directors Central San's elected Board of Directors (Board) are the governing body of Central San. While administrative matters are delegated to the General Manager, policy -level decisions and responsibilities are retained by the Board. Key banking and cash management responsibilities of the Board include the following: July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 103 of 123 Page 23 of 38 Attachment 3 Number: AP 1OX BANKING & CASH MANAGEMENT Page 4 of 11 i. Authorize master banking and investment services agreements. ii. Adopt and periodically review banking and cash management policies. iii. Appoint the position to serve as Central San's Treasurer, currently the Deputy General Manager of Administration. b. General Manager Central San's General Manager serves as the chief executive officer of Central San overseeing all operating departments through two Deputy General Managers, among other members of the executive team. Key banking and cash management responsibilities of the General Manager include the following: iii iv v vi Execute approval. Authorize and ensure the enfc procedures. Adopt policy revisions Check signer (backup to Treasur Wire transfer approver (see 1 Authorize investment actions in Im, Authorize intra-banking tr�`s (I c. Deputy General Manager of Central San's Di Administration D being involved in signatory wit Treasurer i dE iv reements, following Board icies and administrative District) omits) BP 005 (see Exhibit A for limits) Lto Treasurer) Maner of Administration oversees Central San's nll so serve as Treasurer. The Treasurer, not g conciliation function, shall serve as the primary banking and cash management responsibilities of the Ov comp ce with banking custodial services agreement. Ensure timely w f master contract and solicitation for new banking services as needed. Implement and enforce policies and administrative procedures as authorized by the General Manager. Recommend policy revisions for consideration of approval by the General Manager as needed. Authorize banking services ancillary to master custodial agreement (i.e., lockbox, credit card acceptance, remote deposit, etc.). Authorize creation or closure of operational accounts under master custodial bank agreement. Add/remove online banking users and specify authorization limits (secondary). Check signer (in addition to the General Manager and Secretary of the District) Wire transfer approver (see Exhibit A for limits) ACH Filters/Blocks administration (secondary) Approve positive pay file exceptions (secondary) Authorize investment actions in line with BP 005 (see Exhibit A for limits) Authorize intra-banking transfers (secondary, see Exhibit A for limits) July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 104 of 123 Page 24 of 38 Attachment 3 Number: AP 1OX BANKING & CASH MANAGEMENT Page 5 of 11 d. Finance Manager (Deputy Treasurer) Central San's Finance Manager oversees the Finance Division, within the Administration Department, and shall also serve as Deputy Treasurer. The Deputy Treasurer, not being directly involved in any recording or reconciliation functions, shall serve as a secondary signatory with the bank. Key banking and cash management responsibilities of the Deputy Treasurer include the following: i. Oversee Finance Division, including assigning banking and cash management responsibilities and tasks to staff as deemed appropriate. ii. Primary point of contact with bank on day-to-day administrative matters. iii. Assist with the implementation and enforcemer]lof policies and administrative procedures. Recommend policy revisions iv. Serve as Treasurer in prolonged absence v. Add/remove online banking users and s� vi. Review and approve (but not prepar vii. Prepare and deliver quarterly inv viii. Wire transfer approver (see Ex ix. Edits ACH Filters/Blocks (primary . x. Approve positive pay file eptions A. Authorize investment acts e xii. Authorize intra-banking tra fers xiii. Delegate submiss uploa Cl appropriate Fin ision ff. 8. AUTHORIZATION / SIG 171", ed. easurer. f horization limits (primary). reco ations. rtfolios. its). 005 (see Exhibit A for limits). see Exhibit A for limits). lit and positive pay files to bank to There should be th a'atones for each bank account. An authorized signatory who is separate om Ce I or otherwise has a change in employment or job responsibilities, be remo d from the list immediately and the bank notified in writing. Central San staff s d mo ' r the list of signatories with the bank and at least annually verify and update as he bank's record of authorized signatories. No custodian or individual who reconciles accounts can be a signatory. 9. BANKING STRUCTURE AND CONTROLS a. Check Signing Checks must be signed manually by an authorized signatory or by an authorized representative of the signatory using the appropriate mechanism (e.g., magnetic ink, printers, check signatory plates). Such mechanisms must be always secured. Additional procedures and internal control requirements over payments (and the underlying invoices/claims) are covered separately in AP 108. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 105 of 123 Page 25 of 38 Attachment 3 Number: AP 1OX BANKING & CASH MANAGEMENT Page 6 of 11 b. Operational Accounts i. General Account This account is considered the master bank account and is designated for non- credit card deposits. As a control, disbursements should not be issued from this account, but from other operational clearing accounts described below funded by authorized bank transfers from the General Account. ii. Disbursement Clearing Account All disbursements are generated through except for petty cash, ACH, and wire tran initiated outside the system. To enhance s reporting of general disbursements, all 0 payments shall be made from a disb m shall be treated as a zero-balancin cour the General Account sufficient t et krA Payroll Clearing Account To enhance si disbursements, from a payroll balancing ac sufficient to checks, payro for addiiiLdo iv. the counting system via check, ayments which are generally and assist in the tracking and ,oll related checks and ACH ing account. This account cl transferred funds from an s thMracking and reporting of general Erroll c s and ACH payments shall be made acc This account shall be treated as a zero- bei transferred funds from the General Account o bligations (i.e., payroll direct deposits, payroll an r payroll -related transactions). Refer to AP 107 n how this account shall be monitored and funded. various accounts may be required by grantees or state may also be established if Central San is the fiscal agent for c. Physical Security of Checks and Printer All check stock, manual or blank, and the check printer device must be kept in a secure location with limited and restricted and controlled access to select personnel only. Refer to AP 108 for additional details on payment processing security. d. ACH Controls To achieve more efficient processing, cost savings as well provide a more secure transaction as compared to utilizing paper transfers (i.e. checks), agencies are strongly encouraged to receive and send funds electronically via ACH (Automated Clearing House) whenever possible. Because ACH transfers are conducted by the bank using batch processing, ACH transfers are far less expensive than wire transfers. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 106 of 123 Page 26 of 38 Attachment 3 Number: AP 10X BANKING & CASH MANAGEMENT Page 7 of 11 Central San staff shall employ common ACH bank controls, coupled with controls outlined in AP 108, to safely utilize this efficient payment methodology: i. ACH Filters —This control is ideal for routine, recurring bank debit transactions, allowing an institution to establish a maximum dollar amount on ACH transactions with specific approved organizations. ii. ACH Blocks - A debit block prevents ACH debits received for processing at a bank from posting to the designated bank account. Unauthorized debits are automatically returned to the originating (sending) company. Use of Positive Pay Positive Pay is a service whereby an institution p issued that day. If a check does not exactly matq to notify the account holder. Unless the acc item noted as not matching, the bank will n institute, whenever feasible and approp e, th, bank to protect itself from check fraud. 10. POOLED CASH 11 Consistent with common agencies, Central San's un efficient cash flow analysis, cash to individual funds is 2 with the pooled cash fund in gains, etc.) of the po based on their we' ed avi its bank with a file of all checks wed item, the bank is required SP cts the bank to pay the ecpaid. Central San shall ieservice provided by its for a(gWbnd medium-sized multi -fund public Ln h i ccounted for in a pooled cash fund to allow for an aximize investment returns. The allocation of a pooled cash account, which shall balance :ate. estment earnings (i.e., interest income, realized rtionately divided among the funds on a quarterly basis Bank reconciliations are an essential internal control tool and are necessary in detecting fraud and correcting accounting errors. Bank reconciliations ensure that all transactions that have been processed by a bank have been reviewed and checked, thus reducing the probability of errors in the data used to record book balances. Bank reconciliations also assist in ensuring that all payments and receipts have been applied to a bank account and have also been recorded in the accounting records. Any differences shall be identified, explained, and rectified. b. Segregation of Duties The reconciliation function requires segregation of duties. In that regard, the person who performs the bank reconciliations shall also not have access to the independent recording of transactions in the accounting system or the processing of cash July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 107 of 123 Page 27 of 38 Attachment 3 Number: AP 1OX BANKING & CASH MANAGEMENT Page 8 of 11 disbursements or receipts. Any differences identified between the accounting records and the bank statements shall be adjusted by a person other than the one performing the reconciliation. The bank reconciliation must be reviewed and approved by someone other than the preparer. Central San must maintain supporting documentation with all reconciliations in accordance with the record retention policies. c. Timeliness A comprehensive reconciliation of all bank accounts held by Central San must be performed, at a minimum, monthly, by the end of the practicable. Central San is encouraged to obtain bA d. Stale Checks Through the bank reconciliation pr requiring action. Assigned staff shall outstanding for six months that have shall either be cancelled or cancfft Stop Payments - delegated the r has been iss since desig d positive pay re Nbseauent month or sooner as statements electronically. may iderTtify outstanding checks pliers for all checks that have been ed as "stale". At that point, checks Ffaff'Wmber of the Finance Division shall be approval of all orders to stop a check after it is utilized, stop payments are not necessary Sff can remove the check in question from the ,IN check is a check written or partially written but then J by Central San prior to issuance. of "void" is used because mbered for control purposes and every check needs to be Voided checks may require some adjustments when iii. Cancelled Checks - A canceled check is a check that has cleared the depositor's bank account and has been marked as "canceled" by the bank. Both voided and canceled checks must be retained in accordance with Central San's record retention policy. 12. LIQUIDITY The Finance Division monitors Central San's cash position weekly to ensure sufficient liquidity to meet Central San's weekly payment obligations and other cash flow needs. The weekly cash flow analysis incorporates anticipated cash receipts and disbursements based on historical information, projected financial activity and value of investment returns. Additional cash requirements are identified and drawn down from the Central San's balance in the State of California Local Agency Investment Fund (LAIF) managed by the State of California Treasurer's Office or other fund(s) as approved by the Treasurer. Temporary idle cash July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 108 of 123 Page 28 of 38 Attachment 3 Number: AP IOX BANKING & CASH MANAGEMENT Page 9 of 11 identified in the cash flow analysis shall be invested in a manner consistent with Central San's Board Policy on Investments (BP 005). Central San's available cash balance is maintained at a flexible goal of at least $2 million in its primary cash account. The target cash balance may vary depending upon anticipated receipts and disbursements identified during the weekly cash flow analysis. 13. COLLATERALIZATION OF DEPOSITS An inherent risk to maintaining cash at a bank, as disclosed annually in Central San's Annual Comprehensive Financial Report, is "custodial credit risk." Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, the Central San will not be able to recover deposits or will not be able to rec collateral securities that are in possession of an outside party. This risk is mitigated at, of Central San's total bank balance, $250,000 is insured by the Federal Deposit e Corporation (FDIC). The remaining on deposit must be collateralized with s rities by the pledging financial institution's agent. Pursuant to California Gover nt Code se 53652, the depository (bank) is required to maintain a market value o east 0% of th pledged collateral. The collateral ization agreement between the banki Ne n and Central San shall adhere to state and federal law. 14. INVESTMENT ADVISOR The General Manager, with rov f the Board, may appoint an independent Investment Advisor registere th t Secu s and Exchange Commission pursuant to the Investment Advisers Act of 40 a I dopted thereunder, or a "Municipal Advisor" as defined by Section 975 0 - Wall Street Reform and Consumer Protection Act, amending S<:)ent" of Securities Exchange Act of 1934, and interpreted by the Securities and Exin its final rules adopted September 10, 2013, to advise the Unified Govstm nt activities. The Investment Advisor will be selected through a competder the Unified Government's Procurement Code. The terms and conditions oionship shall be set out in a contract. The duties and responsibilities of the In Advisor at a minimum shall include the following. a. Providing advice and analysis on the Unified Government's Investment Policy, portfolio management techniques, portfolio structures, and new investment securities and products; b. Assistance in developing or improving and implementing cash flow modeling; c. Providing advice on investment benchmarking and performance reporting; d. Evaluation of the capabilities and usage of software utilized in management of and accounting for the investments; e. Assisting in any investment related presentations to the Finance Committee and/or Board; and July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 109 of 123 Page 29 of 38 Attachment 3 Number: AP IOX BANKING & CASH MANAGEMENT Page 10 of 11 f. Providing analysis, advice, and assistance on other investment -related matters, including investment of bond proceeds. 15. EXCEPTIONS AND ALTERNATIVE PROCEDURE Any exception to this Administrative Procedure shall be approved by General Manager, documenting the justification for deviating from standard procedures. All exceptions will be deemed non -recurring and approved on a case -by -case basis. Repeated requests for exceptions should trigger management's review of policy for consideration of revisions. 16. PERIODIC REVIEW This Administrative Procedure shall be reviewed at least needed to ensure protocols and internal controls over pay reflect changes in Central San operations, personnel, J Attached Supporting Documents: Exhibit A — Banking & Cash Management Autho (Original retained by the Secretary of the Pry two years and revised as s are revised, as necessary, to actives. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 110 of 123 Attachment 3 Number: AP 10X BANKING & CASH MANAGEMENT Page 11 of 11 Exhibit A Banking & Cash Management Authorization Limits Employee Posi ' / Title Transaction Deput neral Finance Manager Type General Manager Secretary of the M g (Deputy Accounting District inistra Supervisor Tre surer)Treasurer) Bank Account No limit (backup to limit None (b p tao Finance No limit No limit Transfers Treasurer) (secondary) (primary) Checks' No limit No limit o limit None None (backup) (se ) (primary) Investment Purchases2 >$5 million o <_ $5 million <_ $1.5 million None Positive Pay No limit No limit No limit No limit Exceptions (backup) o (backup) (secondary) (primary) Wire Transfers3 No limit limit No limit No limit None (backup) ackup) (secondary) (primary) All manual checks must be signed by two authorized personnel, with the Treasurer being the primary signer. Checks generated through Central San's accounting system shall be signed via a properly secured signature plate and include both General Manager's and Treasurer's signatures. 2 Ordinarily, barring a short or long-term absence of an approving party, transactions must be approved by all involved parties. For instance, a $6 million investment purchase should be authorized by the Finance Manager, Treasurer, and General Manager. 3 Execution requires approval by two different authorized personnel. July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 111 of 123 Project Implementation Timeline (In -House Treasury) Attachment 4 PROJECT START November 1, 2021 November cember DeTASK January February March April May June July August September October November December January February Discovery Internal audit on payables function 11/01/21 03/25/22 Finalize reporting and present audit findings to Board 03/26/22 07/21/22 Internal process assessment and survey on best practices 07/11/22 08/12/22 Inform Board and obtain direction 08/23/22 09/15/22 Retain independent specialist to assist with project 01/01/23 04/10/23 Risk Assessment and Board Direction Fieldwork and information gathering 05/11/23 06/06/23 Engagement findings/reporting phase 06/06/23 06/13/23 Report review and finalization 06/13/23 07/06/23 Finance Committee presentation and project support 07/06/23 07/18/23 Board presentation and direction to proceed 07/19/23 08/17/23 Policy Development Draft Banking and Cash management BP and AP 05/11/23 06/06/23 Consultant review 06/06/23 06/13/23 Review other policies and procedures for potential changes 06/13/23 06/30/23 Update Additional policies as needed 08/01/23 09/30/23 Board/GM adoption of new or changes to policies/procedures 10/01/23 10/31/23 Depository Banking Services RFP Gather service need requirements 07/01/23 07/21/23 Complete RFP draft and release 07/21/23 07/28/23 Deadline for questions from banks 07/29/23 08/11/23 Responses to questions from District 08/12/23 08/18/23 Proposal submission deadline 08/19/23 08/25/23 Institution interviews and initial selection 08/26/23 09/08/23 Contract negotiations 09/09/23 09/22/23 Contract approval by Board 09/23/23 10/05/23 Commencement of services 10/05/23 10/05/23 Account structure, check stock, wire transfer, ACH setup 10/13/23 12/31/23 Role designation and banking portal setup dell. 10/06/23 10/31/23 Investment Management Services RFP Gather service need requirements 07/01/23 07/21/23 Complete RFP draft and release 07/21/23 07/28/23 Deadline for questions from investment advisors 07/29/23 08/11/23 Responses to questions from District 08/12/23 08/18/23 Proposal submission deadline 08/19/23 08/25/23 Interviews and initial selection 08/26/23 09/08/23 Contract negotiations 09/09/23 09/22/23 Contract approval by Board 09/23/23 10/05/23 Adopt revisions to investment policy 09/23/23 10/05/23 Commencement of services 10/05/23 10/05/23 Planning and strategy meeting with investment advisor 10/09/23 10/13/23 ERP Implementation and Configuration Changes Align internal resources (Finance and IT) 08/01/23 08/31/23 ERP implementation contracting 08/15/23 09/30/23 Discovery and planning 10/01/23 11/30/23 Scenario testing 12/01/23 02/28/23 Software functionality deployment 03/01/24 03/31/24 Post -go live support 04/01/24 04/30/24 Withdrawal From County Pool Review Contra Costa County Treasury withdrawal procedures 08/01/23 08/31/23 Appointment of Treasurer (Board policy and resolution) 10/01/23 10/31/23 Insurance provider updates for bonded employees/board 10/01/23 10/31/23 Notify Bond counsel 10/01/23 10/31/23 Draft formal letter to County Treasury notifying intent of withdrawal 10/01/23 10/31/23 Board report about current funds in county treasury 10/01/23 10/31/23 Adopt resolution (Board) for withdrawal of funds from county pool 10/01/23 10/31/23 Draft formal letter to county treasurer request to withdraw funds 11/01/23 11/30/23 County evaluation of withdrawal 01/01/24 01/31/24 County Treasury transfer of funds to designated bank 04/01/24 04/01/24 Page 1 of 2 July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 112 of 123 Project Implementation Timeline (In -House Treasury) Attachment 4 PROJECT START Discovery Internal audit on payables function Finalize reporting and present audit findings to Board November 1, 11/01/21 03/26/22 2021 03/25/22 07/21/22 March April May June July August September October November December January February March April Internal process assessment and survey on best practices 07/11/22 08/12/22 Inform Board and obtain direction 08/23/22 09/15/22 Retain independent specialist to assist with project 01/01/23 04/10/23 Risk Assessment and Board Direction Fieldwork and information gathering 05/11/23 06/06/23 Engagement findings/reporting phase 06/06/23 06/13/23 Report review and finalization 06/13/23 07/06/23 Finance Committee presentation and project support 07/06/23 07/18/23 Board presentation and direction to proceed 07/19/23 08/17/23 Policy Development Draft Banking and Cash management BP and AP 05/11/23 06/06/23 Consultant review 06/06/23 06/13/23 Review other policies and procedures for potential changes 06/13/23 06/30/23 Update Additional policies as needed 08/01/23 09/30/23 Board/GM adoption of new or changes to policies/procedures 10/01/23 10/31/23 Depository Banking Services RFP Gather service need requirements 07/01/23 07/21/23 Complete RFP draft and release 07/21/23 07/28/23 Deadline for questions from banks 07/29/23 08/11/23 Responses to questions from District 08/12/23 08/18/23 Proposal submission deadline 08/19/23 08/25/23 Institution interviews and initial selection 08/26/23 09/08/23 Contract negotiations 09/09/23 09/22/23 Contract approval by Board 09/23/23 10/05/23 Commencement of services 10/05/23 10/05/23 Account structure, check stock, wire transfer, ACH setup 10/13/23 12/31/23 Role designation and banking portal setup 10/06/23 10/31/23 Investment Management Services RFP Gather service need requirements 07/01/23 07/21/23 Complete RFP draft and release 07/21/23 07/28/23 Deadline for questions from investment advisors 07/29/23 08/11/23 Responses to questions from District 08/12/23 08/18/23 Proposal submission deadline 08/19/23 08/25/23 Interviews and initial selection 08/26/23 09/08/23 Contract negotiations 09/09/23 09/22/23 Contract approval by Board 09/23/23 10/05/23 Adopt revisions to investment policy 09/23/23 10/05/23 Commencement of services 10/05/23 10/05/23 Planning and strategy meeting with investment advisor 10/09/23 10/13/23 ERP Implementation and Configuration Changes Align internal resources (Finance and IT) 08/01/23 08/31/23 ERP implementation contracting 08/15/23 09/30/23 Discovery and planning 10/01/23 11/30/23 Scenario testing 12/01/23 02/28/23 Software functionality deployment 03/01/24 03/31/24 Post -go live support 04/01/24 04/30/24 Withdrawal From County Pool Review Contra Costa County Treasury withdrawal procedures 08/01/23 08/31/23 Appointment of Treasurer (Board policy and resolution) 10/01/23 10/31/23 Insurance provider updates for bonded employees/board 10/01/23 10/31/23 Notify Bond counsel 10/01/23 10/31/23 Draft formal letter to County Treasury notifying intent of withdrawal 10/01/23 10/31/23 Board report about current funds in county treasury 10/01/23 10/31/23 Adopt resolution (Board) for withdrawal of funds from county pool 10/01/23 10/31/23 Draft formal letter to county treasurer request to withdraw funds 11/01/23 11/30/23 County evaluation of withdrawal 01/01/24 01/31/24 County Treasury transfer of funds to designated bank 04/01/24 04/01/24 Page 2 of 2 July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 113 of 123 Page 33 of 38 Attachment 5 1 Table of Contents 1. Introductions & Background 2. Risk Assessment 3. Banking & Cash Management Policies/Procedures 4. Implementation Timeline 5. Alternatives/Considerations 6. Recommended Board Action 7. Questions & Discussion 2 July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 114 of 123 1 Page 34 of 38 Attachment 5 Introductions & Background July 21, 2022 — Internal audit report identifying treasury structure inefficiencies presented to Board September 15, 2022 - Board directed staff to explore in-house treasury arrangement and return with recommendation and action plan May 23, 2023 — Update to Board on project progress and introducing project consultants 3 Introductions Background James Ramsey, CPA, CFE Partner 4 & EideBailly. {2I5. fs RL::146L' hl?'r'I!iCYlti Over 17 years working with governmental agencies throughout California providing accounting, assurance, and/or advisory services Provides unique perspective to clients, having worked in finance department of California city conducting a wide array of governmental accounting and financial functions Experience conducting audits of local government agencies, including Single Audits of federal awards CENTRALSAN July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 115 of 123 2 Page 35 of 38 Attachment 5 Introductions & EideBaitty Background Nick Rosas, CPA Senior Manager r • Over 11 years of experience in various aspects of auditing, compliance and financial regulatory reporting for California governmental agencies Served as Accounting Manager for medium-sized full -service city in Northern California Helped lead the implementation of Oracle Cloud Fusion, including its Cash Management module Risk Assessment Z'l_R) CENTRALSAN Understand and document status quo versus desired "to be" structure, policies and procedures Required changes, associated risks and steps to address risk Overall conclusion on Central San's ability to administer an in-house treasury function July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 116 of 123 3 Page 36 of 38 Attachment 5 Policy Development • In-house treasury goals • Process and internal control • Internal controls details Definitions for key treasury • Treasurer appointment , terms • Custodial services agreement • Staff roles and responsibilities + ' approval • Reference to internal •Specific treasury solutions administrative procedures 7 Implementation Timeline 2. Board 3. Policy Direction Development 4. Banking 5. Investment Services RFP Services RFP Target go -live date for in-house banking services is April 1, 2024 E✓.� July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 117 of 123 4 Page 37 of 38 Attachment 5 Alternatives/Considerations • No change management risk or incremental cost increase • Inefficiencies and underutilization of ERP persists 0 • Appoint a Board member or other employee • Less common arrangement, more Board involvement in administrative matters • Conduct in house or use a non -advisory broker • Higher risk of non-compliance and increase to staff workload Recommended Board Action Review risk assessment, draft policies and procedures, and project implementation plan related to the proposed transition to an in-house treasury structure and receive a staff presentation on the topic. Direct staff to proceed with designing and implementing an in-house treasury function for Central San consistent with the draft banking and cash management policy and procedures and project implementation plan presented by staff. 10 r mom July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 118 of 123 5 Page 38 of 38 Attachment 5 11 July 18, 2023 Regular FINANCE Committee Meeting Agenda Packet - Page 119 of 123