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HomeMy WebLinkAbout08. Review risk assessment, draft policies and procedures and a project implementation plan related to the proposed transition to an in-house treasury structure and provide direction to staff on the transitionDCENTRALSAN MEETING DATE: AUGUST 17, 2023 BOARD OF DIRECTORS POSITION PAPER Page 1 of 41 Item 8. SUBJECT: REVIEW RISK ASSESSMENT, DRAFT POLICIES AND PROCEDURES AND A PROJECT IMPLEMENTATION PLAN RELATED TO THE PROPOSED TRANSITION TO AN IN-HOUSE TREASURY STRUCTURE AND PROVIDE DIRECTION TO STAFF ON THE TRANSITION SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION -FINANCE REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION Roger S. Bailey General Manager ISSUE 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 August 17, 2023 Regular Board Meeting Agenda Packet - Page 50 of 115 Page 2 of 41 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 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 August 17, 2023 Regular Board Meeting Agenda Packet - Page 51 of 115 Page 3 of 41 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 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 August 17, 2023 Regular Board Meeting Agenda Packet - Page 52 of 115 Page 4 of 41 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. 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, August 17, 2023 Regular Board Meeting Agenda Packet - Page 53 of 115 Page 5 of 41 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. 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. August 17, 2023 Regular Board Meeting Agenda Packet - Page 54 of 115 Page 6 of 41 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. 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. Following a staff presentation, a discussion was held and several questions were posed to staff and the third party project consultant, Eide Bailly. The Finance Committee was satisfied with the explanations of staff and the consultant, requesting the presentation be lengthened slightly to expand on the risk assessment process and findings. Finance Committee members then closed the matter with their unanimous recommendation for Board approval. 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. GOAL THREE: Workforce Diversity and Development Strategy 3 - Retain skilled workers by investing in resources and opportunities for all employees to grow and thrive GOAL FOUR: Governance and Fiscal Responsibility Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, Strategy 3 - Maintain financial stability and sustainability GOAL FIVE: Safety and Security Strategy 1 - Reduce and eliminate risks of injury or illness GOAL SEVEN: Innovation and Agility Strategy 3 - Be adaptable, resilient, and responsive ATTACHMENTS: August 17, 2023 Regular Board Meeting Agenda Packet - Page 55 of 115 Page 7 of 41 1. Treasury Implementation Risk Assessment 2. Banking & Cash Management Board Policy (Draft) 3. Banking & Cash Management Administrative Procedure (Draft) 4. Project Implementation Timeline (GANTT Chart) 5. Presentation August 17, 2023 Regular Board Meeting Agenda Packet - Page 56 of 115 Page 8 of 41 TREASURY IMPLEMENTATION RISK ASSESSMENT Consulting Engagement Report CENTRAL CONTRA COSTA SANITARY DISTRICT (CENTRAL SAN) Submitted By Eide Bailly LLP August 17, 2023 Regular Board Meeting Agenda Packet - Page 57 of 115 CENTRAL SAN —TREASURY IMPLEMENTATION TABLE OF CONTENTS ExecutiveSummary.......................................................................................................3 Background...................................................................................................................3 Depository Banking and Investment Services...............................................................4 BankReconciliations......................................................................................................5 Disbursements..............................................................................................................8 CashReceipts................................................................................................................10 Condusion.....................................................................................................................11 August 17, 2023 Regular Board Meeting Agenda Packet - Page 58 of 115 FA Page 9 of 41 IRS no Page 10 of 41 CENTRAL SAN - TREASURY IMPLEMENTATION Executive Summary Eide Bailly LLP ("We", or "Our") worked with the Central Contra Costa Sanitary District (Central San) Finance Department to provide an evaluation of the feasibility and potential risks of managing Central San's treasury function in-house in lieu of delegating the responsibility to the County of Contra Costa Treasurer's Office (County Treasurer). As part of our work, we documented and developed a plan to suggest an ideal internal control structure to address identified risks that may be associated with this responsibility. Background In 2022, Central San staff completed an assessment of the treasury function within its organization to evaluate the adequacy of the control environment after the implementation of a new Enterprise Resource Planning (ERP) system to ensure it was appropriate, considering the operational needs, size, and complexity of the organization. The results of this assessment were presented to Central San's Board of Directors (Board) on August 23, 2022. The primary finding of the assessment was the identification of operational inefficiencies associated with Central San's treasury relationship with the County Treasurer. This presentation included a recommendation to explore banking and investment management alternatives, perform an internal control risk assessment of the recommended future control environment, draft banking and treasury policies, and create an implementation plan. To assist with risk assessment, internal control design, policy development, and implementation, Central San engaged Eide Bailly. In order to develop a plan for assessing the potential risks and make recommendations to address those risks, Eide Bailly gained an understanding of the current structure by reviewing policies and procedures, sample transactions, and reconciliations. Based on the information obtained from these documents, Eide Bailly created a plan for performing process observations, requested additional documents, and developed interview questions in preparation for meeting with Central San staff. On May 11, 2023, Eide Bailly met with Central San staff, conducted interviews of personnel involved with the treasury function, and observed the accounts payable, payroll, cash receipts, and bank reconciliation processes as they were performed. The information gained from these procedures were used to create a comparative analysis of the current control environment and a proposed future one related to banking and treasury that identified potential risks associated with the identified differences and the necessary steps to mitigate the potential risks associated with those differences 3 August 17, 2023 Regular Board Meeting Agenda Packet - Page 59 of 115 CENTRAL SAN - TREASURY IMPLEMENTATION Depository Banking and Investment Services ON Central San's cash and investments are held within Contra Costa County's (County Treasurer) pooled investment fund. The County's Depository Banking services are provided by Wells Fargo. Page 11 of 41 Central San will maintain its own depository banking relationship and will deposit its cash and investments without interaction with, or oversight from, the County Treasurer. A majority of Central San's investments are managed by Central San will continue to purchase investments the County Treasurer in a separate account, with specific investments purchased and held by the County Treasurer based on the investment guidelines in BP005 and will at the direction of Central San through the use of : leverage the expertise of an investment advisor to investment request forms and based on the investment ! ensure investments follow adopted policies. The guidelines detailed in Board Policy 005 — Statement of custody of these investments will be with Central San's Investment Policy (BP005). bank of choice. Liquid funds are held in the County Treasurer's pooled ! Central San will continue to use its existing LAIF account for immediate use. Remaining funds are invested ! account as an additional route for investing and will in LAIF. maintain adequate liquid funds. The County Treasurer and Central San currently share the responsibility for tracking cash balances of Central San, monitoring investment maturities and ratings, and ensuring Central San has adequate funds to pay for nses as they become due. Central San will have sole responsibility for tracking cash and investment balances and for ensuring that it has sufficient cash to pay for expenses as they become due. The County Treasurer charges a small fee for this service Central San will be solely responsible for all costs which is charged to Central San during the allocation of ! associated with depository banking and investment interest on funds invested in LAIF. advisory services. BANKING RELATIONSHIP Central San will need to procure the services of a banking institution prior to its separation from the County Treasurer's investment pool. Central San will need to ensure that the institution selected can meet its needs and provide services at a cost that is the same or less than that charged by the County Treasurer. The appropriate banking institution may need to provide some of the following services in order to meet the needs of the 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 data and Central San assets • End-to-end merchant services • Check payments with payee positive pay • Wire transfer, securities transactions, transfers, and ACH transaction capability 4 August 17, 2023 Regular Board Meeting Agenda Packet - Page 60 of 115 Page 12 of 41 CENTRAL SAN - TREASURY IMPLEMENTATION • A dedicated support team to respond to Central San needs and provide troubleshooting for issues on a timely basis Central San should issue a request for proposals for the banking services listed above to ensure that a qualified banking institution is selected at competitive rates. Central San should consider conducting interviews of qualified institutions during the process to select the institution which best meets its needs and can provide services at a reasonable cost to limit the fiscal impact of the new banking relationship on Central San. INVESTMENTS With the increased cost associated with procuring stand-alone banking and investment advisory services, Central San faces the risk of losing investment income and incurring significantly more expenses for services received. To address this risk, Central San should review its investment policy to ensure that it creates appropriate procedures for the safety, liquidity, and yield of its investment pool. This includes an evaluation of its targeted average duration, liquidity, and investment mix. Any updates to these policies should be vetted by a qualified investment advisor and approved by its Treasurer and Board. Central San should procure the services of an investment advisor/manager to handle the selection and purchase of investments in accordance with policy and to maximize earnings on portfolio investments while maintaining safety to protect principal while providing liquidity to meet Central San's ongoing cash flow needs. To accomplish this, Central San should issue a request for proposals for investment advisory and management services to ensure a qualified investment advisor is selected. Central San should consider conducting interviews of qualified advisors to select the institution which best meets its needs and can provide services at a reasonable cost to limit the fiscal impact of the new investment advisor relationship on Central San. POLICIES & PROCEDURES As a result of Central San's proposed withdrawal from the County Treasurer's investment pool and these new processes, Central San will lose a layer of oversight and review currently provided through its relationship with the County. To address this change in the control environment, Central San should review all existing policies and procedures to ensure that an appropriate control environment is in place to prevent error or fraud, provide for proper review and segregation of duties, and maximize efficiency. Central San should also adopt a new treasury board policy and treasury administrative procedure which will name a treasurer, define roles and responsibilities, and outline procedures to be performed related to banking and investing. Central San should create and implement a training program to ensure that all personnel involved with these processes can perform the duties necessary to continue operations without disruption. Bank Reconciliations 5 August 17, 2023 Regular Board Meeting Agenda Packet - Page 61 of 115 CENTRAL SAN - TREASURY IMPLEMENTATION W>- Central » Central San performs a weekly cash review as well as a monthly bank reconciliation. The purpose of the weekly cash review is to ensure that sufficient funds are available to make upcoming payments, as the County Treasurer will not allow Central San to process payments if its fund's cash balance is insufficient, despite there being an overall positive cash balance pool. Central San staff pulls cash balances from Oracle and on both the cash balances and warrants payable balances from Workday, the County Treasurer's ERP system, to come up with an available cash balance. This is then compared to weekly check run totals to ensure there is sufficient cash. This process will initiate a transfer from LAIF if it is determined that there is not enough cash to cover the week's payments. Bank reconciliations are currently done as a three-way reconciliation. The amount per general ledger includes cash balances from both Oracle and Workday and are compared to the bank balance. Any discrepancies are reduced by deposits in transit and outstanding checks and the remaining balance must be determined through the identification of missing transactions and/or errant entries to arrive at a reconciled end of month balance where the general ledger and bank balances agree. Differences are posted to the general ledger through journal entries. Page 13 of 41 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 depository banker. 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 a majority of the transaction matching process, allowing Central San to focus on timing differences between its bank balance and general ledger balance. The updated bank reconciliation process will reconcile the bank to the general ledger 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's new banking relationship will 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 Treasurer's ledger and the control environment it provides, Central San will 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 0 August 17, 2023 Regular Board Meeting Agenda Packet - Page 62 of 115 Page 14 of 41 CENTRAL SAN - TREASURY IMPLEMENTATION 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. 7 August 17, 2023 Regular Board Meeting Agenda Packet - Page 63 of 115 CENTRAL SAN - TREASURY IMPLEMENTATION Disbursements Accounting staff are responsible for payment processing for Central San. Central San's payroll staff, which is part of the human resources department, processes payroll for all employees. Central San has a two week pay period, beginning on Sundays and ending on Saturdays. The following Monday, the timesheet validation process is started. Accounts payable transactions are entered and processed by accounting 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. The Finance Manager reviews and signs a paper printout of all accounts payable transactions. The Finance Manager also reviews transaction support in more detail for all transactions above $5,000. Central San relies on the County Treasurer 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 Treasurer for signature and then returned to Central San's office for delivery. Page 15 of 41 Accounting staff will maintain responsibility for all payment processing for Central San. The payroll process will remain unchanged from its current structure. 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 all of its payments. Central San will adopt a positive pay procedure to ensure that payments are not made in error and that payee or payment amounts are not fraudulent. This will occur through a daily process by which payment exceptions identified by the bank as payments are processed and either validated or rejected by Central San staff. Central San will no longer require paper review of its accounts payable transactions. Electronic workflow in Oracle, check printing controls, proper segregation of duties, and controls put in place by Central San's bank will provide an environment which should prevent error or fraud. Central San will not rely on the County Treasurer for check processing. A designated treasurer or designee will be responsible for signatures. Central San may choose to manually sign its checks or adopt a magnetic ink character recognition (MICR) printing process which includes micro -text signature printing. With the inception of a new stand-alone baking relationship, Central San will have sole responsibility for payment processing, liquidity, and security of its resources. The removal of the County Treasurer's oversight from payment processing will allow Central San to significantly improve the efficiency of its wire transfer, ACH, and physical check disbursements processes. Central San's bi-weekly payroll funding policy and accounts payable policy can be modified to allow for more immediate responses to cash needs through account transfers which will be managed solely by Central San. M August 17, 2023 Regular Board Meeting Agenda Packet - Page 64 of 115 Page 16 of 41 CENTRAL SAN - TREASURY IMPLEMENTATION Central San must 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 prevent Central San from having to sell investments at a loss to cover its obligations. Central San must adopt a policy for monitoring positive pay exceptions and assign qualified individuals to monitor this process. These individuals must understand how to differentiate between exceptions which should be approved for payment and those which arise from error or fraud and should be rejected. Banks have a morning cut-off every business day for processing positive pay exceptions. To ensure someone is always available to monitor these exceptions, Central San should consider the impacts of its employees' schedules and each employees skills, knowledge, and experience when assigning this duty. Central San should assign, at a minimum, one (1) primary and two (2) back-ups to this task to ensure that there is sufficient coverage for expected and unexpected days off. Central San should ensure these individuals 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. Oversight for these new processes and the adoption of appropriate policies and procedures should be the responsibility of Central San management and of the Treasurer. IN August 17, 2023 Regular Board Meeting Agenda Packet - Page 65 of 115 CENTRAL SAN - TREASURY IMPLEMENTATION Cash Receipts 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 Treasurer. All checks over $1,000,000 must be driven to the bank to be deposited in-person. This threshold is set by the County Treasurer and is for individual transactions, not in Central San staff must pull daily bank statements from Wells Fargo to record ACH receipts and credit card fees. These transactions must be entered into both Oracle and the County Treasurer's ERP system. Central San staff have the ability to process transactions in Oracle but must use an electronic deposit permit, which is an online form submitted to the County Treasurer to request the recording of all receivable transactions that would not otherwise go through the general ledger. Page 17 of 41 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 staff will continue to use daily bank statements to record ACH receipts 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 Treasurer through the use of electronic deposit permits will cease as the need for the County Treasurer to record cash balances for Central San will no longer be required. Cash is collected in small amounts by Central San. This cash is accumulated and stored in a safe until $1,000 is Cash collections will continue as they do currently. accumulated. This cash is then driven to the bank for deposit Central San uses PayPal to collect payments When feasible, Central San will implement the cash electronically. management module in Oracle to capture online payments for invoices generated from various sources. A majority of the cash receipt processes will remain unchanged and most process updates that are required will involve only the removal of interaction with the County Treasurer from the process, creating operational efficiencies. The implementation of the cash management module in Oracle will 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. Additionally, Central San should adopt best practices and change its policies and procedures to the extent possible throughout this process. The implementation of the cash management module in Oracle will also have budget implications due to the cost of implementation and the ongoing cost of subscription. Central San should analyze the cost of ME August 17, 2023 Regular Board Meeting Agenda Packet - Page 66 of 115 Page 18 of 41 CENTRAL SAN -TREASURY IMPLEMENTATION implementing the additional module when preparing future budgets, should analyze adopted budgets, and process budget adjustments when necessary. The elimination of PayPal as Central San's preferred electronic payment processor will require Central San to communicate with its customers to ensure they understand the new payment procedures to prevent payment processing errors. 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. Conclusion Based on our review of internal policies, interview of key personnel, documentation of the aforementioned processes, and comparison of Central San's practices to best practices, we noted that Central San can realize operational efficiencies in its banking and reconciliation processing and has the necessary skills, knowledge, and experience to maintain proper segregation of duties to protect Central San's liquid assets. August 17, 2023 Regular Board Meeting Agenda Packet - Page 67 of 115 Page 19 of 41 W THE FOUNDATION OF SU((ESS Caring for our external and internal clients with a passion to go the extra mile. Respecting our peers and their individual contributions. Conducting ourselves with the highest level of integrity at all times. Trusting and supporting one another. Being accountable for the overall success of the Firm, not just individual or office success. Stretching ourselves to be innovative and creative, while managing the related risks. Recognizing the importance of maintaining a balance between work and home life. Promoting positive working relationships. And, most of all, enjoying our jobs ... and having fun! EideBailly What inspires you, inspires us. eidehailly.com August 17, 2023 Regular Board Meeting Agenda Packet - Page 68 of 115 Number: BP 049 Attachment 2 Page 20 of 41 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 Frng 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] August 17, 2023 Regular Board Meeting Agenda Packet - Page 69 of 115 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 Page 21 of 41 Attachment 3 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) August 17, 2023 Regular Board Meeting Agenda Packet - Page 70 of 115 Page 22 of 41 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. August 17, 2023 Regular Board Meeting Agenda Packet - Page 71 of 115 Number: AP 1OX BANKING & CASH MANAGEMENT Page 3 of 11 R 7 Page 23 of 41 Attachment 3 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 manag a ssMshould be developed such that no individual is able to complete a transactio r s o finish. This entails segregating the core transactional duties of r epi i.e., ability to record the transaction in the accounting system), custody h g ac ss to blank check stock or ability to initiate an ACH credit or wire transf and a n (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 eco i enting an internal control (i.e., number of employees, staff time, techn etc.) sh Id n t exceed its benefit. Individuals with thea 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: August 17, 2023 Regular Board Meeting Agenda Packet - Page 72 of 115 Page 24 of 41 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 lin, Authorize intra -banking tram`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 Ovcomp 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) August 17, 2023 Regular Board Meeting Agenda Packet - Page 73 of 115 Page 25 of 41 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). Jit 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. August 17, 2023 Regular Board Meeting Agenda Packet - Page 74 of 115 Page 26 of 41 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 enhances 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. August 17, 2023 Regular Board Meeting Agenda Packet - Page 75 of 115 Page 27 of 41 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 apprope, 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 fora(gWbnd medium-sized multi -fund public Lsh i ccounted for in a pooled cash fund to allow for n, 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 August 17, 2023 Regular Board Meeting Agenda Packet - Page 76 of 115 Page 28 of 41 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 August 17, 2023 Regular Board Meeting Agenda Packet - Page 77 of 115 Page 29 of 41 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 collateralization agreement between the bankiNe 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 Se tiof 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 August 17, 2023 Regular Board Meeting Agenda Packet - Page 78 of 115 Page 30 of 41 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 August 17, 2023 Regular Board Meeting Agenda Packet - Page 79 of 115 Pry two years and revised as s are revised, as necessary, to actives. Number: AP 10X Attachment 3 BANKING & CASH MANAGEMENT Page 11 of 11 Exhibit A Banking & Cash Management Authorization Limits 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. August 17, 2023 Regular Board Meeting Agenda Packet - Page 80 of 115 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 None limit (b p taogFii 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 limitNo 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. August 17, 2023 Regular Board Meeting Agenda Packet - Page 80 of 115 Project Implementation Timeline (In -House Treasury) Project 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 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 August 17, 2023 Regular Board Meeting Agenda Packet - Page 81 of 115 Attachment 4 Project Implementation Timeline (In -House Treasury) Project Discovery Internal audit on payables function Finalize reporting and present audit findings to Board 11/01/21 03/26/22 03/25/22 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 2 of 2 August 17, 2023 Regular Board Meeting Agenda Packet - Page 82 of 115 Attachment 4 Page 34 of 41 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 August 17, 2023 Regular Board Meeting Agenda Packet - Page 83 of 115 1 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 July 18, 2023— Finance Committee reviewed risk assessment, project implementation plan, draft policies, and staff recommendation. Introductions & Background James Ramsey, CPA, CFE Partner Page 35 of 41 Attachment 5 EideBailly. 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 ftCENTRAL SAN August 17, 2023 Regular Board Meeting Agenda Packet - Page 84 of 115 2 Introductions & EideBaitty Background Nick Rosas, CPA Senior Manager r Page 36 of 41 Attachment 5 • 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 Divided Central San's risk assessment into four business cycles/processes August 17, 2023 Regular Board Meeting Agenda Packet - Page 85 of 115 3 • Held with financial Financial institution institutions in Central credit risk San's name nterest rate risk • Central San to utilize Liquidity risk an investment advisor to assist in maximizing Price risks investments • Weekly casF No new or transitional requirements analysis risks identified — no change • Utilization of cash management module in ERP Two-way reconciliation (Central San ERP balance to bank balance) Collateralization agreement with financial institution Utilize investment advisor to assist in planning maturity an minimizing pricing risks aintain a portion vestments in LAIF ueveiop erTiciencies in bank reconciliations b), eliminating a three (3) way reconciliation • Central San prints and Unauthorized check ositive pay is signs its own checks are paid by the bank implemented utilizing • Central San utilizes Bank balances may ppropriate personne electronic workflow in not be sufficient to Weekly cash needs ERP for approvals cover overages analysis is conducted • Central San utilizes • Eliminate recording of aintain a portion of positive pay investments with LAIF • Remote deposit of No new or transitional Cash management processing check risks identified module utilized to payments remotely — reate efficiencies by no change no longer requiring • Enter in ACH h double transactions into the re econciliation between ERP entral San's system and the County's • Eliminate recording of ystem electronic deposit permits by County educes the risk • Implement cash rrors management module Risk Assessment Risk Assessment Conclusion With an in-house banking arrangement, Central San could improve efficiency and gain additional control Central San can adjust its internal controls to address risks if transitioning to an in-house treasury function Capability assessment includes both operational and human capital components Policy Development • In-house treasury goals • Internal controls • Treasurer appointment • Custodial services agreement approval • Reference to internal administrative procedures 12 Page 39 of 41 Attachment 5 • Process and internal control "wr details • Definitions for key treasury terms • Staff roles and responsibilities • Specific treasury solutions CENTRALS) mom August 17, 2023 Regular Board Meeting Agenda Packet - Page 88 of 115 6 1. Project 2. Board 3. Policy Discovery Direction Development ✓ Completed: Sep -2022 In progress: Aug -2023 In progress: Aug -2023 4. Banking 5. Investment 6. ERP System Services RFP Services RFP Changes Completion: Sep -2023 Completion: Sep -2023 Completion: Marrv2024 7.Withdrawal • • ' • 13 Alternatives/Considerations 71 e4' ptwp w � t- -opinvestment ..Treasurer Management • No change • Appoint a Board • Conduct in house ` management risk member or other or use a non- y or incremental employee advisory broker cost increase • Less common • Higher risk of _ • Inefficiencies and arrangement, non-compliance underutilization more Board and increase to of ERP persists involvement in staff workload administrative matters 14 August 17, 2023 Regular Board Meeting Agenda Packet - Page 89 of 115 Page 40 of 41 Attachment 5 S �.1 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.► 15 Questions, Feedback & Discussion 16 Page 41 of 41 Attachment 5 August 17, 2023 Regular Board Meeting Agenda Packet - Page 90 of 115 8