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HomeMy WebLinkAbout03.d. Receive Fiscal Year (FY) 2022-23 Pre-Audit Year-end Financial Statement Summary Report and Consider Alternative for Handling Various Pre-Audit Budget VariancePage 1 of 15 Item 3.d. MEETING DATE: SUBJECT SUBMITTED BY: BOARD OF DIRECTORS POSITION PAPER OCTOBER 27, 2023 REVIEW DRAFT POSITION PAPER TO RECEIVE FISCAL YEAR (FY) 2022- 23 PRE -AUDIT YEAR-END FINANCIAL STATEMENT SUMMARY REPORT AND CONSIDER ALTERNATIVES FOR HANDLING VARIOUS PRE -AUDIT BUDGET VARIANCES INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION -FINANCE REVIEWED BY: PHILIP LEIBER, DEPUTYGENERAL MANAGER -ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER ISSUE The Board of Directors (Board) approves the Operations and Maintenance (O&M), Capital Improvement (CI B), Self -Insurance, and Debt Service budgets on an annual basis. At fiscal year-end, staff reviews and compares the final revenues and expenditures, based on the pre -audit financial reports and provides an update to the Board on the budget -versus -actual results. If there is a favorable budget variance, staff typically provides alternatives for the Board's consideration for allocating the unspent funds. BACKGROUND Consistent with long-standing practice and pursuant to Central San's Board Policy BP 048 - Budget, following the close of the fiscal year, a report of year-end results shall be provided to the Board for disposition of overall favorable or unfavorable budget variances, along with the impacts on reserve requirements as specified in BP 015 - Fiscal Reserves. This annual report shall also specify the amount of Capital I mprovement Budget (CI B) carryforward appropriations. This Position Paper fulfills this annual reporting requirement, and attached hereto is a District -wide summary of FY 2022-23 budget -to -actual results (Attachment 1). This summary includes the revenue and expense budgetary variances for each major sub -fund of Central San, which includes the O&M, Sewer Construction, Self -I nsurance, and Debt Service funds. A detailed analysis as well as graphical illustrations of FY 2022-23 O&M fund budget -to - actual revenue and expense variances is also provided (Attachment 2). Relevant Principles I n terms of proposing an optimal recommendation, the following principles are relevant for consideration: 1. Maintain adequate funding availability to ensure reliable operations (Fiscal Reserves Policy, BP 017); 2. Keep long-term Sewer Service Charge (SSC) rates as low as possible (Budget Policy, BP 048); October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 106 of 135 Page 2 of 15 3. Provide SSC rate stability by minimizing significant unplanned fluctuations year to year (Fiscal Reserves Policy, BP 017); 4. Keep borrowing within specified policy -level constraints (Debt Management and Continuing Disclosure Policy, BP 029); 5. Maintain progress in reducing employee -related pension and Other Post -Employment Benefits (OPEB) liabilities as specified in relevant Board policies (Pension Funding policy, BP 041; OPEB Funding policy, BP 042) 6. Maintain consistent treatment for funds that have already been allocated in the current fiscal year's budget and associated reserve calculations (Board direction per current adopted budget) FY 2022-23 Budget Variance Actions: Keeping the above principles in mind, staff recommends the following actions as viable, balanced alternatives, given the pre -audit budget variances for FY 2022-23: • O&M Fund Favorable $5.8 Million Budget Variance - Contribute to OPEB and Pension Prefunding Trusts ($3.2M) and Self -Insurance Fund ($0.5M) (Principles 1, 5 and 6) Consistent with the Fiscal Reserves policy (BP 017), the FY 2023-24 budget adopted by the Board was structured to close the prior fiscal year with targeted minimum working capital reserves of $40.1 million. To achieve this working capital reserves target, it was necessary for staff to project year-end FY 2022-23 O&M fund revenue and expenditure results prior to the close of the fiscal year. This projected year-end result ultimately determined how much of FY 2023-24 total sewer service charges (Central San's primary operating revenue source) is allocated between the O&M, Sewer Construction, and Self -I nsurance funds. Since the Board -approved budget already projected the O&M fund would close with a positive variance of approximately $2.1 million, staff recommends that this favorable O&M budgetary variance remain in O&M working capital reserves consistent with the FY 2023-24 adopted budget. Doing otherwise, without also changing the sewer service charge allocation percentages already approved by the Board for FY 2023-24 budget would result in non- compliance with the reserve requirements. As separately reported to the Board, a budget amendment is being proposed for the Self -I nsurance Fund budget to cover legal fees associated with a litigated matter for which insufficient appropriations are expected to be available in FY 2023-24. The recommended funding source proposed for this budget amendment is an immediate transfer from the O&M fund of $0.5 million given the favorable O&M variance reported in the prior year. This is recommended as the preferred funding source rather than next year's SSC allocation as it allows the Self -I nsurance Fund to retain its minimum policy -level reserve requirement of $9 million throughout the remainder of the current year (FY 2023-24), barring any other unanticipated cost pressures. This leaves a residual amount of FY 2022-23 O&M budgetary variance of $3.2 million for further consideration. While this favorable variance could be used for various purposes, given the adverse inflationary and financial market circumstances observed over the past year, it is the recommendation of staff to first consider the funded status of post -retirement benefit plans when considering responsible dispositions of budgetary variances. Regarding Central San's OPEB plan, the most recent biennial actuarial report dated July 1, 2022 (issued April 11, 2023) estimated the plan would close with a funded position of 93.8% on a market valuation of assets (MVA) basis as of July 1, 2023, which equates to an estimated dollar value of $79.9 million. Although the OPEB trust reported a market value of $81.3 million as of June 30, 2023, poor investment performance since then has resulted in the trust balance receding slightly to a market value of $78.5 million as of September 30, 2023. This results in an OPEB trust funding gap of $1.4 million compared to the latest actuarial estimates as of July 1, 2023. Like the OPEB trust, the pension plan has experienced losses over the past year as well. Contra Costa County Employees' Retirement Association's (CCCERA) latest actuarial report dated December 31, 2022 (issued July 27, 2023) reported a decrease in Central October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 107 of 135 Page 3 of 15 San's funded position by approximately -2.2% to a new funded position of 99.01 % equating to an unfunded actuarially accrued liability (UAAL) of approximately $4.9 million on an actuarial value of assets (AVA) basis. Given these two circumstances, staff recommends splitting the remaining O&M variance of $3.2 million between the OPEB and Pension Prefunding trusts at $1.6 million each. Sewer Construction Fund Favorable $12.0 Million Budget Variance - Retain in Capital Reserves (Principles 4 and 6) As highlighted in Attachment 1, the Sewer Construction Fund is reporting a favorable FY 2022-23 revenue variance of approximately $12.0 million attributable to various capital revenue sources coming in over budget (i.e., capacity fees, property taxes, investment income, and annual capital cost sharing from the City of Concord). It is recommended that this positive budgetary variance be retained in the Sewer Construction Fund as bolstering reserves will help reduce future borrowing needs currently anticipated in the long-term financial model. The adopted FY 2023-24 budget anticipated the Sewer Construction Fund would close FY 2022-23 with working capital reserves well above the minimum policy level, which is necessary in future years to reduce borrowing and provide stability to SSC rates. The total amount of budgetary carryforward from capital project spending below levels anticipated in the FY 2022-23 budget and prior years is $78.8 million, which is net of $18.5 million directed to Cl B reserves per the FY 2023-24 adopted budget as well as $1.6 million in savings from projects completed during FY 2022-23. Pursuant to BP 048, this net carryforward amount shall roll into the current year increasing authorized capital spending from the $71.2 million authorized in the adopted FY 2023-24 CI B to an amended FY 2023-24 CI B of $150.0 million. Staff will be conducting a detailed analysis of anticipated capital program expenditures in connection with the budgeting process for next year (FY 2024-25) in the upcoming annual Board financial workshop to ensure a realistic spending plan is adopted. • Self -Insurance Fund Favorable $0.4 Million Budget Variance - In line with Year -End Projections of FY 2023-24 Budget and No Immediate Action Needed (Principles 1 and 6) Each year, the budget incorporates an allocation of SSC to the Self -Insurance Fund to cover operational expenses (i.e., insurance premiums, uninsured losses, legal fees, etc.) as well as meet the minimum reserve requirements stipulated by Central San's Fiscal Reserves Policy. Actual year- end results for the Self -Insurance Fund are largely in line with the adopted FY 2023-24 budget, which anticipated the fund would close FY 2022-23 with favorable revenue and expenditure budgetary variances netting to approximately $0.4 million. So, this favorable variance was already considered when allocating SSC to the various sub -funds and is not "available" to absorb the FY 2023-24 expense overage discussed in another position paper for this Finance Committee meeting. As noted in the O&M variance analysis previously, a budget amendment is being proposed for the Self -Insurance Fund to cover legal fees associated with litigation for which insufficient appropriations are expected to be available in FY 2023-24. The recommended funding source proposed for this budget amendment is an immediate transfer of $0.5 million from the O&M Fund from favorable prior year budgetary variances. This is recommended as the preferred funding source rather than next year's SSC allocation as it allows the Self -Insurance Fund to retain its minimum policy -level reserve requirement of $9 million throughout the remainder of the current year (FY 2023-24) barring any other unanticipated cost pressures. October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 108 of 135 Page 4 of 15 FY2023-24 Funds Allocated Toward UAAL Post Retirement Benefit Trust Contributions (Principles 5 and 6) Staff is also seeking the Board's direction regarding $1.0 million budgeted in FY 2023-24 for paying down OPEB or pension related UAAL obligations. As the funding gap between the OPEB actuary's projection of trust assets on an MVA basis as of July 1, 2023, and the actual trust balance as of September 30, 2023 will be bridged, at least temporarily, with a $1.6 million transfer from the prior year's O&M fund variance, it is recommended the $1.0 million in already budgeted additional trust contributions be directed to the Pension Prefunding trust. This would bring total FY 2023-24 Pension Prefunding trust contributions to $2.6 million, which is an appropriate course of action considering the latest CCCERA actuarial valuation reported a UAAL for Central San's pension plan of $4.9 million (on an AVA basis). ALTERNATIVES/CONSIDERATIONS The Board may elect to allocate the favorable FY 2022-23 budget variance toward the staff -recommended alternatives being proposed or may elect to fund these choices at different levels. Absent specific Board action, any favorable budget variance of the O&M Fund would, through operation of the Fiscal Reserve Policy and mechanics of the financial plan, ultimately be allocated to the Sewer Construction Fund. This allocation is accomplished by modifying the proportional split of SSC between the O&M and Sewer Construction funds in the following fiscal year's budget. FINANCIAL IMPACTS The actions being recommended are in line with Central San's FY 2023-24 budget and long-term financial plan. Funding the reserves to policy required levels (or beyond in the case of the Sewer Construction Fund) will help provide flexibility to mitigate SSC rate volatility and future reliance on debt financing. Furthermore, augmenting the OPEB and Pension Prefunding trusts should increase their funded positions in accordance with Board policies. COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its October 27, 2023, Special meeting and recommended Board RECOMMENDED BOARD ACTION The following Board actions are being recommended at this time: Receive the Pre -Audit Year -End Financial Statement Summary Report and direct staff on the following FY 2022-23 net budgetary variances totaling $18.2 million: o O&M Fund favorable budgetary variance of $5.8 million designated for the following purposes, ■ $2.1 million - Retain in O&M working capital reserves consistent with adopted FY 2023- 24 budget, ■ $0.5 million - Transfer to Self -I nsurance fund to augment unanticipated FY 2023-24 legal costs, ■ $1.6 million - Transfer to the OPEB trust, ■ $1.6 million - Transfer to Pension Prefunding trust. • Sewer Construction Fund favorable budgetary variance of $12.0 million to be retained in working capital reserves, • Self -Insurance Fund favorable budgetary variance of $0.4 million to be retained in working capital reserves consistent with the adopted FY 2023-24 budget. October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 109 of 135 Page 5 of 15 2. Amend the FY 2023-24 O&M Fund budget to increase appropriations by $3.7 million to facilitate inter -fund transfers of prior year favorable budget variances to the Self -I nsurance Fund ($0.5 million), OPEB trust ($1.6 million), and Pension Prefunding trust ($1.6 million). 3. Direct $1.0 million in trust contributions already included in the O&M Fund's FY 2023-24 adopted budget to the Pension Prefunding trust. Strategic Plan re -In GOAL FOUR: Governance and Fiscal Responsibility Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, Strategy 3 - Maintain financial stability and sustainability ATTACHMENTS: 1. Overall Variance Summary 2. O&M Fund Variance Analysis 3. Presentation October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 110 of 135 Operations & Maintenance Revenues Expenses Total Sewer Construction Revenues Expenses Total Self Insurance Revenues Expenses Total Debt Revenues Interest & Other Principal Payment Total Pre -Audit - Fiscal Year Ending June 30, 2023 (FY 22-23) Overall Variance Summary Budget Actual FY 2022-23 FY 2022-23 Variance Comments $ 69,762,907 $ 71,921,203 $ 2,158,296 F 85,019,046 81,395,192 3,623,854 F (15,256,139) (9,473,989) 5,782,150 86,787,570 98,776,643 11,989,073 F 157,985,178 59,097,479 98,887,699 F (71,197,608) 39,679,164 110,876,772 1,734,501 1,910,621 176,120 F 2,170,000 1,961,374 208,626 F (435,499) (50,753) 384,746 13,251,922 11,905,088 (1,346,834) U 2,501,922 1,155,088 1,346,834 F 10,750,000 10,750,000 - District Totals (4 Funds) Revenues 171,536,900 184,513,555 12,976,655 F Expenses/Debt Principal 258,426,146 154,359,133 104,067,013 F Total $ (86,889,246) $ 30,154,422 117,043,668 Exclusionls): 1. Sewer Construction Fund spending variance attributable to timing of expenditures (78,819,461) on multi -year capital projects carried forward to FY 2023-24 budgel 2. Decrease in CIB carryforward per adopted FY 2023-24 budget (18,500,000) 3. Savings from capital projects completed under budget in FY 2022-23 (1,568,238) (Retained in reserves per BP 048) District -wide net variance to be considered $ 18,155,969 See Attachment 2 See Attachment 2 Attachment 1 Attributable to favorable variances in capacity fees, property taxes, investment income, and concord capital reimbursements. Excludes SRF proceeds, which is a non -revenue debt financing source. Anticipating sizable carryforward, the FY 23-24 CIB re -prioritized projects and reduced adopted budget (from $91.01V! to $71.2M) and directing $18.5M in FY 22-23 carryforward to reserves for future year CIP needs. Largely due to higher than anticipated investment income Attributable to liability and property insurances as well as self -insured losses lower than projected. Revenues allocated equal to total costs Variance due to annual amortization of premium, not included in budget Legend F = Favorable U = Unfavorable October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 111 of 135 Attachment 2 Pre -Audit - Fiscal Year Ending June 30, 2023 (FY 22-23) Operations and Maintenance (O&M) Fund Variance Analysis ($ in thousands) Variance Budget Actual Variance ($) N Variance Explanation Implications for FY 23-24 Budget (if applicable) Revenues Sewer Service Charges $47,162 $48,447 1,285 2.7% Higher than projected development in service area and None - Conservative assumptions for development and flow volumes for commercial customers. assumed for upcoming year. City of Concord 17,600 17,649 49 0.3% Immaterial variance; actuals largely in line with budget None - Budget based on expected flow and estimated treatment projections in all material respects. plant expenditures. HHW Reimbursements 1,048 1,006 -42 -4.0% Immaterial variance; actuals largely in line with budget projections in all material respects. Recycled Water 445 475 30 6.7% Higher than anticipated usage; Recycled Water O&M expenses Conservative estimates for recycled water revenue were applied in continue to exceed revenue, so no excess revenue was FY 23-24 budget, assuming growth of approximately 3% over prior transferred to Sewer Construction Fund. year budget. Other Service Charges 666 752 86 12.9% Immaterial variance; actuals largely in line with budget Conservative assumptions for growth are used; employing multi - projections in all material respects. year averages for budget projections expected to yield higher than budgeted results. Permit & Inspection Fees 1,800 1,706 -94 -5.2% Primarily attributable to side sewer inspection revenue falling Budgeted permit & inspection fees held largely flat next year as a 18% short of projections. result of this trend and input from engineering staff. Other Nonoperating 780 928 148 19.0% Attributable largely to auction sales proceeds and other None - While next year's budget incorporates anticipated increases Income difficult to nonrecurring and/or predict miscellaneous income in lease revenues within this category, not budgeting increase for sources. difficult to predict non -recurring miscellaneous revenue sources. Investment Income 262 958 696 265.6% Variance attributable to several Fed interest hikes during fiscal Utilizing current historically high interest rates, budgeting year designed to curb inflation, the extent of which were significant increase in investment income next fiscal year. unknown and unanticipated when FY 22-23 budget was developed and adopted. Total Revenues $ 69,763 $ 71,921 $ 2,158 3.1% Overall favorable revenue variance 1 October 27, 2023 Special FINANCE Committee Meeting Agenda Packet -Page 112 of 135 Attachment 2 Expenditures Salaries & Benefits Unfunded Liabilities Utilities & Fuel Chemicals Other Operating Supplies Professional & Technical Services Pre -Audit - Fiscal Year Ending June 30, 2023 (FY 22-23) Operations and Maintenance (O&M) Fund Variance Analysis ($ in thousands) Variance Budget Actual Variance ($) N Variance Explanation Implications for FY 23-24 Budget (if applicable) $55,061 $53,624 1,437 1,380 2,379 -999 6,108 8,174 -2,066 2,346 2,175 3,952 2,675 7,894 4,451 171 1,277 3,443 2.6% Immaterial variance; actuals largely in line with budget projections. Favorable variance largely attributable to actual vacancy factor (5.2% at year-end) exceeding the assumed vacancy factor in FY 22-23 budget (3%). -72.4% Additional OPEB trust contribution authorized by the Board in the Fall 2022 to be funded by FY 2021-22 budgetary variance which was not contained in the adopted FY 22-23 budget. -33.8% Variance primarily in Treatment Plant Division attributable to higher than expected price increases in electricity and natural gas. 7.3% Largely attributable to higher than expected spending on treatment chemicals such as lime and polymer. 32.3% Primarily attributable to lower than projected spending in the Plant Maintenance and IT divisions. 43.6% Attributable to lower than anticipated spending in several divisions. Noteworthy savings here include: CCTV inspection services, no general election costs, legislative and advocacy consulting, board legal advisory costs. Additionally, the IT division budgeted over $0.8 million in this category which was subsequently nearly entirely reclassified to other accounts for improved tracking purposes (i.e., on -premise software support, computer repairs and maintenance, etc.). Contracted Repairs & 4,118 4,182 -64 -1.6% Immaterial variance; actuals largely in line with budget Maintenance projections. Largely includes contracted repairs budgeted in the treatment plant maintenance division. 2 October 27, 2023 Special FINANCE Committee Meeting Agenda Packet -Page 113 of 135 None - Budgeted vacancy factor remaining at 3% next year. None - Variance attributable to discretional trust contribution. Also FY 23-24 budget included $1M contribution to retirement plan trust whereas FY 22-23 budget did not. Budget incorporates substantial increases in all major energy sources necessary to run plant including electricity, natural gas, and landfill gas. As actual FY 22-23 electricity costs higher than projected during FY 23-24 budget development, staff will continue to monitor sufficiency of planned budget increases and recommend Board action to current budget and long-term forecast if necessary. Lime and polymer overages were largely considered non -recurring with large orders made late in the year and a polymer storage maintenance incident in FY 22-23. Significant increase in chemicals for FY 23-24 attributable to hypochlorite, where substantial region -wide unavoidable negotiated consortium price increases are expected. Plant Maintenance and IT divisional budgets reduced for this line item following historical spend analysis and assessment of next year's needs. Some savings expected to continue into FY 23-24 with total budget in this category being reduced to $6.3 million (from $7.9 million in FY 22-23). Attachment 2 Pre -Audit - Fiscal Year Ending June 30, 2023 (FY 22-23) Operations and Maintenance (O&M) Fund Variance Analysis ($ in thousands) Variance Budget Actual Variance ($) N Variance Explanation Implications for FY 23-24 Budget (if applicable) Hauling & Disposal 1,367 1,059 308 22.5% Hauling costs for household hazardous waste (HHW) and Savings expected to continue into FY 23-24 with total budget in sludge lower than budgeted. HHW variance largely this category being reduced to $1.2 million (from $1.4 million). attributable to decreases in waste volumes/participation, which were experienced state-wide. Other Contracted Services 1,366 1,455 -89 -6.5% Immaterial variance; actuals largely in line with budget projections. Includes security, rentals, cleaning and other contracted services connected to property owned or used. Other Expenses 1,428 1,221 207 14.5% Primary driver for budgetary savings is the limited amount of This level of budgetary savings is not considered recurring with travel, lodging, and registrations for conferences and training travel/training ramping up following in post -pandemic in post -pandemic operations. environment and given number of new employees. Accordingly, FY 23-24 budget incorporated budgeted increases in training/travel costs. Total Expenses $ 85,020 $ 81,395 $ 3,625 4.3% Overall favorable variance expenses variance Net Increase $ (15,257) $ (9,474) $ 5,783 (Decrease) 3 October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 114 of 135 Page 10 of 15 Attachment 3 Objectives Consider past guidance on use of variances from PFM (Financial Advisor) Review variances from close of FY 2022-23 Review alternatives and direct available funds towards optimal use Provide direction on additional trust contribution already included in FY 2023-24 budget October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 115 of 135 Page 11 of 15 November 10, 2016 Workshop Financial Alternatives for Excess Reserves PFM's Review of Excess PFM's Recommendation and Fund Alternatives: Direction Given by the Board: 1. Pay down CCCERA unfunded pension liabilities (UAAL) (done) 2. Pay down other post -employment benefits (OPEB) unfunded liabilities and shorten amortization period from 22 to 18 years (done) 3. Set up and fund IRS Sec 115 Pension Prefunding Trust (done) 4. Allocate to CIB program 5. Use to cover 0% rate increase FY 2017-18 3 Allocate all currently available dollars to reduce pension UAAL and OPEB liability. $2.5M budgeted in FY 2016-17 toward OPEB Trust (done Feb. 2017 by unanimous vote) $3.359M initial funding of Pension Prefunding Trust using FY 2015-16 budget variances (done Aug. 2017 by majority vote) Budget Variances to Address: Brix • Total budgetary variance of $18.2 million attributable to the following sub funds: • $5.8 million - O&M Fund favorable • Both expenditure and revenue variances • $12.0 million - Sewer Construction Fund favorable • Revenue variances (excludes expenditure variances attributable to timing of project spending to be carried forward) • $0.4 million - Self -Insurance Fund favorable - • Both expenditure and revenue variances. — 4 "=►�1 4 October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 116 of 135 2 Page 12 of 15 Potential Variance Uses A. For O&M, retain in O&M reserve B. For Sewer Construction, leave variance in Sewer Construction Reserve If favorable, to reduce future debt or rate increases If negative, offset with reduced spending or increased revenue/debt proceeds G. Contribute to Rate Stabilization Reserve Account D. Restore Self -Insurance Fund to targeted balance for FY 2023-24 (after higher expenses anticipated this year) E Contribute to OPEB or Pension Prefunding Trusts F Make contribution directly to pension administrator (CCCERA) for any new UAAL 5 Recommended Allocations ($ Millions) A. B. C. D. E. E. F. Pension Recommended O&M SC-CIB Rate Self OPEB Prefunding CCCERA Reserve Reserve Stabilization Insurance Trust Trust Trust C) Allocation of Funds: Total Reserve Acct Year -End Variances Operating $5.8 $2.1 - $0.5 $1.6 $1.6 Capital 12.0 - 12.0 - - - Self -Insurance 0.4 - 0.4 - - Total $18.2 $2.1 $12.0 $0.9 $1.6 $1.6 Budgeted 2023-24 UAAL Liabilities $1.0 6/30/23 Funding Status Fully More than Fully No Target Fully g5.4% 99.0% Funded Funded Established Funded *Funding status derived from CCCERAs 12/31/22 actuarial valuation. [: 5 6 Wa October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 117 of 135 3 Page 13 of 15 Reserve Status Rate i ($ millions) Stabilization O&M Reserve Acct Reserve SC-CIB ( including Pension Assets inCCERA Total (5)12 Reserve Self O&M and OPEB Prefunding CI3) Variance sud , 50 % CIB Insurance Capital) Trust (1) Trust (2) Reserves as of 6/30/23 * $43.0 $137.8 $9.10) $7.46 $81.3 $ - $492.7 Policy Required Level 37.6 43.2 9_0 - - Difference 5.4(5) 94.6(4) 0.1 i r Proposed Reallocations (3.7) - 0.5 1 - 1 1.6 2.6 Balances After Reallocations $ - 3 $137.8 $9.6 $7.46 $82 9 $2.6 $492.7 * Reserve balances per pre -audit financial statements and external sources as applicable. (1) OPEB trust reported a balance of $78.5 million as of September30, 2023, most current balance known immediately prior to the presentation of this position paper to the Board (2) Actuarial value of assets per 12/31/22 CCCERA valuation. - (3) Balance is higher than the policy required level due to unspent CIB cerryforwards (total authorized spending less ' (4) actual spending) Higher balance at 6/30/23 will be reduced over the course of FY 2023-24 through a lower allocation of SSC (consistent �`. with adopted budget) so that the 6/30/24 balance meets the policy targeted level. (5) Exceeds $9.0 million reserve requirement. Given $0.4 million in additional legal expenses anticipated for FY 2023-24, additional $0.5 million allocation will be used to absorb unanticipated budget increases. 7 7 History of OPEB ($ Millions) Actuarial Value of Assets % Per Bartel 2-year Valuation Assets0) Funded(') 7/1/2012 $22.5 22.4% 7/1/2014 33.7 32.4% 7/1/2016 43.8 44.0% 7/1/2018 59.4 56.3% CalPERS Medical Transition 7/1/2019 65.9(2) 82.9%(3) 7/1/2020 69.8 82.0% 7/1/2021 $8402) 96.9%(4) 7/1/2022 $80.3 96.3% 7/1/2023 $81.3(2) 95.4%(4) (1) Bartel OPEB biennial actuarial report, unless specified otherwise (2) Market value of assets per PARS OPEB Trust statements as assets not yet available in biennial funding valuation. Accordingly actuarial smoothing was not utilized. (3) Calculated using PARS OPEB Trust statements and revised 7/1/18 AAL per 2/8119 Bartel letter preceding transition to CaIPERS healthcare. Bartel did not provide a revised AAL estimate as of 7/1 /19 reflecting figures from the transition to CalPERS healthcare (4) Not actuarially smoothed. Calculated internally using market value of assets per trust statements and projected UAAL per biennial OPEB "funding" valuations. 8 8 October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 118 of 135 4 Page 14 of 15 History of Additional UAAL Payments ($ Millions) FY 2013-14 2014-15 2015-16 2016-17 2017-18 2017-18 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 0 Pension CCCERA Prefunding Date of Payment Trust Trust OPEBTrust Dec 2013 $5.0 Dec 2014 5.0 Dec 2015 2.5 Feb 2017 $2.5 Aug 2017 $3.4 Various 2.5 Various 2.0 Various 2.5 Various 1.25 1.25 Various $70.8 (12.8) Various 1.25 L6 2.60 Various Subtotal $83.3 $1.6* $10.1 Total Source of Funds Budgeted Budgeted $95.0 Budgeted -Board Decision Funded by FY 2015-16 variances Budgeted -Board Decision Funded by FY 2016-17 variances Budgeted -Board Decision Budgeted $1.2511 to OPEBTrust, and $1.25M Variance from FY 2018-19 to Pension Prefunding Trust Payoff of Pension UAAL (included earnings of $3.65 M) Budgeted $1.2511 to OPEBTrust Prior year variance allocated, plus direction on $1 M already budgeted in FY 2023-24 Recommendation on Variance Funds Direct staff to utilize the FY 2022-23 variances as follows: A. Retain O&M budgetary variance in reserves increasing amount of $2.1 million SSC directed to sewer construction fund as assumed in the adopted budget for FY 23-24. B. Contribute O&M budgetary variance to OPEBTrust $1.6 million C. Contribution O&M budgetary variance to Pension PrefundingTrust $1.6 million D.Transfer O&M budgetary variance to Self -Insurance Fund $0.5 million E. Retain minor Sewer Construction revenue and spending variance in $12.0 million reserves, which remain above policy required levels. F. Retain favorable Self -Insurance Fund budgetary variances in reserves $0.4 million consistent with FY 2023-24 adopted budget Total $18.2 million 10 10 9 10 October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 119 of 135 5 Page 15 of 15 Questions? 11 October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 120 of 135 6