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HomeMy WebLinkAbout03.a. Review Draft Position Paper to Consider Revisions to Board Plicy No. BP 048 - BudgetPage 1 of 6 Item 3.a. DCENTRALSAN MEETING DATE: OCTOBER 31, 2023 BOARD OF DIRECTORS POSITION PAPER DRAFT SUBJECT: REVIEW DRAFT POSITION PAPER TO CONSIDER REVISIONS TO BOARD POLICY NO. BP 048 -BUDGET SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION -FINANCE REVIEWED BY: PHILIP LEIBER, DEPUTYGENERAL MANAGER -ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER ISSUE Revisions to Board policies require approval of the Board of Directors. Staff is proposing amendments to Central San's Budget Policy (BP 048) specifically pertaining to the capital improvement budget's year-end carryforward and contingency processes. BACKGROUND Central San's budget policy was implemented by the Board of Directors (Board) on March 24, 2022. The primary objective of developing a budget policy was to formalize important policies and objectives related to the budgeting process. This was of particular importance following the implementation of a new system (Oracle EPM) for budget development and monitoring as well as the turnover of several key staff in the Finance function in recent years. Specific processes included in the scope of the budget policy were the development, adoption, monitoring, and amendment of the budget. While many of the components of the budget policy are largely a formalization of long-standing practices at Central San, incorporating the rules into a written policy document enhanced the transparency of important budget policies for the Board, staff, and members of the public. The development of a budget policy was also in line with best practices recommended by the Government Finance Officers Association (or "G FOA"). At this time, staff is recommending certain changes to the current budget policy to provide clarification around two capital improvement budget (CI B) areas. One proposed change pertains to the annual carryforward of unexpected appropriations in the CI B, while the other one pertains to CI B contingency. Regarding the Cl B carryforward, the budget policy previously formalized a long-standing protocol stating that any unexpended C I B appropriations shall automatically roll into the following fiscal year at the close of the prior year. It is recommended that this section be revised to clarify that the General Manager may request that the Board direct some portion of the Cl B carryforward to roll to sewer construction fund October 31, 2023 Special ADMIN Committee Meeting Agenda Packet - Page 3 of 111 Page 2 of 6 reserves for future use as outlined in the long-range capital improvement plan (C I P), and not be automatically re -appropriated in the following year. This language has been updated based on feedback provided by the Administration Committee on October 11. Regarding the Cl B contingency, the policy previously only stated that "any savings from closed capital projects or unused contingency in the CIB shall remain in the sewer construction fund," and did not provide clear guidance on how it shall be maintained or replenished. Accordingly, it is recommended that a new section be added clarifying that appropriations for the C I B contingency be replenished annually through one or more of the following: 1. Budget transfer of un-expended and available budgetary carryforward from specific project(s); 2. Budget transfer of savings from closed capital projects; or 3. Re - appropriation of full contingency amount in the new fiscal year allowing prior year contingency carryforward to roll to reserves. This language has also been updated based on feedback provided by the Administration Committee on October 11. Beyond providing greater transparency and administrative guidance on how CI B budgetary carryforward and contingency are administered, these proposed changes are also in line with recent Board direction. For instance, the Board -adopted Fiscal Year (FY) 2023-24 budget directed $18.5 million in FY 2022-23 CI B carryforward to reserves rather have it be re -appropriated in FY 2023-24. While this was not prohibited in the budget policy, the topic was unaddressed. Additionally, as presented in the January 2023 Financial Workshop, in an effort to control expenditure growth in the 10-year CI P, the CI B contingency was removed as an annual expenditure in the 10-year plan. Alternatively, staff proposed a one-time seeding of the C I B contingency using closeout savings or prior C I B carryforward and that the contingency would carry a maximum of $5 million and be replenished and roll over annually. ALTERNATIVES/CONSIDERATIONS The Board may elect not to adopt the proposed changes to Central San's Budget Policy. This is not recommended, however, as providing the new clarifications will provide greater guidance to staff for budget administrative purposes and will enhance transparency. Additionally, the proposed changes are in alignment with prior Board action. The Board may direct modifications to the changes being proposed to the Budget Policy or may direct other revisions. Should other changes be requested that are not specified in this position paper, it is recommended that the Board, via motion, direct specific changes to be made to the attached draft policy document. FINANCIAL IMPACTS Adoption of the proposed changes to the Budget policy are not expected to have any immediate or direct fiscal impacts to Central San. COMMITTEE RECOMMENDATION The Administration Committee reviewed this matter at its October 11, 2023 special meeting and its October 31, 2023 special meeting and recommended RECOMMENDED BOARD ACTION Adopt the proposed changes to Board Policy No. BP 048 - Budget, providing additional clarification on the C I B budgetary carryforward and contingency processes. October 31, 2023 Special ADMIN Committee Meeting Agenda Packet - Page 4 of 111 Page 3 of 6 Strategic Plan Tie -In GOAL FOUR: Governance and Fiscal Responsibility Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, Strategy 3 - Maintain financial stability and sustainability ATTACHMENTS: 1. Proposed Revisions to Budget Policy BP 048 (with markup) October 31, 2023 Special ADMIN Committee Meeting Agenda Packet - Page 5 of 111 Page 4 of 6 Attachment 1 Number: BP 048 Authority: Board of Directors Effective: March 24, 2022 Revised: Reviewed: 03/01/22, 03/24/22, 10/2023 Initiating Dept./Div.: Administration/Finance BOARD POLICY BUDGET PURPOSE To set forth a budget policy for Central San consistent with current and future goals as they pertain to fiscal responsibility, accountability, transparency, and sustainability. POLICY 1. Central San recognizes the importance of the budgeting process to document resource needs, provide the foundation for effective financial management, and demonstrate that cost matters in the provision of service at responsible rates. 2. Transparency shall be a key goal in the preparation of the annual budget document, with key assumptions documented, and commentary provided on relevant financial policies and the proposed budget's relation to the long- term financial plan. 3. Budgets shall be presented to and adopted by the Board for each fiscal year (FY), which starts July 1 and ends June 30. 4. Public involvement shall be encouraged in the annual budget development and adoption process, which shall include presentation to Board Committee(s), the Board, and shall include a public hearing. Outreach to key agencies affected by Central San's proposed budget shall be conducted. 5. The annual Budget is prepared in the context of other key planning processes including strategic planning, long-term financial planning, and rate setting. Board input shall be obtained to shape the development of the proposed budget through these and other processes to ensure appropriate alignment and consistency. 6. Budgets shall incorporate strategic plan goals and strive to provide the resources necessary for achieving them. 7. Central San shall strive to achieve a long-term structurally balanced budget. October 31, 2023 Special ADMIN Committee Meeting Agenda Packet - Page 6 of 111 Page 5 of 6 Attachment 1 Number: BP 048 BUDGET Page 2 of 3 8. The legal level of budgetary control (i.e., the level at which expenditures may not exceed appropriations) shall be at the fund level on a FY basis. 9. A secondary legal level of budgetary control for the Capital Improvement Budget (CIB) shall be at the total project level, which may overlap multiple FYs. Detailed parameters relating to the financial administration of capital projects is specified it other documents, including BP 037 - General Manager Delegation of Authority, and as outlined in the annual budget document. 10. The budget shall include a 10-year rolling forecast for long-range financial planning. 11. At the close of each FY, absent any alternative direction by the Board, any unspent CIB appropriations for active projects shall automatically rollover for reappropriation in the following FY's CIB. To achieve rate stability and prevent over -inflation of the CIB due to spend timing issues, the General Manager may request Board approval (through budget, financial plan and rate adoption) to may -direct that all or part of the unexpended carryforward be allocated to sewer construction fund reserves for future vears consistent with the 10-vear capital improvement plan (CIP) 12. Appropriations for the CIB contingency shall be replenished annually through one or more of the following actions: o Budget transfer of unexpended and available budgetary carryforward from specific prolect(s), o Budget transfer of savings from closed capital projects, or o Reappropriation of full contingency amount in new fiscal year allowing prior year contingency carryforward to roll to reserves. 13. Any savings from closed capital projects or unused contingency in the CIB shall remain in the sewer construction fund. e 42-.14. Central San shall monitor its contractual commitments to ensure budgetary compliance and alignment with its long-range financial plan. REPORTING AND ACCOUNTABILITY Staff shall be accountable for monitoring and controlling their respective operational and project budgets. Finance shall develop and present budget -to -actual reports to the Finance Committee and Board, not less than quarterly, to demonstrate budgetary control, fiscal accountability, and compliance, where applicable. Projections of current year spending are compiled and reported on as part of the budget development process. October 31, 2023 Special ADMIN Committee Meeting Agenda Packet - Page 7 of 111 Page 6 of 6 Attachment 1 Number: BP 048 BUDGET Page 3 of 3 Following the close of the FY, a report of year-end results shall be provided to the Board for disposition of overall favorable or unfavorable budget variances, and impacts on reserve requirements as specified in BP 017 - Fiscal Reserves. This annual report shall also specify the amount of CIB rollover appropriations as previously described. AUTHORITY The General Manager has the authority to approve line -item transfers within funds between organizational units (i.e., departments or divisions) and/or accounts. Furthermore, the General Manager has the authority to approve inter -project budget transfers in the CIB up to the maximum threshold specified in BP 037. Inter -project budget transfers above this authority level must be approved by the Board. Any spending above total fund appropriations specified in the adopted budgets must be accompanied by a budget amendment authorized by the Board. In the CIB, any increases to individual project budgets not covered by inter -project budgetary transfers are considered budget amendments, thereby requiring Board authorization. For purposes of this policy, Board approval of a budget amendment shall be demonstrated by a motion passed via simple majority. POLICY REVIEW This policy shall be reviewed on an annual basis to reflect the highest standards of fiscal management and Central San's budgetary goals. Any changes must be approved by the Board after review by the Administration Committee. [Original Retained by the Secretary of the District] October 31, 2023 Special ADMIN Committee Meeting Agenda Packet - Page 8 of 111