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Home My WebLink About03.e. Approve Updated Administrative Overhead and Benefits Rate of 163 Percent for Fiscal Year (FY) 2024-25Page 1 of 9 Item 3.e. MEETING DATE: SUBJECT BOARD OF DIRECTORS POSITION PAPER FEBRUARY27, 2024 REVIEW DRAFT POSITION PAPER AND APPROVE UPDATED ADMINISTRATIVE OVERHEAD AND BENEFITS RATE OF 163 PERCENT FOR FISCAL YEAR (FY) 2024-25 SUBMITTED BY: INITIATING DEPARTMENT: CHRISTOPHER THOMAS, ACCOUNTING ADMINISTRATION -FINANCE SUPERVISOR KEVIN MIZUNO, FINANCE MANAGER REVIEWED BY: PHILIP LEIBER, DEPUTYGENERAL MANAGER -ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER ISSUE Board approval is needed to adopt the updated administrative overhead and benefits rate for the fiscal year ending J une 30, 2025 (FY 2024-25). This rate is used for several purposes, including billing outside agencies, calculating certain customer rates and charges, and internal use in billing labor costs to capital projects. BACKGROUND The purpose of calculating administrative overhead, employee benefits, and non -work hours rates has been for Central San to recover the full cost, including indirect costs, of the services it provides to various users. This has been consistent with long-standing Board policy on cost recovery. Staff strives to bring the annual updated percentage to the Board early every calendar year, in an effort to set the rate early enough to be used for calculating rates and charges and the negotiation of the Clean Water Program contract. The administrative overhead and benefits rate is comprised of three sub -components capturing the following: 1. Administrative overhead consists of all administrative indirect costs for Central San that are incurred for a common purpose benefiting more than one task including all Executive Governance and Administration Department costs, and certain support costs of the Engineering & Technical Services and Operations departments. 2. Employee benefits consist of costs associated with retirement pension payments, medical premiums, deferred compensation contribution in lieu of social security, and other similar benefits expressed as a percentage of salaries. February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 142 of 196 Page 2 of 9 3. Non -work hours consist of the value of compensated leave (i.e. vacation, sick leave, administrative leave, birthday holiday), and earned overtime expressed as a percentage of annual work hours. Calculation Methodology The current administrative overhead and benefits rate calculation methodology was approved by the Board on April 3, 2014, and first employed in FY 2014-15. The calculation is supported by a study issued by Matrix Consulting Group, an independent consulting firm specializing in developing overhead rates for governmental agencies in conformance with prevailing laws and best practices. I n summary, the methodology currently used is based on the independent consultant's study and incorporates the following previously Board approved principles: 1. Standardizes the methodology for calculating the rate by: • Using the actual cost of benefits as reported in the independently audited financial statement for the benefits component of the calculation rather than budgeted estimates, • Allocates other post -employment benefits (OPEB) trust contributions in excess of pay-as-you- go costs for active employees and retirees to their respective organization units (i.e. departments and divisions), leaving only the administrative portion in the administrative component, • Continuing to treat retiree health and other premiums as indirect, and include them in the administrative overhead component of the rate, and • Allocating any additional Unfunded Actuarial Accrued Liability (UAAL) payments to their respective organization units and including only the administrative portion in the administrative overhead component of the rate. 2. A single administrative overhead percentage is to be used for billing outside agencies, calculating the annual Environmental and Development rates and charges, and for internal use in charging to capital projects (administrative and non -work hours percentages used); and 3. A three-year smoothing methodology to adjust for volatility in the rate, initially using FY 2014-15 as the base year (with the rate for FY 2015-16 using two years of data, and from FY 2016-17 forward fully using three-year smoothing). Proposed Rate for FY 2024-25 The proposed administrative overhead recovery rate for FY 2024-25 has been calculated in accordance with the methodology approved by the Board as outlined. The proposed rate (three-year smoothed) for FY 2024-25 is 163 percent, reflecting a decline of 1 percent from the approved FY 2023-24 rate of 164 percent. This is the result of the overall decline in annual rates over the past several years, declining annually in seven of the past eight years. While the three-year smoothed rate is declining, there was also a 4.6 percent decrease in the un-smoothed one-year rate from the prior fiscal year from 162.6 percent (FY 2023-24) to 158.0 percent (FY 2024-25) which is attributable to the following factors: Employee Benefits Rate Component- This component decreased by 1.0 percent from the prior year, largely attributable to the increase in employee benefits costs (numerator) being outpaced by the increase in employee salaries (denominator). The minimal increase in the benefit cost rate was primarily driven by a slight increase in benefit premium rates overall in FY 2022-23. The increase in salaries (denominator) is attributed to the labor agreements specifying cost of living adjustments and other salary adjustments (i.e., longevity, step increases, etc.). 2. Administrative Overhead Rate Component - This component decreased by 3.7 percent from the prior year, largely due to the proportional increase in indirect overhead costs (numerator) being slightly outpaced by the increase in direct salaries costs (denominator). While relatively minimal, increases February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 143 of 196 Page 3 of 9 in indirect costs were most evident in the following areas: overall increases indirect salaries and wages attributable to the labor agreements specifying cost of living adjustments and other salary adjustments (i.e., longevity, step increases, etc.) as well as an increase in non -labor support costs in certain functions. The increase in direct salaries (denominator) is attributable to prevailing labor agreements and other salary adjustments mentioned previously. The attached presentation (Attachment 1) provides additional highlights of the proposed FY 2024-25 rate compared to the rates adopted by the Board in prior years. ALTERNATIVES/CONSIDERATIONS The methodology used for this year's calculation employed the same methodology previously approved by the Board, which employs three-year smoothing as well as the use of audited actual numbers as opposed to using budgeted or projected figures. Alternatives that could be employed include eliminating three-year smoothing or using budgeted or projected figures instead of actuals. These alternatives are not recommended as doing so would significantly impact comparability of the rate with prior years and would cause the rate to not be in line with best practices. Additionally, in the Board's consideration of the FY 2023-24 rate, an alternative was presented to exclude the 2021 COPs debt service, which would significantly decrease the rate. This alternative was not selected at that time, and is not being recommended currently, as the debt service associated with the 2021 COPs is essentially a swap for the prior pension UAAL expenses (albeit at a significantly lower interest rate) and excluding it would reduce full cost recovery, which is a primary objective of the rate. FINANCIAL IMPACTS The administrative overhead and benefits rate is calculated annually for the purpose of recovering administrative overhead and employee benefit costs when charging to capital projects and developing fees for the full recovery of costs incurred for services provided to customers, including residents, other agencies, businesses, and developers/contractors. COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its meeting on February 27, 2024, and recommended RECOMMENDED BOARD ACTION Approve the use of the administrative overhead and benefits rate of 163 percent for Fiscal Year 2024-25. 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. Presentation February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 144 of 196 Page 4 of 9 February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 145 of 196 Page 5 of 9 Issue Board approval necessary to updat0 NOW e administrative overhead and benefits Fill rate to recover full cost of indirect "7 support services Rate used for various purposes:;, Billing outside agencies r Calculating certain customer rates and charges," Capital project labor charges Labor charges for grants without program- specific rates/limits 3 Backaround Methodology Calculation conducted by staff utilizing Board -approved methodology Methodology supported by a study issued by an independent consulting firm (Matrix Consulting Group) in conformance with prevailing laws and best practices I Utilizes audited actual year-end figures, not budget or _ projections Employs 3-year smoothing r Rate comprised of 3 sub -components 4 February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 146 of 196 2 Page 6 of 9 Backaround Rate Components Employee Benefits consists of costs associated with direct employee benefits Non -work hours consists of the value of compensated leave and earned overtime expressed as a percentage of annual work hours Administrative overhead consists of all administrative indirect costs incurred for a common purpose benefiting more than one task 5 Backaround Proposed Rate Single year FY 2024-25 unsmoothed rate is 158.0 3-year smoothed rate proposed for adoption is 162.6% Consistent with prior years, largest component is administrative overhead, decreasing by -3.7% Slight reduction in benefits rate component by -1.0% Overall, 3-year smoothed rate decreasing by 1.1% 1i -10. Administrative Overhead & Benefits Rate FY 2024-25 Administrative Overhead & Benefits Rate Sub -Components ■ Employee Benefits Administrative Overhead Non -Work Hours February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 147 of 196 3 Page 7 of 9 7 Backaround Historical Trends 250.0% 200.0% 0.0% 2015-I6 2011-11 8 Historical Trend of Rate Components RI 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 Fiscal Year ■ Employee Benefits ■Administrative Overhead m Non -Work Hours February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 148 of 196 4 Page 8 of 9 Alternatives & Considerations Alternative courses of action the Board may consider include the following: Budgeted or projected cost instead of actuals A single year rate versus smoothed Excluding the 2021 Certificates of Participation (COPS) debt service All considered previously by the Board and have not been adopted and are not being recommended this year Doing so may impact comparability, deviate from best practices, and diminish full cost recovery Ito] February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 149 of 196 5 Page 9 of 9 11 February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 150 of 196