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HomeMy WebLinkAbout03.f. Authorize the General Manager To Execute a Contract with U.S. Bank for Banking, Investment Safekeeping/Custody, and Merchant Card Services for a Five-Year TermPage 1 of 5 Item 31 MEETING DATE: SUBJECT SUBMITTED BY: BOARD OF DIRECTORS POSITION PAPER FEBRUARY27, 2024 REVIEW DRAFT POSITION PAPER TO AUTHORIZE THE GENERAL MANAGER TO EXECUTE A CONTRACT WITH U.S. BANK FOR BANKING, INVESTMENT SAFEKEEPING/CUSTODY, AND MERCHANT CARD SERVICES FOR A FIVE-YEAR TERM INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION -FINANCE REVIEWED BY: PHIL LEIBER, DEPUTYGENERAL MANAGER -ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER ISSUE Board authorization is requested for the General Manager to execute a contract with U.S. Bank for banking, investment safekeeping/custodial services, and merchant card services for up to a five-year term, with an estimated start date of May 1, 2024. BACKGROUND On August 17, 2023, consistent with prior direction of the Board, staff brought forth additional information and recommendations related to key aspects of implementing an in-house treasury function for Central San. Staff provided the following deliverables to support this recommendation and the Board's deliberation process: • An internal controls risk assessment over the proposed "to be" banking function, • Draft banking and treasury policy and administrative procedures applicable for the proposed "to be" treasury structure, • Proposed project implementation plan After a presentation summarizing the highlights of these deliverables, the Board voted unanimously in favor of staff continuing to pursue the in-house treasury function consistent with the risk assessment, draft policies and procedures, and project implementation plan. The project implementation plan highlighted seven key phases, as follows: 1. Project discovery, 2. Risk Assessment and Board direction/action on treasury structure, 3. Policy development, February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 151 of 196 Page 2 of 5 4. Request for proposals (RFP) for banking services, 5. RFP for investment management services, 6. Enterprise Resource Planning (ERP) system implementation and configuration changes, 7. Withdrawal from County Pool. Following the Board's authorization to proceed with project implementation as recommended by staff, the first three phases of the project have now been largely completed with the next project phase focusing on the solicitation for banking services. I n accordance with this plan, with the support of project consultant Eide Bailly, staff developed an RFP for governmental banking and other optional services (i.e., custodial, merchant card, and procurement card services) which was issued on October 4, 2023. Unfortunately, when this initial RFP closed on November 1, 2023, only one bank had submitted a proposal. Following more extensive outreach by staff to qualified banks in the governmental services sector, a second RFP was issued on November 15, 2023, with a proposal submittal deadline of December 22, 2023. The banking services RFP provided a background of Central San's history, operations, fiscal health, and current treasury arrangement, and requested banking institutions' submitting proposals provide information related to their qualifications and experience in the governmental banking services sector as well as information demonstrating their fiscal health (i.e., creditworthiness, deposit strength, etc.). The RFP disclosed that proposing banks would be evaluated on the following criteria: • Understanding the needs and operational requirements of Central San, • Bank and branch locations, • Scope of services offered, including degree of automation, • Relevant experience managing similar services with governmental agencies, • Professional experience and qualifications of the individuals assigned to the account, • Responsiveness to proposal format and inclusion of all required exhibits/reports, • Local decision -making authority to handle emergency needs, • Financial strength and capitalization of the banking institution, • Adequacy of financial controls and security protection against loss, • Value of any new product or service suggestions or other new ideas and enhancements, • Quality and scope of the conversion plan, • Ability to provide services as outlined in the Scope of Services and quality of the proposal, • Quality of references, • Best rate of interest paid historically on accounts, • Best earnings credit rate (ECR), and • Proposed cost. Central San received four proposals from the following banking institutions: BMO Bank, Five Star Bank, U.S. Bank, and Wells Fargo. Staff and project consultants from Eide Bailly held interviews with each of the proposed banks on January 9, 2024. As a result of the evaluation committee's assessment of written proposals and interviews pursuant to the RFP's specified evaluation criteria, U.S. Bank was tentatively selected for further negotiations on a banking services agreement on February 6, 2024. The evaluation committee found U.S. Bank to be the best fit for Central San in consideration of all evaluation criteria included in the RFP, particularly regarding the bank's reputation and fiscal health, a competitive ECR, customer service resources and approach, experience with similar implementations, and municipality references. Shortly after the evaluation committee's decision was publicized, staff and representatives from U.S. Bank began discussing the desired scope of service, terms, and conditions to be included in U.S. Bank's standard banking services contract template. While contract negotiations are still underway, major elements of the banking services contract will include the following elements contained in the bank's proposal: • Scope of Services: The proposed banking services contract with U. S. Bank covers all the services needed by Central San as specified in the RFP. Key banking services covered in the February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 152 of 196 Page 3 of 5 proposed contract include, but are not limited to, the following: • Collateral ization of Central San's deposits pursuant to Califomia Govemment Code section 53651-53652, • Access to a dedicated banking system and ERP integration implementation team specializing in the governmental sector, • Automated cash management information access utilizing U.S. Bank's modern and robust yet user-friendly "Single Point" online commercial banking platform. This platform provides all modern online commercial banking functionalities including: • Transfer and payment management (i.e., positive pay, ACH filters/blocks, etc.), • ERP system integration capabilities (to and from), • Cashflow forecasting, • Processing and depositing collections, • Fraud prevention, • User -specific system access/security, • Document imaging. • Access to a dedicated Relationship Manager and Treasury Management Consultant for support needs as well as a dedicated government customer service team to service Central San's day-to-day needs, • Zero Balance Accounts (ZBA) for all operational control accounts (i.e., payables, payroll, and merchant card services). • Daily sweep accounts to ensure idle liquidity is invested securely overnight. • Merchant card services, • Mobile depositing, and • Investment safekeeping and custody services. Team: Nick Nelson, Relationship Manager, will serve as Central San's dedicated Government Banking Relationship Manager and is responsible for U.S. Bank's Northern California portfolio. Donna Chu, Treasury Management Consultant, will be Central San's primary contact for treasury management needs, during and after initial implementation. Other staff of U.S. Bank will be assigned as necessary, with specialists the areas of merchant card services, corporate payment systems, and institutional trust and custody services. Cost: Governmental commercial banking services are generally provided on a fee per transaction basis, with various fee types spelled out in a comprehensive fee schedule. These fees are offset by an ECR which is accrued and applied against the gross amount of fees that would otherwise be due each month. The attached banking services agreement outlines the detailed fees, which are consistent with industry norms for commercial banking. Beyond the various transaction -based fees, the following are other critical components memorialized in the contract with U.S. Bank: • ECR —Rate of 2.5 percent, guaranteed for the term of the contract. • Six-month fee waiver commencing at the start of implementation, including setup, training, and scanning equipment fees. • Bonus credit of $5,000 towards lockbox should Central San implement within six months of contract signing. • Investment safekeeping and custody services fee of one basis point (0.01 percent) on the first $500 million in market value and a half basis point (0.005 percent) thereafter with an annual minimum fee of $15,000. Term: The proposed contract would commence on approximately May 1, 2024, and extend for a five-year term ending April 31, 2029. Entering into an agreement with US Bank for the aforementioned services is a critical step towards the Board supported initiative of implementing an in-house treasury structure, for which many operational and strategic benefits are expected in the long -run. Continuing to make progress on this significant initiative is February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 153 of 196 Page 4 of 5 in line with two strategies of Goal 7 of Central San's FY 2023-24 Strategic Plan, including to "be adaptable, resilient, and responsive" and "implement organization -wide optimization." ALTERNATIVES/CONSIDERATIONS Banking services will be essential to Central San in an in-house treasury services structure. I n terms of alternatives, the Board could select another bank. This is not recommended as U.S. Bank was selected in a competitive process and has been responsive to Central San's stated needs. The Board could propose different terms in the banking services contract such as those relating to cost parameters; the term of agreement; or the scope of work to be included in the contract. It is a best practice recommendation of the Government Finance Officers'Association (GFOA) that governments use an independent third -party custodial service for safekeeping of investments. The GFOA publication clarifies that an independent third -party in a safekeeping arrangement may be a financial institution separate from where the depository cash assets are being held, or it may be a separate division of that same named institution. In December 2021 US Bank acquired P F M Asset Management (PFMAM), which is one of the industry leaders in governmental investment management and advisory services. Central San anticipates releasing its RFP for investment management and advisory services in the near term and is hopeful PFMAM and other investment management and advisory services firms will submit a proposal. At this time, it is unclear whether executing an investment safekeeping and custodial services arrangement with US Bank will preclude PFMAM from submitting a proposal. Staff will continue to investigate this matter with partners from Eide Bailly (project implementation consultant) and US Bank. Accordingly, the Board could direct staff to enter into a custodial services arrangement with either Wells Fargo or Five Star Bank, who also included investment safekeeping and custodial services in their responses to Central San's banking services RFP. This is not recommended by staff, however, as it is anticipated Central San would benefit from operational efficiencies in utilizing US Bank for commercial banking as well as investment safekeeping and custodial services via reduced wire fees, faster inter - divisional correspondence, and integrated reporting. FINANCIAL IMPACTS Generally, costs associated with the adoption of this contract are relatively immaterial in consideration of Central San's entire operations and maintenance (O&M) budget of $91 million in FY 2023-24. While total fees are expected to be well below the contract threshold requiring Board approval, the Board's approval of this contract is warranted given the significance of banking services to Central San's ongoing operations and administrative structure. Accordingly, the following provides a synopsis of potential direct financial impacts associated with entering into a commercial banking, safekeeping/custodial, and merchant services contract with U.S. Bank. If authorized by the Board to proceed with the recommended staff action, contract terms and conditions will be negotiated by the General Manager and staff. Any material deviations from this position paper, though not expected, will be disclosed to the Board at a later date. Fees for commercial banking services are based on transaction volumes and would increase or decrease in correlation with volume fluctuations. While precise Central San -specific banking volumes were not available to staff given Central San's historical status as a voluntary pooled participant of the County Treasury Pool, a pro forma cost analysis was conducted by Central San's implementation consultant using historical cash balances and estimated future transaction volumes to estimate the potential monthly fee for commercial banking services. This analysis concluded that Central San should not expect to directly pay (via disbursement) any fees for commercial banking services, largely due to the competitive ECR offered by U.S. Bank. Given the six-month implementation fee waiver included in the proposal, no costs are expected to be incurred at the onset of the contract for the purchase of a remote check scanner, initial check stock, or other banking supplies. February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 154 of 196 Page 5 of 5 For investment safekeeping and custodial services, fees would be charged based on the average market value of investments held. Considering the non -local agency investment fund (LAI F) portion of Central San's investment portfolio has been approximately $140 million on average, staff estimates that the minimum services fee of $15,000 would apply. Regarding merchant card services, costs will include both recurring service fees charged on a per transaction basis as well as one-time set-up costs associated with the purchase and installation of credit card equipment. Transaction costs are $0.86 per credit card authorization. Given the competitive nature of US Bank's merchant services fees, which do not have a markup, total credit card fees for over-the-counter transactions are expected to remain consistent with those under the current arrangement. To put this into context, for the fiscal year ended J une 30, 2023, Central San paid approximately $3,800 for credit card fees attributable to its over-the-counter devices. One-time costs associated with the acquisition and installation of merchant services equipment range from $1,190 to $1,300 per payment location (with two locations anticipated), plus an overall licensing fee of $149. This includes terminals, pin pads, printers, and an imprinter. As disclosed in the August 17, 2023, Board Position Paper requesting direction on treasury structure and project implementation plans, consultant fees were expected related to the implementation of the ERP's Cash Management module (currently unutilized) and modifications to the Payables and Receivables modules. Implementation costs associated with this project are expected to be covered by an existing contract with Apps Associates (formerly Emtec), Central San's ERP implementation and support consultant. This contract is used for ongoing support (i.e., troubleshooting, minor enhancements, etc.) as well as larger functionality enhancements and implementations. At this time, the contract has sufficient funds remaining for this implementation, estimated to cost between $110,000 and $130,000. COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its February 27, 2024, meeting and recommended RECOMMENDED BOARD ACTION Authorize the General Manager to execute a contract with U.S Bank for commercial banking, investment safekeeping/custodial, and merchant card services for a term of five years. Strategic Plan Tie -In GOAL FOUR: Governance and Fiscal Responsibility Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, Strategy 3 - Maintain financial stability and sustainability GOAL SEVEN: Innovation and Agility Strategy 2 - Implement organization -wide optimization, Strategy 3 - Be adaptable, resilient, and responsive February 27, 2024 Regular FINANCE Committee Meeting Agenda Packet - Page 155 of 196