HomeMy WebLinkAbout05. Approve updated administrative overhead and benefits rate of 163 percent for Fiscal Year (FY) 2024-25Item 5.
BOARD OF DI RECTORS
POSIT ION PA PER
M E E T ING D AT E:MA R C H 21, 2024
S UB J E C T: A P P R O V E UP D AT E D A D MI NI S T R AT I V E O V E R HE A D A ND B E NE F I T S
R AT E O F 163 P E R C E NT F O R F I S C A L YE A R (F Y) 2024-25
S UB M I T T E D B Y:
C HR I S TO P HE R T HO MA S, A C C O UNT I NG
S UP E RV I S O R
K E V I N MI Z UNO, F I NA NC E MA NA G E R
I NI T I AT I NG D E PART M E NT:
A D MI NI S T R AT I O N-F I NA NC E
RE V IE WE D B Y:P HI L I P L E I B E R , D E P UT Y G E NE R A L MA NA G E R - A D MI NI S T R AT I O N
R oger S . B ailey
General Manager
IS S UE
Board approval is needed to adopt the updated administrative overhead and benef its rate for the f iscal
year ending J une 30, 2025 (F Y 2024-25). T his rate is used f or several purposes, including billing outside
agencies, calculating certain customer rates and charges, and internal use in billing labor costs to capital
projects.
B AC K G RO UND
T he purpose of calculating administrative overhead, employee benefits, and non-work hours rates has
been for C entral San to recover the full cost, including indirect costs, of the services it provides to various
users. T his has been consistent with long-standing Board policy on cost recovery. S taff 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 f or calculating rates and charges and the negotiation of the Clean Water Program contract.
T he administrative overhead and benefits rate is comprised of three sub-components capturing the
following:
1. Administrative overhead consists of all administrative indirect costs for C entral San that are
incurred f or a common purpose benef iting more than one task including all E xecutive Governance
and A dministration D epartment costs, and certain support costs of the E ngineering & Technical
Services and Operations departments.
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2. Employee benefits consist of costs associated with retirement pension payments, medical
premiums, deferred compensation contribution in lieu of social security, and other similar benef its
expressed as a percentage of salaries.
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.
C alculation Methodology
T he current administrative overhead and benef its rate calculation methodology was approved by the B oard
on A pril 3, 2014, and first employed in F Y 2014-15. T he calculation is supported by a study issued by
Matrix Consulting Group, an independent consulting f irm specializing in developing overhead rates f or
governmental agencies in conf ormance with prevailing laws and best practices. I n summary, the
methodology currently used is based on the independent consultant's study and incorporates the f ollowing
previously Board approved principles:
1. Standardizes the methodology for calculating the rate by:
Using the actual cost of benef its as reported in the independently audited f inancial statement
for the benefits component of the calculation rather than budgeted estimates,
Allocates other post-employment benef its (O P E B ) 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,
C ontinuing to treat retiree health and other premiums as indirect, and include them in the
administrative overhead component of the rate, and
Allocating any additional Unf unded Actuarial A ccrued L iability (UA A L ) 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 f or 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 F Y 2014-15 as
the base year (with the rate for F Y 2015-16 using two years of data, and from F Y 2016-17 f orward
fully using three-year smoothing).
Proposed Rate for F Y 2024-25
T he proposed administrative overhead recovery rate f or F Y 2024-25 has been calculated in accordance
with the methodology approved by the Board as outlined. T he proposed rate (three-year smoothed) for
F Y 2024-25 is 163 percent, ref lecting a decline of 1 percent f rom the approved F Y 2023-24 rate of 164
percent. T his is the result of the overall decline in annual rates over the past several years, declining
annually in seven of the past eight years. W hile 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 (F Y
2023-24) to 158.0 percent (F Y 2024-25) which is attributable to the following f actors:
1. Employee Benefits Rate Component - T his 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). T he minimal increase in the benefit cost rate was
primarily driven by a slight increase in benef it premium rates overall in F Y 2022-23. T he increase in
salaries (denominator) is attributed to the labor agreements specif ying cost of living adjustments and
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other salary adjustments (i.e., longevity, step increases, etc.).
2. Admi nistrative Overhead Rate Component - T his component decreased by 3.7 percent f rom 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). W hile relatively minimal, increases
in indirect costs were most evident in the f ollowing 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 f unctions. T he increase in direct salaries (denominator) is attributable to prevailing labor
agreements and other salary adjustments mentioned previously.
T he attached presentation (A ttachment 1) was delivered to the F inance C ommittee which provides
additional highlights of the proposed F Y 2024-25 rate compared to the rates adopted by the Board in prior
years. T his presentation is provided to the Board f or reference and informational purposes only and is not
intended to be covered in-depth with the f ull Board. T he adoption of the annual administrative overhead
and benef its rate is being presented to the Board f or approval on consent as it is considered a routine
matter, being an annual exercise which was prepared using a methodology consistent with prior direction
from the B oard.
ALT E RNAT I V E S /C O NS I D E RAT IO NS
T he methodology used f or this year's calculation employed the same methodology previously approved by
the B oard, 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 f igures instead of actuals. T hese alternatives are not recommended as doing so would
signif icantly 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 F Y 2023-24 rate, an alternative was presented to exclude
the 2021 C O P s debt service, which would signif icantly decrease the rate. T his alternative was not
selected at that time, and is not being recommended currently, as the debt service associated with the
2021 C O Ps is essentially a swap f or the prior pension UA A L expenses (albeit at a signif icantly lower
interest rate) and excluding it would reduce f ull cost recovery, which is a primary objective of the rate.
F I NANC IAL I M PAC T S
T he 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 f or the full recovery of costs incurred f or services provided to customers, including residents, other
agencies, businesses, and developers/contractors.
C O M M I T T E E RE C O M M E ND AT IO N
T he F inance C ommittee received a presentation f rom staff at its meeting on F ebruary 27, 2024.
F ollowing the presentation and a discussion with staff, committee members recommended the matter for
Board approval.
RE C O M M E ND E D B O ARD AC T I O N
Approve the use of the administrative overhead and benef its rate of 163 percent f or F iscal Year 2024-25.
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Strategic Plan Tie-I n
G O A L FO U R : G overnance and Fiscal R esponsibility
Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, Strategy 3 - Maintain financial stability
and sustainability
AT TAC HM E NT S :
D escription
1. P resentation
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1
FY 2024-25
Administrative
Overhead &
Benefits Rate
T. Kevin Mizuno
Finance Manager
March 21, 2024
Table of Contents
1.Issue
2.Background
•Methodology
•Rate Components
•Proposed Rate
•Historical Trends
3.Alternatives &
Considerations
4.Recommendation
1
2
Attachment 1
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2
Issue
•Board approval necessary to update
administrative overhead and benefits
rate to recover full cost of indirect
support services
•Rate used for various purposes:
•Billing outside agencies
•Calculating certain customer rates and
charges
•Capital project labor charges
•Labor charges for grants without program-
specific rates/limits
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
•Utilizes audited actual year-end figures, not budget or
projections
•Employs 3-year smoothing
•Rate comprised of 3 sub-components
Background
3
4
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3
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
Administrative Overhead
& Benefits Rate
Administrative
Overhead
Non-work
Hours
Employee
Benefits
Background
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%
Background
FY 2024-25 Administrative Overhead & Benefits
Rate Sub-Components
Employee Benefits Administrative Overhead Non-Work Hours
5
6
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4
Historical Trends
Background
150.0%
160.0%
170.0%
180.0%
190.0%
200.0%
210.0%
220.0%
230.0%
240.0%
250.0%
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25
Be
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Fiscal Year
Historical Trend of Smoothed versus Singler Year Rates
3 Year Smoothed Rate Single Year Rate
Historical Trends
Background
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25
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Fiscal Year
Historical Trend of Rate Components
Employee Benefits Administrative Overhead Non-Work Hours
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5
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
Recommendation
•Adopt the FY 2024-25 Administrative Overhead and Benefits rate of 163%
to take effect July 1, 2024
9
10
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6
Questions & Discussion
11
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