HomeMy WebLinkAbout10. Consider authorizing the General Manager to execute a contract with U.S. Bank for commercial banking, investment safekeeping/custody, and merchant card services for a five-year termItem 10.
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: C O NS I D E R A UT HO R I Z I NG T HE G E NE R A L MA NA G E R TO E X E C UT E A
C O NT R A C T W I T H U.S. B A NK F O R C O MME R C I A L B A NK I NG, I NV E S T ME NT
S A F E K E E P I NG/C US TO D Y, A ND ME R C HA NT C A R D S E RV I C E S F O R A
F I V E -YE A R T E R M
S UB M I T T E D B Y:
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 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 authorization is requested f or the General Manager to execute a contract with U.S. Bank for
banking, investment saf ekeeping/custodial services, and merchant card services for up to a five-year term,
with an estimated start date of May 1, 2024.
B AC K G RO UND
On August 17, 2023, consistent with prior direction of the Board, staf f brought f orth additional inf ormation
and recommendations related to key aspects of implementing an in-house treasury f unction for C entral
San. S taff provided the f ollowing deliverables to support this recommendation and the B oard’s
deliberation process:
An internal controls risk assessment over the proposed “to be” banking function,
Draft banking and treasury policy and administrative procedures applicable f or the proposed “to be”
treasury structure,
P roposed project implementation plan
After a presentation summarizing the highlights of these deliverables, the Board voted unanimously in f avor
of staf f continuing to pursue the in-house treasury function consistent with the risk assessment, draft
policies and procedures, and project implementation plan. T he project implementation plan highlighted
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seven key phases, as f ollows:
1. Project discovery,
2. R isk Assessment and Board direction/action on treasury structure,
3. Policy development,
4. R equest for proposals (R F P ) for banking services,
5. R F P for investment management services,
6. Enterprise Resource Planning (E R P ) system implementation and configuration changes,
7. W ithdrawal from C ounty P ool.
F ollowing the B oard’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 B ailly, staff developed an R F P f or 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 R F P closed on November 1, 2023, only one bank had submitted a proposal. F ollowing
more extensive outreach by staff to qualif ied banks in the governmental services sector, a second R F P
was issued on November 15, 2023, with a proposal submittal deadline of December 22, 2023.
T he banking services R F P provided a background of Central S an’s history, operations, f iscal 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.). T he R F P
disclosed that proposing banks would be evaluated on the f ollowing criteria:
Understanding the needs and operational requirements of Central S an,
B ank and branch locations,
S cope of services offered, including degree of automation,
Relevant experience managing similar services with governmental agencies,
P rofessional experience and qualif ications of the individuals assigned to the account,
Responsiveness to proposal f ormat and inclusion of all required exhibits/reports,
L ocal decision-making authority to handle emergency needs,
F inancial strength and capitalization of the banking institution,
A dequacy 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,
A bility to provide services as outlined in the Scope of Services and quality of the proposal,
Quality of ref erences,
B est rate of interest paid historically on accounts,
B est earnings credit rate (E C R), and
P roposed cost.
C entral San received f our proposals from the f ollowing banking institutions: B MO B ank, F ive Star Bank,
U.S . B ank, and Wells F argo. S taff and project consultants from Eide B ailly held interviews with each of
the proposed banks on J anuary 9, 2024. A s a result of the evaluation committee’s assessment of written
proposals and interviews pursuant to the R F P’s specif ied evaluation criteria, U.S. Bank was tentatively
selected for further negotiations on a banking services agreement on F ebruary 6, 2024. T he evaluation
committee found U.S. Bank to be the best f it f or Central S an in consideration of all evaluation criteria
included in the R F P, particularly regarding the bank’s reputation and fiscal health, a competitive E C R,
customer service resources and approach, experience with similar implementations, and municipality
ref erences. S hortly af ter the evaluation committee’s decision was publicized, staff and representatives
from U.S . B ank began discussing the desired scope of service, terms, and conditions to be included in
U.S . B ank’s standard banking services contract template. W hile contract negotiations are still underway,
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major elements of the banking services contract will include the following elements contained in the bank’s
proposal:
Scope of Services: T he proposed banking services contract with U. S. Bank covers all the
services needed by Central S an as specif ied in the R F P. Key banking services covered in the
proposed contract include, but are not limited to, the following:
C ollateralization of C entral San’s deposits pursuant to California Government Code section
53651-53652,
A ccess to a dedicated banking system and E R P integration implementation team specializing
in the governmental sector,
A utomated cash management inf ormation access utilizing U.S. Bank’s modern and robust yet
user-f riendly “Single P oint” online commercial banking platf orm. T his platf orm provides all
modern online commercial banking functionalities including:
Transf er and payment management (i.e., positive pay, A C H filters/blocks, etc.),
E R P system integration capabilities (to and from),
Cashflow f orecasting,
P rocessing and depositing collections,
F raud prevention,
User-specific system access/security,
Document imaging.
Access to a dedicated Relationship Manager and Treasury Management C onsultant f or
support needs as well as a dedicated government customer service team to service Central
San’s day-to-day needs,
Z ero Balance A ccounts (Z B A ) 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
I nvestment safekeeping and custody services.
Team: Nick Nelson, Relationship Manager, will serve as Central S an’s dedicated Government
Banking Relationship Manager and is responsible f or U.S. Bank’s Northern C alif ornia portfolio.
D onna Chu, Treasury Management C onsultant, will be Central S an’s primary contact f or treasury
management needs, during and af ter initial implementation. Other staf f of U.S . B ank 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 f ee per transaction
basis, with various f ee types spelled out in a comprehensive fee schedule. T he cost of most
transactions associated with this contract are covered by the E C R, which is earned by maintaining a
minimum cash balance (compensating balance) at all times. T he compensating balance required is
calculated based on the estimated monthly f ees that will be incurred and the E C R. As these
transaction fees are incurred, they are offset by the E C R in lieu of making direct payments. E xcess
earnings do not transfer to Central S an, and f ees in excess of the monthly E C R must be paid
directly. Transactions which are not covered by the E C R include wire transfers, insuf f icient fund
fees, and credit card charge backs, which must also be paid directly, similar to the current
arrangement with the County.
T he attached banking services agreement outlines the detailed f ees, which are consistent with
industry norms for commercial banking. B eyond the various transaction-based f ees, the following
are other critical components memorialized in the contract with U.S. Bank:
E C R – R ate of 2.5 percent, guaranteed for the term of the contract.
S ix-month f ee waiver commencing at the start of implementation, including setup, training, and
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scanning equipment fees.
B onus credit of $5,000 towards lockbox should C entral San implement within six months of
contract signing.
I nvestment safekeeping and custody services fee of one basis point (0.01 percent) on the f irst
$500 million in market value and a half basis point (0.005 percent) thereaf ter with an annual
minimum f ee of $15,000.
Term: T he proposed contract would commence on approximately May 1, 2024, and extend for a
five-year term ending A pril 31, 2029.
Entering into an agreement with US Bank for the af orementioned 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
in line with two strategies of Goal 7 of C entral San's F Y 2023-24 Strategic P lan, including to "be
adaptable, resilient, and responsive" and "implement organization-wide optimization."
ALT E RNAT I V E S /C O NS I D E RAT IO NS
Banking services will be essential to Central S an in an in-house treasury services structure. I n terms of
alternatives, the Board could select another bank. T his is not recommended as U.S. Bank was selected in
a competitive process and has been responsive to Central S an’s stated needs. T he Board could also
consider proposing dif f erent 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. Staf f does not
recommend reducing the term f rom 5 years as this longer term was an important factor in obtaining a
locked-in competitive E C R of 2.5% through the duration of the contract, which set US Bank's proposal
apart f rom the other proposing banks. Additionally, for something as operationally and strategically
signif icant as banking services, a bank change in less than 5 years would be administratively cumbersome
to staff and potentially disruptive to operations. As with nearly all contracts C entral San enters into, this
contract is anticipated to contain a cancellation clause, which will allow C entral San to terminate the contract
with adequate notice, further supporting that a shorter duration contract is not necessary.
F I NANC IAL I M PAC T S
T he execution of this contract f or commercial banking, investment saf ekeeping/custody, and merchant
card services will not result in a material cost increase f rom current costs incurred by Central S an as a
voluntary pooled participant with the C ounty Treasury Pool. W hile it is dif f icult to estimate with certainty,
any cost increases for these services are not expected to exceed $10,000 annually. W hile total f ees 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 S an’s ongoing operations and
administrative structure. A ccordingly, the f ollowing provides a synopsis of potential direct f inancial impacts
associated with entering into a commercial banking, saf ekeeping/custodial, and merchant services contract
with U.S. Bank. I f authorized by the Board to proceed with the recommended staff action, contract terms
and conditions will be negotiated by the General Manager and staf f . A ny material deviations from this
position paper, though not expected, will be disclosed to the B oard at a later date.
F ees for commercial banking services are based on transaction volumes and would increase or decrease
in correlation with volume f luctuations. W hile precise Central S an-specif ic banking volumes were not
available to staff given Central S an’s historical status as a voluntary pooled participant of the County
Treasury P ool, a pro f orma cost analysis was conducted by Central S an’s implementation consultant using
historical cash balances and estimated f uture transaction volumes to estimate the potential monthly f ee for
commercial banking services. T his analysis concluded that Central S an should not expect to directly pay
(via disbursement) any fees f or commercial banking services, largely due to the competitive E C R offered
by U.S. Bank. Given the six-month implementation f ee waiver included in the proposal, no costs are
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expected to be incurred at the onset of the contract f or the purchase of a remote check scanner, initial
check stock, or other banking supplies.
F or investment saf ekeeping and custodial services, f ees would be charged based on the average market
value of investments held. C onsidering the non-local agency investment fund (L A I F ) portion of C entral
San’s investment portfolio has been approximately $140 million on average, staff estimates that the
minimum services f ee of $15,000 would apply.
R egarding merchant card services, costs will include both recurring service f ees 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 B ank's merchant services fees, which do not have a markup, total credit card fees f or over-the-counter
transactions are expected to remain consistent with those under the current arrangement. To put this into
context, f or the fiscal year ended J une 30, 2023, C entral San paid approximately $3,800 f or 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 f ee of $149. T his includes terminals, pin pads, printers, and
an imprinter.
As disclosed in the A ugust 17, 2023, Board P osition P aper requesting direction on treasury structure and
project implementation plans, consultant f ees were expected related to the implementation of the E R P’s
C ash Management module (currently unutilized) and modifications to the P ayables and Receivables
modules. I mplementation costs associated with this project are expected to be covered by an existing
contract with Apps Associates (formerly Emtec), C entral San’s E R P implementation and support
consultant. T his contract is used for ongoing support (i.e., troubleshooting, minor enhancements, etc.) as
well as larger f unctionality enhancements and implementations. A t this time, the contract has suf f icient
funds remaining f or this implementation, estimated to cost between $110,000 and $130,000.
D espite these costs, transition to an in-house treasury structure will provide f or many strategic advantages
that offset these costs, which were considered previously by the B oard when directing staf f to pursue this
initiative f urther. Time saved on more ef f icient bank reconciliations and not needing to drive to the County
each week f or check runs and other transactions will allow F inance Division staff to focus on other
important tasks and projects.
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 reviewed this matter at its F ebruary 27, 2024, meeting and recommended it f or
Board approval.
RE C O M M E ND E D B O ARD AC T I O N
Authorize the General Manager to execute a contract with U.S B ank f or commercial banking, investment
safekeeping/custodial, and merchant card services f or a term of f ive years.
Strategic Plan Tie-I n
G O A L FO U R : G overnance and Fiscal R esponsibility
Strategy 3 - Maintain financial stability and sustainability
G O A L S E V E N : I nnovation and Agility
Strategy 2 - I mplement organization-wide optimization, Strategy 3 - Be adaptable, resilient, and responsive
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