HomeMy WebLinkAbout08. Approve Resolution No. 2024-009 establishing Central San's treasury function and separation from Contra Costa County Treasury Pool, appoint Deputy General Manager - Administration as District's Treasurer, adopt Board Policy (BP) 051Item 8. BOARD OF DI RECTORS POSIT ION PA PER M E E T ING D AT E:MAY 16, 2024 S UB J E C T: A P P R O V E R E S O L UT I O N NO. 2024-009 E S TA B L I S HI NG C E NT R A L S A N'S O W N T R E A S URY F UNC T I O N A ND S E PA R AT I O N F R O M T HE C O NT R A C O S TA C O UNT Y T R E A S URY P O O L , A P P O I NT T HE 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 A S T HE D I S T R I C T 'S T R E A S UR E R , A ND A D O P T B O A R D P O L I C Y (B P ) 051 - BANKING AND CASH MANAGEMENT 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 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 C entral San's B oard previously authorized staf f to pursue an in-house treasury function to improve the ef f iciency of operations, be better positioned to nimbly respond to unf oreseen operational and environmental events and be more aligned with the treasury structure of similarly sized agencies. F ollowing the selection of US B ank to provide banking, custodial saf ekeeping, and merchant card services on March 21, 2024, the next step towards the implementation of an in-house treasury structure is the approval of a R esolution to withdrawal from the County Pool along with the adoption of policies and procedures appointing a District Treasurer amongst other matters. B AC K G RO UND C entral San is a voluntary participant in the Contra Costa County (the County) Treasury P ool and has the option to depart and implement an in-house treasury function with proper B oard authorization. California Health and S af ety Code section 6801 (S ection 6801) outlines the process in which an independent special district such as Central S an can designate a D istrict Treasurer and deposit its f unds with a bank. T he attached R esolution (Attachment 1) addresses the various requirements spelled out in S ection 6801 to withdraw f rom the C ounty P ool and implement an in-house treasury f unction. Once approved by C entral San's B oard of D irectors (the Board), the Resolution must be presented to the County Board of Supervisors allowing Central S an to move f orward with implementing full banking services with US B ank, May 16, 2024 Regular Board Meeting Agenda Packet - Page 58 of 500 Page 1 of 19 the bank selected by Central S an following a formal request f or proposal solicitation process. T he R esolution specifies a "not to exceed" implementation timeframe of fifteen (15) months from the approval date of the R esolution, even though it is the goal of staf f to implement an in-house treasury structure in S eptember 2024. W ith the support of a third-party consultant (E ide Bailly), staff developed a draft Banking & Cash Management board policy (B P 051) establishing key policies over the prudent management of its treasury function, including the appointment of the D eputy General Manager of A dministration as the D istrict's Treasurer (A ttachment 2). I n conjunction with the approval of the attached Resolution, the B oard is also being asked to adopt B P 051 at this time. To supplement to this a thorough process-level Banking & Cash Management Administrative Procedures (A P 051) document was also developed to serve as a General Manager directive to staf f regarding key treasury processes (Attachment 3). W hile it is C entral San's policy that Administrative Procedures are within the authority of the General Manager and do not require Board authorization, A P 051 is being presented to the B oard to enhance the transparency of forthcoming internal treasury protocols once an in-house treasury structure is implemented. A major objective of A P 051 is to establish clear roles, responsibilities, expectations as well as limitations f or key staff involved in the treasury management function. F ollowing the B oard's approval of the attached Resolution as well as B P 051, staff will coordinate with C ounty officials to obtain proper authorization to proceed on the County's end. W hile staff has already provided the attached Resolution to C ounty Counsel f or review and received conf irmation that it is acceptable in f orm, the Resolution must still be brought to the County Board of S upervisors for approval following approval by Central S an's Board. I t is anticipated this will occur sometime in J une or J uly 2024. C oncurrently, staf f will also be working to complete solicitation for investment advisory/management services and make a contract recommendation to the B oard sometime in J uly or August 2024. Staf f will also commence ef f orts with its enterprise resource planning (E R P ) consultant and US B ank to implement banking system integration functionalities (i.e., bank reconciliations, payments, deposits, etc.) and appropriate system-based internal controls and security. ALT E RNAT I V E S /C O NS I D E RAT IO NS T he B oard may direct amendments to the attached R esolution or Banking & Cash Management Board Policy (B P 051), which can either be directed at this meeting or effectuated by requesting staff to return with revisions to either of the documents for consideration at a later date. Staf f does not recommend deferring the adoption of the Resolution or B P 051 as it could adversely impact the in-house treasury implementation target of September 2024 and other contemporaneous project efforts (i.e., E R P modifications, solicitation and selection of and investment advisor/manager, etc.). F I NANC IAL I M PAC T S T he recommended action to approve the attached R esolution and Banking & Cash Management Board Policy by itself will not have any immediate or direct financial impacts. A s required by the County and/or state law, C alif ornia S anitary D istricts that maintain their own treasury f unction are required to obtain and maintain both crime & fidelity I nsurance as well as a surety bond, which must be deposited annually prior to October 1st of each year at an amount determined by the Board. W hile Central S an already possesses crime & fidelity I nsurance, the coverage and amount will be re-assessed during insurance renewal process. I t is also unclear what size of a surety bond will be appropriate, which is being assessed currently by Risk Management and F inance D ivision staf f , as well as project implementation consultants, Eide B ailly. T he additional cost f or expanded insurance coverage and meeting the surety bond requirements is not expected to be signif icant and is expected to be covered by the F Y 2024-25 S elf I nsurance f und budget. Any costs in excess of Board approved Self -I nsurance fund budget will be brought back to the Board f or approval as required by policy. May 16, 2024 Regular Board Meeting Agenda Packet - Page 59 of 500 Page 2 of 19 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 meeting on April 16, 2024, and recommends this matter for Board approval with a few minor revisions. At the suggestion of the F inance Committee, staff amended B P 051 to include a requirement (bullet #5 within the "Policy" section) that an annual audit must be perf ormed within twelve months of the fiscal year end pursuant to state law. A dditionally, at the request of the F inance C ommittee, A P 051 was updated to make reference to the internal audit function, which may be used to assess the design, implementation, and operational effectiveness of internal controls over the treasury f unction. T he updated drafts of B P 051 and A P 051 are attached hereto, with these changes highlighted using track changes in red font. RE C O M M E ND E D B O ARD AC T I O N Approve R esolution No. 2024-009 establishing C entral San's own treasury function and separation from the Contra Costa County Treasury P ool, appoint the Deputy General Manager - A dministration as the D istrict's Treasurer, and adopt Board P olicy (B P) 051 - Banking and Cash Management. 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 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 AT TAC HM E NT S : D escription 1. Resolution 2. B anking & C ash Management B oard Policy (B P 051) 3. B anking & C ash Management Administrative Procedures (A P 051) May 16, 2024 Regular Board Meeting Agenda Packet - Page 60 of 500 Page 3 of 19 RESOLUTION NO. 2024-009 A RESOLUTION OF THE CENTRAL CONTRA COSTA SANITARY DISTRICT AUTHORIZING TRANSFER OF TREASURER AUTHORITY FROM CONTRA COSTA COUNTY TO THE BOARD OF DIRECTORS OF THE CENTRAL CONTRA COSTA SANITARY DISTRICT APPOINTING A DISTRICT TREASURER AND AUTHORIZING THE DEPOSIT OF DISTRICT FUNDS WITH U.S. BANK WHEREAS, the Central Contra Costa Sanitary District (Central San) is a special district and a public entity established under the Sanitary District Act of 1923 and operating pursuant to California Health and Safety Code section 6400 et seq: and WHEREAS, the Contra Costa County Treasurer currently maintains custody of all Central San funds; and WHEREAS, Central San intends to withdraw its money from the County treasury and appoint a District Treasurer pursuant to Health and Safety Code section 6801; and WHEREAS, Central San has a system to record its financial transactions under generally accepted accounting principles that is available upon request to reflect Central San’s financial position as well provide sufficient records to be audited by an independent auditor; and WHEREAS, Central San undergoes an annual financial statement audit as engaged by an independent auditor and the audit is conducted under generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States; and WHEREAS, Central San has a system of internal controls over its various transaction cycles and business operations, including having developed procedures for drawing and signing checks, for preventing fraud and ensuring accountability, and ensuring that bond principal and salaries shall be paid when due; and WHEREAS, it is the policy of Central San to pay claims and demands before they are approved by the Board of Directors if the Treasurer determines that the claims and demands conform to Central San’s approved budget; and WHEREAS, to establish an alternative depository for Central San funds, Health and Safety Code section 6801 requires Central San’s Board of Directors to fix the amount of the surety bond for Central San’s District Treasurer; and WHEREAS, Central San’s Board of Directors approved the establishment of a bank account with US Bank as a depository for Central San’s funds; and WHEREAS, it is the desire of Central San’s Board to appoint a District Treasurer and establish an alternative depository to the County Treasurer, pursuant to Health and Safety Code section 6801. Attachment 1 May 16, 2024 Regular Board Meeting Agenda Packet - Page 61 of 500 Page 4 of 19 Central Contra Costa Sanitary District Resolution No. 2024-009 Page 2 of 3 NOW, THEREFORE, THE BOARD OF DIRECTORS OF THE CENTRAL CONTRA COSTA SANITARY DISTRICT DOES HEREBY RESOLVE AS FOLLOWS: Section 1. The Recitals set forth above are true and correct and are incorporated into this Resolution by this reference. Section 2. Central San’s Board hereby appoints the Deputy General Manager - Administration as its District Treasurer who will serve in the place of the County Treasurer. Section 3. Central San’s Board wishes to withdraw its money from the County Treasury and hereby states its intention to withdraw its money from the County Treasury and have all revenues collected by the County on behalf of Central San sent to US Bank. Section 4. Central San’s Board hereby states that Central San will establish its own relationship with the Local Agency Investment Fund (“LAIF”). Section 5. Central San’s Board and the County Board of Supervisors shall determine a mutually acceptable date for the withdrawal of the district’s money from the County Treasury to take place but no later than 15 months from the date of this Resolution. Section 6. Central San’s Board hereby designates US Bank as the depository of Central San’s money. Section 7. Central San’s District Treasurer and all Central San employees responsible for handling Central San’s finances shall be covered in the amount set forth in Central San’s Employee Dishonesty (Crime & Fidelity) Insurance Policy with National Union Fire Insurance Company of Pittsburgh, PA. Section 8. Central San’s District Treasurer shall make quarterly or more frequent written reports to Central San’s Board, as the Central San Board shall determine, regarding the receipts and disbursements and balances in the accounts controlled by Central San’s District Treasurer. Section 9. Central San’s Board shall determine the amount of a surety bond that will be deposited by the District Treasurer annually prior to October 1 of each year. Section 10. Central San’s management has developed a system of internal controls, policies, and procedures regarding Central San’s system of accounting, the drawing of checks, the timing of payments such as bond principal, salaries, and other demands and claims. Section 11. The Board Secretary shall certify the adoption of this Resolution. May 16, 2024 Regular Board Meeting Agenda Packet - Page 62 of 500 Page 5 of 19 Central Contra Costa Sanitary District Resolution No. 2024-009 Page 3 of 3 PASSED AND ADOPTED this 16th day of May 2024, by the Board of Directors of the Central Contra Costa Sanitary District by the following vote. AYES: Members: NOES: Members: ABSENT: Members: Michael R. McGill President Pro Tem Central Contra Costa Sanitary District County of Contra Costa, State of California COUNTERSIGNED: Katie Young, CPMC, CMC Secretary of the District Central Contra Costa Sanitary District County of Contra Costa, State of California Approved as to form: J. Leah Castella, Esq. Counsel for the District May 16, 2024 Regular Board Meeting Agenda Packet - Page 63 of 500 Page 6 of 19 Number: BP 051 Authority: Board of Directors Effective: 05/16/2024 Revised: Not applicable Reviewed: Not applicable Initiating Dept./Div.: Administration/Finance BOARD POLICY 1 BANKING & CASH MANAGEMENT PURPOSE To set forth policy direction for banking and cash management at Central San. POLICY 1.The Board recognizes the strategic value of maintaining an in-house treasury function as it relates to improved operational control, process efficiencies, and responsiveness to change (i.e., emergencies, disasters, laws/regulations, programs, etc.). 2.Management shall establish and enforce suitable internal controls over the banking and cash management function to safeguard Central San’s liquid assets. A wide range of internal controls should be considered including those that are preventative, detective, as well as corrective. 3.The Deputy General Manager of Administration shall serve as Central San’s Treasurer with specific authorities delegated by the General Manager as set forth in internal administrative procedures. 4.Based on the significant amount of assets involved, banking and custodial safekeeping services must be authorized by the Board. 5.Pursuant to California Government Code section 26909 an independent audit of Central San’s annual financial statements shall be completed within twelve months of the end of the fiscal year. As part of the audit process, Central San’s cash and investment balances, including the underlying treasury internal control environment, shall be considered. The nature, timing, and extent of audit procedures to be performed are determined by the independent auditors through a risk assessment process conducted in accordance with auditing standards generally accepted in the United States of America. In addition to the annual independent audit, the Board may direct Central San’s internal auditor to perform additional procedures over the treasury function as desired. 4. Attachment 2 May 16, 2024 Regular Board Meeting Agenda Packet - Page 64 of 500 Page 7 of 19 Number: BP 051 BANKING & CASH MANAGEMENT POLICY Page 2 of 2 2 AUTHORITY The General Manager has the authority to execute all banking and custodial safekeeping service agreements once the necessary Board authority to proceed is obtained. The General Manager shall establish, implement, and enforce administrative procedures to support this policy. PERIODIC REVIEW This policy shall be reviewed at least biennially to ensure alignment with current strategic priorities set by the Board. Any changes must be approved by the Board following initial review by the Administration Committee. [Original Retained by the Secretary of the District] May 16, 2024 Regular Board Meeting Agenda Packet - Page 65 of 500 Page 8 of 19 Number: AP 051 Related Board Policy: N/A Authority: General Manager Effective: Revised: Reviewed: Initiating Dept/Div: Administration/Finance Date Signed: Philip Leiber, Deputy General Manager, Administration Attachment 3 Roger S. Bailey, General Manager ADMINISTRATIVE PROCEDURE BANKING & CASH MANAGEMENT 1. PURPOSE To set forth administrative procedures over Central San’s banking and cash management functions establishing requirements for opening, closing, updating, and managing bank accounts and cash balances. Beyond ensuring the security of Central San’s monetary assets, this policy shall also outline protocols to ensure Central San maintains adequate liquidity for covering operations while minimizing idle cash for utilization in the investment portfolio. 2. SCOPE The policies in this document shall apply to all employees involved in the banking and cash management function. Excluded from the scope of this administrative procedure are many policy requirements associated with Central San’s investments, accounts payable, payroll, and cash receipts processes as those are covered in separate related policies listed hereafter. 3. RELATED POLICIES This policy focuses on the administrative procedures associated with banking protocols. Other administrative procedures covering protocols associated with cash management include the following: a. Investments (BP 005) b. Petty Cash Reimbursements (AP 103) c. Cash Receipts Handling (AP 105) d. Bi-weekly Payroll Funding (AP 107) e. Accounts Payable (AP 108) May 16, 2024 Regular Board Meeting Agenda Packet - Page 66 of 500 Page 9 of 19 Number: AP 051 BANKING & CASH MANAGEMENT Page 2 of 11 4. BACKGROUND Central San’s Banking & Cash Management Administrative Procedures were developed in preparation for its transition from being a voluntary pooled participant with the Contra Costa County Treasurer Tax Collector’s Office to taking the treasury function (i.e., banking and cash management) in-house. Following several months of deliberation and planning involving peer agency benchmarking, risk assessment analysis, best practice research, independent professional consultations, and public discussions with the Board, it was concluded that a transition to an in-house treasury function was in the strategic best interest of Central San. As a prerequisite to this move, the Board took action to appoint a Treasurer and adopt these Banking & Cash Management Administrative Procedures, with the purpose of establishing clear policy and process guidelines, roles, and responsibilities for staff, as well as establishing a framework for developing internal controls to protect those monetary assets. 5. DEFINITIONS a. ACH Credit – Equivalent to a digital check “written” by the payer that instructs the ACH network to transfer funds from their account to a payee’s account. An ACH credit transaction is completely electronic, eliminating the need for a written paper check and visit to the bank. The most common type of ACH credit transactions are payroll direct deposits. Often referred to as “push” transactions, ACH credits typically take 1-2 business days to process. b. ACH Debit – Initiated by the payment receiver, an ACH debit is the most common type of ACH transfer. Also known as a “pull” transaction, the receiver is “pulling” funds from the payer. Per National Automated Clearing House (NACHA) rules, ACH debits must be completed within one business day. c. Automated Clearing House (ACH) – The primary system that agencies use for electronic funds transfers. With ACH, funds are electronically deposited in financial institutions, and payments are made online. d. Bank Account – Any and all bank and investment accounts with financial institutions including but not limited to checking, savings, money market, certificates of deposits (CDs), mutual funds, and investment accounts. e. Cash – coins and currency and all negotiable instruments with monetary value (including but not limited to checks, money orders, ACH transactions, etc.), that can be deposited into a bank account. f. Check - A written, dated, and signed instrument that directs a bank to pay a specific sum of money to the bearer. The person or entity writing the check is known as the payor or drawer, while the person to whom the check is written is the payee. g. Collateralization of Deposits – Process by which a bank or financial institution pledges securities, or other deposits for the purpose of securing the repayment of deposited funds. May 16, 2024 Regular Board Meeting Agenda Packet - Page 67 of 500 Page 10 of 19 Number: AP 051 BANKING & CASH MANAGEMENT Page 3 of 11 h. Custodial Agreement – An arrangement wherein one holds an asset or property on behalf of the actual owner (beneficiary). This may include cash, stock certificates, bonds, and other financial instruments. The custodian is responsible for safeguarding these types of assets, usually held at one of the custodian’s premises, a sub-custodian facility, or an outside depository. i. Electronic Funds Transfer (EFT) - This encompasses Automated Clearing House (ACH) debits, ACH credits (e.g., direct deposit) and wire transfers. j. Positive Pay - A common automated cash service that helps banks detect fraud by matching a company's issued check with the check presented for payment. The dollar amount, check number and account number must all match, or the check is flagged and sent back to the issuer for review. k. Wire Transfer – An electronic transfer of funds via a network that is administered by banks and transfer service agencies around the world. Wire transfers involve a sending and receiving institution and require information from the party initiating the transfer, such as the receiver’s name and account number. 6. SEGREGATION OF DUTIES As an underlying principle, cash management processes should be developed such that no individual is able to complete a transaction from start to finish in isolation. This entails segregating the core transactional duties of recordkeeping (i.e., ability to record the transaction in the accounting system), custody (i.e., having access to blank check stock or ability to initiate an ACH credit or wire transfer), and authorization (i.e., signing a check or releasing a wire transfer) between different individuals (or work groups) when practical. Alternatively, compensating internal controls should be implemented where full segregation of duties is not feasible. Generally, the cost of implementing an internal control (i.e., number of employees, staff time, technology, etc.) should not exceed its benefit. Individuals with the authority to instruct a bank to make positive pay exceptions cannot have any responsibility for preparing the bank reconciliation of that bank account. Individuals assigned by the Finance Manager to reconcile the account shall not be the same individuals who are authorized to sign checks or approve EFTs on the account. 7. ROLES AND RESPONSIBILITIES The following are the core parties involved in the cash management and banking function and associated roles and responsibilities: a. Board of Directors Central San’s elected Board of Directors (Board) are the governing body of Central San. While administrative matters are delegated to the General Manager, policy-level decisions and responsibilities are retained by the Board. Key banking and cash management responsibilities of the Board include the following: May 16, 2024 Regular Board Meeting Agenda Packet - Page 68 of 500 Page 11 of 19 Number: AP 051 BANKING & CASH MANAGEMENT Page 4 of 11 i. Authorize master banking and investment services agreements. ii. Adopt and periodically review banking and cash management policies. iii. Appoint the position to serve as Central San’s Treasurer, currently the Deputy General Manager of Administration. b. General Manager Central San’s General Manager serves as the chief executive officer of Central San overseeing all operating departments through two Deputy General Managers, among other members of the executive team. Key banking and cash management responsibilities of the General Manager include the following: i. Execute banking and investment services agreements, following Board approval. ii. Authorize and ensure the enforcement of policies and administrative procedures. Adopt policy revisions as needed. iii. Check signer (backup to Treasurer and Secretary of the District) iv. Approve wire transfers (see Exhibit A for limits) v. Authorize investment actions in line with BP 005 (see Exhibit A for limits) vi. Authorize intra-banking transfers (backup to Treasurer) c. Deputy General Manager of Administration (Treasurer) Central San’s Deputy General Manager of Administration oversees Central San’s Administration Department and shall also serve as Treasurer. The Treasurer, not being involved in any recording or reconciliation function, shall serve as the primary signatory with the bank. Key banking and cash management responsibilities of the Treasurer include the following: i. Oversee compliance with banking custodial services agreement. Ensure timely renewals of master contract and solicitation for new banking services as needed. ii. Implement and enforce policies and administrative procedures as authorized by the General Manager. Recommend policy revisions for consideration of approval by the General Manager as needed. iii. Authorize banking services ancillary to master custodial agreement (i.e., lockbox, credit card acceptance, remote deposit, etc.). iv. Authorize creation or closure of operational accounts under master custodial bank agreement. v. Add or remove online banking users and specify authorization limits (secondary). vi. Check signer (in addition to the General Manager and Secretary of the District) vii. Approve wire transfer (see Exhibit A for limits) viii. Administer ACH filters and blocks (secondary) ix. Approve positive pay file exceptions (secondary) May 16, 2024 Regular Board Meeting Agenda Packet - Page 69 of 500 Page 12 of 19 Number: AP 051 BANKING & CASH MANAGEMENT Page 5 of 11 x. Authorize investment actions in line with BP 005 (see Exhibit A for limits) xi. Authorize intra-banking transfers (secondary, see Exhibit A for limits) d. Finance Manager (Deputy Treasurer) Central San’s Finance Manager oversees the Finance Division, within the Administration Department, and shall also serve as Deputy Treasurer. The Deputy Treasurer, not being directly involved in any recording or reconciliation functions, shall serve as a secondary signatory with the bank. Key banking and cash management responsibilities of the Deputy Treasurer include the following: i. Oversee Finance Division, including assigning banking and cash management responsibilities and tasks to staff as deemed appropriate. ii. Act as primary point of contact with bank on day-to-day administrative matters. iii. Assist with the implementation and enforcement of policies and administrative procedures. Recommend policy revisions as needed. iv. Serve as Treasurer in prolonged absence of Treasurer. v. Add or remove online banking users and specify authorization limits (primary). vi. Review and approve (but not prepare) bank reconciliations. vii. Prepare and deliver quarterly investment portfolios. viii. Approve wire transfers (see Exhibit A for limits). ix. Edit ACH Filters and Blocks (primary). x. Approve positive pay file exceptions (primary). xi. Authorize investment actions in line with BP 005 (see Exhibit A for limits). xii. Authorize intra-banking transfers (primary, see Exhibit A for limits). xiii. Delegate submission/upload of ACH credit and positive pay files to bank to appropriate Finance Division staff. e. Internal Auditor xiii. Central San’s Internal Auditor serves a crucial role in assessing the design, implementation, and operating effectiveness of internal controls. While an internal function, the Internal Auditor, reporting directly to the General Manager, is independent from management of the accounting and finance function regarding the design, enforcement, and monitoring of the internal control environment and activities. As part of the annual audit plan development, the Internal Auditor shall assess inherent and internal control risks associated with the banking and cash management function, and design appropriate audit procedures as warranted. Separate from this risk assessment process, the General Manager may direct the Independent Auditor to conduct specific audit procedures over the banking and cash management function. 8. AUTHORIZATION / SIGNATURIES There should be three or more signatories for each bank account. An authorized signatory who is separated from Central San, or otherwise has a change in employment or job responsibilities, must be removed from the list immediately and the bank notified in writing. Central San staff should monitor the list of signatories with the bank and at least annually May 16, 2024 Regular Board Meeting Agenda Packet - Page 70 of 500 Page 13 of 19 Number: AP 051 BANKING & CASH MANAGEMENT Page 6 of 11 verify and update as needed the bank’s record of authorized signatories. No custodian or individual who reconciles the accounts can be a signatory. 9. BANKING STRUCTURE AND CONTROLS a. Check Signing Checks must be signed manually by an authorized signatory or by an authorized representative of the signatory using the appropriate mechanism (e.g., magnetic ink, printers, check signatory plates). Such mechanisms must be always secured. Additional procedures and internal control requirements over payments (and the underlying invoices/claims) are covered separately in AP 108. b. Operational Accounts i. General Account This account is considered the master bank account and is designated for non- credit card deposits. As a control, disbursements should not be issued from this account, but from other operational clearing accounts described below funded by authorized bank transfers from the General Account. ii. Disbursement Clearing Account All disbursements are generated through the accounting system via check, except for petty cash, ACH, and wire transfer payments which are generally initiated outside the system. To enhance security and assist in the tracking and reporting of general disbursements, all non-payroll related checks and ACH payments shall be made from a disbursement clearing account. This account shall be treated as a zero-balancing account, only being transferred funds from the General Account sufficient to meet known obligations. iii. Payroll Clearing Account To enhance security and assist in the tracking and reporting of general disbursements, all payroll related checks and ACH payments shall be made from a payroll clearing account. This account shall be treated as a zero- balancing account, only being transferred funds from the General Account sufficient to meet known payroll obligations (i.e., payroll direct deposits, payroll checks, payroll taxes and other payroll-related transactions). Refer to AP 107 for additional details on how this account shall be monitored and funded. iv. Other From time-to-time various accounts may be required by grantees or state statute. Accounts may also be established if Central San is the fiscal agent for another organization. c. Physical Security of Checks and Printer All check stock, manual or blank, and the check printer device must be kept in a secure location with limited and restricted and controlled access to select personnel only. May 16, 2024 Regular Board Meeting Agenda Packet - Page 71 of 500 Page 14 of 19 Number: AP 051 BANKING & CASH MANAGEMENT Page 7 of 11 Refer to AP 108 for additional details on payment processing security. d. ACH Controls To achieve more efficient processing, cost savings as well provide a more secure transaction as compared to utilizing paper transfers (i.e. checks), agencies are strongly encouraged to receive and send funds electronically via ACH (Automated Clearing House) whenever possible. Because ACH transfers are conducted by the bank using batch processing, ACH transfers are far less expensive than wire transfers. Central San staff shall employ common ACH bank controls, coupled with controls outlined in AP 108, to safely utilize this efficient payment methodology: i. ACH Filters –This control is ideal for routine, recurring bank debit transactions, allowing an institution to establish a maximum dollar amount on ACH transactions with specific approved organizations. ii. ACH Blocks - A debit block prevents ACH debits received for processing at a bank from posting to the designated bank account. Unauthorized debits are automatically returned to the originating (sending) company. e. Use of Positive Pay Positive Pay is a service whereby an institution provides its bank with a file of all checks issued that day. If a check does not exactly match the issued item, the bank is required to notify the account holder. Unless the account holder instructs the bank to pay the item noted as not matching, the bank will return the check unpaid. Central San shall institute, whenever feasible and appropriate, the Positive Pay service provided by its bank to protect itself from check fraud. 10. POOLED CASH Consistent with common practices for other large and medium-sized multi-fund public agencies, Central San’s unrestricted cash is accounted for in a pooled cash fund to allow for efficient cash flow analysis, reconciliation, and maximize investment returns. The allocation of cash to individual funds is accounted for through a pooled cash account, which shall balance with the pooled cash fund in the aggregate. Investment earnings (i.e., interest income, realized gains, etc.) of the pool shall be proportionately divided among the funds on a quarterly basis based on their weighted average balances. May 16, 2024 Regular Board Meeting Agenda Packet - Page 72 of 500 Page 15 of 19 Number: AP 051 BANKING & CASH MANAGEMENT Page 8 of 11 11. BANK RECONCILATIONS a. Purpose Bank reconciliations are an essential internal control tool and are necessary in detecting fraud and correcting accounting errors. Bank reconciliations ensure that all transactions that have been processed by a bank have been reviewed and checked, thus reducing the probability of errors in the data used to record book balances. Bank reconciliations also assist in ensuring that all payments and receipts have been applied to a bank account and have also been recorded in the accounting records. Any differences shall be identified, explained, and rectified. b. Segregation of Duties The reconciliation function requires segregation of duties. In that regard, the person who performs the bank reconciliations shall also not have access to the independent recording of transactions in the accounting system or the processing of cash disbursements or receipts. Any differences identified between the accounting records and the bank statements shall be adjusted by a person other than the one performing the reconciliation. The bank reconciliation must be reviewed and approved by someone other than the preparer. Central San must maintain supporting documentation with all reconciliations in accordance with the record retention policies. c. Timeliness A comprehensive reconciliation of all bank accounts held by Central San must be performed, at a minimum, monthly, by the end of the subsequent month or sooner as practicable. Central San is encouraged to obtain bank statements electronically. d. Stale Checks Through the bank reconciliation process, staff may identify outstanding checks requiring action. Assigned staff shall contact suppliers for all checks that have been outstanding for six months that have been identified as “stale”. At that point, checks shall either be cancelled or cancelled and reissued. i. Stop Payments - A designated staff member of the Finance Division shall be delegated the responsibility for approval of all orders to stop a check after it has been issued. If positive pay is utilized, stop payments are not necessary since designated Central San staff can remove the check in question from the positive pay record. May 16, 2024 Regular Board Meeting Agenda Packet - Page 73 of 500 Page 16 of 19 Number: AP 051 BANKING & CASH MANAGEMENT Page 9 of 11 ii. Voided Checks - A voided check is a check written or partially written but then canceled or deleted by Central San prior to issuance. of “void” is used because checks are pre-numbered for control purposes and every check needs to be accounted for. Voided checks may require some adjustments when reconciling the bank statement. iii. Cancelled Checks - A canceled check is a check that has cleared the depositor’s bank account and has been marked as “canceled” by the bank. Both voided and canceled checks must be retained in accordance with Central San’s record retention policy. 12. LIQUIDITY The Finance Division monitors Central San’s cash position weekly to ensure sufficient liquidity to meet Central San’s weekly payment obligations and other cash flow needs. The weekly cash flow analysis incorporates anticipated cash receipts and disbursements based on historical information, projected financial activity and value of investment returns. Additional cash requirements are identified and drawn down from the Central San’s balance in the State of California Local Agency Investment Fund (LAIF) managed by the State of California Treasurer's Office or other fund(s) as approved by the Treasurer. Temporary idle cash identified in the cash flow analysis shall be invested in a manner consistent with Central San’s Board Policy on Investments (BP 005). Central San’s available cash balance is maintained at a flexible goal of at least $2 million in its primary cash account. The target cash balance may vary depending upon anticipated receipts and disbursements identified during the weekly cash flow analysis. 13. COLLATERALIZATION OF DEPOSITS An inherent risk to maintaining cash at a bank, as disclosed annually in Central San’s Annual Comprehensive Financial Report, is “custodial credit risk.” Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, the Central San will not be able to recover deposits or will not be able to recover collateral securities that are in possession of an outside party. This risk is mitigated in that, of Central San’s total bank balance, $250,000 is insured by the Federal Deposit Insurance Corporation (FDIC). The remaining balances on deposit must be collateralized with securities held by the pledging financial institution’s agent. Pursuant to California Government Code section 53652, the depository (bank) is required to maintain a market value of at least 110% of the pledged collateral. The collateralization agreement between the banking institution and Central San shall adhere to state and federal law. 14. EXCEPTIONS AND ALTERNATIVE PROCEDURE Any exception to this Administrative Procedure shall be approved by the General Manager, documenting the justification for deviating from standard procedures. All exceptions will be deemed non-recurring and approved on a case-by-case basis. Repeated requests for exceptions should trigger management’s review of policy for consideration of revisions. May 16, 2024 Regular Board Meeting Agenda Packet - Page 74 of 500 Page 17 of 19 Number: AP 051 BANKING & CASH MANAGEMENT Page 10 of 11 15. PERIODIC REVIEW This Administrative Procedure shall be reviewed periodically and revised as needed to ensure protocols and internal controls over banking and cash management are revised, as necessary, to reflect changes in Central San operations, personnel, and objectives. Attached Supporting Documents: Exhibit A – Banking & Cash Management Authorization Limits [Original retained by the Secretary of the District] May 16, 2024 Regular Board Meeting Agenda Packet - Page 75 of 500 Page 18 of 19 Number: AP 051 BANKING & CASH MANAGEMENT Page 13 of 13 Exhibit A Banking & Cash Management Authorization Limits Transaction Type Employee Position / Title General Manager Secretary of the District Deputy General Manager of Administration (Treasurer) Finance Manager (Deputy Treasurer) Accounting Supervisor Intra-Bank Account Transfers No limit (backup to Treasurer) None No limit (backup to Finance Manager) No limit (secondary) No limit (primary) Checks1 No limit (backup) No limit (secondary) No limit (primary) None None Investment Purchases2 >$5.0 million None ≤ $5.0 million ≤ $2.5 million None Positive Pay Exceptions No limit (backup) None No limit (backup) No limit (secondary) No limit (primary) Wire Transfers3 No limit (backup) No limit (backup) No limit (secondary) No limit (primary) None 1 All manual checks must be signed by two authorized personnel, with the Treasurer being the primary signer. Checks generated through Central San’s accounting system shall be signed via a properly secured signature plate and include both General Manager’s and Treasurer’s signatures. 2 Ordinarily, barring a short or long-term absence of an approving party, transactions must be approved by all involved parties. For instance, a $6 million investment purchase should be authorized by the Deputy Treasurer (Finance Manager), Treasurer (Deputy General Manager of Administration), and General Manager. 3 Execution requires approval by two different authorized personnel. May 16, 2024 Regular Board Meeting Agenda Packet - Page 76 of 500 Page 19 of 19