HomeMy WebLinkAbout03.c. Review draft Position Paper and conduct biennial review of Board Policy BP 017-Fiscal ReservesPage 1 of 13
Item 3.c.
DCENTRALSAN
MEETING DATE: OCTOBER 1, 2024
BOARD OF DIRECTORS
POSITION PAPER
DRAFT
SUBJECT: REVIEW DRAFT POSITION PAPER AND CONDUCT BIENNIAL REVIEW
OF BOARD POLICY BP 017 -FISCAL RESERVES
SUBMITTED BY: INITIATING DEPARTMENT:
KATIE YOUNG, SECRETARY OF THE SECRETARYOF THE DISTRICT
DISTRICT
REVIEWED BY: KEVIN MIZUNO, FINANCE MANAGER
PHILIPLEIBER, DEPUTYGM -ADMINISTRATION
ROGER S. BAILEY, GENERAL MANAGER
ISSUE
Revisions to Board policies require the review and approval of the Board of Directors (Board).
BACKGROUND
As part of the biennial review of Board Policy BP 017 - Fiscal Reserves consider the proposed revisions:
• Clarify that sewer service charges and taxes are "largely" received in two installments as minor
installments are also received in October (unsecured property taxes) and in June (5 percent true -up)
annually.
• Provide a more precise definition of how working capital is calculated for improved transparency.
Attachment 1 includes the proposed red -lined revisions.
ALTERNATIVES/CONSIDERATIONS
The Board may choose not to consider the proposed revisions or direct staff to make additional revisions
to the policy.
FINANCIAL IMPACTS
None.
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COMMITTEE RECOMMENDATION
The Administration Committee reviewed this matter at its meeting on October 1, 2024 and recommended
RECOMMENDED BOARD ACTION
Approve updated Board Policy BP 017 - Fiscal Reserves.
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 FIVE: Safety and Security
Strategy 2 - Protect personnel and assets from threats and emergencies
ATTACHMENTS:
1. Updated Board Policy BP 017 -Fiscal Reserves (Red -lined)
October 1, 2024 Regular ADMIN Committee Meeting Agenda Packet - Page 63 of 182
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Number: BP 017
Authority: Board of Directors
Effective: September 17, 2015
Revised: DeEember2,2-021October 17, 2024
Reviewed: 11 /0''�October 1, 2024
Initiating Dept./Div.: Administration
BOARD POLICY
FISCAL RESERVES
PURPOSE
To set forth the Districts' policy for establishing and maintaining fund reserve targets for
each of the District's reserve funds. Fiscal reserves provide working capital for
operations and maintenance activities, funding for long-term capital improvement
requirements, fulfillment of legal, regulatory and contractual obligations and mitigation of
risk and liability exposures.
=IIfVA
This policy is intended to ensure that the District has sufficient cash flow to meet current
and future needs and provide transparency to its ratepayers by establishing fund
reserve targets for each of the District's reserve funds. Reserve funds are needed to
provide funding for planned and unplanned events. Planned events include, but are not
limited to:
• accumulating balances to fund operating needs
• capital improvement program needs for capacity expansion and renewal and
replacement of existing assets
• debt service obligations,
• providing funds to mitigate cash flow variances throughout the fiscal year, and
• funding for employee related pension and other post -employment benefits
Unplanned events include:
• accounting for revenue shortfalls
• unanticipated expenses
• paying for unforeseen emergency events
The established reserve targets defined herein provide guidance for long-term financial
planning and maintaining the District's long-term financial health. Adequate fund
reserves are of value to: 1) provide working capital to fund operating needs; 2) provide
working capital to fund capital improvement program needs; 3) provide a financial
cushion for dealing with unanticipated financial needs and emergencies; and 4) are a
component of achieving favorable credit ratings which can help to reduce the costs of
issuing debt.
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Number: BP 017
FISCAL RESERVES
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This policy designates specific reserve accounts and establishes certain targets that the
Board of Directors has determined to be in the best interest of the District. It also
establishes the authority of the Board and staff for the implementation and maintenance
of the reserve fund targets defined herein. For each reserve, this policy specifies a
targeted level (if applicable), the conditions and procedures for the use or replenishment
of the reserve, and authorities for the General Manager (GM) related to such.
Reserve Fund Targets
The District maintains a number of reserve funds. All funds are designated or restricted
for specific purposes and are independent of one another. Each year the Board should
review its actual and recommended reserve targets and replenish each designated
reserve fund as needed.
Definitions:
A. Designated Reserves
Established and designated for specific purposes. These funds are to be utilized
to fund such things as operations and maintenance, future capital facilities, repair
and replacement of existing assets, economic uncertainties, regulatory
requirements, local disasters and other financial hardships.
B. Restricted Reserves
Restrictions on the use of these funds are imposed by an outside source such as
creditors, grantors, contributors, laws, or regulations governing use.
Achieving Fund Reserve Targets
Each Designated reserve has been set at a targeted level by the Board through this
Policy. The District will update its 10-year rate model each year in order to determine
appropriate rate and fee adjustments, or to confirm the continued necessity of multi -year
rate actions previously adopted. Rate and fee adjustments should be adopted to
achieve and maintain -the District's minimum fund reserve targets over the 10-year
planning period. This can include phasing in a series of rate increases to gradually
restore reserves to target levels over a number of years. For financial planning
purposes, it is acceptable for reserves to drop below their target level on a temporary
basis, as long as the District takes action to achieve the target over the planning period
and as otherwise specified in this policy for each reserve.
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Number: BP 017
FISCAL RESERVES
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Types of Reserves
A. Operations and Maintenance Fund — Working Capital Reserves (Designated)
The operations and maintenance fund provides for the general operations,
maintenance and administration of the District. Sewer Service Charge (SSC)
revenues are collected by the Contra Cost County Tax Assessor's Office and
remitted to the District largely in two installments in April and December of each
year. The Government Finance Officers Association (GFOA) recommends local
governments establish a customized target amount of working capital as the
measure of available margin or buffer in enterprise funds. Accordingly, in order
for the District to pay its ongoing expenses throughout the year, it reserves a
specified percentage of prospective budgeted gross operating expenditures at
the start of each fiscal year as its targeted working capital reserve. The specified
percentage is 41.7% (representing 5 months of annual expenses). This working
capital reserve fund is typically used in the normal course of District operations.
For purposes of this policy "working capital" shall be defiRed-calculated as the
SUM of ni irrent i inrestrinted nosh onrd unrestricted and available
current assets (i.e., cash, investments, receivables, prepaids, etc.) adjusted fer
year_enrd nlosing onnruols onrd other timing issi 1esless current labilities as of fiscal
year end.
Provisions Regarding Usage:
Calculation of the Reserve: Projections of the reserve are made in connection
with financial planning and rate setting, where rates may be set to achieve a
targeted reserve level. The year-end reserve amount is re -calculated annually in
connection with the annual financial statement closing and audit and compared
to the required reserve level. Any variance from the required level would be taken
into account when rates and budgets are set for the subsequent year.
Draws from the Reserve: Reductions can be made to cover normal O&M
spending up to the overall total O&M budget amount, consistent with the
GM delegation of authority.
Any O&M spending in excess of the overall approved O&M budget would
require a budget amendment by the Board.
Additions to the Reserve: The Reserve balance would increase with the
receipt of revenues. Overall net additions are made annually through
planned net income. The ending reserve balance is calculated as part of
the annual financial close process.
B. Capital Improvement Project Fund — Working Capital Reserves (Designated)
The capital projects fund provides for treatment plant and collection system asset
renewal and replacement expenditures, general improvements, and recycled
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Number: BP 017
FISCAL RESERVES
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water, as well as office facilities renewal, vehicle and equipment replacement,
information systems replacement and miscellaneous capital needs. Property Tax
and SSC revenues, which comprise a significant portion of annual capital project
revenues, are also GolleGterd by the Contra (most CO inty Tax Assessor's OffiGe
e
and remitted to the
rllstrlGtCentrral San OR tWE)mApril and Denemhe
of eaGhyear. ASRoteGFCMreGOFnrnends r
IGGali goy rcrRments-
e
available margin or buffer eRrterprise fi inrls. AG y in order o meet the
Gash fIGW Reeds of the rani+al improVernents program the DistriG+Central San
reserves r'n�. 0% of the anni ial nnn_hnnd fi Riled Gapwi+al prejeGts budget atthestart
Of eaGh fisEa year as its targeted werkiRg Gapitareserve (i.e. the 5
reniireme it eVGI Arles prejer•ts anticipated to he fi Riled with available houd
proceerds in that fisGal yearl. In addition to helping to ensure adequacy of intra-
year funds, this reserve may- also hold funds beyond one fiscal year in the event
of slower than anticipated capital project spending, or to set aside funds
necessary to meet future year capital spending needs. For purposes of this
policy "working capital" shall be calculated as the sum of unrestricted and
available current assets (i.e., cash, investments, receivables, prepaids, etc.) less
current (abilities and unspent capital project carryforwards as of fiscal year end.
For^ purposes f this, "w g Gapit�hall�QefiRed ast si rn ref Gurrrret
i inrestriGted Gash aprl adjusted for i rpspent Gapital prefect
Garryfepn/arylse i iyearend Glosing aGGrals and ether timii i ng isses
f
Provisions Regarding Usage:
This fund is used in the normal course of District operations. Funds are drawn
down on a routine basis through capital project spending and replenished
through the receipt of revenues. In addition:
Draws from the Reserve: The reserve would be drawn down through
capital project spending.
On a planned basis (in advance of the subject year), the reserve can be
drawn down if the reserve balance is higher than the required/targeted
level. This would be done by setting rates such that contributions to the
fund are less than expenditures. Such reductions are implicitly approved
when the Board sets rates and represent underlying assumptions in the
financial plan. A forecast of the reserve, including any draw down, is
included in the budget book provided to and adopted by the Board.
The reserve is also drawn down during a fiscal year related to timing of
SSC and ad valorem tax collections; capital expenditures can occur in
advance of such revenues. - No specific authorization is required related
to this normal use of this reserve.
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Number: BP 017
FISCAL RESERVES
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The reserve may also be drawn down during the year due to:
(1) Planned capital expenditures that exceed the total approved capital
budget (which includes the current year CIB plus prior year
carryforward). This would generally be possible if there were
additional funds from an unallocated prior year variance or
revenues have surpassed the current year's projection.
(2) Planned capital expenditures due to construction contracts
awarded by the Board that exceed the project budget for the
subject year; whereas funds are available for that project in the
subsequent year's budget, and funds are not otherwise available to
be transferred from the CIB contingency account or another
project(s).
Board/Committee approval of such draws described in items (1) and
(2) would be required, unless provided for in the GM Delegation of
Authority.
Additions to the Reserve: The Reserve balance would increase with the
receipt of revenues.
Overall net additions to the Reserve are made when sewer construction
fund revenues (including planned transfers) exceed expenses over the
course of a year. This can occur on a planned or unplanned basis. On a
planned basis, rates would be set to provide additions to the reserve when
the reserve balance is below the targeted level. On an unplanned basis,
additions to the reserve occur through favorable O&M or capital budget
variances.
C. Self -Insurance Fund Reserves (Designated)
The Self -Insurance Fund (SIF) was established in 1986 to allow the District to
self -insure a portion of its risks. This reduces the cost of insurance premiums
and gives the District greater control over its retained losses. The Board
establishes the amount of risk retained and reviews the self -insured retention
periodically to align it with the Board's risk tolerance, the District's loss
experience, and insurance market conditions.
Government Accounting Standards Board Statement No. 10 (GASB-10)
established requirements on how public agencies must fund their self -insured
risks. To comply with GASB-10, reserves for certain types of liability risks were
segregated into a sub -fund that must be actuarially reviewed at least every two
years. In order to fund GASB-10 retained risks this sub -fund ("A") shall maintain
a minimum reserve of at least three times the amount of the District's self -insured
retention, which is currently $500,000, and accordingly the fund presently has a
targeted level of $1,500,000. The Self-insurance Fund Reserves and Self -
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Insurance Catastrophic Loss/Emergency Reserves are comprised of cash and
investments within the Self Insurance fund, adjusted for year-end closing
accruals and other timing issues.
Provisions Regarding Usage:
Draws from the Reserve: Reserve funds are used to pay claims and
claims expenses within the self -insured retention during the fiscal year.
Individual payments are reported to the Finance Committee in the monthly
expenditures report and to the Administration Committee in Risk
Management Reports. Total fund expenditures are reported to the Board
in the Risk Management Annual Report. Payments are governed by the
limits set in the GM Delegation of Authority.
Additions to the Reserve: Annually, upon the Board's adoption of the SIF
and O&M budgets, this reserve is replenished with an allocation of Sewer
Service Charge funds, or a transfer of O&M funds in an amount needed to
meet the minimum reserve requirements stated above.
D. Self -Insurance Catastrophic Loss/Emergency Reserves (Designated)
In order to mitigate the financial impacts and maintain uninterrupted service in
the event of an emergency or catastrophic event the District maintains a
Catastrophic Loss/Emergency Reserve balance of $7.5 million in the SIF. There
is an expectation that the targeted level of the Catastrophic Loss/Emergency
Reserve balance level will be adjusted biennially to reflect inflation and other
appropriate factors as part of the biennial policy review. The Self-insurance Fund
Reserves and Self -Insurance Catastrophic Loss/Emergency Reserves are
comprised of cash and investments within the Self Insurance fund adjusted for
year-end closing accruals and other timing issues.
This reserve (housed in the SIF (Sub Fund C)), holds funds for the following
purposes:
1. Insurance premium payments and related expenses
2. Claims settlements and expenses for self -insured losses not governed by
GASB 10
3. Costs to initiate claims against others
4. Funds reserved to respond to emergency conditions as determined by the
Director of Emergency Services.
Provisions Regarding Usage:
Draws from the Reserve:
Draws for items 1, 2, and 3 shall be made in accordance with the
GM's authority outlined in Resolution 2016-046 or updates thereto.
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• Draws for item 4 shall be made in accordance with the authority
granted to the Director of Emergency Services as outlined in
Resolution 2010-089 or updates thereto.
Additions to the Reserve:
• This fund is replenished annually upon the Board's adoption of the
SIF Budget. This reserve is replenished with an allocation of Sewer
Service Charge funds, or a transfer of O&M funds in the amount
needed to maintain a reserve of $7.5 million.
E. Debt Service Reserves "Bond Reserve" (Restricted)
The District has the capacity to finance capital projects through the issuance of
bonds and various types of debt financing. A requirement of some types of debt
may include the establishment and maintenance of a contingency reserve that is
defined in the debt documents. If required, the Bond Reserve funding level will
be set at the amount required in the debt documents. Changes to the reserve
amount typically only occur due to: (1) additional debt being issued; (2) the
required reserve amount changes due to normal amortization and repayment of
debt; and (3) the debt is fully az,,, r+�Qamortized, and the reserve is
extinguished.
As of Q^+��r September 20244-, there is no Debt Service Reserve/Bond
Reserve in place.
Provisions Regarding Usage:
Draws from the Reserve: Use of the reserve to pay debt service would
occur if the funding requirement decreased, in this case, excess funds
would be applied to next required debt payment; or funds were otherwise
unavailable to pay debt service and would only occur in extraordinary
situations. In such circumstances, the GM would notify the Board of the
planned use of the reserve, and report via GM written announcement at a
subsequent next upcoming Board meeting.
Additions to the Reserve: are made in connection with a Board approved
bond issuance during the bond closing process.
F. Rate Stabilization Fund "RSF" (Designated)
The District aims to establish rates that are stable and not unduly volatile, while
meeting necessary financial metrics and providing adequate funding for the
District's programs (the revenue requirement). The 2018 Bond Indenture allows
for the establishment of a Rate Stabilization Fund (RSF) that can be used
towards those ends. The 2018 Bond Indenture allows for draws from the RSF for
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the purpose of paying debt service on the Bonds or any lawful purpose of the
Wastewater System.
The Rate Stabilization Fund level shall be considered by the Board of Directors
concurrent with Sewer Service Charge rate proposals and reviews of the long-
term Financial Plan.
Provisions Regarding Usage:
Draws from the Reserve:
• Any draw from the RSF shall require Board of Directors approval:
o The RSF may be drawn down during or after the close of a
fiscal year in order to meet a specified Debt Service
Coverage level (either 1.00x, 1.25x per bond covenants, or
the Debt Management policy specified level of 2.0x).
o The RSF may be drawn down on a planned basis (during
rate setting) to avoid the need for higher than desired rate
increase.
o The RSF may be drawn down for any legal use specified by
the Board of Directors, as permitted by the 2018 Bond
Indenture of Trust.
• As provided for in the 2018 Bond Indenture of Trust, amounts so
transferred from the Rate Stabilization Fund to the Wastewater
System Funds shall constitute Gross Revenues for such Fiscal
Year for purposes of the Debt Service Coverage requirements of
the Bond Indenture. Such transfers may be made until (but not
after) 180 days after the end of such Fiscal Year.
Additions to the Reserve:
Additions (other than interest earnings) to the RSF shall require
Board of Directors approval, and may take place:
o After the close of a fiscal year through the disposition of
year-end variances.
o When rates are set to contribute a specified amount to the
RSF.
• Amounts transferred from Wastewater System Funds to the Rate
Stabilization Fund shall constitute a reduction in Gross Revenues
for the Fiscal Year such funds were budgeted.
G. GARB 45 OPEB Trust (Restricted)
The District has negotiated and provides Other Post Employment Health Care
Benefits (OPEB) for retired employees that meet certain criteria. Biannually, the
District updates funding requirements needed to provide these benefits by
conducting an actuarial study. While the OPEB Trust is not a O+striGt reserve the
District's funding intent is to perform biennial actuarial studies and deposit into
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the trust the recommended actuarially determined contribution. The investments
in the OPEB Trust are managed by an investment advisor with oversight by
District staff and the Board Finance Committee.
Provisions Regarding Usage:
Draws from the Trust: A planned draw from the OPEB Trust may be
included in a Board adopted budget and executed by the GM. Only
premiums, claims, and/or administrative costs for OPEB related expenses
paid for by the District for the current year or one year back are eligible for
reimbursement or distribution through the OPEB Trust. Health care costs
or other premiums for current active employees are not eligible.
Additions to the Trust: An amount may be included in a Board adopted
budget to pay down unfunded employee related liabilities for pension or
OPEB obligations. If specifically designated for OPEB, the GM may direct
such funds be deposited into the OPEB Trust. The Board may also direct
that other funds, such as those available from favorable budget variances
are also directed to the OPEB Trust.
H. Section 115 Pension Prefunding Trust (Restricted)
The District has established an IRS Code Section 115 Pension Prefunding Trust
to allow for voluntary contributions toward pension obligations. The name of the
Trust per the resolution is the "Public Agencies Post -Employment Benefits Trust",
which is a multi -employer trust administered by PARS. This Pension Prefunding
Trust allows contributions to count toward the unfunded liability (and as a result
the funded ratio) while not placing the contributions with the Contra Costa County
Employee's Retirement Association (CCCERA). Only premiums, claims, and/or
administrative costs for pension related expenses paid for by the District for the
current year or one year back are eligible for transfer, payment, or
reimbursement from the Prefunding Pension Trust.
The Pension Prefunding Trust may be withdrawn by the District and contributed
to CCCERA at a time convenient for the District. Uses for this Trust may include
mitigating rate volatility, or to offset normal cost expenses that are required even
when all liabilities have been met. The District may make budgeted and planned
contributions to the Pension Prefunding Trust, Trust or may make contributions
based on the availability of funds from favorable budget variances in either case,
subject to Board approval. The investments in the Pension Prefunding Trust are
managed by an investment advisor with oversight by District staff and the Board
Finance Committee. The Section 115 Pension Prefunding Trust is not a DisfriGt
reserve.
Provisions Regarding Usage:
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Draws from the Trust: A planned draw from the Pension Prefunding Trust
may be included in a Board adopted budget to pay required CCCERA
pension contributions, and withdrawals up to that amount may be
executed by the GM. Withdrawals in excess of that amount would require
additional Board authorization.
Transfers, payment and reimbursement from the Pension Trust are
allowed for the following:
• Transfer to a Qualified Trust for employer contribution (e.g.,
retirement system);
• Distribution directly to insurer, third party administrator, service
provider or other entities providing services in connection with
determining the employer's pension obligation; and
• Reimbursement to the employer for employer contributions made to
a Qualified Trust and/or related pension administrative costs paid
by the employer.
Additions to the Trust: An amount may be included in a Board adopted
budget to pay down unfunded employee related liabilities for pension or
OPEB obligations. If specifically designed for pension liabilities, the GM
may direct such funds be deposited into the Pension Prefunding Trust.
The Board may also direct that other funds, such as those available from
favorable budget variances are also directed to the Pension Prefunding
Trust.
Management Responsibility
The GM is authorized to establish and implement procedures to support this policy.
Management will ensure that these funds and reserves are reviewed during the annual
budget cycle and are adjusted as necessary to remain within the guidelines outlined in
this document. Management will report on the use of the reserve funds as required
above, and through recurring financial reporting mechanisms.
Investing Reserve Funds
Reserve Funds will be invested according to the District's Statement of Investment
Policy, BP 005. Furthermore, the Restricted fund investments are managed by Public
Agency Retirement Services (PARS) the Trust Administrator, Hir hmark Capital PFM
Management (successor firm/acquirer of Highmark Capital) -is the Investment Manager,
and US Bank is the Trustee Custodian of assets.
Inter Sub -Fund Borrowings and Transfers of Reserve Funds
• Temporary borrowings: Movement of cash or investments between sub -funds
(Running Expense, Sewer Construction, and Self -Insurance) on an interim basis
for cash management purposes may be effectuated by the GM consistent with
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the GM delegation of authority and are not "inter -fund transfers" pursuant to
generally accepted accounting principles with the condition said funds must be
repaid in full. Such temporary borrowings are recorded as a due to/due from in
each sub -fund and are typically cleared when monies are available in the
recipient sub -fund in a timeframe not to exceed one year from the fiscal year-end
balance sheet date. Pursuant to generally accepted accounting principles,
balances unpaid beyond one year are considered inter -fund borrowings and must
be approved by the Board and should bear interest.
Permanent transfers: Inter -fund transfers between sub -funds on a permanent
basis may be specified in the District's financial plan and budget, andbudget and
must be approved by the Board through the adoption of the annual budget, rates
or other specific Board action. Inter -fund transfers may be authorized by the
Board following the adoption of the annual budget through the authorized
disposition of annual budgetary favorable variances or other Board action. Such
inter -fund transfers do not require an appropriation amendment as the action only
constitutes a transfer of reserves from one of the District's sub -funds to another.
[Original Retained by the Secretary of the District]
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