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Home My WebLink About1985-05-14; City Council; 8037-1; Results of Cash Management Study" •,' 0 w > 0 0:: • a.. a.. <C z 0 ~ _. 0 z ::, 0 t.) CIT~ ._OF CARLSBAD -AGENt'-·BILL AB# f oJ.2:::j DILE; MTG~ 5/l4/85 RESULTS OF CASH MANAGEMENT STUDY DEPT.,_F=I=N __ -CITY AT:r'f-\,:0 -"'-,- CITY MGR . .J6'- RECOMMENDED ACTION: Accept the report presented by Deloitte Haskins & Sells. ITEM EXPLANATION: In January 1985, the City Council authorized the expendi~ure of $15,000 for a Cash Management Study to be conducted by Deloitte Haskins ·, Sells. During the succeeding two months, the DH&S staff spent several weeks working with the Finance Department staff to develop improvements. to our cash management systems. Below is a summary of the findings shown in the final DH&S report: Projected Savings or Additional Interest Earning Area Deposits State Taxes Recommendation Improve timing of deposits to bank by changing armored car schedule, and iillplement the use of a 11 lock box" for water payments. (A lock box i$ a P.O. box address which allows payments to be directly collected by the bank." Improve timing of deposit of state taxes such as sales tax, motor vehicle in lieu taxes, etc., into the City bank account. Water, Trash Consider implementing cycle billing to Sewer Receipts accelerate cash flow. Accounts Payable Investments Implement a late charge or other incentive to· encourage earlier payment of bills. Establish a system which holds payables until the necessary due date. Modify purchasing policies for the use of discounts and the timing of payments. Modify the City's investment policy to allow the Treasurer to take advantage of larger investments and a more varied portfolio. Also, modify the City's investment policy to be more specific. Potential $ 6,875 • $13,088 $ 41,849 $14,438 $ 4,961 $17,090 $ 30,000 I Page -2-of Agenda Bill No.f:037-/ Area Short Term Borrowing Cash Flow Fore:asting Recommendation Consider using the ability to issue tax exempt short term (1 year or less) debt in the form of tax anticipation notes or revenue anticipation notes. The City should establish a cash-flow forecasting system which will allow the Treasurer to better control the timing of City investments. Projected Savings or Addtti9n~l Interest Earning Potential $105,000 The staff has already implemented improvements in the collection of state t1xes and has created a cash flow model which can be put into use. All of the recommendations included in the report have significant advantages to the City and will be implemented by City staff. A proposed timetable for implementation of the proposed cash flow improvements is shown on page 21 through 23 of the report, FISCAL IMPACT: The estimated benefits in terms of possible additional interest earnings of the DH&S recommendations is $233,000. Although the actual recovery will depend on the staff's ability to establish the procedures outlined by the consultant, the prevailing interest rates, and any limitations placed on the proposed changes by City policies, the net return will be substantial. The gain realized by implementing these proposed changes will exceed the cost of the study. EXHIBITS: Cash Management Study --prepared by Deloitte Haskins & Sells, dated Apdl 17, 1985. Q Del:'~tte Haskins+Sells Mr. Frank Aleshire City Manager City of Carlsbad 1200 Elm Avenue Carlsbad, California 92008 Dear Frank: Suite 1900 701 "B" Street San Diego, California 92101-8198 (619) 232-6500 TWX 910-335-1573 April 17, 1985 We are pleased to present our final report summarizing the results of our review of the cash management processes, policies, and procedures of the City of Carlsbad. This report describes the scope of the work, and presents our findings and recommendations. We found that the City has already made significant efforts to improve the management of cash. The Treasurer and Finance Director are cognizant of the importance of effective cash management, and recently negotiated a more favorable banking relationship as the result of a Request for Proposal for banking services. We have not, however, emphasized the existing strengths of the City's cash management system. Our intent is for this report to be constructive in nature, and accordingly, we have emphasized those areas where we believe opportunities exist for improving cash management practices. We appreciate the excellent cooperation provided by the City's management and staff. It has been our privilege to assist the City of Carlsbad with this important project. If you have any ques~ions or need additional information, please call (619) 232-6500. Yours very truly, --Za-L- Frank Panarisi Manager cc: Frank Mannon, City Manager Jim Elloitt, Finance Director ✓ Bill Esterline, Treasurer CITY OF CARLSBAD CASH MANAGEMENT STUDY TABLE OF CONTENTS PAGE I. EXECUTIVE SUMMARY 1-3 II. OBSERVATIONS AND RECOMMENDATIONS 4-11 III. EXHIBITS 12-20 IV. CASH MANAGEMENT IMPLEMENTATION WORKPLAN 21-23 I. EXECUTIVE SUMMARY m -· - The purpose of our study was to perform a comprehensive analysis of the City of Carlsbad's cash management system. Effective cash management focuses on the full utilization of cash resources. The significant cash in-flows and out-flows of an organization as large as the City of Carlsbad provide significant opportunities for improving cash management procedures. Our goals in this project were to identify opportunities for improving cash flow and to increase interest earnings. In the course of our work, we performed the following tasks: Interviewed employees Completed various analyses and reviews Performed data gathering activities Analyzed cash information and paper flows Evaluated existing practices and procedures Compared policies and procedures to those of similar organizations Determined needs Applied our knowledge and experience to the City's cash managecent practices Recommended improvements. These tasks were performed for the areas of: Cash Flow Forecasting Cash Receipts/Accounts Receivable Banking Relationships Investments Financing Cash Disbursements/Accounts Payable -1 - Our review of the above areas identified opportunties for improving cci~ll lllanagement _practices, Based on-the· rcsulcts of our ·study, th"E~ implementation of the following recommendations could provide the City of Carlsbad with an aunual benefit of approximately $230,000, Cash Receipts Deposit all cash receipts on the day rece~ved. Establish a special postal zip code for the receipt of tax payments. Accelerate receipt of the City's share of taxes from the State. Implement procedures to accelerate the billing cycle and to dun late paying customers earlier. Cash Disbursements Establish procedures to ensure that City obligations are not paid until the due date. Analyze the cost/benefit of taking discounts, Negotiate favorable payment terms on contracts. Review purchasing policies and procedures annually. Pay Federal income taxes withheld no sooner than the due date. Investments Increase the maturity of the portfolio and the size of investments as cash flow requirements allow. Diversify the portfolio. Pursue an active portfolio strategy. Implement a formal bidding process when placing an investment. -2 - Investment Policv ---.., •• Develop a comprehensive and constructive investment policy. Short-Term Borrowing Consider the benefit of a short-term borrowing progra~. Analyze the benefit of issuing debt on a pooled basis to reduce borrowing costs. Cash Flow Forecasting Implement a cash flow forecasting system to allow for more productive investing of available funds balances. -3 - II. OBSERVATIONS AND RECOMMENDATIONS OBSERVATION/BACKGROUND DEPOSITS Cash receipts are deposiced the day after they are received, resulting in a one day loss of interest income. Although water receipts have a unique Post Office box, all other mailed payments tire received at the City Hall together with general correspondence. Checks received via mail constitute the majority of receipts. STATE TAXES The State notifies the City in advance of the date and amount of the City's share of taxes collected by the State. Our research indicated the San Diego Trust and Savings' correspondent account with Bank of America in Sacramento received credit for the taxes on the same date stated on the advice. RECOMMENDATIONS We recommend the City pick up the mail before 8 a.m., immediately process the receipts, and prepare the deposit for noon deposit. Photocopies of checks or payment stubs can be used for recording the payments later in the day. The City should set up a Post Office Box for all payments other than water payments. Thi·:: will eliminate the time needed to separate payments from the general mail, and decrease the incidence of possible misrouting and the loss of checks. ESTIMATED BENEFIT $ 6.,875 We recommend the City arrange $13,083 for San Diego Trust and Savings to give the City credit the same day the bank receives credit. If the bank hesitates, we suggest establishing a Sacramento account with the Bank of America and have deposits to the account wired to the primary San Diego Trust and Savings Account on the day received. -4 - EXHIBIT 1 2 OBSERVATION/BACKGROUND WATER, TRASH, AND SANITATION RECEIPTS Beca~se the City bills all of its customers once a month, a lag between the time the meter is read and when the bill is mailed ranges from 5 to 30 days. Although payment is due 15 days after the billing date, 42% of the total amount billed is paid late. The percentage of late payments increases to 48% in the Sum.mer and Fall months due to late payments made primarily by farmers. Past due notices, with an advice to shut off water after 10 days, are not mailed unttl 45 days after the initial bill. RECOMMENDATIONS The City should consider the benefit of implementing a cycle billing process. Payment of th~ bill should be "due on presentation", but not later than 15 days after the billing date. Cycle billing would accelerate receipts "aid on or before the due :~,::;.t.:t by approximately 15 days. ESTIMATED DENEFI'f $41,849 To de<.·rease the amount of late $14,438 paymentE, dunning not•ices should be mailed two days after the payment due date. A late charge should be added to give a sense of urgency to the remitting customer. The late penalty assessed should be equal to or greater than the current level of interest rates. Earlier mailing of dunning notices with a lat~ penalty charge could accelerate the receipt of late payments. -5 - EXHIBIT 3 4 -0 OBSERVATION/BACKGROUND INTEREST PAYMENTS ON INVESTMENTS Interest earned on Certificates of Deposit is paid by check and received in the mail on a monthly basis. ACCOUNTS PAYABLE The Finance Department files all payables alphabetically, and processes them for payment weekly. Because payables are processed in the week they are sub- mitted for payment, we found the City is paying payables early. Based on a sample of the City's trade payables, we estimate the City is paying an average of 7 days early. The Purchasing Department rc~tes purchase orders for the ~ppropriate approval and then submits them to the Finance Department for final processing. The Purchasing Department estimates that purchase orders are paid three weeks after they are received. :.:":, ,";, RECOMMENDATIONS If the City takes advantage of the recommendation that it invest in larger blocks, wire transfers should be used to cut down on mail float. If the cost of a wire ESTIMATED BENEFIT transfer is $10, an interest receipt of $36,500, or greater, justifies the use of a wire transfer. (See recommendation under Invescments.) We recommend the City establish a filing system based on the due date. If terms are not specified, payment should be scheduled for 30 days after the goods or services are received, or the invoice date, whichever is later. -6 - $ 4,9ol $17,090 ,.r, :~'~ :;.,-., •,' ,,(\ ..;:, _.',.:'IV ...,:;.,_,~pl~.,.,.;;{~•::,,-;-;,:;, ~,.. . ...., , ,» ,.., ,_~,_,,,.~~:,,...,,-.-:-~ .._,.,:, ,. ";-..._, ~-,,', J;: ,.,., EXHIBIT 5 6 OBSERVATION/BACKGROUND The Purchasing Department does take aqvantage of discounts; however, no policy exlsts for taking advantage of the discounts offered on other payables. The Purchasing Department has a compre- hensive written policies and procedures manual. The manual is reviewed every two years on an ad hoc basis. Contracts are negotiated at the depart- ment level without specific consideration of payment terms. RECOMMENDATIONS A policy of analyzing the cost/benefit of a discount should apply to all payables. Exhibit 7 provides an example which can be used as a tool to decide whether or not a discount should be taken. The Purchasing Department Policies and Procedures should be reviewed annually on a regularly scheduled basis. In contract negotiations, consideration should be given to the time value of money and effort given to gaining favorable payment terms. Although a con- tract may be higher in price, if payment terms are longer, the net present value of the higher priced contract may actually be lower and, therefore, be the better choice. Included in each contract should be a standardized phrase specifying payment terms. -; - ESTIMATED BENEFIT EXHIBIT 7 OBSERVATION/BACKGROUND INVESTMENTS The City mana$es an investment portfolio in excess of $32 million. The portfolio is 73% invested in Certificates of Deposit with an average principal amount of under $500,000. An additional 17% is invested in the State managed "local agency fund." The remainder of the portfolio is invested in Bankers Acceptances and Federal Home Loan Notes. The average yield on the portfolio as of March 1, 1985 was 10.331%. RECOMMENDATIONS ESTIMATED BENEFIT While the Treasurer has been $30,000 successful in obtaining relatively high yields for the instruments and maturities selected, we feel potential exists for improving the yield by at least 10 basis points without any increased risk to the City. A moderate increase in maturity and investments in larger denomi- nations, as cash flow requirements permit, would improve yields. Diversification into U.S. Treasury Bills and Notes, Federal National Mortgage Association securities, Farm Credits, Bankers Acceptances (BAs) (particularly Japanese BAs), would result in higher liquidity and increased potential for capital gains increases. An active portfolio strategy, which would include techniques such as riding the yield curve and swap transactions, would provide fu~ther opportunity for increasing yields. -8 - EXHIBIT 8 c.,.., OBSERVATION/BACKGROUND INVESTMENT POLICY The City has complied with State regulations by adopting an "investment policy." The guidelines set forth in the policy, however, generally reflect the State's policy and do not reflect the InvestmQn~ Policy of the City Treasurer, Finance Director, and the City Council. RECOMMENDATIONS The City should implement a formal bidding process when placing investments. Major California banks and broker/dealers should be included in the process. Documentation should be retained for one year. Once the City's Investment Officer has gained greater knowledge and confidence in the money market, we also recommend further diversi- fication into the highest rated commercial paper. We recommend the City develop a more comprehensive and con- structive policy that can be used as an actual working document. By defining an investment policy, the City Council will be more informed, the Treasurer is .provided greater guidance and protection, and citizens can be more certain of the prudent management of municipal funds. Items to be addressed include: -9 - ESTIMATED BENEFIT EXHIBIT -C... OBSERVATION/BACKGROUND SHORT-TERM BORROWING The City has the opportunity to borrow tax free and invest in higher yielding money market instruments as the result of current laws. Municipalitie~ are allowed to borrow to meet current short-term cash flow needs. These are defined as those periods of time in which projected cash disbursements exceed projected cash receipts~ The amount which can be borrowed equals the total of the cash deficit plus projected cash disbursement& for one month. The City is permitted to borrow these funds at the beginning of the fiscal year and repay at the end of the year. ESTIMATED Rf.COMMENDATIONS . the objective of the policy . a definition of acceptable risk . statements regarding active versus passive trading . diversification of risk . measurement of performance . composition of advisory committees . authority and limitations . selection of maturity . reporting and documentation . selection of financial institutions . safekeeping . ethics, and . formal adoption, and periodic revision of the policy BENEFIT We recommend the City consider $105,000 entering into a formal short- term borrowing program in order to (1) borrow at the lowest possible cost, and (2) gain the benefits of arbitrage profits. A number of instruments are available for short-term, tax-exempt financing, including revenue anticipation notes (RANs) and tax anticipation notes (TANs), as well as others. -10 - ,, • ,' ,_.,,_r;_..,: >,.: J ~• ., ,,,,.•-4•~,,,,,,/,,~ .:.,, .... -._"'.,,:~-~:/.,.n,".L,~, -.,,,; ~-..:---~)~_ •,,,;:_,f, -~••.,,:,}::• .. •&~> ~,_: EXHIBIT 10 ) OBSERVATION/BACKGROUND CASH FLOW FORECASTING The City does not yet have a formalized cash flow forecasting system in place. However, the Finance Director has begun to develop such a system~ For example, the City is investing short- term, $18 million earmarked for projects during the fiscal year 1984-85, even though only $5 million of that amount was needed early in the year. BANKING RELATIONSHIPS The City recently issued a banking Request for Proposal and entered into a new banking agreement. RECOMMENDATIONS Alternatively, smaller muni- cipalities are working together to issue short-term debt on a pool basis. This reduces costs by ·allocating expenses among a number of cities. We recommend the City use the Cash Forecast to more effec- tively invest available bal- ances. The Forecast will point out those amounts which can safely be invested and offer higher yield. We have reviewed that contract and the activity to date in the relationship and have found no significant opportunities for improving the relationship. -11 - ESTIMATED BENEFIT EXHIBIT III. EXHIBITS EXJUBIT 1 CITY OF CARLSBAD BANK DEPOSIT Receipts collected at City Hall: Public facilities fee Park in lieu Planned local drainage Sewer construction Construction permits Business license fee License tax on new construction Services charges Fines and forfeits Other Receipts collected at Post Office - Water Number of business days per year Average receipts per day Estimated one-day float gained by early deposit Opportunity cost of funds Estimated annual benefit $ 2,132,800 460,000 250,000 2,070,000 800,000 300,000 500,000, 1,865,500 475,000 513,000 7 2 205 2 415 $16,571, 715 t 249 66,553 X 1 X 10.33%* 1 .§.! sz 5 *Yield on portfolio was 10.33% as of March 1, 1985. -12 - ~"~ •'-!- " (!•l ,, ,> ! Q ,1 EXHIBIT 2 CITY OF CARLSBAD -- SAME DAY CREDIT .FOR STATE TAX RECEIPTS State tex receipts Sales Cigarettes Vehicle in lieu Gas Total Opportunity cost Days per year Additional interest earned per day Estimated number of days float gained Additional interest earn~d -13 - $5,076,000 140,000 910,500 480,000 $6,606,500 X 10.33% t 365 $1,870 X 7 EXHIBIT 3 CITY OF CARLSBAD CYCLE BILLING FOR WATER RECEIPTS *Average receipts per year Number business days per year Average daily billings Estimated number days float gained Subtotal Opportunity cost Increased interest earnings $7,205,415 -:-249 28,937 X 14 $ 405,124 X 10.33% $ *Average calculated using data from first month in last four quarters to smooth out seasonal flunctuations. -14 - (> I 7 EXHIBIT 4 CITY OF CARLSBAD IMPACT OF MAILING DUNNING NOTICES EARLl:ER Average receipts per year Percentage of receipts paid late Estimated percentage of customers that respond to dunning notice Average receipts accelerated by dunning notice Number business days per year Average daily receipts during late payment period Estimated number of days float gained Subtotal Opportunity cost Potential increased interest earnings -15 - $7,205,415 X 42% X 50% 1,513,137 X ~ 249 6,077 23 $ 139,768 X 10.33% $_, ... 1~.! 4~§ 1:'VUTU_T'l' C: .......... u..... J CITY OF CARLSBAD IMPACT OF PAYING TRADE PAYABLES BY DUE DATE Estimated trade payables per annum (A) Estimated number days float gained Subtotal Opportunity cost per annum Number of days interest earned Additional interest earnings $ 2,503,990 X 7 $17,527,930 X 10.33% + 365 A. [Total opetating budget FY 83/84 less Salaries and Purchase orders] x 95% (allowance for overbudgeting of expenditures) ($19,290,979 -$8,028,521 -$8,626,679) X .95 = $2,503,990 -16 - r -·· .. , I 'f !i .11 .:! !' I ; ( ii· .. !I )/ Ii _. I ( c:.: i j I. -tl I EXHIBIT 6 CITY OF CARLSBAD IMPACT OF PAYING PURCHASE ORDERS WHEN DUE Total FY 83-84 Estimated increase in float (days) Subtotal Opportunity cost Number of days interest earner; Increased interest earnings -17 - $8,626,679 X 7 $60,386,753 $ X 10.33% ~ 365 --17 J.090 !' I I lJ ;• ,> • Example: Formula: Analysis: "o l' ',. '.;I EXHIBIT 7 CITY OF CARLSBAD COST BENEFIT ANALYSIS OF A DISCOUNT 1% Net 10 Days 1% per month per year X (365/20) = 18% At an interest rate level of 10%, there is clearly a benefit to taking a discount worth 18%. -18 - ; , l I I l ; ' t l ! } ! 1 ' I \ ' I' 'l _.,..,. EXHIBIT 8 IMPACT OF RECOMMENDED INVESTMENT STRATEGY Total investments portfolio Increase in yield Additional interest income -19 - $30,000,000 X .0010 • '1 }-f EXHIBIT 9 IMPACT OF ARBITRAGE Projected deficit Average monthly cash disbursement Total amount of borrowing Percent spread between tax-exempt borrowing and money market investment Gross Benefit $1,200)000 2,300,000 3,500,000 X 3,00% L102J..900 * *This does not consider some of the necessary costs to be incurred to issue the debt. -20 - f •• • Apri 1, 1985 Recommendation Person Responsible 1. Establish procedure for Doug Passmore preparing receipts for same day deposit. 2. Set up a Post Office Doug Passmore Box for all receipts other than water receipts. 3. Arrange for San Diego Trust Jim Elliott and Savings to give same day credit for the City's share of taxes deposited in the Bank's correspondent bank account in Sacre.mento. 4. Implement a cycle billing system for utility billings. Develop and implement the manual and auto- mated procedures for a cycle billing system. Set up a system for dunnjng water customers two days after the payment due date. Oversee implementation of the billing system to insure cash manage- ment objectives are met. 5. Develop a statement of investment policy which is specific enough to offer guidance to the treasurer, but which is general enough to allow flexibility. Jim Elliott Jim Elliott Bill Esterline -21 - Target Date 5/10/85 5/1/85 5/1/85 6/30/85 6/1/85 7/30/85 7/30/85 6/1/85 9/30/85 4/30/85 Recommendation Person Responsible -6. Implement s~ratagies for improving yield on the Investment Portfol~o. 7. Evaluate the following financing alternatives: tax-free, short term borrowing and issuance of short term debt on a pooled basis~ 8. Establish procedures for paying accounts payable by due date. In the Finance and Purchasing Departments, set up an accounts payable filing system, based on due date. Prepare written policies regarding the determination of due dates for payable. B:i-11 Es terl;":i ne Jim Elliott Bill Esterline Jim Elliott 9. Establish policies in the Jim Elliott Finance Department and Purchasing Department for analyzing and taking discounts. 10. Develop for inclusion in the Jim Elliott Purchasing Policy and Proce- dures Manual: A policy of formally reviewing the manual on an annual basis. A procedure for including in construction contracts a standardized phrase specifying payment terms. A policy of negotiating for favorable payment terms on large contracts. -22 - Target Date 6 / 30/8-5 6/30/85 7/19/85 6/30/85 7/30/85 5/31/85 6/30/85 Recommendation 11. Continue to develop and implement a cash flow forecast system. Person Responsible Jim Elliott -23 - Target Date 6/30/85