RANCHO MURIETA, CA (MPG) - Local and state governmental agencies and many companies routinely use cost allocation as part of the budgeting process, but using it with the security fund has been a bone of contention in Rancho Murieta for several years.

The Rancho Murieta Community Services District Board has voted 3:0 to change that allocation methodology and to apply it to four open fiscal budget years “to right-size” the financial records. The special meeting was held on Jan. 19.

Cost allocation is the assignment of indirect or overhead costs to one or more programs according to a formula that represents a reasonable equitable distribution. When formulating the budget each year, the CSD staff allocates the administrative costs to the water, sewer, drainage, solid waste and security funds. The five utilities are either funded with taxes or fees, although security gets additional funding.

Until this fiscal year when only $50,000 of property taxes was allotted to security, the current and past boards have used the bulk of the property taxes to prop up security operations instead of putting the money into reserves. That’s because Measure J hasn’t brought in enough tax dollars to cover the cost of operations for more than a decade.

In 2020, then-General Manager Tom Hennig followed a recommendation from the Punn Group accounting firm to hire a consultant to reconsider the formula to allocate administrative costs to the enterprise funds. The result was used for the 20/21, 21/22, 22/23 and 23/24 fiscal year budgets. The formula is 37% for water, 27% for waste water, 3% for drainage, 4% for solid waste (since it is mostly a pass-through of costs from Cal Waste), and 32% for security.

During 2021 and 2022, the current board repeatedly discussed how to deal with the red ink in security operations and the need to build up the underfunded reserves. That led to the board seeking a significant rate increase for June 2022 which was shot down by patrons. The board also put Measure R on the ballot to fund security without using property taxes. It was shot down in November of 2022.

During the past discussions at those board meetings and on social media, some critics of the district, particularly Crystal Matter, said that the large administrative allocation to security was a major reason the fund was in the hole. She said the district shouldn’t allocate any administrative costs to security.

A couple of years later at the Dec. 20 CSD Board meeting, Director Stephen Booth, who had only been on the board for 14 months, questioned the security budget. He said the administrative allocation this year to security was $637,227, which represents a hit of 38.9% to the operational budget.

General Manager Mimi Morris told Booth she was in “complete agreement” and said the distribution of administrative costs must be recalibrated according to the level of administrative effort that is being utilized.  “We are kind of baffled how it landed on security at that heavy level,” she said.

After Booth said he wanted the issue placed the agenda for an upcoming board meeting, Morris directed Mark Matulich, who is the CSD director of administration and finance and a CPA, to come up with an alternative methodology for administrative costs. His recalibration of the methodology was discussed at three board meetings and one Finance Committee meeting, all in January.

Matulich didn’t find much documentation on what the consultant used in 2020 to allocate overhead,  but it appears she based it on the number of FTE (full-time equivalent) employees in each department, which is common. He considered other cost drivers such as the overall complexity of a fund’s operation and the corresponding demands, it’s physical plant and equipment, and the operating budget in addition to the number of positions.

He came up with 52% for water, 27% for sewer, 3% for drainage, 4% for solid waste, and 14% for security. He also explained what it would mean in dollars this fiscal year, although it was a ballpark estimate since the three prior budgets haven’t been closed and audited.  Applied to security in the 23/24 budget, the new methodology would drop the allocation from $637,227 to $280,540, which would leave it in the black at $53,296.

However, the water fund allocation would increase from $745,435 to $1,042,000.  As a result, the fund would now be in the red $824,911 instead of  $528,348, according to his rough estimate.

Whether to use the revamped allocation methodology was discussed at the Jan. 17 board meeting. Morris recommended that it be applied to the current and three past budgets that are all still open even though the 20/21 budget had just been sent the auditor. Since the attorney said it would take board action to make a budget change, a special board meeting was convened on Jan. 19 with Morris, Matulich, and Directors Booth, Randy Jenco and President Tim Maybee attending. Directors Linda Butler and Martin Pohl weren’t present.

Booth said he favored making an adjustment to the current budget but didn’t know if there was any value for the past budgets since it was essentially a paper change. “I’d rather just start fresh this fiscal year, get it right, and do so moving forward, unless you can convince me there is some other tangible results,” he said.

Morris responded to his point. “I think one thing for me that is the integrity of the financials,” she said. “From my perspective, it’s actually cleaning up the financials so the costs are appropriately aligned with the different units,” she said. “Then you have the information you can really share with everyone and have your credibility bolstered.”

Jenco said he was concerned about what going backward to make changes would do, especially for the water fund.

Morris told him that a rough calculation she made for the CSD Finance Committee showed that if a $360,000 administrative allocation was moved from security to water “We would have to charge $12 per month per house and expenses…Then we would have to add for reserves.”

Booth said they could make addressing the administrative allocation in prior years a zero-sum game. “But if we apply this reallocation, it puts on a kind of right-sizing,” he said. “Then if we apply it to this year, then we are not going to have enough money in our sewer, drainage and water rates in the budget.”

Jenco said that no matter what, people are going to pay more.

Booth told him that was inevitable. “But I think we are potentially placing ourselves in a position you weren’t in when Measure R and the rate increase were turned down,” he said. “Once we have a couple audits completed, and we have taken a look at whether we are properly distributing our overhead, we will have a better idea of what our true costs all for all of our services.

“We will be in a better position when we seek additional money for rates and can justify it based on verifiable numbers that we just didn’t have two years ago,” Booth concluded.

Morris also said that she is bringing the administration fund costs down, which will also affect the future allocation of its costs.

After further discussion in which Jenco favored applying the revised administrative allocation change to all years to create a truer picture, he made the motion to that effect. The vote to approve was 3:0.

As a side note during the discussion, Jenco asked Morris if the security fund being in the black under the new allocation methodology could mean another security position. Morris told him no because the security resources that come from Measure J, even without any administrative cost allocation, barely fully cover the cost of the current staffing levels.