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HomeMy WebLinkAboutMINUTES - 06042013 - C.07RECOMMENDATION(S): APPROVE the methodology for interest rate calculations on construction performance/security deposits as recommended by the Finance Committee. FISCAL IMPACT: Interest payments will be paid from interest earned on construction deposits. BACKGROUND: This item was presented to the Finance Committee on May 13, 2013 and, as a result of that presentation, was recommended to go before the Board of Supervisors on this date. The Finance Committee discussion surrounding this item focused on any potential impact on County finances and what methodology was appropriate for use in calculating the interest earned on these types of deposits. The conclusion reached was by using the recommended methodology, the interest paid on these deposits would be more appropriate and not have a negative impact on County finances since the interest paid would reflect more closely what was earned over the life of the deposits. The methodology proposed is to use a hybrid calculation: Calculate the rate based on the average of the last four quarters as minimally required while also calculating the rate based on the average of the quarters APPROVE OTHER RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE Action of Board On: 06/04/2013 APPROVED AS RECOMMENDED OTHER Clerks Notes: VOTE OF SUPERVISORS AYE:John Gioia, District I Supervisor Candace Andersen, District II Supervisor Mary N. Piepho, District III Supervisor Karen Mitchoff, District IV Supervisor Federal D. Glover, District V Supervisor Contact: Wanda Quever, (925) 313-2372 I hereby certify that this is a true and correct copy of an action taken and entered on the minutes of the Board of Supervisors on the date shown. ATTESTED: June 4, 2013 David Twa, County Administrator and Clerk of the Board of Supervisors By: Stacey M. Boyd, Deputy cc: Robert Campbell, Auditor-Controller C. 7 To:Board of Supervisors From:Julia R. Bueren, Public Works Director/Chief Engineer Date:June 4, 2013 Contra Costa County Subject:APPROVE the methodology for interest rate calculations on construction performance/security deposits. BACKGROUND: (CONT'D) over the life of the deposit, paying whichever is higher less one percent (1%) to cover administrative costs. A brief summary of the item is presented below. The Public Works Department requires security/performance deposits on construction projects. A portion of these deposits are made in the form of cash. Historically, when deposits were made, interest rates using California Government Code Section 53079 (GC53079) resulted in a modest positive rate of return. GC53079 states: "If a local public entity requires any person, on or after January 1, 1986, to furnish a security, in the form of cash or a cashier's check made payable to the local public entity, to guarantee the performance of any act or agreement related to a construction project, and if the local public entity invests that cash or the proceeds of that check, the local public entity shall pay interest on all, or any portion, of the amount of the balance of the security deposit which is returned to the person who furnished the security if the security is held by the local public entity for more than 30 days. The local public entity shall pay interest on that amount. The minimum interest rate paid shall be the average rate of return earned by the local public entity on its investments during the four full calendar quarters last preceding the return of the security deposit, less 1 full percentage point. Interest shall be paid from the date the security is provided to the local public entity until the date that all, or any portion, of the balance of the security deposit is returned to the person who furnished the security.” At least in part due to the economy, the Department has held some deposits for many years. In addition, the downturn in the economy over the last several years along with the corresponding low interest rates has created an interesting issue. By November 2011, interest rates had fallen to less than one percent for over a year, which effectively resulted in zero interest earnings. Since many of these deposits are held for long periods of time and/or are for large dollar amounts, strictly following GC53079 would have resulted in refunding deposits without any interest earnings, despite interest having been earned over part of the time deposits were held. This approach meant that, based on simple timing alone, an applicant or developer would get no return on funds that we held for five years or more even if earlier years resulted in a positive return, which seemed neither fair nor equitable. As a result of these circumstances, in November 2011, Julie Bueren, as the Public Works Director, allowed for temporarily modifying the minimum legal requirement by averaging quarterly interest for the life of the deposit. The approach is more equitable and mirrors more closely the rate of return over the life of the deposits held, less the one percent (1%). The approach staff would recommend using going forward is to use a hybrid calculation: Calculate the rate based on the average of the last four quarters as minimally required while also calculating the rate based on the average of the quarters over the life of the deposit, paying whichever is higher, less the one percent (1%). By adopting this approach, we ensure that even as interest rates rise, we will be in compliance with the minimum legal requirement of GC53079 and also more closely reflect the rate of return over the entire life of the deposit, even when the last four quarters may result in a zero or negative rate. CONSEQUENCE OF NEGATIVE ACTION: Without Board approval, Public Works will continue to calculate interest based on the minimum legal requirement of GC53079. This will result in the refunding of deposits without interest and will not reflect actual interest earning on these deposits. CHILDREN'S IMPACT STATEMENT: Not applicable.