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CITY RESERVE POLICY
POLICY STATEMENT AND PURPOSE
A key attribute of a financially stable organization is adequate reserves which are established to provide protection from risk. The City of Bakersfield faces risks from revenue shortfalls during recessions, losses from unexpected emergencies, like natural disasters or catastrophic events caused by humans, excessive unfunded liabilities related to pension obligations, or legal judgements against the organization. Reserves can help ensure that the City can respond quickly and decisively to extreme events and also support vital public services during revenue declines. A reserve policy describes how much the City desires to retain in reserve and also describes acceptable uses of reserves. This City Reserve Policy serves as a framework to use City resources prudently and has been established in conjunction with Council approved Resolutions 212-14 (“Fund Balance Policy”) and 091-19 (“Cash Reserve and Facility Replacement Reserve Plan”) along with discussions with Councilmembers at the Budget & Finance Committee meetings
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THE CITY OF BAKERSFIELD’S RESERVES
The City of Bakersfield will establish three (3) designated reserve accounts. These include the Rainy-Day/Cash Basis Reserve, Pension Rates Stabilization Reserve, and the Facility Replacement Reserve.
• Rainy-Day Reserve - The amount of money held in this reserve will be a stated percent of budgeted operating expenses which is viewed as a reliable indicator of its ongoing needs. This is so that the City of Bakersfield reserve stays consistent with the size of the budget over time. At a minimum, the reserve will be equal to at least
16.7% of expenses which would be equal to approximately two months of operations. This reserve amount is based on industry best practice estimates from the Government Finance Officers Association.
• P
ension Rate Stabilization Reserve - The City of Bakersfield’s goal is to achieve a 100% funded status of its pension obligation though positive investment strategies by CalPERS and contributing 100% of the A ctuarial Determined Contribution (ADC) each year . In addition, to meet this 100% funding status and accelerate th e p
aydown of the Unfunded Accrued Liability (UAL), the City contribute s additional a
mounts annually to the IRS §115 pension prefunding trust . This fund serves as a c
ontingency to buffer against future pension cost volatility. At a minimum, the City shall budget and contribute:
a. The interest savings associated with paying the UAL contribution upfront
EXHIBIT A
S:\Accounting\RANDY\Admin\Admin Issues\City Reserves\GF Reserve Policy 2022 DRAFT.docx 2 b. 25% of annual surplus in the General Fund
c. Escalating annual dollar contributions as recommended by the Finance Director and ratified by City Council based upon f unded status and annual plan experience
The City will review significant events impacting the funding progress each year recommending course corrections to the City Council as necessary. If the combined funded status between assets with CalPERS and assets in the City’s trust exceeds 100%, the City wi ll draw down the trust balance to satisfy the minimum required employer contribution (ADC). If operational needs of the City require it, the City may pause annual contributions to the trust by a majority vote of City Council.
Annually, the Finance Director shall identify and evaluate fiscally prudent opportunities to reduce future pension costs and level-off future pension peaks after considering liquidity and budgetary needs. Recommended actions, if any, will be presented to Council for authorization.
• Facility Replacement Reserve – The City will maintain a reserve for capital assets and facility replacement. These reserves will be utilized to cover portions of major capital asset purchases or replacement such as buildings and equipment. The reserve could also be utilized to make improvements or emergency repairs on City infrastructure or other facilities. The current expected Facility Replacement Reserve balance is established at $10 Million . That reserve balance can be adjusted with Council authorization. Budgetary action to reach and maintain that established funding level will be made annually during budget preparations. Recommendations for use of these reserves should be made during the annual budget review and adoption process unless they are needed for an emergency repair or an unforeseen capital asset replacement.
The City’s long-range forecasting model will be used to track estimated growth of the annual budget and the related contribution requirements to stay within the established range of reserves. If the City’s budget analysis and forecasting shows operational shortfalls, contributions to any reserve may be deferred with City Council approval until economic conditions improve.
If the minimum reserve balance for each account is not met during the forecast period, the Finance Director and/or Budget Officer will develop a plan to bring the reserve balances to the desired amount. This plan will be offered to the City Council’s Budget and Finance Committee for consideration.
Acceptable Uses of Reserves
• Rainy day reserves are meant to address unexpected, nonrecurring costs. Reserves should not be used for recurring annual operating costs. An exception is poor economic conditions or events that disrupt the City of Bakersfield’s revenues. In such cases, reserves may be used to provide short -term relief so that the City can restructure its operations in an orderly manner. Any use of these fund s should be recommended by the City Manager and/or Finance Director and approved by the City Council.
• The Pension Rate Stabilization Reserve has Federal limitations on how those funds placed in a §115 Trust can be used. The City may only utilize the trust to satisfy the minimum require d employer contribution to CalPERS in the event of significant budgetary distress or to provide additional contributions directly to the pension plan.
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• Facility replacement reserves are defined as funds available for major facility needs identified during the budget review or in an emergency based on the City Manager and/or Finance Director and approved by the City Council.
Replenishment of Reserves
If the City of Bakersfield uses its reserves and those reserves are below the allowed maximum, then the Finance Director and/or Budget Officer will propose a plan for the replacement of the reserves. The City Council will review and approve the plan. The City will try to replace the reserves within the minimum amount of time that is practical.
Governance and Transparency
The Finance Director shall report to the City Council annually during the budget development process or other open meeting:
a. The funded status of Council defined reserves
b. Significant events that have impacted the funding of those reserves c. Major events that occurred that will likely impact the future funded status of those reserves