CITY OF COTATI
DRAFT Fiscal Resilience Policy
Table of Contents
1. Policy........................................................................................................................................2
2. Objectives:................................................................................................................................2
3. Scope ........................................................................................................................................2
4. Continuous Evaluation.............................................................................................................2
5. Steps to Address Shortfalls.......................................................................................................4
6. Review and Approval:..............................................................................................................6
1. Policy
In accordance with the Municipal Code of the City of Cotati and under authority granted by the City Council, the City Manager, working closely with the Administrative Services Director, is responsible for keeping the city council fully apprised of the financial condition and needs of the city (Cotati Municipal Code [CMC] 2.12.140).
The goal of this policy is to provide guidance in effectively identifying and preemptively managing potential or existing financial shortfalls, while prioritizing core essential services and maintaining financial stability. The core functions of the City are:
a. Protecting life, health and safety.
b. Administration of zoning and building.
c. Maintaining City-owned infrastructure, including assets in the public right of way, parks, City buildings, and water/sewer infrastructure.
2. Objectives:
This policy has been established to standardize a process for regular evaluations of the City’s financial position to identify potential threats as early as possible, as well as providing a suite of potential actions to address shortfalls.
In accordance with the City Financial Principles and Policies (Resolution 2017-36), as well as Resolution 2009-50, setting a General Fund Reserve Policy, the City has enacted fund balance policies that are intended to maintain a healthy fund contingency to ensure continued operations during major emergencies or financial disruptions. The fund reserve goals set are:
1. General Fund: 25% of fund balance or no less than two months of regular general fund operations.
2. Water/Sewer Funds: 33% of annual expenditures, including estimated capital improvements.
The City’s primary objective is to maintain a prudent level of financial resources to protect against reducing core service levels or raising taxes and fees due to temporary revenue shortfalls or unexpected one-time expenditures. The City also seeks to maintain the highest possible credit ratings, which are dependent, in part, on the City’s maintenance of a healthy fund balance.
3. Scope
While the objective of the policy is to address fiscal emergencies that impact the City’s overall financial position, the focus of this policy is on major funds for the City, including the General Fund, Water Fund, and Sewer Fund. These funds are primarily responsible for funding the core functions that serve our community directly. Most other funds, while possibly financially significant, do not pose a significant risk to operations.
4. Regular Evaluation
The City shall generate regular financial reports including, but not limited to,quarterly financial reports, mid-year reports, and long-range financial forecasts. Within the reports, in addition to the existing reserve policies, staff shall incorporate a summary of the financial standing, utilizing ratios analysis, threshold maintenance, and observations of economic conditions for Financial Considerations including, but not limited to the following:
1. General Fund Fiscal Health Analysis:
a. Maintain a minimum cash coverage ratio equivalent to 25% of annual operating expenditures or no less than two months of regular general fund operations. b. Ensure the liquidity ratio (quick ratio = liquid assets/current liabilities) stays above 1.0, with a goal of 2.0 or higher.
c. Total Revenues compared to the budget or prior year have not had a negative change by more than 10%.
d. An increase in overall General Fund expenses by more than 10%, caused by any one of the above factors or other unanticipated factors. e. Significant Revenue Sources including, but not limited to, Property Tax and Sales Tax decline individually by more than 10% from budget or the prior year. f. Identification of any significant community event such as the closure of a top10 sales tax producing commercial activity. g. Ratio of operating revenue to operating expenses drops below 1.1, to ensure continued ability to save 10% of annual revenue for reserves or infrastructure projects.
2. Water and Sewer Funds Fiscal Health Analysis:
a. Each operating fund must support a minimum cash coverage ratio equivalent to 33% of annual budgeted operating expenses, including estimated capital improvements.
b. Ensure the liquidity ratio (quick ratio) stays above 1.0, with a goal of 2.0 or higher.
c. A reduction in revenues compared to the budget or prior year exceeding 15% d. An increase in overall expenses by more than 15%, caused by any one of the above factors or other unanticipated factors.
e. Confirmation from Sonoma County Water Agency or City of Santa Rosa Wastewater Treatment of a tentative rate increase more than 2% above the expected rates included within the City adopted rate study. f. Ratio of operating revenue to operating expenses drops below 1.1, to ensure continued ability to save 10% of annual revenue for reserves or infrastructure projects.
3. 5 Year Moving Community Fiscal Health Analysis:
a. Community Growth Trends: –
i. Evaluating the population growth to project possible increased service demand and operational costs.
ii. Evaluating housing and commercial building growth, to project possible increased service demand and operational costs.
b. Property Valuation Trends. This indicates the overall value of properties within the city and can give insight into the changes in potential tax revenue base. c. Business Formation and Closure Trends: Evaluating the rates of new business formations and closures provides insights into the entrepreneurial activity and overall business climate within the community. A high rate of new business formations suggests a dynamic economy, while a high rate of closures may indicate challenges for businesses.
d. Consider US, Statewide, or Regional Economic Factors:
i. US Personal Savings Rate, as reported by the US Bureau of Economic Analysis.
ii. Unemployment Rates Measurement. A low unemployment rate indicates a healthy job market and suggests that residents have stable sources of income, which can positively impact tax revenue and consumer spending.
5. Steps to Address Shortfalls
Some primary indicators generally require immediate action, while other secondary indicators could be indicative individually or collectively of trends that could present a near or mediumterm risk to the City.
Primary Indicators
Primary indicators include dropping below target fund reserve levels, the closure of a top 10 revenue producing commercial activity, or unbudgeted drops in revenue or increase in expenses above 10% in the general fund and 15% in the water or sewer funds, as described above.
If a Primary Indicator indicates an issue, the City will immediately freeze any new non-essential contract services and will not issue any new capital improvement contracts and will prepare a recommendation for next steps to the City Council within 30 calendar days.
Secondary Indicators
If, during the evaluation period, it is noted that more than one (1) Secondary Indicator suggests there is current or projected fiscal uncertainty to the detriment of the City, the following assessment will be performed and presented to the City Council at the next quarterly financial update to address possible fiscal shortfalls.
1. Assessment:
a. Upon reaching the defined thresholds, initiate an immediate assessment of the complete financial situation.
b. Review quarterly financial presentations to analyze the breakdown and identify the cause of any shortfall.
c. Evaluate the indicator to identify the projected magnitude and duration of the financial impact.
Potential Measures to Consider
The following measures are intended as a general outline of the triage process to consider when addressing an acute financial situation, in priority order. However, the City Council should consider the order and implementation of measures based on the actual conditions as they present themselves.
Each measure that is considered should be evaluated with the focus on prioritization of core essential services. Identified essential services will be prioritized for operations and other nonessential services during evaluations for potential adjustments. More specifically, core essential services include distribution of clean reliable water, effective wastewater system management, ability to maintain city zoning and building services, maintenance of public spaces in a safe condition, and police services which directly provide public safety and emergency response.
City will strive to allocate reasonable resources to critical areas to maintain uninterrupted service delivery.
To identify Non-Critical Expenditures, the City will evaluate contracts, including capital project contracts, professional services contracts, and other services/subscriptions/fees to determine their necessity to maintain the City’s core services and relative budgetary and service impact.
While staff will initially identify, categorize and make recommendations on these expenses, the City Council will decide where, and in what order, to reduce expenditures based on the fiscal needs of the City.
1. Outside Contract Freezing or Renegotiation and Cost Reduction:
a. Consider freezing any new capital expenditures and related “soft” costs. b. Consider freezing any design services for future capital projects. c. Consider freezing or reducing any service contracts. d. Initiate renegotiation with outside contracts and explore any potential costsaving measures.
2. Excess Asset Liquidation:
a. If the financial issue is expected to be relatively short in duration, to manage cash flow shortfalls, assess available physical and financial assets and explore opportunities for asset monetization, liquidity of investments, loans or privatization of assets to inject additional funds.
i. Consider selling or leasing surplus or underutilized properties or equipment.
ii. Evaluate long-term investments for liquidation prioritization to meet cashflow needs.
3. Staffing & Training Freeze and Union Negotiations:
a. Consider implementing a hiring freeze on all positions. Extended hiring freezes may need to be lifted for certain positions essential to carry out the City’s core functions.
b. Consider freezing non-essential training, particularly training that require air travel or hotel stays.
c. Consider engage in dialogue with labor unions to seek collaborative solutions.
4. New Revenue:
a. Consider exploring new revenue sources, particularly when the financial situation appears to be a long-term issue that is expected to continue to negatively affect core City service levels.
5. Debt Management:
a. Consider working with lenders, including CalPERS, to renegotiate loan or other unfunded liability payment terms such as extending maturity dates, adjusting interest rates, or restructuring debt payments to better align with cash flow projections.
b. Evaluate internal debt service payments to delay or expedite payments to restructure cash flow for operations.
When implementing cost reduction measures, communication and transparency with the community will be key. This should include communicating the financial challenges and proposed measures transparently to stakeholders and the community and providing regular updates on the status of budget shortfalls and actions taken to address them.
Monitoring and Adjustments:
a. Establish a monitoring framework to track the implementation and effectiveness of cost-saving measures.
b. Conduct regular reviews to assess the impact of actions taken and adjust strategies as needed.
Documentation and Reporting:
a. Document all budget decisions, negotiations, and financial projections meticulously.
b. Provide comprehensive reports to the City Council and stakeholders to maintain transparency and accountability.
6. Review and Approval:
This policy shall be reviewed with the City Financial Policies on a regular basis by the City Manager and Administrative Services Director and updated as necessary through approval by the City Council to ensure its effectiveness in identifying and addressing budget shortfalls.