Attachment A
One-time Funds Allocation Plan
Fiscal Year 2024-25
Background
Due to a favorable negotiated settlement, the Council has uncommitted $74.5 million dollars in one-time funds. The options outlined in this plan are intended to provide the Council with recommendations for how these dollars can be allocated. In creating the three different potential options for allocating these dollars, staff developed Areas of Focus and Guiding Principles that have influenced the allocation plan options discussed in this report. Staff also reviewed prior budget surveys to assess areas that the community wanted to scale back on or retain, and lastly reviewed service level reductions and unmet needs to develop potential use of these dollars in the current fiscal year.
Areas of Focus
Staff reviewed reductions made to date and the following focus areas were identified to ensure the recommended allocation options included variable funding for the community, staff, and City infrastructure:
Restoring Community Benefits – Prioritizes adding back any community benefits that had been reduced where practical, and where ongoing funding is minimal to not increase the structural deficit.
Restoring Reduced Services – Prioritizes restoring reduced services where practical, and where ongoing funding is minimal to not increase the structural deficit.
Investing in Employees – Prioritizes funding for training and development, reclassifications where necessary to align with new duties and responsibilities because of budget reductions and, new positions where practical and where ongoing funding is minimal to not increase the structural deficit.
Enhancements – This includes any new funding requests that are not a restored budget reduction.
Guiding Principles
One-time funds should be allocated for one-time expenses that result in ongoing savings and/or efficiencies.
One-time funds should be allocated for one-time expenses, even if that allocation doesn’t result in ongoing savings and/or efficiencies.
Funds should be held for future use when immediate needs are not present.
Limited use of funds on ongoing expenses to limit increasing the structural deficit.
Allocation Plan Options
Staff has developed three options for Council consideration for the allocation of or reserving the funds. The highlights of each plan are summarized in the table below:
Allocation Plan
Capital Fund Reserve
Allocations for current use
General Fund
Reserves
Option A
Option B
Option C
OPTION A – No allocation recommendations; funds are to be held in a new committed reserve. Under this option, the City Council would create a “Reserve for Future Use,” committing funds for future needs to be determined by the City Council. This reserve would be drawn down as the funds are expended and would not be replenished, as these are one-time funds resulting from the uncommitted sales tax repayment reserve.
As outlined on page 167 of the Fiscal Year 2024-25 Final Budget, committed reserves “include amounts that can be spent only for specific purposes determined by formal action of the City’s highest decision-making authority, the City Council. Commitments may be changed or lifted only by the City taking the same formal action (resolution) that imposed the constraint originally.” The City currently faces operational needs, such as aging infrastructure, that—if left unaddressed—could lead to additional operational costs not currently included in the forecast. However, holding these funds as a reserve for future needs carries certain financial limitations due to inflation. The following tables provide a 10-year historical comparison of inflation against annualized returns from the 1-5 Year Treasury and Agency Index benchmark (provided by Chandler Asset Management) and the Local Agency Investment Fund (LAIF). The inflation rate is based on data from the U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in San Francisco-Oakland-Hayward, CA.
Below are two charts comparing the effects of inflation on investing uncommitted funds against two benchmarks for investment vehicles currently utilized by the City. As shown in the first chart, which compares inflation to long-term investments, the purchasing power of the $74.5 million reserve would decline by approximately $10 million over 10 years if interest is reinvested. This decline is even steeper, over $20 million, if the interest is instead used to support operations. The second chart presents a similar comparison with LAIF returns, where the purchasing power of the $74.5 million reserve decreases by around $13 million if interest is reinvested over 10 years and by more than $20 million if the interest supports operations.
This analysis demonstrates that inflation continues to outpace investment returns, making this holding strategy unsustainable over the long term. The California Government Code imposes restrictions on the types and durations of investments allowed, which limits potential returns and underscores the priority of safety and liquidity over yield. Given these constraints, this option may not provide the necessary growth to preserve the reserve’s purchasing power for future needs.
OPTION B – Allocates funds for spending, allocates funds in a committed reserve in the General Fund, and any remaining funds are transferred to the Capital Reserve. This option provides a balanced approach to how these funds might be used. Allocating funds for aging infrastructure, departmental needs and leveraging one-time dollars to provide ongoing savings and or efficiencies. This option also sets aside funding to cover the structural deficits in the 10-year forecast.
Allocations for Future Use:
Area of Focus
Guiding Principal
Description
Allocation One-time
Allocation Ongoing
Enhancement
Hold funds for future use
Transfer to the Capital Reserve. Public works staff will return at a future date with a spending plan for these dollars. It is anticipated that based on the list of projects presented and subsequently adopted additional staffing may be necessary to support an increase in the CIP projects. See attachment M for unfunded CIP list. $31,811,295
$0
Enhancement
Hold funds for future use
Create a committed reserve in the General Fund for estimated deficits in the 10-year forecast. Funds are estimated for use beginning in FY 2028-29 through FY 2033-34. Should alternate revenue sources and or additional reduced spending be identified to produce a balanced budget in all years of the forecast, staff would return to Council to uncommit these funds. $31,000,000
$0
Total Allocations for Future Use
$62,811,295
$0
Allocations for Current Use, see Attachment E for more detail:
Area of Focus
Guiding Principal
Description
Allocation
One-Time
Allocation
Ongoing
Restoring of Community Benefits
N/A
All but one community benefit item was not reduced
$0
$0
Restoring Reduced Service
N/A
Staff is still determining the workability of increasing any reduced service and will return later with a proposal if needed. $0
$0
Investing in Employees
One-time funds with ongoing savings or efficiencies, and limit ongoing expenses Invest $10 million towards CalPERS unfunded actuarial liability payment (following section for more detail.) Purchase of a new Enterprise Resource Planning Software (Finance/HR) and increases to training funding citywide to 50% of what was originally reduced (ongoing). $10,769,166
$175,500
Enhancements
One-time funds with ongoing savings or efficiencies
Staffing study
$66,000
$0
One-time funds
Purchase of goods, studies, software and enhance physical safety controls at City Hall. $500,000
Limit ongoing expenses
New limited term Grants analyst and new classifications $0
$178,039
Total all allocations for immediate use
$11,335,166
$353,539
CalPERS One-Time Allocation to Unfunded Actuarial Liability (UAL) UAL is defined by CalPERS as “the amortized dollar amount needed to fund past service credit earned (or accrued) for members who are currently receiving benefits, active members, and for members entitled to deferred benefits, as of the valuation date.” To address this liability, the City is considering a one-time Additional Discretionary Payment (ADP) of $10 million. If implemented, this ADP is projected to decrease the City’s cash outflows over the next 10 years by approximately $13 million, resulting in net savings of $3 million. The estimated impact on retirement payments is illustrated in the chart below.
In addition to cash flow savings, this one-time payment would immediately improve the funded status of the City’s retirement plan, raising it from 67% to 75% in the first year. Although the funded status improvement narrows over the 10-year forecast, the ADP maintains a higher funded status than without the payment, as shown in the table below.
Note: Projections in the charts are provided by CalPERS’ Managing Employer Contributions Tool.
OPTION C – Allocates funds for all current year budget requests and transfers all remaining funds to Capital Reserve for future use. This transfer would bring the Capital Reserve total to an estimated $65.7 million. This option leaves no funds from the sales tax payment reserve in the unassigned category. All funds after funding requests are met would be moved to the Capital Reserve Fund.
This option transfers all funds to the Capital Reserve for future spending and allocates no funds to a reserve or unassigned account to fund potential structural deficits in the out years, leaving the city vulnerable to future budget reductions.
Description
Allocation
One-Time
Allocation
Ongoing
Fund all allocations in the Allocations for Current Use table above (green). $11,335,166
$353,539
Transfer remaining balance to Capital Reserve to fund future Capital Improvement Plan (CIP) projects. $62,811,295
-
Total Reserve Recommendations
$74,146,461
$353,539
GRAND TOTAL OPTION C
$74,146,461
$353,539
In conclusion, three options are presented for Council consideration. With council direction, staff will bring updates on the funds based on council direction as part of the FY 2024-25 Mid-Year Financial Report.
Examples of this include funding for pavement and retiree health unfunded actuarial liability made when the City received one-time funds related to the sale of Pruneridge Ave. These decisions paid off during our most recent budget reductions when the city could significantly reduce spending on pavement with minimal impacts and was able to use the funding in the retirement health fund to cover two years of costs. Both of these significantly assisted in balancing the budget.