DATE: March 25, 2024
TO: Mayor and Members of the City Council
VIA: Stefan Chatwin, City/District Manager
FROM: Edmund Suen, Finance Director
Waqas Hassan, Assistant Finance Director
Mimi Lam, Financial Services Manager
SUBJECT: INTERNAL SERVICE FUNDS SUMMARY
RECOMMENDATION
It is recommended that the City Council review this report and its attachments, and by Minute order, provide policy direction on reserve levels and funding methodologies for its Internal Service Funds in the preparation of its FY 2024-25 budget.
EXECUTIVE SUMMARY
As indicated in Attachment 1, each of the Internal Service Funds (Vehicle Replacement Fund, Equipment Replacement Fund, Information Technology Fund, Building Maintenance Fund, Compensated Absences Fund, and Wastewater Equipment Replacement Fund) is projected to meet targeted reserve levels as of 6/30/2024. The Self-Insurance Fund and Water Equipment Replacement Fund are $94,722 and $176,471 shy of their target of $1.0 million and $4.29 million respectively. The Longevity Benefit and PEHMCA Benefit Internal Service Funds reserve balances represent set asides for post-employment liability. Based on the current practice, City staff recommends the continuation of assessments for estimated benefit charges to applicable departments in FY 2024-25. Lastly, the Compensated Absences Internal Service Fund reserve balance represents the estimated accrued value of earned leave (vacation and sick) upon General Fund employee separation from the City. As such, earned leave payout is charged to this Fund at such time.
BACKGROUND
Internal Service Funds are the mechanism by which the City accumulates funding over time in preparation for known future large purchases and/or other future liabilities.
Internal Service funding is a conservative budgeting strategy that has helped Foster City proactively fund necessary expenditures.
The City of Foster City has established eight (8) Internal Service Funds to which it transfers funds in preparation for future large expenses. These funds are:
•Vehicle Replacement Fund (501) – For staffing costs and purchases related to the vehicle fleet including vehicles and repair equipment. •Equipment Replacement Fund (502) – For the purchase of operations equipment with a cost of at least $1,000.
•Self-Insurance Fund (503) – For the costs associated with the Insurance and Risk Management program.
•Information Technology Fund (504) – For staffing costs and purchases of equipment related to information technology including computers, servers, phone systems, routers, etc.
•Building Maintenance Fund (505) – For staffing costs and the upkeep of all City buildings, including paint, HVAC, roofing, equipment, and building maintenance. •Compensated Absences (509) – For payouts of accrued leave upon termination of employment based upon provisions of various employee Memoranda of Understanding (MOUs) and the City’s Compensation and Benefits Plan. •Water Enterprise Equipment Replacement Fund (408) – For the purchase of operations equipment with a cost of at least $1,000.
•Wastewater Enterprise Equipment Replacement Fund (458) – For the purchase of operations equipment with a cost of at least $1,000.
Funding is set aside in these funds based on an annual analysis of each Fund’s needs.
Balances are impacted by various factors, including interest accumulation on reserves, estimates of replacement values, actual timing of asset replacements compared to scheduled timing of such replacements, and/or disparities (if any) on the cost of replacement items compared to accumulated funding. The Compensated Absences Fund Balance tends to vary from year to year depending upon actual vacation accruals, vacation time taken by staff, annual elected vacation payouts, the number of retirements, and/or separations from service.
The City also has two (2) Internal Service Funds that collect assessments of estimated retiree benefit payments to applicable departments, namely:
•Longevity Recognition Benefits Fund (507) – For the payment of Longevity Recognition Benefits post-employment benefits to qualified individuals. •PEMHCA Benefits Fund (508) – For the payment of Public Employees Medical and Hospital Care Act post-employment benefits to qualified individuals.
City staff recommends the continuation of this practice in FY 2024-25.
ANALYSIS
Internal Service Fund balances are analyzed periodically to ensure that funding is adequate based upon the requirements of each Fund and to determine the level of available balances compared to calculated requirements.
Over the course of the past months, each Internal Service Fund was analyzed and after deducting funding dedicated for the replacement of equipment and/or the accrued liability, the reserve established by policy is then applied. The resulting balance is considered available Unassigned Fund Balance (reserve balance).
Over the past years, City staff implemented a 15% chargeback discount in the Vehicle Replacement Fund and Equipment Replacement Fund and have continued to hold adequate reserves. Staff recommends the continuation of this practice for FY 2024-25.
This discount methodology is expected to limit each Fund’s reserve build-up in future years while still maintaining targeted reserves.
The analysis of Internal Service Fund balances is an integral step in financial and fiscal sustainability management and is done annually as part of the budget process.
Detailed discussion about each Internal Service Fund can be found in the separate staff reports presented this evening.
FISCAL IMPACT
City Staff seeks reaffirmation of the City Council’s policy on reserve levels and funding methodologies for its Internal Service Funds in the preparation of its FY 2024-25 budget.
A reaffirmation helps maintain the City’s fiscal sustainability.
CITY COUNCIL STRATEGIC PRIORITY
Staff Empowerment and Operational Excellence
Attachment:
Attachment 1 - Analysis of Internal Service Funds Balances