DATE: March 24, 2025
TO:
Mayor and Members of the City Council
President and Members of the Estero Municipal Improvement District (EMID) Board of Directors
VIA: Stefan Chatwin, City/District Manager
FROM: Nate Cruz, Finance Director
SUBJECT: INTERNAL SERVICE FUNDS SUMMARY
RECOMMENDATION
It is recommended that the City Council provide policy direction on reserve levels and funding methodologies for its Internal Service Funds in the preparation of its FY 2025-26 budget.
EXECUTIVE SUMMARY
As indicated in Attachment 1, each of the Internal Service Funds is projected to meet targeted reserve levels as of June 30, 2025 except the Equipment Replacement Fund. Staff recommends transferring $550,000 from the Vehicle Replacement Fund to the Equipment Replacement Fund in order to eliminate the shortfall.
The Longevity Benefit and PEHMCA Benefit Internal Service Funds reserve balances represent set asides for a larger post-employment liability, and have no excess balance available. The Compensated Absences Internal Service Fund reserve balance exceeds the amount needed to fund costs in FY 2025-26, therefore staff recommends an assessment holiday in FY 2025-26.
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 2025-26.
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. Any excess 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. For the first time, however, the Equipment Replacement Fund (for the General Fund only) has a shortfall of $548,650. Staff recommends addressing this shortfall through a transfer of $550,000 from the Vehicle Replacement Fund. Staff will continue tracking fund levels to determine if the 15% chargeback discount continues to be reasonable for future budget cycles, but does not recommend any changes in this practice at this time.
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.
A detailed discussion about each Internal Service Fund can be found in the separate staff reports presented at the March 24, 2025 Budget Study Session.
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 2025-26 budget.
CITY COUNCIL STRATEGIC PRIORITY
Staff Empowerment and operational Excellence.
ATTACHMENT:
Attachment 1 - Analysis of Internal Service Funds Balances