CITY OF MENIFEE
SUBJECT: Fiscal Year 2024/25 Mid-Cycle Budget Review: Fund Balance Policy for General Fund
MEETING DATE: May 7, 2024
TO: Finance Committee
PREPARED BY: Margarita Cornejo, Deputy Finance Director REVIEWED BY: Travis Hickey, Chief Financial Officer
APPROVED BY: Armando G. Villa, City Manager
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RECOMMENDED ACTION
1. Review the existing Fund Balance Policy No. CC-07 for the General Fund and provide input for policy updates as part of Fiscal year 2024/2025 Mid-Cycle Budget Adoption.
DISCUSSION
Policy No. CC-07, Fund Balance Policy for the General Fund (“Policy”), initially adopted June 21, 2011, and most recently updated in September 2021, provides a formal policy outlining the City’s minimum levels of unrestricted fund balance to address protection from any unexpected situations that require financial resources. As part of the City’s overall financial management and long-term planning efforts, reviewing the existing Policy periodically provides an opportunity to assess if the existing structure and thresholds provides the agency with adequate reserves to support municipal operations.
Maintaining adequate reserves benefits the City in several ways, including, but not limited to:
increased credit quality, provides the City with a stronger long-term financial health to address downturns in the economy and impacts of negative events, as well as support needed funding for continued maintenance of property, replenishment of vehicles and equipment, and larger and more volatile on-going expenses, such insurance premiums/claims, and pension liability related costs. At the same time, the City must balance retaining adequate reserves with funding services and current expenditures. With increasing costs often outpacing the growth of revenues, the City must weigh the opportunity cost of directing resources towards building reserves versus funding other items.
During the 2021 review update of the reserve policy, the City identified the intent to review the policy every three years and assess the need and ability to increase the reserve. Based on the current adopted policy, the City presently has a total reserve requirement in the General Fund of
City of Menifee Staff Report
FY2024/25 Mid-Cycle Budget Review: Fund Balance Policy for General Fund May 7, 2024
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35% of operating expenditures. In the calculation of the reserve requirement, both Fund 100 (General Fund) and Fund 105 (Quality of Life) are included. The three components of the existing Fund Balance Reserves, based on the FY2023/24 Adopted Budget, are:
Reserve Fund Requirement for FY2023/24
Operating Stabilization Reserve (12.5%) =
$11,257,355 (Committed)
Economic Uncertainty Reserve (12.5%) =
$11,257,355 (Assigned)
Unassigned Fund Balance (10%) =
$9,005,884 (Unassigned)
Total: $31,520,594
For general reference surrounding agencies have reserve requirements ranging from 17.5% to 35% of annual budgeted expenditures. However, each city has unique revenue and expenditure composition, with the corresponding fund balance reserve policy developed upon such structure.
In its review of the FY2024/25 Mid-Cycle Budget review process, staff has preliminarily reviewed the existing Policy and the projected fund balance in excess of the established required 35% threshold to determine the financial feasibility to consider increasing the reserve requirement beginning FY2024/25.
From an overall perspective, the City’s recommended approach would be to focus on reserves as financial strategy to serve two main purposes:
1.Reserves as Insurance: Dedicated reserves intended to guard the City against risks such as revenue instability, catastrophic events, and cashflow instability. Collectively, this represents the City’s current 35% reserve requirement. In the 2024 update, an option would be to increase from 35% to 40%.
2.Reserves as Savings: Dedicated accounts (Restricted, Committed, Assigned) deliberately accumulated to pay for future costs or cost increases that would not be affordable within a single year’s revenue. For example, in the FY2023/24 and FY2024/25 budget adoption in June 2023, the City Council approved establishing Assigned Fund balances for insurance/self-insured retention (SIR) costs, and Fleet Replacements, where surplus funds beyond the reserve requirement were identified. In the 2024 update, options would include: reviewing/establishing the adequate amounts to dedicate to such accounts, as well as consider establishing accounts towards pension liability and public facility costs.
As a relatively newer City, Menifee has been able to pay off its unfunded pension liability annually. However, as the City ages, pension liability grows, more of the workforce becomes retirees, and CalPERS investment performance fluctuates year over year, it will be increasingly difficult to absorb an outstanding unfunded liability within a single year’s budget. Additionally, the City Council may wish to consider a more robust and deliberate accumulation of funding set aside for future public facilities.
Staff will present a proposed revised Policy with final recommendation as part of the June 5, 2024, City Council meeting as part of the mid-cycle budget adoption process. In preparation for this, City of Menifee Staff Report
FY2024/25 Mid-Cycle Budget Review: Fund Balance Policy for General Fund May 7, 2024
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staff would like to collect input from the Finance Committee on some of the options to consider in the 2024 update.
FISCAL IMPACT
There is no fiscal impact associated with the recommended action. The proposed Policy will be presented for City Council consideration at the June 5, 2024 meeting. Modifications of the Policy such as increasing the reserve requirement threshold (i.e. increasing from 35% to 40%), or incorporating new restricted, committed, or assigned fund balances would result in a fiscal impact of available unassigned fund balance. The final fiscal impact of such modification will be addressed in the Ppolicy update staff report.
ATTACHMENTS
1. Policy No. CC-07: Fund Balance Policy for the General Fund (as of September 2021)