CITY COUNCIL STAFF REPORT
Meeting Date: April 18, 2022
TO: THE HONORABLE MAYOR AND CITY COUNCILMEMBERS
SUBJECT: ADOPT RESOLUTION NO. __-22 APPROVING AN UPDATED
GENERAL FUND RESERVE POLICY
SYNOPSIS
The City first established a General Fund reserve in 2002 to ensure that the City had adequate financial resources to maintain basic municipal services in the event of a significant revenue shortfall or unanticipated expenditure. Since then, the City has periodically reviewed and modified its General Fund reserve, as expressed in the General Fund Reserve Policy, to respond to changing circumstances. City staff is updating the General Fund Reserve Policy to include the Pension Rate Stabilization Reserve with the intent to deposit funds into the Section 115 Pension PARS Trust.
Staff is requesting the City Council adopt the proposed resolution to update the General Fund Reserve Policy as recommended by the Budget Committee.
DISCUSSION
Background
Definition of Fund Balance
The City and all other public agencies account for their financial assets and liabilities using a system called governmental fund accounting, which is required by the Governmental Accounting Standards Board (GASB). A fund is an account established to keep track of all of the assets and liabilities related to a particular City activity or program. The General Fund is the fund that receives all of the City’s general tax revenues (e.g., sales tax, property tax, etc.) and from which the majority of the City’s expenditures are paid. Resources in the General Fund can be expended for many different purposes. At any given time, all funds, including the General Fund, have a fund balance, which is simply the difference between all of the assets and liabilities in the fund. Fund balance can contain several components which are summarized below:
a. Restricted – consists of amounts that are subject to externally enforceable legal purpose restrictions imposed by creditors, grantors, contributors, or laws and regulations of other governments; or through constitutional provisions or enabling legislation. b. Committed – consists of amounts that are subject to a purpose constraint imposed by a formal action of the government’s highest level of decision-making authority before the end of the fiscal year, and that require the same level of formal action to remove the constraint.
c. Assigned – consists of amounts that are subject to a purpose constraint that represents an intended use established by the government’s highest level of decision-making authority, or by their designated body or official. The purpose of the assignment must be narrower than the purpose of the general fund, and in funds other than the general fund. Assigned fund balance represents the residual amount of fund balance. d. Unassigned – represents the residual classification for the government’s general fund, and could report a surplus or deficit. In funds other than the general fund, the unassigned classification should be used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed, or assigned.
The current General Fund Reserve is classified as Assigned Fund Balance in the financial statements since the reserve is set by City Council through an approved resolution.
General Fund Reserve History
The City Council first created a General Fund reserve in 2002 (Resolution No. 44-02) when it directed that a portion of unrestricted General Fund balance be set aside for cash flow, revenue shortfalls, natural or manmade calamities, and unanticipated expenditures. The reserve was initially set at $5.0 million beginning on July 1, 2002. The Council modified the reserve in 2003 (Resolution No. 54-03) by increasing it to $8.0 million and directing that the reserve increase by 2% every July 1st thereafter. The City again modified the reserve in 2006 (Resolution No. 35-06) by specifying that $6.0 million be used for cash flow (working capital) and $2.3 million held for unforeseen emergencies, and by removing the direction to increase the reserve annually. In 2014, the City updated the reserve (Resolution No. 31-14) when it established a General Fund Reserve Policy that required a Reserve for Working Capital - $5 million, Reserve for Economic Uncertainty - $2 million, Reserve for Catastrophic Event - $1 million, and a Reserve for Umpqua Bank Loan - $890,000. The City most recently updated the reserve in 2019 (Resolution No. 9-19) by requiring a $10 million reserve (Reserve for Working Capital of $5 million and Reserve for Budget Stabilization of $5 million).
Analysis
Public Agency Retirement Services (PARS) Section 115 Pension Trust The Budget Committee and staff have been working on establishing a Section 115 Pension Trust with PARS. This would be a new tool to the City to assist in prefunding pension liabilities. The benefits for the City to prefund through a Section 115 Trust are the following:
a. Complete Local Control over Assets – City has complete control over assets, including contributions, disbursements and the timing, amount, and risk tolerance level of investments
b. Pension Rate Stabilization – Assets can be transferred to the retirement system at the City’s direction, potentially reducing fluctuations in employer contribution amounts c. Rainy Day Fund – Can be an emergency source of funds when employer revenues are strained in difficult budgetary or economic times since the trust can be used for ongoing pension costs
d. Diversification – Allows for flexibility and offers the potential for assets to earn greater returns than the General Fund; spread the risk vs. sending additional money to CalPERS The Budget Committee recommended modifying the General Fund Reserve Policy to initially fund the Section 115 Trust at $1 million along with a policy on future contributions and withdrawals.
The Section 115 Trust would earn interest income over the years and could provide assistance to fund pension costs. This amendment establishes the Reserve for the Pension Rate Stabilization with the initial contribution and would hopefully increase in value as interest income is earned.
Also, the funds in the trust are legally restricted for pension costs and would be treated as “Restricted General Fund Balance.” Finally, the Section 115 Trust serves as a mechanism to assist in pre-funding pension costs but one of the advantages is that the fund could still be used in a fiscal emergency as defined above as part of the “Rainy Day Fund” description.
The revised General Fund Reserve Policy would consist of the following:
a. $5 million Reserve for Working Capital
b. $4 million Reserve for Budget Stabilization
c. $1 million initial contribution to the Reserve for Pension Rate Stabilization (amount will change over time due to interest income, market value of the portfolio, and/or contributions to the trust)
FISCAL IMPACT
The fiscal impact is the amendment to reclassify and deposit $1 million into the Section 115 Trust.
If necessary, these funds can be used for pension related costs at any time.
PUBLIC CONTACT
Public Contact was made through posting of the City Council agenda on the City’s official notice bulletin board, in the City Clerk’s office, at the Pleasant Hill Library, and at the Pleasant Hill Police Department. The agenda and staff report are posted on the City’s web page and are available in the City Clerk’s Office.
RECOMMENDED CITY COUNCIL ACTION
Adopt a resolution approving the proposed updated General Fund Reserve Policy as recommended by the Budget Committee.
ALTERNATIVES TO RECOMMENDED ACTION
Do not adopt the resolution updating the General Fund Reserve Policy and provide direction to staff.
ATTACHMENT(S):
Proposed Resolution
Exhibit 1: General Fund Reserve Policy
Prepared by: Erick Cheung
Approved by: June Catalano, City Manager