CITY OF POMONA
COUNCIL REPORT
December 19, 2022
To: Honorable Mayor and Members of the City Council
From: James Makshanoff, City Manager
Submitted By: Andrew Mowbray, Finance Director/City Treasurer SUBJECT: PRESENTATION OF THE UPDATED TEN-YEAR FINANCIAL FORECAST AND ADOPT A RESOLUTION TO APPROVE THE UPDATED CONSOLIDATED FISCAL POLICIES AND ADMINISTRATIVE PROCEDURES AND PURSUE A PENSION 115 TRUST RECOMMENDATION:
It is recommended that the City Council take the following actions and adopt the following resolutions:
Receive and File the updated Ten-Year Financial Forecast RESOLUTION NO. 2022-225 - A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF POMONA, CALIFORNIA ADOPTING THE CITY’S UPDATED CONSOLIDATED FISCAL POLICIES AND ADMINISTRATIVE PROCEDURES Direct staff to purse a Pension 115 Trust that allows the City to build its pension reserve while maintaining oversight of investment management and control over the risk tolerance of the portfolio EXECUTIVE SUMMARY: City staff have been working with the City’s financial advisor, Urban Futures, Inc. (UFI), to develop an Updated Ten-Year Financial Forecast and a Consolidated Fiscal Policies and Administrative Procedures (Attachment No. 1 – Exhibit A). The budget-based forecast is a dynamic model of the City’s forecasted labor costs, operating expenditures, and revenues for the General Fund. Every component of the model is driven by a set of assumptions and variables that are intended to make the forecast as highly predictive and useful in understanding the City’s future financial condition, based on present revenues and expenditures, expected changes to such revenues and expenditures, and the financial impact of various scenarios the City may consider addressing its service needs, strategic objectives, and incorporating current Fiscal Sustainability Policies. While the forecast is not intended as a replacement or substitute for careful monitoring and consideration of the City’s annual budget and financial statements, it is a tool for good financial planning, recommendations, and decision-making by City leadership to help better secure the City’s financial stability and sustainability.
The last ten-year forecast was presented to the Mayor and City Council in May 2021. The findings addressed past action of the development of a Transaction Use Sales Tax (TUT) Measure (PG) have helped sustain the City’s General Fund.
The purpose of tonight’s Ten-Year Forecast and the adoption of the updated Consolidated Financial Policies is to establish guidelines for the City’s overall fiscal planning and management. The policies are intended to establish guidelines for the City’s overall fiscal planning and management. These policies are intended to foster and support the continued financial strength and stability of the City as reflected in its financial goals. The consolidated policy document is designed and structured to develop principles that guide the financial administration of the City. The document includes City Council policies and staff administrative procedures.
FISCAL IMPACT: No fiscal impact at this time.
PREVIOUS RELATED ACTION:
On March 21, 2022, the City Council approved a $20k appropriation as part of the Fiscal Year 2021-22 Mid-Year Budget Review to enter into an agreement with UFI to provide an update to the City’s Financial Forecast Model as well as to update the City’s Fiscal and Financial Policies. On May 3, 2021, the city Council received a presentation of the City’s Ten-Year Forecast. On November 16, 2020, the City Council approved a $10k appropriation as part of the Fiscal Year 2020-21 General Fund 1st Quarter Budget Review to enter into an agreement with the City’s Financial Advisor Urban Futures (UFI) to provide an update to the City's Financial Forecast Model. A Ten-Year forecast was presented on December 11, 2017, as it was critical for the City to begin addressing long term needs.
DISCUSSION:
Over the past several months, the Finance Department staff worked closely with UFI to consolidate fiscal policies and administrative procedures as well as to collect and analyze the necessary financial data, structure and trends required to model the various revenue streams and expenditure drivers for the updated General Fund Ten-Year Forecast. The presentation will be broken down into these areas:
Consolidated Fiscal Policies and Procedures – this section will focus on the City Council Policy and Administrative Procedure. City Council Policy requires action or decision by City Council, more high-level in substance, and typically applies to broad policy goals and objectives relating to the allocation of resources. Policies include Fund Balances, Reserves & Surplus, Pension and Other Post Employment Benefit (OPEB) Funding, Budget Adoption and Administration, Fiscal Sustainability Plan Elements, Capital Improvement, Debt Management, Investments and Economic Development. Any amendments to the City Council Policy shall require City Council approval. In contrast, Administrative Procedures require management decisions that involve detailed steps used regularly to meet operational objectives. Procedures include Cash Management, Accounting, Auditing and Financial Reporting, Risk Management, Grant Management, Travel and Expense, Purchasing and Capital Asset Management. Amendments to Administrative Procedures shall require City Manager approval.
Updated Baseline Forecast – the City’s fiscal outlook moves from precarious to stable. The City’s General Fund Balance is growing and healthy. However, there is the impact of the Sales Tax Measure sunset date.
Updated Scenario Forecast and Updated Fund Balances, Reserves & Surplus Policy – this section will focus on allocating the fund balance to required reserves and authorizes encumbrances of any one-time revenues in a set fashion. The City performed an examination of the City’s risk factors that generally influence the amount of contingency reserve the City should hold. Risks that posed the most clear and present danger to the City were identified and assessed, including potential for decreased revenues and increased pension costs due to an economic downturn. The City also benchmarked general fund reserve balances of other comparable cities. The following are the proposed updated fiscal policies:
Update of General Fund Economic Reserves at 20% of operating expenses, eventually increasing to 22%. As of the FY 2022-23 First Quarter Budget Update, General Fund Fund Balance is at 35%, which is 18% above the current policy goal of 17% (see Table 1).
Table 1: FY 2022-23 Fund Balance
Finance staff proposed and the Labor Sub-Committee concurs to update the General Fund Economic Reserve to a higher amount than the 17% that was first created in 2011.
Purpose(s): Financial needs due to a downturn or recession in the local, state, or national economy; action by another government that eliminates or shifts revenues from the City; an unanticipated inability to fully pay the General Fund’s debt service obligations in any given year; other unexpected reductions or interruptions of revenue streams; or cash flow requirements of the General Fund.
Amount: minimum of 20% with the goal of incrementally increasing to a maximum of 22% of the General Fund’s current fiscal year operating expenses. Determination of this reserve amount should be based in part on the General Fund’s revenue loss/recovery during prior economic downturns and recessions, an assessment of the volatility of General Fund’s various major revenue streams, and a quantification of the General Fund’s cash flow demands over the fiscal year as compared to the timing of revenue receipts. As a perspective, below are the amounts proposed as a percentage of FY 2022-23 operating expenses:
17% $24,097,442
21% $29,767,428
20% $28,349,932
22% $31,184,925
Setup a Catastrophic Events Reserve at $300k initially and increasing for 10 years to reach $5 million.
Purpose(s): Financial needs due to unforeseen claims, damages, or liability, loss of critical infrastructure, facilities, equipment, or assets; extraordinary public service demands caused by natural disasters (earthquake, flood, fire etc.), civil unrest or other unforeseen events.
Amount: $300k initially and a goal of $5 million with annual appropriation towards that goal determined by the City Council at the time of the annual budget adoption. Determination of this reserve amount is a risk-loss assessment based on the City’s own loss experience, claims data, history of natural disasters or unexpected events, and other relevant data.
Establish a Pension 115 Trust funding at $1.5 million initially and $500k annually thereafter.
Purpose(s): The Section 115 Trust allows the City to build its pension reserve while maintaining oversight of investment management and control over the risk tolerance of the portfolio. Funds placed intro the trust is irrevocable, meaning it cannot be withdrawn and used for another expenditure of the City. The benefits of the Section 115 Trust include:
Assets in the trust will offset unfunded pension liabilities.
The City will control the risk tolerance of the portfolio.
Assets held in trust will allow for greater investment flexibility and risk diversification compared to the City’s investment portfolio.
Assets can be used to stabilize rates – to offset unexpected contribution rate increases or be used as a rainy-day fund when revenues are impaired based on economic or other conditions.
A higher rate of return on investments may, under certain circumstances, be achieved than can be earned on the pooled investment portfolio or LAIF City will have the flexibility to access trust assets any time, as long as it is used to pay employer pension.
Once the City transfers funds into such a trust, they can only be utilized for payment of employee pension.
Amount: $1.5 million initially and $500k annually thereafter, to the extent that the City has excess reserves, unspent budget monies at year-end, unspent proceeds from capital projects, and/or one-time revenues or any additional resources, it shall be the City’s policy to consider and establishing and allocating such available resources to a Section 115 Trust.
Pursuant to the implementation of this policy, staff will seek Council direction and approval on the establishment of a Section 115 Trust to build a pension reserve on a separate council meeting.
Other Post Employment Benefit (OPEB) will remain pay-as-you-go and there will ne no prefunding at this time.
Capital Improvement Projects (CIP) Funding from General Fund initially at 1/2% of adopted revenues, with an eventual goal of 1% of adopted revenues Purpose(s): To phase in the impact of unfunded capital improvement projects.
Amount: Annual funding shall be targeted at 1/2% of the operating revenues. This amount shall be for CIP projects without an identified funding source.
Equipment Replacement Funding from General Fund at $100k, increasing annually to $400k at the end of 10 years.
Purpose(s): To phase in the impact of replacement and upgrade costs of capital equipment and high-cost vehicle replacements.
Amount: $100k initially with total funding goal of $400k at the end of 10 years.
The above recommendations set the goals and sometimes only portions of the goal may be attained annually as part of the budget. With the presentation of the updated ten-year forecast, along with the fiscal policy commitments, it reminds the City of the structural issues the City’s General Fund is facing that may make these commitments difficult to pursue. However, we can start to incrementally “chip away” towards these commitments by using the available reserves. Finally, with tonight’s presentation, the City may begin the discussion of removing the sunset clause on the Measure PG Sales Tax that is scheduled to end in 2029.
COUNCIL PRIORITIES & GOALS: This item supports the Fiscal Year 2019-20 City Council Priorities and Goals - Priority 1 (GOAL A): Continue to ensure that the City has sufficient financial reserves in accordance with the City Fund Balance Policy, including at least 17% of General Fund operational budget for General Fund Reserves.
ALTERNATIVE(S): None
Prepared by:
Andrew Mowbray
Finance Director/City Treasurer
ATTACHMENT(S):
Attachment No. 1 – RESOLUTION NO. 2022-225
Exhibit A – City of Pomona Consolidated Fiscal Policies and Administrative Procedures Attachment No. 2 – Presentation: 10-Year Forecast
Presentation of the Ten-Year Financial Forecast and Adopt a Resolution to approve the Updated Consolidated Fiscal Policies and Administrative Procedures