September 20, 2022
Finance Department
DATE: September 20, 2022
TO: Mayor Butt and Members of the City Council
FROM:
Delmy Cuellar, Director of Finance
Mubeen Qader, Budget Administrator
Subject:
Annual Review and Adoption of Financial Policies for
Fiscal Year 2022-23 (Cash Reserve, Debt, Investment,
OPEB Funding, SWAP and Grant Management)
FINANCIAL IMPACT: The adoption of and adherence to financial policies can be measured by factors such as:
•Minimizing borrowing costs;
•Better management of the City's debt and investment
portfolios;
•Providing fiscal security during times of unforeseen
economic downturns; and
•Paying down the City’s unfunded liability annually.
PREVIOUS COUNCIL
ACTION:
N/A
STATEMENT OF THE
ISSUE:
City Staff is requesting that City Council review and
approve the City’s annual Financial Policies (Cash
Reserve, Debt, Investment, OPEB Funding, SWAP and
Grant Management)
RECOMMENDED ACTION:
REVIEW and ADOPT the Financial Policies (Cash
Reserve, Debt, Investment, OPEB Funding, SWAP and
Grant Management) and resolutions for Fiscal Year
2022-2023 – Finance Department (Delmy Cuellar 510-
620-6740).
AGENDA
REPORT
September 20, 2022
DISCUSSION:
Cash Reserve Policy
Municipal governments provide a wide range of services that have an impact on public safety and quality of life for community members. Prudent use of resources helps determine how effectively these services are provided on an ongoing basis. In addition to managing revenues and expenditures, it is also the municipal finance official’s responsibility to focus on the General Fund balance and maintain cash reserves. In particular, to maintain operations in case of any significant event that could cause disruptions in cash flow, such as an economic downturn or natural disaster.
Determination of the appropriate level of General Fund reserves is a policy decision.
Some general guidelines have been suggested in governmental finance literature. The Governmental Finance Officers Association (GFOA) recommends that reserve levels be directly related to the degree of uncertainty the local government faces. As a general guideline, the GFOA recommends a minimum level of unrestricted fund balance equal to two months of regular revenues or regular expenditures.
The Cash Reserve Policy identifies a year end cash balance equal to fifteen – twenty percent (15-20%), slightly more than two months of General Fund total expenditures including transfers out as the minimum needed to provide stability against potential volatility of revenues and uneven cash flows.
Debt Policy
The foundation of any well-managed debt program is a comprehensive debt policy. A debt policy sets forth the parameters for issuing debt and managing the debt portfolio, including post-issuance compliance. In the credit rating process, the rating agencies believe it is appropriate to place significant value on debt policies that have been adopted by cities.
The City's Debt Policy requires that annual commitments relating to General Fund debt not to exceed ten percent (10%) of annual General Fund revenues.
Investment Policy
The City of Richmond Investment Policy is an integral part of the Finance Department, setting standards and procedures regarding how the City's funds are invested. The Investment Policy is consistent with the guidelines of the California Municipal Treasurers Association (CMTA) Certification Program. The policy addresses the 19 sections that the Association deems as critical elements, which are as follows:
1. Policy
2. Scope
3. Prudence
4. Objective
September 20, 2022
5. Delegation of Authority
6. Ethics and Conflicts of Interest
7. Authorized Financial Dealers and Institutions
8. Authorized and Suitable Investments
9. Review of Investment Portfolio
10. Investment Pools/Mutual Funds
11. Collateralization
12. Safekeeping and Custody
13. Diversification
14. Maximum Maturities
15. Internal Controls
16. Performance Standards
17. Reporting
18. Investment Policy Adoption
19. Glossary
The Investment Policy provides for the City to invest public funds in a manner which will provide the highest investment return, with maximum security, while meeting the daily cash flow demands of the City and conforming to all state and local statutes governing the investment of public funds. It further provides that the policy shall be reviewed annually and adopted by resolution of the City Council.
OPEB Funding Policy
The City provides medical benefits to retirees. The benefit is paid monthly to the retiree, subject to proof of coverage and attestation of premium payment, and generally ceases upon death of the retiree. Unlike the expenses associated with pension benefits, the City has historically chosen to pay its OPEB expenses as they come due (the monthly reimbursements to retirees) rather than as they are earned. These annual “pay-as-you- go” benefit expenses have increased over the last five years, are expected to continue growing at that pace as more active employees retire and as healthcare costs increase.
Payment of OPEB expenses as they come due, rather than as they are earned, results in the accumulation of unfunded liability for the future benefit. To estimate that liability, and to calculate the annual contribution required to pay down that liability over a specified amortization period (the actuarial determined contribution, ADC), the City’s actuary prepares an OPEB valuation annually.
Effective as of January 17, 2017, the City and Richmond Police Officers Association (RPOA) agreed on separating and maintaining two separate OPEB Plans. The RPOA OPEB plan was established in June 2019 with CalPERS. All current RPOA employees and future retirees after January 17, 2017, belong to the RPOA OPEB Plan. All other City active members and Retirees belong to the City OPEB Plan with Public Agency Retirement Services (PARS).
The City’s OPEB valuation, as of July 1, 2021, estimated an unfunded actuarial accrued liability (UAAL) of $103.79 million, $90.80 million for City OPEB plan and $12.99M for RPOA OPEB plan. In May 2022, the City’s Actuary estimated and projected an ADC of
September 20, 2022
$12.48 million consisting of $10.23M for the City Plan and $2.25M for the RPOA plan for FY22-23.
Based on the City’s current efforts to pay down the UAAL by contributing annually to the OPEB trusts established with PARS and CalPERS, the City has managed to have an ending balance of $31.1M in PARS and $7.4M in CalPERS as of June 30, 2022.
Staff recommends that the City Council continue pre-funding the City’s OPEB liabilities by directing the City Manager to continue contributing the ADC minus the pay-as-you-go costs into the Trusts to pay down the City’s unfunded liability annually.
SWAP Policy
As of April 20, 2021, the City adopted a guiding fiscal policy which prohibits the use of interest rate swaps when issuing debt (section VII Debt Management). Therefore, the Interest Rate Swap Policy in the paragraph below relates only to interest rate swap agreements entered into prior to April 20, 2021, and prohibits the City from that date forward from entering into swap agreements on currently held and future debt. The Policy does not prohibit the renegotiation of current swap agreement terms as long as the renegotiation does not involve entering into another swap agreement.
Since the scope of interest rate swaps is beyond that of the traditional fixed rate long term bonds covered by the Debt Policy, it is important for the City to maintain a policy that will provide guidance in selecting, implementing and administering all swaps related to City bond issues. Standard & Poor's Rating Agency assigns Debt Derivative Profile (DDP) scores to individual swap transactions, with the lowest score of "1" equating to no risk and highest score of "4" meaning "high risk". By adhering to the guidelines established in its Swap Policy, the City has successfully achieved a DDP score of "1.5" (low risk) on all of its swap transactions.
Grant Management Policy
The City of Richmond continues its practice of taking advantage of granting opportunities to support operations, programs, and capital improvement projects. Major sources of grant awards are federal, state, and local agencies, and private organizations. A grant’s scope is determined by the policy goals of the grantor, and the grantee is obligated to deliver services through successful execution of the provisions.
Each grant has unique features based on the funding source and scope of work. City staff members at any given time are managing grants from different sources with a range of scopes including but not limited to capital improvement and operational.
The purpose of this policy is to set forth an overall framework for guiding the City’s use and management of grant resources. The Government Finance Officers Association (GFOA) recommends that governments develop a formal grants policy. The proposed revised policy was drafted according to the GFOA’s best practices and provides guidance on steps in the grant life cycle, including grant application, execution, and closeout.
September 20, 2022
DOCUMENTS ATTACHED:
Attachment 1 – Resolution Adopting Fiscal Year 2022-23 Cash Reserve Policy Attachment 2 – Fiscal Year 2022-23 Cash Reserve Policy
Attachment 3 – Resolution Adopting the Fiscal Year 2022-23 Debt Policy Attachment 4 – Fiscal Year 2022-23 Debt Policy
Attachment 5 – Resolution Adopting the Fiscal Year 2022-23 Investment Policy Attachment 6 – FY2022-23 Investment Policy
Attachment 7 – Resolution Adopting Fiscal Year 2022-23 OPEB Funding Policy Attachment 8 – Fiscal Year 2022-23 OPEB Funding Policy
Attachment 9 – Resolution Adopting Fiscal Year 2022-23 Swap Policy Attachment 10 – Fiscal Year 2022-23 Swap Policy
Attachment 11 – Resolution Adopting Fiscal year 2022-23 Grant Management Policy Attachment 12 – Fiscal Year 2022-23 Grant Management Policy