City of Sacramento
Budget and Audit Committee Report
915 I Street Sacramento, CA 95814
www.cityofsacramento.org
File ID: 2024-02019 1/28/2025 Discussion Item 5.
(B&A) Review of Proposed Prior Year Savings Guideline Policy File ID: 2024-02019
Location: Citywide
Recommendation: 1) Review the proposed Prior Year Savings Guideline Policy; and 2) Pass a Motion forwarding to the City Council for adoption.
Contact: Peter Coletto, Director of Finance, (916) 808-5416, [email protected]; Mirthala Santizo, Budget Manager, (916) 808-5078, [email protected]; Department of Finance
Presenter: Peter Coletto, Director of Finance, (916) 808-5416, [email protected]; Mirthala Santizo, Budget Manager, (916) 808-5078, [email protected]; Department of Finance
Attachments:
1-Description/Analysis
2- Prior Year Savings Guidelines Policy
Description/Analysis
Issue Detail: The City is facing significant financial challenges. The City’s budget is facing a structural deficit with the pace of expense growth exceeding revenue growth. In addition, the City has significant unfunded liabilities including $1.4 billion in unfunded pension liabilities, $1.4 billion in unfunded capital and deferred maintenance needs over the next five years, and $0.2 billion in unfunded Other Post Employment Benefits (OPEB) liabilities for retirees. While the Fiscal Year (FY) 2024/25 Approved Budget (Budget) begins to address the structural deficit, the five-year forecast shows larger deficits continuing in the out-years. The City also suspended contributions to the Economic Uncertainty Reserve (EUR) to balance the FY2024/25 Budget, leaving the EUR balance below the 10% of General/Measure U revenues minimum.
Staff is proposing the adoption of the Prior Year Savings policy, to create a new funding mechanism to begin to address the City’s long-term liabilities and long-term fiscal challenges (Attachment 2):
Prior Year Savings Guideline Policy: The City faces a dual challenge of getting its operating
File ID: 2024-02019 1/28/2025 Discussion Item 5.
budget back to structural balance while identifying funding for approximately $3 billion of unfunded pension and capital liabilities. To help address these issues, staff is proposing the adoption of guidelines regarding the use of prior-year savings balancing operating budget needs with long-term fiscal stability. The recommended guidelines are as follows:
· 1st Priority - Budget balancing if there is a projected deficit in the coming budget year. · 2nd Priority - Restore the EUR to the minimum balance established by Council policy (currently 10% of General/Measure U revenues) if there is no projected budget deficit in the coming budget year.
· 3rd Priority - If the first two priorities are met, any remaining prior year savings will be allocated as follows:
o One-third - To a new fund for capital projects and deferred maintenance. o One-third - To a new fund for unfunded pension liabilities and/or OPEB liabilities. o One-third - Discretionary one-time uses.
Dedicated funding for the City’s long-term liabilities will potentially shorten the term of loans and reduce future interest payments, improve public facilities, and avoid additional unfunded maintenance liabilities. This will improve the outlook of the City’s fiscal condition by ratings agencies who evaluate overall liabilities including bonds and pensions, and policies.
Policy Considerations: The proposed policy is based on best practices. The guideline around prior year savings use will support budget balancing and provide dedicated funding to address the City’s long-term liabilities.
Economic Impacts: Not applicable.
Environmental Considerations:
California Environmental Quality Act (CEQA): This report concerns administrative activities and government fiscal activities that do not constitute a “project” as defined by CEQA Guidelines section 15378 and California Public Resources Code section 21080 and are not subject to the provisions of CEQA (CEQA Guidelines, §15060(c)(3)). CEQA review for any project which utilizes funds allocated in this report, has been or will be performed in conjunction with planning, design, and approval of each specific project as appropriate.
File ID: 2024-02019 1/28/2025 Discussion Item 5.
Sustainability: Not applicable.
Rationale for Recommendation: The policy regarding the use of prior year savings provides dedicated funding to address long-term unfunded liabilities once immediate budget deficits are addressed.
Financial Considerations: The proposed policy will support efforts to move the City’s operating budget back to structural balance and paying down unfunded liabilities, which will help improve the City’s overall fiscal condition.
Local Business Enterprise (LBE): Not applicable.
Prior Year Savings Guideline Policy
Scope: CITYWIDE
Administrative Entity
Department of Finance
(916) 808-5845
[email protected]
Table of Contents
Purpose
Background
Policy
3.1 Criteria for Prior Year Savings
3.2 Funding Priorities
Related Regulatory References
Council Motion 2025-XXXX
Effective Date: TBD
Prior Year Savings Guideline Policy
1. PURPOSE
The purpose of this policy is to create a new funding mechanism to address the City’s long-term liabilities and long-term fiscal challenges.
2. BACKGROUND
The City is facing significant financial challenges. The City’s budget is projecting a structural deficit with the pace of expense growth exceeding revenue growth in the Fiscal Year (FY) 2024/25 Approved five -year forecast. In addition, the City has significant unfunded liabilities including $1.4 billion in unfunded pension liabilities, $1.4 billion in unfunded capital and deferred maintenance needs over the next five years, and $0.2 billion in unfunded Other Post Employment Benefits (OPEB) liabilities for retirees. There are currently no dedicated or new funding sources to address the City’s structural deficit and long-term liabilities challenges.
3. POLICY
3.1 Criteria for Prior Year Savings :
Prior year savings include net positive year -end budgetary results from the General Fund, Measure U Fund and/or any future general-purpose fund.
3.2 Funding Priorities:
1st Priority – Budget balancing if there is a projected deficit in the coming budget year.
2nd Priority – Restore Economic Uncertainty Reserve to the minimum balance established by Council policy (currently 10% of General/Measure U revenues) if there is no projected budget deficit in the coming budget year.
3rd Priority – If the first two priorities are me t, any remaining prior year savings will be allocated as follows:
One-third – To a new special fund for capital projects and deferred maintenance.
One-third – To a new special fund for unfunded pension liabilities and/or OPEB liabilities.
One-third – Discretionary one-time uses.