SUBJECT: General Fund Reserve Policy
ADOPTED: March 27, 2012 by Resolution No. 2012-7631
REVISED: May 12, 2015 by Resolution No. 2015-8054
December 10, 2019 by Resolution No. 2019-8698
June 11, 2024 by Resolution No. 2024-xxxx
PURPOSE
The purpose of this policy is to establish parameters governing the classification and reporting of fund balance in the financial reports to help ensure that there will be adequate financial resources to protect the City against unforeseen circumstances and events such as revenue shortfalls and unanticipated expenditures. This policy also sets forth guidelines for replenishing deficiencies and will describe both how such replenishment is to be funded, and the period over which the replenishment is to occur.
POLICIES AND PROCEDURES
This policy shall define the components of fund balance, authorize the City Manager to prepare financial reports which accurately categorize fund balance in compliance with GASB 54 and GASB 43, establish contingency limits and establish guidelines for replenishing deficiencies.
Following sound financial practices and adhering to the Government Finance Officers’ of America (GFOA) recommendations, the City’s designated reserves include reserves for known and unknown contingencies, which take into consideration the:
Diversity of revenue base
Cyclical nature of revenue
Changes in community priorities
Frequency of budget surpluses/deficits
Cash flow management practices
The purpose of this policy is to establish a target minimum level of designated reserves in the General Fund to:
Reduce the risk of financial impacts resulting from a natural disaster or other catastrophic events; Respond to the challenges of a changing economic environment, including prolonged downturns in the local, state, or national economy; and Demonstrate continued prudent fiscal management and creditworthiness.
General Fund Balance and Reserve Levels
The City will set aside any remaining unassigned fund balance, which excludes non-liquid, nonexpendable assets (noncurrent assets for land held for resale, prepaids, long-term notes, deposits, etc.), into three designated reserves to address unforeseen emergencies or disasters, key opportunities for one-time recurring savings and/or economic development, and significant changes in the economic environment. These set-aside funds will be designated as the Catastrophic/Emergency Reserve, One-time Recurring Savings/Opportunity Reserve and Economic Contingency/Pension Stabilization Reserve. It is the City Council’s intent that funds set aside into any component of the designated reserve be fully liquid and available on short notice to address any emergency, opportunity or contingency which may present itself.
The City commits to maintaining these reserves (total unassigned fund balance) at a minimum of 40% of General Fund annual operating expenditures allocated between the Catastrophic/Emergency Reserve (33 1/3%), One-time Recurring Savings/Opportunity Reserve (33 1/3%), and Economic Contingency/Pension Stabilization Reserve (33 1/3%). The General Fund Reserve Policy is reviewed by the City Council as part of the annual operating budget review and adoption process.
The required reserve level should be adequate to meet the City’s immediate financial needs for basic operating expenses for approximately 90 days, including salary and benefits for safety and non-Safety City employees, while still meeting debt service obligations. This time frame would enable the City explore other available cash alternatives and would provide for a transition period, giving the City adequate time to realign its operating costs with available resources, while minimizing service impacts.
General Fund Reserve Designations
Catastrophic/Emergency Reserve
Funds reserved under this category shall be used to mitigate costs associated with unforeseen emergencies, including natural disasters or catastrophic events as declared by the Mayor and/or City Council or by the City Manager and later ratified by the City Council. Should unforeseen and unavoidable events occur that require the expenditure of City resources beyond those provided for in the annual budget, the City Manager shall have the authority to approve Catastrophic Reserve expenditures pursuant to a formal declaration of emergency. The City Council shall meet as soon as practicable thereafter to ratify such expenditures and authorize such additional appropriations as it deems necessary to address the catastrophe or other emergency at hand.
One-Time Recurring Savings/Opportunity Reserve
Funds reserved under this category are designated for certain opportunities such as one-time expenditures that will result in future efficiencies and/or budgetary savings (examples: pre-payment of a liability to avoid costly finance charges or one-time transitional costs associated with organizational restructuring to secure long-term personnel cost savings) and/or key economic development opportunities as authorized by City Council. These may also be used for key infrastructure and capital/special projects as identified in the City’s Capital Improvement Plan, if there is no ongoing funding source to support the City’s capital needs. Appropriations from the One-time Recurring Savings/Opportunity Reserve may only be authorized by formal City Council action where findings have been made as to what constitutes the savings and how future efficiencies and/or budgetary savings will be achieved.
Economic Contingency/Pension Stabilization Reserve
Economic Contingency Reserve funds shall be used to mitigate unanticipated budget revenue shortfalls (actual revenues less than projected revenues) due to changes in the economic environment and/or certain economic triggers. Examples of “economic triggers” include, but are not limited to:
Significant decrease in property, sales tax or lease, or other economically sensitive revenues; Loss of businesses considered to be significant sales tax generators; Reductions in revenue due to actions by the state/federal government.
These reserves will only be used to cover day-to-day operations under declaration of a fiscal emergency.
Up to 50% of funds under this category shall be designated as Pension Stabilization Reserve funds which will be invested in an irrevocable trust in compliance with Section 115 of the Internal Revenue Code to leverage potentially greater investment earnings that would otherwise be earned as part of the General Fund. Funds shall be used to mitigate pension costs and liabilities which include, but are not limited to:
Set aside funds for future pension contributions or liabilities.
Alleviate operating budget deficiencies resulting from unanticipated spikes in employer contribution rates.
Reduce the City’s pension unfunded liability.
Appropriations from the Economic Contingency/Pension Stabilization Reserve may only be authorized by formal City Council action where findings have been made as to how the use of reserves appropriately mitigates the emergency or contingency at hand.
Replenishment of Unassigned Fund Balance
In keeping with the principles discussed in this policy, the City Council will develop a 10-year reserve replenishment plan, should the use of any of the above reserves allow the total unassigned fund balance to fall below the minimum threshold of 40% of General Fund ongoing, operating expenditures, excluding one-time expenditures. The reserve replenishment plan shall include the purpose for which the reserve funds were used, the amount of reserve funds that was used, rate of interest to be paid (must be at least equal to the investment earnings the reserve funds would have received), and term of the replenishment plan.
Excess Fund Balance
At the end of each fiscal year, the Finance Department reports on the audited year-end budgetary fiscal results. Should actual General Fund revenues exceed expenditures and encumbrances, a year-end operating surplus shall be reported. Any year-end surplus and/or any liquidation of non-liquid assets that increases results in the General Fund unassigned fund balance shall be distributed to the Vehicle and Equipment Acquisition/Replacement Fund (20%), City Facilities Replacement/Rehabilitation Fund (40%), and City Infrastructure Replacement/Rehabilitation Fund (40%), and in accordance with the Fiscal Management Policy adopted on May 12, 2015 or as otherwise allocated and/or assigned by Council.
POLICY NO. 2012-04