City of San Mateo, California
Financial Policy
General Fund Reserves
I. Purpose
The General Fund Reserve is established to ensure that the City of San Mateo (the City) can sustain municipal services during economic downturns, natural disasters and other major emergencies.
Three of the General Fund’s primary revenue sources are property tax, sales tax, and real property transfer tax. Sales tax and real property transfer tax are highly sensitive to economic cycles. While property tax remains stable, uncertainties around the property tax in-lieu of vehicle license fees (VLF) shortfalls and unfunded pension liabilities create additional long-term financial risks. Further, the City must be prepared for seismic and other catastrophic events that could threaten the City’s long-term fiscal health.
This policy outlines the management, usage, and replenishment of the General Fund reserves to ensure the City’s financial stability and sustainability.
II. Amounts Held in the General Fund Reserves
The General Fund Reserves are divided into five primary categories:
1. Contingency Reserve
The General Fund Contingency Reserve will be maintained at 15% of the General Fund budgeted operating expenditures. This reserve will only be utilized for extraordinary, one-time events that cause significant financial strain, such as natural disasters, public health crises, legal obligations, emergency infrastructure repairs, or major unforeseen non-financial emergencies as determined by the City Council. This reserve is not intended to address revenue losses due to normal economic cycles. City Council authorization is required for any use of this reserve.
2.Housing Set-Aside Reserve
In accordance with the approved Housing Element, 20% of RDA residual property tax will be allocated annually to the Housing Set-Aside Reserve at the discretion of the City Council. This reserve will be used to support affordable housing initiatives with City Council authorization.
3.Capital Improvement Projects (CIP) Carryover Reserve:
The General Fund CIP Carryover Reserve will hold funds budgeted for capital improvement projects that have not yet been transferred to the Capital Projects Fund. This reserve is designed to separate committed funds from the remaining General Fund reserves, to ensure effective financial planning and to prevent commingling of designated capital project funds with other reserves.
4.Budget Stabilization Reserve
The General Fund Budget Stabilization Reserve will be set at 15% of the General Fund budgeted revenues. This reserve is intended to stabilize the General Fund budget during economic downturns or unforeseen expenditure increases to maintain service levels. This reserve will be replenished during economic growth periods and utilized to stabilize the budget and maintain core services during economic downturns.
The 15% target level serves as a goal range, not a minimum, recognizing that this reserve is intended to be used during economic downturns. It is expected that the balance may fall below 15% in challenging times, as the reserve is designed to help stabilize the budget and maintain essential services. If economic conditions or long-term financial risks warrant additional reserves, the City Council may temporarily increase the Budget Stabilization Reserve above 15% to strengthen the City’s financial position.
The Finance Director shall develop a General Fund long-range forecast and review General Fund reserve levels as part of the budget development process. If the Budget Stabilization Reserve is projected to fall below 10% in the next two budget cycles per the long-range forecast, the City Manager shall propose a plan to restore the reserve to the target level, subject to City Council approval.
5.Pension Stabilization Reserve
The General Fund Pension Stabilization Reserve is established to mitigate impact of rising pension costs and prevent unexpected increases in unfunded pension liabilities from affecting city services.
This reserve is intended to stabilize the City’s annual pension contributions to maintain service levels.
If pension cost uncertainty declines, the Finance Director shall propose options to adjust the reserve level based on the assessed risk, subject to City Council approval. Options may include making one- time discretionary payment to CalPERS to reduce the City’s unfunded pension liabilities.
Initial funding shall be determined at the discretion of the City Council. Additional funding may come from surplus funds, one-time revenues, or other unrestricted funding sources, subject to City Council approval.
Investment earnings generated from this reserve will be credited back to the reserve.
III. Unassigned Fund Balance
Unassigned fund balance represents the portion of General Fund balance that is not restricted, committed, or assigned to specific purposes, including the reserve requirements outlined above. It is the most flexible portion of the General Fund balance and is available at the discretion of the City Council.
This balance may serve as an additional cushion for unforeseen expenses. If the unassigned fund balance exceeds 10% of General Fund budgeted expenditures, the Finance Director shall propose options for City Council consideration as part of the budget development process. These options may include additional contributions to the Capital Investment Reserve, one-time capital improvements, pension liability reduction, or other long-term financial priorities. City Council authorization is required for any allocation of the excess funds.
IV. Annual Review of Policy
The General Fund Reserve policy will be reviewed at least annually with the development of each fiscal year’s budget. If changes are deemed necessary, to safeguard its effectiveness and relevance to the City’s long-term needs, or to ensure that the policy remains current with government financial best practices, changes to the policy may be authorized by the City Council at any time.