City of San Mateo
General Fund
Reserve Policy
Aril 7, 2025 1
Agenda
• Why It Matters
• Current General Fund Reserve Policy
• Our Approach to Reviewing Current Policy
• Proposed Changes
• Before and After Comparison
• Council Direction and Next Steps
2 Why This Matters for the City
3 • The General Fund Reserve Policy directly impacts the City’s ability to mitigate risk and maintain services during emergencies or economic downturns.
• Current General Fund reserves have some inefficiencies (in structure and reserve levels) that need to be addressed.
• Aligning policy with best practices and credit rating agency expectations.
Why This Matters for the City
General Fund Balance Over the Last 10 Years
$-
$20
$40
$60
$80
$100
$120
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 Estimate
ENDING BALANCE (IN MILLIONS) $112 mil.
4 Why This Matters for the City
General Fund Balance Over the Last 20 Years
$112 mil.
$-
$20
$40
$60
$80
$100
$120
ENDING BALANCE (IN MILLIONS)
Great Recession
Pandemic
5 Our Approach
1. Review Industry Standard and Best Practice
2. Review Peer Cities
3. Consider AAA Credit Rating Criteria
4. Assess Our City-Specific Circumstances
Review our Cash Flows and Overall Financial Positions. Assess our Risk Factors.
Ensure the Reserve Policy Reflects San Mateo’s unique needs. 6 Industry Standard & Best Practice
7 GFOA Best Practice
The Government Finance Officers Association (GFOA) recommends that governments establish a formal policy on maintaining an unrestricted fund balance in the General Fund for both accounting and budgetary purposes. This policy ensures financial stability and mitigates risks.
GFOA suggests at least two months of regular operating revenues or expenditures.
Governments facing higher risks (e.g., reliance on volatile revenues, exposure to natural disasters) may require more.
Policies should define when fund balance can be used and how it will be replenished. If unrestricted fund balance exceeds policy requirements, i.e. excess funds, governments should have a strategy for its use.
Peer Cities
8 • Reviewed reserve policies of neighboring cities.
• Most maintain reserves aligning with best practices.
• Cities with structured reserve policies tend to have higher financial flexibility.
Peer Cities
General Fund Reserve Levels Per FY 2024-25 Budget
Daly City Minimum 17% of General Fund operating expenditures (preferred target level at 25%)
$57.2 million (46%)
South San
Francisco
General Reserve: 20% of General Fund revenues $27.0 million (20%) Infrastructure Reserve: Set-aside for future infrastructure projects. $ 4.9 million Pension Stabilization Reserve $ 5.8 million
Total General Fund Reserves $37.7 million
Unassigned Fund Balance $17.6 million
Total General Fund Balance $55.3 million
9 Peer Cities (continued)
General Fund Reserve Levels Per FY 2024-25 Budget
Redwood
City
15% of General Fund revenues $25.4 million (15%)
Pension Trust 1 $27.0 million
Total Reserves + Pension Trust $52.4 million
Mountain
View
General Fund Reserve: 20% ~25% of General Fund budgeted expenditures. $36.9 million Budget Contingency Reserve: one-time funding during uncertain conditions. $3.5 million Transportation Reserve to fund major transportation projects. $6.8 million Capital Improvement Reserve to fund unanticipated priority CIP projects. $4.9 million General Non-operating Fund: limited-period revenues and expenditures. $11.3 million 10 other General Fund reserves $37.0 million
Total General Fund Reserves $100.4 million
Note 1 – Pension trust balance is based on Redwood City’s latest ACFR. 10 Peer Cities (continued)
General Fund Reserve Levels Per FY 2024-25
Budget
Sunnyvale Contingency Reserve: 15% of General Fund operating expenditures $33.8 million Budget Stabilization Reserve: 15% of General Fund projected revenues $89.5 million (35%) CIP Reserve: established for purchasing land or property. $6.5 million Equipment & Project Carryover: project budget carryover $ - million Total General Fund Reserves $129.8 million
Santa Clara Budget Stabilization Reserve: 25%of General Fund budgeted expenditures. $45.8 million (15%) Capital Project Reserve: for CIP with no other funding sources. $6.1 million Land Sale Reserve: Set-aside proceeds from land sales for land-related purpose. $18.5 million Pension Stabilization Reserve to address unfunded pension liability. $21.4 million 7 other General Fund reserves $12.5 million
Total General Fund Reserves $104.3 million 11
Peer Review
General Fund Reserve Levels Per FY 2024-25 Budget
San Mateo County In September 2024, San Mateo County supervisors approved increasing General Fund reserves from 10%
to 15% of Net Appropriations (currently at
approx. $3.5 billions)
$507.4 million
12 AAA Credit Rating
13 • Maintaining AAA credit rating ensures that the City can borrow at a low cost for public financing.
• Credit rating agencies take many factors into consideration:
• General Fund debt and other obligations
• Diverse and reliable revenues
• Large general fund balances
• Strong liquidity
AAA Credit Rating (continued)
14 AAA Credit Rating (continued)
15 Moody’s Rating
San Mateo’s Unique Needs
Evaluate Our Financial Position & Risk Factors
Risk Factors:
Non-Fiscal Emergency
earthquakes, floods, fires,
public health crisis, legal,
infrastructure emergency
Risk Factors:
Fiscal Emergency
revenue loss during
economic downturns,
VLF shortfalls, pension,
expenditure spikes.
Financial
Position:
Cash Flows
Historical trends
16 General Fund Reserves – Current Structure
Projected
General Fund
Balance
as of
6/30/25
$112 mil.
Operating Reserve
25% of GF OpExp
$42 mil.
Housing Set-Aside
$7 mil.
Rainy Day
Reserve
$63 mil.
CIP Carryover
$10 mil.
17 What are the Problems?
18 1. CIP carryover – Currently mixed within the Rainy Day Reserve, making it unclear how much of the Rainy Day Reserve is actually available.
2. Overlapping reserves - Operating Reserve and Rainy Day Reserve currently have overlapping functions.
3. Fund Balance – Currently, the entire General Fund balance is classified as reserves.
A clear distinction between reserves and unassigned fund balance is needed. • Reserves – set-asides for specific purchases
• Unassigned fund balance is available for spending at the City Council’s discretion.
4. Reserve Levels - Adjustment required to optimize resource allocation Proposed Change # 1
Operating Reserve
25% of GF OpExp
$42 mil.
Housing Set-Aside
$7 mil.
Rainy Day
Reserve
$63 mil.
CIP Carryover
$10 mil.
CIP Carryover
$10 mil.
Proposed Change # 1
Separate CIP Carryover from
the Rainy Day Reserve, and
establish a new reserve
category called
CIP Carryover Reserve.
Operating Reserve
25% of GF OpExp
$42 mil.
Housing Set-Aside
$7 mil.
Rainy Day
Reserve
$53 mil.
19 Proposed Change # 2
Proposed Change # 2
(1) Rename Operating Reserve to
Contingency Reserve with
clear definition;
(2) Lower Reserve Level to 15%
of General Fund budgeted
operating expenses, freeing
up $17 million.
Operating Reserve
25% of GF OpExp
$42 mil.
Contingency Rsv
15% of GF OpExp
$25 mil.
Free Up $17 mil.
Clear Definition:
Contingency Reserve will only be utilized for
extraordinary, one-time events …. such as natural
disasters, public health crises, legal obligations,
emergency infrastructure repairs, or major
unforeseen non-financial emergencies or disasters
as determined by Council.
Target Level:
15% of General Fund budgeted operating expenses
20 Proposed Change # 2 (continued)
21 Key reasons to lower the Contingency Reserve:
The City of San Mateo has strong cash flow management and access to liquidity. • Pooled Cash Investment Strategy – San Mateo manages its cash on a pooled basis, where various funds contribute to central investment pools for efficient cash management. This ensures funds are available when needed without having to hold large, idle reserves. • Interfund Borrowing – In the case of a catastrophic event, immediate funding needs could be met through available pooled cash and short-term interfund borrowing to ensure liquidity for critical operations.
• Federal and State Financial Aids – State or federal emergency funding, such as FEMA or State financial aids, grants, issue short-term loans to cover immediate costs.
Proposed Change # 3
Proposed Change # 3
(1) Rename the Rainy Day
Reserve to Budget
Stabilization Reserve with
clear definition; and
(2) Change its target level from
$30 million to 15% of the
General Fund budgeted
revenues
(3) Set Aside $10 million for
Pension Stabilization.
(4) Free up $18 million
Budget Stabilization
Reserve
15% of GF Revenue
$25 mil.Rainy Day
Reserve
$53 mil. Pension
Stabilization
Reserve
$10 mil.
Clear Definition:
The Budget Stabilization Reserve is intended to
stabilize the City’s budget during economic downturns
or unforeseen expenditure increases to maintain
service levels.
Use and Replenish: Replenished during economic
growth periods and utilized during downturns.
Target Level:
15% of General Fund budgeted revenues, with
flexibility to temporarily increase reserve level, if
Council approves, when the City faces additional
uncertainties.
Pension Stabilization:
Setting aside $10 million to stabilize annual pension
contributions and maintain service levels.
Free Up
$18 mil.
22 Proposed Change # 4
Operating Reserve
25% of GF OpExp
$42 mil.
CIP Carryover
$10 mil.
Rainy Day
Reserve
$53 mil.
Proposed Change # 1
Housing Set-Aside
$7 mil.
Operating Reserve
25% of GF OpExp
$42 mil.
Housing Set-Aside
$7 mil.
Rainy Day
Reserve
$63 mil.
Total: $112 million
$17 mil. Free up
Contingency Reserve
15% of GF Expenditures
$25 mil.
CIP Carryover
$10 mil.
Housing Set-Aside
$7 mil.
Proposed Change # 2
Budget Stabilization Res.
15% of GF Revenues
$25 mil. $18 mil.
Free up
Proposed Change # 3
Pension Stabilization Res.
$10 mil.
Proposed Change # 4
Set up a Capital
Investment Reserve in the
Capital Project Funds
Capital
Investment
Reserve
Unassigned Fund Bal.
$10 mil.
$25 mil.
23 Comparison: Current Structure
General Fund
Reserve
$112 mil.
General Fund Balance
$112 mil.
24 Comparison: New Structure
General
Fund
Capital
Project
Fund
Assigned Fund Bal.
General Fund
Reserve
$77 mil.
Unassigned Fund Bal.
$10 mil.
Capital Investment
Reserve
$25 mil.
General Fund Balance
$112 mil.
25 New Reserve Levels
Contingency Reserve
15% of GF Expenditures
$25 mil.
CIP Carryover
$10 mil.
Housing Set-Aside
$7 mil.
Budget Stabilization Res.
15% of GF Revenues
$25 mil.
Capital Investment
Reserve
$25 mil.
General Fund Reserve Unassigned Fund Balance
Measure CC
$6 mil.
Measure S
$2.5 mil.
General Fund
$1.5 mil.
Pension Stabilization Res.
$10 mil.
Capital Investment
Reserve
Total: $77 million Total: $10 million Total: $25 mil. Grand Totals $112 mil.26 Summary of Proposed Changes
• Separate the CIP Carryover from the Rainy Day Reserve. • Rename the Operating Reserve to Contingency Reserve, setting target level at 15% of General Fund budgeted expenditure for non-fiscal emergencies. • Rename the Rainy Day Reserve to Budget Stabilization Reserve, setting target level at 15% of General Fund budgeted revenues for fiscal emergencies. • Create a Pension Stabilization Reserve, with initial funding of $10 million, to mitigate risk of rising pension costs.
• Create a Capital Investment Reserve under the Capital Project Funds, with initial funding of $25 million, for critical unfunded infrastructure projects. • Establish guidelines for reserve replenishment and use. 27 Staff Recommendation
1. Establish a Formal General Fund Reserve Policy with
proposed changes
2. Establish a Formal Capital Investment Reserve Policy 28 Council Direction Needed
1. City Council Direction on the General Fund Reserve Policy Support establishing a formal General Fund Reserve Policy (staff recommended) Support proposed changes (staff recommended)
No change - maintain the current General Fund Reserve
2.City Council Direction on Establishing a Capital Investment Reserve Policy Support a formal Capital Investment Reserve Policy (staff recommended) Transfer $25 million to this new Reserve for future capital projects (staff recommended) No change - keep funds in the General Fund Reserve
29 Next Steps
• Based on Council direction, staff will incorporate the Reserve Policies to the FY 2025-26 Budget
• Through budget adoption in June 2025, the Reserve Policies will be formally established.
30 Thank you.
Karen Huang
Finance Director
[email protected]
650-522-7110
31 Supplemental Information
32 Supplemental Information
33 $127.3
$86.2
$64.7
$133.4
$48.0
General Fund
Special Revenue Funds
Capital Project Funds
Enterprise Fund
Other Funds
Cash and Investment
Total $460 million
Case Study
What if we have a major emergency?
Santa Rosa / Tubbs Fire – major
disruptions
•In such scenarios, General Fund reserve alone
cannot solve the problem.
•Multiple-facet approach is needed for recovery.
34 Case Study
Tubbs Fire (Santa Rosa)
Year: 2017
Structures Damaged: 5,600+
Recovery Time: 5-6 years
Short-Term (Year 1-3): Major Revenue Loss
• Focus on clean up, recover and planning
• Initial rebuilding was slow due to insurance claims, permitting processes, and labor shortages
• Immediate property tax decline, business closures impact sales tax Mid-Term (Year 4-6): Recovering
• Partial revenue recovery as homes got rebuilt and reassessed. • FEMA and State emergency aids kick in
• Immediate property tax decline
Long Term (Year 6+)
• Homes rebulit and property values rebound
• Community recovered and fiscal stability restored
35 RECAP: General Fund Reserve Levels
Contingency Reserve
15% of GF OpExp
$25 mil.
CIP Carryover
$10 mil.
Housing Set-Aside
$7 mil.
Total: $77 million
Budget Stabilization Res.
15% of GF Revenues
$25 mil.
Pension Stabilization Res.
$10 mil.
Contingency Reserve - only be utilized for extraordinary, one-time events …. such as natural disasters, public health crises, legal obligations, emergency infrastructure repairs, or major unforeseen non-financial emergencies as determined by the Council. Target level is set at 15% of the General Fund budgeted operating expenditures.
Housing Set-Aside – for affordable housing initiatives
Budget Stabilization Reserve - stabilize the City’s budget during economic downturns to maintain service levels. Target level is set at 15% of General Fund revenues, and allow temporary increase, if Council approves, when the City faces additional uncertainties.
Pension Stabilization Reserve – is a sub-set of the Budget Stabilization Reserve. It should only be utilized for unusual pension spikes to maintain service levels.
CIP Carryover – funds that were committed and budgeted to Capital Improvement Projects (CIP), but not yet transferred out to the Capital Project Funds. 36 Alternative Option
Contingency Reserve
15% of GF OpExp
$25 mil.
CIP Carryover
$10 mil.
Housing Set-Aside
$7 mil.
Budget Stabilization Res.
20% of GF Revenues
$35 mil.
Total: $87 million Total: $10 million Total: $15 mil. Grand Totals $112 mil Capital Investment
Reserve
$15 mil.
General Fund Reserve Unassigned Fund Balance
Measure CC
$6 mil.
Measure S
$2.5 mil.
General Fund
$1.5 mil.
Pension Stabilization Res.
$10 mil.
Capital Investment
Reserve
37