COUNCIL AGENDA REPORT
TO: Mayor and City Council
FROM: Rebecca Campbell, Director of Finance
DATE: April 7, 2026
SUBJECT: Adoption of a Resolution Approving an Updated General Fund Reserve Policy and Section 115 Trust
Description:
The City Council will consider adopting a Resolution approving a new General Fund Reserve Policy and will consider establishing a Section 115 Trust and funding those accounts as outlined in the Fiscal Considerations section to this report.
Environmental Notice: The activity is not a “Project” as defined under Section 15378 of the California Environmental Quality Act State Guidelines; therefore, pursuant to State Guidelines Section 15060(c)(3) no environmental review is required.
RECOMMENDATION:
1. Adopt a Resolution approving an updated general fund reserve policy and Section 115 Trust; and
2. Authorize the Finance Director to take steps to establish the Section 115 Trust for the City’s other post-employment and unfunded pension long-term debt; and
3. Authorize the Finance Director to align funding the reserves and the Section 115 trust as outlined in the Fiscal Considerations section of this report.
BACKGROUND:
The City’s current Reserve policy endeavors to maintain a minimum unassigned fund balance of at l east 25 percent of operating appropriations to insulate the General Fund programs and current service levels from large and unanticipated one -time expenditure requirements, a revenue reduction due to a change in State or Federal legislation, and other unforeseen circumstances.
In Fiscal Year (FY) 2010-11, the City adopted a General Fund Prudent Reserve (known as the “Economic Stabilization Reserve”) under Governmental Accounting Standards Board (GASB) Statement Number 54. The prudent reserve amount is upd ated annually calculated based on 25 percent of operating appropriations. Appropriations from the reserve can only be made by formal City Council action and are limited to emergencies such as:
• An unplanned, major event such as a catastrophic disaster requ iring expenditures over five percent of the adopted General Fund Budget. • Budgeted revenue took over by another entity.
2 • A drop in projected/actual revenue of more than five percent of the adopted General Fund revenue budget.
The policy outlines that s hould the prudent reserve commitment be used, and its level falls below the minimum amount as described herein, the goal is to replenish the fund within two fiscal years.
The Local Economic Augmentation Fund (LEAF) reserve fund was established in FY 2000-01 to be used as the primary financing mechanism to address any potential revenue shortfalls during times of economic downturns or severe State action, so as not to significantly impact the operating budget and service levels of the General Fund. The City Council set aside General Fund proceeds into this account. The intent of this fund was to be used as a “gap financing” mechanism during downturns in the local economy. Per policy, the City will strive to maintain 5 percent of General Fund and Measure U fund annual appropriations in the LEAF fund balance.
The City also has maintained reserves for its Other Post -Employment Benefits (OPEB) long-term debt and for its Pension long-term debt.
The City of Santa Maria (herein referred to as the “City”) should maintain a prudent level of financial resources to protect against reducing service levels or incurring debt due to revenue shortfalls or unpredicated one -time expenditures. This policy establishes how and when the City builds up stabilization funds and identifies the purposes for which they may be used. The Government Finance Officers Association (GFOA) provides guidance and recommendations for the development of these funds. The City’s current policies on reserves have been reviewed and policy modifications are recommended in accordance with GFOA guidance, credit agency recommendations, and best practices.
DISCUSSION:
The maintenance of a General Fund Reserve is a sound business practice to protect the fiscal solvency of the City. A prudent General Fund Reserve level is a critical measure of a government’s ability to manage risk. Risk comes in many forms, often unforeseen – a reserve fund is a key tool in meeting the financial challenges of such unforeseen occurrences.
The City has current policies on establishing and maintaining Reserve funds, and support for Reserves are a best practice recommendation from the GFOA and various credit rating agencies. Reserves are a key factor in municipal bond credit ratings because they provide liquidity, fiscal flexibility, and a buffer against economic volatility.
The GFOA recommends, at a minimum, that general-purposes governments, regardless of size, maintain unrestricted fund balance in their General Fund of no less than two months (or 16.7 percent) of general fund operating expenditures. Credit agencies look at strong reserves that are generally above 20 percent to 30 percent of appropriations. A stable, reasonable level of reserved and unreserved fund balance denotes financial stability and strong fiscal manag ement, both important factors considered by rating 3 agencies in evaluating the credit worthiness of the City. The General Fund Reserve Policy and General Fund Appropriation for Contingencies establishes guidelines to ensure the City maintains an unrestricted fund balance in line with GFOA recommendations.
A General Fund Reserve Policy is important in order to ensure that the City is effectively able to:
Respond strategically and responsibly to the challenges of a changing fiscal environment;
Mitigate operational impacts during difficult economic times;
Provide flexibility to the City Council for thoughtful reaction to State fiscal or legislative actions that reduce City revenues or increase City costs;
Maintain adequate cash balances;
Manage unanticipated costs occurring on a one -time basis, such as natural disasters; and
Demonstrate fiscal soundness and continued creditworthiness to bond rating agencies and the financial community.
In reviewing GFOA guidance, credit agency recommendations , and best practices for local governmental organizations the following reserves are recommended:
General Fund Reserve (GFOA Core Operating Reserve) – It is the goal of the City Council to build a General Fund Reserve of 16.7 percent of the prior year’s budgeted General Fund operating expenditures . The purpose is to maintain liquidity and cover normal revenue fluctuations and unexpected expenditures.
Local Economic Augmentation Fund – When adopting the annual budget for the General Fund, the City Council to put aside 10 percent to 15 percent of General Fund expenditures to buffer against economic downturns, recessions, or major volatility.
Emergency / Catastrophic Reserve – When adopting the annual budget for the General Fund, the City Council shall put aside 5 percent to 10 percent of General Fund expenditures to respond to disasters or major unforeseen events.
Appropriation for Contingencies – An amount up to five (5.0) percent of the General Fund operating expenditures and should not be less than one (1.0) percent of the approved General Fund operating expenditures in any given year. An amount appropriated for unanticipated expenditure requirements that are adopted as part of the Budget with a majority vote of the City Council and can be used during th e course of a fiscal year transferring the appropriation to elsewhere in the budget. 4 The Appropriation for Contingencies expires June 30th of each fiscal year to be reestablished the following year.
Fund balances represent the net assets of each fund. Net assets generally represent a fund’s assets (cash, receivables, etc.) less liabilities. Portions of a fund’s balance may be non-spendable, restricted, assigned or committed for future expenditure as a result of City policy. In the event that there is excess Fund Balance Available – The amount, if any, of actual General Fund balance that is available, after the close of fiscal year accounting, exceeding the estimated General Fund Balance Available used in the Budget. This difference, if any, is considered when finalizing the annual Adopted Budget and shall be prioritized as follows:
1. The first priority for Excess General Fund Balance Available at the beginning of each fiscal year, if any, is to increase the General Fund Reserve to ensure it is maintained within the recommended 16.7 percent of the prior year’s General Fund and Measure U budgeted operating expenditures.
2. The second priority for Excess General Fund Balance Available at the beginning of each fiscal year, if any, is to increase the Local Economic A ugmentation Fund (Stabilization Reserve) to put aside 10 percent to 15 percent.
3. The third priority for Excess General Fund Balance Available at the beginning of each fiscal year, if any, is to increase the Emergency/Catastrophic Reserve to put aside 5 percent to 10 percent.
4. The fourth priority for Excess General Fund Balance Available at the beginning of each fiscal year, if any, is to dedicate excess fund balance for known and quantified unfunded liabilities or one -time unmet needs, including but not lim ited to the following:
a. Employee pension plan contributions and pension obligation bond debt service
b. Other post-employment benefits (retiree health)
c. Unmet building or maintenance needs
d. Accrued employee leave
e. Litigation settlements
Section 115 Trust
The GFOA supports Section 115 trusts because they help governments responsibly manage long-term liabilities, especially OPEB and pension costs.
In 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions. GASB 68 requires that governmental employers that sponsor Defined Benefit plans (i.e., CalPERS) to recognize a Net Pension Liability on their balance sheet, which is the difference between the City’s total pension liability (actuarial accrued liability) and 5 actual plan assets. G ASB 68 (which replaces the requirements of GASB 27) became effective for fiscal years starting after June 15, 2014. The City’s Net Pension Liability is $195.7 million as of June 30, 2024. The City set has set aside $6.2 million in reserve, established in FY 2017-18, for Unfunded Pension liability costs. Currently the reserve sits at $15.8 million.
In 2015, the GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. GASB 75 requires the City to rep ort costs and obligations for post -employment healthcare and other post -employment benefits (called “OPEBs”) much like the current accounting requirement to report pension obligations. Like GASB 68, the City must also report its net OPEB liability (differe nce between the total OPEB liability and assets accumulated in an irrevocable trust) on its Financial Statements. GASB 75 (which replaces the requirements of GASB 45) will become effective for fiscal years beginning after June 15, 2017. The City’s Net OPEB liability is $19.1 million as of June 30, 2022. The City set has set aside a $6.2 million in reserve, established in FY 2010-11, for OPEB liability costs.
To help public agencies address and manage their GASB 68 and 75 liabilities, programs have been established as a multiple employer trust. To be able to properly offset liabilities on the City’s financial statements, funds must be set aside in an exclusive benefit, irrevocable trust that cannot be accessed by creditors. The trust permits the City, under federal and state law, to invest in a more diversified array of investments to maximize investment returns long term and reduce the City’s liabilities.
Expected benefits of a Section 115 Trust Program to the City include:
Contributions placed in an exclu sive benefit trust can offset unfunded liabilities, which will lower the City’s Net OPEB Liability and address its Net Pension Liability. Investment flexibility with Section 115 Trust compared to restrictions on general fund investments.
Increased risk diversification of plan assets through different asset management Oversight and control of fund management selection, monitoring of performance and ability to replace fund management based on performance criteria. Increased flexibility on use of trust assets (i.e., trust assets can be accessed at any time if the assets are used to fund the City’s pension and OPEB obligations and defray reasonable expenses associated therewith)
Potential for positive rating agency and investor consideration.
Staff will return to City Council as a next step with a resolution for the Section 115 Trust.
Alternative(s)
None presented at this time.
6 Fiscal Considerations
In order to fund the General Reserve, LEAF, Emergency Catastrophic Reserve, and Contingencies, and the Section 115 trust for pension liability, funding will be transferred from the existing Pension Reserve as shown in Table 1.
Table 1: Transfers Out from Pension Reserve
Table 2 represents the projected status of the City’s General Fund reserves at June 30, 2026. Recommended changes are reflected in the New Policy column with this policy update. Please note that the “General Reserve” was formally known as the Economic Stabilization Reserve and will be retitled.
Table 2: General Fund Reserves – Projected Year End
Existing June 30, 2026 New Policy
General Reserve
(Core Operating Reserve) $ 19,800,000 $ 24,650,000
Local Economic Augmentation
Fund (Emergency Reserve) $ 11,494,306 $ 15,894,306 Emergency/Catastrophic
Reserve (Disaster Reserve) - $ 1,000,000 Contingencies* - $ 2,519,324 OPEB $ 6,200,000 - PENSION $ 15,769,324 - Total GF Reserves $ 53,263,630 $ 44,063,630
Staff is recommending that $6,200,000 from the OPEB reserve and $3,000,000 from the Pension Reserve be moved from the investment pool to a Section 115 irrevocable trust account. Staff will return to City Council for next steps on that establishment. Therefore, there will be an estimated total of $53,263,630 in funding set aside in reserves and in the Section 115 trust.
7 Impact on the Community
Maintaining a prudent financial reserve has several direct and indirect impacts on a community. From a public finance perspective, reserves enhance financial stability, service continuity, and long-term affordability of government services. For the community, prudent reserves result in: stable public services, lower infrastructure financing costs, better emergency respons e capability, reduced likelihood of sudden tax increases or service cuts, and greater financial resilience during economic downturns. A prudent reserve functions as the community’s financial safety net, protecting both services and taxpayers during periods of uncertainty.
Prefunding pension and OPEB obligations through a Section 115 trust benefits both the community and employees by ensuring these long -term commitments are funded in a disciplined, transparent, and sustainable way. For the community, it hel ps stabilize budgets, reduce long-term costs, and protect service levels by avoiding sharp increases in future contributions. For employees, it provides greater security that promised retirement benefits will be paid, backed by dedicated assets that are pr ofessionally managed and legally restricted for that purpose.
ATTACHMENT(S)
A. Resolution – General Fund Reserves Policy
B. General Fund Reserves Policy