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1 Addition to Fiscal Policies: Plan to replenish funds leveraged to help pay for sexual abuse claims The City’s Liability Program provides funding to investigate, defend and pay all damages for liability claims and lawsuits filed against the City. The Liability Program is self-insured to $1 million (the selfinsurance retention, or SIR). Each department and fund within the City contributes to the self insurance fund annually based on an actuarial valuation that amortizes the liabilities over time and functional area.
Additional liability insurance limits are secured through the Authority for California Cities Excess Liability (ACCEL), a joint powers authority of which the City is a member. At the time of the initial settlement, ACCEL self-insured all losses from $1 million to $10 million.
Excess liability insurance is then purchased to cover losses over the ACCEL limits.
From May 2020 to July 2022, the City settled sexual abuse claims against by a former City employee and volunteer. The settlements totaled $107.325 million. The settlement amounts exceeded the SIR and ACCEL limits, which together totaled $13 million ($2 million in SIR, $11 million in ACCEL). The remaining amount of $94.325 million was paid up front using General Fund reserves but was also tendered to the City’s excess liability insurers for reimbursement.
On April 25, 2023, the City Council approved an additional settlement agreement to pay $122.5 million on additional claims related to one of the former employees. As the SIR and ACCEL limits were previously reached, the full $122.5 million was paid up front using City funds, while the claim was tendered to the City’s excess liability insurers for reimbursement. Given the previous $94.325 million payment from the General Fund, the significant revenue losses that the General Fund has suffered as a result of the COVID pandemic, and the continuing reduced levels of service in the General Fund due to reduced revenue levels and competing needs, funding sources in addition to the General Fund were needed to make the payment.
The funding sources for the $122.5 million settlement were as follows:
• $65.3 million from General Fund reserves
• $6.5 million from the General Fund portion of the Workers’ Compensation Fund • $25 million from the Housing Trust Fund’s General Fund contributions • $5.6 million from the deferral of the FY 2022-23 Measure GSH contribution from the General Fund to the Housing Trust Fund
• $5.1 million from the deferral of the FY 2023-24 Measure GSH contribution from the General Fund to the Housing Trust Fund. Staff has determined that this transfer will be feasible, and has been budgeted, in FY 2023-24, reducing the need to include it in the payback plan. • $15 million from Boeing Gillette settlement funds held in the Water Fund In addition, a $5.9 million Measure GSH FY 2020-21 transfer to the Housing Trust Fund from the General Fund, retained per Council authorization on May 5, 2020 to help the General Fund meet spending needs during the economic downturn resulting from the COVID pandemic, is still pending. Staff would like to include the payment of this amount as part of this payment plan.
The General and non-General Fund reserves used were not legally restricted as to use, but it is the City’s intent that the fund balances of all affected funds be replenished. This plan, however, must take into consideration the current climate of scarce resources, significant contingent liabilities, and uncertain
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2 future revenue projections. Certain conditions must be met annually for the City to maintain its operational and financial stability. Specifically, these conditions fund current operations, known liabilities, and mandated reserve levels. These financial obligations must be considered in the order of financial risk when developing each year’s budget.
The following conditions must be met each year at the time the 5-year forecast is presented to Council along with the Midyear Budget Review. Items are prioritized based on financial risk level. At this time, no further funding is needed to meet these targets during the FY 2023-25 Biennial Budget period.
However, needs are subject to change based on external factors that cannot be controlled by the City.
Priority
Level
Fund Target Explanation and Risk Level
1.1 General Fund Rainy Day Fund
rebuilt by 0.5%
increments annually
until 15% target
reached
To maintain essential services in the event of an economic crisis or natural disaster as well as exhibit the City’s financial stability to credit rating agencies, allowing access to lower cost financing, it is necessary to pursue Council-adopted targets to gradually rebuild the Rainy Day fund balance as set out in the Fiscal Policies reaching 15% of annual
expenditures for the FY 2027-28 Budget.
1.2 Workers’
Compensation
Fund
Fund reserve level to
at least 75%
confidence level
(striving for 90%)
To ensure that the Workers’ Compensation Fund has
adequate funds set aside to make stipulated payments
related to indemnity, medical and miscellaneous liabilities for all claims, a valuation of the liability and reserve levels is done annually to determine contributions from various
funds to the Workers’ Compensation Fund to achieve a
certain confidence level. A confidence level is the statistical certainty that an actuary believes funding will be sufficient.
Failure to do so would threaten annual operations as funds would need to be reallocated.
1.3 General Fund Maintain positive
balance of annual
Revenues and
Expenditures for 5
years
To maintain current service levels and be able to address any emerging concerns that threaten the active pursuit of the City’s Council-adopted priorities, the General Fund forecast must show a positive balance over 5 years, provided that all resources necessary to maintain service levels have been considered. This will require the use of working capital currently assigned in the fund balance for this purpose.
1.4 Water Fund Required transfer of
$15 million to cover
pollution
remediation liability
To ensure the maintenance of water services and water
sustainability improvements without negatively impacting ratepayers or water quality, the Water Fund is required to allocate $15 million towards pollution remediation activities at a rate of $1.25 million annually from FY 2029-30 to FY 2034-35, and $1.5 million annually in FY 2035-36, with
minimum transfers of $600,000 annually beginning in FY
2036-37 through 2046-47.
1.5 General Fund Maintain at least $21
million annual Capital
Improvement
Program allocation
To sufficiently maintain infrastructure and equipment
replacement, assets critical to the health and welfare of the community, a minimum of $21 million is needed for
deferred maintenance to restore, repair, and construct
physical assets, to replace vehicles and technology
hardware, and to update major software. Target begins in FY 2024-25.
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3 While funding for the Workers’ Compensation Fund and Water Fund operations will be accommodated through annual assessments as noted in the table above, General Fund and Housing Trust Fund reserves will be replenished from funds received from the excess liability insurers1 and from the proceeds of the sales of General Fund-owned properties as follows:
• To replenish funds previously set aside for affordable housing programs and projects, transfer 50% of one-time funds from General Fund property dispositions and insurance proceeds to the Housing Trust Fund, up to the target amount of $36.5 million. • To rebuild reserve funds that will protect the City from future contingent liabilities, economic uncertainty, and community priority capital projects, allocate a minimum of 50% of one-time funds from property dispositions or insurance proceeds to the General Fund Other Purposes reserve, up to the target amount of $65 million.
If adopted by Council on October 24, 2023, this plan will be added to the Fiscal Policies that are adopted each year along with the Annual Budget and will be subject to future changes by Council. 1 The City is currently litigating a total of $216.825 million in insurance claims paid to date (the $94.325 plus the $122.5 million) with its excess liability insurers.