PROPOSED RIVISIONS TO THE CITY’S FISCAL POLICIES ATTACHMENT P Page P-1 of 3
Interfund Transfers and Loans
In order to achieve important public policy goals, the City has established various special revenue, capital project, debt service and enterprise funds to account for revenues whose use should be restricted to certain activities. Accordingly, each fund exists as a separate financing entity from other funds, with its own revenue sources, expenditures and fund equity.
Any transfers between funds for operating purposes are clearly set forth in the Biennial Budget.
From time to time, interfund borrowing may be appropriate; however, this is subject to the following criteria in ensuring that the fiduciary purpose forthat fund is met: The Council must approve temporary interfund loans, while the Director of Finance and the City Manager are authorized to negotiate and approve terms and conditions of those loans.
Plan to replenish funds leveraged to help pay for sexual abuse claims During the Budget Adoption Council meeting on June 27, 2023, a motion was passed asking staff to return to Council with a payment plan that would commit the City to replenishing the impacted funds, namely the Housing Trust Fund, Water Fund, and Workers’ Compensation Fund. The following plan was presented to and adopted by Council on October 24, 2023, as part of the FY 2022-23 Year-End Budget Review:
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 self- insurance retention, or SIR). Each department and fund within the City contribute 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 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 PROPOSED RIVISIONS TO THE CITY’S FISCAL POLICIES ATTACHMENT P Page P-2 of 3
• $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 originally estimated from the deferral of the FY 2023-24Measure GSH contributions from the General Fund to the Housing Trust Fund • $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. As well as an additional $0.6 million deferral of the FY 2023-24 and $5.0 of the FY 2024- 25 Measure GSH contributions from the General Fund to the Housing Trust Fund. These amounts has been included 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 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 2025-27 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
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
PROPOSED RIVISIONS TO THE CITY’S FISCAL POLICIES ATTACHMENT P Page P-3 of 3
Expenditures
for 5 years
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 FY 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.
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 insurers and from the proceeds of the sales of General Fund-owned properties as follows:
• To replenish funds deferred and transferred, which were previously set aside for affordable housing programs and projects, up to the target amount of $47.2 million, the General Fund will transfer to the Housing Trust Fund as follows:
▪ $339,242 annually for four (4) years beginning in FY 2025-26. ▪ 50% of one-time funds from General Fund property dispositions and insurance proceeds to the Housing Trust Fund.
• 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.