CITY OF SIGNAL HILL
Policy & Procedure
Fund Balance Reserve Policy
DATE: APPROVED:
I. PURPOSE
Sound financial management includes the practice and discipline of maintaining adequate reserve funds for known and unknown contingencies. Such contingencies include, but are not limited to cash flow requirements, economic uncertainties including downturns in the local, state or national economy, local emergencies and natural disasters, loss of major revenue sources, unanticipated operating or capital expenditures, future capital projects, and capital asset and infrastructure repair and replacement.
The City acknowledges the imperative outlined by the Government Finance Officers Association (GFOA) for cities to maintain sufficient fund balances to mitigate various risks, including revenue shortfalls and unanticipated expenditures. A reserve provides protection from risk. Reserves help make sure that the City of Signal Hill can respond quickly and decisively to extreme events. Reserves also support vital public services during revenue declines.
The City recognizes the necessity of adopting a robust Fund Balance Reserves Policy. This policy not only addresses the guidelines set forth by GFOA but also aligns with the standards stipulated in GASB Statement No. 54, ensuring comprehensive and transparent financial reporting.
II. RESPONSIBILITIES
The key responsibilities related to the Reserve Fund Balance Policy include:
1. Criteria and Thresholds Establishment:
· Define the criteria and thresholds for establishing and maintaining reserve fund balances. · Review and update the reserve fund balance policy, as needed, to reflect changing economic conditions, risk factors, and financial goals.
2. Risk Assessment and Mitigation:
· Conduct periodic risk assessments to identify potential threats to the City's financial stability, such as revenue shortfalls, economic downturns, or emergencies. · Determine appropriate levels of reserve fund balances to mitigate identified risks and ensure the city's ability to respond effectively to unforeseen events.
III. POLICY
The Fund Balance Reserves Policy is a tool the City uses to ensure sufficient liquidity for the City meets its financial obligations. According to the Government Finance Officers Association (GFOA), it is essential that cities maintain adequate levels of fund balance to mitigate current and future risks such as revenue shortfalls and unanticipated expenditures. Maintaining prescribed levels of unrestricted fund balance mitigates the impacts of natural disasters, volatile revenue sources or potential decreases to state aid or federal grants. The policy should strive to set reserve funding targets as a range instead of a single point to accommodate some of the uncertainty in risks, as GFOA recommends.
This Fund Balance Reserves Policy establishes the procedures for reporting unrestricted fund balance in the General Fund Annual Comprehensive Financial Reports (ACFR). Certain Commitment and assignments of fund balance will help ensure that there will be adequate financial resources to protect the City against unforeseen circumstances and events such as revenue shortfalls and unanticipated expenditures. This policy aims to improve financial reporting by establishing fund balance classifications that create a hierarchy based on the extent to which the City is bound to observe spending constraints that govern how the City can use amounts reported in the governmental fund balance sheet. This policy satisfies the requirements of GASB Statement No. 54 and classifies the reserves funds as committed fund balances that can be used only for a specific purpose determined by a formal action of the City Council.
Types of Reserves:
Type I: The first type of reserve funds includes five (5) reserve funds, created to prepare for future, unpredictable adverse events, such as recessions, which are the most prevalent source of financial instability for local governments. These reserves can play a crucial role in counteracting downturns in the economic cycles coupled with spending cuts. These reserves include the following:
§ General Fund Unassigned Target Balance
§ Economic Uncertainties Reserve
§ CalPERS Reserve
§ Other Post Employment Benefit (OPEB) Reserve
§ Insurance Reserve
The total of the above reserve balances should be pooled and calculated as a percentage of the General Fund Adopted Expenditures for the same year to meet the overall target range for Type I reserves.
Type II: These types of reserves function similarly to a savings account, set aside to cover future expenses that would not be affordable within a single year’s revenue budget. These types of reserves support multi-year financing strategies for large expenses, a capital asset outlay is an example of such a cost.
The Capital Improvement Project (CIP) Reserve falls into this type and separate reserve parameters have been established as it is a reserve specifically set aside for large-scale capital projects aimed at enhancing existing or improving a long-term asset that rely on the General fund for financing. The CIP reserve fund is estimated based on the five-year CIP schedule. It is imperative that this reserve has funding priority, reviewed annually and is adequately funded to ensure long-term financial sustainability to maintain and improve the City’s physical infrastructure.
The remaining Type II reserve funds have a narrower focus, typically allocated to a single specific type of infrastructure or maintenance costs with pre-determined funding estimates. These reserves were established for specific purposes which may have a variable spending timeframe or scope that would not impact the General Fund, for example: the police radio/system reserve and the economic development reserve.
Presentation:
Both Type I and II reserves are identified in the annual adopted budget and are presented in the General Fund Committed for Contingencies section of the Summary of Changes in Fund Balance Statement.
Use of Reserves:
Type I reserves shall only be used for cashflow purposes or revenue instability, rising cost of retiree benefits and City insurance, loans to other funds, major citywide emergencies (e.g., earthquakes, floods, or fire), severe economic downturns, or loss of a major sales tax producer and other catastrophic emergencies. The Unassigned Fund Balance reserve will be utilized first before the use of the Economic Uncertainties reserve will require City Council approval.
Type II reserves shall only be used for purposes identified when City Council committed the reserve funds; any changes to application of funds will require City Council approval.
Strategies for Accumulation:
1. One-Time resources
One-Time revenue windfalls, such as one-time surpluses, should be evaluated and designated to increase reserves or used for one-time expenditures. The funds should not be used for on-going expenditures. To the extent such funds are not required for current expenditures, capital improvements, debt retirement and/or operating reserves, such funds should be transferred to a designated reserve.
2. Replenishment of Reserves
In keeping with the principles discussed in this policy, when either reserves are utilized for their specific, intended purposes, or the levels fall below the policy levels as described and set forth herein, the City Council will approve a reserve replenishment plan to return the various reserves to their policy levels. This plan will seek to return the reserves to their policy levels within one (1) to five (5) years, per City Council direction. Furthermore, Unassigned funds will be first utilized to maintain and/or return the Committed reserves to the appropriate level.
IV. ECONOMIC UNCERTAINTIES RESERVES (TYPE I)
A. General Fund Unassigned Target Reserve
1. Target Level: The City’s Target Reserve Level for the General Fund Unassigned Balance is established at a level of 30% to 40% of the General Fund Adopted Expenditures for the same year.
2. Minimum Threshold: The minimum threshold for the General Fund Unassigned Balance Reserve Fund is established as 30% of General Fund Adopted Expenditures for the same year.
3. Authority: The Finance Director may regularly review and recommend updates to the established Target Reserve Levels to the City Council to reflect changing economic conditions, risk factors, and financial goals.
4. Use: Access to this reserve shall be triggered by one or more of the following conditions:
· A reduction in revenue equal to or greater than 5% of projected revenues in a given fiscal year could trigger the potential use of these funds to support core City services · A Resolution declaring a State of Local, or National Emergency. · Emergency Contract Services for the preservation of assets, or to protect public health. · Any other catastrophic emergency such as but not limited to the repair or rebuilding of the City’s streets, hardscape, facilities, communication and technology systems, or other City-owned properties.
B. Economic Uncertainties Target Reserve
This committed reserve is held to mitigate annual revenue shortfalls due to a fluctuating economy, unforeseen natural disaster, or actions by the state/federal government. This reserve could be used to support core City services.
1. Target Level: The City’s Target Reserve Level for the General Fund Economic Uncertainties Reserve is established at a level of 20% to 35% of the General Fund Adopted Expenditures for the same year.
2. The Minimum Threshold: The minimum threshold for the Economic Uncertainties Reserve Fund is established as 20% of General Fund Adopted Expenditures for the same year.
3. Authority: The Finance Director may regularly review and recommend updates to the Reserve fund balance policy to the City Council to reflect changing economic conditions, risk factors, and financial goals.
4. Use: Access to this reserve shall be triggered by one or more of the following conditions:
· A reduction in revenue equal to or greater than 5% of projected revenues in a given fiscal year could trigger the potential use of these funds to support core city services to be used after the General Fund Unassigned Balance Reserves are exhausted. · A Resolution declaring a State of Local, or National Emergency. · Emergency Contract Services for the preservation of assets, or to protect public health.
Based on the above to reserve requirements, the minimum threshold for both the General Fund unassigned fund balance and the Economic Uncertainties Reserve fund is established at 50% with an upper of range of 75%. The CalPERS, OPEB and Insurance reserves cold be considered a part of this total reserve target as these reserves are also established to mitigate economic uncertainty that may affect annual and long-term related expenditures and are included in the following details.
C. CalPERS Reserve
The City has participated in the California Public Employees Retirement System since the 1940’s. The City established the PERS Reserve in FY 2003-2004 with an initial investment of $505,000. PERS dictates the rate increases which are the result of historical net gains or losses in PERS investments portfolio. This reserve is set aside to pay current year pension liability costs and/or pay down the longer-term pension liabilities presented in the ACFR for Governmental Activities. Pension costs are largely subject to economic cycles affecting CalPERS investment funds and CalPERS not meeting the stated discount rate.
1. Target Level: The reserve balance should be a minimum equal to 1% of the CalPERS total liability of the Governmental Activities presented in the most recent CalPERS valuation reports.
2. The Minimum Threshold: The minimum threshold this Reserve Fund should be established at $1,500,000.
3. Authority: The Finance Director may regularly review and recommend updates to the Reserve fund balance policy to the City Council to reflect changing economic conditions, risk factors, and financial goals.
4. Use: to mitigate the cost associated with pensions such as towards a funding source for potential additional discretionary payment to pay down the unfunded accrued liability (UAL) and for unanticipated increases to the annual pension costs from future actuarial assumptions and investment market volatility, or to make the City’s annual payments during times of economic uncertainty resulting in funding gaps.
5. Application: Could be considered as part of the total reserve target for the Economic Uncertainties Reserve and unassigned fund balance levels as the reserve was established to mitigate economic uncertainty that may affect annual and long-term sustainability.
D. Other Post Employment Benefit Reserve
This reserve is set aside to pay down the other post-employment benefits (OPEB) liabilities or used towards current year retiree medical benefit costs.
1. Target Level: Approximately two years’ worth of annual retiree medical benefit costs.
2. The Minimum Threshold: The minimum threshold for this Reserve Fund should be established at $1,400,000
3. Authority: The Finance Director may regularly review and recommend updates to the Reserve fund balance policy to the City Council to reflect changing economic conditions, risk factors, and financial goals.
4. Use: to mitigate the cost associated with retiree medical benefit including making an additional discretionary payment to pay down the unfunded accrued liability (UAL) and for unanticipated increases to the annual retiree medical benefit costs from future actuarial assumptions and investment market volatility, or to make the City’s annual payments during times of economic uncertainty resulting in funding gaps.
5. Application: Could be considered as part of the total reserve target for the Economic Uncertainties Reserve and unassigned fund balance levels as the reserve was established to mitigate economic uncertainty that may affect annual and long-term sustainability.
E. Insurance: Risk Management Reserve
insurance Reserve Fund has been established to level the effect of the rising cost of general liability and worker’s compensation insurance and to provide funds pay for any liability losses not covered by insurance.
1. Target Level: Approximately 50% of annual insurance costs to level the raising costs of insurance.
2. The Minimum Threshold: The minimum threshold for this Reserve Fund should be established at $500,000.
3. Authority: The Finance Director may regularly review and recommend updates to the Reserve fund balance policy to the City Council to reflect changing economic conditions, risk factors, and financial goals.
4. Use: To mitigate the cost associated with insurance liability coverage, liability or property losses not covered by insurance, or to make the City’s annual payments during times of economic uncertainty resulting in funding gaps.
5. Application: Could be considered as part of the total reserve target for the Economic Uncertainties Reserve and unassigned fund balance levels as the reserve was established to mitigate economic uncertainty that may affect annual and long-term sustainability.
IV. OTHER RESERVES (TYPE II)
A. Capital Improvement Project Reserve (CIP) Fund
This Reserve is set aside for major improvement projects related to roadways, storm drains, parks, facilities, and rights-of-way. Subject to the annual budgeting process, the CIP reserve will be funded, to the extent possible, by allocating the following to the CIP fund:
1. Target Level: Annually, the City shall re-assess the target level based on the five-year capital improvement plan to ensure future projects that rely on funding from the CIP reserve are adequately funded.
2. The Minimum Threshold: The recommended target for this Reserve Fund is approximately $2,000,000 with consideration of external economic conditions and the next 2 years of budgeted capital improvements that utilize the CIP reserves as a funding source.
3. Authority: The Finance Director may regularly review and recommend updates to the Reserve fund balance policy to the City Council to reflect changing economic conditions, risk factors, and financial goals.
4. Use: Specific to Capital Improvement project funding.
B. All other Type II Reserves
All other Type II reserves should be reviewed annually to ensure adequate funds are available for annual and long-term planned expenditures. The specific target level should be tied to the identified program or project to commit the funds. Prioritization should be identified during the annual adopted budget process for City Council’s approval.
V. RISK ASSESSMENT AND MITIGATION:
Conduct periodic risk assessments to identify potential threats to the city's financial stability, such as revenue shortfalls, economic downturns, or emergencies. Determine appropriate levels of reserve fund balances to mitigate identified risks and ensure the city's ability to respond effectively to unforeseen events.