CITY OF SIMI VALLEY
MEMORANDUM
April 25, 2022
TO: City Council
FROM: Department of Administrative Services
SUBJECT: GENERAL FUND – FUND BALANCE POLICY
STAFF RECOMMENDATION
It is recommended that the City Council approve the proposed general fund – Fund Balance Policy (Attachment A) for inclusion in the Budget and Fiscal Policies.
BACKGROUND AND OVERVIEW
Due to conservative budget practices of the C ity Council, the City has maintained a structurally balanced budget for the last two Adopted Budgets and it is anticipated to maintain structurally balanced budgets for the foreseeable future.
The many years of fiscal restraint has now led to some year-end surpluses of one- time funds that can be used for strategic purposes. This report will propose to establish a policy to address future unanticipated year-end surpluses.
FINDINGS AND ALTERNATIVES
Due to conservative fiscal budgeting and complimentary fiscal oversight by the City Manager and Department Heads, the City has enjoyed a year-end Budget surplus for the last five years. This fiscal constraint has served the City well as the prior years’ year-end surpluses helped to establish the COVID Recovery Fund in FY 2020 -2021 to be used to offset the financial impacts of the COVID pandemic. To date, the City has weathered the COVID financial impacts well.
The City maintains a General Fund balance comprised of the Prudent Reserve, Assigned Fund balance, and Unassigned Fund balance. The Prudent Reserve, equal to 17% of General Fund budgeted expenditures , is set aside for emergencies and catastrophic events. The Assigned Fund Balance is restricted for financial purposes such as encumbrances, prior obligations, long -term receivables, and special funds. The Unassigned Fund Balance is a compilation of funds that are generally available for use at the City Council’s discretion. The combination of the Prudent Reserve and the Unassigned Fund Balance are funds that, in total, are avai lable for use at the City Council’s discretion and for emergencies and catastrophic events; it is the Assigned Fund Balance that are non-discretionary funds.
AGENDA ITEM NO.
9C
2 In light of the year -end surpluses, staff has evaluated the infrastructure and other budgetary needs of the City, as well as the City’s CalPERS obligations, while weighing the continued growth of the City’s General Fund balance. As of June 30, 2021, the City’s Unassigned Fund Balance was $30.5 million (unaudited), or 43% of FY 2020-21 operating expenditures. This amount is in addition to the $12 million set aside as the City Council’s Prudent Reserve balance. This combined total also exceeds the Government Finance Officers Association (GFOA) recommen dation of maintaining an unrestricted budgetary fund balance of no less than two months or 17% of operating revenues or expenditures.
Combining the Unassigned Fund Balance of $30.5 million and the Prudent Reserve of $12 million results in a discretionary amount of $42.5 million, equal to 60% of actual expenditures for FY 2020-2021.
In order to preserve a healthy and appropriate General Fund balance and address one- time investments into the community, staff is recommending a policy that will provide a minimum Unassigned Fund Balance and community investment plan.
Staff is proposing the City Council adopt a policy for the allocation of any one-time year- end General Fund surplus (Attachment A). Should the Unassigned Fund Balance exceed 30% of the Proposed year Budgeted General Fund expenditures, it is recommended that any prior year-end General Fund net surplus be allocated as follows:
• Retirement Investment Fund - 40% shall be deposited into a Retirement Investment Fund to be used for such options as , but not limited to , a dditional discretionary payments, or a 115 Trust to reduce the City’s Unfunded Accrued Liability portion of the City’s PERS obligation, or a payment to reduce the City’s OPEB liability.
The City ’s Funded ratio position with CalPERS has improved from 67.82% to
75.13% due to CalPERS exceeding their rate of return in 2020 at over 21%.
However, at the same time, CalPERS reduced their annual rate of return from
7.0% to 6.8%. While these investment changes will not impact the City’s obligations until 2024, the current projections indicate the City’s annual payments for the UAL and the Normal Cost will slightly decrease. Nevertheless, the City’s prudent path is to invest surplus funds into a 115 Trust Account to be used as a “rainy day fund” for CalPERS payments or to make Additional Discretionary Payment (ADPs) to reduce the City’s UAL. Additionally, the funds could be used to make payments towards the City’s Other Post -Employment Benefits (OPEB) account.
All Addit ional Discretionary Payment decisions should necessitate an analysis performed by an independent Municipal Advisor and shall provide proper documentation of the analysis and decision- making process. This analysis shall review the City’s UAL amortization bases with respect to the maturity of the bases to maximize the greatest savings.
3 • Infrastructure Investment Fund - 40% shall be deposited into an Infrastructure Investment Fund to be used for any one-time capital needs included but not limited to roads, equipment replacement, and deferred maintenance.
Due to revenue challenges and the loss of Transportation Development Act (TDA) funding, over the last decade the City was less than diligent in investing in its infrastructure, particularly in the area of st reets and roads. While the City is receiving SB1 funding from the State’s increased gas tax, these funds are dedicated to addressing the City’s Minor (residential) street system. However, investment into the City’s Major (arterial) street system has lagged. Additionally, the City has lagged in investing in other City infrastructure including the storm drainage system, traffic signal equipment, facilities and buildings, and miscellaneous equipment. Assigning a portion of the City’s year-end surplus will help to address the City’s aging infrastructure. All expenditures from the Infrastructure Investment Account shall be one- time expenditures and shall not create an on-going financial obligation of the City.
• Contingency Fund - 20% shall be deposited into a Contingency Fund to allow for one-time expenditure needs that are urgent and unanticipated or related to identified fiscal issues. This Account will have a maximum balance of $2 million.
While the City budgets annually for all known and anticipated expenditures, there are occasions when unanticipated needs arise with an urgent need to be addressed. In order to provide funding for such circumstances, it is recommended to establish a fund that can be used to address these unbudgeted expenses.
While fundi ng would be made available, the City would follow all purchasing requirements including bidding and contract approval requirements delineated in the Municipal Code. All expenditures from the Contingency Account shall be one- time expenditures and shall not create an on-going financial obligation of the City.
Should the Contingency Account reach the $2 million maximum balance, year - end surplus monies that would normally flow to this Account will be distributed equally between the Infrastructure Investment Fund and the Retirement Investment Fund.
The City Manager, or designee, will evaluate the application of the funds within the above allocated Fund Balances to propose the highest valued use to the City Council for consideration and appropriation.
The following alternatives are available to the City Council:
1. Approve the proposed General Fund – Fund Balance Policy (Attachment A).
2. Provide staff with other direction.
4 Staff recommends Alternative No. 1
SUGGESTED CITY COUNCIL MOTION
I move to approve the proposed General Fund – Fund Balance Policy for inclusion in the Budget and Fiscal Policies.
SUMMARY
It is recommended that the City Council formally approve the proposed General Fund – Fund Balance policy (Attachment A) for inclusion in the Budget and Fiscal Policies.
____________________________________
Joseph D. Toney
Administrative Services Director
Prepared by: Carolyn Johnson, Budget Officer
INDEX Page
Attachment A - Year End General Fund – Fund Balance Policy ..... 5
AT TACHMENT A
Y
ear End General Fund – Fund Balance Policy
Fund Balance – General Fund Policy
P
er existing policy, the City will maintain a General Fund balance comprised of the Prudent Reserve, Assigned General Fund balance, and Unassigned General Fund balance. The Prudent Reserve will maintain a balance equal to 17% of General Fund budgeted expenditures for emergencies and catastrophic events. The Assigned Balance is restricted for financial purposes such as encumbrances, prior obligations, long -term receivables, and special funds. The Unassigned Balance is a compilation of funds that are generally available for use.
Year End General Fund Surplus Policy
A
t the close of each fiscal year, if three criteria are met, the reallocation of surplus dollars will be allowed. The three criteria that have to be met are:
1)
There is a General Fund surplus savings in the most recent fiscal year closed, 2) The 17% prudent reserve is fully funded in the most recent fiscal year closed, and
3) The unassigned fund balance exceeds 30% of operating expenditures in the most recent fiscal year closed.
If
the above three criteria are met, the prior year end surplus funds will considered for reallocation when developing the subsequent Proposed Budget. The prior year surplus funds will be considered for reallocation into Assigned Balances after the 17% Prudent Reserve and 30% Unassigned minimums are maintained in the Proposed Budget (the net remaining surplus funds) as follows:
a.
40% shall be deposited into an Unfunded Pension/Retiree Medical Benefit Obligations Fund to be used for items such as but not limited to Additional Discretionary Payments or a 115 Trust to reduce the City’s Unfunded Accrued Liability and Other Post-Employment Benefits (OPEB).
b. 40
% shall be deposited into an Infrastructure Fund to be used for any one-time capital needs including but not limited to: roads, equipment replacement, storm drain, buildings, and deferred maintenance.
c.
20% shall be deposited into a Contingency Fund to allow for one- time expenditure needs that were unanticipated or are related to the identified fiscal issues. This fund will have a maximum balance of $2 million.
T
he City Manager, or designee, will evaluate the application of the funds within the above allocated Fund Balances to propose the highest valued use to the City Council for consideration and appropriation.
5