cc 2023 AR 10/24 gf reserve policy revision and fb consolidation

ACTION:
____________________________
Clerk/Secretary
Department: Finance Item No: D2
Prepared by:

Sara Taylor, Budget Manager
Mike Sylvia, Director/Treasurer Meeting Date: October 24, 2023 Approved by: John Conley, City Manager Agenda Location: Discussion SUBJECT: GENERAL FUND BALANCE ACCOUNT REVIEW AND RESERVES POLICY

MODIFICATION
RECOMMENDATION: Adopt City Council Resolution No. 2023- , amending City Council Policy 200-19, Use of Year End Fund Balance, and consolidating General Fund balance accounts.

CORRELATION TO CITY COUNCIL GOALS: Fiscal Responsibility.

PRIOR ACTION: On March 7, 2023, conducted a workshop which included the presentation of a ten-year General Fund financial forecast, received a report on the Operating Budget preparation for Fiscal Years 2023/24 and 2024/25, and provided direction to staff (No vote).

On June 28, 2022, received and filed the Risk-Based Analysis and Stress Test of General Fund Reserve Requirements Financial Report; and adopted City Council Resolution No. 2022-112, authorizing the transfer of funds from the General Fund Emergency Reserves to the Section 115 Pension Trust and Amending the Operating Budget for Fiscal Years 2021/22 and 2022/23. (Vote: 4- 0, Ritter absent (Ritter experienced technical difficulties)).

On February 1, 2022, conducted a pension funding workshop and provided direction to staff for future pension liability mitigation efforts (No vote).

On November 13, 2018, adopted City Council Resolution 2018-175, amending City Council Policy No. 200-19, Use of Year End Fund Balance (Vote: 5-0).

On October 11, 2016, adopted City Council Resolution 2016-151, amending City Council Policy No. 200-19, Use of Year End Fund Balance (Vote: 5-0).

On June 14, 2011, adopted City Council Resolution 2011-121, approving City Council Policy No. 200-19, Use of Year End Fund Balance (Vote: 5-0).

STATEMENT ON THE SUBJECT: The 2007-09 Great Financial Crisis (GFC) significantly reduced the City’s revenues, creating a fiscal emergency that the City was not fully prepared to handle. Layoffs and furloughs were among the results, which impacted the City’s ability to maintain its level of service to constituents. As a result of the GFC, former City Council (Council) established City Council Policy No. 200-19, Use of Year End Fund Balance (“Policy”) with a goal to build the City’s General Fund reserves, AGENDA
REPORT

CITY COUNCIL

COMMUNITY DEVELOPMENT COMMISSION

SUCCESSOR AGENCY

BUENA SANITATION DISTRICT

JOINT POWERS FINANCING AUTHORITY
Approved above recommendation, adopted City Council Resolution No. 2023-185. Vote: 5-0.

MEETING DATE: October 24, 2023 PAGE 2
SUBJECT: GENERAL FUND BALANCE ACCOUNT REVIEW AND RESERVES POLICY

MODIFICATION
initially to 20 percent of annual appropriations, in an effort to minimize future impacts on services levels during economic recessions, and to provide funding needed due to an emergency situation. Subsequent to that initial effort, Council amended the Policy and increased the goal to 30 percent and 35 percent of annual appropriations in 2016 and 2018, respectively. In addition, staff created additional reserves for various other earmarked funds such as Fire Equipment Replacement and Proposition L excess funds.

To parallel the general reserves savings efforts, in 2016 Council approved the establishment of a Section 115 Pension Trust. By 2020, staff was growing more concerned about the rising level of pension-related unfunded actuarial liabilities (UAL) and in early 2022 provided UAL mitigation strategies to Council, upon which staff was given direction to bring back funding plans to deal with UAL as well as verification that the City’s General Fund reserves were right-sized.

In June 2022, Council received a staff presentation of a risk-based analysis and stress test of the City’s General Fund reserves which recommended a reserve level range of 20 to 35 percent of annual appropriations. Additionally, Council approved a shift of $10 million from general reserves to the City’s 115 Pension Trust to invest the proceeds beyond the five-year limit of the City’s pooled portfolio and to allow the ability to invest in equities as well as fixed-income investments.

More recently in March 2023, staff presented a 10-year General Fund financial forecast, and during the discussion, Councilmembers proposed a General Fund general reserve of 30 percent and direction to staff to identify funding sources for one-time expense projects which align with City Council goals. Staff has amended the Policy, per Council direction and added an additional recommended element specific to the Section 115 Pension Trust of 1.5 years of coverage for current CalPERS pension expenses (both UAL and Normal Costs). Staff has identified $12.1 million in available funding for Council-directed, one-time cost projects sourced from excess Successor Agency Project Area property taxes (Account nos. 310758 and 310760 in Exhibit 4). Included as Exhibit 4 is a summary of the reserve accounts for all funds that are used as sources in both the Operating and Capital Project budgets.

Staff recommends approval of the modified Policy, as shown in Exhibit 2. In addition, staff is seeking direction for the available funding detailed above and will bring future agenda reports as needed for the associated project(s). Lastly, staff recommends account consolidation, as shown in Exhibit 1A.

FISCAL IMPACT: There is no direct fiscal impact associated with this discussion. Any future fiscal impact is dependent upon the City Council’s direction provided to staff during the discussion of the item. Any direction provided by the City Council will be brought back for formal consideration by Council with requisite fiscal impacts provided at that time.

EXHIBITS:

1.City Council Resolution No. 2023- , amending City Council Policy 200-19, Use of Year End Fund Balance, and consolidating General Fund balance accounts

2.Policy 200-19 Use of Year End Fund Balance – Redline version

3.Current Policy 200-19

4.City of Vista General Fund Risk Analysis Report 2022-06-15 – FINAL

5.Summary of Fund Balance reserve accounts.
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00029213 7
RESOLUTION NO. 2023-

A RESOLUTION OF THE CITY COUNCIL OF THE CHARTERED CITY OF VISTA, CALIFORNIA, AMENDING CITY COUNCIL POLICY 200-19, USE OF

YEAR END FUND BALANCE AND CONSOLIDATING GENERAL FUND

BALANCE ACCOUNTS
The City Council of the City of Vista does resolve as follows:

1. Findings. The City Council hereby finds and declares the following:

A. Staff worked with the Government Finance Officers Association (GFOA) in calculating estimated reserve needs via a risk-based analysis and stress test of the City’s reserves in 2022. Based on this analysis the City recommends that City Council Policy No. 200- 19, Use of Year End Fund Balance be amended.

B. The City recommends the consolidation of the Structural Deficit Reduction and the California Public Employees’ Retirement System (CalPERS) fund balance accounts into the Emergency Reserve fund balance account.

2. Action.

A. City Council Policy No 200-19, Use of Year End Fund Balance, is amended as proposed.

B. The Structural Deficit Reduction and the CalPERS fund balance accounts are consolidated into the Emergency Reserve fund balance account as set forth in Exhibit A.

3. Adoption. PASSED AND ADOPTED at a meeting of the City Council of the City of Vista held on October 24, 2023, by the following vote:

AYES:

NOES:

ABSTAIN:

APPROVED AS TO FORM:

WALTER CHUNG, CITY ATTORNEY
By:

APPROVED
Walter C. Chung
20231012161145
JOHN B. FRANKLIN, MAYOR
ATTEST:

KATHY VALDEZ, CITY CLERK
By:
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EXHIBIT 1

RESOLUTION NO. 2023-

CITY COUNCIL FOR THE CHARTERED CITY OF VISTA
PAGE 1 EXHIBIT A

1. Account Number Account Description Increase Decrease 0010000.310754 Structural Deficit Reduction Reserve 9,301,789$ 0010000.310726 PERS Reserve 4,763,871$
0010000.310711 Emergency Reserve 14,065,660$
Consolidation of the Structural Deficit Reduction and the PERs fund balance accounts into the Emergency Reserve fund balance account.
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Vista City Council Policy
200-19 (1)
200-19 USE OF YEAR END FUND BALANCE AND GENERAL FUND

RESERVES

PURPOSE
Establish guidelines for the use of any funds remaining at the end of a fiscal year (commonly referred to as a “Year End Fund Balance”).

POLICY
Any available amount of a Year End Fund Balance should be strategically used to meet current budget year needs, enhance the City’s infrastructure, strengthen the City’s financial position, or support one-time uses that align with the City Council’s adopted goals. Given these criteria, use of a Year End Fund Balance is authorized for the following purposes:

1. If existing, close any remaining structural deficit amount in the budget.

2.Increase Maintain the City’s Revenue Shortfall Emergency Reserves Account at 3530% of the greater of the two fiscal years’ original General Fund current year appropriations (including Transfers Out to other funds) within the current biennial Operating Budget.

3.Maintain the City’s Section 115 Pension Trust balance to 1.5 times the total annual CalPERS pension obligation (both Unfunded Actuarial Liability and Normal Costs) of the greater of the two fiscal years’ original pension expenditure appropriations within the current biennial Operating Budget.

34.Other uses as identified in the current fiscal year fourth quarter financial report, or as directed by a majority of the City Council.

Items are ranked in priority order. Funds required to satisfy Item #1, if needed, should be allocated in full. After Item #1 has been satisfied, any remaining Year End Fund Balance may be allocated to Items 2 and/or 3through 4, by a majority vote of the City Council.

HISTORY
Adopted June 14, 2011, City Council Resolution No. 2011-121.

Amended October 11, 2016, City Council Resolution No. 2016-151.

Amended November 13, 2018, City Council Resolution No. 2018-175.

Amended October 24, 2023, City Council Resolution No. 2023-. 10/24/2023 D2 5 of 69
EXHIBIT 2

Vista City Council Policy
200-19 (1)
200-19 USE OF YEAR END FUND BALANCE

PURPOSE
Establish guidelines for the use of any funds remaining at the end of a fiscal year (commonly referred to as a “Year End Fund Balance”).

POLICY
Any available amount of a Year End Fund Balance should be strategically used to meet current budget year needs, enhance the City’s infrastructure, strengthen the City’s financial position or support one-time uses that align with the City Council’s adopted goals. Given these criteria, use of a Year End Fund Balance is authorized for the following purposes:

1.If existing, close any remaining structural deficit amount in the budget.

2. Increase the City’s Revenue Shortfall Reserves to 35% of General Fund current year appropriations.

3.Other uses as identified in the current fiscal year fourth quarter financial report, or as directed by a majority of the City Council.

HISTORY
Adopted June 14, 2011, City Council Resolution No. 2011-121.

Amended October 11, 2016, City Council Resolution No. 2016-151.

Amended November 13, 2018, City Council Resolution No. 2018-175. 10/24/2023 D2 6 of 69
EXHIBIT 3

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A Risk-Based Analysis and Stress Test of
General Fund Reserve Requirements for the
City of Vista, California
June 2022
Produced by:

The Government Finance Officers Association
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EXHIBIT 4

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Table of Contents
Section 1 - Executive Summary ..................................................................................................................... 3 Section 2 - Introduction .............................................................................................................................. 15 Section 3 - The Approach to Uncertainty .................................................................................................... 17 Section 4 - General Fund Revenue Volatility and Pension Risk .................................................................. 21 Section 5 - Extreme Events ......................................................................................................................... 27 Section 6 - Secondary Risks and Comparable Analysis ............................................................................... 38 Section 7 - Putting it All Together ............................................................................................................... 46 Appendix 1 – Limitations of GFOA’s Analysis .............................................................................................. 59

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Section 1 - Executive Summary
A local government’s “reserves” are the portion of fund balance which serves as a hedge against risk. The City of Vista (“the City” or “Vista”) has asked the questions: “what is the right amount of general fund reserves for us?” and “how resilient would any potential reserve target be to losses?” The Government Finance Officers Association (GFOA) has helped the City answer this question by examining the risks that it is subject to.

GFOA’s methodology is intended to evaluate potential risks and their cost to the City’s general fund. Our methodology is not intended to predict Vista’s future. The GFOA Risk Model provides the option for Vista to adjust variables when future conditions change. Our model and this report also describes the assumptions behind our analysis and recommendations.

First, we identified the risks that posed the most clear and present danger to the City. The major risks are:1
• Wildfires
• Recessions and revenue volatility
• Flooding
• Earthquakes
• Pensions
• Infectious disease
Next, for each risk, we calculated the probability that the City would experience the risk over a ten-year period and, if an event were to occur, what the magnitude of the loss would be for the City’s general fund.

To calculate the probability and magnitude of events, we did the following:
• Analyzed Vista’s own experience and the experiences of other municipalities. For example, a recession would have similar impacts in other California municipalities because the economic and legal environment would be similar (e.g., state aid would be impacted similarly). • Reviewed research produced by other agencies. For instance, the Federal Emergency Management Agency (FEMA) has data on costs that natural disasters have caused. • Drew from the expertise of City staff. City staff work every day on preparing the City for the risks it faces. Staff provided their expertise to help us estimate risks. For example, City staff helped us understand the nuances of natural disaster risks and revenue instability risks in Vista. The City’s hazard mitigation plan was also a valuable resource.2
We modeled each risk individually and then combined each individual risk into a ten-year model of the City’s reserves. The model is intended to answer the question: what amount of reserves will give the City of Vista sufficient confidence that it will be able to cover the losses from the risks GFOA has analyzed?

1 The first four risks were taken from the City’s Multi-Hazard Mitigation plan. 2 The City’s Hazard Mitigation plan is part of the multi-jurisdictional hazard mitigation plan produced by San Diego County.
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Exhibit 1.1 shows the chance that the City’s current reserve will reach the “critical threshold” ($18.5 million) each year. The critical threshold is the amount that the City does not want reserves to go below.

For the purposes of this report, we set the amount at about $18.5 million, which is roughly equivalent to 20% of the City’s revenues. The rationale for $18.5 million as the critical threshold is that the City is concerned about maintaining its AA bond rating. According to documentation from Moody’s bond rating agency, a reserve equal to about 15% to 30% is equivalent to AA rating.3 Thus, 20% provides some room for the City to maneuver and to stay well within rating agency expectations. The GFOA Risk Model does not cover every conceivable risk the City could face. Thus, this critical threshold also provides some protection against the “unknown risks” the City is subject to. Finally, in the past, the City general fund has provided a financial “backstop” to The Wave waterpark. The critical threshold also provides some capacity to backstop the waterpark in the future.

When we consider Exhibit 1.1 it is useful to note that GFOA has observed that most municipalities are comfortable with about 10% to 20% chance of reaching their critical threshold by the end of the analysis period. Vista has a slightly higher chance than this – the chances are just over 20%. It is important to note that, generally, the blue bars will always get higher the further in the future we look because more bad things can happen. This is not the case for Vista. The blue bars are much higher in the next few years. This is because the financial challenges posed by the City’s pensions are thought to be the worst during this time, before eventually stabilizing. This means that if the City can weather the next few years it should have smoother sailing after that.4 The
transfer of additional funds to the City’s
pension trust is one way to help make
sure the City does weather that period.

Exhibit 1.2 shows the average remaining reserve per year (blue line). The exhibit shows the City’s reserves are simulated to remain fairly stable, with slight growth, under “average” conditions. This is sufficient to

3 Reserves are not the only factor that rating agencies evaluate, so a large reserve does not guarantee a AA rating. 4 This City’s ability to weather the pension challenges of the next few years will be largely influenced by the investment return the pension fund can generate. As we will discuss more later, investing in the pension trust can help offset some of the risk associated with poor returns.

Exhibit 1.1 – Chance to Reach Critical Threshold Each Year

The City has just over a 20% chance of reaching the critical threshold by the 10th year of our analysis period.
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keep the City above the critical threshold. The chart also shows the 20th percentile (green line), which means the simulation shows reserves to be at or under the green line 20% of the time. It shows that the City falls below the critical threshold (dotted red line) for practically the entire analysis period in one out of five cases.

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Exhibit 1.2 – Simulated Remaining Reserve Per Year

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Exhibit 1.3 is a cumulative probability chart. It shows the confidence available from varying levels of reserves. Vista existing reserve intersects the red line at about 78% confidence. The main take-away from this graphic is the reserves have a diminishing return at a certain point because the flatter the line gets, the less confidence an additional dollar of reserve “buys” you. This is because the further to the right you go on the graph, the more extreme the events are that must be covered by reserves. This graphic shows that the City would still get a good “bang for the buck” from higher reserves than it has today. This City would not be as well served by accumulating reserves past the point where the line starts to flatten out.

Exhibit 1.3 – Cumulative Probability Chart

The implication of the line going flat is that not all points on the line are equally cost effective. Let’s examine Exhibit 1.3 to illustrate. According to the graph, to be 90% confident of staying above the critical threshold requires a reserve of $26.6 million. To be 95% confident requires a reserve of $31.7 million, a difference of about $5.2 million from 90% confidence. To be 99% confident requires $47 million, which is about $15 million more than the amount required to be 95% confident. Thus, it costs three times as much to “buy” a similar increase in confidence. This is the point where the line in Exhibit 1.3 goes flat and it is not efficient to build reserves.

The table on the next page translates the dollar figures referenced in this paragraph to percentages of the City’s budget.

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What do these reserve targets look like as a percent of City revenues? A reserve policy typically expresses reserve targets as a percent of revenue.

Below we have converted the dollar figures to a percent of revenues.

Dollars Percent of Budget
$27 million (90% confident over 10 years) 29%
$32 million (95% confident over 10 years) 35%

City officials will also want to think about other factors in order to finalize the reserve target range. This is because Exhibit 1.3 cannot account for every possible factor that should go into deciding how much Vista should keep in its reserve. The figures shown in the exhibit are what is needed to protect the City from just the risks described in this report. Usually, municipal governments have other concerns they expect their reserves to address. Here are examples of such concerns:
• There are risks that are sometimes called “unknown unknowns.” These are risks that are totally unanticipated. There is also the possibility of the City general fund needing to financially backstop The Wave Waterpark again in the future.
• The City has historical experience with low reserves during the period associated with the 2008 Great Recession. At the time, the City needed to engage in layoffs to balance the budget. A strong reserve allows the City to make a soft landing in the event of financial catastrophe. • Our Risk Model is based largely on historical data, which, by definition, does not capture the potential future impacts of global climate change. Though the model has some accommodations for climate change (see discussion of wildfires, floods, and pandemics), it is impossible to say what the future impacts of climate change will be. This might suggest a more “risk averse” approach to reserves (i.e., maintaining more, rather than less).
• The City might wish to use reserves for purposes other than mitigating risks – for example, building a capital project using cash financing. The Risk Model gives the City the ability to estimate the cost of potential projects to see the financial impact on these reserves.5 The GFOA Excel Risk Model allows the City to add these considerations to what we call “minimum acceptable reserves” or “critical threshold.” GFOA’s discussions with the City staff suggest a critical threshold of $18.5 million to help the City maintain a good reputation with investors in municipal debt.

This amount is shown in Exhibit 1.3. The City could choose to vary this critical threshold, which would then change the total amount of reserves the City would need to maintain in order to achieve a given degree of confidence that reserves would stay above the threshold.

5 Note that the City has historically done some level of cash financing of projects. The model already accounts for “normal” spending that takes place in the City’s annual budget, so this feature of the Risk Model would be used for larger projects that exceed what might be considered “typical.” 10/24/2023 D2 14 of 69

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Here are some other conclusions we can draw from the graphics presented on the previous pages:
• It is important to remember that we have assumed Vista will produce smaller annual surpluses than in the past because of more extensive public service objectives in the future. Even so, we still assumed a healthy annual surplus of 5% on average. Vista’s ability to consistently generate surpluses provides a great deal of protection from the impacts of unplanned, unavoidable expenditures over the long-term.
• The City should remain mindful of the potential for extreme consequence events. To illustrate, Exhibit 1.4 updates Exhibit 1.2 to change the 20th percentile to the 10th percentile (green line) to show the effect of more extreme events. This shows that 10% of the time the City drops below its critical threshold by a considerable margin for the entire analysis period.

Exhibit 1.4 – Simulated Remaining Reserve Per Year (showing 10th percentile)

GFOA discussed all of the factors above with the City Manager and Finance Director and the conclusion of this discussion was that the City of Vista would be well served by a policy that calls for reserves equal to between 20% and 35% of its budget. This gives the City between about 80% and 95% confidence of being able to handle the risks included in our analysis. This represents keeping a similar “floor” on the City’s reserve practices as has been suggested by City staff in past, but also adds a “ceiling.” The 35% ceiling would provide reasonable confidence while providing the potential to free up resources for other uses that are financially sustainable (e.g., using one-time revenues for one-time expenditure) and is consistent with the current City Council Reserve target.

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is also worth reiterating that our report assumes that the City follows through on the plan to transfer about $10 million to its pension trust in order to A) better prepare the City to weather its upcoming pension difficulties; and B) get a better return on its funds. Pensions are one of the City’s foremost risks, so preparing for this risk is a savvy strategy. To complement the reserve analysis, we offer the following additional recommendations:

The City should adopt a robust reserves policy. GFOA has conducted extensive research into what it takes for a local government to be financially sustainable. We call this body of work “Financial Foundations for Thriving Communities” (Financial Foundations). This research has shown that local governments require clear decision-making boundaries. A policy on the target level of reserves that the City should maintain and the acceptable use of those reserves provides clear decision-making boundaries for reserves.

Furthermore, GFOA has found that a policy that identifies a floor and ceiling for reserves, rather than just a single target number, may provide more useful guidance. This is because a City government will rarely, if ever, have exactly the amount of reserves called for by its policy. Having a range defines the acceptable tolerances the reserves should stay within.

The City currently has a policy that addresses the use of excess reserves. This is a great start. The City could build on this with the following policy elements:
• A range of desired reserves to provide a “floor” and “ceiling” for the amount the City will maintain in reserve.
• Description of acceptable uses of reserves. This includes excess reserves, but also the conditions under which reserves can be used. Acceptable uses might include responding to extreme events and allowing the City budget to make a “soft landing” in times of recession. The policy should limit the use of reserves to purposes that are sustainable over the long-run. • Definition on who has authority to draw on reserves.
• A commitment to replenish reserves when they are used, especially if reserves drop below the “floor” established by the policy.

GFOA has templates and examples the City can use to augment its existing policy.

The City should adopt a mechanism to monitor its own compliance with the policy. GFOA’s Financial Foundations research suggests that boundaries (e.g., financial policies) must be monitored in order to be fully effective.

The City of Tempe, Arizona provides a good example of how a reserve policy can be monitored. Tempe’s policy is to maintain the general fund reserve equal to between 20% and 30% of general fund revenues.

The general fund reserve policy is combined with Tempe’s five-year financial forecast, where the goal is to keep reserves within the 20% to 30% boundary during the five-year forecast period. This approach originated in 2009 when Tempe had a policy to maintain reserves equal to 25% of general fund revenues.

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and 30% of revenues. This range would provide more discretion, but it would also create clear bounds for what Tempe would consider acceptable maximum and minimum reserves.

Tempe staff developed a presentation of Tempe’s revenue forecast in the context of this new arrangement and informally called it the “Golden Cone of Prosperity.” Exhibit 1.5 shows the presentation as it was in 2009, where the yellow cone representing the range of desired fund balance widens over the forecast horizon as the new policy is phased in and the black line representing actual fund balance gradually enters the cone.

Exhibit 1.5 —Tempe’s Golden Cone of Prosperity in 2009

The meaning of the Golden Cone of Prosperity is straightforward, and its design and name give it a memorable character. As of 2020, Tempe staff still presented the Golden Cone twice per year to help public officials to understand the big picture and to show whether Tempe is staying within agreed-upon boundaries. This is a testament to the communicative power of the Golden Cone. Vista could develop a similar presentation to help make sure the City stays within its agreed upon financial boundaries.

Adopt a policy of objective forecasting and conservative budgeting. The City has been running large surpluses for the past number of years. GFOA understands that there is some desire on the part of the City Council to expand services. This is a reasonable goal. The question is: how can services be expanded without putting the City’s finances at excessive risk? In the past, the City’s surpluses have allowed the City to meet its reserve goal. There are a number of budget policies and practices the City could adopt to allow it to expand services while safeguarding its financial position at the same time. • Understand the risk of increasing on-going expenditures. The risk of adding more services to the City budget is that it makes it more likely the City will run a deficit and need to cut back, possibly including layoffs. So, the balance the City needs to find is: how much can expenditures be increased without incurring unacceptable risk? The City can adopt forecasting methods that 10/24/2023 D2 17 of 69

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highlight the risk of the City budget getting out of balance. The City can also adopt a range of policies to protect against this risk, as outlined below. • One-time revenue policy. Limit the use of one-time, non-recurring revenues to one-time, non- recurring expenditures or to pay down liabilities (e.g., catching up on deferred asset maintenance, like a park, road, etc., or making additional discretionary payments to CalPERS to reduce unfunded actuarial pension liability). An example of a one-time, non-recurring revenue would be proceeds from a lawsuit or the sale of an asset. Another important example is excess reserves: reserve accumulated above the ceiling amount called for in the City’s policy. • Volatile revenue policy. Some revenues, like sales taxes, are recurring, but they can go up and down substantially from year to year. A volatile revenue policy would treat extraordinarily high annual revenues from a volatile source as a one-time revenue. The bulk of the revenue income would be treated like a recurring revenue – it is just the extraordinary amount that would have more limited uses. This protects the City from using peak revenues to over-invest in programs that have to be supported for many years.
• Adopt a structurally balanced budget. Cities are required to adopt a balanced budget by law.

However, this just means financial sources must equal uses. So, for instance, City Hall could be sold off (a non-recurring revenue) and the proceeds used to hire more firefighters (a recurring expenditure). This would, of course, be a bad idea. A structurally balanced budget policy commits the City to balancing its recurring revenues and recurring expenditures and balancing its non- recurring revenues and expenditures, separately.
• Adopt a phased schedule of spending on non-recurring expenditures and condition spending on forecasts being met. As part of its budget, the City could adopt a prioritized list of one-time expenditures, in addition to its regular on-going expenditures. The total of the one-time and on- going expenditures would be equal to or less than the City’s projected revenue. The one-time expenditures would then be made throughout the year, in priority order, and conditioned on revenues coming in as projected. If revenues underperform the City’s forecasts, then the lower priority expenditures would not be made.
• Adopt flexible strategies for providing on-going services. It is unlikely that all of the City’s service goals can be met through one-time expenditures. New on-going services may be needed. The City could look for opportunities to adopt flexible service models, where costs can be scaled up or down. In fact, the City does this now with its law enforcement agreement with the San Diego County Sheriff – the City could request additional Sheriff’s deputies, but would have to pay for it.

But it could also then reduce it later fairly easily. This is more flexible than if the City had its own police department. Contracted services often can provide flexibility that in-house staff cannot.

This is not to say that in-house staffing is undesirable. There may be situations where in-house staffing is better, but there may also be opportunities where contracts can provide financial flexibility.
• Affirmative reauthorization of spending. The conventional approach to budgeting is that once a new service is authorized it is “baked in” to the budget and is funded year after year. This can lead to financial distress when new services are layered on top of old services. An alternative is to require affirmative reauthorization for a new service. This could be especially useful where a new service is intended to achieve some clear public policy goal. At the end of some set period, the Council could be required to explicitly reauthorize funding based on whether or not the program is achieving its stated goals.

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• Local governments are the most attractive targets for cybercriminals and ransomware attacks against local governments are becoming more common.
• The amount of damages from an attack appear to only be weakly correlated to the size of the government. Data suggests that the average attack costs around $100,000 but attacks can and have cost local governments many millions of dollars. The City’s current policy limit is $1 million.

This means that even though Vista is not as large as cities that have made headlines for the losses incurred by an attack, Vista could still suffer a substantial loss – perhaps in excess of its policy limits.
• Cyber insurance policies are getting more expensive and harder to come by. As for this writing, GFOA members are reporting doubling of premiums or being denied coverage altogether.

Given the points above, the City might consider the following recommendations that have implication for the City’s reserves:
• Continue planning for enhanced security and make cost-effective investments in cybersecurity controls that both: A) reduce the likelihood of a successful attack; and B) reduce the potential damages, if an attack succeeds. Because reserves are ultimately a form of self-insurance there could be a strong case for using some of the City’s reserves to strengthen its cybersecurity. This is because a dollar invested in prevention is usually going to be more effective than a dollar invested in remediation.
• Be prepared to retain more risk on a cyber insurance policy. If policies get substantially more expensive (or, worst case, unavailable), Vista could lower the cost by retaining more risk. This could be accounted for in Vista reserve amount. As we stated above, there is a plausible risk of a cyberattack costing the City more than $1 million. Therefore, “retention” of risk is not just the insurance deductible, but also includes the risk of a catastrophic attack that costs more than the policy limit.

For natural hazards consider “parametric” insurance in addition to traditional indemnity insurance.

Indemnity insurance is the type of insurance that most governments have traditionally purchased, where the insurance corresponds to the value of the assets being insured and reimbursement is paid out after a certain deductible has been met. The advantage of traditional indemnity insurance is that there is a known damage threshold past which the City is covered.

Parametric insurance is a newer type of insurance for providing coverage for extreme events, having increased in popularity in the last 15 years or so in the public sector but has been in use in the private sector for decades. Parametric coverage provides the policyholder (the City) with a payment amount that is defined ahead of time, should a defined event come to pass (a fire of a certain magnitude). Parametric insurance could be more useful for providing an injection of liquidity because the policyholder receives the defined payment immediately upon verification by a third-party that the given event occurred, which usually would be within a matter of days. As a simple illustration, a parametric policy might provide the City of Vista with $5 million upon the occurrence of an earthquake of some given magnitude, after magnitude is verified by a third-party, such as the U.S. Geological Survey (USGS). This feature of parametric insurance also eliminates much of the administrative hassle that would be associated with a traditional indemnity policy (e.g., working with claims adjusters). A final advantage is that the proceeds from the policy payout are completely fungible – the City could use them to fund whatever service it deems necessary or to counteract revenue loss from tax base impairment, whereas indemnity policies 10/24/2023 D2 19 of 69

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might require the policyholder to use the funds to repair or replace the asset that was insured. Parametric policies are not without their drawbacks, though, and are not a substitute for traditional insurance. The City can learn more about parametric policies in the publicly available GFOA research report “Parametric Insurance: An Emerging Tool for Financial Risk Management.”6 A robust insurance strategy could make use of both traditional indemnity and parametric insurance. For example, traditional indemnity insurance could be used to protect against loss of the City’s assets, while parametric insurance could be used to compensate the City for the losses in tax revenue it would experience from an impaired tax base, for instance.

The City could consider a robust internal borrowing policy. There will always be some chance that Vista could find that it needs access to more financial resources than are available in its reserves. GFOA’s research suggests that interfund borrowing could be a practical “last line of defense” in emergency circumstances. Some other funds might be able to make short-term loans to the general fund in case of an emergency. The City could develop policies to provide the flexibility to use these borrowing tools while also providing the necessary guidelines and limitations to ensure that borrowing occurs in a fiscally prudent manner.

Vista might consider if a policy could recognize internal borrowing’s role as a supplementary risk management tool. A policy would “pre-position” the City to better respond to an extreme financial catastrophe. A policy could address the following points:
• The rationale for using internal borrowing (reserves may not be able to handle every possible contingency);
• When internal borrowing may be used (if reserves are ever exhausted by an extreme event); • Differentiate between short-term (to be paid back within the same fiscal year) and long-term borrowing;
• How the interest on the borrowing will be calculated (can have multiple alternatives to be determined on a case-by-case basis); and
• General repayment terms (e.g., interest only, fully amortized, duration, etc.).

GFOA’s analysis has its limits. It is impossible for any risk analysis to be completely comprehensive of all considerations facing the City. Appendix 1 to this report lists the important limitations of this analysis.

6 Available at: https://www.gfoa.org/parametric-insurance/ . 10/24/2023 D2 20 of 69

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Section 2 - Introduction
“Reserves” are the portion of a local government’s fund balance that are available to respond to the unexpected. Reserves are the cornerstone of financial flexibility, sustainability, and continuity of existing service levels. Reserves provide a government with options to respond to emergencies and provide a buffer against shocks and other forms of risk. Managing reserves, though, can be a challenge. Foremost is the question of how much money to maintain in a general fund reserve. How much is enough and when does a reserve become too much?
The City of Vista has been considering this question recently, given its vulnerability to economic stressors and natural disasters, such as wildfires. The City engaged the GFOA in order to produce a recommendation to help it decide the appropriate reserve level for the general fund, given these risks. GFOA is a non-profit association of more than 21,000 state and local government finance professionals and elected officials from across North America. A key part of GFOA’s mission is to promote best practices in public finance, including reserve policies.

GFOA’s approach to reserves does not suppose “one-size-fits-all.” Ideally, a local government’s reserve strategy will be customized to the risk that the local government faces. For example, GFOA’s “Best Practice” on general fund reserves recommends that general-purpose governments maintain reserves of no less than two months of regular operating revenues or regular operating expenditures (i.e., reserves equal to about 16.7 percent of revenues or expenditures), but that local governments should determine a reserve target that is most appropriate for their circumstances.7 Therefore, GFOA worked with the City to conduct an analysis of the risks influencing the need for reserves as a hedge against uncertainty and loss.

A “risk” is defined as the probability and magnitude of a loss, disaster, or other undesirable event.8 The GFOA’s framework of risk assessment is based on the risk management cycle: identify risk; assess risk; identify risk mitigation approaches; assess expected risk reduction; and select and implement mitigation methods. Our analysis focuses primarily on risk retention, or using reserves, to manage risk. However, our analysis also encourages the City to think about how other risk management methods might alleviate the need to hold larger reserves. In other words, can the City manage its risks in some other way besides holding reserves? For example, could insurance or borrowing strategies complement the City’s reserve strategy? A thorough examination of the risk factors should lead to a range of desired reserves and improve the City’s understanding of its overall risk profile. A risk-aware analysis helps the City stress test its reserve strategy.

As a first step to this project, GFOA conducted a review of the risk factors influencing the amount of reserves a municipal government should hold.9 This review identified the risks on Exhibit 2.1 as the most salient risks to Vista’s general fund reserve.

7 GFOA Best Practice. “Appropriate Level of Unrestricted Fund Balance in the General Fund.” GFOA. 2009. 8 Definition of risk taken from: Douglas W. Hubbard. The Failure of Risk Management: Why It’s Broken and How to Fix It. John Wiley and Sons, Inc. Hoboken, New Jersey. 2009. 9 The risk factors and basic review method were developed and published in the GFOA publication: Shayne C.

Kavanagh. Financial Policies. (Government Finance Officers Association: Chicago, IL) 2012. 10/24/2023 D2 21 of 69

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Exhibit 2.1 – Primary Risk Factors that Influence Reserve Levels for Vista

Revenue source stability, particularly as it relates to the potential for revenue decline from an economic downturn
Vulnerability to extreme events and public safety concerns, with emphasis on:
• Wildfires
• Recessions and revenue volatility
• Flooding
• High winds
• Earthquakes
• Pensions
• Infectious diseases

The next section gives an overview of how we analyze these risks and what you can expect to see in the rest of this report.

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Section 3 - The Approach to Uncertainty
The accomplished forecasting scientist, Spyros Makridakis, suggests a “Triple-A” approach for dealing with highly uncertain phenomena.10

1. Accept. First, we must accept that we are subject to uncertainty. For example, the severity and timing of an earthquake is unpredictable. Vista could go years without experiencing a serious earthquake or one could occur next month!

2. Assess. Next, we must assess the potential impact of the uncertainty, with history providing a useful reference point. The experiences of other local governments are also a good reference point. For example, we used the historical experiences of Vista and other relevant municipalities to estimate the potential impact of future extreme events. However, historical experiences are not perfectly predictive of the future. That leads us to the next point…

3. Augment. The range of uncertainty we face will almost always be greater than what we initially assess it to be. Therefore, we must augment our understanding of risk beyond what our historical experiences show us. For example, very few people saw the 2008 Great Recession coming or thought it could be as bad as it was. They were unprepared for this historically unprecedented recession. We can augment our understanding of risk using a technique called “Probability Management.”11 Probability Management is an application of modern information processing technology that allows us to simulate thousands of potential events (e.g., floods, recessions, etc.) so that we can observe the probability of events of various magnitudes coming to pass. The statistical technique that Probability Management is based on is called “Monte Carlo analysis.” This technique was established in the late 1940s, but until very recently required special computers and software to use. Modern information technology has made Monte Carlo analysis accessible to anyone with a personal computer.

In order to use Probability Management, we express any given type of extreme event as a range of possibilities that the City might experience. This range is called a “distribution.” A distribution is a shape that signifies how frequently the City might expect to experience a certain type of event and/or how severe the event might be.

The most common type of distribution is called the “normal distribution,” more popularly known as the “bell curve.” Many phenomena fit a bell curve. To help us understand how to read a distribution, we can start with an example that is related to everyday life: the height of American men.

10 See: Spyros Makridakis, Robin Hogarth, and Anil Gaba. Dance with Chance: Making Luck Work for You. (Oneworld Publications: Oxford, England). 2009.
11 The discipline of “Probability Management” was developed by Dr. Sam Savage, author of The Flaw of Averages.

You can learn more about Probability Management at probabilitymanagement.org. 10/24/2023 D2 23 of 69

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Exhibit 3.1 shows a bell curve for the height of American men. The horizontal axis of Exhibit 3.1 represents height. The vertical axis represents frequency. The most common height is 5’9”, so it is shown at the top of the curve. Much taller men, like NBA centers, would be found on the right-hand side of the curve. Very short men would be found on the left.

Exhibit 3.1 – The Normal Distribution for American Men

Frequency

Height

The normal distribution can help analyze risk. To illustrate, the severity of an economic downturn is roughly normally distributed. A
few downturns are slight, few are
severe, but most are closer to
average.

Another type of distribution we
use in our analysis is an
asymmetrical distribution,
shown in Exhibit 3.2.

Earthquakes fit an asymmetrical
distribution. Exhibit 3.2 shows
that tremors are the most
common. Full-fledged
earthquakes are relatively rare.

The distribution is
“asymmetrical” because the
frequency with which we will
experience these events are not evenly distributed around the middle of the distribution. Put another way, there are far more tremors that are smaller than the “average” earthquake. Yet, there are far fewer earthquakes (“the big one”) that are larger than the average earthquake.

Exhibit 3.2 – Sample Asymmetrical Distribution

Frequency
of Quake

Severity of Quake 
5%10%15%20%25%30%35%40%45%50%55%60%
Earthquake
Tremor
"The Big One"
Very Short Very Tall
Average
5’9”

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Expressing Vista’s vulnerability to distributions allows us to calculate the probability that an event of a given magnitude will come to pass. When we associate a dollar amount with that event, we can estimate the probability or chance that Vista will need to have a given amount of money on-hand to respond.

Exhibit 3.3 is not a distribution but is a type of graphic we will use in this report. It is called a “cumulative probability chart.” It shows that increasing amounts of reserves are needed to gain more confidence that the City will have enough money to cover the losses to the general fund arising from a recession that lasts one year. The mildest of recessions might have negligible impact on the City budget. Hence, we see the blue line intersects the vertical axis at zero (there is about a 10% chance of negligible impact). We then see the blue line go up and to the right from the vertical axis. This means that the City needs put aide greater reserves to give itself a better and better chance of covering the losses from a recession. The line then flattens out. This means that, at some point, the City reaches a limit of how much extra assurance it can get from putting more money in a reserve.

It is important for the reader of this report to understand that there is never one single, objectively best amount of reserves to hold. The amount of reserves the City will want to hold will partially be a function of the City’s willingness to take on risk. If City officials are willing to take on risk, they might opt for lower reserves and spending more money on current services. If officials are more risk averse, they might opt for higher reserves. GFOA’s recommendations are informed by where reserves appear to provide the best value or “bang for the buck.” The spot on a cumulative probability chart, like Exhibit 3.3, before where the line begins to flatten out is usually where the best bang for the buck lies.

In Section 4, we cover revenue instability owing to economic downturns. In Section 5 of this report, we will review the City’s primary risks posed by extreme events, including wildfires, floods, earthquakes, and Exhibit 3.3 – Annual Loss Curve for Vista from a One-Year Recession Chance that
damages will
be EQUAL TO

OR LOWER
THAN the
amount shown
on the graph

Damages in Millions of Dollars
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infectious disease. Section 6 reviews secondary risk factors that have less weighty implications for the City’s reserve strategy. We include Section 6 to highlight the full range of risks that were considered, even if some of them did not seem to present as clear and present a threat to the City’s general fund reserve.

After we analyze the individual risks, in Section 7, we will consider the risks holistically. This section will:
• Consider the risks over a ten-year time period. This provides a more complete perspective on potential vulnerability and how to use reserves. For example, the numbers shown in Exhibit 3.3 pertain just to one year. The potential losses are much greater over a ten-year period. • Consider the potential occurrence any of the risks we analyzed to occur at the same time.

Obviously, if they did occur at the same time, the stress on the City’s reserves would be compounded.

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Section 4 - General Fund Revenue Volatility and Pension Risk An important risk for any local government is revenue volatility owing to downturns in the economy.

Reserves can be used to help a local government make a “soft landing” in the event of a revenue downturn. In this section of the report, we will analyze Vista’s vulnerability to revenue downturns.

For purposes of our analysis, we divided the City’s revenues into the categories shown in Exhibit 4.1. Sales taxes are, by far, the most important single source, as you can see in Exhibit 4.1. Immediately following Exhibit 4.1, we will analyze the risk the City faces in each category.

Exhibit 4.1 – Relative Importance of City Revenues, based on 2021 Data Revenue % of Total
Taxes
Property Tax & Vehicle License
Fees (VLF) Compensation 24%
Sales Taxes 32%
Transient Occupancy Tax 1%
Other Taxes 11%
Total Taxes 70%
Charges for Service 17%
All other revenue 13%
TOTAL 100%

Before we examine each individual revenue source, let’s make a note of Vista’s historical population growth. Vista grew from 90,000 people in 2000 to 98,381 people as of the 2020 US Census, which is about a 9% increase over the period. Much of this increase took place before 2003. Our analysis starts in 1999 in order to capture the impact of two recessions: the 2001 “dot.bomb recession” and 2008 “Great Recession.” Rapid population growth likely offset at least some of the revenues losses the City would have otherwise experienced from the 2001 “dot.bomb” recession. Therefore, we converted all historical revenues to per-capita figures for our analysis and all figures presented are per capita unless otherwise noted.

Below we will briefly review key, relevant features about the volatility of each revenue shown in Exhibit

4.1. The purpose of this section is to be clear about the assumptions that go into our simulation of Vista’s revenue volatility in the face of recessions.

Property Taxes
Property taxes are a stable revenue for Vista. They have exhibited consistent year-over-year growth since 1999, except during the period of the 2008 Great Recession, when they declined three years in a row. Of course, the 2008 recession featured a popping property price bubble that was felt across much of the world. Even so, we should not discount the possibility that future recessions could also result in declining property values and property tax revenues. In fact, GFOA’s examination of recessions before 1999 shows that housing prices have declined during some of these recessions. 10/24/2023 D2 27 of 69

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So, to model risk we looked at the decline during the Great Recession and found that the annual decrease was 5%. We took this as representative of the possibility of future severe recessions. During the 2001 recession, property taxes actually grew for Vista. This represents the possibility that during a relatively mild recession, like 2001’s, property tax revenue could actually go up. The 2008 recession is the worst recession, in terms of GDP 12 decline, since World War II whereas the 2001 recession was one of the mildest. Hence, we can use these two recessions rough “boundaries” on the possibilities for future recessions.13 In our simulation we did account for the fact that the 2008 recession was unusually weighted towards losses in real estate. This was done in order to avoid overestimating the vulnerability of property taxes to recessions. We looked at how much property values declined, nationally, during a past, more “average” recession and compared that to what happened in 2001 and 2008. This “average” price decline was not exactly in between 2001 and 2008, but was skewed closer to 2001. We included this skew in our simulation.

Finally, it is worth noting that Vista does not have a material risk from concentration of the tax base in one or few taxpayers. An example of this risk would be if a small municipality has a large industrial property, where that property makes up a large portion of the tax base – if the factory were to close, then it would have a big impact on the tax base. Fortunately, Vista does not appear to have such a risk. The taxpayer with the highest assessed value is MG Preserve of Melrose Apartments, whose property comprises about 1% of the City’s assessed value. This is not a very large amount and apartments should be a relatively stable tax payer.

Vehicle License Fees (VLF) Property Tax Compensation
This revenue compensates the City for the loss of vehicle license fees and did not exist during the 2001 recession. It declined by 3% in 2011, which was the tail end of the impact of the Great Recession on the City. Otherwise, it remained stable. This revenue’s performance during the Great Recession and in 2019 (when it went up by 6%) suggests it will be stable going forward. Hence, for our analysis we assumed that a 3% decline represents one boundary for future recessions and 1% growth represents the other. This growth assumption parallels our assumption for property tax – the VLF is derived from property taxes.

Sales Taxes
This category includes not only the City’s standard Bradley-Burns sales tax, but also its Proposition L Transaction and Use Tax and SB 172 Sales Tax.14 Sales taxes have a reputation for being more responsive to economic downturns than property tax and this is true in Vista. Sales taxes declined by 1% during the 2001 recession and the worst year-over-year decline during the 2008 recession was 9%. More recently, sales taxes declined in 2019 due to the need to correct a prior over-collection from Time Warner. This means that the revenue loss was not due to the economy experiencing an underlying weakness, like it would during a recession. When it comes to COVID-19, the federal government provided financial aid to

12 Gross domestic product, a standard measure of national economic activity. 13 Our simulation method does not treat these as firm boundaries. Rather there were about ten recessions since World War II, the Great Recession was the worst, the 2001 recession the mildest which puts them at the 10th and 90th percentile. This leaves room for even worse or even milder recessions than these two in our simulations. 14 SB 172 Sales Taxes are collected with the intention to maintain funding for public safety services (police, fire, district attorneys, and corrections.)
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individual citizens during the pandemic, beyond what is normal for an economic downturn. Hence, we should not take 2019 and the subsequent COVID-19 experience as representative of future possible downturns. We used the 2001 and 2008 recessions as our boundaries for the analysis.

Transient Occupancy Tax
Though this is a very small part of the City’s total revenue, we treated it separately in our analysis because it can be very volatile: it declined by 6% during 2001 and by 20% in 2009! These served as the boundaries for the risk analysis.

Other Taxes
In 2021, the most import “other tax” for the City was cannabis tax. We have excluded cannabis tax from the analysis presented here because it has special features and questions that suggest the need for a separate analysis. That analysis will be completed in a subsequent project. At this point, though, we can say that cannabis appears to be like alcohol in that sales are not depressed by a recession. This means cannabis taxes should pose little risk from vulnerability to a recession. It is also worth noting that the City could face more competition for retailers in nearby jurisdictions. Presumably, the diversion of demand to these new retailers could place downward pressure on sales in Vista’s retailers.

For the remaining “other taxes,” the franchise tax is the largest. As a group, this revenue has been quite stable during recessions. It barely changed during either recession. Our simulation assumes similar stability in future recessions (again, excluding cannabis tax).

Charges and Fees
This category comprises a large number of revenue sources such as planning fees, fire fees, ambulance fees, and recreation fees. Charges and fees experienced some interesting swings during the recessions, from an 8% annual decline to 7% annual increase. Our simulation allows for similar swings in future recessions.

All Other Revenue
This includes a variety of sources such as fines and forfeitures, licenses and permits, intergovernmental revenue and more.15 This revenue source can be vulnerable to recessions. For example, license and permits were cut by about a half during the Great Recession. Taking into account all other revenues, the City saw an 8% decline during the 2001 recession and a 16% annual decline during the 2008 recession.

We used these as the boundaries for our simulation.

Analyzing Revenue Volatility Risk
In order to analyze the risk that the City is subject to we used the information presented above to inform our Risk Model. In addition to this information we also used the following information:
• We used data on how often recessions have occurred and how long those recessions have lasted from 1950 onwards as a starting point to simulate the frequency and duration of future recessions.

15 It excludes other financing sources like transfers in because the size of transfers in are largely dependent on policy choices by the City.
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• In examining the City’s data we noted that the City’s revenue downturns appeared to exceed the length of the economic recessions by a non-trivial amount of time. For example, the 2008 Great Recession lasted about 19 months, however, the City’s revenues were in a downturn for about three years. The 2001 recession lasted for 12 months, but the City had two years of stagnant revenue. We have noticed a similar phenomenon in other California local governments we have worked with. It could be partially caused by, for example, state laws that limit the growth of taxes but do not limit the decline. In any event, our model simulates revenue downturns for the City that are longer than the economic recessions. We assume that the additional length ranges from nothing to 75% longer, with the most likely additional length being 40% longer. This is consistent with what we’ve observed in the City’s data and in data for other California cities we have worked with.16
• The model does not include any assumptions about what the City might do in response to a recession like cutting expenditures or adding new revenues. However, the model does not ignore these possibilities either. The user of the model has the option to define the City’s assumed response to recessions and see how that impacts the City’s financial position. This is discussed in more detail in Section 7 of this report.

Exhibit 4.2 below shows the cumulative probability curve for a single year loss, accounting for all the information described in this section. The blue line shows the losses assuming that recession DOES occur and it lasts the entire year. The red line shows the losses given the chance a recession does OR does not occur. This accounts for the fact that a recession could not occur at all or last less than the entire year.

Note that although the lines in Exhibit 4.2 are limited to what could happen in a single year, our simulation also allows for the possibility that a recession could span multiple years. We will discuss the multi-year perspective on all the of the City’s risks that we analyzed in Section 7.

In Exhibit 4.2, we can see the red line remains at zero about 70% of the time, which means that 70% of the time the City is simulated to not be in a period of revenue downturns. The graph would show a number higher than 70% if it weren’t for the fact that the City’s revenue downturns seem to last longer than the associated economic recession. The blue line reaches zero as well because the mildest of recessions could result in mere revenue stagnation, rather than an outright loss. We see that there is just over a 10% chance of no loss, even if a given year is at least partially in a recession.

Both lines slope up and to the right, which means that as we move to the right the potential losses get higher, but we also get higher and higher confidence that the losses would be less than the indicated amount. We see that on an annual basis, loses around $2 million to $3 million might be considered a plausible, not just possible, risk. For example, on the red line, we can be 85% confident that losses will be less than $2 million in any given year, and 15% confident that losses will be more. We can be 90% confident that losses would be less than $3 million.

Both lines flatten out to at the right end. This shows that extreme annual losses, as high as $14 million are possible, but are also highly unlikely. This is because the corresponding values on the vertical axis are

16 For one city we were able to obtain monthly data which showed us, more precisely, when revenues began to decline and turn back up.
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above 95%, which means we can be 95%, or more, confident that the losses during a given year will be less than these extreme amounts.

Exhibit 4.2 – Cumulative Probability Chart for Annual Recession Losses (total, not per capita)

Confidence
that losses
will be the
indicated
amount or
less

Checkpoints
 Property tax is an important revenue for the City and is also very stable.  Sales tax is the single most important revenue source but is also responsive to economic conditions.  VLF replacement and other taxes are quite stable revenues, but all other revenues sources including charges and fees, licenses, and more have exhibited volatility.  We excluded cannabis tax from this analysis because it has special traits and considerations that suggest the need for a separate analysis. We can say that cannabis taxes appear to be resistant to downward pressure from recessions.
 In a given year, there is about a 70% chance that there would be no impact at all from a recession.

There is a 90% chance losses in a given year would be less than $3 million.  The analysis presented in this section does not take account of any willingness on the part of the City to cut its budget in response to a recession. That is addressed in Section 7.

Pension Risk
Like many cities throughout the country, Vista has a substantial liability for employee pensions. This is potentially a risk for the general fund because if the pension plan investments perform below expectations, then the City will need to make up the difference. This potential unplanned, unavoidable expenditure places additional pressure on the City finances. The City has taken the prudent step of establishing a pension trust fund to help insulate the City from this risk. The advantage of the pension 10/24/2023 D2 31 of 69

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trust fund is that idle funds held in the trust can be invested at a much higher rate of return than would typically be available for idle cash. The City could add additional funds to the trust.

The GFOA Risk Model examines the vulnerability the City’s pension situation under different scenarios.

We worked with GovInvest to develop five different scenarios that are consistent with different long-term return assumptions from CalPERS. Of particular relevance to the questions being posed by this report is the possibility of underperformance of CalPERS investments. GovInvest developed two scenarios for unfavorable investment results: one for poor returns and one for very poor returns. “Poor” and “very poor” were defined by assumptions published by CalPERS about the expected range of possible performance of its investment strategies.17 We then correlated these scenarios with the GFOA recession model, so that, generally, in scenarios reflecting poor economic performance, there would be poor CalPERS performance.

The GFOA Risk Model also includes the City’s pension trust fund. The GFOA Risk Model gives the City the option to treat the trust fund as a buffer between the City’s general fund reserve and poor investment performance, where underperformance is absorbed by the trust fund, before it would impact the general fund. The Risk Model also provides the option for the general fund reserve to absorb losses first. This would protect the City’s investments in the trust, which will, on average, earn a higher return. The Risk Model can also accommodate any combination of these two strategies. For the purposes of this report, we assumed the general fund reserve would absorb all losses in order to preserve the City’s investment in the trust and maximize long-term returns. Under these assumptions, the model shows the following:
• There is about an 85% chance that the general fund will be burdened with an additional $3.2 million in costs over a ten-year period.
• About a 13% chance that the general fund will be burdened with an additional $11 million in costs over a ten-year period.
• About a 2% chance that the general fund will be burdened with an additional $27 million in costs over a ten-year period.

Note that all three possibilities add up to 100%, which covers the full range of outcomes that we simulated. Thus, if we look at the last two bullet points we see there is about a 15% chance of a general fund impact of $11 million or greater over a ten-year period.

Checkpoints
 Pensions are an important risk for the City not only because of the size the liability but because poor performance of the pension investment will be correlated with poor performance of the City’s revenues. That means the general fund reserves will be under pressure from both revenue losses and pension losses at the same time, if the economy performs poorly.  There is about a 15% chance that the general fund will need to absorb $11 million or more over a ten-year period due to pension under-performance.

17 To be more technical, CalPERS publishes average expected return (6.8%) and then the “standard deviation.” Standard deviation is a statistical term that describes the degree of uncertainty in the returns. We used the standard deviation to estimate the returns for poor (1 standard deviation below the mean) and very poor (2 standard deviation) returns.
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Section 5 - Extreme Events
Although Vista can receive reimbursement
from insurance and public agencies for
natural disasters and some man-made
extreme events, having adequate reserves in
place is important to quickly and decisively
respond to extreme events. For example,
FEMA reimbursement will not cover all the
costs the City incurs and it could take months,
if not years, to receive reimbursement. As the
City’s Hazard Plan notes, wildfires,
earthquakes, and flooding are major natural disaster risks the City faces. In discussions with City staff, these disasters represent the greatest risk and will be the focus of this section of the analysis.

The following sub-sections will explore the potential budgetary implications that these hazards have for the City government.18 These sections will explain any notable features of the data sets we used and discuss the range of potential damage the City could experience, as suggested by the data we gathered.

A. Wildfires
We gathered data from a number of sources to examine Vista’s wildfire risk. Exhibit 5.A.1 shows fire hazard severity zones. We see that the south part of Vista has a substantial “very high” fire severity zone.

The northwest border of the City abuts (and crosses into at some spots) a large “very high” fire severity zone in the unincorporated area. The City’s fire protection responsibilities don’t stop the City’s borders.

The fire protection district has a number of at-risk areas that the City’s fire department may need to respond to. Exhibit 5.A.1 is zoomed into the Vista region. If we zoomed out to a wider view, we’d see that a large severe fire hazard continues to extend west and north.19

18 Our analysis excludes damages to private property and any anything else not the direct financial responsibility of City government.
19 This is based on a national data set from the USDA.

FEMA and Reserves
The U.S. Federal Emergency Management Agency
(FEMA) reimburses local governments for monies spent
in response to a federally-declared disaster. FEMA
reimbursement is only partial (typically 75 percent) and is often not immediate. Therefore, local governments
must have the financial capacity to respond quickly and decisively, independent of FEMA assistance.
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Exhibit 5.A.1 – Very High Fire Hazard Severity Zones (in Red) (from CAL FIRE)

To quantify the risk, we consider two kinds of fires. Regional “mega-fires” (of the kind that would rise to the level of presidentially-declared disasters) and smaller local fires wildfires. These “local” wildfires would still be large enough to cause unplanned and unavoidable expenditures that the general fund would have to cover, but no so large as to be a presidentially-declared disaster.

For regional mega-fires, we examined the number of regional mega-fires since 2002, a 20-year period. We found there were three fires that cost San Diego County at least $37 million. Two of these fires came close to Vista: the 2007 Coronado Hills fire and the 2017 Lilac fire. The City did not incur significant costs from either event. Nevertheless, we will assume a frequency of mega-fires equal to 2 in 20 or 1 in 10. This could be seen as a “conservative” estimate given neither of the historical fires actually impacted Vista and or has there been a megafire in Vista before this. However, as we will see below our damage simulation also provides for the possibilities that fires could minimally impact Vista, so these assumptions should not overestimate Vista’s risk too much. The Risk Model assumes that if a mega-fire occurs, then the chance of a mega fire in subsequent years is reduced by 50%. This recognizes that the fuel for a future mega-fire could be largely consumed by a past mega-fire. Because there has not been a large fire in or around Vista recently, there is a large amount of potential fuel available for a fire.

For damages from a fire we looked at per capita historical reimbursements from FEMA to California municipalities from previous mega-fires. On the low end, we found about $0.25 per capita (or $25,000 for Vista), an average of $1.77 ($178,000 for Vista,), and on the high end about $46 ($4.6 million for Vista). It 10/24/2023 D2 34 of 69

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is worth noting that the Risk Model does not treat these numbers as minimums and maximums but rather as guidelines for the simulation, meaning the Risk Model does account for possibilities worse than the historical maximum.20 In fact, Exhibit 5.A.2 shows the potential damages from a mega fire, assuming a fire occurs. We can see that the graph produces a hockey stick shape. This is very common for natural catastrophes. It means that there is a small chance of a mega-fire that devastates Vista, but it is much more likely that the damages will be in the bounds we described above. Section 7 of this report incorporates the chance of a fire occurring in the first place into the Risk Model.

Exhibit 5.A.2 – Simulated Damages from a Mega Fire the Impacts Vista Chance that
damages will be

EQUAL TO OR

LOWER THAN
the amount
shown on the
graph

Damages

For local wildfires, we examined how many fires occurred since 2000 in the Vista region. There were a total of five in the approximately 120 square miles included in the region we examined. The Vista Fire District and City together covers about 38 square miles, which is divided roughly evenly between the two jurisdictions.21 This equates to about a 1 in 5 chance of a fire in the region each year. However, none of these fires impacted the City of Vista directly and, as we see in Exhibit 5.A.1, a rather small part of the City of Vista is in a high-risk fire hazard zone (and that zone appears not to include any critical city facilities).

That said, Vista might have to assist on fires that are close to Vista city limits, but not within Vista city

20 The $46 per capita is the 90th percentile of the historical data, which means the Risk Model assumes a 10% chance of damages being worse than that. We fit what is known as a log normal or asymmetrical distribution to fire damages.

This type of distribution was shown in Exhibit 3.2. It is also worth noting that in our analysis of historical damages, we dropped very small cities because our analysis showed they tend to suffer disproportionately high damages on a per capita basis. We also dropped Santa Rosa because its location is unrepresentative of the risk faced by Vista. 21 We excluded Coronado Hills and Lilac fires since they were already accounted for by the “mega fire model.” 10/24/2023 D2 35 of 69

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limits. This seems to be the case for a 1987 fire just outside of the Vista’s southwest boundary, for example.

So, for a conservative estimate we assumed that Vista could be impacted by fires in one-sixth of the region. Vista is about 20 square miles (18.6 to be exact) of the 120 square mile region we examined. This is conservative because Vista is at less risk of fires than many parts of the region, but since Vista’s fire response responsibilities do not necessarily end at the City limits, it may not be overly conservative.

Altogether, this equates to a 1 in 30 chance the City would need to respond to a local wildfire in a given year (1/5 chance of fire in the region multiplied by 1/6 chance of the fire impacting Vista).

For damages, we looked at the bottom half of per capita damages from the mega-fires. Cities in the bottom half would not have been exposed to the worst of a mega-fire, so this could be considered roughly analogous to being directly exposed to a local wildfire. In that case the presumed damages might range from about $176,000 on the high end to $24,000 on the low end, with an average of $77,000.

We assume that all mega-fires are FEMA eligible, which is consistent with historical experience. We assume that local wildfires are not FEMA eligible but have a 50% chance of being eligible for State of California Governor’s Office of Emergency Services (CalOES) coverage. This figure was derived from work we did with San Diego County on fire risk.

For both the mega and local wildfires we drew on historical data. Global climate change could make fires more likely, more damaging, or both compared to the past. For that reason, the GFOA Risk Model allows the user to increase the likelihood and severity in user-defined increments and observe the results.

Finally, GFOA has been in contact with researchers from Wharton University who have developed a comprehensive data set of wildfire impacts on California cities and that incorporates climate change impacts. GFOA is in talks with Wharton about how to integrate its data set into our Risk Model. We will upgrade Vista’s Risk Model with this data as soon as is possible.

Checkpoints
 The City of Vista is at risk of both regional mega-fires and local wildfires.  We used historical data to simulate frequency and severity. There is about a 7% chance of a mega- fire occurring in any given year. For a regional mega-fire, there is a 90% chance that a fire could cause damages equal to or less than $4.6 million, with average damages equal to or less than $178,000.
 Local wildfires have occurred in the region more frequently, but it is rare for the City Fire Department to be directly involved and incur large expenditures as a result. We estimate about a 4% chance of a local wildfire that creates significant costs for the City. The simulation results in average damages from a local wildfire of about $77,000, with a 90% chance of damages being less than $176,000.
 The GFOA Risk Model accounts for FEMA and CalOES support to partially offset the damages.

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B. Flooding
The City is at some risk for flooding. There are two distinct flood zones in the north and south of the City, shown in blue in Exhibit 5.B.1. The north flood zone is the more consequential. The total value of private property in the north flood zone is 4 to 5 times greater than the south flood zone and there are also three key public facilities in the north flood zone that the City’s general fund bears responsibility for: the Civic Center Complex, a library, and Fire Station #6. It is also worth noting that The Wave Waterpark is located in the north flood zone, but because that is outside the general fund it is not accounted for in this analysis.

However, the City general fund has “backstopped” The Wave Waterpark in the past by paying for repair/replacement of park assets, so we should account for that in the City’s reserve strategy. We will account for this in Section 7 of the report.

Exhibit 5.B.1 – Flood Zones in Vista (in Blue)

Flood zones are typically divided in a 100-year or 500-year flood zone. 100-year and 500-year floods are rare events because they are expected to occur once every 100 years or 500 years, respectively. This translates to a 1% and 0.2% chance of such a flood occurring in any given year. However, if such a flood did occur, we might expect that the City would incur a material cost to respond to the event – for example, public safety response. And, in the case of a north flood zone, damage to public buildings. The good news for the City is that the public buildings we are focused on are in the 500-year flood zone, so have less exposure than if in the 100-year flood zone.

Let’s first examine how we estimated the potential costs to respond / recover from a flood, excluding damages to public buildings, which we will cover later. City staff first supplied us with statistics of the properties in each flood zone. GFOA looked at our most recent clients where the property in the flood 10/24/2023 D2 37 of 69

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zone was correlated to actual historical damages for floods. Of course, the City’s general fund is not responsible for providing financial assistance to private property owners, but the value of the property in the flood zone should provide a reasonable measure on the magnitude of the City response required. As such, our approach is looking at the potential cost the City would incur to respond to a flood. For example, if the flood zone was completely uninhabited, then one might reasonably assume that minimal or no emergency response would be required. If there is very intensive land use, a greater response might be required. We then developed a range of plausible damages for Vista, based on the value of properties in the zone and based on what other clients have
incurred for similar values in their own 100-year
and 500-year floods zones. Following the Triple-A
rule we described earlier in this report, we also
doubled the range of results. This is a conservative
approach to the simulated damages. We also spot
checked our numbers against actual damages
experienced by San Diego area cities from
historical floods using FEMA records. For example,
Vista experienced a flood in 2005 that resulted in
damages equal to about $50,000 in 2022 dollars. Some cities in the area experienced much greater damages, but: A) those cities appear to have more exposure to flood plains; and B) the range of damages we simulated does allow for possibilities much greater than $50,000. Exhibit 5.B.2 shows the ranges of damages we arrived at.

To estimate the cost to public buildings we first looked at the City’s insurance policies. The City’s policies call for a $100,000 deductible per building in high risk flood areas. We then assumed a minimum of $15,000 in costs, per building, from a flood. This was a low-end estimate drawn from the historical costs of municipal public building repairs resulting from
floods in San Diego County. We assumed a
maximum cost of $100,000 (the size of the
deductible) and simulated costs for each of three
public buildings in that range.

Exhibit 5.B.3 shows a simulated damages for varying
levels of confidence for a 100-year and 500-year
flood for the north flood zone of Vista, including
public buildings. We see that floods can be quite
costly, but the most costly floods should be rare. For example, 60% of 100-year floods are simulated to be less than $153,000 in damages, while only 10% of 100-year floods are more than $189,000.

It is also worth noting that the 500-year damages are much greater than the 100-year damages. It is expected that the 500-year damages would be more since it represents more severe floods, but the potential damages are many multiples of the 100-year damages because of the presence of the public buildings.

Exhibit 5.B.2 – Potential Damages in North and
South Flood Zones
North Flood Zone South Flood Zone
100-Year Flood 100-Year Flood
Minimum: $110,801 Minimum: $27,329
Maximum: $221,602 Maximum: $54,659
500-Year Flood 500-Year Flood
Minimum: $196,814 Minimum: $48,545
Maximum: $393,629 Maximum: $97,090
Exhibit 5.B.3 – Chance that a Flood in North
Flood Zone of Vista would be Less Than the
Indicated Amount
Chance 100-Year Flood 500-Year Flood
50% $ 144,458 $ 436,600
60% $ 152,543 $ 453,771
70% $ 161,709 $ 471,393
80% $ 172,993 $ 491,996
90% $ 188,821 $ 521,622
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The GFOA Risk Model also includes the south flood zone, but we focused on the north flood zone in the report since the numbers are much larger. One point we should make about the south flood zone is that the Risk Model simulates floods in the north and south separately. The City’s subject matter experts on the geography of the city suggested that flooding in the two areas is only weakly related, so our Risk Model simulates them separately, but models a weak relationship. This means that if one area floods, then there is only a slightly higher chance that the other will flood too.

Finally, the figures we have shown in this report do not include FEMA or CalOES reimbursement. FEMA reimbursement is factored into the ten-year risk outlook in Section 7 of this report. FEMA is assumed to reimburse 75% of the cost of a flood. Any FEMA reimbursement is assumed to arrive two years after the event. CalOES is assumed to cover 20% of the flood cost, leaving the City to pick up the remaining 5%.

An important caveat to what we have discussed so far is climate change. One could argue that climate change could make severe floods more likely. The GFOA Risk Model gives the user to increase the chances of severe floods and observe the results.

Checkpoints
 The City is vulnerable to flooding.
 Highly damaging events are rare – 1 in 100 or 1 in 500 years.  If a highly damaging event does occur, FEMA assistance will offset much of the costs. However, 25% of the costs will have to be shouldered by the City and the reimbursement will not arrive immediately.
 Three important public buildings are in the 500-year flood zone which means the impact on the City’s financial position will be that much greater. The City does have insurance, which limits the risk.

C. Earthquakes
Vista is susceptible to earthquake risk. Five major active faults are located within the San Diego County.22 Exhibit 5.C.1 identifies the five faults and their maximum likely magnitude as identified in the County’s 2018 Multi-Jurisdictional Hazard Mitigation Plan. Staff with the San Diego County’s Office of Emergency Services noted to GFOA that researchers have learned more about the Rose Canyon Fault, which presents a greater risk to the area than originally thought when the plan was published. In 2020, the Earthquake Engineering Research Institute San Diego Chapter conducted a study entitled “San Diego Earthquake Planning Scenario: Magnitude 6.9 on the Rose Canyon Fault Zone.” The study focused on a scenario in which a magnitude (M) 6.9 earthquake occurs along the Rose Canyon Fault, resulting in $38 billion in building and infrastructure damages for the region. Such a scenario is estimated to have a recurrence

22 San Diego County, California, “Multi-Jurisdictional Hazard Mitigation Plan,” 2018. 10/24/2023 D2 39 of 69

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interval of 1,000 years or has a one-in-1,000 probability of occurring in any given year.23 The Rose Canyon Fault, according to the most recent U.S. Geological Survey (USGS) fault maps, is located closest to the City.

Exhibit 5.C.1 – Maximum Likely Magnitudes for Faults within San Diego County 24 Fault Maximum Likely Magnitude
San Jacinto M6.4 to 7.3
Elsinore M6.5 to 7.3
Rose Canyon M6.2 to 7.0
La Nacion M6.2 to 6.6
Coronado Bank M6.0 to 7.7
San Clemente M6.6 to 7.7
Source: San Diego County, California, “Multi-Jurisdictional Hazard Mitigation Plan,” 2018 Even if Vista is not near the epicenter of an earthquake, seismic activity within the area can have damaging impacts. The County has had historical experiences with earthquakes, with the most recent one being a M5.3 earthquake in June 2004. Other reported seismic activity include a series of tremblors in June 1985 ranging in M3.9 to M4.0 in intensity, a M6.0 earthquake in July 1986, and M4.7 earthquake in October 1986.

The City does not have historic cost information from these earthquakes. However, the County’s hazard mitigation plan identifies potential damages to the County government from a one-in-100-year earthquake (nominal) and from a one-in-500-year earthquake ($8.0 million).25 The Earthquake Engineering Research Institute San Diego Chapter also provided figures on estimated damages for a one- in-1,000 year earthquake along the Rose Canyon fault.26 Since the figures are for the County, we adjust them to reflect the Vista’s share by using population. We also adjust the figures to be reflective of the range of possibilities for what the Vista could experience. We apply the Triple-A rule we described in Section 3, which advises us to double our range of expectations when we have limited references, such as with this analysis. We then augment the estimated amount of damages for earthquakes with frequencies below one-in-500 year 27 and above one-in-1,000 year.

Exhibit 5.C.2 reflects the estimated damages to the City for varying types of earthquakes. From the left, the first column is annual frequency of exceedance, which shows the chance of an earthquake of a given magnitude exceeds its expected occurrence interval in a 50-year period. The second column is ground motion as a percentage of gravity (%g), which is a metric used to describe the magnitude of forces caused

23 Earthquake Engineering Research Institute San Diego Chapter, “San Diego Earthquake Planning Scenario:

Magnitude 6.9 on the Rose Canyon Fault Zone,” 2020.
24 These scenarios are sourced from the U.S. Geological Survey. 25 See pages 94 and 95 of the County’s Multi-Jurisdictional Hazard Mitigation Plan. The County share is the column under government for rows for the unincorporated rural and urban areas. 26 GFOA estimates the County’s share with the Rose Canyon fault will be of similar proportion to the County’s share of damages for a 1-in-500 year earthquake, 0.1%.
27 The County’s hazard mitigation plan identified that earthquakes with frequencies of one-in-100 year do not have a material impact on the County. Thus, we do not estimate potential damages at this and more common recurrence intervals.
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by the shaking during an earthquake. The higher the %g, the greater the acceleration due to gravity, hence, the greater the force of an earthquake. The two columns to the right show the respective range of damages. We align the estimated cost to Vista for a one-in-500-year earthquake and one-in-1,000-year earthquake with the annual frequency of exceedance in Exhibit 5.C.2. The high damage estimate is 1.25x the estimated cost and low damage estimate is 0.75x the estimated cost. From there, GFOA extrapolates based on the damage estimates based on annual frequency of exceedance. In the GFOA Risk Model, for an event to trigger the resultant damage, it would have to meet a certain threshold, based data on the annual frequency of an earthquake from the USGS.

Exhibit 5.C.2 – Estimated Damages to Vista for Earthquakes of Varying Frequency and Ground Motion Annual Frequency of
Exceedance Ground Motion (%g)
High Damage
Estimate
Low Damage
Estimate

0.000002 152.00% $6,259,720 $3,755,832

0.000011 109.00% $3,129,860 $1,877,916

0.000044 77.80% $1,564,930 $938,958

0.000145 55.60% $782,465 $469,479

0.000413 39.70% $782,465 $469,479

0.001034 28.40% $368,907 $221,344

0.002344 20.30% $184,454 $110,672

0.004877 14.50% $92,227 $55,336

0.009509 10.30% NA NA

0.017137 7.38% NA NA

0.029545 5.27% NA NA

0.048941 3.76% NA NA

0.077954 2.69% NA NA

0.120420 1.92% NA NA

0.179330 1.37% NA NA

0.255720 0.98% NA NA

0.349890 0.70% NA NA

0.458950 0.50% NA NA
Sources: U.S. Geological Survey, Earthquake Engineering Research Institute San Diego Chapter, and San Diego County Multi-Jurisdictional Hazard Mitigation Plan
It is important to point out that this analysis relies heavily on the Rose Canyon Fault scenario as well as information from the USGS on potential ground motion and damages based on Modified Mercalli Intensity. The Rose Canyon Fault extends into Mexico, but one of the limitations with this scenario is that it does not incorporate the impacts should the epicenter occur across the international border.28 As such, it does not reflect the impact of a less damaging earthquake along the fault. A number of factors affect the severity of an earthquake (e.g., density of an area, depth of the earthquake, distance from the

28 Earthquake Engineering Research Institute San Diego Chapter, “San Diego Earthquake Planning Scenario:

Magnitude 6.9 on the Rose Canyon Fault Zone,” 2020.
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epicenter, local geological conditions, architecture, and secondary effects such as floods, landslides, fires, etc.).29 Unfortunately, information on these less damaging earthquakes is unavailable, so our risk analysis is probably “conservative” in that it relies on these worst-case estimates.

Finally, our analysis does not address the San Andreas Fault line. Though the direct impact of an earthquake on San Diego County would not be great, the economic disruption from a large earthquake likely would have some impact on in the region, including Vista.

Checkpoints
 The San Diego region has had experience with seismic activity.  We used damage information from the U.S. Geological Survey, San Diego County’s Multi- Jurisdictional Hazard Mitigation Plan, and Earthquake Engineering Research Institute to estimate potential costs of a given earthquake and adjusted it for the City’s share.

D. Pandemics / Infectious Disease
COVID-19 has made people more aware of the risks posed by pandemics. We included pandemics in the Risk Model. First, to simulate the frequency of pandemics we looked at the historical frequency of pandemics that have had a substantial impact on the United States: the 1918 flu and the COVID-19 pandemic. This suggests pandemics might occur once every 100 years in the United States.30 However, one could argue that pandemics will be more likely in the future. For example, easier travel means that infectious diseases could spread more easily. Global climate change could create environments that are more hospitable to disease carrying organisms. Therefore, the Risk Model gives the user the option to increase the assumed likelihood of pandemics and observe the results. We assumed a pandemic could last up to three years.

There are two types of financial losses the City could incur: increased costs and decreased revenues. We used the City’s actual experience from COVID-19 as a starting point to estimate increased costs. The City has two years of experience with COVID-19, but this is still a very small data set. Therefore, we apply the Triple-A rule we described in Section 3, which advises us to double our range of expectations. Exhibit 5.D.1 shows the ranges of losses we simulated. The City’s actual additional annual expenditures were $400,000.

The Triple-A rule advises doubling the upper limit, which gives us $800,000. It also advises us to consider if the damages could be less, so we take $200,000 as a minimum.

As for revenues, the City’s revenue totals did not decline during the pandemic due to introduction of medical cannabis tax and revisions to the sales tax to generate revenues from online sales. However, in a future pandemic we shouldn’t assume that new or reformed revenue sources will necessarily be available.

29 Sarah Zielinski, “Seven Factors that Contribute to the Destructiveness of an Earthquake,” Smithsonian, February 23, 2011, http://www.smithsonianmag.com/science-nature/seven-factors-that-contribute-to-the-destructiveness- of-an-earthquake-44395116/.
30 We did not think it was appropriate to account for disease outbreaks that did not impact the US as that would overstate the frequency of events that could impact Vista. An example is the 2012 Middle East respiratory syndrome coronavirus.
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Therefore, we looked at the decline in the City’s sales and use taxes that occurred in 2019 as an indicator of what could happen during a future pandemic. These taxes declined by around $750,000, so doubling that gives us a maximum of $1.5 million. That said, we can’t ignore that the City’s actual revenues losses were essentially zero. Hence, the simulation allows for that possibility in a future pandemic.

Exhibit 5.D.1 – Simulated Range of Annual Losses from a Pandemic Additional Costs from a Pandemic Lost Revenue from a Pandemic High $800,000 $1,500,000
Low $200,000 $0

The Risk Model also takes into account the possibility of financial assistance from other levels of government. The model assumes FEMA reimbursement for costs at the customary level of 75%. Coverage of lost revenue is not as clear cut. First, we must simulate if there will be any revenue coverage at all. The experience of the COVID-19 pandemic suggested that Democratic officials were more favorably disposed towards such financial assistance for local governments than Republican officials. Since we have a two- party system we assume there is an equal chance (50/50) one or the other will be in power and thus a 50/50 chance that federal/state officials will provide support. Assuming there is financial support, the next question is: how much will there be? The experience with COVID-19 suggests that some local governments have used federal support to replace 100% of lost revenues, while others have replaced much less. Hence, the model simulates a range of possibilities from 50% to 100% replacement.

Section 7 of this report shows how pandemic risk impacts the City’s reserves, along with the other risks we analyzed.

Checkpoints
 Pandemics are an extremely rare, but high consequence event.  We used the experience with COVID-19 as a starting point to simulate what future pandemics might look like. This is only one data point, though. So, we greatly expanded our expectations for uncertainty beyond what we saw happen during COVID-19. That means the model simulates possibilities for pandemics that are much worse and much milder than COVID-19 (as well as pandemics of similar impact).

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Section 6 - Secondary Risks and Comparable Analysis
Prior sections of this report reviewed the risks of the greatest financial consequence to Vista. In this section we briefly review some other potential risk factors that were considered but that did not appear to present as a pressing risk to Vista’s general fund reserve as the other risk factors we examined. In some cases, this is because potential impact of the risk is not high. In other cases, it is because the event is highly unlikely to occur. The primary risks are risks that Vista stands a good chance of experiencing in the next ten years. This is not to say that Vista should not prepare for rarer, but potentially high consequence events or for more frequent, but lower impact risks like some of those described below. It is only to say that these events were not included in the scope of our analysis because of their very low probability of occurring. Also, in this section we examine how Vista compares to other cities on indebtedness and the amount of fund balance maintained.

A. Secondary Risks
The City of Vista’s Hazard Mitigation Plan identifies a number of risks that are not major risks. These risks are not major risks because they are judged to be of low probability, of low severity, or both.31 Some of the more notable risks are listed in the table below.

Secondary Risks
High Winds
Terrorism
Cyberattack

Because risks like those in the table above are not thought to be major risks to the City, we did not quantitatively analyze them. However, that is not to say the City shouldn’t be prepared for these risks in some way. Below we discuss these risks in more detail.

High Winds
The City is at risk from high winds. For example, Santa Ana winds could blow branches off of trees that the City would have to clean up. However, there has not been a recorded event that has caused the City extra expenses that couldn’t be absorbed in the regular City budget.

In another example, in the last few years there was a rainstorm incident during which trees were uprooted due to the ground being saturated from the rain. The City made claim with CalOES for about $200,000.

Cyberattack
Local governments are at high risk for cyberattack, particularly ransomware attack. In fact, studies have shown that local governments are the most popular ransomware targets for cybercriminals. The City currently has coverage under a cyber liability program. The insurance has a $1 million limit and a $250,000

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retention (i.e., a deductible). GFOA is not an insurance expert and a detailed examination of the policy was outside the scope of this project, but it is worth noting a few specific points that could entail additional risk:
• The policy limit is set at $1 million. A particularly bad attack could cost more than $1 million. The City of Atlanta, Georgia and City of Baltimore, Maryland made news for incurring well over $10 million each in cost from a ransomware attack. Of course, these cities are much larger than Vista, but research suggests that potential damages and size of the government are only weakly correlated. This means that it quite possible that Vista could experience in excess of $1 million in damages.
• The policy excludes hardware damages. “Bricking” of hardware is not an uncommon consequence of a cyberattack.
• The policy excludes acts of war. This is a common exclusion in insurance policies, but many ransomware attacks are thought to be perpetrated by state or quasi-state actors. If interpreted as an “act of war” the City would not have coverage.
• Generally, municipal governments have found cyber policies to be increasingly expensive or hard to get at all. Insurance companies are becoming more rigorous in their underwriting practices and are increasingly requiring that policyholders have risk-mitigating practices in place, like multi- factor identification and more. This has two implications for the City:
o The City is under contract and in the process of developing a Cyber Security Plan An example of a resource that is accessible to local governments is CIS 18 Critical Security controls, https://www.cisecurity.org/controls .
o The City may need to be prepared to take on a higher deductible for cyber policies.

Note that although GFOA did not model cyber risk, generally, we did model ransomware, specifically.

We have data available to build a ransomware model and ransomware is the most prevalent cyber risk for local governments.

Terrorism
According to information provided by the City’s law enforcement representative, a study of threats in California shows that Mexican-based transnational criminal organizations, street gangs, and prison gangs are the top threat in San Diego County. The report also acknowledges risk from mass casualty and domestic terrorism attacks. The City could face financial consequences from a high profile public safety event relating to emergency response, legal costs, and more. Thankfully, such events are quite rare.

Continued participation in regional public safety consortiums can help prevent risks and respond effectively to events that do occur.

In addition to the three risks above we looked at three other risks:
• First is the potential for lawsuits. Like every local government Vista could have a judgment go against it and have to bear the financial consequences. The City is self-insured up to $150,000 and has insurance (through California Joint Powers Insurance Authority) to cover awards greater than that. Vista’s history with its self-insurance for lawsuits shows that it has routinely put more than enough aside for lawsuits.
• Second is cash flow issues. For some local governments, reliance on property tax can create cash flow risk if revenues are only received at one or two points during the year. Fortunately for Vista, 10/24/2023 D2 45 of 69

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it is not overly reliant on the property tax; and through cash flow analysis, typically has sufficient liquidity to meet the City’s financial obligations.
• Third is unfunded infrastructure maintenance. Extreme cases of unfunded infrastructure could raise the chances of catastrophic failure of critical infrastructure. The City does not report that it has a backlog of poorly maintained infrastructure that creates a substantial safety risk.

In terms of financial protection from the risks above, the GFOA Risk Model includes a “critical threshold” of reserves that the City would not want go below. We recommend that the critical threshold be set above zero because the GFOA Risk Model can’t include every possible contingency. The critical threshold amount could help protect the City against any significant financial losses that arise from the risks in the table above. This is discussed more in Section 7.

Secondary Risk Checkpoints
 The City’s Hazard Plan identifies a number of other risks to be insufficiently likely and/or potentially less severe to be categorized as a major risk. We did not quantitatively model these risks.  The City should still prepare for these risks, though. When it comes to reserves, GFOA suggests that the City identify a “critical threshold” amount that it will strive to keep reserves above. This provides a buffer amount beyond the reserves called for by the analysis of the major risks. The critical threshold is discussed more later in this report.

 In addition to the risks described in the Hazard Plan, we identified a number of other financial risks, including: cash flow issues arising from unavoidable mismatches between revenue inflows and expenditure outflows, underfunded pension liabilities, and a backlog of unfunded asset maintenance. These risks constrain the City’s financial flexibility, making reserves an even more important source of flexibility. This emphasizes the need to manage reserves well.

B. Comparable Analysis
This section compares Vista to other cities on indebtedness and the amount of fund balance they maintain. This information provides context for the City in selecting its own reserve levels. Debt and reserves are both determinants of financial flexibility. A high debt burden means less flexibility, which then would suggest that reserves are especially important for providing flexibility. A lower debt burden would mean the converse.

Debt
At the end of FY 2021, Vista’s total direct and overlapping debt amounted to $346.8 million, of which $94.7 million was direct debt. Fitch Ratings assigned the City an AA+ credit rating, which is the equivalent to Aa1 for Moody’s Investor Services. Exhibit 6.B.1 compares the City of Vista with the medians of cities with population greater than 50,000 across different Moody’s credit ratings. The top row shows the direct debt a city has relative to its full value or total assessed value. For this indicator, Vista fares better than similarly rated Aa cities and is on par with Aaa cities. The second row shows direct debt a city has relative to its total operating revenues. For this indicator, Vista is nominally higher than cities rated as Aaa, Aa, and A, with direct debt 0.8 times its operating revenues. 10/24/2023 D2 46 of 69

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Exhibit 6.B.1 – Comparison of Vista's Financial Indicators to Cities with Population Greater Than 50,000 Vista Aaa Aa A Baa Ba & Below
Direct Debt /
Full Value (%) 0.7% 0.7% 1.1% 2.0% 2.9% 2.1%
Direct Debt /
Operating
Revenues (x)

0.80 0.79 0.78 0.76 1.23 1.14
Source: Moody’s Investors Service, “2021 US Local Government Medians Cities and Counties”

To further explore measures of debt, we examined how Vista compares to a group of peer California cities based on a combination of factors, including geography, population, and general fund revenue portfolio.

Exhibit 6.B.2 provides summary statistics from each of the cities’ FY 2021 annual comprehensive financial report and includes four commonly used measures of indebtedness. The measures are categorized as measures of overall debt and measures of direct debt.

Measures of overall debt captures the full burden placed on the public by debt issued by all local governments that overlap the city. Within this category, the first measure, overall debt per capita, shows the burden placed on citizens by municipal indebtedness inclusive of direct and overlapping debt. The second measure, overall debt burden, compares direct debt plus the debt of overlapping jurisdictions as a percent of the full assessed value of properties in the jurisdiction.

Measures of direct debt includes debt service (inclusive of principal and interest payments) as a percent of the city’s expenditures. This measure gauges the pressure placed on the budget by debt payments. The second measure shows direct debt as a percent of the city’s full value to show the debt burden relative to the City’s tax base.

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Exhibit 6.B.2 – Comparison of Vista’s Debt Measures with Peer California Cities Measures of Overall Debt Measures of Direct Debt

Population Overall Debt
per Capita
Overall Debt
Burden
(Overall Net
Debt as % Full
Value)
Debt Service
as a % of
Expenditures
Direct Net
Debt as % of
Full Value
Vista 98,381 $3,525 2.40% 5.98% 0.66%
Carlsbad 114,746 $6,172 2.01% 0.01% 0.00%
Encinitas 62,007 $4,945 1.70% 3.70% 0.17%
Escondido 151,038 $3,428 3.67% 4.59% 0.04%
Oceanside 174,068 $3,007 1.98% 2.72% 0.18%
Poway 48,841 $7,700 6.07% 1.76% 0.17%
San Marcos 94,833 $7,395 4.71% 1.02% 0.04%
Mean 106,273 $5,168 3.22% 2.82% 0.18%
Median 98,381 $4,945 2.40% 2.72% 0.17%
Sources: FY 2021 annual comprehensive financial report of each city and U.S. Census Bureau’s 2020 Decennial Census

Among its peers, Vista’s overall debt per capita is $3,525, which is lower than both the mean and median of the peer cities. Oceanside and Escondido both have a lower overall debt per capita at $3,007 and $3,428, respectively. With respect to overall debt burden, Vista’s represents the median of the peer cities at 2.40%, with the Cities of Encinitas, Oceanside, and Carlsbad recording lower overall debt as a percent of full value than Vista.

In examining direct debt measures, Vista has the highest debt service as a percentage of expenditures, as well as the highest direct net debt as a percentage of full value. The direct debt largely represents the City’s one bond issuance from the 2015 Refunding Lease Revenue Bonds. Vista’s debt service as a percentage of expenditures is 5.98%, which is followed by Escondido at 4.59%. With direct net debt as a percentage of full value, Vista has the highest at 0.66% followed by Oceanside at 0.18%. The City has $0.05 sales tax to service the debt. Other cities may not have similarly dedicated revenue streams.

Vista’s direct debt is comparable to similarly sized cities with a population of greater than 50,000.

However, comparing figures in Exhibit 6.B.1 to Exhibit 6.B.2, the California peer cities maintain a lower level of direct debt. While debt could play a role in the City’s risk mitigation strategy, it should be used cautiously.

Claims on Fund Balance
It is important to gain an understanding of existing claims on the City’s general fund balance in order to fully see funds available to the City in case of a major, unforeseen expenditure or emergency.

To help the City consider the amount of reserves to maintain, Exhibit 6.B.3 provides a table of general fund balances as a percent of general fund revenues for peer cities. Several notes should be made about Exhibit 6.B.3 in order for the reader to fully understand its meaning. First, “fund balance” is an accounting 10/24/2023 D2 48 of 69

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term describing the difference between assets and liabilities in the general fund. “Reserves” (which are the main topic of GFOA’s analysis for Vista) are the portion of fund balance set aside, by City policy, as a hedge against risk. Hence, not all “fund balance” is necessarily available as a reserve. The right-hand section of Exhibit 6.B.3 shows how much each city holds in fund balance as a percent of general fund revenues. Each of the four columns on the right in this exhibit examine fund balances from a different perspective between its relationships to risk mitigation. Going from left to right, the columns show a broad to narrow perspective on funds available for risk mitigation.

The first column shows “unrestricted” fund balance as a percentage of general fund operating revenues.

This column is the broadest perspective of funds available for risk mitigation. It captures the portion of the fund balance that do not have constraints placed on their use by an outside entity (e.g., through a legal agreement) and are spendable (e.g., cash or other liquid assets). An “unrestricted” fund balance may still have constraints placed upon its use, but these constraints would be created by the city government itself. One common constraint is to dedicate some portion of fund balance to hedging against the types of risks described in this report. However, other constraints have nothing to do with risk mitigation—to illustrate: a common self-imposed constraint is setting aside fund balance to pay for a special capital project. The City does have such a constraint, including fund balance assigned for capital projects and park maintenance improvements, which could be removed and made available for risk mitigation.

The second column shows the amount of fund balance available for risk mitigation. Compared to the first column, this column removes portions of the fund balance that have self-imposed restrictions unrelated to risk mitigation. This leaves portions of the fund balance set aside to address a specific risk as well as the portion of fund balance that do not have a dedicated use (unassigned), which could easily be used for responding to emergency events if needed. For Vista, the second column includes the amount assigned for a future CalPERS rate increase and restricted for Internal Revenue Code Section 115 Pension Trust for pension stabilization.

The third column includes fund balances set aside to address a risk, including amounts set aside for a pension trust. Compared to the second column, the third column does not include portions of the fund balance that do not have a dedicated use (unassigned fund balance). The third column only captures what has been specifically set aside for risk, which includes Vista’s funds set aside for a future CalPERS rate increase and for its pension trust fund.

It should be noted that the analysis in Exhibit 6.B.3 is based only upon the information included in each city’s FY 2021 annual comprehensive financial report. Cities may also have a legislative policy document might call for maintaining a given amount in fund balance as a reserve without creating an accounting restriction that would show up in the financial report. Vista has such a policy for the City’s revenue shortfall reserves to be 35% of current year general fund appropriations. The Cities of Carlsbad, Encinitas, and San Marcos all also have similar legislative policies in place. The City of Carlsbad’s policy is to have 40% of operating expenditures in reserves or unassigned fund balance. The City of Encinitas’s financial policy calls for 20% of general fund revenues to be set aside for contingencies and an additional 2% to be set aside for budget stabilization. The City of San Marcos’s policy is to set aside 40% of annual general fund operating expenditures for reserves, equally divided into three categories:
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catastrophic/emergency reserve, one-time recurring savings/opportunity reserve, and economic contingency/pension stabilization reserve. As such, it is possible the actual amount dedicated to risk mitigation could be higher for these cities.

The fourth column includes fund balances set aside to address a risk, excluding amounts set aside for a pension trust. Compared to the third column, the fourth column identifies the portions of the fund balance that is dedicated to risk outside of pension investment risk. Because many of the peer cities established a pension trust to set aside extra resources to mitigate pension investment risk and this is a very specific risk, we want to look at other risk factors that are of concern to the peer cities. For example, the fourth column includes Vista’s funds assigned for a future CalPERS rate increase.

Exhibit 6.B.3 – Comparison of Vista’s General Fund Balance as Percentage of Revenues to Peer California Cities
City Unrestricted Available for Risk
Mitigation
Dedicated to Risk
Mitigation Including
Pension Trust*
Dedicated to Risk
Mitigation Excluding
Pension Trust*
Vista 101.6% 46.9% 11.6% 4.8%
Carlsbad 88.3% 56.1% 3.6% 3.6%
Encinitas 38.1% 38.1% 24.7% 24.7%
Escondido 27.5% 25.1% 23.8% 14.3%
Oceanside 48.5% 34.0% 24.7% 14.2%
Poway 90.9% 58.8% 40.3% 40.3%
San Marcos 59.7% 49.4% 3.3% 0.0%
Mean 64.9% 44.0% 18.9% 14.6%
Median 59.7% 46.9% 23.8% 14.2%
*The figures are based on details identified in each city's annual comprehensive financial report. A city may have a legislative policy to maintain a certain amount in fund balances as a reserve without creating an accounting restriction.

Sources: FY 2021 annual comprehensive financial report

As mentioned previously, the columns in Exhibit 6.B.3 provide a broader to a narrower perspective on funds available for risk mitigation going from left to right. The first column shows the broadest view in terms of percentage of unrestricted general fund balance as a percentage of general fund revenues. Here, Vista ranks the highest at 101.6%, meaning Vista’s general fund balance is roughly the same amount as its general fund revenues. When we look more closely to portions of the fund balance set aside to address a specific risk along with the portion of fund balance that do not have a dedicated use (unassigned) that can be utilized in case of an emergency, the amount Vista has available for risk mitigation represents the median of the peer cities at 46.9%. The Cities of Carlsbad, Poway, and San Marcos have a higher level of fund balance relative to revenues available for risk mitigation.

The third column takes a narrower perspective on funds available for risk mitigation and includes only what has been dedicated to a specific risk, including pension investment risk. As noted previously, Vista 10/24/2023 D2 50 of 69

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has amounts for a pension trust fund and CalPERS rate increase in this category. Compared to peer cities, only two other cities, Carlsbad, and San Marcos, have lower levels dedicated to risk mitigation. However, both cities also have internal reserve policies that call for maintaining a given amount in fund balance as a reserve without creating an accounting restriction. Meaning, they have set aside additional funds but are not reported on in the annual comprehensive financial reports we examined. For example, at the end of FY 2021, per Carlsbad’s reserve policy, $9.6 million of its unassigned balance is for economic uncertainty. Because this policy does not create an accounting restriction, this policy is not reflected in Exhibit 6.B.3. Thus, the figures in Exhibit 6.B.3 understate their actual reserve strategy.

The fourth column excludes the funds set aside for a pension trust, which leaves other risk areas that the peer cities have created accounting designations for. This column provides a view of different risk factors that other peer cities are considering as part of their risk mitigation strategy. Only the City of San Marcos did not have funds specifically dedicated to risk outside of the pension trust. Vista has funds assigned to future CalPERS rate increase. The City of Carlsbad also has a similar strategy with funds assigned for CalPERS contribution. The City of Encinitas has amounts committed for budget stabilization and an operating reserve. The City of Escondido has funds committed to reserves. The City of Oceanside has amounts assigned for revenue/economic stabilization, PERS supplemental reserve, and Measure X. Lastly, City of Poway has the highest percentage of general fund balance as a percentage of revenues dedicated to risk mitigation, committing $13.2 million for extreme events and $7.2 million in economic volatility.32 Compared to its peer cities in California, Vista maintains a high level of general fund balance that could be a hedge for risk. A more deliberate analysis, such as the approach in this report, will provide greater insights into if such level is appropriate given the risk factors that the City faces as well as what other peer cities are considering as risks and if they are using reserves as a way to address such risks. From there, the City could create accounting restrictions to portions of the fund balance to set aside funds for specific risks it faces.

32 GFOA worked with the City of Poway to establish these categories after a similar risk analysis. Poway made the determination on the level of fund balance to maintain for extreme events and economic volatility. 10/24/2023 D2 51 of 69

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Section 7 - Putting it All Together
In Sections 4 and 5 we examined individual risks such as recessions, fires, floods, and more. We examined each of these risks individually in order to best understand the nature of each risk and the financial implications. However, to arrive at a final reserve strategy for the City, we need to consider these risks as a group. Considering the risks as a group has important advantages.

The first advantage is that considering risks as a group recognizes the diversity in the risks that the City faces. This diversity actually is an advantage for City finances! Diversity in risks means we should not simply add together a reserve for each individual risk. This may overstate the amount of reserves that the City really needs. This is because it is unlikely that the City will experience a deep recession, a severe earthquake, and severe flood all within a short time period.

The second advantage of considering all of the risks together is that not all of the risks have an equal chance of occurring over a given time period. Recessions are more common than a 100-year flood. The reserve analysis should reflect this fact. In the bullet points below, we show the relative chance of each of the major risks occurring over a ten-year period. We can use these probabilities to build a model of risks over a long-term time horizon.
• Revenue loss due to a recession. Historical data suggests that it is highly likely (over 90% chance) that there will be at least one recessionary year in a ten-year period.33 The historical data also tells us there is a considerable chance of having more than one recessionary year in a ten-year period.
• Pension stress. The City will experience greater pension stress if its investments underperform expectations. Investments are much more likely to underperform expectations during a recession.

The GFOA Risk Model links pension stress to the same recessionary loss assumptions described above: particularly poor economic conditions will translate to particularly poor pension performance.
• Flood. Based on the flood data we have available; the model simulates 100-year and 500-year floods. These floods have a 1% and 0.2% annual chance of occurring, respectively. The GFOA Risk Model gives the City the option of increasing the likelihood of these floods, by up to 400% but we did not assume any increase for the purposes of this report. • Wildfires. A large regional “mega-fire” is assumed to have a 1 in 10 chance occurring, which is consistent with the historical occurrence of large mega-fires in the Vista region (though no mega- fires have actually been in Vista). Smaller regional wildfires that are large enough to cause the City significant unplanned expenditures but small enough to not be declared a disaster by FEMA are assumed to have a 1 in 30 chance of occurring. This is consistent with historical fires in the region. • Ransomware. There is about an 8% chance of a successful ransomware attack. This is based on an off-the-record conversation we had with a local government risk pool that insures against ransomware and is thought to be a slightly conservative estimate. • Earthquakes. There is about 0.5% annual chance of an earthquake large enough to cause the City government substantial damages. This is based on USGS modeling.34

33 We took economic data since 1950 and used that to calculate the odds of a recession occurring in a ten-year period, including how many of those years would be recession years. 34 This can be read off Exhibit 5.C.2 – the line associated with the highest frequency for which there are any damages. 10/24/2023 D2 52 of 69

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• Pandemic / Infectious diseases. The model simulates pandemics occurring with a 1% annual likelihood, which is based on historical frequency of pandemics that impacted the United States.

The final advantage of considering all the risks together is that we can consider “risk interdependencies.” This simply means that the occurrence of one risk could impact the probability and/or magnitude of a related risk. In Vista’s case, the most important interdependency is recessions and pensions: poor economic performance would put downward pressure and revenues and upward pressure on pension costs. Other than that, there does not appear to be any critical interdependencies. This is not unusual for local governments GFOA has worked with.

To realize the advantages described above, we built a model that considers the City’s risks over a ten-year time horizon. The GFOA Risk Model runs hundreds, thousands, or even ten thousand simulations of possible futures for Vista. Below are the key assumptions behind the model. Some of these assumptions are user-definable so that the City can explore alternative scenarios to those described in the report.

Below, we have italicized user definable variables and described the default values included in the model. • Probability of an undesirable event. The probability of any undesirable event occurring is consistent with the assumptions described above.
• Magnitude of an undesirable event. Should a simulation show that an undesirable event occurs in a given year, the magnitude is generated randomly in a manner identical to how we described for the risks earlier in this report.
• FEMA / CalOES reimbursement. The City could recoup some of its losses from extreme events, such as floods, fires, and earthquakes from reimbursements from FEMA and CalOES. The model assumes the reimbursements are received two years after the event occurs.35 The model assumes any mega-fire would quality for FEMA assistance, but local wildfires would not. The model assumes that any earthquake and any 100-year flood would qualify for FEMA assistance. CalOES would supplement FEMA in all the cases above and the model also assumes a 50% chance of CalOES assistance for small regional wildfires. We also assume the City will be reimbursed at the customary rate of 75% of incurred costs by FEMA. We assume 20% reimbursement from CalOES. • The City does cut some spending to help offset the impact of a recession or an extreme event.

At least some of the losses from a recession or extreme event could be absorbed by cutting back on the City’s regular spending. The Risk Model provides the user with the ability to set the amount of spending the City is willing to cut. For the purposes of this report, we assumed the City is willing to cut up to 2% of its budget in any given year to close a deficit, before using reserves. This is consistent with some past experiences the City has had in balancing its budget. • The City will usually generate budget surpluses in years when there is not a recession. The City has historically generated surpluses in non-recessionary years. Annual surpluses can be used to offset unexpected cost or help pay for capital projects. The Risk Model simulates budget surpluses for non-recessionary years. Looking at the City’s history, the City has generated rather large surpluses which have helped it build up a large fund balance. We understand that there is a desire on the part of the City Council to provide more public services and generate smaller surpluses in the future. Thus, we have assumed smaller surpluses than the City’s historical data would suggest.

We assumed a maximum annual surplus of 10% and a most likely surplus of 5%. We also assumed a worst-case deficit of 15%, which is based on the City’s historical experience. In other words, we

35 Our research shows that FEMA reimbursements are completed 18 months after the disaster occurs, on average.

So, this is a conservative assumption.
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must account for the fact that the City will occasionally be unlucky, just as it has occasionally run into bad luck in the past. Later on in this section we provide a number of recommendations for how the City could spend more on public services and generate smaller surpluses while also protecting its strong financial position.
• Critical threshold. This is the amount that the City does not want reserves to go below. For the purposes of this report, we set the amount at about $18.5 million, which is roughly equivalent to 20% of the City’s revenues. The rationale for $18.5 million as the critical threshold is that the City is concerned about maintaining its AA bond rating. According to documentation from Moody’s bond rating agency, a reserve equal to about 15% to 30% is equivalent to AA rating.36 20% provides some room for the City to maneuver and to stay well within rating agency expectations.

The GFOA Risk Model does not cover every conceivable risk the City could face. Thus, this critical threshold also provides some protection against the “unknown risks” the City is subject to. Finally, in the past, the City general fund has provided a financial “backstop” to The Wave Waterpark. The critical threshold also provides some capacity to backstop the waterpark in the future. • Transfer to pension trust fund. The City staff has been considering recommending to the City Council to transfer a sizeable amount of money from the general fund reserves to the pension trust fund. The rationale is that the pension trust fund should generate a better return on the City’s money and will help protect the City against risk posed by pension liabilities. The Risk Model assumes that $10 million will be transferred from the general fund reserve to the pension trust fund, which we understand is consistent with past conversations between the City staff and City Council. This means that the $10 million transferred will not be immediately available to cover risks like wildfires, earthquakes, etc. However, funds from the pension trust fund could be used to finance the CalPERS and other pension expense portions of the general fund budget. As with all other assumptions, the Risk Model gives the user full control over this assumption. • City’s starting reserve. Our analysis does not include all of the City’s fund balance because much of it is already dedicated to other uses (see section 6). In conversation with City staff, the portion that seemed most appropriate to this analysis totaled about $30 million. When we subtract from that the $10 million for the pension trust, as described in the bullet point above, we are left with $20 million.

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36 Reserves are not the only factor that rating agencies evaluate, so a large reserve does not guarantee a AA rating. 10/24/2023 D2 54 of 69

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We combined all of the information described above to create a ten-year probabilistic model. The City’s goal for this analysis was to find an amount that can give the City sufficient comfort that its reserves will cover its risks. We next present a series of graphics based on this model. Exhibit 7.1 shows the chance that the City’s current reserve will reach the critical threshold ($18.5 million) each year. GFOA has observed that most municipalities are comfortable with about 10% to 20% chance of reaching their critical threshold by the end of the analysis period. Vista has a slightly higher chance than this – the chances are just over 20%. It is important to note that, generally, the blue bars will always get higher the further in the future we look because more bad things can happen. This is not the case for Vista. The blue bars are much higher in the next few years. This is because the financial challenges posed by the City’s pensions are thought to be the worst during this time, before eventually stabilizing. This means that if the City can weather the next few years it should have smoother sailing after that.37 The transfer of additional funds to the City’s pension trust, as described above, is one way to help make sure the City does weather that period.

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37 The City’s ability to weather the pension challenges of the next few years will be largely influenced by the investment return the pension plan can generate. As we will discuss more later, investing in the pension trust can help offset some of the risk associated with poor returns.

Exhibit 7.1 – Chance to Reach Critical Threshold Each Year

The City has just over a 20% chance of reaching the critical threshold by the 10th year of our analysis period.
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Exhibit 7.2 shows the average remaining reserve per year (blue line). The exhibit shows the City’s reserves are simulated to remain fairly stable, with slight growth, under “average” conditions. This is sufficient to keep the City above the critical threshold (dotted red line). The chart also shows the 20th percentile (green line), which means the simulation shows reserves to be at or under the green line 20% of the time. It shows that the City falls below the critical threshold for practically the entire analysis period in one out of five cases.

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Exhibit 7.2 – Simulated Remaining Reserve Per Year

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Finally, below is Exhibit 7.3. This is a cumulative probability chart. It shows the confidence available from varying levels of reserves. Vista existing reserve intersects the red line at about 78% confidence. The main take-away from this graphic is the reserves have a diminishing return at a certain point because the flatter the line gets, the less confidence an additional dollar of reserve “buys” you. This is because the further to the right you go on the graph, the more extreme the events are that must be covered by reserves. This graphic shows that the City would still get a good “bang for the buck” from higher reserves than it has today. This City would not be as well served by accumulating reserves past the point where the line starts to flatten out.

Exhibit 7.3 – Cumulative Probability Chart

The implication of the line going flat is that not all points on the line are equally cost effective. Let’s examine Exhibit 7.3 to illustrate. According to the graph, to be 90% confident of staying above the critical threshold requires a reserve of $26.6 million. To be 95% confident requires a reserve of $31.7 million, a difference of about $5.2 million from 90% confidence. To be 99% confident requires $47 million, which is about $15 million more than the amount required to be 95% confident. Thus, it costs three times as much to “buy” a similar increase in confidence. This is the point where the line in Exhibit 7.3 goes flat and it is not efficient to build reserves.

The table on the next page translates the dollar figures referenced in this paragraph to percentages of the City’s budget.

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What do these reserve targets look like as a percent of City revenues? A reserve policy typically expresses reserve targets as a percent of revenue.

Below we have converted the dollar figures to a percent of revenues.

Dollars Percent of Budget
$27 million (90% confident over 10 years) 29%
$32 million (95% confident over 10 years) 35%

City officials will also want to think about other factors in order to finalize the reserve target range. This is because Exhibit 7.3 cannot account for every possible factor that should go into deciding how much Vista should keep in its reserve. The figures shown in the exhibit are what is needed to protect the City from just the risks described in this report. Usually, municipal governments have other concerns they expect their reserves to address. Here are examples of such concerns:
• There are risks that are sometimes called “unknown unknowns.” These are risks that are totally unanticipated. There is also the possibility of the City general fund needing to financially backstop The Wave Waterpark again in the future.
• The City has historical experience with low reserves during the period associated with the 2008 Great Recession. At the time, the City needed to engage in layoffs to balance the budget. A strong reserve allows the City to make a soft landing in the event of financial catastrophe. • Our Risk Model is based largely on historical data, which, by definition, does not capture the potential future impacts of global climate change. Though the model has some accommodations for climate change (see discussion of wildfires, floods, and pandemics), it is impossible to say what the future impacts of climate change will be. This might suggest a more “risk averse” approach to reserves (i.e., maintaining more, rather than less).
• The City might wish to use reserves for purposes other than mitigating risks – for example, building a capital project using cash financing. The Risk Model gives the City the ability to estimate the cost of potential projects to see the financial impact on these reserves.38 The GFOA Excel Risk Model allows the City to add these considerations to what we call “minimum acceptable reserves” or “critical threshold.” GFOA’s discussions with the City staff suggest a critical threshold of $18.5 million to help the City maintain a good reputation with investors in municipal debt.

This amount is shown in Exhibit 7.3. The City could choose to vary this critical threshold, which would then change the total amount of reserves the City would need to maintain in order to achieve a given degree of confidence that reserves would stay above the threshold.

Here are some other conclusions we can draw from the graphics presented on the previous pages:

38 Note that the City has historically done some level of cash financing of projects. The model already accounts for “normal” spending that takes place in the City’s annual budget, so this feature of the Risk Model would be used for larger projects that exceed what might be considered “typical.” 10/24/2023 D2 58 of 69

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• It is important to remember that we have assumed Vista will produce smaller annual surpluses than in the past because of more extensive public service objectives in the future. Even so, we still assumed a healthy annual surplus of 5% on average. Vista’s ability to consistently generate surpluses provides a great deal of protection from the impacts of unplanned, unavoidable expenditures over the long-term.
• The City should remain mindful of the potential for extreme consequence events. To illustrate, Exhibit 7.4 updates Exhibit 7.2 to change the 20th percentile to the 10th percentile (green line) to show the effect of more extreme events. This shows that 10% of the time the City drops below its critical threshold by a considerable margin for the entire analysis period.

Exhibit 7.4 – Simulated Remaining Reserve Per Year (showing 10th percentile)

GFOA’s experience with other municipalities suggests that range described above would provide a comparable level of confidence to that preferred by other local governments we have worked with. It is also worth reiterating that our report assumes that the City follows through on the plan to transfer 10/24/2023 D2 59 of 69

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about $10 million to its pension trust in order to A) better prepare the City to weather its upcoming pension difficulties; and B) get a better return on its funds. Pensions are one of the City’s foremost risks, so preparing for this risk is a savvy strategy. To complement the reserve analysis, we offer the following additional recommendations:

The City should adopt a robust reserves policy. GFOA has conducted extensive research into what it takes for a local government to be financially sustainable. We call this body of work “Financial Foundations for Thriving Communities” (Financial Foundations). This research has shown that local governments require clear decision-making boundaries. A policy on the target level of reserves that the City should maintain, and the acceptable use of those reserves provides clear decision-making boundaries for reserves.

The City currently has a policy the addresses the use of excess reserves. This is a great start. The City could build on this with the following policy elements:
• A range of desired reserves to provide a “floor” and “ceiling” for the amount the City will maintain in reserve.
• Description of acceptable uses of reserves. This includes excess reserves, but also the conditions under which reserves can be used, generally. Acceptable uses might include responding to extreme events and allowing the City budget to make a “soft landing” in times of recession. The policy should limit the use of reserves to purposes that are sustainable over the long-run. • Definition on who has authority to draw on reserves.
• A commitment to replenish reserves when they are used, especially if reserves drop below the “floor” established by the policy.

GFOA has templates and examples that the City can use to augment its existing policy.

However, Tempe had been maintaining fund balances above 30%, which was causing some to question why Tempe was not in alignment with the policy and whether Tempe had a fund balance that was too large. City Council and staff agreed to change the policy to set a goal for the reserves to be between 20% and 30% of revenues. This range would provide more discretion, but it would also create clear bounds for what Tempe would consider acceptable maximum and minimum reserves. 10/24/2023 D2 60 of 69

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Tempe staff developed a presentation of Tempe’s revenue forecast in the context of this new arrangement and informally called it the “Golden Cone of Prosperity.” Exhibit 7.5 shows the presentation as it was in 2009, where the yellow cone representing the range of desired fund balance widens over the forecast horizon as the new policy is phased in and the black line representing actual fund balance gradually enters the cone.

Exhibit 7.5 —Tempe’s Golden Cone of Prosperity in 2009

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• One-time revenue policy. Limit the use of one-time, non-recurring revenues to one-time, non- recurring expenditures or to pay down liabilities (e.g., catching up on deferred asset maintenance, like a park, road, etc., or making additional discretionary payments to CalPERS to reduce unfunded actuarial pension liability). An example of a one-time, non-recurring revenue would be proceeds from a lawsuit or the sale of an asset. Another important example is excess reserves: reserve accumulated above the ceiling amount called for in the City’s policy. • Volatile revenue policy. Some revenues, like sales taxes, are recurring, but they can go up and down substantially from year to year. A volatile revenue policy would treat extraordinarily high annual revenues from a volatile source as a one-time revenue. The bulk of the revenue income would be treated like a recurring revenue – it is just the extraordinary amount that would have more limited uses. This protects the City from using peak revenues to over-invest in programs that have to be supported for many years.
• Adopt a structurally balanced budget. Cities are required to adopt a balanced budget by law.

This is not to say that in-house staffing is undesirable. There may be situations where in-house staffing is better, but there may also be opportunities where contracts can provide financial flexibility.
• Affirmative reauthorization of spending. The conventional approach to budgeting is that once a new service is authorized it is “baked in” to the budget and is funded year after year. This can lead to financial distress when new services are layered on top of old services. An alternative is to require affirmative reauthorization for a new service. This could be especially useful where a new service is intended to achieve some clear public policy goal. At the end of some set period, the City Council could be required to explicitly reauthorize funding based on whether or not the program is achieving its stated goals.

The City should consider further investments in cybersecurity. Cybersecurity is an emerging and growing threat for local governments. As we described earlier, available data suggests a number of sobering points:
• Local governments are the most attractive targets for cybercriminals and ransomware attacks against local governments are becoming more common.
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• The amount of damages from an attack appear to only be weakly correlated to the size of the government. Data suggests that the average attack costs around $100,000 but attacks can and have cost local governments many millions of dollars. The City’s current policy limit is $1 million.

This means that even though Vista is not as large as cities that have made headlines for the losses incurred by an attack, Vista could still suffer a substantial loss – perhaps in excess of its policy limits.
• Cyber insurance policies are getting more expensive and harder to come by. As of this writing, GFOA members are reporting doubling of premiums or being denied coverage altogether.

Given the points above, the City might consider the following recommendations that have implication for the City’s reserves:
• Continue planning for enhanced security and make cost-effective investments in cybersecurity controls that both: A) reduce the likelihood of a successful attack; and B) reduce the potential damages, if an attack succeeds. Because reserves are ultimately a form of self-insurance there could be a strong case for using some of the City’s reserves to strengthen its cybersecurity. This is because a dollar invested in prevention is usually going to be more effective than a dollar invested in remediation.
• Be prepared to retain more risk on a cyber insurance policy. If policies get substantially more expensive (or, worst case, unavailable), Vista could lower the cost by retaining more risk. This could be accounted for in Vista reserve amount. As we stated above, there is a plausible risk of a cyberattack costing the city more than $1 million. Therefore, “retention” of risk is not just the insurance deductible, but also includes the risk of a catastrophic attack that costs more than the policy limit.

For natural hazards consider “parametric” insurance in addition to traditional indemnity insurance.

Parametric insurance is a newer type of insurance for providing coverage for extreme events, having increased in popularity in the last 15 years or so in the public sector but has been in use in the private sector for decades. Parametric coverage provides the policyholder (the City) with a payment amount that is defined ahead of time, should a defined event come to pass (a fire of a certain magnitude). Parametric insurance could be more useful for providing an injection of liquidity because the policyholder receives the defined payment immediately upon verification by a third-party that the given event occurred, which usually would be within a matter of days. As a simple illustration, a parametric policy might provide the City of Vista with $5 million upon the occurrence of an earthquake of some given magnitude, after magnitude is verified by a third-party, such as the USGS. This feature of parametric insurance also eliminates much of the administrative hassle that would be associated with a traditional indemnity policy (e.g., working with claims adjusters). A final advantage is that the proceeds from the policy payout are completely fungible – the City could use them to fund whatever service it deems necessary or to counteract revenue loss from tax base impairment, whereas indemnity policies might require the policyholder to use the funds to repair or replace the asset that was insured. Parametric policies are not without their drawbacks, though, and are not a substitute for traditional insurance. The City can learn 10/24/2023 D2 63 of 69

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more about parametric policies in the publicly available GFOA research report “Parametric Insurance: An Emerging Tool for Financial Risk Management.”39
A robust insurance strategy could make use of both traditional indemnity and parametric insurance. For example, traditional indemnity insurance could be used to protect against loss of the City’s assets, while parametric insurance could be used to compensate the City for the losses in tax revenue it would experience from an impaired tax base, for instance.

39 Available at: https://www.gfoa.org/parametric-insurance/ . 10/24/2023 D2 64 of 69

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Appendix 1 – Limitations of GFOA’s Analysis
This section highlights the most important limitations of our analysis.

Our analysis is not predictive. GFOA does not forecast future recessions, natural disasters, or other extreme events. Rather, our model generates hundreds or even thousands of different scenarios to show how the future could unfold. This helps the City think more broadly about risk so that it can be more prepared for whatever future event does eventually come to pass. Finally, it is important to note that low probability events are still possible events. Hence, even if our model says an event has a low probability, then that does not mean it won’t occur.

GFOA is not a risk management consultant. We worked with the City to find out which risks the City believes are most salient and then modeled those risks quantitatively to judge the potential financial impact. We are not risk managers and it is not our role to tell the City which risks it should be more concerned or less concerned about or what the best way is to manage those risks.

Our analysis is based on historical records. Historical data is often a good way to model potential future outcomes. However, historical data may not be perfect. For example, global climate change could increase the City’s vulnerability to naturally occurring extreme events.40 This means that historical data could underestimate the likelihood and/or severity of extreme events in the future. Unfortunately, no one can say precisely what the impact of climate change will be. Hence, GFOA can’t speculate if an upward adjustment to the reserves is necessary and, if so, by how much. However, this does mean that there could be a case for reserving a higher amount than the efficient range described in our report (or pursuing other risk management strategies). Also, GFOA’s Microsoft Excel Risk Model provides the City with the ability to adjust the likelihood and/or magnitude of floods. This feature could be used to test different scenarios, including ones where climate change is assumed to increase the likelihood and/or magnitude of extreme events.

Our analysis is not inclusive of every risk the City could possibly face. We examined the City’s past history and worked with City staff to identify the risks that posed the most clear and present danger to the City.

However, it is possible that the City could experience a shock that no one was expecting. Hence, there is a case for reserving more than our analysis suggest is efficient. This could provide additional protection against risks that no one can foresee. Being prepared for these “unknowable” events is part of the value of the “red line” or critical threshold that our reserve analysis took into account. However, this does not mean that the City doesn’t need to prepare for risks that aren’t included in our model.

Our model is focused on general fund reserves as a risk mitigation tool. Other mitigation tools, such as insurance, can provide additional resources to respond to an extreme event. We did not judge the adequacy of the City’s insurance program.

40 According to the Fourth National Climate Assessment created by the U.S. Global Change Research Program (USGCRP) and released in November 2018: “more frequent and extreme weather and climate-related events, as well as changes in average climate conditions, are expected to continue to damage infrastructure, ecosystems, and social systems.” The report cites climate-related risks to communities “from adverse weather and climate related events such as extreme storms or wildfires.” https://nca2018.globalchange.gov/chapter/1/ . 10/24/2023 D2 65 of 69

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Good decisions do not always lead to good outcomes. Excel simulation tools can enhance one’s perception and understanding of uncertainty and risk.41 However, when dealing with uncertainty, even the best decision may not lead to a good outcome, if luck goes against you.42 To illustrate, imagine an insurance company was willing to sell Vista an insurance policy against being hit by a meteor for $50 million. A meteor strike is an extremely remote risk, so spending $50 million on an insurance policy would not be a wise decision. Imagine Vista does then get hit by a meteor that causes $100 million in damage.

Should you criticize the decision not to buy insurance? No, because the decision was reasonable given the information available at the time and there was no way to predict a meteor hitting the City. Similarly, our model may show that a given amount of reserves is reasonable under most conditions, but Vista could encounter a confluence of undesirable events that the reserves are insufficient to address.

41 To survive in an increasingly unpredictable world, we need to train our brains to embrace uncertainty, Emre Soyer, Quartz Magazine, January 9, 2017 https://qz.com/879162/to-survive-in-an-increasingly-unpredictable-world-we- need-to-train-our-brains-to-embrace-uncertainty/.
42 This is one of the primary lessons in: Annie Duke. Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts. Portfolio. 2019.
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Summary of Fund Balance Reserve Accounts - General Fund Fund Balance
Classification
Account
Number Fund Balance Account Name Balance

10.10.23 Account Description
Assigned 310522 VFD Equip. Replacement 5,978,455 General Fund revenues. Set aside annually with the Operating Budget based on the Fire Vehicle/Equipment Replacement Schedule.

Funds are used for the purchase of vehicles and equipment for the Vista Fire Department.

Restricted 310523 Aerial Equipment Fee 243,685 Aerial apparatus development impact fees. Based on square footage of each floor above the second or square foot of floor area over 50,000 square feet. Use is restricted to the purchase, replacement, or improvements of the aerial apparatus.

Restricted 310526 Underground In-Lieu Fee 1,018,249 Underground in-lieu fees. Paid by developer in lieu of performing required utilities undergrounding improvements. Use is restricted to future undergrounding of utilities.

Restricted 310528 Housing In-Lieu Fee 1,445,552 Housing in-lieu fees. Paid by developer at time of building permit in- lieu of including inclusionary housing in the development. Restricted to the purpose of providing affordable housing.

Restricted 310544 Asset Forfeiture Fund 291,430 Unclaimed evidence money. Remitted to the City from the County of San Diego. No longer setting revenue aside. Revenue amounts are typically around 5-20k and are used to fund eligible portions of the Sheriff's Contract in the fiscal year collected.

Restricted 310547 Cable Franch PEG Fee 1,448,943 Public, Educational, and Government (PEG) Fee. Fee paid by operators. Restricted to use for providing public, education, and government access.

Restricted 310568 SB1186 DAE Fee 148,816 SB1186 Disability Access and Education fee. Fee applied to the sale of business licenses and renewals to fund activities that promote compliance with construction-related accessibility standards.

Assigned 310710 Capital Projects 3,238,362 General Fund revenues. Set aside with year end fund balance and one time revenues. Current balance to fund Public Works Laydown yard on existing property.

Unreserved 310711 Emergency Reserve 20,428,781 General Fund revenues. Set aside with year end fund balance and one time revenues.

Committed 310717 Senior Nutrition Center
Donations
52,475 Donations. Donations received to fund Senior Nutrition special event programming.

Assigned 310721 Curbside Improvements 50,000 Curbside rent payments. Set aside from previous rent payments from the Curbside property. Anticipated to be programmed with the FY 2023/24 Q1 report for roof replacement.

Assigned 310726 CalPERS 4,763,871 General Fund revenues. Set aside with excess one time revenues.

Recommended to be consolidated with the Emergency Reserve.

Committed 310731 Moonlight Facility Fee 913,376 Moonlight ticket fees. Fees from Moonlight tickets set aside for facility improvements and ticket software maintenance and replacement.

Committed 310733 Park Cellular Revenues 881,718 Cell tower lease revenue. Revenue from cell towers located in the parks set aside annually for artificial turf replacement in various parks.

Committed 310740 Park & Facility Maint Fee 105,687 Facility rental revenue. No longer setting aside 5% of rental revenue. Current funds recommended for unplanned facility repairs. Annual revenue collected is not significant enough to warrant set aside.
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EXHIBIT 5

Summary of Fund Balance Reserve Accounts - General Fund Fund Balance
Classification
Account
Number Fund Balance Account Name Balance

10.10.23 Account Description
Committed 310741 Sr Center Facility Maint Fee 14,056 Senior Center rental revenue. No longer setting aside 5% of rental revenue. Current funds recommended for unplanned facility repairs. Annual revenue collected is not significant enough to warrant set aside.

Committed 310744 Proposition "L"19,724,342 Prop L 0.5% Sales Tax. Excess of annual Prop L revenues over expenses (Prop L Bonds debt service and $1,205,201 for Fire Personnel).

Assigned 310754 Structural Deficit Reduction 9,301,789 General Fund revenues. Set aside with excess one time revenues.

Recommended to be consolidated with the Emergency Reserve.

Assigned 310756 Community Project Reserve 1,267,535 General Fund revenues. Set aside with excess one time revenues.

Use for one-time facility maintenance and improvements .

Assigned 310757 Safety Radio Replacement 541,221 General Fund revenues. Set aside annually with the Operating Budget for future safety (Fire and Law Enforcement) radio replacement.

Committed 310758 AB 1484 Tax Distribution 10,120,634 AB 1484 property tax distribution and ROPS loan repayments to the City. One time payments initially set aside to fund the completion of Paseo Santa Fe. ROPs loan repayments are complete, funds are available to be programmed on one-time projects.

Committed 310760 Paseo Santa Fe Project 2,000,000 General Fund revenues. Set aside with excess one time revenues.

Initially set aside to fund the completion of Paseo Santa Fe. Paseo Santa Fe project is complete, funds are available to be programmed on one-time projects.

Assigned 310761 Council Econ Dev Priorities 123,280 General Fund revenues. Set aside with excess one time revenues for Council directed economic development priorities. Current funds are for the Façade Improvement Program.

Assigned 310765 Park Maint & Improvement 543,330 General Fund revenues. Set aside with excess one time revenues. $160,000 anticipated to be programmed with the FY 2023/24 Q1 report for ball field laser leveling.

Assigned 310771 Abandoned Veh Program 130,559 Vehicle Abatement fee (no longer collected). Using approx. 20k annually to fund part time position for parking enforcement.

Assigned 310777 General Plan Update Fee 173,601 General Plan Update Fee. Collected as part of the permit fee. Use is restricted to General Plan Update.

Assigned 310778 Climate Action Plan 185,110 General Fund revenues. Set aside with excess one time revenues to support needs identified by the Climate Action Plan.

Committed 310779 Gloria McClellan Center 178,404 Developer agreement. Funds received as part of a developer agreement for improvements at the Gloria McClellan Senior Center.

Committed 310782 AB1484 Tax Dist 2 8,700,000 AB 1484 property tax distribution. Set aside to back the spending of the 2011 TABS.

Assigned 310784 Cultural Arts AB5 977,028 Shuttered Venue Grant. AB5 increased temp staffing costs, reserve will allow for a gradual ticket fee increase over multiple years.

Assigned 310785 Wave Water Park 700,000 General Fund revenues. Set aside with excess one time revenues.

Intended purpose is for maintenance/ improvements needed at the Wave Waterpark.
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Summary of Fund Balance Reserve Accounts - Non-General Funds Fund Balance
Classification Fund Fund Balance Account
Name
Balance

10.10.23 Account Description
Restricted 002 General Fund
Capital
Biological Mitigation 87,882 Biological Mitigation (no longer collected). Deposits received related to biological mitigation. To be programmed in future Capital Project budgets.

Restricted 002 General Fund
Capital
Traffic Mitigation 250,732 Traffic Mitigation (no longer collected). Deposits received related to traffic mitigation. To be programmed in future Capital Project budgets.

Restricted 102 Park
Development
Park Development 9,660,566 Development Impact Fee - Park Fee. Fees paid by the developer restricted to use for new park facilitates or capital improvements to existing park facilities. Programmed in the Capital Project Budget.

Assigned 106 Gas Tax Vehicle Replacement 241,390 Gas Tax. Set aside annually with the Operating Budget based on the Vehicle Replacement Schedule. Funds are used for the purchase of vehicles and equipment related to the Gas Tax Fund.

Restricted 109 Drainage Fees Drainage 613,303 Development Impact Fee - Drainage Fee. Fees paid by the developer restricted to use for drainage projects. Programmed in the Capital Project Budget.

Restricted 110 RTCIP Fees RTCIP 656,526 Development Impact Fee - Regional Transportation Congestion Improvement Program Fee (RTCIP). Restricted to use for street improvements on Arterials. To be programmed in future Capital Project budgets.

Restricted 110 Traffic Fees Traffic Impact 186,560 Development Impact Fee - Traffic Fee. Fees paid by the developer restricted to use for traffic, transportation, and other related projects. Programmed in the Capital Project Budget.

Restricted 110 Public Facility
Fees
Public Facility 2,679,444 Development Impact Fee - Public Facility Fee. Fees paid by the developer restricted to use for capital public facility improvement projects. Programmed in the Capital Project Budget.

Restricted 110 Fire Protection
Fees
Fire Protection 367,622 Development Impact Fee - Fire Protection Fee. Fees paid by the developer restricted to use for Fire Protection projects. Programmed in the Capital Project Budget.

Restricted 128 Deferred Street
Construction
Deferred Street
Construction
4,054,654 Deferred Street Construction fees. Fees collected in lieu of performing required street frontage improvements. Use is restricted to improvements in the public rights-of-way for that street.

Assigned 501 Vista Sewer
Operating
Vehicle Replacement 1,776,784 Sewer Fees. Set aside annually with the Operating Budget based on the Vehicle Replacement Schedule. Funds are used for the purchase of vehicles and equipment for the Vista Sewer.

Assigned 503 Buena Sanitation
District Operating
Vehicle Replacement 786,645 Sewer Fees. Set aside annually with the Operating Budget based on the Vehicle Replacement Schedule. Funds are used for the purchase of vehicles and equipment for the Buena Sanitation District.

Assigned 603 Fleet
Maintenance
Vehicle Replacement 4,533,807 Charges to other funds. Set aside annually with the Operating Budget based on the Vehicle Replacement Schedule. Funds are used for the purchase of vehicles and equipment for the City.

Assigned 604 Information
Technology
Future Capital
Replacement
548,066 Charges to other funds. Set aside annually with the Operating Budget based on the IT Future Capital Replacement Schedule. Funds are used for capital purchases of IT equipment and software for the City.

Restricted 711 Section 115 Trust Section 115 Trust 18,793,432 General Fund revenues. Set aside with year end fund balance and one time revenues. Use is restricted to coverage of current CalPERS pension expense (both UAL and Normal Costs).
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Vista City CouncilOctober 24, 2023

Vista City Council
October 24, 2023