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HomeMy WebLinkAbout2009/11/05 Item 4CITY COUNCIL AGENDA STATEMENT P-----. _.i~ ~ ,,- wry ~~ CITY OF CHULAVISfA November 5, 2009 Item ITEM TITLE: RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CHULA VISTA REPLACING THE GENERAL FUND RESERVE POLICY PER THE CITY'S FISCAL HEALTH PLAN SUBMITTED BY: DIRECTOR OF FINANCE/TREASURER `-~ REVIEWED BY: CITY MANAGER S T -Fa ~ 7- S ASSISTANT CITY MANAGER ~j~ 4/STAS VOTE: YES ~ NO ~X SUMMARY On January 20, 2009, the City Council endorsed the City Managers "Fiscal Health Plan". The Plan, which was created to address the City's immediate financial emergency as well as its long- term fiscal sustainability, includes an update of the General Fund Reserve Policy. The proposed draft policy will provide guidelines for the use of reserves as well as an increased minimum reserve levels. ENVIRONMENTAL REVIEW The Environmental Review Coordinator has reviewed the proposed action for compliance with the California Environmental Quality Act (CEQA) and has detemuned that the activity is not a "Project" as defined under Section 15378 of the State CEQA Guidelines because the action only involves fiscal issues which do not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment; therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines the activity is not subject to CEQA. RECOMMENDATION That the City Council adopt the resolution amending the General Fund Reserve Policy to include the following distinct reserve categories: • General Fund Operating Reserves -minimum 15% • Economic Contingency Reserves -minimum 5% • Catastrophic Event Reserves - 3% 4-1 NOVEMBER 5, 2009, Item Page 2 of 4 BOARDS/COMMISSION RECOMMENDATION Not Applicable DISCUSSION On July 9, 1996, the City Council approved the establishment of a targeted minimum reserve level for the General Fund at 8% of the operating budget. The reserves policy was established to protect the fiscal solvency of the City by mitigating the impact of economic fluctuations on revenues, to fund unforeseen expenditure requirements, to provide minimum levels of cash investment interest revenue, and to avoid the need to borrow for cash management purposes. Public entities accumulate and maintain reserves to help ensure both financial stability and the continued ability to provide core services. Sufficient reserves creates financial stability resulting in increased credit quality and allows the public entity to weather times of uncertainty and the impacts of negative events, both major and minor. Properly Funded reserves allow for the continued maintenance of property and payment of expenses beyond the amount of the funds available for a single fiscal year. The major reserve category used by all cities is the General Fund Operating Reserve. General Fund Operating Reserve (Recommend minimum of I S% of Operating Budgetl The General Fund Operating Reserves represent unrestricted resources available for appropriations by the City Council to address extraordinary needs of an emergency nature. The General Fund Reserve policy is established to provide a policy to see that the City's finances aze managed in a manner which will (1) continue to provide for the delivery of quality services, (2) maintain and enhance service delivery as the community grows in accordance with the General Plan, (3) minimize or eliminate the need to raise taxes and fees because of temporary revenue shortfalls, and (4) establish the reserves necessary to meet known and unknown future obligations and ability to respond to unexpected opportunities. Over the past ten years, several cities have added separate reserve categories to provide for greater distinction, increased security and accountability in the use of reserves. The following are two additional reserve categories proposed which would provide long-term financial stability to the City and its ability to provide services during economic downturns or as a result of catastrophic events. Economic Contingency Reserves (Recommend minimum of 5% of Operating Bud¢et) The Economic Contingency Reserve represents monies set aside to mitigate service impacts during a significant downturn in the economy which impacts City revenues such as sales tax, property tax, business License tax etc. Several of the City's major revenue sources, such as Sales Tax, Property Tax, Motor Vehicle License Fees and Transient Occupancy Tax aze sensitive to the economic climate of the region. As we have seen with the current economic downturn, the volatility of these revenue streams 4-2 NOVEMBER 5, 2009, Item Page 3 of 4 have a significant impact on the City's ability to continue providing services without interruptions unless healthy reserve levels axe available to provide some stability. Catastrophic Event Reserve (Recommend 3% of Operating Budget) The Catastrophic Event Reserves are monies set aside to fund unanticipated expenses related to a major natural disaster in the City. These reserves are associated with the City's Disaster Preparedness Program. The City is susceptible to earthquakes, fires, floods and terrorist threats. In the event that the City Council or their designee proclaims a local emergency, the Catastrophic Event Reserves can be utilized to fund recovery costs until reimbursements from Federal and/or State agencies can be recovered. The City has experienced two major natural disasters in the past 6 years which required the use of reserves. Fortunately, the City did not experience any structural damages and the Finance Department, along with the participating Departments, was able to work with FEMA and State agencies to obtain the reimbursements avoiding impacts to reserves or cash flows during the fiscal yeaz. If a major event were to occur where structural damage occurred or if the billing and reimbursement process crossed fiscal years, there could be an impact to the City's reserves. Establishing a separate reserve at reasonable levels would provide the City some flexibility and time to recover the funds without having a significant impact to operations or cash flows. Cash Flows Since the establishment of the reserve policy in 1996, the City's cash flow receipts for major revenue sources such as Sales Taxes and Motor Vehicle Fees received have changed as a result of the State's revenue shifts causing reductions in the City's monthly cash flow receipts. Since there is a close correlation between reserve level and cash balance, it is generally true that the higher the reserve level, the larger the cash balance. Adequate cash balances are important for two reasons; generating investment interest returns in support of operations, and avoiding the potential cost of having to borrow money on a short-term basis. As the reserve levels dropped the City has participated in short term borrowing through the issuance of Tax and Revenue Anticipation Notes (TRANS) over the past two years as it did in the early 1990's. Although the issuance of TRANS has been relatively inexpensive due to favorable market conditions, this is changing as the investment community is shying away from California investments. It is estimated that the minimum cash balance required at the beginning of the fiscal year in order to avoid borrowing additional money for ashort-term is approximately $25 million, which further supports the total recommended reserve level of 23%. DECISION MAKER CONFLICT Staff has reviewed the decision contemplated by this action and has determined that it is not site specific and consequently the 500 foot rule found in California Code of Regulations section 18704.2(a)(1) is not applicable to this decision. 4-3 NOVEMBER 5, 2009, Item 7 Page 4 of 4 CURRENT YEAR FISCAL IMPACT There is no current year fiscal impact to approving this updated General Fund Reserve Policy. The reserves discussed in this report would likely be built over a 10-year period as the City recovers from the recent significant downturn in the economy impacting all the major discretionary revenues. The Finance Department is in the process of updating the 5-year financial outlook which will likely reflect continued financial challenges as the economy is expected to recover at very moderate levels. The financial forecast is anticipated to be extended out to a ten year outlook following the initial forecast at which time projections will be provided reflecting the anticipated funding available to rebuild the reserves with the goal of achieving the prudent level of reserves as recommended in this report. ONGOING FISCAL IMPACT Estimated current General Fund Operating reserves are projected at 6.7% (unaudited). Given the economic conditions the City has faced over the past three years, the proposal to increase the General Fund reserves would likely occur over time at very moderate rates. General Fund Reserves Overview Current Poli Projected Reserves FY 2009 Recommended' ?Policy Additional Set Aside Future Years General Fund Operating Reserve Economic Contingency Reserve Emergency Service Reserves 8% 0% 0% 6.7% 0.0% 0 0% '15% 'S% 3% 8% 6% 3° % Total % Reserves 8% 6.7% - Q3% ° 16 /° *rotal Tar eted Reserves $ 11,096,162 $ 9,293,036 x.31 901 467 $ 22,608,431 *Caiculated applying the fiscal year 2009-10 adopted operating budget. Prepared by: Marra Kachadoorian, Director oJFinance, Finance Department 4-4 COUNCIL POLICY CITY OF CHULA VISTA SUBJECT: General Fund Reserves -Fiscal Health POLICY EFFECTIVE Plan NUMBER DATE PAGE 220-03 1 of 4 ADOPTED BY: (Resolution No.) DATED: November 5, 2009 AMENDED BY: Resolution No. (date of resolution) PURPOSE: Public entities purposely accumulate and then maintain adequate reserves to help ensure both financial stability and the continued ability to provide core services in difficult times. Sufficient reserves create financial stability resulting in increased credit quality and allows the public entity to better weather downturns in the economy and the impacts of negative events, both major and minor. Properly funded reserves allow for the continued maintenance of property, the replenishment of vehicles and equipment, and payment of expenses beyond the amount of the funds available for a single fiscal year. BACKGROUND: The General Fund Reserve policy is established to ensure that the City's finances are managed in a manner which will (1) continue to provide for the delivery of quality services, (2) maintain and enhance service delivery as the community grows in accordance with the General Plan, (3) minimize or eliminate the need to raise taxes and fees because of temporary revenue shortfalls, and (4) establish the reserves necessary to meet known and unknown future obligations and ability to respond to unexpected opportunities. Fiscal stability is an important factor in operating a City. Establishing certain financial reserves would protect the City against unexpected interruptions in revenues, vulnerability to Federal or State actions, adverse economic conditions, unpredictable one-time costs, and exposure to natural disasters and emergencies. There are additional benefits to establishing a minimum General Fund reserve. Credit rating agencies carefully monitor levels of reserves in a government's General Fund to evaluate a government's continued creditworthiness. A higher credit rating results in savings to the taxpayer when the City issues debt or participates in short-term borrowing. Finally, reserve levels are a crucial consideration in long-term financial planning. The Government Finance Officers Association (GFOA), an international organization that promotes the professional financial management of governments for the public interest, recommends maintaining a minimum unreserved fund balance (reserves) in the General Fund of no less than 5% to 15% of general fund operating revenues, or no less than one to two months of regular general fund operating expenditures. A government's particulaz situation may require levels of unreserved fund balance in the general fund significantly in excess of these recommended minimum levels. Cities with higher reserve levels aze better positioned to protect public services during economic downturns. 4-5 COUNCIL POLICY CITY OF CHULA VISTA SUBJECT: General Fund Reserves -Fiscal Health POLICY EFFECTIVE Plan NUMBER DATE PAGE 220-03 2 of 4 ADOPTED BY: (Resolution No.) DATED: November 5, 2009 AMENDED BY: Resolution No. (date of resolution) GFOA recommends that in establishing a policy governing the level of unreserved fund balance in the general fund, a government should consider a variety of factors, including: The predictability of its revenues and the volatility of its expenditures (i.e. higher levels of unreserved fund balance may be needed if significant revenue sources aze subject to unpredictable fluctuations or if operating expenditures aze highly volatile.) The availability of resources in other funds as well as the potential drain upon general fund resources from other funds (i.e. the availability of resources in other funds may reduce the amount of reserves needed in the general fund, just as deficits in other funds may require that a higher level of reserves be maintained in the general fund). Liquidity (i.e., a disparity between when financial resources actually become available to make payments and the average maturity of related liabilities may require that a higher level of resources be maintained). Designations (i.e. governments may wish to maintain higher levels of unreserved fund balance to compensate for any portion of unreserved fund balance already designated for a specific purpose). POLICY: This Policy establishes three (3) distinct General Fund Reserves: 1. General Fund Operating Reserves -minimum 15% 2. Economic Contingency Reserves -minimum 5% 3. Catastrophic Event Reserves - 3% The total recommended minimum reserve level for the three categories combined is 23%. i l F d (~ R ' eaervee nn nerat ng C enera The General Fund Operating Reserves represent unrestricted resources available for appropriations by the City Council to address extraordinary needs of an emergency nature. The City shall maintain General Fund Operating Reserve levels of no less than 15% of the annual operating budget. This level of reserves represents approximately 1.8 months of General Fund operating expenditures. The reserves may be used to provide temporary financing for unanticipated 4-6 COUNCIL POLICY CITY OF CHULA VISTA SUBJECT: General Fund Reserves -Fiscal Health POLICY EFFECTIVE Plan NUMBER DATE PAGE 220-03 3 of 4 ADOPTED BY: (Resolution No.) DATED: November 5, 2009 AMENDED BY: Resolution No. (date of resolution) extraordinary needs of an emergency nature, such as major storm drain repairs, litigation or settlement costs or an unexpected liability created by Federal or State legislative action. If funds are appropriated (spent) from the operating reserves due to unanticipated needs, the funds should be replenished in the budget process during the subsequent fiscal year to maintain the minimum reserve balance. If the magnitude of the event caused the General Fund Operating Reserves to be deeply reduced, the City Manager and Finance Director shall provide the City Council with a plan to incrementally replenish the reserves to the minimum 15% level. Authorized use (mid-year appropriations) of the General Fund Operating Reserves will require approval by four/fifths (4/5) vote of the City Council. Reserve ntin ene i C F g ~ c~nnm c o The Economic Contingency Reserve represents monies set aside to mitigate service impacts during a significant downturn in the economy which impacts City revenues such as sales tax, property tax, business license tax etc. The City shall maintain General Fund Economic Contingency Reserve levels of no less than 5% of the annual operating budget to provide for unexpected financial impacts related to a significant economic slowdown. Funds may be appropriated from the Economic Contingency Reserves only after the City Manager and the Finance Director have prepared an analysis providing sufficient evidence that the remaining reserves are adequate to offset potential downturns in revenue sources and provide sufficient cash balance for the daily financial needs of the City for the remainder of the fiscal year. Once the analysis has been presented to the City Council, action to appropriate from the reserves will require a declaration that a fiscal emergency or extraordinary need exists through an affirmative vote by 4/Sths of the City Council. If the Economic Contingency Reserves should ever drop below the minimum reserve level, the City Manager and Finance Director will develop a plan to replenish the reserves. The plan will be included in the adoption of the City's annual operating budget and Long-Term Financial Plan. Fvent Reserves tastr hic C' . a on The Catastrophic Event Reserves are monies set aside to fund unanticipated expenses related to a major natural disaster in the City. 4-7 COUNCIL POLICY CITY OF CHULA VISTA SUBJECT: General Fund Reserves -Fiscal Health POLICY EFFECTIVE Plan NUMBER DATE PAGE 220-03 4 of 4 ADOPTED BY: (Resolution No.) DATED: November 5, 2009 AMENDED BY: Resolution No. (date of resolution) A reserve level of 3% of the General Fund operating budget should be maintained as Catastrophic Event Reserves. These funds are associated with the City's Disaster Preparedness Program. The City is susceptible to earthquakes, fires, floods and terrorist threats. In the event that the City Council proclaims a local emergency, the Catastrophic Event Reserves can be utilized to fund recovery costs until reimbursements from federal and/or state agencies can be recovered. Authorized use of the Catastrophic Event Reserves will require a Proclamation of a Local Emergency by the City Council or Director of Emergency Services. In addition, authorized use (mid-year appropriations) of the Catastrophic Event Reserves will require approval by four/fifths (4/5) vote of the City Council. f R C' l l i eserves a cn at nn o The reserves will be calculated using the following year's Adopted General Fund budgeted operating expenditures. Reserves will be evaluated annually in conjunction with the development of the City's 10 Year Financial Forecast and Annual Operating Budget process. There is no maximum reserve level as any additional reserves would provide a greater level of fiscal security. 4-8 RESOLUTION NO. 2009- RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CHULA VISTA REPLACING THE GENERAL FUND RESERVE POLICY PER THE CITY'S FISCAL HEALTH PLAN WHEREAS, on July 9, 1996, the City Council approved the establishment of a targeted minimum reserve level for the General Fund at 8% of the operating budget; and WHEREAS, the reserves policy was established to protect the fiscal solvency of the City by mitigating the impact of economic fluctuations on revenues, to fund unforeseen expenditure requirements, to provide minimum levels of cash investment interest revenue, and to avoid the need to borrow for cash management purposes; and WHEREAS, public entities accumulate and maintain reserves to help ensure both financial stability and the continued ability to provide core services; and WHEREAS, sufficient reserves creates financial stability resulting in increased credit quality and allows the public entity to weather times of uncertainty and the impacts of negative events, both major and minor; and WHEREAS, properly-funded reserves allow for the continued maintenance of property and payment of expenses beyond the amount of the funds available for a single fiscal year; and WHEREAS, the General Fund Operating Reserves represent unrestricted resources available for appropriations by the City Council to address extraordinary needs of an emergency nature; and WHEREAS, on January 20, 2009, the City Council endorsed the City Manager's "Fiscal Health Plan" (the "Plan") that was created to address the City's immediate financial emergency as well as its long-term fiscal sustainability, including an update of the General Fund Reserve Policy; and WHEREAS, the proposed policy will provide guidelines for the use of reserves as well as increased minimum reserve levels so that the City's finances are managed in a manner which will: (1) continue to provide for the delivery of quality services; (2) maintain and enhance service delivery as the community grows in accordance with the General Plan; (3) minimize or eliminate the need to raise taxes and fees because of temporazy revenue shortfalls; and (4) establish the reserves necessary to meet known and unknown future obligations and ability to respond to unexpected opportunities; and WHEREAS, the new policy proposes separate reserve categories to provide for greater distinction and increased security and accountability in the use of reserves, including: (i) General Fund Operating Reserves -minimum 15%; (ii) Economic Contingency Reserves -minimum 5% and (iii) Catastrophic Event Reserves - 3%; and 4-9 Resolution No. 2009- Page 2 WHEREAS, the Economic Contingency Reserve represents monies set aside to mitigate service impacts during a significant downturn in the economy which impacts City revenues such as sales taxes, property taxes, business license taxes, etc.; and WHEREAS, the Catastrophic Event Reserves are monies set aside to fund unanticipated expenses related to a major natural disaster in the City and are associated with the City's Disaster Preparedness Program; and WHEREAS, in the event that the City Council or its designee proclaims a local emergency, the Catastrophic Event Reserves can be utilized to fund recovery costs until reimbursements from Federal and/or State agencies can be recovered; and WHEREAS, if a major event were to occur where structural damage occurred or if the billing and reimbursement process crossed fiscal years, there could be an impact to the City's reserves; and WHEREAS, establishing a separate reserve at reasonable levels would provide the City some flexibility and time to recover the funds without having a significant impact to operations or cash flows; and WHEREAS, since the establishment of the reserve policy in 1996, the City's cash flow receipts for major revenue sources such as Sales Taxes and Motor Vehicle Fees received have changed as a result of the State's revenue shifts causing reductions in the City's monthly cash flow receipts; and WHEREAS, since there is a close correlation between reserve level and cash balance, it is generally true that the higher the reserve level, the larger the cash balance; and WHEREAS, adequate cash balances aze important for two reasons: generating investment interest returns in support of operations, and avoiding the potential cost of having to borrow money on a short-term basis; and WHEREAS, as the reserve levels dropped the City has participated in short term borrowing through the issuance of Tax and Revenue Anticipation Notes (TRANS) over the past two yeazs as it did in the early 1990's; and WHEREAS, although the issuance of TRANS has been relatively inexpensive due to favorable market conditions, this is changing as the investment community is shying away from California investments; and WHEREAS, it is estimated that the minimum cash balance required at the beginning of the fiscal year in order to avoid borrowing additional money for ashort-term is approximately $25 million, which further supports the total recommended reserve level of 23%. 4-10 2 Resolution No. 2009- Page 3 NOW, THEREFORE, BE IT RESOLVED that, in accordance with the City's previously- approved Fiscal Health Plan, the City Council of the City of Chula Vista replaces the City's existing General Fund Reserve Policy with a new General Fund Reserve Policy, a copy of which is on file in the office of the City Clerk. Presented by Approved as to form by Maria Kachadoorian Bart Miesfeld `M ~o2r.-4 ct Director of Finance/Treasurer City Attorney 4-11 3