RPVCCA_CC_SR_2012_03_06_04B_City_Reserve_PolicyCrrvOF
MEMORANDUM
RANCHO PALOS VERDES
TO:
FROM:
DATE:
SUBJECT:
REVIEWED:
Staff Coordinator:
HONORABLE MAYOR AND MEMBERS OF THE CITY COUNC~
DENNIS McLEAN,DIRECTOR OF FINANCE &INFORMATION
TECHNOLOGY
MARCH 6,2012
CITY COUNCIL POLICY NO.41:RESERVE POLICY
CAROLYN LEHR,CITY MANAGER oS2-
Kathryn Downs,Deputy Director of Finance &Information ",GO
Technology
Ryan Mills,Sejl~r Administrative Analyst,Finance &Information
Technology lIV\
RECOMMENDATION
1)Direct Staff whether or not to prepare an analysis leading to a recommendation
regarding revisions to the City Council Policy No.41:Reserve Policy;and
2)If the City Council elects to direct Staff to conduct an analysis,provide Staff with
objectives for any such revisions.
EXECUTIVE SUMMARY
On January 17,2012 Staff was given the direction by the City Council to agendize a
discussion regarding City Council Policy No.41:Reserve Policy,including the possible
increase of the General Fund reserve level.The City currently has a Reserve Policy for a
number of funds,including the General Fund that is set at 50%of General Fund operating
expenditures and the Capital Improvement Projects Fund that is set at a minimum of $3
million,funded with amounts equal to Transient Occupancy Tax revenue.The purpose of
the CIP reserve is to fund major improvement projects related to roadways,storm drains,
parks,buildings,rights-of-way,and the sewer system in the case of an emergency.
Staff has attached the City's current Reserve Policy,the December 21,2010 staff report
that provides an in depth analysis of how the City arrived at its current policy levels,and a
summary of reserve policies from comparable cities to serve as a benchmark.Staff has
also included Best Practices from the Government Finance Officers Association (GFOA)to
provide a general framework of what to consider when establishing a reserve policy.While
the City's Reserve Policy should be based on its own unique state of affairs,this
4B-1
CITY COUNCIL POLICY NO.41:RESERVE POLICY
March 6,2012
Page 2 of 4
information should help assist the Council in understanding the strategy for the City's
reserves.
BACKGROUND
Staff has attached City Council Policy No.41 :Reserve Policy (Attachment A)and the staff
report,dated December 21,2010 (see Attachment B)that led to the commitment to
transfer all,or most all of,the transient occupancy tax revenue to the Capital Improvement
Projects Fund Reserve.The Policy states:
"The City will maintain a minimum of $3 million in the Capital Improvement Projects
(CIP)fund as a reserve for major improvement projects related to roadways,storm
drains,parks,buildings,rights-of-way,and the sewer system.Subject to the annual
budgeting process.the CIP reserve will be funded.to the extent possible,by
allocating amounts equal to the annual Transient Occupancy Tax (TOT)revenue to
the CIP fund.".
The Estimated CIP Fund balance is expected to be about $8.5 million as of June 30,2012,
about $5.5 million in excess of the $3 million reserve threshold.
The set-aside of reserves,rainy-day funds,or contingency funds is a prudent fiscal policy
and an important factor in the analysis of financial condition,credit worthiness and fiscal
management.The establishment of prudent financial reserve policies is important to
ensure the long-term financial health of the City.Reserves do not reflect an agency's
financial capacity or underlying fiscal strength,per se,but rather the agency's ability absorb
unexpected cash expenditure demands and manage risk.The Reserve Policy was
developed using best practices,including a comprehensive review of reserve policies of
other California cities and an internal assessment of the City's risk environment.
On December 2,2008,the City Council adopted City Council Policy No.41 ,which changed
the Reserve Policy threshold to be based on 50%percent of expenditures,as opposed to
50%percent of annual revenues,because the City has greater capability to control
expenditure levels.
BEST PRACTICES
In 2009,the GFOA updated its recommended best practices to stipulate that a formal
policy should establish the level of unrestricted fund balance in the General Fund.This
policy should include a temporal framework and specific plans and trigger points for
increasing or decreasing the level of unrestricted fund balance when the amount varies
from the policy.While the adequacy of unrestricted funds in the General Fund should be
assessed based on the City's own unique circumstances,GFOA recommends that the
General Fund maintain,at a minimum,no less than two months of operating revenues or
operating expenditures,depending on which measure is more predictable.Two months is
equal to 16.67%of operating expenditures,in comparison to the City's Reserve Policy of
50%of operating expenditures.'
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CITY COUNCIL POLICY NO.41:RESERVE POLICY
March 6,2012
Page 3 of 4
According to the best practices recommendation 1 ,in establishing a policy governing the
level of unrestricted fund balance in the General Fund,a number of factors should be
considered,including:
•The predictability of revenues and the volatility of its expenditures (Le.,higher levels of
unrestricted fund balance may be needed if significant revenue sources are subject to
unpredictable fluctuations or if operating expenditures are highly volatile).
•The City's perceived exposure to significant one-time or ongoing outlays,such as,
natural disasters,immediate capital needs,and state budget cuts.
•The potential drain upon general fund resources from other funds,as well as the
availability of resources in other funds (Le.,deficits in other funds may require that a
higher level of unrestricted fund balance be maintained in the general fund,just as,the
availability of resources in other funds may reduce the amount of unrestricted fund
balance needed in the general fund)
•Liquidity (Le.the 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).
•Commitments and assignments (Le.,maintenance of higher levels of unrestricted fund
balance to compensate for any portion of unrestricted fund balance already committed
or assigned by the City for a specific purpose).
RISKS TO CHANGING THE RESERVE POLICY
The City's Reserve Policy is not only important to its citizens,but also to potential financial
markets.If the City were to take on any type of future debt to fund capital projects or to
meet any other type of financial obligations,financial markets would be interested in the
City's Reserve Policy as a basis for rating the City's credit worthiness before issuing debt.
Any revision of the City's Reserve Policy should be consistent with Best Practices,based
upon changes of circumstances,prudent financial management,and be memorialized with
the rationale for the adjustment in both the staff report and the Reserve Policy document.
It would be beneficial for City Council to formalize which future events (e.g.a loss of a
significant revenue stream,a catastrophic event that caused unexpected uninsured
expenditures)might give reason to potential changes in the Reserve Policy,as to
communicate with financial institutions a sense of stability with the City's financial policies.
With the foundation of the Reserve Policy established,future revisions are expected to be
based upon a substantial change of circumstances.
If Council decides to keep the Reserve Policy at its current level,this doesn't impair the
City's ability to accumulate additional monies for Council objectives.The Council retains
the ability to accumulate any type of funds necessary to achieve the City's goals without
changing the actual Reserve Policy.On the other hand,if the Council chooses to change
1 Appropriate Level of Unrestricted Fund Balance in the General Fund (2009),Government Finance Officers Association
http://www.gfoa.org/index.php?option=com content&task=view&id=1450 4B-3
CITY COUNCIL POLICY NO.41:RESERVE POLICY
March 6,2012
Page 4 of 4
the Reserve Policy,it could create future impediments for Council to meet certain financial
goals in lean years,such as the funding of projects.
CURRENT RESERVE POLICY AND ESTIMATES
In accordance with City Council Policy No.41:Reserve Policy,the chart below summarizes
each fund's reserve level,the estimated reserve at June 30,2012 and identifies any
expected excess or shortage.The estimates are based on the proposed FY11-12 budget.
General Fund
~i!!!!!~T""ZiW_I:;;•.&g~E!+~1
50%of budgeted
expenditures $9,719,748 $11,385,761 $10,987,229 $1,267,481
Capital
Improvement
Proiects
Capital
Improvement
Proiects
Street
Maintenance
Habitat
Restoration
Habitat
Restoration
Equipment
Replacement
Sub-region
One
Emergency
Proiects
FEMA Reserve
One year of
Portuguese Bend
Road
Maintenance
Emergency
Proiects
Future
Maintenance
Estimated
replacement cost
of assets held
Developer
Endowment
$3,000,000
$215,209
$516,400
$50,000
$74,784
$1,770,984
$750,000
$5,024,937
$215,209
$769,485
$50,000
$213,058
$1,733,217
$766,007
$8,250,937
$215,209
$631,355
$50,000
$175,358
$1,742,117
$759,807
$5,250,937
$-
$114,955
$-
$100,574
$(28,867)
$9,807
With the average reserve policy for comparable cities at 40%,the City of Rancho Palos
Verdes falls in the top one-third of most conservative reserve policies.
ATTACHMENTS
Attachment A -City Council Policy No.41:Reserve Policies
Attachment B -"Reserve Policies"Staff Report (December 21,2010)
Attachment C -Reserve Policies of Comparable California Cities
4B-4
CITY COUNCIL POLICY
NUMBER:41 (Amended)
DATE ADOPTED/AMENDED:April 19,2011
SUBJECT:Reserve Policies
POLICY:
The City utilizes a variety of accounting funds for accounting and budgeting for
revenues and expenditures of the City.Appropriations lapse at each fiscal year-
end.The City Council authorizes continued appropriations for certain incomplete
capital projects,other one-time projects and services which have not been billed.
Remaining dollars left in each fund that are undesignated and unencumbered
constitute available reserves of the City.It is appropriate that reserve policies for
the City be established for each of the various funds,that the purpose of these
reserves be designated,and that dollars available in excess of the reserve
amounts be appropriately and effectively utilized.This policy governs the City's
reserves as follows:
A.General Fund
The City will maintain a minimum fund balance of at least 50 percent of
annual operating expenditures in the General Fund.This is considered the
minimum level necessary to maintain the City's credit worthiness and to
adequately provide for:
1.Economic uncertainties,local disasters,and other financial hardships
or downturns in the local or national economy.
2.Contingencies for unseen operating or capital needs.
3.Cash flow requirements.
B.Capital Improvement Fund
The City will maintain a minimum of $3 million in the Capital Improvement
Projects (CI P)fund as a reserve for major improvement projects related to
roadways,storm drains,parks,buildings,rights-of-way,and the sewer
system.Subject to the annual bUdgeting process,the CIP reserve will be
funded,to the extent possible,by allocating amounts equal to the annual
Transient Occupancy Tax (TOT)revenue to the CIP fund.All interest
earnings in this fund will be used for capital improvement projects.
C.Equipment Replacement Fund
The City will maintain retained earnings equal to the estimated
replacement cost for equipment assets held by this fund.
1
4B-5
City Council Policy #41 (Amended)
D.Water Quality Flood Protection Fund
Project spending in the Water Quality Flood Protection (WQFP)fund
fluctuates year to year.The Storm Drain User Fee is a source of funding
for these projects.To avoid a fluctuating Fee,the City will maintain
retained earnings over the life of the WQFP fee to establish rate
stabilization,thereby enabling fund availability for scheduled projects and
maintenance.
E.Building Replacement Fund
The City will maintain retained earnings in this fund to accumulate monies
and interest earnings to finance major improvements (e.g.roofing),and
partially provide for future replacement of City owned buildings.
F.Utility Undergrounding Fund
The City will maintain retained earnings in this fund to accumulate monies
for relocating utility poles and lines on City arterial roadways underground,
as well as provide residents assistance with the process leading to utility
undergrounding in residential areas of the City.
G.Street Maintenance Fund
The City will maintain a minimum of one year's appropriations for road
maintenance on Palos Verdes Drive South in the landslide area.
H.Habitat Restoration Fund
The City will maintain a minimum of $50,000 in this fund as required by
the National Communities Conservation Plan (NCCP)for emergency use
for habitat restoration purposes in addition to maintaining any interest
earnings.
I.Subregion One Maintenance Fund
As part of the development agreement for SUbregion One,the developer
provided $750,000 as an endowment to generate interest earnings for
future maintenance of the open space area in Subregion One.
J.Improvement Authority Abalone Cove Fund
In connection with the Horan lawsuit,the Redevelopment Agency's
Reimbursement and Settlement Agreement with property owners and the
County stipulated that $1,000,000 of County loan proceeds was to be
deposited in the Abalone Cove Maintenance Nonexpendable Trust Fund
of the Joint Powers Improvement Authority.Interest earnings from this
deposit are used to maintain landslide abatement facilities in the Abalone
Cove area of the active landslide,except sewers in accordance with the
reimbursement and settlement agreement
2
4B-6
City Council Policy #41 (Amended)
Reserve levels will be reviewed annually during the budget process.Any
recommended adjustments to reserve levels will be presented to City Council for
its consideration during the annual bUdget process.
COMMITMENTS AND ASSIGNMENTS OF FUND BALANCE:
Governmental Accounting Standards Board Statement No.54,Fund Balance
Reporting and Governmental Fund Type Definitions,provides the City with a
method to self-classify fund balance for financial statement reporting purposes.
A.Committed Fund Balance
Fund balance may be committed to specific purposes using its highest
level of decision-making authority,the City Council.It is the City Council's
policy that commitments of fund balance for a fiscal year must be adopted
by resolution prior to fiscal year end.Amounts that have been committed
by the City Council cannot be used for any other purpose unless the City
Council adopts another resolution to remove or change the constraint.
B.Assigned Fund Balance
The General Fund balance may be assigned for amounts the City Council
intends to use for a specific purpose.It is the City Council's policy that
assignments of fund balance for a fiscal year must be approved by
minute-order of the City Council prior to the fiscal year end.Any changes
to assignments must also be made by minute-order of the City Council.
It is the City Council's policy to spend classified fund balance in the following
order when amounts in more than one classification are available for a particular
purpose:
1.Restricted Fund Balance -amounts constrained to specific purpose by
their providers through constitutional provisions or enabling legislation.
Examples include grants,bond proceeds and pass-through revenue from
other levels of government.
2.Committed Fund Balance -amounts constrained to specific purpose by
resolution of the City Council.
3.Assigned Fund Balance -amounts in the General Fund which are
intended to be used for a specific purpose,expressed by minute-order of
the City Council.
4.Unassigned Fund Balance -amounts available for any purpose in the
General Fund.
BACKGROUND:
Reserves,rainy-day funds,or contingency funds are a prudent fiscal policy and
an important credit factor in the analysis of financial analysis and management.
Local governments have experienced much volatility in their financial stability due
3
4B-7
City Council Policy #41 (Amended)
to the economy,natural disasters,terrorist attacks,and actions taken by state
government which includes taking revenues from local governments to resolve
state budget problems.California cities are at an even greater disadvantage
than the rest of the country due to the unique regulations imposed by Proposition
13,and the inability to raise property taxes if the need would arise.Sound
financial management includes the practice and discipline of maintaining
adequate reserve funds for known and unknown contingencies.Such
contingencies include,but are not limited to:cash flow requirements,economic
uncertainties including downturns in the local,state or national economy,local
emergencies and natural disasters,loss of major revenue sources,unanticipated
operating or capital expenditures,uninsured losses,tax refunds,future capital
projects,vehicle and equipment replacement,and capital asset and infrastructure
repair and replacement.The establishment of prudent financial reserve policies
is important to ensure the long-term financial health of the City.
4
4B-8
CITY OF
MEMORANDUM
RANCHO PALOS VERDES
TO:
FROM:
DATE:
SUBJECT:
REVIEWED:
HONORABLE MAYOR AND CITY COUNCIL MEMBERS
DENNIS McLEAN,DIRECTOR OF FINANCE &
INFORMATION TECHNOLOGY
DECEMBER 21,2010
PROPOSED REVISION TO CITY COUNCIL POLICY
NO.41 -RESERVE POLICIES
CAROLYN LEHR,CITY MANAGER
Staff Coordinators:Kathryn Downs,Deputy Director of Finance &Information
Technology
Adam Raymond,Senior Administrative Analyst
RECOMMENDATION
Approve the attached amended City Council Policy No.41-Reserve Policies.
BACKGROUND AND DISCUSSION
On December 2,2008,the City Council adopted City Council Policy No.41 -Reserve
Policies (Reserve Policy,see attached).Reserves do not per se reflect an agency's
financial capacity or underlying fiscal strength,but rather the agency's ability to manage
risk.
The Reserve Policy was developed using best practices,including a comprehensive review
of reserve policies of other California cities and an internal assessment of the City's risk
environment.As Rancho Palos Verdes is a coastal city with an active landslide that could
contribute to several disasters simultaneously and is situated next to one of the world's
largest and busiest ports,Staff recommended that Rancho Palos Verdes should have a
more conservative policy than other cities.
The set-aside of reserves,rainy-day funds,or contingency funds is a prudent fiscal policy
and an important factor in the analysis of financial condition,credit worthiness and fiscal
management.Local governments have experienced volatility in their financial stability due
to the economy,natural disasters,terrorist attacks,and actions taken by state government
such as taking revenues from local governments to resolve state budget problems.
California cities are at an even greater disadvantage than the rest of the country due to the
4B-9
PROPOSED REVISED CITY COUNCIL POLICY NO.41-RESERVE POLICIES
December 21,2010
Page 2
unique regulations imposed by Proposition 13 and the inability to raise property taxes if the
need would arise.Sound financial management includes the practice and discipline of
maintaining adequate reserve funds for known and unknown contingencies.Such
contingencies include,but are not limited to:cash flow requirements,economic
uncertainties including downturns in the local,state or national economy,local emergencies
and natural disasters,loss of major revenue sources,unanticipated operating or capital
expenditures,uninsured losses,unanticipated tax refunds,future capital projects,vehicle
and equipment replacement,and unexpected capital asset and infrastructure repair and
replacement.The establishment of prudent financial reserve policies is important to ensure
the long-term financial health of the City.
As a bes,t practice,the Reserve Policy should be reviewed periodically.At this time,Staff is
recommending the City Council amend the Reserve Policy to allow for change in the way
the Capital Improvement Fund reserve is funded.Specifically,Staff recommends changing
Section B,Capital Improvement Fund to state (the recommended text addition is
underlined):
The City will maintain a minimum of $3 million in the Capital Improvement Projects (CIP)
fund as a reserve for major improvement projects related to roadways,storm drains,parks,
buildings,rights-of-way,and the sewer system.Subject to the annual budgeting process,
the CIP reserve will be funded,to the extent possible,by allocating annual Transient
Occupancy Tax (TOT)revenue to the CIP fund.All interest earnings in this fund will be
used for capital improvement projects.
Due to the potential volatility of TOT revenue,Staff and the City's Financial Advisor feel that
the dedicated use of TOT revenue for capital projects and debt retirement would be fiscally
prUdent.Staff is not requesting the reserve amount be increased,but rather the TOT
revenue received is transferred to the CIP fund and committed for future capital projects.
As a General Fund revenue source,future TOT cannot be restricted to a specific purpose.
Staff's recommendation seeks to formalize the process of allocating TOT to fund capital
projects.
Status of Reserves
The following table is a summary of the current reserve levels and estimated reserves at
June 30,2011.
4B-10
PROPOSED REVISED CITY COUNCIL POLICY NO.41-RESERVE POLICIES
December 21,2010
Page 3
General Fund 50%of budgeted expenditures 8,988,303 10,243,052
One ye ar of P ortugue se Be nd
S tre et M ainten ance road maintenance (1)450,300 356,951
Habitat Restoration Emerg ency projects 50,000 50,000
Habitat Restoration Fu ture m aintenan ce 64,443 135,688
S ubreg ion One Developer endowment 750,000 751,436
Capital Improvement
Projects Emerg ency projects (2)3,000,000 2,757,458
Capital Improvement FE MA reserve for FY04-05
Projects winter storms 274,430 274,430
Equipment Estimated replacement cost of
Replacem'ent assets held 1,661,947 1,695,958
1,254,750
(93,349)
71,245
1,436
(242,542)
34,011
(1)Road maintenance in the Portuguese Bend (the City's active landslide area)has recently
increased.The estimated reserve is expected to increase to policy level with expenditure
savings.
(2)The Capital Improvement Projects (CIP)Fund contributed about $375,000 to the Upper
Filiorum open space land purchase during FY09-10.The estimated reserve is expected to
return to policy level with both expenditure savings and interest earnings.
Fiscal Risks
Revenue Volatility
In General,the City does not face significant revenue volatility risk due to the City's large
dependence on property tax revenues (about 46%of annual General Fund revenue)and
the City's strong property tax base.The average property assessment in the City is still
considerable less than current market values.As long as a small number of properties
transfer ownership each year,an overall decrease ofthe City's total property tax revenue is
a highly improbable event.However,TOT and community development permit revenue
(together representing about 18%of General Fund revenue)are certainly more affected by
the economy and can be more volatile.
Cash flow is another factor that can impact revenue volatility.In staff's analysis of the
City's cash flow,it proved to be an insignificant risk due to the steady and predictable trend.
The only spikes in the fiscal year reflect the two large collections of property tax revenues
in December and April.
Another variable to consider in examining revenue volatility is the stability of revenue
receipts from the state,especially in light of continued State budget issues.The State of
California has a history of taking revenues from local governments to resolve the State's
budget problems.However Proposition 1A established by California voters in 2006 and
Proposition 22 established by California voters in 2010 have restricted the State's ability to
raid local government revenue.
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PROPOSED REVISED CITY COUNCIL POLICY NO.41-RESERVE POLICIES
December 21,2010
Page 4
Uninsured Losses
These risks from potential uninsured losses are best estimated through a complete
actuarial analysis,which can be very costly to perform.Insurance deductibles and co-
insurance terms were evaluated by staff and showed to be immaterial.The deductibles
range from $1,000 for city-owned vehicle losses to a maximum of $100,000 for earthquake
and flood damages.As noted in the City's financial statements,during the prior three fiscal
claim years,no settlements or judgments have exceeded pooled or insured coverage.
Liability risks not normally covered by insurance,such as labor relations issues should also
be given some consideration in evaluating the City's reserve level.
Over the,last decade,the City has been a defendant in several significant lawsuits resulting
from challenges by property owners regarding regulatory decisions, including view,antenna
and other land use issues.Insurance loss protection would not have been available in the
event significant monetary damages were awarded by trial courts.Several lawsuits were
the result of City ordinances that have been enacted by voters and/or the City Council and
facts and circumstances that may continue to be challenged by property owners.The
possibility of uninsured future trial court awards should continue to be considered during the
assessment of the City's reserve policy.
Environmental and Regulatory Risks
Rancho Palos Verdes'physical characteristics create a substantial risk to the environment
due to the City's aged infrastructure,land movement,and changing environmental
regulations and penalty provisions.With 7.5 miles of coastline,the City carries a significant
risk for polluting the shoreline and the ocean in the event that a sewer line or storm-drain
system fails.Environmental fines can cost at least $10,000 per day for these types of
events.Other cities have faced significant fines;and typically these are settled for an
agreed upon amount,but they can still be very costly.The City should strongly consider
this risk in the development of the reserve policy.
Disaster and Terrorism Risks
Many costs of declared disasters are covered by state and federal funds;but there is still a
portion of the cost that is not,and the receipt of state and federal funds may not be
immediately available.The City faces risk from fire,earthquakes,flood,landslide,and
terrorist threats at the Port of Los Angeles;and it is critical that reserves be available to
respond to these events appropriately.Staff consulted with the Office of Emergency
Preparedness Area G coordinator to gather information about disaster risks specific to
Rancho Palos Verdes.The City's coordinator stated that there are no best practices for
quantifying the potential damages.The City's portion of uncovered disaster costs would be
6.25 percent of the total amount of qualifying damages.FEMA provides cash advances for
disaster relief differently depending on the size of the event,and the amount would likely be
immaterial.There is a high level of uncertainty in trying to determine the amount needed
for upfront costs for repairs due to so many unknown variables.Additionally,federal funds
for disaster assistance are SUbject to audit,disputes,potential negotiations and
settlements.The City should consider this risk in the development of the reserve policy.
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PROPOSED REVISED CITY COUNCIL POLICY NO.41-RESERVE POLICIES
December 21,2010
Page 5
Capacity Maintenance and Transition Policies
When permanent changes in resources or costs occur,reserves should be adequate to
provide funds for a smooth transition while seeking new resources or reducing ongoing
costs.A common example of this change would be the bUilding and development activity,
which is significantly impacted by the local and national economy.When the economy
slows down,it is common for building activity to also slow,and this can cause a loss in
revenue.Reserves are necessary to balance any cyclical changes in activity.This risk
factor is of moderate significance because these fees are only a small percentage of the
City's total revenue.
In frastru9ture
During the City's early history,financial resources were not sufficient to fund repair and
maintenance of infrastructure resulting in further deterioration.Over the last decade,the
City has begun to establish systems to regularly evaluate the status and need for repair
and maintenance of its street,arterial roadways,sewer and storm drain infrastructure.
Although the City has made significant progress improving the condition of its infrastructure
systems,Staff believes that the cost of known repairs and maintenance of infrastructure
exceeds the current level of net annual revenue and fund reserves.As an example,the
proposed Lower San Ramon storm drain project was not included in the storm drain
program established in 2005,and is currently estimated to cost about $20 million.
Staff has provided a summary of the trend of infrastructure capital improvement
expenditures over the last 6 years below:
Total Capital Expenditures
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
FY04-05 FY05-06 FY06-07 FY07-08 FY08-09 FY09-10
Historical Events
In developing the original reserve policy,staff looked back from a historical perspective to
consider the unplanned events from the past ten years which required a large unexpected
disbursement from the General fund or money from the General fund reserves.Events
such as the Bronco storm drain project ($1 million)in FY01-02,the Upper San Ramon
4B-13
PROPOSED REVISION TO CITY COUNCIL POLICY NO.41-RESERVE POLICIES
December 21,2010
Page 6
drainage and landslide stabilization project ($4 million)in FY02-03,and the McCarrell
Canyon storm drain project ($7.5 million)completed in FY08-09 are examples of how the
City's physical characteristics,aging of infrastructure,and unexpected events have cost the
City millions to repair.
Recent Accounting Pronouncement
In March 2009,the Governmental Accounting Standards Board issued Statement No.54
(GASB 54),Fund Balance Reporting and Governmental Fund Type Definitions,to address
issues related to how fund balance was being reported.The City will be required to
implement GASB 54 with the FY10-11 financial statements issued December 2011.Prior
to the close of FY10-11,Staff will provide recommendations to the City Council for
implementation.
The following fund balance classifications are allowed by GASB 54:
);>Nonspendable -amounts that are in a nonspendable form (e.g.inventory,or the
$750,000 Subregion 1 endowment);
);>Restricted -amounts constrained to specific purposes by their providers (e.g.grant
funds advanced to the City);
);>Committed -amounts constrained to specific purposes by the City Council via
resolution or ordinance (e.g.TOT revenue that has been transferred to the CIP fund
to be used for future capital projects);
);>Assigned -amounts the City Council intends to use for a specific purpose (e.g.
incomplete projects carried forward to the next fiscal year);and
);>Unassigned -amounts available for any purpose,only to be reported in the General
Fund.The City's General Fund Reserve would be reported in this category.
As part of GASB 54 implementation,Staff will likely recommend the City Council adopt a
resolution to "commit"TOT revenue that has been transferred to the CIP fund for capital
projects.Once funds are committed,they can only be uncommitted by adoption of another
resolution.
FISCAL IMPACT
There is no fiscal impact resulting from Staff's recommendation.If the revised Reserve
Policy is approved by the City Council,Staff will include a transfer of TOT revenue to the
CIP Fund in the draft FY11-12 budget.
The City has not included the use of TOT revenue for the annual operating bUdget.
Budgeted FY1 0-11 TOT revenue is $2,026,100.Through November 15,2010,the City has
collected more than $1.1 million of FY1 0-11 TOT revenue.
4B-14
Table of Reserve Policies from Comparable Cities
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Dana Point Cash Flow Reserve 10%of General Fund Revenue
Emer enc Reserve 20%of General Fund Revenue
Calabasas
Hermosa Beach
La Car'iada/Flintrid e
La una Hills
Los AltOs
Manhattan Beach
Malibu
Palos Verdes Estates
Redondo Beach
Rollin Hills
Capital Projects
Sinkin Fund
State Budget
1m acts Fund
General Fund
General Fund
General Fund
General Fund
General Fund
General Fund
General Fund
General Fund
General Fund
General Fund
Community
Facilities Fund
Municipal Self
Insurance Fund
OPEB Fund
Minimum balance of $2.5 million
Minimum cash &investments equal to 100%of
the latest 30 year actuarial estimate in the
CalPERS California Employer's Retirement
Benefit Trust
Unrestricted fund balance of 100%of budgeted
annual ex enditures
Miniumum balance of $1.2 million
Minimum balance of $2 million
Funded with excess development end-of-year
balances
Funded with Refuse surchar e fees
4B-15