CC SR 20210216 04 - Reserve Policies
CITY COUNCIL MEETING DATE: 02/16/2021
AGENDA REPORT AGENDA HEADING: Regular Business
AGENDA TITLE:
Consideration and possible action to amend City Council Policy No. 41, Reserve Policies.
RECOMMENDED CITY COUNCIL ACTIONS:
(1) Review the Finance Advisory Committee’s (FAC) recommendations to amend
City Council Policy No. 41, Reserve Policies, thereby addressing General Fund
transfers to the Capital Improvement Program (CIP) Fund and provide Staff with
direction on the following:
• Adding clarifying language in the policy introduction;
• Adding clarifying language and options for CIP funding:
(a) Clarifying that the current and historical practice of General Fund transfer is
from Terranea Resort’s Transient Occupancy Tax (TOT) revenues only;
and,
(b) Adding the option for the City Council to decrease the General Fund TOT
transfers to CIP Fund by adjusting or suspending the reduction of transfers
based on the cumulative increases in the public safety contract when the
General Fund will not have a balanced budget;
• Adding clarifying language for the General Fund transfers to CIP Fund using
“unrestricted excess reserve” instead of “favorable expenditure variance;”
• Increasing the CIP Fund reserve limit from $3 million to $5 million; and,
• Changing the reserve limit of the Equipment Replacement Fund (ERF).
FISCAL IMPACT: N/A
Amount Budgeted: N/A
Additional Appropriation: N/A
Account Number(s): N/A
ORIGINATED BY: Vina Ramos, Deputy Director of Finance
REVIEWED BY: Trang Nguyen, Director of Finance
APPROVED BY: Ara Mihranian, AICP, City Manager
ATTACHED SUPPORTING DOCUMENTS:
A. Draft City Council Policy No. 41, Reserve Policies (page A-1)
B. Finance Advisory Committee Staff Report for the January 19, 2021 meeting
(page B-1)
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BACKGROUND:
In June 2020, during the public hearings to adopt the FY 2020-2021 Budget, Staff
projected that TOT revenues, one of the City’s main sources of revenues, was
estimated to be impacted the most from the economic downturn. In accordance with the
City Council Policy No. 41, Reserve Policies, and subject to the annual budget process,
the City Council historically approved the General Fund transfers of the TOT revenues
received from the Terranea Resort to the CIP Fund. In FY 2017-2018, with the City
Council’s goal to continue to enhance public safety services for the residents of Rancho
Palos Verdes, the City Council approved to reduce the TOT transfers to the CIP Fund
by the cumulative annual increases in the public safety contract. At that time, the
approval was based on the stipulation that the reduction of the public safety increases
can be revisited in the future when deemed necessary by the City Council.
In FY 2020-21, the adopted budget for TOT revenue from Terranea is approximately
$3.4 million and a transfer of $1.9 million to CIP Fund. As reported at the past budget
workshops, the net transfer amount includes the cumulative public safety increases of
$1.5 million, calculated as follows:
Compared to the prior years before the economic downturn in March 2020, the transfer
of $1.9 million in FY 2020-21 is lower by approximately $500,000 in FY 2019-2020 and
lower by $2.4 million in FY 2018-2019.
In response to the significant drop of General Fund transfers to the CIP Fund, in June
2020, the City Council directed staff to revisit City Council Policy No. 41 Reserve
Policies, to plan for the next budget cycle. The purpose of the review is to provide the
City Council with options, if feasible, to suspend or adjust the reduction of the General
Fund transfers to the CIP Fund that was enacted in FY 2017-2018. Additionally, as a
result of reviewing the reserve policies, in addition to addressing the General Fund
transfers to CIP Fund, Staff has identified other areas that can be improved. The
additional revisions identified are mainly clarifying/clean-up language that are relevant
and consistent with the City’s current and best practices for consideration by the City
Council as part of this report.
FY 2020-21 Adopted Budget - TOT Revenue (Terranea Resort)$3,389,300
Less FY 2017-2018 Public Safety Increase (893,000)
Less FY 2018-2019 Public Safety Increase (200,500)
Less FY 2019-2020 Public Safety Increase (260,800)
Less FY 2020-2021 Public Safety Increase (101,000)
FY 2020-21 Adopted Budget - Transfer to CIP $1,934,000
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DISCUSSION:
On January 19, 2021, Staff presented to the FAC the proposed revisions to the City
Council Policy No. 41, Reserve Polices (Attachment B). At the conclusion of the
meeting, FAC supported the proposed revisions and recommended to add language
explaining that the City’s TOT sources of revenues are not only from Terranea. The City
receives TOT revenues from the Terranea Resort, Terranea Casitas, and America’s
Best Value Inn.
The following are FAC’s and Staff’s recommendations incorporated in the draft City
Council Policy No. 4, Reserve Policies (Attachment A). Please note that deleted text is
shown in strike-through and added text underlined:
Policy Introduction
The proposed revisions to the Policy Introduction are as follows:
The City Council may authorize continued appropriations and purchase orders
carryover for certain incomplete capital projects, other one-time projects, and
services which have not been billed or completed.
As part of the annual year-end report to the City Council, the Finance Department
compiles information for the City Council’s conside ration to approve and continue the
unspent funds for projects that have not been completed or paid by the end of the fiscal
year. The current language in the reserves policy only references continuing
appropriations. Therefore, for consistency, the proposed clarifying language is aligned
with the City’s current practice of the approval process for both continuing
appropriations and purchase orders carryover.
CIP Fund (Section B.1)
The proposed revisions Capital Improvement Program Fund are as follows:
1. Amounts equal to the annual Transient Occupancy Tax (TOT).
a. Pursuant to the City’s Municipal Code Chapter 3.16, Transient Occupancy
Tax is collected from hotels that are located within the City. "Hotel" means
any structure, or any portion of any structure, which is occupied or intended or
designed for occupancy by transients for dwelling, lodging or sleeping
purposes, and includes any hotel, inn, tourist home or house, motel, studio
hotel, bachelor hotel, lodging house, rooming house, apartment house,
dormitory, public or private club, mobile home or house trailer at a fixed
location, or other similar structure or portion thereof.
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b. The tax imposed in any hotel is based on temporary occupancy. "Temporary"
means a period of thirty consecutive calendar days or less, counting portions
of calendar days as full days.
c. General Fund transfer amounts to the CIP are equal to the TOT collected
from the Terranea Resorts, the main source of TOT revenues. During the
annual budget process if it is determined that the General Fund will not have
a balanced budget, the City Council may reduce the transfer amount to the
CIP by a portion or all of the increases in the public safety contract.
The proposed change described above adds language that the City’s TOT revenue
sources are from hotels located within the City. The changes in 1(b) is to clarify and to
stay consistent with the City’s historical practice by defining that the General Fund is
transferring the total TOT revenues collected from the Terranea Resort. Moreover, 1(c)
documents the change that occurred FY 2017-18 when the City Council elected to
reduce the transfers only by the cumulative increases in the public safety contract from
that year moving forward.
CIP Fund (Section B.2)
The following is the existing language in Section B.2 that is proposed to be deleted:
Amounts equal to the prior year General Fund favorable expenditure
variance, when applicable.
The above language is proposed to be replaced with the following:
If deemed necessary, the City Council may allocate all or a percentage of the prior
year’s General Fund unrestricted excess reserve during budget adoption process.
The proposed language replaces “favorable expenditure variance” to “unrestricted
excess reserve”. This change would provide a more refined definition and is consistent
with the City’s current practice.
Increase the CIP Fund Reserve Limit (Section B)
The FAC recommends increasing the minimum CIP fund balance reserve from $3
million to $5 million that can be used for major CIP projects. In accordance with the
current CIP 5-Year Plan approved by the Infrastructure Management Advisory
Committee (IMAC) and the City Council, the CIP funding in the next five years, with the
exception of FY 2020-2021, are more than $3 million and as follows:
• FY 2020-2021: $2.5 million
• FY 2021-2022: $7.5 million
• FY 2022-2023: $4.3 million
• FY 2023-2024: $3.6 million
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• FY 2024-2025: $5 million
• To be determined projects: $19.3 million
FY 2020-2021 - Five-Year Capital Improvement Program – Summary of Funding
In 2010, as recommended by the FAC and approved by the City Council, the funding for
the reserves for CIP Fund was amended to transfer amounts equal to the TOT
revenues instead of increasing the limit from $3 million to $5 million. At that time, TOT
from the Terranea Resort was approximately $2 million compared to the average of
over $5 million per year, prior to the financial impacts of the COVID-19 pandemic. Due
to the anticipated TOT revenue loss in FY 2020-2021 from Terranea, and to the
amounts budgeted in next five year of scheduled projects, FAC recommends increasing
the CIP Fund reserves to $5 million. The increase has no financial impact to the
General Fund as the recommendation is to restrict additional $2 million from the CIP’s
unrestricted excess reserves.
Equipment Replacement Fund (Section C)
The proposed revisions to the Equipment Replacement Fund are as follows:
The City will maintain a minimum reserve of 75% but no more than 100% of the
retained earnings equal of the estimated replacement cost for equipment assets
held by this fund that are due to be replaced in the City’s next fiscal year.
Historically, the City has never spent 100% of the estimated replacement cost for the
assets that are due for the next fiscal year. It has been the City’s practice to extend the
life of the assets and only replace when necessary. The proposed language would allow
flexibility and options for the City to elect to fund the equipment replacement at a
minimum of 75% but no more than 100% during the budget process. This would provide
flexibility and options to allocate funding to where it is needed the most.
ADDITIONAL INFORMATION:
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Currently, the Water Quality Flood Protection Fund, Building Replacement Fund, and
Utility Underground Fund are inactive due to a zero balance in the fund. When deemed
necessary, any future funding may be approved by the City Council and the reserve
policy will be reinstated at that time.
CONCLUSION:
In response to the significant drop of General Fund transfers to the CIP Fund in
FY2020-21, the City Council directed staff to revisit City Council Policy No. 41 Reserve
Policies. The objective was to analyze and provide the City Council with options, if
feasible, to increase general transfers to the CIP Fund by suspending the reduction of
the transfers based on the cumulative increases in the public safety contract. Since the
last revisions to this Policy were made in 2010 and 2013, Staff also identified some
clean-up text to align the City’s current and best practices.
Based on the City Council’s direction, Staff will bring back the final City Council Policy
No. 41, Reserve Policies, for consideration to adopt at the next meeting as a consent
calendar item. If approved by the City Council, the proposed revisions do not
appropriate any funds. Staff will bring forward the financial information during the
budget process for the City Council’s consideration as a separate agenda item.
ALTERNATIVES:
In addition to the Staff recommendations, the following alternative action s are available
for the City Council’s consideration:
1. Identify other actions, as deemed appropriate.
2. Do not proceed with the FAC recommended revisions in the City Council
Policy No. 41, Reserve Policies.
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CITY COUNCIL POLICY
NUMBER: 41
DATE ADOPTED/AMENDED: 12/02/08 (Amended XX/XX/XX)
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 may authorize continued appropriations and purchase
orders carryover for certain incomplete capital projects, other one-time projects
and services which have not been billed or completed. 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 $5 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 the following to the CIP fund:
1. Transient Occupancy Tax (TOT).
a. Pursuant to the City’s Municipal Code Chapter 3.16, Transient
Occupancy Tax is collected from hotels that are located within the
City. "Hotel" means any structure, or any portion of any structure,
which is occupied or intended or designed for occupancy by
transients for dwelling, lodging or sleeping purposes, and
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includes any hotel, inn, tourist home or house, motel, studio hotel,
bachelor hotel, lodging house, rooming house, apartment house,
dormitory, public or private club, mobile home or house trailer a t
a fixed location, or other similar structure or portion thereof.
b. The tax imposed in any hotel is based on temporary occupancy.
"Temporary" means a period of thirty consecutive calendar days
or less, counting portions of calendar days as full days.
c. General Fund transfer amounts to the CIP are equal to the TOT
collected from the Terranea Resort, the main source of TOT
revenues. During the annual budget process if it is determined
that the General Fund will not have a balanced budget, the City
Council may reduce the transfer amount to the CIP by a portion
or all of the increases in the public safety contract.
2. Amounts equal to the prior year General Fund favorable expenditure
variance, when applicable. If deemed necessary, the City Council may
allocate all or a percentage of the prior year’s General Fund unrestricted
excess reserve during budget adoption process.
All interest earnings in this fund will be used for capital improvement
projects.
C. Equipment Replacement Fund
The City will maintain a minimum reserve of 75% but no more than 100%
of the estimated replacement cost for equipment assets that are due to be
replaced in the City’s next fiscal year.
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.
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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
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
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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 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.
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FINANCE ADVISORY COMMITTEE MEETING DATE: 01/21/2021
AGENDA REPORT
AGENDA TITLE:
Consideration and possible action to review, discuss, and provide recommendations on
the proposed revisions in the City Council Number 41, Reserve Policies.
RECOMMENDED FINANCE ADVISORY COMMITTEE ACTION:
(1) Review, discuss, provide recommendations on the amended language for the
policy introduction;
(2) Review, discuss, provide recommendations on the clarifying language for the
Transient Occupancy Tax (TOT) and include the option for public safety;
(3) Review, discuss, provide recommendations on the amended language for the
CIP transfer of General Fund unrestricted excess reserve;
(4) Review, discuss, provide recommendations on the increase to the Capital
Infrastructure Projects (CIP) Fund reserve limit;
(5) Review, discuss, provide recommendations on the clarifying language and
options to fund the Equipment Replacement Fund (ERF);
(6) Review, discuss, provide recommendations on the clarifying language for funds
with a zero balance; and
(7) Other actions as deemed appropriate.
FISCAL IMPACT: N/A
Amount Budgeted: N/A
Additional Appropriation: N/A
Account Number(s): N/A
ORIGINATED BY: Vina Ramos, Deputy Director of Finance
REVIEWED BY: Same as above
APPROVED BY: Trang Nguyen, Director of Finance
ATTACHED SUPPORTING DOCUMENTS:
A.
B.
Reserve Policies Amended April 30, 2013 (Attachment
A-1) Draft Reserve Policies (Attachment B-1)
BACKGROUND:
In June 2020, during the public hearings to adopt the FY 2020-2021 Budget, staff
projected that one of the City’s main sources of revenues that was estimated to be
B-1
impacted the most from the economic downturn is the TOT revenue. In accordance with
the City Council No. 41, Reserve Policies, and subject to the annual budget process,
the City Council approves the General Fund transfers of the TOT revenue received from
the Terranea Resort to the CIP Fund. With the City Council’s goal to continue to
enhance public safety services, in FY 2017-2018, the City Council at that time approved
to reduce the TOT transfer to the CIP Fund by the cumulative annual increases in the
public safety contract. At that time, the approval was based on the stipulation that the
reduction of the public safety increase can be revisited in the future when deemed
necessary by the City Council.
In FY 2020-2021, the adopted budget for TOT revenue from Terranea is approximately
$3.4 million and a transfer of $1.9 million to CIP. As reported at the budget workshops,
the amount includes the cumulative public safety increase of $1.5 million, calculated as
follows:
Compared to the prior years before the economic downturn in March 2020, the transfer
of $1.9 million is a reduction of approximately $500,000 over FY 2019 -2020 actuals and
$2.4 million over FY 2018-2019 actuals.
During the public hearings in June 2020 to adopt the FY 2020-2021 Budget, in response
to the significant drop of general fund transfers to the CIP, the City Council directed staff
to revisit City Council 41 Reserve Policies to plan for the next budget cycle. The
purpose is to provide the City Council with options, if feasible, to suspend, or adjust the
reduction of the general fund transfers to the CIP fund that was enacted in FY 2017-
2018 based on the increase of the public safety contract.
After reviewing the City Council Reserve Policies, the following are staff
recommendations for the FAC’s review and feedback:
Add clarifying language for policy introduction;
Add clarifying language for TOT and include the option for public safety, as
approved by the City Council;
Increase CIP minimum fund balance reserve from $3 million to $5 million;
Add clarifying language for the transfer of the General Fund reserve. Change
“favorable expenditure variance” to “unrestricted; excess reserve” and add
“approved by the City Council”;
FY 2020-21 Adopted Budget - TOT Revenue (Terranea Resort)$3,389,300
Less FY 2017-2018 Public Safety Increase (893,000)
Less FY 2018-2019 Public Safety Increase (200,500)
Less FY 2019-2020 Public Safety Increase (260,800)
Less FY 2020-2021 Public Safety Increase (101,000)
FY 2020-21 Adopted Budget - Transfer to CIP $1,934,000
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Add clarifying language and options to fund the ERF from 100% to adding a
range of 75% to 100%, as approved by the City Council;
Add clarifying language for funds with a zero balance.
The details of each recommendations are highlighted below.
DISCUSSION
1. Clarifying Language for Policy Introduction
Under Section A, General Fund of the policy, staff is proposing to amend the following
language (the recommendation text addition is underlined):
The City Council may authorize continued appropriations and purchase orders
carryover for certain incomplete capital projects, other one-time projects, and
services which have not been billed or completed.
The proposed clarifying language is aligned with the City’s current practice of the
approval process for BOTH continuing appropriations and purchase orders carryover for
projects that are not completed or paid by the end of the fiscal year.
2. Clarifying Language for CIP Funding, Section B Number 1
Under Section B, Capital Improvement Fund Number 1 of the policy, staff is proposing
the following amendment (the recommendation text addition is underlined):
1. Amounts equal to the annual Transient Occupancy Tax (TOT).
a. TOT is the general tax revenues collected from the Terranea
Resort;
b. Beginning FY 2017-2018, with the goal to continue to enhance
public safety services offered to the residents of Rancho Palos
Verdes, the City Council may reduce the transfer a portion or all
of the increases in the public safety contract. The City Council
may revoke or amend the reduction of transfer during the annual
budgeting process.
The proposed change for 1(a) is to further clarify and consistent with the City’s current
practice, by defining that the general fund is transferring the total TOT revenue collected
from the Terranea Resort. Additionally, 1(b) would clarify that in FY 2017-2018, the City
Council elected to reduce the transfers by the increases in the public safety contract.
Finally, the last sentence would clarify that the City Council may revoke or amend the
transfer during the annual budgeting process.
3. Clarifying Language for CIP Funding, Section B Number 2
Furthermore, Under Section B, Capital Improvement Fund Number 2 of the policy, staff
is proposing to change to the following (the recommendation text addition is underlined):
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2. If deemed necessary, the City Council may allocate all or a percentage
of the prior year’s General Fund unrestricted excess reserve during
budget adoption process.
The following is the original language in the policy:
Amounts equal to the prior year General Fund favorable expenditure
variance, when applicable.
The proposed changed is a clarifying language by replacing “favorable expenditure
variance” to “unrestricted excess reserve”. The change would provide a more refined
definition and consistent with the City’s current practice.
4. Increase the CIP Fund Reserve Limit
Under Section B, Capital Improvement Fund of the policy, staff is proposing to increase
the minimum CIP fund balance reserve from $3 million to $5 million that can be used for
major improvement projects. In accordance with the current CIP 5-Year Plan approved
by the Infrastructure Management Advisory Committee (IMAC) and City Council, the
CIP funding in the next five years, with the exception of FY 2020-2021, are more than
$3 million and as follows:
FY 2020-2021: $2.5 million
FY 2021-2022: $7.5 million
FY 2022-2023: $4.3 million
FY 2023-2024: $3.6 million
FY 2024-2025: $5 million
To be determined projects: $19.3 million
FY 2020-2021 - Five-Year Capital Improvement Program – Summary of Funding
In 2010, as recommended by the FAC and approved by the City Council, the funding for
the reserves for CIP was amended to transfer amount equal to the TOT revenue instead
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of increasing the limit from $3 million to $5 million. At that time, TOT from Terranea was
approximately $2 million compared to the average of over $5 million per year, prior to
the financial impacts of the pandemic. Due to the anticipated TOT revenue loss in FY
2020-2021 from Terranea, and to the amounts budgeted in next five year of scheduled
projects, staff recommends increasing the reserve to $5 million. The increase has no
additional financial impact to the general fund as the recommendation is to restrict
additional $2 million from the unrestricted excess reserves. At the end of FY 2019-2020,
the CIP has a fund balance of $25.3 million, and after applying the $3 million reserve
policy and approved purchase order carry overs of $1.4 million, the unrestricted excess
reserve is $21 million. If the proposed $5 million is recommended by FAC and approved
by the City Council, the unrestricted excess reserve in CIP would be reduced by $2
million during the budget approval process.
5. Clarifying Language and Options for the ERF
Under Section C, Equipment Replacement Fund, staff is proposing the following
amendment (the recommendation text addition is underlined):
The City will maintain a minimum reserve of 75% but no more than 100% of the
estimated replacement cost for equipment assets that are due to be replaced in
the City’s next fiscal year.
Historically, the City has never spent 100% of the estimated replacement cost for the
assets that are due for the next fiscal year. It has been the City’s practice to extend the
life of the assets and only replace when necessary. Staff is proposing to add the
language that would allow flexibility and options for the City to elect to fund the
equipment replacement at a minimum of 75% but no more than 100% during the budget
process. This would provide flexibility and options to allocate funding to where it is
needed the most. At the end of FY 2019-2020, the Equipment Replacement Fund has a
fund balance of $2.9 million, and after applying the $2 million reserve policy and
approved purchase order carryovers of $139,000, the unrestricted excess reserve is
$788,200.
6. Clarifying Language for Funds with Zero Balances
The remaining clarifying language are under Section D through G. The added language
is to clarify that the funds have a zero balance. When deemed necessary, any future
funding may be approved by the City Council.
For Section D Water Quality Food Protection Fund, a sentence was added that effective
FY 2018-2019, the fund has a zero balance and it was closed due to the fund no longer
collecting user fees. As such, the fund can no longer be accounted under Enterprise
Fund and all subsequent activities will be recorde d in the General Fund or Capital
Improvement Fund.
CONCLUSION
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In response to the significant drop of general fund transfers to the CIP, the City Council
directed staff to revisit City Council 41 Reserve Policies. The objective is to analyze and
provide the City Council with options, if feasible, to suspend the reduction of the general
fund transfers to the CIP based on the increase of the public safety contract. Since the
revisions were last made in 2010 and 2013, staff have also identified a few clean-up
languages for clarification and that are aligned with the City’s current best practices.
Tonight, staff is asking for the Finance Advisory Committee’s recommendation of the
proposed changes and/or changes deemed appropriate by the committee. Based on the
discussions and recommendations in tonight’s meeting, a final document is tentatively
scheduled for the City Council’s consideration at the February 16, 2021 meeting.
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