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HomeMy WebLinkAboutReso 45-21 Adopting Revised GFER PolicyRESOLUTION NO. 45-21 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF MORRO BAY, CALIFORNIA TO RESCIND RESOLUTION NO. 85-18, AND AMENDING THE GENERAL FUND EMERGENCY RESERVE POLICY THE CITY COUNCIL City of Morro Bay, California WHEREAS, Resolution No. 85-18 established a General Fund Emergency Reserve Policy; and WHEREAS, the needs and uses of the General Fund Emergency Reserve (GFER) have changed in light of the unprecedented financial impacts due to the COVID-19 Pandemic in 2020 and 2021; and WHEREAS, on May 26, 2021, at the Budget Study Session the City Council appointed an ad -hoc committee of Mayor John Heading and Councilmember Robert Davis to review this and other financial policies to ensure the polices are up to date, aligned with current conditions, and reflect best practice; and WHEREAS, the ad -hoc committee of Mayor Heading and Councilmember Davis reviewed this policy and believe a revision is warranted given the lessons learned due to the volatility of General Fund revenues and the continuation of escalating operating costs such as pension costs and pay to attract and retain dedicated city personnel; and WHEREAS, the ad -hoc committee of Mayor Heading and Councilmember Davis recommend a reserve level that would allow the city to operate for three to six months if there was a catastrophic reduction in revenues for the General Fund; and NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Morro Bay, California: 1. Resolution No. 85-18 is rescinded and replaced in their entirety with the passage of this Resolution; 2. The City Council wishes to revise and approve the General Fund Emergency Reserve Policy as contained in Exhibit A herewith. 3. The City Council further desires to increase the level of minimum and target reserves as follows: This GFER Policy outlines minimum and target funding levels. Minimum Level: Equal to thirty-three percent of annual on -going operating expenditures (including Measure Q and E operating expenditures and excluding transfers out) based on the most recent adopted budget. Target Level Equal to fifty percent of annual on -going operating expenditures (including Measure Q and E operating expenditures excluding transfers out) based on the most recent adopted budget. 4. To clarify the definition of the General Fund Emergency Reserve the following passage has been added to the GFER Policy contained in Exhibit A When referring to the GFER no other unassigned/unreserved fund balances accounted for in the General Fund shall be included in this total except for any excess revenue over expenditures at the end of each fiscal year. This includes General Fund Vehicle Replacement Fund, Capital Replacement, Project Accumulation, and the Opportunity Fund (closing at the end of FY 2020-21). While the unassigned/unreserved fund balances could be reallocated by City Council action it is the policy of the City Council that those specialized reserves be excluded from reporting on the fund balance of the GFER. 5. To ensure it is clear that replenishing the General Fund Emergency Reserve Policy is a process that may take a number of years to achieve the following passage has been added to the GFER Policy contained in Exhibit A: The City Manager, in conjunction with the Finance Department, will develop and implement plans to return cash accumulation reserves to their minimum target levels as quickly is reasonable given the financial circumstances facing the City, ideally within three years. 6. Other minor revisions have been made to the policy to ensure there is consistency throughout as a result of the proposed policy revisions as contained in Exhibit A. PASSED AND ADOPTED by the City Council of the City of Morro Bay at a regular meeting thereof, held on the 22nd day of June 2021, by the following vote: AYES: Headding, Addis, Barton, Davis, Heller NOES' None ABSENT: None ABSTAIN: None JOHN HAD or ATTEST: DANA SWANSON, City Clerk EXHIBIT "A" CITY OF MORRO BAY GENERAL FUND EMERGENCY RESERVE POLICY Policy Statement The City of Morro Bay (City) is a full -service city, providing essential services to over 10,000 residents related to public safety, planning, building, public works and recreation. In addition, the City has a vibrant tourism industry, attracting thousands of visitors annually, all of whom utilize City services in some fashion As such, it is prudent for the City to establish and maintain reserve funds to mitigate a variety of emergency situations and ensure that core, essential services are maintained The City first established a General Fund Emergency Reserve in 1993, which has since been modified four times by Council resolution, the most recently being in 2015 per Resolution No. 33-15 The City Council of the City has been proactive in setting aside emergency reserves and recognizing the need to utilize reserves during recessionary periods. The City Council sets legislative financial management policies, as recommended by staff and advisory committees. This General Fund Emergency Reserve Policy (Policy) is designed to establish guidelines to e nsure fiscal stability of the City and provide guidance to staff in the financial management of City o perations. Purpose A properly designed reserve policy is not only a financial best practice, but also sends a positive signal to ratepayers, investors, regulatory, and credit rating agencies the City is committed to maintaining the long - run fiscal strength of the City. Strong and transparent financial policies, including maintaining prudent reserves for emergencies, working capital, and capital improvements, are consistent with Government Accounting Standards and are important to the City as they help to: • Maintain the short-term and long-term financial health of the City • Maintain stable user fees for customers and help ensure manageable rate increases • Fund unanticipated expenditure contingencies, including emergencies • Ensure funds exist for system and infrastructure improvements • Ensure cash exists for the timely payment of bills • Act as a significant positive credit factor in bond ratings After the City's financial records are finalized and audited, with legal obligations and liability reserves funded, revenues in excess of expenditures are closed out to the General Fund Emergency Reserve. A base amount, both minimum and target levels, are established by Council with adoption of this policy. Staff shall bring forward a recommendation for Council consideration to provide direction on use of funds above the target levels. Definitions The General Fund Emergency Reserve ("GFER") is classified as an "Unrestricted Undesignated Reserve," representing funding that is being set aside to provide temporary financing for budget stabilization caused by fiscal downturns, unanticipated extraordinary expenditures related to a natural disaster or calamity, or from an unexpected liability or funding decrease created by a legislative action. Those moneys may be u sed for any lawful purpose, as approved by the City Council, and have not been designated for specific capital and operating needs. The following Unrestricted Undesignated Reserve Policy addresses the level, u se and replenishment of those types of unrestricted cash. The GFER will be accounted for within the General Fund. When referring to the GFER no other unassigned/unreserved fund balances accounted for in the General Fund shall be included in this total except for any excess revenue over expenditures at the end of each fiscal year. This includes General Fund Vehicle Replacement Fund, Capital Maintenance, Project Accumulation, and the Opportunity Fund (closing at the end of FY 2020-21). While these u nassigned/unreserved fund balances could be reallocated by City Council action it is the policy of the City that those specialized reserves be excluded from reporting on the fund balance of the GFER. Unrestricted-Undesignated Reserve Policy The General Fund will have sufficient Unrestricted Undesignated cash accumulated to maintain or improve its credit ratings, ensure operating and maintenance costs will be paid in a timely manner, pay debt service o bligations invest in needed capital improvements and equipment replacement and other uses on a timely basis. In addition, the GFER will maintain sufficient cash accumulation to minimize impacts from economic downturns, departmental expenditure freezes due to market volatility, other economic impacts on demands, contingencies, and regulatory changes. This GFER Policy outlines minimum and target funding levels. Minimum Level: Equal to thirty-three percent of annual on -going operating expenditures (including Measure Q and E operating expenditures and excluding transfers out) based on the most recent adopted budget. Target Level* Equal to fifty percent of annual on -going operating expenditures (including Measure Q and E operating expenditures excluding transfers out) based on the most recent adopted budget. Example (FY 2021-22 Proposed Budget): General Fund Operating Expenditures (on -going annual expenditures, excluding transfers) FY Measure Q and E Operating Expenditures Minimum Level 33%* Minimum Cash Accumulation Example (FY 2021-22 Proposed Budget): General Fund Operating Expenditures (on -going annual expenditures, excluding transfers) FY Measure Q and E Operating Expenditures Target Level 33%: Target Cash Accumulation $14,197,170 $ 2,009,061 x 0.33 $ 5,402,077 $14,197,170 $ 2,009,061 x050 $ 8,103,115 In calculating the minimum and target funding level, one-time expenditures and transfers out are not considered in the base for determining the operating expenditures. The minimum and target funding levels are intended to ensure sufficient resources to pay budgeted operating and maintenance expenses, recognizing the timing differences between payment of expenditures and receipt of revenues Minimum and Target Levels equate to four months and six months of operating expenses, respectively. It also provides a source of funding to allow the City to operate during short term fluctuations in revenues and/or expenditures. Withdrawal & Replenishment of Accumulation Reserves The City will treat the minimum levels as practical reserve floors and allow reserves to increase or decrease within the minimum and target levels, as approved by City Council during the annual budget process. To the extent cash in the GFER is above the target levels, the Council has the flexibility to direct staff to u tilize those available funds to fund internal service funds to target levels, fund other one-time operating n eeds, capital projects (reducing the need for future debt), or pay down liabilities in accordance with this policy as defined in the purpose statement above. Reserve levels below the minimum target reserves would leave the City exposed to operational risks. The City may only draw down the reserve levels with Council approval. The City Manager, in conjunction with the Finance Department, will develop and implement plans to return cash accumulation reserves to their minimum target levels as quickly is reasonable given the financial circumstances facing the City, ideally within three years. This plan to replenish the GFER is subject to approval by City Council, typically through the adoption of the annual budget. Reporting and Oversight GFER levels will be monitored during the fiscal year and reported in the quarterly financial reports, as provided by the Finance Department. GFER minimum and target levels will be analyzed annually by the Finance Department and an over/under reserve determination shall be made in conjunction with year-end financial results. Those results will be reported to the City Council as part of the year-end financial report presentation. If GFER levels need adjustment due to new risk factors or changes in the industry, then that information will be brought to the City Council as part of the year-end report or sooner, as determined by the City Manager and Finance Department. This Policy will be reviewed during the City's annual budget process, and updated if needed, as a result of material changes in the risk exposures or new conditions that required changes in this Policy.