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HomeMy WebLinkAbout2023-11-28 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 7 Special Meeting November 28, 2023 The Finance Committee of the City of Palo Alto met on this date in the Community Meeting Room and by virtual teleconference at 5:31 PM. Present In Person: Burt, Lythcott-Haims, Stone Present Remotely: None Absent: None Action Items 1. Discussion and Recommendation to the City Council to Accept the Macias Gini & O'Connell's Audit of the City of Palo Alto's Financial Statements as of June 30, 2023 Assistant Director of Administrative Services Department Christine Paras noted [inaudible] below the appropriation limit. They were still within compliance. Staff had fixed the calculation error going forward, and hopefully they would not have that finding next year. Assistant City Manager Kiely Nose stated there was a very old law that would ensure Palo Alto staying in balance with state calculations of appropriations based on revenues. It was something Council approved yearly as part of the budget process. It was called the GANN limit, and the calculation was based on population, and staff accidentally used the wrong factor. Once the factor was fixed, they were well within state limits. It was not a good or a bad thing but just an error. MOTION: Council Member Lythcott-Haims moved, seconded by Vice Mayor Stone to recommend the City Council approve the City of Palo Alto’s audited financial statements for the fiscal year ended on June 30, 2023, and the accompanying reports provided by Macias Gini & O’Connell LLP MOTION PASSED: 3-0 2. Approval of the FY2023 Annual Comprehensive Financial Report (ACFR), Year-End Budget Adjustments in Various Funds, and a Resolution to Extend and Amend the Development Services Reserve Fund Policy SUMMARY MINUTES Page 2 of 7 Finance Committee Meeting Summary Minutes: 11/28/2023 Assistant Director of Administrative Services Department Christine Paras declared that a clean audit opinion had been received on the ACFR. It had been uploaded to the City’s website for anyone to view. She noted that the City received the Excellence in Financial Reporting Award from the Government Financial Officers Association. She displayed slides and noted that the presentation had been broken into government-wide financials and fund financials. The government-wide encompassed all the City’s funds. She provided a slide with bar charts, and she detailed the government-wide total net position. She furnished a slide showing the summary of the government-wide statement of activities, which she outlined. She commented that a primary driver of the expense increase was adjustments for pension and retiree medical obligations as required by GASB 68 and 75, and a description of GASB 68 and 75 were in the Staff Report on Packet Page 55. She presented a slide outlining fund balances of governmental activities. She provided a table summarizing the General Fund Budget Stabilization Reserve, which was on Packet Page 65, and staff recommended, by Council policy, that the $3.3M in excess of the 20% target be sent to the Infrastructure Reserve and the 115 Trust. After considering the 2024 recommended adjustments, which would be presented to Council in February 2024, there was a projected BSR balance of $53.7M. She detailed and shared a slide related to the General Fund. She supplied a slide detailing the total of all revenue categories, which she outlined. She spoke about the Excess Revenue Allocation Fund (ERAF), which was a calculation of property tax increments going to cities in excess of a certain calculation. Assistant City Manager Kiely Nose added that based on the state budget a certain quota essentially needed to be filled for schools, and once the quota was reached, anything above that turned into “excess,” which would be distributed to counties and subsequently all recipients. It fluctuated based on that calculation. Assistant Director Paras summarized a slide showing the budget-to-actual view of all the City’s General Fund departments. She furnished slides comparing actuals of General Fund expenses and the Enterprise Fund net positions, which she elaborated on. She presented a slide outlining Attachments B and C and discussed their content. Staff expected to bring forth an updated Development Services Revenue Fund policy for Council’s consideration. In that time, staff recommended Council extend that policy through FY2025. It was anticipated that a cost-of- service study would be brought forward in January 2024. Public Comments Jasmina Bojic, Director and Founder of the United Nations Association Film Festival, thanked the Committee and City Council for an 11-day film festival. She provided the Committee with a gift, which she declared was below $5 in cost. There would be a screening of some of the films from the festival at the libraries on November 30 and December 7, and she invited the Committee to attend. The film festival next year would be held October 17 to 27 at Mitchell Park. SUMMARY MINUTES Page 3 of 7 Finance Committee Meeting Summary Minutes: 11/28/2023 Council Member Lythcott-Haims asked how the $83.3M increase in the net position came about and what it meant. She asked if it was standard practice that the excesses in the General Fund Budget Reserve be split 50/50 between the Capital Fund Infrastructure Reserve and the Section 115 Pension Fund. Her instinct was to give more to the unfunded pension liability. She requested that the typo on Page 54 be corrected to reflect Section 115 instead of 114. Assistant City Manager Nose thought it was important that everybody understand that the net position was very different than what was discussed when doing the financial planning and the budget actions. She explained that that the calculation discussed in May was not the same calculation used for the net position. She elaborated on how the budget calculation was brought forth by staff. The calculation was somewhat the financial status of an organization and should be a positive number, and Council worked to make that positive, which she provided an example of. She noted that they struggled every year in how to calculate the statement of net position/financial totality as an organization versus what was used for annual financial planning. The two numbers were reconciled, although they were calculated in a very different way. As for the excess in the General Fund Budget Stabilization Reserve, it had been a unique practice to bring it forward to the Committee and Council for a decision, which had been done since COVID. Council’s adopted practices were that the City Manager had the discretion at the end of the year to transfer any excess funds 50/50 between the 115 and the Infrastructure Reserve. The City Manager at the end of the year could have taken the $3M and automatically done the transfers, but because the City had been in a somewhat COVID recovery period, they had been bringing it forward, for transparency, and doing it at midyear. She recommended that it revert to the Council-adopted policy. She explained why it would be split into both. Chair Burt added that a surplus amount of revenue versus expenses in a given year was considered. He provided a definition of assets, which were not considered income or expenses. He explained why they tried to have modestly conservative projections on expenses and revenues when there was a surplus amount, and typically the balance was divided between the pension liability and the Capital Fund. Vice Mayor Stone requested an explanation of the pie chart on Slide 3 showing unrestricted at $28.9M. He queried if this was the highest the BSR had been since it had been established. He questioned how the adjustments required by the GASB could lead to such a dramatic increase. He asked if projections being off by $3M was good or bad. Assistant Director Paras answered that the $28.9M was city-wide, so it included Enterprise funds. Concerning how the adjustments required by the GASB could lead to such a dramatic increase, for the most part, a lot of the standards they issued were on an accounting basis, and staff was somewhat bifurcating the accounting basis and presentation versus budget and financial planning. She provided an example. The GASB pronouncements provided a different view when presenting at the entity-wide level, for example, because when looking at the budget for financial planning purposes, staff was looking primarily at the fund level where a lot of the adjustments would not be made. SUMMARY MINUTES Page 4 of 7 Finance Committee Meeting Summary Minutes: 11/28/2023 Assistant City Manager Nose added that Slide 3 was also the accounting calculation, which had not been refined for the specific budgetary calculation. The $28.9M was the net position and included the assets and liabilities (paper transitions) in addition to cash transactions. She voiced that Slide 6 listed the reconciling of the actual BSR, which was the funding Council could spend in the event of an emergency or other priority. In terms of a year-end appropriation, she did not know if this was highest the BSR had been since it had been established. She clarified that it was always a percentage of the General Fund budget. She thought this year’s General Fund budget was the largest the organization had seen recently. On a percentage basis, it was standard and well within the range of how a year typically ended. The projections being off by $3M was scary to her and was razor thin, which she elaborated on. Chair Burt added that the issue was not projecting it accurately, but with all the factors, it would be assumed everything would average out within a range. He remarked that when the last budget was approved, the budget projection range had been narrowed, and in most years, the projection had been more conservative than this year, which was why there was routinely a surplus in operations, and that surplus was being counted on to pay for infrastructure and the unfunded pension liability. He noted that the BSR standard was 15% to 20%, and the target was the upper end of that range in the budget, which currently came in a little above that, so even if this year there had been a shortfall, there was the Stabilization Reserve, which had been targeted at 20% due to a concern of economic uncertainty. He mentioned that going forward there may be a lagging impact on some of the revenue sources, such as property and sales taxes. He suggested that Slide 8 make note of the cumulative inflation from 2019 through 2023. If adjusting for inflation, he did not think there was an increase but instead a decrease in tax revenues in that period. Assistant City Manager Nose thought that was a fair statement. Vice Mayor Stone asked what the implications would be for Palo Alto if Santa Clara County was audited for excess ERAF, like Marin County. Assistant Director Paras responded that Marin County was challenging the ERAF calculation, so Santa Clara County had advised reserving a portion of the ERAF revenues. Within the balance sheet, $4.1M had been reserved, which represented 22%, the prescribed range that the county felt was at risk within the balance sheet. If ERAF funds needed to be returned, that amount was set aside to hopefully mitigate that risk. Chair Burt questioned if those dollars were on the balance sheet but not being spent at this time. Assistant Director Paras answered that the dollars were set aside. SUMMARY MINUTES Page 5 of 7 Finance Committee Meeting Summary Minutes: 11/28/2023 Assistant City Manager Nose added that Council had had a reserve in place for a few years because of continual challenges to this revenue stream. Chair Burt thought it should be noted that that was a prudent and conservative approach. Assistant Director Paras stated that was in the unrestricted portion of things. Chair Burt wanted prior Council policy to be considered concerning the surplus of the BSR and asked when and how the policy could be reviewed. He queried how it would align with the 50/50 policy if it was discretionary by the City Manager. He felt the 50/50 split was correct, but he could envision times when that should be split differently. Assistant City Manager Nose responded that reviewing that would be a recommended referral from the Finance Committee to the Full Council, and Council would then need to direct staff to review. There were two policies – the BSR Infrastructure Reserve Policy and the Pension Funding Policy – both of which indicated the excess BSR be split 50/50 between the two. Both policies would need to be changed if Council should choose to review and authorize it on an annual basis. As for aligning with the 50/50 policy if it was discretionary by the City Manager, she voiced that it was not discretionary by the City Manager, but the City Manager had the ability make the 50/50 transfer in alignment with Council policy. She outlined how that would occur and what the difference would be the policy was changed. If the policies were left as they were, with that discretion, the City Manager still had to go to Council to fix the appropriations, and she detailed how increasing a specific transfer would occur. There would always be flexibility to not move forward with the appropriation actions, and adjustments could be made. Chair Burt liked the policy as a guidance but not necessarily as a formula to always be followed, the discretion of the City Manager to make a recommendation based on the guidance, and that the decision would be a Council decision in an affirmative way. He asked how the item should be referred to Council. Assistant City Manager Nose answered that this evening’s motion should recommend Council refer it back to staff, so upon presentation to the Full Council, Council would need to approve the referral for staff to revisit the policies. Council Member Lythcott-Haims liked the idea. Assuming this moved forward, she voiced that there would need to be context of the 115 Trust and the Capital Infrastructure Fund balances so Council would have a sense of what the correct split should be. Assistant City Manager Nose remarked that Council, as part of the Pension Funding Policy, was to review it every four years, and it had just been reviewed, changes made, and it was affirmed. She explained why she cautioned against having context of the balances. Chair Burt agreed, but he stated it should be affirmative action by the Council. SUMMARY MINUTES Page 6 of 7 Finance Committee Meeting Summary Minutes: 11/28/2023 Vice Mayor Stone asked if the current process was the City Manager making the 50/50 recommendation to Policy and Services for approval and then it going to City Council. Assistant City Manager Nose replied that Council had two policies – one for the Infrastructure Reserve and excess BSR for that and another policy for long-term funding obligations. Both policies had allocations and set priorities that excess funds would be split 50/50. In alignment with that policy, at the end of the year, the financial transactions to uphold those policy choices could be done administratively by the City Manager. Council had signed off on it previously by approving the policies, and to finalize the transaction, any appropriation action would have to be approved by Council. The City Manager would follow Council policies, but to execute the transaction, the appropriation would have to go through Council, which was the guardrail, and the City Manager did not have the authority to deviate from the 50/50 split. Council could choose to not appropriate the funds, to make the transfers, or do nothing. She thought Chair Burt preferred an affirmative approach and that the City Manager present a recommendation as opposed to the City Manager executing on the policy and bringing the appropriation action forward for the Committee and Council to approve or deny. Chair Burt added that the distinction would be giving guidance earlier on as opposed to at the appropriation level, which was the end of a process, which may have to be vetoed. Vice Mayor Stone asked how this referral to Council would proceed. Assistant City Manager Nose thought it would be similar to the Committee making referrals through the budget process, so the Committee would recommend approval of the document, for example, and recommend the Council refer X to staff, and then Council would review the item recommended for approval as well as the referral and make a decision whether to refer it to staff. Vice Mayor Stone asked if the policy should pass if it would be an annual action item for the Finance Committee and if the Finance Committee would then make a recommendation for Council that would likely go on Council’s consent calendar. Assistant City Manager Nose did not recommend it be done annually. She thought it would be a referral that would happen during calendar year 2024. Chair Burt thought Vice Mayor Stone was referring to the change in policy being adopted. Assistant City Manager Nose replied that this would be done as part of the year-end action and report of the ACFR. Staff would make a recommendation that would then be implemented six months later. The cost of doing this would be six months of investment earnings in a 115 Trust due to the delay in the decision. Funds would be in the General Fund and basically the bank account until midyear as opposed to being able to transfer the funds in February. SUMMARY MINUTES Page 7 of 7 Finance Committee Meeting Summary Minutes: 11/28/2023 Chair Burt asked why it could be done six months sooner if it was the City Manager’s role to automatically follow the policy. Assistant City Manager Nose explained why it could be done six months sooner. Chair Burt did not understand why giving guidance earlier than approving an appropriation would delay investment timing. Assistant City Manager Nose explained further why giving guidance earlier than approving an appropriation would delay investment timing. Vice Mayor Stone supported Council discussing the issue. MOTION: Chair Burt moved, seconded by Council Member Lythcott-Haims to recommend the City Council approve: 1. The City’s Fiscal Year (FY) 2023 Annual Comprehensive financial Report (ACFR) and reports collectively referred to as the Single Audit; 2. Amend the FY 2023 Budget Appropriation for various funds as identified in the attached Recommended Amendments to the City Manager’s FY 2023 Budget 3. Adopt a resolution to extend and amend the Development Services Reserve Fund (DSRF) Policy 4. Recommend that the Council refer to staff review of the approval process for excess BSR allocations in both the long-term retiree benefit funding policy and capital infrastructure reserve policy. MOTION PASSED: 3-0 Future Meetings and Agendas Assistant City Manager Kiely Nose announced there would be a meeting on December 5 at 5:30 p.m. The agenda was out, and staff was finalizing the Staff Report, which would be issued as soon as they were completed. She would email the Committee, and the clerk would post publicly as soon as they were ready. There was one item on the agenda for review, which was the long-range financial forecast, and there would also be an information item updating the Committee on the status of any referrals made to the Committee. Adjournment: The meeting was adjourned at 6:50 P.M.