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HomeMy WebLinkAbout0487.092November 5, 1992 HONORABLE CITY COUNCIL Palo Alto, Californi~ Attention: Finance Committee GHNBRAL FUND RESERVE POLICY Members of the Council: Report in Brier Staff recommends that the Council adopt a policy of ~aintaining the main discretionary General Fund reserve, the Reserve for Capital Projects, in a minimum amount of 10 percent and a maximum of 30 per-cent of the annual budgeted General FUnd operating expenditures. For 1992-9), this would place the reserve targets at a minimum of $6 .. 89 million and a maximum of $20.68 million.. Staff also recommends th~t this Reserve for Capital Projects be retitled -Budget Stabilization Reserve." In addition, staff recommends that the Reserve for General Contingencies be retitled "Reserve for Emergencies,· and contain approxi~ately 10 percent of General Fund salaries and benafits, currently $5 million~ No other changes to reserve titles or purposes are proposed. During the 1992-94 Budget hearings/ staf~ was requested to return to the City Council with a proposed pol ic}' for General Fund reserves~ CUrrent Gene.ral Fund reserves and (ur".a;ldited) bala'1.ces as of June 30,,, 199:2 are shown beloW": CMR:487:92 Discretionary Reser~es: Reserve for capital projects Rf':serve tor Streets and SidE" .• alks Reserve for G~neral contingencies Advances to other Funds Reser~e for AS 702 Credit Total Discretionary ReserveS Non-Discretionary Reserves; Resarve for Encumbrances/Reapprop. Reserve for Inventory Total Non-Discretionary Reserves TOTAL GENERAL FUND RESERVES .----1.2..i.l_ $11/~55 4B5 5~OOO 447 2.....ll§. 19,463 3,76J L..Qll 4.805 $24,268 1992 5,415 6)2 5,000 2,667 ___ 0 13,714 $18,829 For 1990-91, the Reserve for Capital Projects representE~d 8.2 percent of General Fund operating E!1gendit\.lres; in 1991-92 ~ it increased to 17.5 percent of General Fund operating expenditures. Discretionary Reserve~: The Reserve for Capital Projects, the Reserve for Btreets and si~.­ walks, the Reserve tor General Contingencies. Reserve for Advances to Other FUnds and (potentially) the Reserve for AD 702 credit are considered "discretionary" reserves iT. the sense that they are not ob1igated and can be drawn upon by the Council at ~ill. o Reserve £or capital Projects; Often referred to as General Fund "savings account." is t~e source during the year of mOl,ies for unbudgeted expenditures in the General Fund. Any excess of General Fund r~venues over eApenditures is trans­ ferred i:>!.to this reserve at year-end; alternatively, this reserve is used as the funding source for General FU~ld operating deficits. It has also been used in the past as the source of start-up equity for the various Internal Service Funds, and as a tf!1"1porary source of funding :for other city funds l such as the recent advances to the Storm Drainage and the street Maintenance Fu~ds. CMR: 487: 92 2 -~----;....-'-.,'.<~.------:- o ~e •• rv. for streets and Sidewalks: The cumulative difference (since the inception of the utility users tax in 1987) of ~evenues fro~ the utility users tax and Cubberley leases, and expenditures for the Lease and Covenant Not To Develop with the Palo Alto Unified School District, school site capital and operations costs and tl-.e accelerated street and sidewalk proqram. o R •• ~rv. for Gen.r.al contJnqeneies: An amount designated for use in the event of a natural disaster such as a!l earthquake, fire, or flood, where infusions of massive amounts of capital and operating dollars may be required to get the City back on its feet. o Reserve tor Advances to Other ~ds: Any amounts drawn from the Reserve for Capital Projects for U$e by other City funds. Since these -loans" could be recalled if the General FUnd were in a fiscal emergency, this reserve is also considered discretionary. o Reserve for All 702 Credit: The amount of credit advanced to the City as part of the Governo:r:s decision to liquidate certain assets in the Public Employees Retirement System (PERS) and to credit related amOlmts against contributions for PERS agencies in fiscal years 1991-92 and 1992-9J. since the credit is being challenged in the courts, these amounts are considered to be reserved until litigation is settlf:!d. It the final determination of the court is to uphold the Governor's decision, the balanCe in the reserve .... i11 be added to the Reserve for capital Projects. Non-DiscretiQna~ Reserves: Reserves set aside for contractual obligatio~s or for which Council has provided direction tl",at monies are to be set aside for specific expenditures or are considered non-discretionary for the purpose of this policy. These reserves include: o Reserve for Encumbr&nc~~ and Reappropriations: Am~unts o obligated contractually to vendors or approved for futUre years' spending by the City CounciL Reserve for Inventory: house inventcry. The net value invested in t~e ware- o Reserve for Notes Receivable; Council-approved loans to Council Appointed Officers {currently a zero balance). CMR:487:92 3 / '.'. , ~",-~I< :.... __ c _ ..... cC· , The r.on-discretionary reserves vill not be discussed further, since this policy is designed to add~ess only thE =ecornmended levels of discretionary reser'.es ~ other Non-General F~.nd Reserves: It should be noted that the Internal 5ervice Funds, initially funded through capital infusions from the General Fund and the Ente~rise FUnds, co~tain reserves relat~d to the purpose for which each fund was created. These include reserves for employee benefits, 'Workers compensation, general liability, and vehicle replacement. Altho~gh the council could use these reserves in the event of a severe fiscal need, ~or the purpose of this policy they are considered to be similar to the non-discretionary reserves, and are not considered !ucther~ Appropriate Level of Reserves Determination of the appropriate levAl of General Fund reserves is a policy decision~ Some general guidelines have been suggested by the literature in the government fir.ance (ield. The Government Finance Officers of America (GFOA) recommend that reserve levels be directly related to the degree of uncertainty tbe local governm~nt faces: the greater the uncertainty, the greate!:' the financial resources necessary. Past experience should be used as a guide, with particular attention bei~g paid to the following: o Diversity of revenue base o Volatility of revenUe structure o Volatility of political environment o Consiostent operating surpluses/occasional or frequent operating deficits o Uncvel"l cash floW's, req1,Jiring short-term borrowing Oiversity of Revenue Base; Palo Alto has a comparatively diverse revenue base: in 1991-92~ a little over half of the $69~8 million General Fund revenue~ came from no~-tax sources~ This included $16.1 million, or 2Z~8 percent from transfers from the Enterprise Funds for-rent and return on equity~ Service fees and permits represented another $6.5 million, or ~~~ percent, with the remainder of non-tax revenues (interest income, joint service aqreements and other revenues) totalling $13.3 million, or 19~1 percent. volatility of Revenue structure: Tax revenues show the most volatility in terms of growth, although Palo Alto's revenues have been far more stable than other cities in Sanca Clara county or the Bay Area in general. Sales tax is fairly evenly divided between CMR:487:92 consumer ret~il, business-to-business sales and other sales (transportation, foed products, and miscellaneous). In ~ddition, there is no dependence on one or two ~ain sales tax accounts, as less than 20 pe~cent of the sales tax CO~gS from the top five sales tax accounts, vhile 70 percent comes from the top 100. Sales taxes have gro'Wn 78 percent over the past ten years, a compound annual rate of 6 percent a year. Ther"e has been sOlne volatility tn the growth rate: in 1983-84, there 'l-!as a 19.6 percent growth; -While two years later in 1985-86, there was a negative growth of 2.8 percent; and in 198~-a9, growth ~as only 1.4 fercent. In addition, there has been a general slo~ing in the growth in overall sales tax revenue since 1986-87, to 4 perc<ent per year for the past five years. Property tax has consistentll~ been a stable source of revenue for the City; the g~o~th in assessed val~ation has averaged 10 percent over the past ten ye.ars, and tax receipts have increased somewhat less, a compound annual rate of 8.3 percent, from $3.85 million in 1981-82 to $B~6 million in 1991-92. Transient occupancy tax has 5ho~n d~pendable~ if not specta~ular, growth over the past ten years, although it is somewhat sensitive to the economy. Motor vehicle-in-lieu tax revenues have been the focus of discussion for the past three years ~nen t.he State found itself short of funds; and in 1991-92 the Governor initially propos~d taking $65 million of cities' revenue from this source, although the final budget package. did not contain this item. Cigarette tax revenues have been reduced to zero by the State over the past two years to fund the State budget deficit. In general, Palo Alto's ta>c revenues have considerable ability to withstand econcmic do~ntu.rns; they are less able to loli thstand political vagaries, however~ Politieal Volatility: While Palo Al to's revenue.s ~ave shown strength and resilience in relation to the general economy, considerable '.'olati Ii ty has been introduc~d by the inabi 1 i ty of the State govern."'!Lent to deal .'ith its olo/'n budget problems~ In 1990-91, the State gave counties authority, throu.gh SB 2557, to charge cities for the cost of booking prisoners and for property tax administration; this action cost Palo Alto approxit'llataly half a million dollars on an annual ba5is~ In 1991-92, the State shifted 47 percent of cities' cigarette tax away to fund trial courts. In addition, the State took hal! of all non-parkinq fines and forfeitures attributa~le to cities. In 1992-9J~ the State reduced cities' propeLty tax revenues by 9 perCEnt, eliminated the balance of cigarette tax revenues .. and extended the definition of booking fees so that counties may potentially double or triple the. charges they assess. CMR:487:92 5 -----... ""' ... ""' ..... --~~'-""'--,.~' -. - The idea of reallocating the 1 percent of the stQte~ide sales taxI which comes to cities ba.sed on either population or need, was raised during the 1992-93 1:udget debates, as .... 'ell as in COM.jur.:ct~on 'With various proposals for regional governance, Sinc~ Palo Ja,.lto~s share of the State's ~opulation is less than half its percent~ge of all city sales tax collected, if sales tax were redistributed on a per capita rather than situs basis, the City could lose over $8.7 million on an annual basis. Of all the factors to be considered in setting reser-..... e level:;. none appears :more critjcal than political volatility jn the current economic environment. operatinq Surplue/Dperatinq Deficit: The General Fund's operatinq results have been relatively favorable for the past s~veral years, and have become ~ore predictable as the budget projections have become more sophisticated. The largest operating deficit in the paf';t ten years occur-red in 1986-8'1 I when a~tual General Fund expendi tures exceeded revenuE'S by $'182 I 000; however, this represented only 1.5 p~rcent of total expenditures and thus, was not a material shortfall. Uneven Cash Flov: General Fund reserves are invested -3.5 part of a pool which includes idle cash in all ~ity funds, includi~g the Enterprise and the Special RevenUE Funds. At June 30, 1992, the portfolio totalleo $152 million. Cash flow projections for the portfcl io reflect no need for short-term bcrro .... ing, and the Cit)~ has not experienced this ~eed in the past. Ironically, prior to 1980 the City issued sho~t-term tax anticipation notes solely for the purpcse of taking zdvantage of favorable arbitrage conditions rather than for cash flow needs~ ~nfJ!..,!:,,!!,J:ve for Capital proi"n<;t3 In examining the key elements of setting adequate reserve levels~ it is clear that the City has the most vulnerability in the area of political volatility. Events in recent years t'.ave left little doubt that the City's careful budget planning can be! completely negated by the actions of the State Legislature and the Governor in Sacramento~ There is everr !:"eascn to be concerr,ed that the City !tay face a drastic reduction in sales tax revenues in the next severai years, conceivably up to $9 millio!"l., if per capita alloca­ tIon were to take the place of situs basis allocation~ Conse­ quently, staff feels that !!I prudent reserve level would be no less than 10 percent of General Fund operating expenditures, to a maximum of 30 parcent. In 1992-9J, this represents a "II'.inimum reserve of $6.89 million and a maximul'll of $20.68 million. The reserve level at the end of 199;2.-93 is proj ected to be $11.36 million, w~ich ~ould place it within the acceptable range. CMR:487:92 6 • -_._._- ',ott- Staff is also recommending that this reserve be retitled "Budget Stabilization Feserve," to ~ore accurately reflect its purpose in City fiscal planni~q. Reserve ~or Streets and Sidewalk~ since the City Council approved the lease 'With the Palo Alto Unified scheol District for the Cuboerley school site, the Reserve for Streets and sidewalks has been considered the source of funding for i:oplementation of thE: cubberley Mzster-Plan. A forecast through the year 2000, \o1hich is ~pdated 'Periodically by the Fir,ance Department, shows this Reserve accumulating between $2 and $3 million over the next ten years. Staff is not recommending a!"ly change in the current policy of r-eserving any excess between the revenues from utiLity users tax and CUcberley leases and the expenditures for streets and sidewalks and CUbberley operations and capital improv~ments. ResQrve fo" General Contibgen_c;:Je~ As discussed above} the Reserve for Gellerell Contingencies repre­ sents funds which could be made immediately available for funding expenditures in an. emergency situation. The City was extremely fortunate to have been spared Z'1ajor damage in the Lorna Prieta earthquake, bllt this ,",ouid be a good example of the need for an emergency fund. The current $5 million reserve level represents ro'Ughly 10 percent of General F'und salaries and benefits, or the equivalent of approximately 30 days of personnel costs. This 'l,io!Jld hopefully be SUfficient time to allow the city to initiate payments from federal disaster assistance, its own insurance coverage, or other reserves~ including the self-insurance reserves, in th~ event of a cataclysmic disaster. re-ti t led "Reserve for its purpose. d.nd th,3.t the two-year budget ~o ensure General Fund sell~ries and Staff recommends that this reserve be Emergencies" to more accurately reflect funding level be re-evaluated 'With each it contains approximately 10 per-ceJ"1.t of benefits. Reeomm'l!nda~ion staff reco1'l'.!ltends that the Finance committee recommend to the City Council the follo~ing: 1. Retitle the Re.serve for capital Projects to "Budget Stabilization Reserve, It and adopt a policy of rnai ntaining this re.serve at a minir:,um of 1Q percent and a maximum c! 30 percent of General Fund operating expenditures. CHR:487:92 7 • 2~ Retitle the Reserve for General Contingencies. to HRescrve .for Emergencie.s. III and adopt a policy of m;;.intaining this reserve at a level llIpproA:imat21y equivalent to 10 percent of budgeted General Fund !5alary and benefit expenditures. J. Affirm the current policy of reserving any excess of utility user:::; tax and CUbberlE'Y lease revenues over streets and sidewalks and Cubherley operations and capit2.1 expenditu~es in the Reserve for Streets and Side'Walks. Respectfully suhmitted. CMR:487:92 8 -~ .. "1--.