CC - Item 5A - Adopting Reserve PoliciesROSEMEAD CITY COUNCIL
STAFF REPORT
TO: THE HONORABLE MAYOR AND CITY COUNCIL
FROM: OLIVER CHI, CITY MANAGER
DATE: JANUARY 8, 2008
SUBJECT: RECOMMENDATON FOR ADOPTING RESERVE POLICIES FOR
SELECTED FUNDS
SUMMARY
A mark of fiscal stability is a city's undesignated General Fund balance or an officially
designated General Fund reserve or one derived from General Fund revenues. In a
"Recommended Practices" report, The Government Finance Officer's Organization
(GFOA) states that, "It is essential that governments maintain adequate levels of fund
balance to mitigate current and future risks (e.g., revenue shortfalls and unanticipated
expenditures) Fund balance levels are a crucial consideration, too, in long-term .
financial planning." The GFOA went on to recommend that governments establish a
formal policy on the level of unreserved fund balances, or reserved or designated fund
balances that should be maintained in the General Fund and other selected funds.
This report recommends that City Council members adopt the accompanying policy
establishing reserve levels for the General Fund and also creating a Capital Projects
Fund and an Equipment Replacement Fund, as well as the procedures for establishing,
maintaining and the use of reserves.
Staff Recommendation
Staff recommends that the City Council adopt Resolution No. 2008-01, "A Resolution of
the City of Rosemead Adopting a Fund Balance Reserve Policy." -
ANALYSIS
After the completion of the FY 2007-08 budget, staff was directed by the Interim City
Manager to prepare a fund balance reserve policy for City Council consideration and
action. It is contemplated by staff that, if adopted, the reserve policy .will be
implemented immediately. As a means of more effective financial management staff is
also recommending the establishment of a Capital Projects Fund and an Equipment
APPROVED FOR CITY COUNCIL AGENDA: O
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City Council Meeting
January 8, 2008
Replacement Fund with reserves to be determined with the FY 2008-09 budget.
How the Policy was Developed - In accordance with the GFOA's recommendation to
establish a formal reserve policy staff is proposing a policy for City Council
consideration and action. For guidance staff has referenced the book The Adoption of
Reserve Policies in California Cities, by Anita Lawrence. The book presents the results
of in with 205 California cities finance professionals with regard to their
treatment of fund balance reserves. So, what is the appropriate rate or amount of
reserves for Rosemead? For further guidance staff turned to the California Society of
Municipal Finance Officers (CSMFO) web site. On the web site three cities posted their
General Fund reserve rate and method for determining the rate or amount. Two of
those cities used a commonly used approach in determining the amount of their
reserves (the equivalent of two to four months of average appropriations) and one of the
cities took a more analytical approach. The analytical approach focuses on the
estimated fluctuation of revenues and the probability of the fluctuation occurring. It also
addresses the issue of cash flow timing, thus avoiding the need for short-term bridge
borrowing and some measurement estimates that consider potential unexpected
expenditures as well as unfunded liabilities. Staff believes the analytical method to be
more rational and defensible than simply reserving an equivalent average of
appropriations for some arbitrary period. The analytical approach was used by staff and
the details are presented on Exhibit A. Staff used the following five measurements to
calculate a prudent "starting point" reserve amount for the General Fund:
1. Tax Stability
2. Broadness of Revenue Base
3. Revenues at Risk Due to State or Federal Action
4. Cash Flow Requirements
5. Unfunded liabilities
Reserve Rate - To simplify the calculation of the reserve amount in future periods, a .
rate can be developed by dividing the base year (FY 2007-08 budget) reserve dollar
amount by the base year total General Fund revenue and applying the rate to each
successive years' General Fund estimated revenues. In the example the City's reserve
rate happens to be about 31 percent, or $5.0 million. Of course, amounts should be
reviewed on an annual basis and when significant changes occur adjustments should
be factored into each year's budget.
Staff is also recommending that two new funds be opened and reserves established for
them: 1) Capital Projects Fund. 2) The Equipment Replacement Fund. Reserve dollar
amounts for these two new funds should be established in the FY 2008-09 budget
cycle.
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City Council Meeting
January 8, 2008
FINANCIAL REVIEW
Adoption of a reserve policy will set aside a portion of a fund's balance for contingencies
or emergencies thereby reducing unreserved, undesignated or unrestricted fund
balances. In the year of establishment, the General Fund and the Capital Projects Fund
will need to reduce the amount of appropriations sufficiently to fund reserves or take it
from fund balance. Thereafter, revenue available for appropriations will fluctuate
depending on the need to increase or decrease reserve levels.
LEGAL REVIEW
City Attorney has approved as to form.
PUBLIC NOTICE PROCESS
This item has been noticed through the regular agenda notification process.
Submitted by:
Steven Brisco,
Finance Director
Exhibit A: Reserve Measurement Worksheet
Exhibit B: Fund Balance Reserve Policy
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EXHIBIT A
City of Rosemead
Reserve Measurement Worksheet
FY 2007 - 08
Recommended
Measurement #1 -Tax Stability
Reserve
Percent of
total tax
Property tax growth (no growth)
$1,498,000 x 3%' _
$ 44,940
0.40%
Property tax in-lieu of sales tax (no growth)
$1,217,000 x 3%' =
36,510
0.32%
Property tax in-lieu of VLF (no growth)
$3,055,000 x 3%' =
91,650
0.81%
Sales tax volatility
$3,650,000 x 10%z =
365,000
3.24%
TOT volatility
$1,698,000 x 10%z =
169,800
1.51%
Subtotal
707,900
6.28%
Measurement #2 - Broadness of Revenue Base
All other General Fund sources $4,813,110 x 20%s = 962,620 20.00%
Measurement #3 - Revenues at Risk Due to
State or Federal Action
TOT - Prop 218 adverse ruling $1,698,000 x 20%a = 339,600
COPS grant $125,000 x 10%a = 12,500
S.T.A.R. $12,500 x 10%" = 1,250
Subtotal 353,350
Measurement #4 - Cash Flow Requirements
Property tax growths $1,498,000 x 50% = 749,000
Property tax in-lieu of sales tax' $1,217,000 x 50% = 608,500
Property tax in-lieu of VLF' $3,055,000 x 50% = 1,527,500
Subtotal 2,885,000
Measurement #5 - Contractual or Other Legal
Obligations
None
Measurement #6 - Expenses for New Operating
Program
None
Measurement #7 - Likelihood of Continuation of
Preseent Fund Balances
None
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EXHIBIT A
City of Rosemead
Reserve Measurement Worksheet
FY 2007 - 08
Measurement #8 - Natural Disasters and Reserves
None
Measurement #9 - Unfunded Liabilities
Annual cost of retiree health insurance
Total recommended reserve
110,270
$ 5,019,140
Budgeted growth was 3%. Contemplates no growth in assessed value.
2 Assumes sales tax decline of 10%.
3 Total General Fund revenue ($16,083,410) less total taxes ($11,270,410) = $4,813,110.
Reserves for loss of 20% of non-tax revenue.
4 Estimated probability of occurance.
5 Approximately half of property tax is not received until December. Creates need to reserve
50% of estimated property tax
Note:
Recommended Reserve Amount/Total GF Estimated Revenue = Reserve Rate
$5,019,140/$16,083,410 = 31.21 %
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EXHIBIT B
CITY OF ROSEMEAD
FUND BALANCE RESERVE POLICY FOR THE ROSEMEAD GENERAL,
CAPITAL PROJECTS AND EQUIPMENT REPLACEMENT FUNDS
PURPOSE
To establish a Fund Balance Reserve Policy for the City General Fund.
II. SCOPE
This policy sets forth the type of reserves and funding methods the City
may establish as it deems necessary.
III. DEFINITION
Fund Balance - Fund balance describes the net assets of the
governmental funds. It is intended to serve as a measure of the
financial resources available in a government fund and generally
represents a fund's assets (cash, receivables, etc.) less its liabilities.
Further, a portion of fund balance may be segregated by reserve,
designation or legal restriction.
Reserves, Designations and Restricted- Portions of a fund's
undesignated fund balance may be reserved, designated or restricted
for certain specific purposes. Such purposes consist of debt service
requirements, debt proceeds, working capital (operational funds
excluding financing and capital expenditures), capital expenditures for
property, plant and equipment, advances to other funds, etc.
Unreserved or Unrestricted Fund Balances - Describes the portion
of a fund's balance which is not reserved, designated or restricted as
to use. As such, the fund's balance is available for use.
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EXHIBIT B
CITY OF ROSEMEAD
FUND BALANCE RESERVE POLICY FOR THE ROSEMEAD GENERAL,
CAPITAL PROJECTS AND EQUIPMENT REPLACEMENT FUNDS
IV. POLICY
A. Equal to 31% of total General Fund estimated revenue on July 1.
B. Each year the Finance Director will review the five measurement
criteria and certify that the assumptions and methodology remain
appropriate and that 31 % of General Fund estimated revenue
remains a prudent rate. In the best judgment of the Finance
Director the rate may be increased. City Council approval is
required to reduce the rate.
C. Source of funding comes from unrestricted or unreserved fund
balance and must be supported by an underlying cash equivalent
equal to the amount of the reserves.
D. Use of reserve funds requires City Council approval and unless
otherwise directed by City Council must be replenished no later
than June 30th of the fiscal year in which they were used.
E. Capital Projects Fund reserves are equal to 10 percent of total
annual capital expenditures at July 1.
F. Equipment Replacement Fund unreserved/undesignated fund
balance is to be used to purchase new and replacement equipment
as appropriated in the annual budget. Fund revenue will be
provided by charges to the using departments in the amount of
depreciation (straight line method with no residual value) plus 5
percent inflation factor.
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RESOLUTION NO. 2008-01
A RESOLUTION OF THE CITY OF ROSEMEAD ADOPTING A FUND
BALANCE RESERVE POLICY
WHEREAS, the City of Rosemead is interested in formalizing a Fund
Balance Reserve policy; and
WHEREAS, the City Manager directed staff to bring a reserve policy to the
City Council for consideration and action; and
WHEREAS, staff has researched and presented information on the
various methods of calculating reserves and funding methods;
NOW, THEREFORE, THE CITY OF ROSEMEAD DOES HEREBY
RESOLVE AS FOLLOWS:
Section 1. The above recitals are true and correct and a substantive
part of this Resolution.
Section 2. That the Fund Balance Reserve Policy for the Rosemead
General Fund hereto attached and marked "Exhibit B" is hereby adopted.
Section 3. The City Clerk shall certify to the adoption of this Resolution
and cause the same to be processed in accordance with state law.
PASSED, APPROVED and ADOPTED this 8th day of January, 2008.
MAYOR OF THE CITY OF ROSEMEAD
ATTEST:
CITY CLERK
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