Staff Report
PREPARED BY: STEVE CONWAY
FINANCE DIRECTOR
Reviewed by: Town Manager, Assistant Town Manager, and Town Attorney
110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832
www.losgatosca.gov
MEETING DATE: 9/18/2018
ITEM NO: 9
ITEM NO: 11
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
DATE: SEPTEMBER 10, 2018
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: REVIEW AND DISCUSS THE TOWN’S PRELIMINARY TOTAL OPERATING
CASH POSITION AS OF JUNE 30, 2018.
RECOMMENDATION:
Review and discuss the Town’s preliminary total operating cash position as of June 30, 2018.
BACKGROUND:
As part of the ongoing discussion about funding opportunities to make additional discretionary
payments (ADPs) towards the Town’s unfunded pension obligation, the Town Council Finance
Committee requested detailed information regarding the Town’s operating cash balances of
approximately $76.7 million. The Committee discussion occurred in early August and this item
provides the Town Council a similar opportunity to understand Town funds in more detail.
The balances reported to the Committee and in this report are “pre-audit” and as such are
preliminary in nature and subject to change because the final closing entrie s are still in process.
The FY 17/18 independent audit is underway, and its results will be contained in the draft
Comprehensive Annual Financial Report, which the Committee and the Council will review in
December.
The Town uses fund accounting to ensure and demonstrate compliance with finance-related
legal requirements. Per GASB 54, all the cash balances in the funds are required to be
identified as either restricted, assigned, or committed by Town Council for operations or capital
projects, or held in internal service or trust funds. Following is a brief description of GASB 54
categories.
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SUBJECT: REVIEW AND DISCUSS THE TOWN’S PRELIMINARY TOTAL OPERATING CASH
POSITION AS OF JUNE 30, 2018.
DATE: SEPTEMBER 10, 2018
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BACKGROUND (cont’d):
Restricted: Includes fund balance amounts that are constrained for specific purposes which are
externally imposed by providers, such as creditors, or amounts constrained due to
constitutional provisions or enabling legislation.
Committed: Includes fund balance amounts that are constrained for specific purposes that are
internally imposed by the municipality through Council Resolution which is a formal action of
the highest level of decision making authority and does not lapse at year-end. Committed fund
balances are imposed by the Town Council.
Assigned: Includes fund balance amounts that are intended to be used for specific purposes
that are neither considered restricted or committed. Fund balance may be assigned by the
Town Manager or Finance Director.
Unassigned: Includes balances within the funds which have not been classified within the
above-mentioned categories.
DISCUSSION:
Town Funds
The following chart (see next page) provides a recap of the total $76.7 million in estimated
operating cash position for the Town as of June 30, 2018 summarized by fund type and broken
out by the cash balances by fund for each fund type. The balance of the report discusses each
Fund in detail.
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SUBJECT: REVIEW AND DISCUSS THE TOWN’S PRELIMINARY TOTAL OPERATING CASH
POSITION AS OF JUNE 30, 2018.
DATE: SEPTEMBER 10, 2018
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DISCUSSION (cont’d):
Town of Los Gatos Total Cash Position All Funds $76.7M
General Fund
$38.4M
General Fund
$35.6M
Compensated
Absences
$2.8M
Special
Revenue
$0.1M
Lighting and
Landscaping
$0.2M
CDBG
$0.1M
Urban
Runoff
<$-0.2M
Capital Projects
$25.3M
GFAR
$15.8M
Construction
Tax
$3.0M
Traffic
Mitigation
$2.6M
Storm Drains
$2.6M
Gas Tax
$1.4M
Grants
<$-0.1M>
Internal
Services
$10.7M
IT
$3.1M
Equipment
Replacement
$2.3M
Workers'
Comp
$2.2M
ABAG
Liability
$1.4M
Facilities
Maint.
$0.9M
Vehicle
Maint.
$0.6M
Stores
$0.2M
Trust Funds
$2.2M
RDA
Successor
$1.7M
Library
Trust
$0.5M
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SUBJECT: REVIEW AND DISCUSS THE TOWN’S PRELIMINARY TOTAL OPERATING CASH
POSITION AS OF JUNE 30, 2018.
DATE: SEPTEMBER 10, 2018
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DISCUSSION (cont’d):
From the total cash position illustrated on the previous page, the following pages provide
summaries of cash fund balances by fund “type.” The summaries provide the cash balances by
fund within the fund type (i.e. General Fund, Special Revenue Fund, Capital Projects Fund, etc.)
and provide additional information related to the existence of the cash balance. For instance in
the General Fund, a significant portion of the cash balances (approximately $8.4 million at June
30, 2018) represent amounts held to pay liabilites, such as accrued payroll or accounts payable
at year end, or represent developer deposits the Town has received to perform various
development-related services, such as inspections. Cash balances and other assets on the
balance sheet that do not have associated liabilities encumbering them make up the reserve
cash balances per the Town’s adopted General Fund Reserve Policy (see Attachment 1).
General Fund $38.4M
General Fund
$35.6M
• BMP Housing Deposits- $3.5M
• Deposits/AP - $2.7M
• General Plan Update Deposits - $2.2M
• Reserves
• Capital Special Projects - $7.9M
• Budget Stabilization - $5.0M
• Catastrophic Reserve - $5.0M
• Pension/OPEB - $3.2M`
• Open Space Reserve - $0.6M
• Compensated Absences (short term) - $0.4M
• Strategic Planning - $0.3M
• Sustainability - $0.1M
• To be allocated per adopted Policy- $5.2M
Compensated Absences
$2.8M
• Compensated Absences (long term) - $2.8M
Inherent in any review of cash balances, staff cautions the consideration of any of these
balances as “idle” or “surplus.” While the Town Council has the discretion and authority to re-
direct some of the monies to other uses and priorities, a discussion of the trade-offs should
occur prior to such a decision. As discussed earlier, all cash balances are held to be available for
many Town priorities, including operating and capital project expenditures.
Concentrating upon the General Fund balances shown above, the Town’s General Fund Budget
Stabilization ($5.0M) and Catastrophic Reserves ($5.0M) represent approximately three months
of the Town’s operating expenditures. To put these contingency reserves of
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SUBJECT: REVIEW AND DISCUSS THE TOWN’S PRELIMINARY TOTAL OPERATING CASH
POSITION AS OF JUNE 30, 2018.
DATE: SEPTEMBER 10, 2018
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DISCUSSION (cont’d):
approximately $10 million in perspective, staff researched the reported financial impact of the
2017 Tubbs fire in Napa, Sonoma, and Lake Counties. According to a December 11, 2017 report
in the Santa Rosa Press Democrat, the City of Santa Rosa is “expected to see a revenue drop of
at least $11.5 million over the next two years, a blow to a government already facing financial
challenges.” An event with the magnitude of the Tubbs fire could potentially extinguish all
Town contingency reserves at their current levels. For these reasons, staff has not advocated
lowering these reserve levels. During the Operating Budget hearings, the Town C ouncil did
express its interest to review the General Fund Reserve Policy (Attachment 1) together with the
data on the actual year end close. Given the preparation of the CAFR and the completion of the
independent audit, it is expected that this topic will be scheduled for November/December.
Other General Fund reserves such as the General Fund Reserve for Capital and Special Projects
($7.9M) serve as funding source for the Town’s Five-Year Capital Improvement Program and as
such are “programmed” out over a five-year future horizon to serve as an integral part of
funding for critical infrastructure improvement projects throughout the Town.
The next fund group is Special Revenue funds which are defined as funds used to account for
proceeds of specific revenue sources restricted to be spent for specific purposes.
Special Revenues $0.1 M
Lighting and
Landscaping Districts
$0.2M
• Restricted for future infrastructure improvements in
each local improvement district. The Town has six of
these districts.
CDBG
$0.1M
• Community Development Block Grants
• Restricted for eligible federal block grant projects that
focus on funding sources for accessibility (Americans
with Disabilities Act) ADA projects.
Urban Runoff
<$-0.2M>
• Fund has a negative cash balance as of June 30, 2018.
The fund is awaiting the January through June 2018
runoff program payment from West Valley Sanitation
District that will be received in July 2018.
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SUBJECT: REVIEW AND DISCUSS THE TOWN’S PRELIMINARY TOTAL OPERATING CASH
POSITION AS OF JUNE 30, 2018.
DATE: SEPTEMBER 10, 2018
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DISCUSSION (cont’d):
The Capital Projects fund is used to account for and report resources that are restricted,
assigned, or committed for expenditure for capital outlay and infrastructure improvement
projects throughout the Town as identified in the Town’s Five-Year Capital Improvement Plan.
Capital Projects $25.3M
GFAR
$15.9M
• AP/Deposits Payable - $1.8M
• Programmed for 18/19 Capital Projects - $14.1M
Construction Tax
$2.9M
• Dedicated for infrastructure
improvements/underground utilities/park
improvements
Traffic Mitigation
$2.6M
• Dedicated for traffic improvements throughout the
Town -$2.5M
• Accounts Payable - $0.1M
Storm Drains
$2.6M
• Dedicated for storm drain improvements - $2.5M
• Accounts Payable - $0.1M
Gas Tax
$1.4M
• Restricted for local road improvements
Grants
<$-0.1M>
• Awaiting grant reimbursements from federal/state
Internal Service Funds represent funds used by the Town to account for financing of goods or
services provided by one department to the Town organization on a cost -reimbursement basis.
Internal Service Funds $10.7M
IT
$3.1M
• Future technology system upgrades per the IT Master
Plan- $2.1M
• Accounts Payable- $1.0M
Equipment
Replacement
$2.3M
• Allocated for future fleet replacement per equipment
replacement schedule
Workers' Compensation
$2.2M
• Claims payable/other liabilities - $1.7M
• Reserved for future claims - $0.5M
ABAG
$1.4M
• Claims payable/other liabilities - $0.6M
• Reserved for future claims - $0.8M
Facilities Maintenance
$0.9M
• Accounts Payable/other liabilities -$0.7M
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SUBJECT: REVIEW AND DISCUSS THE TOWN’S PRELIMINARY TOTAL OPERATING CASH
POSITION AS OF JUNE 30, 2018.
DATE: SEPTEMBER 10, 2018
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DISCUSSION (cont’d):
Internal Service Funds $10.7M (cont’d)
Vehicle Maintenance
$0.6M
• Vehicle maintenance supplies
• Claims payable/other liabilities - $0.4M
Stores
$0.2M
• Cash balance dedicated for Town-wide printing/postage
For additional information on the cash balances available in the Town’s Internal Service Funds,
staff has provided a review of audited fund balance histories from FY 2010/11 through FY
2016/17 in Attachment 2. Included in this review are the levels of fund balance (fund balance
largely consists of cash but could also include other assets such as accounts receivable,
inventory, etc.) and the fund balance targets for each fund.
Some funds like ABAG Self-Insurance, Workers Compensation, and Facilities Maintenance have
experienced adverse claims experience or damage to Town facilities in recent years which have
caused the fund balances to be below targeted levels. The targeted levels are based upon
staff’s judgment of potential adverse self-funded claims activity or the potential repair costs
such as a major heating/ventilation/air conditioning failure or other major repairs to one of the
Town’s buildings due to flooding, fire, etc.
For example, the Town’s Equipment Replacement Fund cash balance was reduced in recent
years by $1.5M as part of the funding solution for the Almond Grove Street Rehabilitation
project. Staff from the Town’s Parks and Public Works Department recently completed a Town-
wide analysis of the Town’s equipment replacement needs projected over the next ten fiscal
years. The analysis included restoring the Equipment Replacement cash balance to its $3.0M
target over the next four fiscal years. Assuming this can be accomplished, the analysis indicates
that even with the restoration of cash to its target level of $3.0M, the cash balances in the
Equipment Replacement fund will be completely exhausted within five years to meet the
replacement needs Town-wide.
Fiduciary or Trust Funds are monies held in trust by the Town, in effect they represent monies
that are legally separate from the Town’s cash assets.
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SUBJECT: REVIEW AND DISCUSS THE TOWN’S PRELIMINARY TOTAL OPERATING CASH
POSITION AS OF JUNE 30, 2018.
DATE: SEPTEMBER 10, 2018
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DISCUSSION (cont’d):
Fiduciary Funds $2.2M
Library Trust
$0.5M
• Dedicated for library use per donor trust agreements
RDA Successor Agency
Trust
$1.7M
• Cash balance to be used for August 2018 COP debt
service (2002 & 2010 COP's principal and interest
payments) totaling $1.5M.
External Trust Funds represent monies held by outside entities restricted for specific purposes.
The Town has established two such funds, one for Other Post Employment Benefits and the
second established to account for resources needed to pay down the Town’s unfunded pension
liabilities.
External Trusts $17.7M
California Employers'
Retiree Budget Trust
$16.5M
• Currently providing approximately 50% of prefunding
for the OPEB plan. Starting from 0% funded status upon
the implementation of GASB 45 in FY 2008/09, the
funded status is approximately twice the statewide
average in a recent survey of California cities.
Public Agency
Retirement Trust
(PARS)
$1.2M
• Newly established IRS Section 115 Pension Trust with
the Public Agency Retirement Services(PARS) dedicated
solely for the payment of pension obligation
expenditures. Using dollar cost averaging deposits
made monthly In FY 2018/19 this Trust is expected to
increase to $4.7 million by June 30, 2019.
Finance Committee Summary:
Staff presented this preliminary review of operating cash balances expected to be reported on
the Town’s annual financial report for the year ended June 30, 2018 to the Town’s Finance
Committee on August 6, 2018. The Committee discussed the levels of cash balances and the
baseline of cash balance determined by staff expertise to support key internal services, such as
workers compensation, general liability claims against the Town, equipment replacements,
information technology services, and Town facilities maintenance. Following are the highlights
of topics discussed:
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SUBJECT: REVIEW AND DISCUSS THE TOWN’S PRELIMINARY TOTAL OPERATING CASH
POSITION AS OF JUNE 30, 2018.
DATE: SEPTEMBER 10, 2018
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DISCUSSION (cont’d):
• Some Committee members and the public expressed concern about the interest rates
earned on the Town’s cash as opposed to the interest cost of unfunded liabilities. S ome
members expressed their interest in accessing some of the available cash balances and
placing them in potentially higher yielding investment opportunities, such as the newly
created pension IRS Section 115 Pension Trust.
• Some expressed their concern about substantial cash balances held in the Town’s
investment portfolio that currently earn low interest yields. The lower yields are the
result of the Town’s Investment Policy in accordance with State law which prioritizes
safety (protection of asset principal value), liquidity (readily convertible to cash in the
public market), and yield in order of importance. The June 30, 2018 investment report
indicates a weighted average return of approximately 1.73%.
• Some members discussed creating cash flow projections for the Capital Improvement
Program to better manage investments; however, any enhanced efficiency in operating
portfolio investments would still be bound by State Law regulating municipal
investments.
• The Committee discussed the Town’s General Fund reserves for Budget Stabilization ($5
M) and Catastrophe ($5 M), totaling approximately $10 million. These amounts are
consistent with the adopted General Fund Reserve Policy (Attachment 1) which has a
target of 25% of operating expenditures, 12.5% for Budget Stabilization and 12.5% for
Catastrophic reserves. This target achieves a three-month reserve for contingencies and
exceeds the GFOA minimum by one month.
CONCLUSION:
Staff is pleased to present the composition and status (preliminary and subject to final year -end
close and final independent audit) of Town-wide fund cash balances to the Town Council. As
detailed in the report, the estimated cash balances totaling $76.7 million as of June 30, 2018
represent a variety of sources and levels of restriction as to their use . Each cash balance
represents amounts either committed legally for specific use by law or by established Town
policy for strategic purposes such as future infrastructure financing or providing a reserve in
case of severe economic downturns or disruptions to Town services from unknown future
catastrophic events. These cash balances are presently invested and reported
quarterly on a month-by-month basis to the Town Council. The most current calculation of
annual yields earned on these balances is approximately 1.73% (June 2018) and many
economists predict a continuing rising interest rate environment for the coming year which
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SUBJECT: REVIEW AND DISCUSS THE TOWN’S PRELIMINARY TOTAL OPERATING CASH
POSITION AS OF JUNE 30, 2018.
DATE: SEPTEMBER 10, 2018
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CONCLUSION (cont’d):
should continue to positively affect the Town’s total returns on the invested cash in the near
term.
COORDINATION:
This report was coordinated with the Town Manager’s Office and the Finance Department.
Attachment:
1. Town of Los Gatos General Fund Reserve Policy
2. Town of Los Gatos Internal Service Fund History-FY 10/11 Through FY 17/18