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Staff Report PREPARED BY: STEPHEN 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 TOWN OF LOS GATOS COUNCIL AGENDA REPORT MEETING DATE: 12/18/2018 ITEM NO: 17 DATE: DECEMBER 13, 2018 TO: MAYOR AND TOWN COUNCIL FROM: LAUREL PREVETTI, TOWN MANAGER SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION RECOMMENDATION: Discuss municipal finance requirements and specific Town financial information. BACKGROUND: In recent months, the Town Council has been discussing financial information pertaining to the Town. In September, the Council requested staff to provide a more in-depth discussion of local government financial practices and requirements, such as the limitations placed on local government investments, cash balances, and reserve levels and policies. The information is presented in a question and answer format. The Town’s Internal Service Funds and an independent analysis of the Town’s Catastrophic and Budget Stabilization Reserves were discussed at the December 10, 2018 Finance Committee meeting. The comments from the Committee are included in this report. DISCUSSION: Q: Why do the Town’s invested assets earn much less than the approximate 7% charged annually by CalPERS on the Town’s calculated unfunded pension liability? A: CalPERS currently assumes a long-term return on its retirement trust assets of approximately 7% and if CalPERS returns are less than the expected rate, the unfunded balance is charged approximately 7%. Additional information on the Town’s unfunded pension PAGE 2 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): liabilities and other post-employment benefits (OPEB) can be found on the Town’s website: https://www.losgatosca.gov/2479/Town-Pension-and-OPEB-Plans-Information. The State of California Government Code Section 53601 et. al. defines the legal investment vehicles available to local governments for investment of operating reserves. In addition, the Town Council annually updates its own Investment Policy which conforms to State law. Under State law, local governments are limited primarily to highly rated U.S Government and U.S. Agency debt instruments, and highly rated corporate securities none of which can exceed five years in maturity. This restriction is intended to preserve a municipalities operating funds at the cost of potentially higher annual yields available from investing in riskier asset classes. Restrictions include an absolute ban on equity or stock or derivate type investments. There are also limits as to how much of the Town’s investments can be held in corporate or other bonds. Because of the low risk nature of these investments, the annual returns of approximately 1.84% (as of September2018) will not compare favorably with riskier investments. However, the Towns investment returns on operating funds do compare favorably to rates of returns recorded by other California local governments. Q: How much of the Town’s assets are invested at this lower rate? A: All of the Town’s cash and investments of approximately $74.0 million (6/30/18 audited balance-Statement of Net Position not including fiduciary funds) is invested at the current weighted average interest rate yield of 1.84% as of September 2018. However, the Town has established two independent trusts to hold assets to pay its unfunded pension and other post- employment benefits. The first being the recently adopted IRS Section 115 Public Agency Retirement System -PARS Trust and the second being the California Employers Retirement Benefit Trust (CERBT) OPEB liabilities Trust. As these are external Trusts, the monies placed in them can be invested over a longer investment horizon with investments in other asset classes like equities (stocks) and longer- term bonds. The investment decisions are guided by the investment strategy and policies set up for each Trust. As of September 30, 2018, the Town has proactively funded the following balances: Name of Trust Balance as of September 30, 2018 PARS Trust $2.2M CERBT Trust $16.6M The new PARS Trust is only seven months old as of September 30, 2018 and the yield for the first quarter over that short-term period was 3.4%. The CERBT Trust was proactively PAGE 3 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): established by Town Council in 2009 in response to a new accounting standard (GASB 45) with an initial contribution of $400,000 with annual payments and interest accruing to its present $16.6 million balance, bringing OPEB funding from 0% at inception to over 50% in a span of less than ten years. The average annual return for the Town’s CERBT Trust from its inception through July 31, 2018 is reported by CERBT at 8.33%. This historical return compares quite favorably to the current 6.75% long term return assumed by the Town’s independent actuaries. Q: Why does the Town have Catastrophic and Budget Stabilization Reserves? When were these Reserves established and does the Town Council General Fund Reserve Policy set the levels at 12.5% of the Operating Budget for each? A: In 2009, the Town Council established the Catastrophic and Budget Stabilization Reserves to allow the Town to have the financial capacity to address unforeseen economic challenges, natural disasters, or other unpredictable events that would require the Town to respond to critical needs of the community. The levels were set at 12.5% each based on the staff’s consultation with the General Finance Officers Association (GFOA) and their approach at that time. Given the Council’s interest in this topic and the question as to whether the Reserves are at the correct level, the Town Manager’s Office hired a well-respected consultant, William C. Statler who utilized a GFOA risk methodology to analyze the Town’s Catastrophic and Budget Stabilization Reserves (see Attachment 1). Mr. Statler will be in attendance at the Council meeting. Q: How much has the Town contributed to the General Fund Appropriation Reserve (GFAR) for capital projects? A: From FY 2007/08 through FY 2017/18, the Town has placed approximately $32.8 in the General Fund Reserve for capital projects. These reserves have been the major funding source for major infrastructure projects like the Almond Grove Street Rehabilitation Project, the new Town Library, and many other improvements in that ten-year span. Q: What are the Town’s Internal Service Funds and why does the Town use them? What are the balances held in these funds and how are they determined by staff? A: A common practice for local governments is to establish Internal Service Funds that allow for the Town to identify and allocate the cost of certain Town -wide services that are incurred throughout the organization. Departments using these services reimburse the Internal PAGE 4 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): Service Funds for the cost of the service. The Town of Los Gatos maintains seven Internal Service Funds (ISF). Examples of Town Internal Service Funds include: • Equipment Replacement Fund - provides dedicated funds for replacement of Town fleet and other equipment. • General Liability and Workers’ Compensation Funds - provides funds to administer and pay claims for general liability and workers’ compensation. • IT Services - provides funds for the provision of Town-wide IT services including funds for future technology upgrades for both hardware and software replacement. • Facilities Maintenance - provides repair and maintenance services for Town owned facilities such as the Town Civic Center, library, corporation yard, police operations, neighborhood center, and other smaller Town facilities. Each of these funds is accounted for on a full accrual basis and funding levels are maintained by staff to achieve targeted funding levels for each fund based upon historical trends and estimates of future costs. The Government Finance Officers Association (GFOA) provides fund balance guidance and a methodology for establishing General Fund reserves but does not provide the same guidance for Internal Service Funds. Local agencies all treat the issue differently since establishing an Internal Service Fund reserve policy is not required under general accounting principles . Members of the California Society of Municipal Finance Officers (CSMFO) often conduct surveys among its 2,000 members, which represent over 300 agencies. A recent member survey of California cities with ISF reserve policies received a limited response from the Cities of Saratoga, La Palma, and Garden Grove. The City of Orange also conducted a reserve survey which obtained 17 responses; however, only eight of those responding agencies have Internal Service Fund (ISF) reserve policies. The table below provides a summary of examples from the surveys. PAGE 5 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): Town Internal Service Funds City of Saratoga City of La Palma City of Garden Grove City of Morro Bay Self-Insurance No Recommendation $1,000,000 90% Confidence Level No Recommendation Workers’ Compensation No Recommendation N/A 90% Confidence Level No Recommendation Information Technology No Recommendation 100% of Replacement Value IT Network 50% of Replacement Cost $100,000 to $150,000 Office Stores No Recommendation N/A N/A No Recommendation Equipment Replacement No Recommendation 33% of Replacement Value 50% Replacement Value 20% to 33% of Replacement Value Vehicle Maintenance No Recommendation N/A 50% Replacement Value 20% to 33% of Replacement Value Facilities Maintenance No Recommendation $50,000 N/A $50,000 to $75,000 The survey results illustrate the general lack of ISF reserve policies and the range of approaches adopted by cities that do have a policy in place. It should be noted that the City of Garden Grove utilized outside consultants (Revenue & Cost Specialists, LLC) for the review of their policies and as a result, made conservative recommendations on funding levels. As part of that review, Revenue Cost Specialists also reviewed the City of La Palma’s reserve policies. The table reflects the lack of consistency in the types of ISFs established, the reserve levels for such funds, and even the adoption of an ISF reserve policy by local government agencies. PAGE 6 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): Other peer ISF reserve policy examples include: • The City of Pittsburg established within its municipal code ISF reserves equal to 30% of all respective operating budget expenses. • The City of Newport Beach approved by Council resolution a compensated absences reserve policy equal to 50% of its long-term liability. • The City of Mission Viejo has a reserve policy for its computer, equipment , and vehicle internal service funds; however, those reserves are kept within the General Fund. The Town does not have a formal adopted policy regarding the Internal Service Fund Reserves; however, the Annual Operating Budget provides a description of the utilization of the funds and the nature of anticipated expenditures. Although no formal policies have been adopted, staff has maintained minimum and maximum target reserve levels for the Town’s ISFs. The ISF Reserve targets have balanced the need to maintain reserves commensurate with historic expenditures while planning for future anticipated and unanticipated expenditures. The following table provides a summary of all the ISF reserves combined. PAGE 7 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): As illustrated in the table, annual expenditures for all ISFs has averaged over $5.0 million since 2008. It’s important to note that while the Town has established an aggregate target balance of $10.0 million for all ISFs, actual fund balances have declined steadily since 2014. Provided below is a summary of the Town’s individual ISF Reserves. Liability Self Insurance Internal Service Fund (Pooled Liability Assurance Network Joint Powers Authority) The Town is a member of an insurance pool, established to provide general liability, property insurance, and risk management services. This self-insurance program is funded through departmental charges based on established assessment rates per labor dollar expended. Service rates are established to maintain fund balance capacity at a minimum of three times the annual operating expense. This rule of thumb (or target) provides a funding source for potential claims against the Town. Excess funding is reduced through lower service rates and transfers back to the General Fund. The graph below illustrates the last ten fiscal years actual spending trends compared with the fund levels and target. The ten-year average annual fund expenses are $640,000, which translate to an approximate reserve target of $1,900,000. The ten-year average annual fund balance is $1.4 million with a PAGE 8 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): recent FY 2016/17 Fund Balance of $885,440, and the FY 2017/18 Fund Balance of $994,769. Staff recommends keeping the Self-Insurance Fund balance reserve target at $1,900,000. Workers’ Compensation Internal Service Fund The Town’s Workers’ Compensation Program provides for anticipated liabilities for workers’ compensation benefits. The Town self-insures for benefits provided to Town employees and volunteers for work-related injuries up to $250,000 and has excess insurance coverage for claims up to $25 million. The Town belongs to the Local Agency Workers’ Compensation Excess (LAWCX) Joint Powers Authority for the purpose of pooling for this excess insurance. A third- party administrator, Innovative Claims Solutions, Inc. (ICS), handles the Town’s day-to-day workers’ compensation claims administration. The revenues to fund the Workers Compensation program are derived as a percentage of salary each payroll period. Each Department pays a portion of the program’s cost based on gross wages and level of risk for the various job classifications within the Department. The annual appropriation to this fund represents the self-insurance premiums paid by the operating Departments. Service rates are established which maintain fund balance capacity at approximately two and one-half times the annual operating expenditures. Any excess funds are returned through reduced rates and fund balance transfers as needed. PAGE 9 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): The ten-year average annual fund expenses are $1,033,301, which translates to an approximate reserve target of $2,600,000. The ten-year average annual fund balance is $1.8 million with a recent FY 2016/17 Fund Balance of $902,310, and a FY 2017/18 Fund Balance of $620,782. Staff recommends keeping the Workers’ Compensation Fund balance target at $2,600,000. Information Technology Fund Information Technology Services (IT) supports the delivery of services to all the Town’s employees and customers through the use of SMART technology (Sensible, Multi -modal, Accessible, Responsive, and Time-phased Technology). Key services include the maintenance, replacement, and upgrade of existing technology and the support for new information technology initiatives. The IT Program receives revenues through charges to General Fund and Special Revenue departmental programs based on service and equipment replacement costs. Service rates are adjusted to build fund balance capacity for future technology projects and the continued need to identify and invest in information technology opportunities. The Town is preparing its IT Master Plan that will provide a comprehensive review of the future costs related to IT replacement. PAGE 10 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): The ten-year average annual fund expenses are $1,050,000. The ten-year average annual fund balance is $2.4 million with a recent FY 2016/17 Fund Balance of $2,251,330, and the FY 2017/18 Fund Balance of $2,161,808. Staff recommends keeping the fund balance target at $2,500,000. The Town’s recommendation regarding the current fund balance target will be re - evaluated based on the completed IT Master Plan. Office Stores Fund Photocopy and printer equipment, postage, and bulk mail expenditures are centrally funded through the Town’s Office Stores Program, and subsequently charged back to the appropriate Department for services and materials utilized on a monthly basis. Due to limited personnel activity in the operations of this program, there are no staffing, key projects, or performance measures accounted for in this fund. The Office Stores Program maintains approximately 36 printers and copiers. The lease and maintenance program includes toner and repairs for all copiers and printers and the Office Stores Fund pays for copy paper use on the printers and copiers on the program. The ten-year average annual fund expenses are $120,000. The ten -year average annual fund balance is $190,000 with a FY 2016/17 Fund Balance of $200,437, and a FY 2017/18 Fund Balance of $227,437. PAGE 11 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): Equipment Replacement Fund The Equipment Replacement Program provides funding for the replacement of Town vehicles, equipment, and information technology with a value greater than $10,000. The initial capital costs associated with an asset are charged to the program budget where the asset exists. The program having custody and utilizing the asset pays the replacement cost amo rtized over the life of the asset through internal service charges. These internal service charges accumulate the needed funding to replace the Town’s vehicle and equipment assets at the end of their useful lives. The result of this funding structure is a smoothing of operating expenditures and a more accurate reflection of the actual cost of operations. Replacement is based on the vehicle meeting predetermined age and/or mileage criteria as set forth in the Equipment Replacement Policy. To date the Town maintains approximately $6.8 million in base cost assets. PAGE 12 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): The ten-year average annual fund expenses are $600,000. The ten -year average annual fund balance is $2.9 million with FY 2016/17 Fund Balance of $1,894,054, and a FY 2017/18 Fund Balance of $2,382,270. Staff maintains a Town-wide equipment replacement list to identify annual anticipated equipment replacement costs utilizing useful life criteria. The replacement list forecasts average annual replacement costs of $1.2 million through 2033 with FY 2018/19 budgeted expenditures of $1.6 million. Staff recommends maintaining a target fund balance of $2,000,000. Vehicle Maintenance Fund The Vehicle Maintenance Fund maintains the Town’s vehicles and equipment to ensure each piece is safe and functional. Program staff provide preventive maintenance and repair for the Town’s fleet and light to heavy duty construction equipment. A combination of in -house personnel and outside contractors provide maintenance and repair services for the Town’s vehicles and equipment. PAGE 13 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): The ten-year average annual fund expenses are $560,000. The ten -year average annual fund balance is $420,000 with FY 2016/17 Fund Balance of $182,370, and a FY 2018/19 Fund Balance of $262,790. No target is needed for this Fund. Facilities Maintenance Fund The Facilities Maintenance Fund provides services to ensure Town facilities are safe and functional for public and employee use. Services include custodial services, elevator maintenance, cell phone services, heating and ventilation systems, building improvements, facility security, and lighting systems. Facilities staff also plan, schedule, and manage small and large building facility projects such as building remodeling, public access infrastructure improvements, floor covering, work space reconfigurations, roof repairs, heating and air conditioning system improvements, electrical services, and all other aspects required to keep the Town’s facilities functional and safe. Revenues for this fund are obtained through assessment chargebacks to Town Departments, based upon a percentage of square footage assigned to each Department. The Facilities Maintenance Program pays for all operating expenditures, including utilities, repairs, and maintenance and the Departments in turn fund the program’s expenditures through these chargebacks. The Town is preparing its Facilities Master Plan that will provide a comprehensive review of the future costs related to facilities replacement. PAGE 14 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): The ten-year average annual fund expenses are $1,300,000. The ten-year average annual fund balance is $720,000 with FY 2016/17 Fund Balance of ($37,870), and the FY 2017/18 Fund Balance of $245,437. Staff recommends keeping the fund balance target at $1,000,000. The Town’s recommendation regarding the current fund balance target will be re-evaluated based on the completed Facilities Master Plan. Q: What were the Finance Committee comments regarding the Reserves and Internal Service Funds? A: The Finance Committee members were in general agreement that the Town ha s too many Internal Service Funds and Reserves, and that this practice le ads to “excess cash” being budgeted instead of being put towards a more productive use. Members believed that the excess dollars would be better used to address unfunded liabilities. Q: If the Council directed the elimination of one or more Internal Service Fund, how would the Town handle expenditures for that item (e.g., equipment replacement)? A: If there is not a specific fund and the Town’s Operating Budget did not anticipate the expense, then the Council would be asked to approve budget adjustments for these expenditures. Any unanticipated budget adjustments would be required to identify a funding source. If surplus funds do not exist than the Council would have to identify previously approved service or investment expenditure to eliminate. Q: What is the Town’s standard budget process and why does the Town budget non - safety positions at top step? A: The budget process begins with goals and objectives derived from the Town Council’s annual Strategic Priorities process usually taking place in January of the preceding fiscal year. The budget planning and preparation process is a collaborative effort involving Town Council, the Town Manager, and Town Departments. The initial budget planning process is informed by a five-year financial forecast which provides estimates of expected resources available and updated cost of service estimates for the coming year. Both the Strategic Priorities and the five-year forecast function as a guide to the development of the proposed budget for the coming year. The proposed budget is introduced typically in May with a public hearing for all interested parties to participate, with the final budget usually adopted in June which will incorporate any changes to the proposed budget as a result of the May public hearing. Property tax revenue estimates for the upcoming budget are updated based on information from the Santa Clara County Assessor’s Office and Tax Collectors Office. Staff obtains sales tax projections from its expert consultant, Muni Services, who compiles sales tax data from the State of California. Staff works closely with all Departments to arrive at accurate estimates of PAGE 15 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): revenues related to Departmental charges for services, licenses, and permits. In addition, Finance staff tracks many smaller revenue sources including franchise fees, interest earnings, and transient occupancy (hotel) tax collections and provides estimates for future years based upon historical trends and local economic forecasts. Expenditure forecasts for operating expenses are tracked by staff using historical trends supplemented by the estimated cost impact anticipated by salary/benefit changes as agreed to through the Town’s collective bargaining process, estimated changes to pension and OPEB costs, future inflationary expectations, any new change to service levels, or types of service delivery. As the Town provides most of its services such as public safety and public works through use of personnel services, labor costs account for approximately 60% of the annual cost of service delivery in the General Fund. The Town budget s non-sworn personnel at top step. This practice allows for the Town to offer highly skilled candidates a reasonable salary and be competitive in a tight labor market. The additional benefit is that if there is any salary savings, it becomes potential budget savings available for capital project funding, which has no dedicated revenue source. After the public adoption of the upcoming fiscal year budget by Town Council, staff has spending authority for service delivery and capital infrastructure spending the next year. The adopted budget is a balanced budget, and should actual revenues exceed e stimates and/or expenditures come in below the adopted budget levels, budget savings will lead to increases to fund balance for governmental funds. Q: How are the General Fund reserve balances determined at fiscal year end? A: For governmental funds, fund balance increases/decreases are the result of actual revenues exceeding (or under) actual expense for the fiscal year. Focusing on the largest governmental fund, the Town’s General Fund, the Town has a General Fund Reserve Policy which provides staff guidance in how to account for the increases to or (uses) of fund balance. Should a surplus exist, the current policy allocates the surplus as follows: PAGE 16 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): GENERAL FUND ALLOCATION OF FISCAL YEAR-END SURPLUS (IF ANY) Step 1 •Adjust restricted reserves for legal requirements such as carryover appropriations for outstanding purchase orders. •Adjust both Reserve for Uncertanties and Budget Stabilization to Required 12.5% of operating budget levels providng a total reserve of 25% of the operating budget. Step 2 •If savings are sufficient, add an additional $300,000 is also added to the Pension/OPEB reserve to be used for potential pay down of unfunded liabilites. •If sufficient savings are available an additional deposit to the Pension/OPEB reserve equal to the payment estimated to be need to amoritze pension pension over 20 versus 30 years. For FY 18/19 the amount calculated is $390,000 Step 3 •All remaing surpluses not used in steps above are avallable for placement into the Reserve for Capital and Special Projects. This reserve is currently the primary source for funding future Town improvements to its capital infrastructure improvement program. PAGE 17 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): Under GASB 54 accounting principles, the Town reserves for governmental funds are further grouped into classifications on the financial statements as follows: Town Reserve Classifications Restricted Fund balances held by fund legally committed for use for the legal purpose. Applies to fund balances for Storm Drain, Construction Tax, Gas Tax and Local Improvement Districts • Reserve for Capital Outlay • Reserve for Repairs and Maintenance Committed The Town Council, serving as the highest level of budget authority, may commit fund balance for specific purposes through formal action with an ordinance or resolution. • Budget Stabilization and Catastrophic Reserve • CalPERS/OPEB Reserve • Almond Grove Street Rehabilitation project Assigned Fund balance amounts that are constrained by the Town’s intent to be used for specific purposes, but are neither restricted or committed, are reported as assigned fund balance. • Future Capital & Special Projects • Compensated Absences • Parking • Other small assigned reserve balances Q: In looking at the General Fund Assigned Reserves, what is the General Fund Assigned Reserve for Compensated Absences? A: Town annually reserves sufficient balances to fully pay its accrued compensated absence balances for all Town employees calculated at fiscal year-end. This practice provides assurance that the Town has resources to pay off all accrued compensated absence liabilities which are reflected as a long-term liability on the Statement of Net Position. If these assets were expended on services and not set aside, the Unrestricted Net Position would be negatively impacted by approximately $2.4 million for the fiscal year ending June 30, 2018. PAGE 18 OF 18 SUBJECT: DISCUSS MUNICIPAL FINANCE REQUIREMENTS AND SPECIFIC TOWN FINANCIAL INFORMATION DATE: DECEMBER 13, 2018 S:\COUNCIL REPORTS\2018\12-18-18\Finance Q & A\Staff Report.docx 12/13/2018 3:30 PM DISCUSSION (continued): CONCLUSION Staff is pleased to present this information to Town Council to provide more understanding and transparency to the Town’s financial information. As stated earlier in the report, the Town’s website is a tremendous resource of additional material including in-depth discussions of the Town’s unfunded pension and OPEB liabilities, annual financial reports (CAFR), annual operating and capital budgets, capital improvement plans, along with other financial infor mation to aid in better communicating the Town’s financial information. Attachment: 1. Independent Analysis of the Town’s Catastrophic and Budget Stabilization Reserves