Attachment 1 -General Fund Reserve Policy Redlined (2)
COUNCIL POLICY MANUAL
TITLE: General Fund Reserve Policy POLICY NUMBER: 4-03
EFFECTIVE DATE: 05/16/2011 PAGES: 6
ENABLING ACTIONS:
REVISED DATES: 02/21/2017; 05/15/2018; 06/04/2019, 09/21/2021
APPROVED:
PURPOSE
The purpose of this Policy is to establish a target minimum level of designated reserves in the
General Fund to:
• Reduce the financial impacts associated with a disaster or catastrophic event;
• Respond to the challenges of a changing economic environment, including prolonged
downturns in the local, state, or national economy; and
• Demonstrate continued prudent fiscal management and creditworthiness.
BACKGROUND
The Town of Los Gatos has always maintained a high level of General Fund reserves, which has
contributed to superior ratings by credit rating agencies; provided financial flexibility in
economic downturns; contributed a source of investment income for General Fund operations;
and assured financial coverage in the event of future emergencies.
GUIDING PRINCIPLES
Following sound financial practices and adhering to the Government Finance Officers of
America (GFOA) recommendations, the Town’s designated reserves include reserves for known
and unknown contingencies, which take into consideration the:
• Diversity of revenue base
• Volatility of revenue structure
• Changes in political environment
• Frequency of operating surpluses/deficits
• Cash flow management practices
ATTACHMENT 1
Small Town Service Community Stewardship Future Focus
TITLE: General Fund Reserve Policy
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POLICY NUMBER: 4-03
The General Fund Reserve Policy is to be reviewed by the Town Council as part of the annual
operating budget review and adoption process.
POLICY
The fund balance is the difference between the assets and liabilities reported in a governmental
fund. Under current accounting standards, there are five separate components of fund
balance, each of which identifies the extent to which the Town is bound to honor constraints on
the specific purposes for which amounts can be spent.
The following components are defined by Governmental Accounting Standards Board (GASB)
Statement No. 54 and shall constitute the Town’s Fund Balance:
• Nonspendable Fund Balance (inherently nonspendable)
• Restricted Fund Balance (externally enforceable limitations on use)
• Committed Fund Balance (self-imposed limitations on use)
• Assigned Fund Balance (limitation resulting from intended use)
• Unassigned Fund Balance (residual net resources)
The first two components listed above are not specifically addressed in this Policy due to the
nature of their restrictions. The example of nonspendable fund balance is inventory. Restricted
fund balance is either imposed by law or constrained by grantors, contributors, or laws or
regulations of other governments. This Policy is focused on financial reporting of unrestricted
fund balance, or the last three components listed above. These three components are further
defined below.
The accounting policies of the Town consider restricted fund balance spent first when
expenditure is incurred for purposes for which both restricted and unrestricted fund balance is
available. Similarly, when an expenditure is incurred for purposes for which amounts of the
unrestricted classifications of fund balance could be used, the Town considers committed
amounts to be reduced first, followed by assigned amounts and then unassigned amounts.
Committed Fund Balance
The Town Council, as the Town’s highest level of decision-making authority, may commit fund
balance for specific purposes pursuant to constraints imposed by formal action taken, such as
an ordinance or resolution. These committed amounts cannot be used for any other purpose,
unless the Town Council removes or changes the specific use through the same type of formal
action taken to establish the commitment. The Town Council action to commit fund balance
needs to occur within the fiscal reporting period; however, the amount can be determined
subsequently at the final close of the fiscal year.
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POLICY NUMBER: 4-03
The Town currently sets aside funds into four committed reserves to address unforeseen
emergencies or disasters, significant changes in the economic environment, unfunded pension
and Other Post-Employment Benefits (OPEB) obligations, and key infrastructure and capital
projects. These include the Catastrophic Reserve, Budget Stabilization Reserve, Pension (OPEB)
Reserve and Almond Grove Street Projects Reserve.
Catastrophic Reserve
Funds reserved under this category shall be used to mitigate costs associated with unforeseen
emergencies, such as a disaster or catastrophic event. Should unforeseen and unavoidable
events occur that require the expenditure of Town resources beyond those provided for in the
annual budget, the Town Manager or designee shall have authority to approve Catastrophic
Reserve appropriations. The Town Manager or designee shall then present to the Town Council
a budget amendment confirming the nature of the emergency and authorizing the
appropriation of reserve funds.
The Town currently commits to maintaining this reserve at a minimum of 12.5% of General
Fund ongoing operating expenditures (minus one-time expenditures).
Should a catastrophic disaster occur, the required reserve level should be adequate to meet the
Town’s immediate financial needs. For example, in the event of natural disaster, the
Catastrophic Reserve would provide necessary coverage for basic operating expenses, including
salary and benefits for safety and non-safety Town employees, while still meeting debt service
obligations for approximately 60 days. This time frame would enable the Town to explore other
available cash alternatives, including the use of internal service funds.
Budget Stabilization Reserve
Funds reserved under this category shall be used to mitigate annual revenue shortfalls (actual
revenues less than projected revenues) due to changes in the economic environment and/or
one-time uses that will result in future efficiencies and/or budgetary savings. Examples of
“economic triggers” and one-time uses include, but are not limited to:
An unplanned, major event such as a catastrophic disaster requiring expenditures which
exceed the General Fund Catastrophic Reserve;
Drop in projected/actual revenue of more than five percent in property or sales tax, or
other economically sensitive revenues;
Budgeted revenue taken over by another entity exceeding $100,000;
Loss of businesses considered to be significant sales tax generators;
Reductions in projected/actual revenue of more than five percent due to actions by the
state/federal government;
Workflow/technical system improvements to reduce ongoing, personnel costs and
enhance customer service;
One-time maintenance of service levels due to significant economic/budget constraints;
and
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POLICY NUMBER: 4-03
One-time transitional costs associated with organizational restructuring to secure long-
term personnel cost savings.
The Town currently commits to maintaining this reserve at a minimum of 12.5% of General
Fund ongoing operating expenditures (minus one-time expenditures).
Should a loss of the Town’s single highest source of sales tax revenue occur, the required
reserve level should be adequate to meet the Town’s immediate financial needs. For example,
the reserve level in the Budget Stabilization Fund would provide for an approximate 3-year
transition period, giving the Town adequate time to realign its operating costs with available
resources, while minimizing service impacts.
Pension/OPEB Reserve
Funds reserved under this category shall be used to further mitigate costs associated with
pension and OPEB unfunded obligations. These funds will be used as a funding source for
potential additional discretionary payments to pay down unfunded pension and other post-
employment obligations, or held in the reserve account to be used as a supplemental funding
source for unanticipated increases to the annual pension and other post-employment costs
resulting from future actuarial assumptions and investment market volatility.
This Policy requires the Town to set aside additional annual discretionary payments (ADPs) to
reduce the effective amortization period of the Town’s pension unfunded actuarial liabilities
from approximately 30 years to 20 years. To facilitate the implementation of this Policy, staff
shall update the estimated unfunded amortization schedules in conjunction with the Town’s
and CalPERS actuaries. This process will coincide with the annual proposed budget process to
determine the additional annual discretionary payment levels required to maintain the goal of
lowering the amortization period from a 30-year to a 20-year amortization period for all prior
year actuarial bases through FY 18/19. The ADP is currently projected at $390,000 for FY
2018/19 (subject to annual updates provided by CalPERS actuaries). Per Council direction ADPs
will either be allocated directly to CalPERS, the Town’s Pension IRS 115 Trust Fund, or the OPEB
IRS 115 Trust Fund.
As part of the proposed budget for each forthcoming fiscal year, staff shall annually
appropriate, to the extent possible, the amount of annual discretionary payments necessary to
maintain the unfunded pension liability amortization shortening from 30 to 20 years.
In the event the annual amount required for additional discretionary payments is not available
from operating revenues, the ADP shall be funded by a first lien on any one-time excess
revenues above expenditures once other General Fund required reserve levels have been
established at the appropriate levels as per the Town’s General Fund Reserve Policy. If in any
given year neither budgetary appropriations or a first lien on one-time excess revenues are
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POLICY NUMBER: 4-03
sufficient to fund the annual ADP, that years ADP will be accrued to the following year until
paid.
Additionally, effective upon the close of fiscal year 2015/16 and thereafter, if sufficient General
Fund year-end savings are available and targeted reserve levels of 25% (12.5% for Catastrophic
Reserve and 12.5% for Budget Stabilization Reserve) of the next fiscal year’s operating budget
and the funding the following year’s proposed budget ADP have been met, upon final close of
the fiscal year, a minimum of $300,000 annually shall be deposited into the Pension/OPEB
Reserve fund. In addition, Council can assign additional amount deposited to the Pension/OPEB
Reserve with a formal Council action from available year end savings.
Almond Grove Street Project Reserve
Funds reserved under this category shall be used to reconstruct the 10 streets identified in the
Almond Grove Street Rehabilitation Project specification.
The Council awarded the bid in April 2017 allowing for $2.9 million savings within the project.
The Council reappropriated the use of the savings through the FY 2017/18 budget process. The
Almond Grove Reserve should be reduced by the identified $2.9 million savings. The Almond
Grove Street Reserve balance will be reduced at each fiscal year end by the funds expended on
the Almond Grove Street Rehabilitation Project during the fiscal year.
Assigned Fund Balance
Amounts that are constrained by the Town’s intent to be used for specific purposes, but are
neither restricted nor committed, should be reported as assigned fund balance. This Policy
hereby delegates the authority to assign amounts to be used for specific purposes to the Town
Manager for the purpose of reporting to assign amounts in the annual financial statements. A
few examples of assigned fund balance follow.
• Encumbrances – material s and services on purchase order and contracts which are
unperformed.
• Reappropriations – appropriated by the Council for specific projects or programs that
were not completed and not encumbered by year end.
• GASB 31 Adjustments – $10,000 or higher unrealized investment gains that have been
recorded in the financial statements in accordance with GASB 31.
Capital and Special Projects Reserve
Funds reserved under this category are designated for key infrastructure and capital/special
projects as identified in the Town 5-year Capital Improvement Plan, as there is no ongoing
funding source to support the Town’s capital needs.
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POLICY NUMBER: 4-03
Unassigned Fund Balance
At the end of each fiscal year, the Finance Department reports on the audited year-end
budgetary fiscal results. Should actual General Fund revenues exceed expenditures and
encumbrances, a year-end operating surplus shall be reported. Any year-end surplus which
results in the General Fund balance exceeding the level required by this Reserve Policy shall be
available for allocation for the following, subject to Council approval:
Offset projected future deficits
Anticipated intergovernmental fiscal impacts
One-time funding, non-recurring needs
Upon funding any of the above reserve levels pursuant to this General Fund Reserve Policy, any
remaining surplus of fiscal year revenues above expenditures shall be placed in the Capital and
Special Projects Reserve for appropriation within the Capital Improvement Program budget.
Replenishment of Unreserved Fund Balance
In keeping with the principles discussed in this Policy, when either fund is used, Town Council
will develop a 1 to 5 year reserve replenishment plan to meet the minimum threshold of 25% of
General Fund ongoing, operating expenditures, excluding one-time expenditures.
APPROVED AS TO FORM:
Robert Schultz, Town Attorney