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HomeMy WebLinkAboutCity Council Staff Report (Finance)CALIFORNIA NATIONAL CITY INCORPORATED City Council Staff Report October 7, 2014 ITEM Staff Report: Resolution of the City Council of the City of National City authorizing the amendment of City Council Policy # 201, "Maintenance of Reserve Funds." BACKGROUND City Council Policy # 101, "City Council Policy Manual," requires that the City Council and City Manager annually review the City Council Policy Manual and authorizes any Councilmember, the City Manager, or the City Attorney to bring suggestions for revisions to the manual at other times during the year. The most recent annual review was completed during the City Council Policy Manual Workshop held December 10, 2013. During the workshop, Council approved changes recommended by staff to Policy # 201, "Maintenance of Reserve Funds." The substantive changes included improving the basis of the balance targets of the Liability Insurance Reserve and Workers' Compensation Reserve and enhancing the Debt Service Reserve requirement to ensure consistency with bond indentures and/or other debt agreements. Staff now brings forward for Council's consideration recommended revisions to Policy # 201 intended to clarify reserve targets, streamline management of the reserves, and enhance control over the use of the reserves. DISCUSSION Policy The general policy statement has been revised to formally delegate to the City Manager the duty to maintain all City reserves. Currently, the policy delegates the responsibility of maintaining the General Fund Contingency Reserve to the City Manager but is silent on this function in relation to the remaining reserves. Formal delegation of the responsibility for maintenance of all reserves to the City Manager clarifies the policy and streamlines the function in a manner consistent with the delegation of authority granted to the City Manager through National City Municipal Code §2.01. The policy statement also stipulates the reserve balance thresholds are goals toward which the City will aim, rather than mandates. This provision allows the City flexibility in meeting and maintaining reserve balances, which may be necessary in the initial efforts to fund all of the reserves at their minimum desired levels or during periods of economic uncertainty and/or financial difficulty. General Fund Contingency Reserve The General Fund Contingency Reserve section has been amended by: Page 2 Resolution of the City Council of the City of National City authorizing the amendment of City Council Policy # 201, "Maintenance of Reserve Funds." October 7, 2014 • removal of the clause regarding the City Manager's responsibility for maintaining the reserve and the sentence regarding Council approval of expenditures from it, to eliminate redundancy resulting from changes relating to these areas elsewhere in the policy; • removal of "minimum target range" with respect to the balance goal, leaving only the range (i.e., "an amount equal to between) 25-50%; and • addition of the definition of "operating expenditures." As noted above, the general policy statement delegates the duty to maintain all reserves to the City Manager; therefore, the provision applying to responsibility for the General Fund Contingency Reserve specifically is unnecessary. And since the use of any reserve must be authorized by Council, this authority has been recognized elsewhere in the policy. Thus, the application of the requirement only to the General Fund Contingency Reserve is redundant. Currently, the policy states the General Fund Contingency Reserve should be "at a minimum target range equal to between 25% and 50% of a single year's General Fund operating expenditures" (emphasis added), which is a self -conflicting statement, since "minimum" denotes a single quantity, while "range" references a plurality. For this reason, only statement of the target range of 25-50% is necessary. "Operating expenditures," as the standard to which the General Fund Contingency Reserve balance is compared, has been clarified to include all expenditures, except those of a capital nature, plus the operating subsidies transferred to other funds. Gas Taxes Fund and Sewer Service Fund Contingency Reserves Language has been added to clarify the revenue bases for the Gas Taxes Fund Contingency Reserve and Sewer Service Fund Contingency Reserve are their corresponding funds. Liability Insurance and Workers' Compensation Reserves The target balance of the Liability Insurance Reserve and Workers' Compensation Reserve currently is defined as "an amount no less than 75% to 85% of the Confidence Level of Adequacy as established annually by the City's actuary." As with the General Fund Contingency Reserve, this definition is contradictory and renders the adequacy of the balance goal subject to negative misinterpretation. In addition, unlike with other reserves, the Liability Insurance Reserve and Workers' Compensation Reserve do not require positive fund balances or equities, i.e., asset balances which exceed their liability balances, only claim -related assets sufficient to pay claims estimated to be paid within a fiscal year. Therefore, these reserves require only an adequate level of claim assets, not fund balance. Accounting for both corrections necessary, the target has been revised to "an amount sufficient to ensure (liability insurance or Workers' Compensation) claim assets equal to the 80% Confidence Level of Adequacy applicable to estimated (liability insurance or Workers' Compensation) claims, as established biennially by the City's actuary." Clarifying language has been added and unnecessary verbiage removed, to enhance the readability and understanding of these sections. Page 3 Resolution of the City Council of the City of National City authorizing the amendment of City Council Policy # 201, "Maintenance of Reserve Funds." October 7, 2014 Debt Service Reserves Since debt service is paid from several funds and a debt service reserve is most appropriately held in the fund from which the corresponding debt service is paid, the Debt Service Reserve section has been amended accordingly, with the heading of the section made plural and addition of a provision allowing for reserves to be held in multiple funds, as appropriate. The cumulative requirement of the section is unchanged. Vehicle Replacement Reserve (Equipment Replacement Reserve renamed) The Equipment Replacement Reserve has been renamed the "Vehicle Replacement Reserve," to better reflect its intended use — the replacement of assets of the City's fleet, primarily composed of motor vehicles. (Renaming of the Equipment Replacement Fund to correspond with its reserve's name change will be proposed, if this amendment is approved.) The goal of a balance range of "an amount equal to between the accumulated depreciation and estimated replacement value of the motor vehicle assets of the Vehicle Replacement Fund" is proposed. The reason for the change is two -fold. First, the existing standard for the reserve target, "(a)n amount equal to the accumulated depreciation of the replacement value of the motor vehicle fleet," is illogical, since only an existing asset may be depreciated, not a future asset, which "replacement value" suggests. Second, as a reserve intended to be used as an ongoing funding mechanism, its balance goal should be a range which accounts for the estimated replacement value of all of its assets and establishes a minimum threshold to ensure sufficient assets exist should a significant vehicle purchase be necessary within a relatively short period of time. A definition for "motor vehicle" has been included to clearly indicate for which assets this reserve is intended to be used. Reserve Balances Currently, assets sufficient to fund most authorized reserves at or near their proposed minimum levels are available within their respective funds; however, balances have not been established for all of those reserves. The table accompanying this report lists current reserve balances, available assets within each fund to be designated to their respective reserves, current reserve balance targets, and proposed reserve balance targets. Revisions Impacting All Reserves A stipulation giving Council the discretion to suspend any or all reserve maintenance requirements has been added. Replenishment guidelines have been established for replenishment of a reserve falling below its minimum required level: • If a reserve is drawn down to 75-99% of its minimum required balance, it shall be restored to 100% over a 1 to 3 year period. • If a reserve is drawn down to 50-74% of its minimum required balance, it shall be restored to 100% over a 3 to 5 year period. Page 4 Resolution of the City Council of the City of National City authorizing the amendment of City Council Policy # 201, "Maintenance of Reserve Funds." October 7, 2014 • If a reserve is drawn down below 50% of its minimum required balance, it shall be restored to 100% over a 5 to 7 year period. Also included is a provision allowing suspension of these timelines, should financial or economic circumstances make meeting them impractical. A provision has been added to permit establishing and reporting on reserve levels at times of the year other than during the development of the budget and presentation of the Comprehensive Annual Financial Report. Finally, since the use of a reserve balance constitutes the increase of the appropriation of a fund, transfers and expenditures from any reserve require Council approval, and the requirement has been added to ensure it is adhered to. RECOMMENDATION Accept staff's recommendation, adopting the amendment of City Council Policy # 201, "Maintenance of Reserve Funds." Page 5 Resolution of the City Council of the City of National City authorizing the amendment of City Council Policy # 201, "Maintenance of Reserve Funds." October 7, 2014 Balances Available for Reserves 6/30/13 Fund Balance Basis Current Estimated Current Rsv Bal. Reserve Available Fund + Reserve Balance Balance' Avail. Balance General Fund Contingency Reserve 9,085,066 1,752,195 10,837,261 Gas Taxes Fund Contingency Reserve - - Sewer Service Fund Contingency Reserve 338,946 2,332,685 2,671,631 Workers' Compensation Reserve 4 6,153,000 1,321,449 7,474,449 Liability Insurance Reserve 4 785,000 182,365 967,365 Debt Service Reserves 5: NCJPFA Debt Service Fund 52 166 218 Library Bonds Debt Service Fund 1,006,328 1,006,328 Other Debt Total Debt Service Reserve Equipment (Vehicle) Replacement Fund Minimum Reserve Minimum Reserve Target (Current) Target (Proposed) 10,824,980 80,221 357,546 7,094,000 979,000 494,730 377,900 923,244 52 1,006,494 1,006,546 2,212,500 6 2,513,162 4,725,668 1,795,874 4,218,429 2 10,503,349 80,221 357,546 7,421,000 1,052,000 494,730 377,900 923,244 1,795,874 4,218,429 3 'General ledger trial balance report as of 6/30/13. 2 Although the current General Fund Contingency Reserve standard is operating expenditures, the balance often has been measured against the total of all General Fund expenditures (operating & capital) but without the inclusion of operating subsidy transfers (to the Library, Parks, Nutrition, & Personnel Compensation funds). 3 Maximum reserve - $21,006,699. 4 Totals are based upon the liability for unpaid loss and loss adjustment expenses at 6/30/14 from the Nyhart/Epler actuarial valuation report of the City's self-insurance programs. 5 Debt service reserve amounts reflected are current fiscal year payment totals. It is recommended the reserves be funded at the cumulative total of the highest payments of the debt service schedule, to ensure, once achieved, the reserve is always fully funded and to maximize interest earnings. 6 The transfer from the General Fund to the Equipment Replacement Fund for reserves was approved for FY 15. 7 Approximate maximum reserve - $5,332,300.