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Home My WebLink About2019-01-10 Study Session - Reserve Policy Res 2018-73 ... i4 s CITY OF P LID DESERT , „ 73-510 FRED WARING DRIVE ---V--- 4' PALM DESERTCALIFORNIA/ C FORNIA 92260-2578 `�. u A J1. 1e. -4 �e � TEL• 760 346-0611 ': 'f'' . FAX: 760 341-6372 °='•�3"• info@palm-desert.org NOTICE OF STUDY SESSION OF THE PALM DESERT CITY COUNCIL NOTICE IS HEREBY GIVEN that the Palm Desert City Council will convene for a Study Session Thursday, January 10, 2019, at 2:00 p.m. in the Administrative Conference Room of the Palm Desert Civic Center, 73510 Fred Waring Drive, Palm Desert, California 92260. Said Study Session will be for the purpose of discussing the City's Reserve Policy, adopted by Resolution No. 2018-73 on September 27, 2018. RA Ft LL D. KLASSEN, I- Y CLERK CITY OF PALM DESERT, CALIFORNIA January 3, 2019 NO ACTION WILL BE TAKEN AT THE STUDY SESSION. PURPOSE OF THE STUDY SESSION IS INFORMATION ONLY. �,PIUNEEO ON IE(IEEEO NJEI 4 City of Palm Desert Adopted Reserve Policy ADOPTED SEPTEMBER 27, 2018 RESOLUTION NO . 2018-73 Purpose of Reserve Policy To reserve adequate resources for: % Operational Liquidity Meet Future Needs Potential Uncertainties yEnsure Stable Service Delivery Reserve Categories 1 . General Fund Operating Reserve 2 . Contingency/Emergency Reserve 3 . Facilities Maintenance Reserve (Reserve Study) 4. Capital Improvement Projects Reserve 5 . Liability Reserve 6. Employment Benefits Reserve 7 . Other Fund Stability Reserve 8. Equipment Replacement Reserve 9 . Economic Development/Land Acquisition Reserve General Fund Operating Reserve For Operating Cash Flow ➢ 3 months (25%) of operating expenditures Reserve : $14,502,403 NOTES: After six months review this amount is right on target as many of the City's revenues are received in the 2nd half of the fiscal year. Contingency/Emergency Reserve Emergencies (economic or natural disaster) " 20% of annual General Fund Revenues Reserve : $ 11,602,479 rt. Facilities Maintenance Reserve Does not include Desert Willow Buildings $ 12,488,217 Infrastructure 8,711, 174 Parks & Gardens 7,806,514 Pool 2,538,800 Hiking Trails 7,386 TOTAL 100% FUNDED $ 31,552,091 ► Less Amounts available (other funds) $ (16,010,650) ► General Fund Reserve $ 15,541,441 Capital Improvement Projects Reserve ➢ Major Capital Projects : ➢ undergrounding ➢ recreational facilities yinfrastructure ➢ parks and gardens ➢ buildings Reserve : 20% of the total 5 year CIP $12,297,553 Liability Reserve Costs not covered by the City's insurance programs • Claim costs within deductibles • Settlements • Judgments o Self-Insurance Retentions (over $50 Million) Reserve: $4 Million ($2M Gen Liability $2M Worker's Comp) Employment Benefits Reserve >Accumulated Compensated Leave (Vac/Sick) Fully Funded Pension Obligations 2017 funding ratio : 70.7% = $87,507,192 (66.2% in 2016) Unfunded liability 6/30/17 = $36,255,427 Other Post-Employment Benefits (OPEB) Currently funded at 85% $ 13.7 Million Unfunded liability 6/30/2018 $2.8 Million less 18/19 payment $ 1M Reserve : 50% of a 1% change in pension discount rate = $9 Million Other Fund Stability Reserve Aquatic Center .' Fire Services % Other funds that are currently self-sustaining Reserve: Prior Year 'transfers out' of the General Fund to other funds approx. $3.3 Million Equipment Replacement Reserve > Currently Fully Funded Vehicles Public Works Equipment Information Technology Systems yCommunication Systems Reserve: 100% of historical cost of assets = the amount ranges from $6.3M to $8.3M Economic Development/ Land Acquisition Reserve Funded by commitments from the General Fund and property sales — City and former RDA Facilitate economic partnerships Economic development incentives Property/Land acquisitions Current Reserve approximately $4,000,000 (does not include $600,000 in economic development fund ) Visualization of Reserves - $78,871,349 pg. 70 CAFR Reserve Category Reserve Amount Designation 6/30/18 Unassigned Fund Balance 78,871 ,349 General Fund Operating Reserve 14,502,403 Assigned Emergency/Contingency Reserve 11 ,602,479 Committed Facilities Maintenance Reserve 15,541 ,441 Committed Capital Improvement Projects Reserve 12,297,553 Committed Liability Reserve 4,000,000 Committed Employment Benefits Reserve 8,925,165 Committed Other Fund Stability Reserve 3,300,000 Committed Equipment Replacement Reserve - Committed Econ Development/Land Acquisition Reserve 4,000,000 Committed Total Committed and Assigned Reserves: 74,169,041 Unassigned after Reserve Allocations vy 4,702,308 Unassigned • other Funds Funds used for restricted purposes include: Streets/Roads (i.e. Measure A Fund, Drainage, Signalization, etc.) Developer Impact Fee Funds (Parks, Fire Facilities, Child Care, etc.) • Recycling • CDBG • El Paseo Assessment District Fund • Assessment Districts and Landscape and Lighting Districts • Low and Moderate Income Housing Asset Fund (dissolution of RDA) Art in Public Places Questions ? The End RESOLUTION NO. 2018-73 STAFF REPORT CITY OF PALM DESERT FINANCE DEPARTMENT MEETING DATE: September 27, 2018 PREPARED BY: Janet M. Moore, Director of Finance REQUEST: Adopt Resolution No. 2018- 73 , a Resolution of the City Council of the City of Palm Desert approving a Reserve Policy Recommendation Waive further reading and adopt Resolution 2018- 73 approving a Reserve Policy and the allocation of fund balance based on the Reserve Policy and this staff report. Strategic Plan Objective/City Manager 2018 Goals This request does not directly apply to a specific strategic plan goal; however, the request will assist in implementing the goals of the plan. The development of a Reserve Policy is included in the City's 2018 Department Goals. Executive Summary In 2008 the City Council approved a memorandum policy establishing a General Fund working capital reserve equivalent to one hundred percent (100%) of the annual General Fund Operating Budget. The existing policy has provided the City with the financial flexibility it needed over the last ten years, although best practice recommends that levels of reserve be determined by assessing the needs of, and risks to, the City's revenues and fund balance. The primary goals of maintaining adequate reserves are for financial stability, operational liquidity, future needs and potential risks to the City's fund balance. To ensure these goals are met, staff analyzed the needs of the City and the risks to revenues and identified the following categories for reserve designations, which are described more fully in the next sections of this report. ➢ General Fund Operating Reserve ➢ Contingency/Emergency Reserve • Facilities Maintenance Reserve ➢ Capital Improvement Projects Reserve ➢ Liability Reserve ➢ Employment Benefits Reserve • Other Fund Stability Reserve ➢ Equipment Replacement Reserve • Economic Development/Land Acquisition Reserve September 27, 2018 - Staff Report Resolution No. 2018- 73 Reserve Policy Page 2 of 8 The amounts recommended to be reserved are identified in the Fiscal Analysis at the end of the report. For illustration, a chart in that section also provides comparisons for reserving fund balance on three percentage based levels (100%, 75%, and 50%) with the exception of the General Fund Operating Reserve and the Contingency/Emergency Reserve which shall remain at one hundred percent (100(%) funded for annual operations. In addition, the Policy sets priorities for the distribution of excess revenue at the end of each fiscal year to assist in funding and replenishing the identified reserve categories as well as ensuring that current operating needs are funded. Background Analysis In 2008, the nation was faced with one of the worst financial crises in history. In order to ensure adequate resources were available to provide City services, the City Council approved a memorandum policy establishing a General Fund working capital reserve equivalent to one hundred percent (100%) of the annual General Fund operating budget. This policy provided the City with the financial flexibility it needed to weather the financial crisis that was affecting the national economy and still maintain service delivery. While this policy has continued to be sufficient for the last ten years, the Government Finance Officers Association (GFOA) suggests that as a best practice cities should, from time to time, consider their own unique circumstances in order to determine adequate reserves. This includes assessing the needs of, and risks to, the City's revenues and fund balance and allocating reserves accordingly. Staff assessed the needs of the City which include ongoing operations for service delivery, operating cash flow, future capital projects, facilities maintenance, pension obligations and equipment replacement. The risks to the City's fund balance include rising public safety costs, fund stability', and unexpected changes in financial condition2 including economic uncertainties, emergencies, revenue volatility, one-time expenditures, and pension obligation stability. Establishing reserves based on these considerations also assists the City to demonstrate to interested parties, the City's financial strength and stability. This information is also often considered for financial ratings for debt issuance and annual disclosures. Identifying Reserve Categories and Funding Analysis The primary goal of the Reserve Policy (Policy) is to identify and reserve, or have an ongoing funding plan to reserve, adequate resources for operational liquidity, future needs and assessed risks to the City's fund balance. The Policy includes broad reserve categories that Fund stability includes the risk to the General Fund of other funds that may depend on a transfer from the General Fund if revenues didn't cover expenses,such as the Palm Desert Aquatic Center. 2 An unexpected change in financial condition could include things such as the economic crisis in 2008,a loss or delay of a major revenue source,a natural disaster,liabilities not covered by insurance,or change in the pension discount rate for the City's unfunded pension liability. September 27, 2018 - Staff Report Resolution No. 2018- 73 Reserve Policy Page 3 of 8 are meant to be as inclusive as possible, yet flexible enough to address needs or risks as they arise. Except as noted,the main funding source for the recommended reserve categories is the General Fund Unobligated (or unassigned) Reserves. These reserve categories are similar to having savings accounts for intended uses but still available if something unexpected surfaces. > General Fund Operating Reserve—The General Fund is the primary fund used to finance the daily operations of the City, such as public safety, streets maintenance, recreational parks, and special events. The General Fund accounts for all general revenues of the City not specifically levied or collected for special or restricted purposes. Because the General Fund's revenue is received at varying times throughout the year and is not consistent with the timing of expenditures, operating funds are necessary for cash flow. Staff recommends initially reserving an amount to equal twenty five percent (25%) of the projected annual General Fund expenditures. This reserve will be adjusted at the end of each fiscal year to the recommended level based on the next year's projected expenditures. Contingency/Emergency Reserve — In the event of an unexpected change in financial condition or public emergency, this contingency reserve would be used to supplement any monetary needs for General Fund operations to ensure service delivery. This could include a public emergency such as a natural disaster, some other unforeseen catastrophic event, economic uncertainties, unexpected operating or capital expenditures, unexpected spike in public safety costs or loss of a major revenue source. The GFOA recommends a reserve of no less than two months of regular general fund operating revenues or expenditures to protect against unexpected changes in financial condition. After the financial crisis in 2008, the fluctuation in the City's revenue was approximately twenty percent (20%) of the 2007-08 budget or $11 million dollars. While the City also reduced its budget at that time to offset the reduction in revenues to the extent possible, the cost of core services was still rising. It took about eight years for the City's revenue base to recover to pre-2008 levels. Based on these actual events, twenty percent (20%) of the annual operating revenue would be prudent as a reserve, understanding that the percentage reserved should be reviewed from time to time to determine whether the amount should be increased for the current circumstances. In order to reserve for these types of uncertainties, staff recommends reserving an amount equal to twenty percent (20%) of the projected annual General Fund revenues. This reserve will be adjusted at the beginning of each fiscal year to the recommended level based on that year's projected revenues. ➢ Facilities Maintenance Reserve -- In 2017, the City Council authorized a Capital Replacement Reserve Study ("Study") to identify the long-term maintenance and replacement needs of the City. The Study is now complete and the summary is attached in Exhibit A. The Study is comprised of over 35 components that include City buildings, September 27, 2018 - Staff Report Resolution No. 2018- 73 Reserve Policy Page 4 of 8 infrastructure, parks and gardens, recreation facilities and hiking trails. The Study contains a recommendation for an initial deposit as well as annual deposits looking forward 30 years. Many of the reserve components identified have multiple sources of funding. The total initial deposit recommendation is $25,000,000. To be fully funded, the Study suggests a total reserve of $31,489,392. Staff has identified approximately $18,629,783 that is available from various sources, some of which are restricted for these purposes, to fund a portion of the reserve. The balance needed from the General Fund to fully fund this reserve is $12,859,609. Staff recommends reserving the fully funded amount of $31,489,392 from the identified sources to fully fund this reserve. Annually, this reserve will be reviewed to identify projects that have been completed with alternative funding, have been completed at a lower/higher cost, or are no longer needed. Staff will then compare the balance along with the recommended Annual Capital Contribution and adjust the reserve accordingly. If this reserve is not fully funded, it will be the goal to keep the reserve funded percentage to at least sixty percent (60%). ➢ Capital Improvement Projects Reserve—With the adoption of the annual budget, the City Council approves a five year Capital Improvement Program (CIP). Projects included in the CIP are for major capital projects or improvements to the City's infrastructure including recreational facilities, undergrounding, roadways, storm drains, parks and gardens, buildings, and rights of way. Many of these projects have other sources of funding identified during the annual budget process; however, the future availability of these funds is limited. For example, the City collects a developer impact fee for new park facilities. As development slows, the collection of the park fee and other similar fees will diminish. CIP projects tend to be one-time expenditures unlike facilities maintenance which are cyclical in nature, i.e. building a bridge vs. painting a building. For purposes of this reserve, property and land acquisitions, including right of way, easements, or properties for strategic redevelopment may be considered as an appropriate use of the reserve. To ensure that projects can be accomplished when they are needed, and are not dependent on the fluctuations in year to year revenues and expenditures, a reserve of an amount equal to twenty percent (20%) of the five year CIP project total is practical. Staff recommends reserving an amount equal to a total of twenty percent(20%) of the current adopted five year CIP at the end of each fiscal year. ➢ Liability Reserve -- The City is responsible for costs not covered by the City's self- insurance programs including claim costs within the deductible amounts, certain types of settlements and judgments, or any claims awarded in excess of $50 million. The City belongs to a self-insurance pool administered by the California Joint Powers Insurance Authority. The City has a $10,000 deductible per claim for property damage. Premiums are determined annually by the City's payroll and claims experience relative to the members within the risk-sharing pool. Premiums and claims fluctuate from year to year so the annual cost can often fluctuate as well. This reserve could also be used for September 27, 2018 - Staff Report Resolution No. 2018- 73 Reserve Policy Page 5 of 8 deductibles, to pay any amount that may be considered a liability to the City consistent with this category, or to pay any contribution or premium to the pool on behalf of the City. In order to reserve for these liabilities, staff recommends reserving$4 million which is the minimum amount of the pooled retention ($2 million each) for both Liability and Workers'Compensation. ➢ Employment Benefits Reserve — Internal Service Funds have been established for the purpose of reserving monies for compensated balances and Other Post Employment Benefits (OPEB), however, several other factors outside of the City's control can affect the cost of annual employment benefits. For example, a one percent (1%) change in the pension discount rate can impact the City's current unfunded liability by almost$16 million dollars. On December 21, 2016, the CaIPERS Board of Administration voted to lower the discount rate from 7.5%to 7% over three years. The City took a proactive approach to leveling the effects of the change by making additional payments toward its unfunded liability, which has resulted in an increase in the City's `funded ratio' from 66.2% to 70.7% for the year ended June 30, 2017. However, the employer's normal contribution rates are still climbing, which will cause the annual employer payroll contributions to increase by approximately $100,000. Since this increase would be cumulative, by the end of the 2021 fiscal year, the City will have paid a total of approximately $600,000 in increased normal contributions. if the rates continue upward, this amount will continue to cumulatively rise as well. In order to maintain budget stability which may include these increases or any other extraordinary change in the cost of employment benefits, this reserve could be used to offset the increases, retire pension liability so that annual costs are in line with available revenues or to offset the cost of any other employment benefits during any year. (See attached Exhibit B - examples of pension amortization schedules and alternatives) Consistent with current practice, staff recommends on June 30 of each year, reserving one hundred percent (100%) of existing obligations of accrued unused vacation, sick leave, and compensatory time as well as the current year's OPEB requirement in the appropriate internal service funds. In addition, staff recommends reserving fifty percent (50%) of a one percent (1%) difference in the Public Employees Retirement System (PERS) discount rate. ' Other Fund Stability Reserve -Some funds are not sufficiently funded by other revenues (e.g. fire services, aquatic center operations) and require a transfer of funds from the General Fund each year to cover expenses. While some other funds are currently self- sustaining, looking forward, this may not always be the case. For example, the City's affordable housing rental programs are currently self-sustaining as many of the needed capital improvements are funded from restricted monies reserved prior to the elimination of redevelopment. These funds, however, are finite and once exhausted, staff will need to seek alternative funding sources (i.e. General Fund) for deferred maintenance. September 27, 2018 - Staff Report Resolution No. 2018- 73 Reserve Policy Page 6 of 8 In the event the General Fund operating budget, in any year, is not balanced, this reserve fund could be used to offset transfers to other funds that are not self-sustaining. Staff recommends initially reserving the expected transfers out for FY 2017-18 of $3.3 million in this reserve. This amount will be adjusted annually based on the needed or anticipated transfers out to other funds. ➢ Equipment Replacement Reserve — An Internal Service Fund has been established for the purpose of equipment replacement. This includes equipment not identified within the Facilities Maintenance Reserve (generally the items included in the Facilities Maintenance Reserve are affixed to the facility in some way) including vehicles, office furniture, information systems, printers, scanners, communication systems, etc. Due to the nature of the replacements, this reserve will be the most fluid as most items in this category typically have relatively short life cycles of between 3-10 years. This reserve is currently funded at 100%. For future years, staff recommends setting aside at least one hundred percent (100%) of the total historical cost of equipment assets as noted in the CAFR and may include amounts set aside in excess of one hundred percent (100%) for any approved one-time expenditures such as those identified in the Information Technology Master Plan. ➢ Economic Development/Land Acquisition Reserve - This reserve was established to facilitate economic development partnerships, incentives and property acquisitions to further the City's economic development goals. This reserve is partially funded by a portion of the proceeds from the former redevelopment agency's land sales and currently has a balance of $737,246. As agency properties close escrow the City's portion will be deposited into this reserve as well. This reserve may be used in connection with any economic development strategic plan goals adopted by the City that may include acquiring properties to assist with economic development in the area. To facilitate the City's economic development goals, staff recommends setting aside an additional$4,000,000 in this reserve for economic development that may include the need to acquire strategic land or properties. Replenishing Reserve Categories with General Fund Excess Revenue In addition, the Policy sets guidelines and priorities for the distribution of excess revenue at the end of each fiscal year to assist in funding and replenishing the identified reserve categories as well as ensuring that current operating needs are funded. The proposed priority for distributing or reserving excess revenue at year end is as follows: 1. All excess revenue shall first be used to replenish the General Fund Operating Reserve until it reaches the Policy designated level. 2. The amount necessary from excess revenue needed to reserve for continuing appropriations and encumbrances that are not funded by other methods, if any. September 27, 2018 - Staff Report Resolution No. 2018- 73 Reserve Policy Page 7 of 8 3. The amount necessary from excess revenue to fund an adequate reserve for potential liabilities, compensated absences, and other post-employment benefits to be paid during the next fiscal year that are not funded by other methods, if any. 4. The amount necessary to fund the Contingency/Emergency Reserve to maintain General Fund operations, service delivery and budgetary stabilization in the event of an unexpected change in financial condition3 or public emergency. Or, if there are insufficient amounts available to fully fund the Contingency/Emergency Reserve, an amount necessary to temporarily reserve for any known and/or anticipated economic downturns during the next fiscal year that are expected to be more than three percent (3%) of the previous year's General Fund revenues. 5. Other considerations for the allocation of excess revenues will be at the discretion of the City Manager after review of the City's outstanding obligations, approved goals, or level of reserves within each category. Fiscal Analysis Having adequate reserves for the City's continued fiscal stability, regardless of economic climate, is the main reason for staff's recommendations below. The chart below provides comparisons for reserving fund balance based on three percentage levels, although the General Fund Operating Reserve and the Contingency/Emergency Reserve remain at one hundred percent funded for annual operations. Staff reviewed the comparisons in funding levels and staff recommends that, based on the reasoning and rationale in the Identifying Reserve Categories and Funding Analysis section of this report, reserves should be funded at the full recommended levels for a total in reserves of $68,374,953. By comparison, under the current reserve policy, the City would have reserved $58,009,613 last year for all of the above purposes. 3 An unexpected change in financial condition could include things such as the economic crisis in 2008, a loss or delay of a major revenue source,a natural disaster,liabilities not covered by insurance,or change in the pension discount rate for the City's unfunded pension liability. • September 27, 2018 - Staff Report Resolution No. 2018- 73 Reserve Policy Page 8 of 8 Recommended Reserve Allocations 2018 For Illustrative Purposes: Recommended Reserve to be allocated from %of 75%Funded %of 50%Funded %of Reserve Category General Fund Total Except* Total Except* Total 6130/17 Unassigned Fund Balance 74,259,748 74,259,748 74,259,748 General Fund Operating Reserve' 14,066,311 21% 14,066,311 24% 14,066,311 30% Emergency,Contingency Reserve* 11,257,255 16% 11,253,049 20% 11,253,049 24% Facilities Maintenance Reserve 12,859,609 19% 9.644,707 17% 6,429,805 14% Capital Improvement Projects Reserve 10,861,666 16% 8,146,250 14% 5,430,833 12% Liability Reserve 4000,000 6% 3,000,000 5% 2,000,000 4% Employment Benefits Reserve 8030,113 12% 6,022,584 10% 4,015,056 9% Other Fund Stability Reserve 3,300,000 5% 2,475,000 4% 1,650,000 4% Equipment Replacement Reserve" - 0°,0 - 0% - 0% Econ DevelopmentiLand Acquisition Reserve 4,000,000 6% 3,000,000 5% 2,000,000 4% Total Recommended Committed Reserves: 68,374,953 100% 57,607,900 100% 46,845,053 100% Unassigned after Reserve Allocations 5,884,795 16,651,848 27,414,695 Reserves that remain at 100%funded status across all comparisons "Reserve is currently funded at 100%and has been set aside in an internal service fund. By adopting the Policy,the City Council is confirming its desire and intent to commit reserves for the identified purposes. In the event funds are needed for some other extraordinary circumstance, the City Council may review and adjust the availability of funds in any reserve. LEGAL R VIEW DEPT. REVIEW FINANCIAL REVIEW CITY MANAGER bert . Har reaves J.arfet M. Moore Janet M. Moore Lauri Aylaian ttor Director of Finance Director of Finance City Manager ATTACHMENTS: Resolution No. 2018-73 Exhibit A-- Replacement Reserve Study Summary Exhibit B—CaIPERS Actuarial Valuations for Palm Desert-30 Year Amortization Schedule and Alternatives Exhibit C—Example of Capital Replacement Plan for one of the 35+ CITY COUNCIL A O?( facilities included in the Study. APPROVED I)ENI O, ► R ECE -4) KeS....r.�.�y. G// 7EIER 40.6.0.0 MEET�,jj G DATE - 01 AYES: `"fir 1 ► \ti. F_�(flrx F, h 1 r, • t rx7 la/ NOES: Noce ABSENT: NSl f ABSTAIN: fit; VERIFIED BY: R t) .J f' Original on File with City erk's Office