Title
Review of General Fund Reserve Policy
Staffreport
SUMMARY
Review proposed changes to the currently adopted General Fund reserve policy to align with organizational needs and industry best practices.
RECOMMENDATIONS
Staff recommends that the Committee receive the presentation on the proposed changes to the General Fund reserve policy and provide feedback and direction on the recommended changes.
BACKGROUND
The City’s current reserve policy was last updated in June 2021. The policy was presented at a City Council work session on May 24, 2021, and adopted by City Council on June 28, 2021.
Analysis
The establishment and adherence of a reserve policy is a critical component of attaining long-term fiscal sustainability. The City routinely reviews its reserve policy to ensure that the policy meets the current needs of the City, while also ensuring adequate risk protection, as well as ensuring the policy meets or exceeds best practices.
Fund Balance
When considering establishing a reserve policy, a city must understand fund balance. Fund balance represents the difference between the City’s totals assets and current/future liabilities. Simply put, fund balance shows the net available resources in a specific fund at a given point in time.
Fund balance consists of five (5) distinct categories:
• Non-spendable - Resources that cannot be spent.
• Restricted - Resources with external restrictions (i.e. grants).
• Committed - Set aside for specific purposes by formal government action.
• Assigned - Intended for specific purposes but not legally restricted (i.e. encumbrances).
• Unassigned - Available for any purpose.
Assigned and unassigned fund balances are the categories in which a reserve policy establishes guidelines for unrestricted balances.
Current Reserve Policy
The reserve policy of the City of San Leandro establishes the foundation for designating funds to reserves that support the City Council’s goal of ensuring fiscal stability and the sustainability of operations. Establishing designated reserve funds is an important step in shaping the long-term financial plan.
The current reserve policy meets the following objectives of the City:
• Ensure financial stability
• Maintain operations in times of economic uncertainty
The City’s current reserve policy sets the following targeted reserve levels:
• Economic Uncertainty - 20% of budgeted General Fund expenditures, excluding any significant one-time expenditures; and
• Major Emergency - Establish a goal of maintaining a target balance of $5,000,000; and
• Undesignated Fund Balance - The Undesignated Fund Balance remains in the General Fund until allocation by the City Council to another designated reserve or fund
Industry Best Practices
In reviewing the current policy, it is important to evaluate the needs of the City and risk tolerance, all while considering industry best practices.
The Government Finance Officers Association (GFOA) is a professional association that acts as a resource, educator, facilitator, and advocate for government agencies, providing best practice guidance, leadership, professional development, resources and tools, advisory services. In the development of policies, government agencies will seek guidance and best practices outlined by GFOA.
The current best practice set by GFOA, recommends that general-purpose governments, like the City of San Leandro, maintain unrestricted (or unassigned) fund balance in its General Fund equal to or greater than two months (or approximately 16.7%) of regular operating expenditures (excluding transfers).
Comparable Policy Levels
The following table provides a comparison of reserve policy levels of neighboring jurisdictions, including the GFOA recommended fund balance level.
|
Agency |
Unassigned Reserve Level |
|
Dublin |
N/A |
|
Oakland |
7.5% |
|
Berkeley |
16.7% |
|
Fremont* |
16.7% |
|
Pleasanton |
16.7%-25.0% |
|
Emeryville |
20.0% |
|
Hayward |
20.0% |
|
Piedmont |
20.0% |
|
San Leandro** |
20.0% |
|
Union City |
20.0% |
|
Alameda*** |
20.0% |
|
Albany |
25.0% |
|
Livermore |
30.0% |
|
Newark |
30.0% |
|
GFOA (Recommendation) |
16.7% |
|
|
Notes:
*City of Fremont -- Policy also includes a Budget Uncertainty Reserve with no set reserve level
**City of San Leandro - Policy also includes $5M for Major Emergencies
***City of Alameda - Policy also includes 5% for Economic Uncertainty
Proposed Reserve Policy Changes
Staff is not recommending a change to the City’s current economic uncertainty fund level of 20% of budgeted operating expenditures (excluding transfers), as it exceeds the GFOA recommended funding level of 16.7% of regular operating expenditures. The policy further exceeds the recommendation with the additional major emergency reserve fund set at $5,000,000.
Staff is recommending the elimination of the targeted funding level of $5,000,000 for the major emergency reserve fund. The funding level of the major emergency reserve fund presents approximately 3.3% of budgeted operating expenditures (excluding transfers). Retaining the additional $5,000,000 further exceeds the GFOA recommended funding level.
Staff is recommending that the objectives of the economic uncertainty reserve fund be further defined to allow for the following:
• Ensure financial stability
• Maintain operations in times of economic uncertainty
• Maintain operations during and in response to natural disasters
• Ensure available funding for major emergencies
With further defined objectives, staff recommends amending the reserve fund title to be changed to “Emergency and Economic Uncertainty Reserve Fund”.
Current Agency Policies
• City of San Leandro - Reserve Policy - Adopted on June 28, 2021
ATTACHMENTS
A: Draft General Fund Reserve Policy
B: Presentation
PREPARED BY: Nicole Gonzales, Finance Director