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Home My WebLink About07 RESERVE POLICY 02-02-98AGEND,. , NO. 7 2-2-98 DATE: January 15, 1998 lnter-Com TO' FROM' SUBJECT: William A. Huston, city Manager John R. Garner, Audit Committee Chairman REVIEW OF RESERVE POLICY FOR CITY OF TUSTIN FISCAL IMPACT: None. RECOMMENDATION: The Audit Committee recommends that the City of Tustin maintain the current Reserve Policy of 15% of General Fund expenditures and a Water Enterprise reserve of 15% of operating cost plus 10% of book value of plant and equipment. DISCUSSION: At the February 1997 Joint Meeting of the City Council and the Audit Committee, the Committee was asked to review the City's current Reserve Policy and provide input to the City Council. The Committee reevaluated its original recommendation made to the City Council on January 21, 1991 and gathered additional information on current practice in other agencies. We also reviewed "An Elected Official's Guide to Fund Balance" published in 1991 by the Government Finance Officers Association (GFOA) and we surveyed Cities across the State. We found that for the twenty-three Cities that responded to our survey, the average reserve is thirteen percent but the median is only nine percent. Surprisingly, approximately thirty percent of the Cities responding don't have a formal Reserve Policy. A review of the State of California's reserves and those of five Southern California Counties show their reserves to be below five percent. The 'Audit Committee does not feel that a change in the City's Reserve Policy is necessary at this time. The Committee would suggest, however, that due to the City's ever increasing dependence on sales and use tax revenues, that when sales and use tax revenues fall five percent or more from estimates over any six month period, the City Manager would report to the City Council with recommendations on how to react to the shortfall in revenues. The Committee also suggests that if sales tax income becomes consistently greater than fifty percent of total General Fund revenues, the City should revisit the Reserve Policy relative to General Fund commitments in two year increments at a minimum. JRG:ts Attachments RAN6: Garner 1. F I N DATE: November 20~ ~997 Inter-Com TO: FROM- SUBJECT: City of Tustin Audit Committee John R. Garner, Audit Committee Member REVIEW OF RESERVE POLICY FOR CITY OF TUSTIN SURVEY OF RESERVE POLICIES AND/OR ACTUAL RESERVES BY OTHER GOVERNMENTAL ENTITIES State of California Los Angeles County Orange County Riverside County San Bernardino County San Diego County Undesignated General Fund Balance as Percent of Operating Funds Operating Reserves -2.6% -0.9% 3.5% 1.6% 0.7% 1.9% 1. Notes Operating Revenues exclude transfers and bond and lease proceeds Operating Funds include General, Special Revenue and Debt Service Funds - 1 - GENERAL FUND RESERVE POLICY SURVEY Cities Population* Reserve Policy Or Actual Reserves Burbank Chula Vista Costa Mesa Fremont Garden Grove Hayward Irvine Livermore Napa Newport Beach Orange Palmdale Pleasanton Redding Richmond San Leandro San Luis Obispo Santa Ana Santa Maria Sunnyvale' Upland Yorba Linda Vista TUSTIN 99,880 20.0 % 153,401 8.0 % 103,823 26.0 % 187,585 12.5 % 152,049 - 0 - 123,364 11.0 % 126,000 5.0 % 64,765 14.0 % 67,757 15.0 % 70,098 15.0 % 120,000 25.0 % 104;656 5.0 % 57,347 29.0 % 78,490 3.0 % 93,015 6.0 % 72,307 7.0 % 43,704 20.0 % 306,961 - 0 - 68,875 5.0 % 125,959 10.0 % 68,875 5.0%. 58,069 50.0 % 81,171 5.0 % 62,497 15.0 % (1) (1) (1) (1) (1) (1) (i) AVERAGE 12.56 % MEDIAN 9.0 % No Formal Policy Source: Annual Report of Financial Transactions Concerning cities of California 1994-95 Fiscal Year - 2 - GENERAL COMMENTS le · A 1991 GFOA Publication entitled "An Elected official's Guide to Fund Balance" states the following: The size or percentage of the Reserve Fund should have some relationship to: le Reliability of governments' revenue sources - stable '(e.g property taxes) or subject to conditions in the general economy (e.g. sales taxes) 2. Predictability of cash flows Excessive Reserve Fund balances miqht be an indication of over taxation A July, i997 Standard '& Poor's report on the 20 AAA Rated Counties in the country stated that "There is no benchmark as to what level of reserves is considered to be ideal, and each situation is considered on its own merits. .However, declining. reserves are usually looked upon as a sign that the County is having difficulty maintaining structured balance". This report "A diverse revenue stream is one key to financial alsO stated, . strength, because too much reliance on one kind of tax can make the County vulnerable to economic downturns". City of Tustin General Economic Statistics: Total General Fund Revenues have increased from FY 91/92 to the present @ 19 % Be Property Tax Revenue has decreased @ 13 % from FY 91/92 to the present C® Sales Tax Revenue has increased @ 51% from FY 91/92 to the present Sales Tax Revenue as a percent of total General Fund Revenues has gone from 39 % in FY.91/92 to 50 % in FY 96/97 E. Actual FY 96/97 General Fund Revenues by Major Category Property Tax $ 3,584 13 % Sales Tax 13,832 50 % Ail Other 10,409. 37 % TOTAL $ 27,825 ~' - 3 - 4. city of Tustin 96/97 General Fund Reserve Fund Percent of Expenditures $ 5,143,461 18.8 Water Enterprise Operatinq Reserve Percent of Expenditures $ 2,800,000 39 % le This $ 2,800,000 is 14.8 % of FY 96/97 book value of the Enterprise plant and equipment RECOMMENDATIONS I have talked to municipal credit analysts, read various municipal related reports, and have professionally been in the Public Finance area for over twenty-five years. In general, I would say that a municipal entity that has a stable Reserve Policy of ten to fifteen percent is one important indication of a strong municipal credit. A somewhat good offsetting problem is that the General Fund-Revenues for the City of Tustin have increased substantially in the last six years. An additional good problem is that Sales Tax Revenues have gone from 39 % of total revenues in FY 91/92 to 50 % in FY 96/97. As the above summary of Reserve Policies indicates, most listed California Cities have a five to fifteen percent policy. My recommendation is to maintain the present City of Tustin Reserve Policy of 15 % for both the General Fund and the Water Enterprise Fund. I feel that the City can comfortably handle a 5 % cumulative decrease in revenues for eighteen to twenty-four months. I would,. however, say that if Sales Tax Revenues get to be consistently higher than fifty (50) percent of General Fund Revenues, then the City will need to review the Reserve Policy and/or policy on long term General Fund commitments (more than two years). ~~ '~oG~a~e~e Member JRG: ts RAN6:Garner2.Nov - 4 - Inter-Com DATE: July 11, 1997 TO: City of Tustin Audit Committee FROM: John R. Garner, Member SUBJECT: PRELIMINARY REVIEW OF RESERVE POLICY SCOPE OF REPORT I. Copy of Audit Committee Recommendation Dated 2-14-91 on General Fund and Water Enterprise Fund Balance Policy II. Sources and Growth of Major Categories of General Fund Revenues III. General Fund Reserve Balances and Water Enterprise Reserve Balances Since Policy Adopted IV. Insurance Exposure on City Owned Property and Water Enterprise Owned Property V. Is the Reserve Policy Adequate VI. Practical Things the City Can Do To Enhance Business Conditions I have. almost completed gathering the general information needed for this report. It is readily apparent that the amount and growth of Sales Tax Revenues is a.very, ver~., important source of General Fund Revenues. This importance will probably continue to grow over time. With regard to the Reserve Policy adopted by the City Council on February 19, 1991, the City has done an excellent job in both the General Fund and the Water Enterprise of meeting or exceeding the 15% Reserve Policy. However, we have a significant amount of uninsured City property and Water Enterprise property; and, I do not know yet whether our Reserve Policy provides adequate protection. Ron and Teresa have been a great help. Any and all comments and/or suggestions would be greatly appreciated. I am very sorry that I will not be able to attend this meeting. Jo~. Garner~ Audit ~.~ittee Member JRG:ts Attachment RA#6: Reserve1. dui GENERAL FUND X. GENERAL INFORMATION A. 15% Reserve Policy Adopted by City Council 2-19-91 B. Sales and Property Tax as Percentage of Total Revenues Prior to Opening of Market Place/Auto Center: Sales Tax 38% Property Tax 15% General Fund Revenues by Major Category FY 91/92 Amount / % FY' 92/93 Amount / % FX 93/94 Amount Property Tax $ 4,126~ 18% Sales & Use Tax 9,178 39% All Other 10,031 43% Total $ 23,335 $ 3,998 18% 9,198 40% 9,601 42% $ 22,797 $ 3,649 14% 10,933 43% 10,832 43%. $ 25,414 FY 94/95 Amount / Amount FY 96/97 Est Amount / % Property Tax $ 3,413 14% Sales & Use Tax 11,866 48% All Other 9,613 38% Total $ 24,892 $ 3,719 15% 12,072' 49% 8,734 36% $ 24,525 $ 3,841 15% 12,495 47% 9,987 38% $ 26,323 (000s omitted) -1- D. Property Tax and Sales Tax Revenue Property Tax Sales Tax FY 91/92 $' 4,126. $ 9,178 FY 92/93 3~,998. 9,198. FY 93/94 3,649. 10,933. FY 94/95 3,413. 11,866. FY 95/96 3,719. 12,072. FY 96/97 Est. 3,841. 12,495. Note: Growth in Property Tax Revenue FY 91/92-FY 96/97 = <7>% Growth in Sales Tax Revenue FY 91/92-FY 96/97 = 36% 'E. Sales or Use Tax by Major Source 1994 1995 1996 Tustin Market Place Tustin Auto Center Ail Other 22 % 22 % 21% 19 % 21% 20 % 59 % 57 % 59 % 2. GENERAL FUND RESERVE BALANCE SINCE POLICY ADOPTED: 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97' $ 3.5 million, 14.6% $. 3.3 million, 14.5% $ 5.1 million, 21.6% $ 6.0 million, 23.9% $ 4.6 million, 17.4% $ 4.8 million, 17.4% *Estimate -2- 3. INSURANCE Property Insurance coverage of all non-Water facilities $ 15.5 million (60%) Self Insured portion of City Property $ 10.3 million (40%) City 4. IS THE 15% RESERVE FUND POLICY ADEQUATE? · PRACTICAL THINGS CITY CAN DO TO ENHANCE BUSINESS CONDITIONS IN THE CITY WATER ENTERPRISE TOTAL ABOVE-GROUND PLANT, Insured - $ 4.7 million, 60% Uninsured - $ 3.2 million, 40% (Total replacement value of plant', not book value, approximately $ 20 million) · WATER ENTERPRISE (Operations Only) RESERVES SINCE POLICY ADOPTION (in millions): Tarqet Balance Actual Balance 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 (Estimate) $ 3.2 $ 2.0 3.5 3.3 3.8 3.0 3.9 4.9 4.0 3.7 4.2 5.6 -3- Note: Since 1992, a portion of the Rate Structure is earmarked for ongoing capital replacement/improvements. This is included in the actual balances listed but the intent is to transfer these resources to the Capital Improvement Fund as they are received beginning in Fiscal 1997-98, to differentiate between Operating and Capital reserves. 3. IS THE 15% RESERVE POLICY ADEQUATE? RA#6: ReserYel. F ! # --4-- DATE: TO: RUARY 14, 1991 WILLIAM A. HUSTONt CITY MANAGER Inter- Corn ~-., FROM: · SUBJECT: RONALD A. NAULT, DIRECTOR OF FINANCE GENERAL FUND AND WATER ENTERPRISE FUND BALANCE POLICY RECO=U2~E~ATIO~f: Adopt the attached policy establishing the General Fund and Water Enterprise Fund Balance Policy as recommended by the City of Tustin Audit Committee. Ronald A. Nault Director of Finance Attachment RAN: ls a: ba lance'.poi DATE: JANUARY 21, 1991 Inter- Com TO: FROM: SUBJECT: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL CITY OF TUSTIN AUDIT COMMITTEE GENERAL FUND AND WATER ENTERPRISE FUND B~LANCE POLICY In our review of the current Comprehensive Financial Report, 'it came to our attention that there was an additional $1.4 million in supplemental appropriations to the General Fund balance. The Committee feels that without thoughtful consideration of the impact of supplemental appropriations on fund balance, adequate reserves may not be available to the City in the event of a catastrophic occurrence. In that regard, the Audit Committee has reviewed the current City policy of setting target General Fund and Water Enterprise Fund balances. The current policy for the General Fund is a target of 15 percent of General Fund expenditures. This is arrived at by calculating cash flow needs for approximately 12 weeks of continual Operations during a catastrophic occurrence that would severely impact the revenue stream of the City. A formal policy for establishing the fund balance for the Water Enterprise has not been adopted but generally it is calculated similar to the General Fund. However, consideration is given to the potentially significant cost involved to reinstate water .service as a 'result of a catastrophic event and the disruption.of revenues while the infrastructure is nonfunctional. we are protected to a limited extent by insurance and state and federal programs that may reimburse the City for costs incurred due to a catastrophe. Reimbursement from state and federal programs will be subject to the availability of funds, and the City can expect the reimbursement process to be drawn out over an extended period of time. The Audit Committee recommends to the City Council that a~ formal policy be adopted that establishes target reserves for the General Fund and the Water Enterprise along the following guidelines: Policy Statement: It shall be the policy of the City Council of the City of Tustin, to adopt an Annual Budget that will reflect an operating fund balance for the General ~nd Water Enterprise Funds of at least fifteen (15) percent. It is deemed to be of paramount importance to maintain the balance of unappropriated reserves in the General Page 2 January 23, 1991 Fund of not less than ten (10) percent'of the annual appropriated expenditures and a Water Enterprise balance of unappropriated reserves of not less than ten (10) .percent of the annual appropriated expenditures, with a target reserve for catastrophic restoration equal to ten (10) percent of investment in property, plant and equipment. ' General Fund Tarqet Reserve Calculation: 15 percent of the total expenditures as presented in the Annual Proposed Budget. Two thirds of the target reserve will be set aside as a reserve for catastrophic contingency. (10 percent) Water Enterprise Tarqet Reserve Calculation: 15 percent of the total expenditures as presented in the Annual.Proposed Budget. 10 percent of the total investment in property, plant and equipment be set aside as a reserve for CatastroPhic contingencies. The Committe~ realizes that this target amount could take a period of years to achieve because of the significant investment in the infrastruCture of the enterprise system. The Committee recommends the build up of this reserve take place over a ~eriod of eight to ten years. The Audit Committee feels that the proposed policies will provide a means of planning for the unknown that can devastate an organization if not addressed in a well thought out, straightforward manner. Walter T. Sullens Audit Committee Chairman RAN:WTS:ls a:~cnfund.ba[