The URL can be used to link to this page

Home My WebLink About2021-04-27; City Council; ; Options for Use of Excess General Fund Reserve BalanceCA Review CKM Meeting Date: April 27, 2021 To: Mayor and City Council From: Scott Chadwick, City Manager Staff Contact: Laura Rocha, Deputy City Manager, Administrative Services Laura.rocha@carlsbadca.gov, 760-602-2415 Ryan Green, Finance Director ryan.green@carlsbadca.gov, 760-602-2414 Subject: Options for Use of Excess General Fund Reserve Balance District: All Recommended Action •Receive an update on compliance with the General Fund Reserve and Pension Funding Policies •Provide direction to city staff on the use of General Fund Reserves balances in excess of the 40% target required by General Fund Reserve Policy Executive Summary The City Council’s General Fund Reserve and Pension Funding policies require staff to communicate the city’s compliance with the General Fund Reserve and Pension Funding Policy requirements to the council each year. Staff are also required to evaluate the city’s reserves in conjunction with the development of its annual operating budget, which is currently in process. The city has committed to maintaining General Fund reserves at a target of 40% of its General Fund annual operating expenditures. This target was exceeded at the end of fiscal year 2019-20 and, based on preliminary analysis, is expected to exceed the target at the end of FY 2020-21. The city has also committed to achieving a combined pension funded ratio – that is, including both the city's miscellaneous and safety plans – of no less than a minimum of 80% of projected future costs, with a target funded ratio range of 80% to 85%. During the FY 2020-21 budget process, the typical amount to set aside annually for the city’s long-term capital needs, 6% of General Fund revenues, was decreased to 3% because of the uncertainty related to the economy during the COVID-19 pandemic. Increasing the amount to be transferred to 6% will support the long-term funding needs of the city’s capital assets. In March 2021, the City Council discussed and defined four City Council goals that may require General Fund Reserve funding for one-time opportunity cost purposes, as defined in City Council Policy 74, General Fund Reserve. April 27, 2021 Item #3 Page 1 of 6 The policy defines these opportunity costs as “… one-time expenditures resulting in future efficiencies, infrastructure, special projects, or key economic development opportunities that provide savings or efficiencies where no funding source otherwise exists.” It also states, “These types of one-time opportunity costs may only be authorized by formal City Council action where findings have been made as to what constitutes the savings or how efficiencies will be achieved.” Staff recommends the City Council consider the following uses for the excess General Fund reserve: • Make an additional contribution to the city’s pension fund to achieve the 80-85% target • Increase of the city’s current year commitment to the Infrastructure Replacement Fund, a transfer that was reduced to balance the budget in light of the pandemic • Fund one-time opportunity costs related to the City Council’s FY 2021-22 goals Discussion In City Council Policy 74, General Fund Reserve Policy, the City Council committed to maintaining General Fund reserves at a target of 40% of the General Fund’s annual operating expenditures. Staff reported the following status of the reserve levels as of June 30, 2020, in the city’s consolidated annual financial report: GENERAL FUND RESERVE BALANCE (in millions of dollars) Actual Target Unassigned General Fund balance $110.1 NA Economic uncertainty set aside 11.1 NA Unassigned fund balance, excluding economic uncertainty 99.0 66.8 Fiscal year 2019-20 adopted General Fund budgeted expenditures 167.1 167.1 General Fund reserve percentage 59% 40% As of June 30, 2020, the total General Fund reserve exceeded the city’s 40% target by $32.2 million. Accurately projecting the FY 2020-21 ending reserve balance is difficult given the uncertainty of many factors at this point in the year. City Council Policy 74 dictates that the reserve calculation be equal to or less than 40% of the prior year’s operating budget using the prior fiscal year’s adopted General Fund budgeted expenditures. However, given the large decrease in the FY 2020-21 budget, staff does not believe this to be a prudent measure of the expected surplus because the city’s FY 2021-22 budget is expected to increase significantly as a result of council initiatives and normal initiatives. Instead, using an estimated budget of $177 million rather than the fy 2020-21 budget of $163.6 million is the more practical approach. April 27, 2021 Item #3 Page 2 of 6 This chart shows the calculations: June 30, 2020 Unassigned balance 110,121,657 Economic Set Aside (11,135,909) Unassigned General Fund Balance 98,985,748 Calculation using the estimated fy 2021-22 Budget Calculation using the actual fy 2020-21 Budget Budget 177,000,000 163,600,000 Policy 74 target 40% 40% Reserve target 70,800,000 65,440,000 Available General Fund balance 98,985,748 98,985,748 Over/(under) 28,185,748 33,545,748 At the discretion of the City Council, reserve levels in excess of the 40% target requirement may be used for one-time opportunity cost purposes. As noted above, these types of one-time opportunity costs may only be authorized by formal City Council action in which the council has made findings “as to what constitutes the savings or how efficiencies will be achieved.” Options Staff has identified the following options as potential uses of the excess General Fund reserve: 1) Pay down existing pension liability to the California Public Employees Retirement System, or CalPERS (a one-time opportunity cost) City Council Policy 86, Pension Funding Policy, commits the city to achieve a combined (both the city's miscellaneous and safety plans) pension funded ratio of no less than a minimum of 80%, with a target funded ratio range of 80% to 85%. The table below shows the city’s combined pension funded ratio was 79% at the end of FY 2019-20, and what funding is required to achieve a funded ratio of 80% and 85%: Total liability Plan position Net liability Liability ratio A B A - B = C B / A = D Miscellaneous plan 401,846,361 322,051,935 79,794,426 80.1% Safety plan 314,256,438 243,910,793 70,345,645 77.6% Subtotal city plans 716,102,799 565,962,728 150,140,071 79.0% Addition to 80% - 6,919,511 (6,919,511) Potential total 716,102,799 572,882,239 143,220,560 80.0% Addition to 85% - 35,805,140 (35,805,140) Potential total 716,102,799 608,687,379 107,415,420 85.0% April 27, 2021 Item #3 Page 3 of 6 The annual cost to the city for the administration of safety- and miscellaneous-defined benefit pension plans is greatly influenced by the annual payment on the portion of the pension plan that is not fully covered by the city’s regular payments for current employees. This amount is known as the unfunded actuarial liability. This unfunded portion totals $150 million, representing a "deficit" of approximately 21% between the two plans combined. Because the unfunded liability is greater than what could be paid in a single year, CalPERS allows participating agencies to spread this payment over time, usually 20 or 30 years, depending on the source of the loss. As an example, an additional payment will pay down a portion of the unfunded actuarial liability in the amount of $7 million, split with 93.3% going to the General Fund and 6.7% to other funds. The remaining 6.7% of the costs will be allocated to the respective funds based on their share of the pension cost. The decrease in annual costs will be between $0.2 million and $0.7 million per year over the next fifteen years and, in total, is expected to save the city $3.6 million in interest. Pros • Provides the city with long-term savings in interest payments to CalPERS o The city will pay $3.6 million less in interest or more over the next fifteen years • Reduces the city’s annual operating costs, allowing resources to be reallocated • Prudent management of the city’s limited financial resources Cons • Funding cannot be used for another purpose in the short-term 2) Contribute to the city’s long-term capital fund, the Infrastructure Replacement Fund During the budget process for FY 2020-21, transfers from the General Fund to the city’s long-term capital funds were $5.5 million, with $1 million going to the Infrastructure Replacement Fund and $4.5 million to the General Capital Construction Fund for major new construction, maintenance and/or replacement of city infrastructure and facilities. This represents 3% of the General Fund revenues, which is a decrease from the 6% transfer that was approved for fiscal year 2019-20 (and the historical average over the prior 17 fiscal years). This percentage was reduced to avoid needing to make additional cuts in personnel and maintenance and operations expenditures in the General Fund in response to the pandemic’s economic environment. Increasing the amount allocated to the Infrastructure Replacement Fund will allow interest to accumulate to help offset the cost of future city capital replacement needs. Pros • Funding of long-term capital asset replacement is necessary to support the longevity of the city’s large, long-term capital assets • Consistent with the prudent management of the city’s limited financial resources Con • Reduces reserve balance available for future one-time opportunity cost purposes, although unspent and unencumbered funds in the Infrastructure Replacement Fund can be transferred back to the General Fund at the discretion of the City Council April 27, 2021 Item #3 Page 4 of 6 3) Fund one-time opportunity costs associated with the City Council’s FY 2021-22 goals On March 11, 2021, the City Council discussed and defined four City Council goals for FY 2021-22: 1. Engage the community through a citizens committee to create a new plan to manage growth in Carlsbad in a way that maintains an excellent quality of life. 2. Reduce the homeless unsheltered population, among those who want help, by 50% within five years, with quarterly reports until we decrease the unsheltered homeless population or five years. 3. Conduct a facilitated City Council workshop to work on team building and City Council communication and an ethics ordinance to support the delivery of superior public service. 4. Bring Fire Department into conformance with Standards of Cover evaluation. Additional one-time funding may be required to effectively execute the workplans associated with these goals. For the city to use excess reserves for such one-time opportunity cost purposes the City Council would need to make the findings on “what constitutes the savings or how efficiencies will be achieved.” Pro • Funds would be available to support the City Council’s goals Con • If the funds are not able to be used for these purposes under the city’s General Reserve policy, the city’s General Fund Reserve balance would remain above its target of 40%. 4) Take no action Pro • Funds would be available to support future needs Con • If funds are not able to be deployed, the city’s General Fund Reserve balance would remain above its target of 40% Fiscal Analysis Depending on the City Council’s actions, the General Fund Reserve balance may decrease. If option one is approved, funding from the General Fund Reserve will be appropriated. If option two is approved, funding from the General Fund Reserve will be appropriated and transferred from the General Fund to the Infrastructure Replacement Fund. There is no immediate fiscal impact of approving option three. Next Steps Resolutions to carry out the City Council’s direction will be brought to the City Council for approval when the preliminary or final budget is presented in May and June, respectively. April 27, 2021 Item #3 Page 5 of 6 Environmental Evaluation This action does not constitute a “project” within the meaning of the California Environmental Quality Act under California Public Resources Code Section 21065 in that it has no potential to cause either a direct physical change in the environment or a reasonably foreseeable indirect physical change in the environment. Therefore, it does not require environmental review. Public Notification and Outreach Public notice of this item was posted in accordance with the Ralph M. Brown Act and it was available for public viewing and review at least 72 hours prior to the scheduled meeting date. Exhibits None April 27, 2021 Item #3 Page 6 of 6 Options for Use of Excess General Fund Reserve Balance Laura Rocha, Deputy City Manager, Administrative Services Ryan Green, Finance Director April 27, 2021 Recommended Action #1 •Receive an update on compliance with the General Fund Reserve and Pension Funding Policies General Fund Reserve Policy Compliance •The city commits to maintaining General Fund reserves at a target of 40% of General Fund annual operating expenditures •Calculated using the prior year’s operating budget using the prior fiscal year’s adopted General Fund budgeted expenditures (very low due to COVID-19) General Fund Reserve Balance June 30, 2020 Unassigned balance 110,121,657 Economic Set Aside (11,135,909) Unassigned General Fund Balance 98,985,748 Calculation using the actual fy 2020-21 Budget Budget 163,600,000 Policy 74 target 40% Reserve target 65,440,000 Calculation using the estimated fy 2021-22 Budget 177,000,000 40% 70,800,000 Unassigned General Fund balance 98,985,748 Excess General Fund Reserve 33,545,748 98,985,748 28,185,748 Pension Funding Policy Compliance •The city will commit to a combined (both the city's miscellaneous and safety plans) pension funded ratio of no less than a minimum of 80%, with a target funded ratio range of 80% to 85% •The term "funded ratio" refers to the level of the pension plan assets relative to the pension plan liabilities Pension Funding Policy Purpose •The policy was put in place to: –Fund pension costs in an equitable and sustainable manner –Help achieve intergenerational equity among those who financially support the plan –Ensure resources are available to fulfill the city's contractual promises to its employees –Minimize the chance that funding of these benefits will interfere with the city's ability to provide essential services to the public Pension Funding Ratio at June 30, 2020 Total liability Plan position Net liability Liability ratio A B A -B = C B / A = D Miscellaneous plan 401,846,361 322,051,935 79,794,426 80.1% Safety plan 314,256,438 243,910,793 70,345,645 77.6% Subtotal city plans 716,102,799 565,962,728 150,140,071 79.0% Addition to 80%-6,919,511 (6,919,511) Potential total 716,102,799 572,882,239 143,220,560 80.0% Addition to 85%-35,805,140 (35,805,140) Potential total 716,102,799 608,687,379 107,415,420 85.0% Recommended Action #2 •Provide direction to city staff on the use of General Fund Reserves balances in excess of the 40% target required by General Fund Reserve Policy •Excess reserve was between $28.1-33.5 million at June 30, 2020 Use of Excess General Fund Reserve 1.Pay down existing pension liability 2.Contribute to the city’s long-term capital fund, the Infrastructure Replacement Fund 3.Fund one-time opportunity costs associated with City Council goals 4.Take no action or an alternative action Long-term Capital Funding •The fy 2020-21 adopted budget included a $5.5 million transfer to the city’s long-term capital funds –Infrastructure Replacement Fund -$1 million –General Capital Construction Fund -$4.5 million •This represented 3% versus 6% of General Fund revenues –This percentage was reduced in response to the economic environment as a result of the COVID-19 pandemic. Fund Costs to Achieve City Council’s Goals •Additional one-time funding may be required to effectively execute the workplans associated with City Council’s goals •For the city to use excess reserves for such one-time opportunity cost purposes the City Council would need to make the findings on “what constitutes the savings or how efficiencies will be achieved” City Council’s Goals •Engage the community through a citizens committee to create a new plan to manage growth in Carlsbad in a way that maintains an excellent quality of life. •Reduce the homeless unsheltered population, among those who want help, by 50% within five years, with quarterly reports until we decrease the unsheltered homeless population or five years. •Conduct a facilitated City Council workshop to work on team building and City Council communication and an ethics ordinance to support the delivery of superior public service. •Bring Fire Department into conformance with Standards of Cover evaluation. Use of Excess General Fund Reserve 1.Pay down existing pension liability 2.Contribute to the city’s long-term capital fund, the Infrastructure Replacement Fund 3.Fund one-time opportunity costs associated with City Council goals 4.Take no action or an alternative action Questions & Discussion 14 Options for Use of Excess General Fund Reserve Balance Fiscal year 20-21 Approved $10 million to reduce unfunded liability 18-19 Paid $20 million to reduce unfunded liability 17-18 Paid $11 million to reduce unfunded liability 16-17 Paid $9 million to reduce unfunded liability Total Paid and approved $50 million since 2010 Additional Pension Contributions •At the discretion of the City Council, reserve levels in excess of the 40% target requirement, may be used for one-time opportunity cost purposes. For example, one-time expenditures resulting in future efficiencies, infrastructure, special projects, or key economic development opportunities that provide savings or efficiencies where no funding source otherwise exists. These types of one-time opportunity costs may only be authorized by formal City Council action where findings have been made as to what constitutes the savings or how efficiencies will be achieved. City Council Policy #74 Fiscal Year 19-20 Completed fiscal policy updates 18-19 Paid $20 million to reduce unfunded liability (both plans) 17-18 Paid $11 million to reduce unfunded liability (misc. plan) 16-17 Paid $9 million to reduce unfunded liability (both plans) 15-16 Established $10 million Pension Stabilization Fund 11-12 Established 2nd Benefit Tier at 2% @ 60 Carlsbad’s Pension Actions Use of Excess General Fund Reserve 1.Pay down existing pension liability 2.Contribute to the city’s long-term capital fund, the Infrastructure Replacement Fund 3.Fund one-time opportunity costs associated with City Council goals 4.Take no action or an alternative action 1.Monroe pool ($15 million) 2.College Blvd (unknown, study underway)