HomeMy WebLinkAbout2019-06-18; City Council; Resolution 2019-099Exhibit 1
RESOLUTION NO. 2019-099
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,
CALIFORNIA, APPROVING CITY COUNCIL POLICY NO. 86 TO ESTABLISH A
PENSION FUNDING POLICY AND REVISING CITY COUNCIL POLICY NO. 74,
GENERAL FUND RESERVE POLICY.
WHEREAS, the City Council of the City of Carlsbad, California believes financial policies
are central to a strategic, long-term approach to financial management; and
WHEREAS, the City Council desires to establish a pension funding policy to help ensure
resources are available to fulfill the city's contractual promises to its employees and minimize the
chance that funding pension benefits will interfere with the city's ability to provide essential services
to the public; and
WHEREAS, the City Council previously revised Council Policy No. 74, concerning General
Fund reserve guidelines, on November 30, 2010; and
WHEREAS, the City Council desires to revise Council Policy No. 74 to help ensure the city
can meet its financial commitments and address unexpected future events in a fiscally prudent manner.
NOW, THEREFORE, BE IT RESOLVED by the City Council ofthe City of Carlsbad, California,
as follows:
1. That the above recitations are true and correct.
2. That the City Council hereby approves the new City Council Policy No. 86 titled
Pension Funding Policy as shown in Attachment A.
3. That the City Council hereby approves the revised existing City Council Policy No.
74 titled General Fund Reserve Policy as shown in Attachment C.
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PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of
Carlsbad on the 18th day of June, 2019, by the following vote, to wit:
AYES:
NAYS:
ABSENT:
Hall, Blackburn, Bhat-Patel, Schumacher, Hamilton.
None.
None.
ATTEST:
~~Co~
BARBAENGlESON, City Clerk
(SEAL)
June 18, 2019 Item #6 Page 4 of 15
{cityof
Carlsbad
Policy No.
Date Issued:
Effective Date:
Attachment A
86
Resolution No.
Cancellation Date: N/ A
Supersedes No. N/ A
Council Policy Statement
Category: FINANCIAL MANAGEMENT POLICIES
Specific Subject: Pension Funding Policy
PURPOSE:
The purpose of this policy is to provide reasonable assurance that the costs of the city's defined
benefit pension plans will be funded in an equitable and sustainable manner. It codifies the city's
commitment to fund these benefits based on regular actuarial valuations, and to measure and report
them in accordance with generally accepted accounting principles (GAAP). Adhering to a funding
policy that embodies these funding and accounting principles is a prudent governance practice, and
helps achieve intergenerational equity among those who financially support the plan. It also ensures
that resources are available to fulfill the city's contractual promises to its employees, and minimizes
the chance that funding of these benefits will interfere with the city's ability to provide essential
services to the public.
BACKGROUND:
The city provides "defined benefit" retirement benefits through the California Public Employees'
Retirement System (CalPERS). CalPERS is a multiple-employer public employee defined benefit
pension plan.
All full-time, certain part-time, and all city safety employees are eligible to participate in CalPERS.
CalPERS provides retirement and disability benefits, annual cost of living adjustments, and death
benefits to plan members and their beneficiaries. Benefits are based on years of credited service,
equal to one year of full time employment. Cal PERS acts as a common investment and administrative
agent for participating public entities within the State of California. Benefit provisions and all other
requirements are established by State of California statute and city resolution.
Pension Funding: A Guide for Elected Officials, issued by eleven national groups including the U.S.
Conference of Mayors, the International City/County Management Association, and the Government
Finance Officers Association, established the following five general policy objectives for a pension
funding policy:
1. Actuarially Determined Contributions -a pension funding plan should be based
upon an actuarially determined contribution (ADC) that incorporates both the cost
of benefits in the current year and the amortization of the plan's unfunded actuarial
accrued liability.
2. Funding Discipline -a commitment to make timely, actuarially determined
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2019-099
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Policy No. 86
contributions to the retirement system is needed to ensure that sufficient assets are
available for all current and future retirees.
3. Intergenerational equity -annual contributions should be reasonably related to the
expected and actual cost of each year of service, so the cost of employee benefits
is paid by the generation of taxpayers who receives services from those employees.
4. Contributions as a stable percentage of payroll -contributions should be
managed so that employer costs remain consistent as a percentage of payroll over
time.
5. Accountability and transparency -clear reporting of pension funding should
include an assessment of whether, how, and when the plan sponsor will ensure
sufficient assets are available for all current and future retirees.
The financial objective of a defined benefit pension plan is to fund the long-term cost of benefits
provided to the plan participants. To assure that the plan is financially sustainable, the plan should
accumulate adequate resources in a systematic and disciplined manner over the active service life of
benefitting employees. This funding policy outlines the method the city will utilize to determine its
actuarially determined contributions to fund the long-term cost of benefits to the plan participants
and annuitants.
POLICY:
To achieve the purpose of this policy, the city will take the following actions:
1. The city will use the actuarially determined contribution (ADC) provided by CalPERS annually
to serve as the basis for its pension contributions. The ADC will include the normal cost for
current service (variable cost) and the amortization of any unfunded amount (fixed cost). The
normal cost will be calculated using the entry age normal cost method using economic and
non-economic assumptions approved by the Cal PERS Board of Administration.
2. The city will review the CalPERS annual actuarial valuations to validate the completeness and
accuracy of the member census data and the reasonableness of the actuarial assumptions.
3. The city supports a policy of funding the full amount of the actuarially determined
contribution each year and making the full contribution as determined by CalPERS. In the
event the city is unable to fund the full amount of the actuarially determined contribution in
each year with current resources (i.e., without borrowing or using reserves), the deputy city
manager, administrative services, or designee, will identify a reasonable period to return to
full funding.
4. 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%. For the purposes of this policy, the term "funded ratio" refers to the level of the
pension plans assets, at market value, in proportion to the pension plans accrued liability.
This is an annual point-in-time measure, as of the valuation date.
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Policy No. 86
5. In the event the city is unable to meet the minimum combined pension funded ratio of 80%
with current resources (i.e., without borrowing or using reserves), the finance director or
deputy city manager of administrative services will identify a reasonable period to return to a
minimum 80% funded ratio status.
6. The city will demonstrate accountability and transparency by communicating all information
necessary for assessing the city's progress toward meeting its pension funding objectives.
This will be achieved, in part, by ensuring full and accurate implementation of Governmental
Accounting Standards Board No. 68, effective fiscal year 2014-15.
7. As part of the annual budget adoption process, the city manager or deputy city manager of
administrative services will report to the City Council on the following:
a. most recent actuarially determined pension contribution
b. most recent actuarially funded ratio and its compliance with either #4 or #5 above
c. any other significant issues associated with funding the defined benefit pension in a
stable and equitable manner as described above.
8. Staff will monitor changes to and expansions of pension funding best practices, as well as any
additional guidance provided by the Government Finance Officers Association that relate to
the funding of defined benefit pensions. Staff will return to City Council with modifications to
this policy as needed.
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{cityof
Carlsbad
Council Policy Statement
Category: FINANCIAL MANAGEMENT POLICIES
Specific Subject: General Fund Reserve Policy
PURPOSE:
Policy No.
Date Issued:
Effective Date:
Resolution No.
Cancellation Date:
Supersedes No.
Attachment C
74
N/A
11-30-2010
The purpose of this policy is to establish a target minimum level of designated reserves in the General
Fund to:
• Reduce the risk of financial impacts resulting from a natural disaster or other catastrophic
events;
• Respond to the challenges of a changing economic environment, including prolonged
downturns in the local, state, or national economy; and
• Demonstrate continued prudent fiscal management and creditworthiness.
This policy also sets forth guidelines for replenishing deficiencies and will describe both how such
replenishment is to be funded, and the period over which the replenishment it to occur.
BACKGROUND:
A key attribute of a financially stable organization is appropriate reserves. Strong reserves, often
referred to as fund balances in governmental funds, position an organization to weather significant
economic downturns more effectively; manage the consequences of outside agency actions that may
result in revenue reductions; and address unexpected emergencies, such as natural disasters,
catastrophic events caused by human activity, or excessive liabilities or legal judgments against the
organization. A reserve policy serves as policy framework to deploy city resources to meet the city's
financial commitments and address unexpected future events in a fiscally prudent manner.
The Government Finance Officers Association (GFOA), an international organization that promotes
the professional management of governments for public interest, recommends maintaining at least
two months of operating expenditures or 15% reserves. According to the GFOA, the methodology
used to create the reserves depends on the circumstances of the individual organizations. Reserves
are typically assessed based on a city's unique circumstances or risk levels, and operating
expenditures are generally the basis for such reserve.
The General Fund is the main operating fund that pays for general services provided by the city, such
as public safety, parks, and library services. The General Fund accounts for all general revenues of the
city not specifically levied or collected for other city funds, and for expenditures related to the
delivery of the city's general services.
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Policy No. 74
The city endeavors to maintain adequate reserves for its General Fund as a matter of fiscal prudence
and sound financial management. Establishing and maintaining General Fund reserves will guide the
city in:
• Planning for contingencies and unexpected events;
• Maintaining good standing with credit rating agencies;
• Ensuring cash availability when revenue is unavailable; and
• Deciding when to use reserves and how to replenish reserves if they have been spent.
As a general budget principle concerning use of reserves, the City Council decides whether or not to
appropriate funds from reserves. Reserve funds will not be spent for any function other than the
specific purpose of the reserve account from which they are drawn without specific direction in the
annual budget; or by a separate City Council action.
Per current Governmental Accounting Standards No. 54 (GASB 54), issued by the Governmental
Accounting Standards Board, fund balances are divided into five classifications in the financial
statements:
Classification Nature of Restriction
Non-Spendable Cannot be readily converted to cash or cannot be legally spent
Externally imposed (by granting agencies, governmental
Restricted entities, etc.) restrictions on spending
City Council formally-imposed (by resolution or other action)
Committed restrictions on spending
Funds reserved by City Council direction for designated
Assigned purposes
Unassigned Residual balance not classified in any of the above categories
These five classifications are applicable only to governmental funds, which includes the General Fund,
and are intended to identify the extent to which fund balance (or a reserve) is constrained by special
restrictions, if any. The city commits to preparing financial reports which accurately categorize fund
balance in compliance with GASB 54. Fund balance levels are a crucial consideration in long-term
financial planning.
POLICY:
For purposes of this policy, the term "reserve" refers to any unassigned fund balance in compliance
with GASB 54. It is the policy of the City of Carlsbad to maintain reserves for unforeseen emergencies
or catastrophic impacts, and for significant changes to the economic environment.
The city commits to maintaining General Fund reserves at a minimum of 30% of General Fund annual
operating expenditures. These reserves shall be comprised of two separate reserves and will be
considered together when calculating the total General Fund reserve balance. The total reserve level
will be calculated using the prior fiscal years adopted General Fund budgeted expenditures.
Reserves will be evaluated annually in conjunction with the development of the city's annual
operating budget process. Staff recommendations will be made to City Council annually on the
available funds and the appropriate reserve levels.
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Policy No. 74
Emergency/Catastrophic Reserve. Funds reserved under this category will be maintained for the
purpose of sustaining General Fund operations in the case of a public emergency such as a natural
disaster or other unforeseen catastrophic event. The Emergency Reserve will not be accessed to
meet operating shortfalls or to fund new programs or personnel. This reserve may be expended only
if an event is determined to be a public emergency by majority vote of the City Council, when such
expenditures are necessary to ensure the safety of the city's residents and their property. In the event
this reserve is reduced below the amount established by this policy, the City Manager or designee
shall promptly prepare a plan as conditions warrant to replenish the Emergency/Catastrophic Reserve
balance to the policy level.
The Emergency/Catastrophic Reserve shall be maintained at a level equal to 25% of prior year's
annual General Fund expenditures for purposes of this calculation.
Economic Contingency/Stability Reserve. Funds reserved under this category shall be used to
mitigate, should they occur, unanticipated budgeted revenue shortfalls (actual revenues less than
projected revenues) due to changes in the economic environment, and/or significant operating
budget deficiencies as a result of certain economic triggers. Examples of "economic triggers" include,
but are not limited to:
• Significant decrease in property tax, sales tax, transient occupancy tax, or other economically
sensitive revenues;
• Loss of businesses considered to be significant sales tax generators;
• Reductions in revenue due to actions by the state/federal government;
• Economic downturns or significant increases in inflation;
• Other circumstances deemed necessary by the City Council to meet the claims and obligations
of the city.
The City Manager or designee shall promptly prepare a plan as conditions warrant to replenish the
Economic Contingency/Stability Reserve balance to the policy level.
The Economic Contingency/Stability Reserve shall be maintained at a level equal to 10% of prior year's
annual General Fund revenues for purposes of this calculation.
For purposes of calculating the total General Fund reserve level, these two reserve levels together
(Emergency/Catastrophic Reserve and the Economic Contingency/Stability Reserve), after being
individually calculated, shall be no less than a minimum of 30% of prior year's adopted General Fund
budgeted expenditures.
At the discretion of the City Council, reserve levels in excess of the 30% minimum 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.
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