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HomeMy WebLinkAboutFS 2015-07-07 Item 2D - Resolution - Financial Reserve PolicyTO: City of Tukwila Jim Haggerton, Mayor INFORMATIONAL MEMORANDUM Mayor Haggerton City Council FROM: Peggy McCarthy, Finance Director DATE: July 1, 2015 SUBJECT: Revision to Financial Reserve Policy ISSUE Consider for approval the proposed revisions to the Financial Reserve Policy, as currently set forth in Resolution 1774. BACKGROUND A Reserve policy was established in 2009 as a safeguard to protect the community, its residents, and businesses from unforeseen or emergent situations that could negatively impact the City's finances including revenue shortfalls and unanticipated expenditures. The policy was revised in October 2012 to augment, simplify and clarify the policy criteria and guidance. The revision now proposed would increase the General Fund reserve level, add a Special Project Reserve and conform the healthcare fund reserve policy to current practices. DISCUSSION Revisions to the current policy is now being considered for the following reasons: 1. To ensure sufficient General Fund balance is maintained. The current policy requires a 10% General Fund minimum fund balance, the Government Finance Officer Association (GFOA) Best Practices recommends a 16.67% minimum balance and the proposed policy revision increases the minimum balance to 18 %. Together, the proposed revised 18% General Fund reserve requirement and the existing 10% Contingency Fund reserve requirement would commit 28 %, or approximately $15.4 million, to reserves. This level is realistic and attainable since the 2014 unassigned General Fund balance was $10 million and the 2014 Contingency Fund balance totaled $5.7 million -- for a combined total of $15.7 million exceeding the estimated $15.4 million required should the policy revision be adopted. The increased level of reserves is considered prudent based on the City's experience with previous revenue shortfalls. When the City experienced a revenue shortfall as a result of the combined effect of the Great Recession and the adoption by the state of Washington of the destination based sales tax, sales tax revenue declined by more than $4 million from a high of $20 million in 2007 to a low of less than $16 million in 2009, 2010 and 2012. Additionally, the governmental fund balances, as presented in Attachment A of the Financial Planning Model, have declined by over $8 million from a high in 2007 of $29 million to the current $21 million level. 2. To establish a Special Project Reserve based on 10% of one -time revenues. To ensure a portion of one -time revenue windfalls is saved for special one -time expenditures, a Special Project reserve is proposed. The reserve would be funded by allocating 10% of one -time revenues to the reserve each year. Through the first quarter of 2015, 10% of one -time revenues 25 INFORMATIONAL MEMO Page 2 approximate $62 thousand comprised of $12 thousand from construction sales tax and $50 thousand from the Tukwila Village land sale. 3. To conform the self - insured healthcare reserve minimums to those used by the actuary in the annual IBNR (incurred but not reported) liability and IBNR reserve calculations. The Policy now states that the IBNR reserve should equal 2.5 times the IBNR. In practice, and as conservatively recommended by the actuary and healthcare broker, the IBNR reserve should equal 1.5% of the IBNR. This reserve is in addition to the IBNR liability. RECOMMENDATION The Council is being asked to approve the resolution revising the Financial Reserve Policy at the July 13, 2015 Committee of the Whole meeting and the subsequent July 20, 2015 Regular Meeting. ATTACHMENTS Revised Financial Reserve Policy — clean copy Revised Financial Reserve Policy — red lined Resolution 1774 Financial Reserve Policy GFOA Best Practice W: \FIN Projects \Council Agenda Items12015 \Reserve Policy \InfoMemo Reserve Policy 6- 30- 15.doc DRAFT A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, REVISING THE PREVIOUSLY ADOPTED FINANCIAL RESERVE POLICY TO INCREASE THE GENERAL FUND RESERVE LEVEL, ADD A SPECIAL PROJECT RESERVE, AND CONFORM THE HEALTH CARE FUND RESERVE POLICY TO CURRENT PRACTICES; AND REPEALING RESOLUTION NO. 1774. WHEREAS, for the well -being and sustainability of the community, its residents, and businesses, it is important that the City of Tukwila be prepared to respond to any and all situations that could result in a risk and /or crisis to the City's finances including, but not limited to, revenue shortfalls and unanticipated expenditures; and WHEREAS, it is the responsibility of the City Council of the City of Tukwila to provide policy direction for the City's biennial budget through the passage of motions and ordinances, adoption of resolutions, and final approval of said budget; and WHEREAS, a financial reserve policy establishes, attains, and restores minimum fund balances, including self- insured health care reserve funds, and specifies review and reporting of such; and WHEREAS, the Best Practices promulgated by the Government Finance Officers Association recommends that the unrestricted fund balance in the General Fund equal no Tess than two months of regular General Fund operating revenues, or 16.67 %; and WHEREAS, credit rating agencies consider combined General Fund and Contingency Reserve Fund balances of at least 30% of operating revenues to be a good indication of credit worthiness; and WHEREAS, with the Great Recession and the imposition by Washington State of the destination -based sales tax, the City's annual sales and use tax revenue declined from a high of over $20 million in 2007 to a low of Tess than 16 million in 2009, 2010 and 2012; and W: \Word Processing \Reserve Policy revised 7 -1 -15 PM:bjs Page 1 of 3 27 28 WHEREAS, the governmental fund balances included in the Financial Planning Model Attachment A declined from a high of over $29 million in 2007 to a current level of $21 million; NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, HEREBY RESOLVES AS FOLLOWS: Section 1. Minimum Fund Balances. A. At the close of each fiscal year, the General Fund unassigned balance shall equal or exceed 18 %, and the Reserve - Contingency Fund reserve balance shall eas# equal or exceed 10 %1 of the previous year General Fund revenue, exclusive of significant non - operating, non - recurring revenues such as real estate sales or transfers in from other funds. B. In regard to the Enterprise Funds, aAt the close of each fiscal year,, the unrestricted fund balances of the Enterprise Funds shall equal or exceed 20% of the previous year revenue, exclusive of significant non - operating, non - recurring revenues such as real estate sales, transfers in from other funds or debt proceeds. Section 2. Special Project Reserve. - - - - - - - • - ' - - - - - shall be authorized by the City Council. A Special Project Reserve shall be established and maintained in the General Fund. The Special Project Reserve shall be credited annually with 10% of the year's one -time revenues, including significant real property sales and sales tax received on construction activity. Section 3. Use and Restoration. Use of reserves or draw down of minimum balances shall occur only upon recommendation of City Administration and approval by City Council through a resolution. Should use or draw down occur, a fund balance decline below the prescribed minimum balance after 2014City Administration shall establish a plan, no later than the end of the fiscal year following the year of decline, to restore the fund balance to the prescribed minimum level. The plan shall be presented to and approved by the City Council. Section 4. Self- insured Health Care Funds. In regard to the self insured health care funds, tThe City shall maintain a reserve balance in each of its self- insured health care funds in an amount equal to 21.5 times, or 250150 %, of the actuarially determined IBNR (incurred but not reported) r,ve balance. Use of the reserve will occur only upon recommendation by City Administration and approval by City Council through a resolution. plan funds. W: \Word Processing \Reserve Policy revised 7 -1 -15 PM:bjs Page 2 of 3 Section 5. A report showing compliance with the Financial Reserve Policy shall be provided to the City Council on an annual basis, no later than July 1 of each year. Section 6. Repealer. Resolution No. 1774 is hereby repealed. PASSED BY THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, at a Regular Meeting thereof this day of , 2015. ATTEST /AUTHENTICATED: Christy O'Flaherty, MMC, City Clerk Kate Kruller, Council President APPROVED AS TO FORM BY: Rachel B. Turpin, City Attorney W: \Word Processing \Reserve Policy revised 7 -1 -15 PM:bjs Filed with the City Clerk: Passed by the City Council: Resolution Number: Page 3 of 3 29 30 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, REVISING THE PREVIOUSLY ADOPTED ADOPTING -A FINANCIAL RESERVE POLICY TO WHEREAS, for the well -being and sustainability of the community, its residents, and businesses, it is important that the City of Tukwila be prepared to respond to any and all situations that could result in a risk and /or crisis to the City's finances, including but not limited to revenue shortfalls and unanticipated expenditures; and WHEREAS, it is the responsibility of the City Council of the City of Tukwila to provide policy direction for the City's biennial budget through the passage of motions and ordinances, adoption of resolutions, and final approval of said budget; and WHEREAS, a financial reserve policy establishes, attains, and restores minimum fund balances, including self- insured health care reserve funds, and specifies review and reporting of such; WHEREAS, the Best Practices promulgated by the Government Finance Officer's Association recommends that unrestricted fund balance in the general fund equalbe no Tess than two months of regular general tfund operating revenues, or 16.67%;, WHEREAS, credit rating agencies consider a combined general fund and contingency reserve fund balances of at least 30% of operating revenues to be a good indication of credit worthiness; WHEREAS, with the Great Recession and the imposition by Washington State of the destination based sales tax, the City's annual sales and use tax revenue declined from a high of over $20 million in 2007 to a low of Tess than 16 million in 2009, 2010 and 2012; and WHEREAS, the governmental fund balances included in the Financial Planning Model Attachment A declined from a high of over $29 million in 2007 to a current level of $21 million; 31 NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, HEREBY RESOLVES AS FOLLOWS: Section 1. Minimum Fund Balances. At the close of each fiscal year, —Lthe General Fund unassigned balance shall equal or exceed 18 %, and the Contingency Fund reserve- balance shall each equal or exceed 10 %, of the previous year General Fund revenue, exclusive of significant non - operating, non - recurring revenues such as real estate sales or transfers in from other funds. At the close of each fiscal year, the unrestricted balances of .the In regard to the Enterprise Funds; at the close of each fiscal year the unrestricted fund balance shall equal or exceed 20% of the previous year revenue, exclusive of significant non - operating, non - recurring revenues such as real estate sales, transfers in from other funds or debt proceeds. Section 2. Special Project Reserve. A Special Project Reserve shall be established and maintained in the General Fund. It will be credited annually with 10% of the year's one -time revenues- including significant real property sales and sales tax received on construction activity. Section 2. All expenditures from the Reserve Fund shall be authorized by the City Council. 32 Section 3. Use and Restoratation. Use of reserves or draw down of minimum balances shall occur only upon recommendation of the City Administration and approval by City Council through resolution. Section 1 shall be attained no later than the end of the 2014 fiscal year. Should use or draw down occur, _ _ _ _ _ _ _ _ - - _ _ - - _ _ _ _ minimum balance after 2011, City Administration shall establish a plan, no later than the end of the fiscal year following the year of decline, to restore the fund balance to the prescribed minimum level. The plan shall be presented to and approved by the City Council. Section 4. Self - insured Healthcare Funds. In regard to the self insured health Tthe City shall maintain a reserve min each of its self- insured health care funds in an amount equal to 12.5 times, or 250150 %, of the actuarially determined IBNR (incurred but not reported) reservebalance. -Use of the reserve will occur only upon recommendation by the City Administration and approval by Council through resolution. plc. Section 5. A report showing compliance with the Financial Reserve Policy shall be provided to the City Council on an annual basis, no later than July 1 of each year. PASSED BY THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, at a Regular Meeting thereof this day of 20122015. ATTEST /AUTHENTICATED: Christy O'Flaherty, MMC, City Clerk Verna-Sea -Kate Kruller, Council President APPROVED AS TO FORM BY: Filed with the City Clerk: Passed by the City Council: Resolution Number: Shelley M. Kcr.lakeRachel Turpin, City Attorney 33 34 City of Tukwila Washington Resolution No. ) `� y A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, ADOPTING A FINANCIAL RESERVE POLICY TO MAINTAIN AN ADEQUATE FUND BALANCE, ALLOWING MITIGATION OF RISKS TO REVENUES. WHEREAS, for the well -being and sustainability of the community, its residents, and businesses, it is important that the City of Tukwila be prepared to respond to any and all situations that could result in a risk and /or crisis to the City's finances, including but not limited to revenue shortfalls and unanticipated expenditures; and WHEREAS, it is the responsibility of the City Council of the City of Tukwila to provide policy direction for the City's biennial budget through the passage of motions and ordinances, adoption of resolutions, and final approval of said budget; and WHEREAS, a financial reserve policy establishes, attains, and restores minimum fund balances, including self - insured health care reserve funds, and specifies review and reporting of such; NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, HEREBY RESOLVES AS FOLLOWS: Section 1. At the close of each fiscal year, the General Fund balance and the Reserve Fund balance shall each equal or exceed 10% of the previous year General Fund revenue, exclusive of significant non - operating, non - recurring revenues such as real estate sales or transfers in from other funds. In regard to the Enterprise Funds, at the close of each fiscal year the unrestricted fund balance shall equal or exceed 20% of the previous year revenue, exclusive of significant non - operating, non - recurring revenues such as real estate sales, transfers in from other funds or debt proceeds. Section 2. All expenditures from the Reserve Fund shall be authorized by the City Council. W: \Word Processing- City \Resolutions \Reserve policy adopted by resolution 9 -18 -12 KM:bjs Page 1 of 2 35 Section 3. The prescribed minimum fund balances outlined in Section 1 shall be attained no later than the end of the 2014 fiscal year. Should a fund balance decline below the prescribed minimum balance after 2014, City Administration shall establish a plan, no later than the end of the fiscal year following the year of decline, to restore the fund balance to the prescribed minimum level. The plan shall be presented to and approved by the City Council. Section 4. In regard to the self- insured health care funds, the City shall maintain a reserve balance in each of its self- insured health care funds in an amount equal to 2.5 times, or 250 %, of the actuarially determined IBNR (incurred but not reported) reserve. The contingency reserve balance will be combined with the IBNR reserve balance and recorded as one liability in each of the self- insured health care plan funds. Section 5. A report showing compliance with the Financial Reserve Policy shall be provided to the City Council on an annual basis, no later than July 1 of each year. PASSED BY THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, at a Regular Meeting thereof this % $ day of Q Crab Q.r , 2012. ATTEST /AUTHENTICATED: '� Jai 2,2 'Flah MMC, City Clerk Christy rty O , ty APPROVED AS TO FORM BY: Shelley M. Kerslake, City Attorney 6 Verna Seal, ouncil President Filed with the City Clerk: - Passed by the City Council: Resolution Number: W: \Word Processing- City \Resolutions \Reserve policy adopted by resolution 9 -18 -12 KM:bjs 36 Page 2 of 2 Government Finance Officers Association G =OA Best Practice Replenishing General Fund Balance Background. It is essential that governments maintain adequate levels of fund balance to mitigate risks and provide a back -up for revenue shortfalls. The adequacy of unrestricted fund balance' in the general fund should be assessed based upon a government's specific circumstances. Nevertheless, GFOA recommends at a mirutn,,., that general- purpose _gov a rnments, regardless of size, incorporate in its inancia policies that unrestricted fund balance in their general fund be noless -t an fwoirlifil rro tegu ar general fund operating revenues or regu ar genera un opera mg expen i -ures. If fund balance falls below a government's policy level, then it is important to have a solid plan to replenish fund balance levels. Rating agencies consider the government's fund balance policy, history of use of fund balance, and policy and practice of replenishment of fund balance when assigning ratings. Thus, a well developed and transparent strategy to replenish fund balance may reduce the cost of borrowing. However, it can be challenging to build fund balances back up to the recommended levels because of other financial needs and various political considerations. Recommendation. GFOA recommends that governments adopt a formal fund balance policy that defines the appropriate level of fund balance target levels. Also, management should consider specifying the purposes for which various portions of the fund balances are intended. For example, one portion of the fund balance may be for working capital, one for budgetary stabilization, and one for responding to extreme events. This additional transparency helps decision makers understand the reason for maintaining the target levels described in the fund balance policy. Governments should also consider providing broad guidance in their financial policies for how resources will be directed to fund balance replenishment. For example, a policy may define the revenue sources that would typically be looked to for replenishment of fund balance. This might include non - recurring revenues, budget surpluses, and excess resources in other funds (if legally permissible and if there is defensible rationale). Year -end surpluses are an especially appropriate source for replenishing fund balance. Finally, a government should consider including in its financial policy a statement that establishes the broad strategic intent of replenishing fund balances as soon as 7. a , ..... : t www.gfomorg 37 38 Government Finance Officers Association Best Practice economic conditions allow. This emphasizes fund balance replenishment as a financial management priority. Governments are subject to a number of factors that could require the use of fund balances. It is therefore incumbent on jurisdictions to minimize the use of fund balance, except in very specific circumstances. Replenishment should take place in a prompt fashion with amounts that have been used to ensure that the jurisdiction is properly prepared for contingencies. With the foundation of a financial policy in place, governments should use their long -term financial planning and budget processes to develop a more detailed strategy for using and replenishing fund balance. With these criteria in mind, the government should develop a replenishment strategy and timeline for replenishing fund balances as soon as possible, and that is still appropriate to prevailing budgetary and economic conditions and that considers the following: 1. The policy should define the time period within which and contingencies for which fund balances will be used. This gives the public a sense for how fund balance is being used as a "bridge" to ensure stable cash flow and provide service continuity. 2. The policy should describe how the government's expenditure levels will be adjusted to match any new economic realities that are behind the use of fund balance as a financing bridge. 3. The policy should describe the time period over which the components of fund balance will be replenished and the means by which they will be replenished. Frequently, a key part of the replenishment plan will be to control operating expenditures and use budget surpluses to replenish fund balance. The replenishment plan might also specify any particular revenue source that will aid in the replenishment of fund balances. For example, if the government has a volatile sales tax yield, it might specify that yields that are significantly above average would be used to replenish fund balances. Generally, governments should seek to replenish their fund balances within one to three years of use. However, when developing the specifics of the replenishment plan, governments should consider a number of factors that influence the rate and time period over which fund balances will be replenished. Factors influencing the replenishment time horizon include: 1. The budgetary reasons behind the fund balance targets. The government should consider special conditions that may have caused it to set its fund balance target levels higher than the GFOA - recommended minimum level. For example, if targets are higher because the community has very volatile cash flows, then the government would want to build the fund balances back up more quickly compared to governments with more stable cash flows. 2. Recovering from an extreme event. An extreme event, such as a natural disaster, that has required the government to use a portion of its fund balance, may make Government finance Officers Association Best Practice it infeasible to replenish the fund balance as quickly as normal, depending upon the severity of the event. 3. Political continuity. Replenishing fund balance takes political will, and that will is often strengthened by the memory of the financial challenge that caused the use of fund balances in the first place. If the governing board and /or management are already committed to a particular financial policy, the replenishment strategy should be as consistent as possible with that policy in order to maximize political support. 4. Financial planning time horizons. Fund balances should typically be replenished within the time horizon covered by the organization's long -tern financial plan. This puts the entire replenishment plan in context and shows the public and decision makers the expected positive outcome of the replenishment strategy. 5. Long -term forecasts and economic conditions. Expectations for poor economic conditions may delay the point at which fund balances can be replenished. However, in its replenishment plan the government should be sure to set a benchmark (e.g., after fund balances have dropped to a certain point below desired target levels) for when use of fund balance is no longer acceptable as a source of funds. 6. Milestones for gradual replenishment. A replenishment plan will likely be more successful if it establishes replenishment milestones at various time intervals. This is especially important if replenishment is expected to take place over multiple years (e.g., if you are starting from 75% of your target, set a goal to reach 80 percent of target in one year, 90 percent in two years, and 100 percent in three years). 7. External financing expectations. A replenishment plan that is not consistent with credit rating agency expectations may increase the government's cost of borrowing. It is important that the logic used by the government to develop the replenishment plan be communicated in an effective fashion to external lenders. Notes: I Unrestricted fund balance comprises the committed. assigned, and unassigned fund balance categories. References. GFOA Best Practice, "Appropriate Level of Unrestricted Fund Balance in the General Fund," 2009. For a fuller explanation of the concept of "bridging" in financial distress, please visit GFOA's financial recovery website at www.gfoa.org/financialrecovery. Approved by the GFOA's Ex-ccutivc Boatrh February, 2011. 39 40