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Home My WebLink AboutCOW 2015-07-27 Item 4E - Resolution - Financial Reserve Policy RevisionCO 1 uNcm AGENDA SYNOPSIS nifials Meetin ,g Date Prepared by Mqyors reiie� Council review 07/27/15 PMC ❑ Resolution Mtg Date 813115 �_A 08/03/15 PMC F-1 Other Mtg Date SPONSOR ❑ Council ❑ Mayor ❑ HR ❑ DCD E Finance [:].Fire E]IT [:] P&R ❑ Police ❑ PWI SPONSOR'S The City Council is being asked to approve a resolution revising the Reserve Policy SUMMARY increasing the General Fund minimum fund balance requirement to 18%, establishing a One-time Revenue Reserve and conforming the reserve requirements for the self-insured health care funds to those currently practiced. This item is scheduled for Council consideration at the 7/27/15 C.O.W. and 8/3/15 Regular Council meeting. RE'V117WE'D BY r-1 cow mtg. ❑ CA&P Cmte Z F&S Cmte ❑ Transportation Cmte ❑ Utilities Cmte ❑ Arts Comm. ❑ Parks Comm. F-1 Planning Comm. DATE: 7/7/15&7/21/15 COMMITTEE CHAIR: HOUGARDY RECOMMENDATIONS: SPONSOR/ADMIN. Finance Department COMMITTEE Unanimous Approval; Forward to Committee of the Whole COST IMPACT / FUND SOURCE EXPENDITURE REQUIRED AMOUNT BUDGETED APPROPRIATION REQUIRED Fund Source: MISCELLANEOUS FUNDING SOURCES, SEE DETAIL Comments., MTG. DATE RECORD OF COUNCIL ACTION 7/27/15 ITEM INFORMATION ITEM NO. 4.E. "W STAFF SPONSOR: PEGGY MCCARTHY ORIGINAL, AGENDA DATE: 7/27/15 AGENDA ITEM Ti,rj,E An Resolution Revising the Reserve Policy. CATEGORY E Discussion Mt Date 7127115 F-1 Motion Mt g Date ❑ Resolution Mtg Date 813115 ❑ Ordinance At g Date ❑ Bid Award Mig Date ❑ Public Hearing Mt g Date F-1 Other Mtg Date SPONSOR ❑ Council ❑ Mayor ❑ HR ❑ DCD E Finance [:].Fire E]IT [:] P&R ❑ Police ❑ PWI SPONSOR'S The City Council is being asked to approve a resolution revising the Reserve Policy SUMMARY increasing the General Fund minimum fund balance requirement to 18%, establishing a One-time Revenue Reserve and conforming the reserve requirements for the self-insured health care funds to those currently practiced. This item is scheduled for Council consideration at the 7/27/15 C.O.W. and 8/3/15 Regular Council meeting. RE'V117WE'D BY r-1 cow mtg. ❑ CA&P Cmte Z F&S Cmte ❑ Transportation Cmte ❑ Utilities Cmte ❑ Arts Comm. ❑ Parks Comm. F-1 Planning Comm. DATE: 7/7/15&7/21/15 COMMITTEE CHAIR: HOUGARDY RECOMMENDATIONS: SPONSOR/ADMIN. Finance Department COMMITTEE Unanimous Approval; Forward to Committee of the Whole COST IMPACT / FUND SOURCE EXPENDITURE REQUIRED AMOUNT BUDGETED APPROPRIATION REQUIRED Fund Source: MISCELLANEOUS FUNDING SOURCES, SEE DETAIL Comments., MTG. DATE RECORD OF COUNCIL ACTION 7/27/15 8/3/15 MTG. DATE ATTACHMENTS 7/21/15 Informational Memorandum dated 07/01/15 Draft Resolution Committee Minutes from Finance and Safety (FS) Committee meeting of 7/7/15 Informational Memorandum from 7/7 FS packet Minutes from the Finance & Safety Committee Meeting of 7/21/15 8/3/15 "W :1 City of Tukwila Jim Haggerton, Mayor INFORMATIONAL MEMORANDUM TO: 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 One -time Revenue 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. 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. This represents 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 of 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 each of the years 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 One -time Revenue Reserve. A One -time Revenue Reserve is proposed to ensure that a portion of revenue windfalls from one -time or periodic events — such as construction sales tax and real property sales -- is set aside and saved. The reserve would reside in the Contingency fund and be in addition to the Contingency fund minimum balance requirement. F; INFORMATIONAL MEMO Page 2 The One -Time Revenue Reserve would be credited annually with 10% of the prior year one -time revenues. This would occur only if the General Fund surplus for the year is sufficient to cover the reserve funding. Use of the reserves would be based on the recommendation by City Administration and approval by City Council through a resolution. Should the Reserve be established, the funding goal for 2015 (based on 2014 actual one -time revenues) would be $81,900. The estimated funding goal for 2016 (based on 2015 estimated one -time revenues) could approximate $170,000, for an estimated biennial total of $251,900. The funding goal for the 2017 -2018 biennium could exceed $1,000,000 depending on the timing of one -time revenue events. These events include real property sales of the Tukwila Village land, TIB Redevelopment properties, Longacres property, and the former Fire Station 53. Planned construction activities generating construction sales tax include Tukwila Village, Washington Place and other development projects. 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 times% 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 Resolution Revising the Financial Reserve Policy Finance and Safety Committee Minutes, July 7, 2015 Informational Memorandum from the July 7, 2015 Finance and Safety Committee meeting C : \UserslchristylAppData \Local \Microsoft \Windows \Temporary Internet Files\Content Outlook \H94XR2JM \InfoMemo Reserve Policy 7 -22 -15 REVISED.docW�€IA!- Prejesls�Se� +risk- Ageada- IE�m °�`',�, F�o�sewe- PelisyUa#aMe+�o- o,.� ° ^.e -roa! }ems— �epy:doc 2 ��[041111la (1) Strike- through /underline text that is not shaded denotes changes from existing policy (as per Resolution No. 1774), and reflects the draft ordinance as it went to the Finance and Safety Committee meeting on 7 -7 -15. (2) Strike - through /underline text that is shaded denotes changes from existing policy (as per Resolution No. 1774), PLUS additional changes (additions /deletions) made after the Finance and Safety Committee meeting on 7 -7 -15. 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 ON&TIME REVENUE.,SPEC xL °RQ j'E 'T 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 less 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,wbth the Great- ReGe'ssiGR and the imposition by Washington Stat „f the destmnatiGR based sales tax, the Gity's aRnual sales and use tax Fevenue deGlin ftern a high of eveF $20 millien in 2007 te a low of less than $16 Million 2009, 2010 and 2012 ih`prior.yearsjhe- financial health of the City was negatively impacted by recession and changes in law; and W: \Word Process ing \Reserve Policy revised -2nd version 7 -15 -15 PM:bjs Page 1 of 3 i 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 each 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 the Enterprise F=URds 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. S06Gial P00je #*Qne-- time'Revenue Reserve. the Resewe F Rd shall be autheFized by the City Ce unnil Revenue Reserve shall be established and maintained in th, Fund. The 10% of the W: \Word Processing \Reserve Policy revised -2nd version 7 -15 -15 PM:bjs 0 Page 2 of 3 Section 43. Self- insured Health Care Funds. in regard to the self iRSi fired - health Gore f„nd , +The City shall maintain a reserve balance in each of its self- insured health care funds in an amount equal to 21.5 times, or 258150 %, of the actuarially determined IBNR (incurred but not reported) resewebalance. Use of the reserve Ishail occur only upon recommendation by City Administration and approval by City Council through a resolution.The Gen +inn Gy reserve balonGe will he Gnmhined wi +h the 113NR reserve balanGe and reGGFded as ene liability on eaGh ef the self insured health Gare plan fund.,,. 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: Filed with the City Clerk: Passed by the City Council: Resolution Number: Rachel B. Turpin, City Attorney W: \Word Processing \Reserve Policy revised -2nd version 7 -15 -15 PM:bjs Page 3 of 3 i :NTA • Finance & Safety Committee Minutes July 7, 2015 - Pape 2 D. Resolution: Financial Reserve Policy Staff is seeking Council approval of a resolution that would revise the City's Financial Reserve Policy in three specific areas. Those revisions and the Committee's discussion is summarized below. A clean copy of the proposed resolution was distributed to the Committee. 1. Change the General Fund minimum balance from 10% to 18 %. Staff considers this increased level of reserves to be prudent based on the City's experience with previous revenue shortfalls, such as those experienced in the Great Recession and the state's adoption of the destination based sales tax. The proposed 18% reserve requirement and the existing 10% contingency fund requirement would commit 28 %, or approximately $15.4 million to reserves. Draw down of the minimum balance could occur only by Council resolution. The Committee agreed with this proposal. 2. Establish a Special Project Reserve based on 10% of one -time revenues. This proposal is to ensure a portion of one -time revenue windfalls is saved for special one -time expenditures, and the reserve would be funded by allocating 10% of one -time revenues to the reserve each year. Use of this reserve could occur only by Council resolution. The Committee spoke in favor of a work session in which Council would establish the criteria for special projects in this scenario. As written, it is undefined and they felt it would be important to clarify this as soon as possible. The Committee asked that staff return with examples from the Mayor of applicable special projects as well as from other jurisdictions with a similar policy. They also requested an analysis of impacts to the 2015 -2016 budget, considering one -time revenues have already been appropriated. The Committee made no recommendation pending the additional information requested. 3. Change the self - insured healthcare reserve minimums from 2.5 times the IBNR (incurred but not reported) to 1.5 %. This is a housekeeping revision that will conform the City's policy to actual practice and recommendation from the actuary and healthcare broker. The Committee agreed with this proposal. Staff requested clarification on when to schedule further discussion on this item. The Committee requested that staff make a determination on when the additional information can reasonably be gathered and this will inform whether the item will move on to the Committee of the Whole or return to Finance and Safety. The potential for a work session as noted above will also be discussed at that time. NO RECOMMENDATION PENDING ADDITIONAL INFORMATION DESCRIBED IN ITEM 2 ABOVE. E. 2015 1 st Quarter Sales Tax and Miscellaneous Revenue Report Staff presented the 2015 1st Quarter Sales Tax and Miscellaneous Revenue Report. Information detailed in the staff report includes retail sales tax, gambling tax, and admissions tax revenues, with sales tax broken out by industry classifications. Total sales tax collections for the 1 st quarter were $546,000, or 16 %, above those for the same period last year. There was an increase in construction sales tax of $123,000 over the same quarter last year, or up by 84 %, and an increase in sales tax from other industries of $423,000, or 13 %. The City collected $284,506 in sales tax mitigation as of March 31. Councilmember Quinn noted that a future presentation from Economic Development staff on industry trends would be useful for the Council. INFORMATION ONLY. LIM .. Mlej City of Tukwila Jim Haggerton, Mayor ► • : 11 G • L; __ 1I�1 C•7:7_ \�I�1�11�1I TO: 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 Five, 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:1FIN Projects\Council Agenda Items120151Reserve PolicyllnfoMemo Reserve Policy 6- 30- 15.doc •X Finance & Safety Committee Minutes July 21, 2015 - Pape 2 Committee members asked clarifying questions about the information outlined in the memo and its attachments. For those items involving an increase or reduction in the beginning fund balance, the Committee requested that the memo be edited to include additional explanation. A public hearing is scheduled for July 27, 2015. UNANIMOUS APPROVAL. FORWARD TO JULY 27, 2015 COMMITTEE OF THE WHOLE FOR PUBLIC HEARING. C. Resolution: Adopting a Financial Reserve Policy Staff is seeking Council approval of a resolution that would revise the City's Financial Reserve Policy in three specific areas, described below: 1. Change the General Fund minimum balance from 10% to 18 %. The Committee reviewed and approved this proposal at its July 7, 2015 meeting and had no further comment. 2. Establish a One -time Revenue Reserve based on 10% of one -time revenues. This item was previously discussed at the July 7, 2015 meeting and the Committee made no recommendation pending additional information. Since then, the name of the proposed reserve has been changed from "Special Project Reserve" to "One -time Revenue Reserve." This reserve is based upon 10% of the prior year one -time revenues and will be stored in the contingency fund. In addition, there is a new provision that the reserve would be credited only if the General Fund surplus is sufficient to cover the reserve funding. As before, use of this reserve could occur only by Council resolution. Staff noted that although this reserve is proposed to be kept in the contingency fund, the accounting system is such that it will be easily identifiable as separate. Following discussion, committee members supported the proposed One -Time Revenue Reserve but requested that the full Council engage in a policy discussion regarding the parameters for spending these funds. It is expected that this discussion will occur at the July 27, 2015 Committee of the Whole. 3. Change the self - insured healthcare reserve minimums from 2.5 times the IBNR (incurred but not reported) to 1.5 times. The Committee reviewed and approved this proposal at its July 7, 2015 meeting and had no further comment. UNANIMOUS APPROVAL. FORWARD TO JULY 27, 2015 COMMITTEE OF THE WHOLE. D. General Revenue Sources Staff provided a comprehensive briefing on various options available to increase revenues, including information such as the amount available, mechanism, type and payee. Options discussed included levy lid lifts, voted bonds, Business & Occupation (B &O) tax, Transportation Benefit Districts, special purpose districts, admission tax, parking tax, Revenue Generating Regulatory License (RGRL), impact fees, Local Improvement District (LID), utility tax, and City -wide reduction of operating costs. The Committee expressed appreciation for the table included in the packet and distributed in color at the table. The following additional information was requested: • Estimated cost to the median homeowner for those items impacting property tax • Appendix indicating King County cities with TBD, B &O tax, levy lid lift, special purpose districts or other similar revenue generating mechanisms. • Admissions tax rates charged by neighboring cities. • Property tax rates of neighboring cities. 91