Evolution of City's Reserve Policy Document from Nov 1999

Memorandum
TO:Thomas J. Bonfield, City Manager
FROM: Richard Barker, Jr., Director of Finance
DATE:November 10, 1999
SUBJECT: Financial Planning and Administration Policy

RECOMMENDATION:
That City Council approve an amended Financial Planning and Administration Policy revising General Fund and enterprise funds reserve minimums and the target level of the budgeted ESP transfer to the General Fund.
BACKGROUND:
On July 23,1998, City Council approved the current Financial Planning and Administration Policy.
At this time, several refinements to the policy are being recommended.
General Fund Reserves:
Current policy calls for a desired General Fund reserve of between 10-12 percent of annual revenues. Based on the potential for weather-related revenue shortfalls in the Tax and Franchise Fee Debt Service Fund and Gas Fund impacting transfers to the General Fund, it is prudent to establish a targeted minimum General Fund reserve of 15 percent of annual revenues. The projected reserve balance for FY 2000 is $3,100,000 or 8.49% of budgeted revenues.
Enterprise Fund Reserves:
According to current policy, enterprise fund reserves should be maintained at levels adequate to support the needs of the various enterprises. Under the proposed policy the City Manager will develop and present to Council a reserve implementation plan for each of the enterprise funds. Each plan will include a minimum l5 percent operating reserve. However, based on the volatility of revenues in certain enterprise
funds due to weather or other risk factors beyond our control, the target reserve may be greater than 15%.
Bond covenants will also be considered when developing the reserve implementation plans. In addition to the operating reserve, enterprise funds will also establish capital reserves to ensure that ongoing capital and infrastructure needs are adequately met. In these funds, the reserve goal will be reached by continuing to treat each fund as a full enterprise with revenues and expenditures budgeted at a level that meets fund needs.
ESP Transfer: Currently, the budgeted ESP transfer to the General Fund has a long-term target of 15 - 20 percent of budgeted ESP revenues. The proposed policy eliminates the percentage range and establishes a straight 20 percent target. This will be accomplished by reducing the transfer a minimum of $100,000 each fiscal year
while continuing to expand the customer base.
The minimum level of reserves should be reached in the General Fund and all enterprise funds within eight years. Reduction of the budgeted ESP transfer to 20% of budgeted ESP revenues should be accomplished within the same time frame.
FINANCIAL IMPACT:
The strengthening of reserve policies and reduction of the budgeted ESP transfer will have a positive impact on the continued fiscal stability of the City. Bond ratings may be enhanced and further savings achieved when entering the debt market for future borrowings.