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HomeMy WebLinkAbout06-21RESOLUTION 06-21 A RESOLUTION OF THE CITY COUNCIL OF THE TOWN OF LOS ALTOS HILLS APPROVES THE FUND BALANCE AND RESERVE POLICY WHEREAS, financial reserves are an essential component to demonstrating financial stability and strength of the organization; and WHEREAS, a fund balance and reserve policy enable an organization to plan for contingencies, maintain good standing with credit rating agencies, generate interest income, and ensure that funds are available during emergencies and economic downturns; and WHEREAS, the Town adopted Resolution 01-19 on January 31, 2019 to update the Town of Los Altos IIills Fund Balance and Reserve Policy; and WHEREAS, the Town desires to replace the existing reserve policy with the new policy in Attachment 1; and WHEREAS, the Town commits $1,575,000 as Pension Contribution Reserve to meet unfunded pension liability, reducing the reserve by $1,000,000 for payment towards the unfunded pension liability; and WHEREAS, the City Manager is responsible for presenting annually an updated reserve threshold report during the annual budget cycle; and NOW, THEREFORE, BE IT RESOLVED, by the City Council of the Town of Los Altos Hills approves the Fund Balance and Reserve Policy. The above and foregoing Resolution was passed and adopted by the City Council of the Town of Los Altos Hills at a regular meeting held on 18th day of February 2021 by the following vote: AYES: Tankha, Tyson, Mok, Schmidt, Swan NOES: None ABSTAIN: None ABSENT: None ATTEST: (j&AtIlul- Deborah Padovan, City Clerk Resolution 06-21 Kavita Tanlcha, Mayor Page 1 LOS ALTOS BILIS Town of Los Altos Hills CALIFORNIA Reserve Policy Purpose To set forth the Town's policy for establishing and maintaining find reserve targets for each of the Town's governmental funds. Fiscal reserves provide working capital for operations and maintenance activities, funding for IT, vehicle, and equipment needs, fulfillment of legal, regulatory, and contractual obligations and mitigation of risk and liability exposures. Policy This policy is intended to ensure that the Town has sufficient cash flow to meet current and future needs and provide transparency to its residents by establishing fund reserve targets for each of the Town's governmental funds. Reserve funds are needed to provide funding for planned and unplanned events. Planned events include, but are not limited to, (1) accumulating balances to fund operating needs; (2) debt service obligations; and (3) funding for employee related pension and other post -employment benefits. Unplanned events include, but are not limited to, (1) accounting for revenue shortfalls; (2) unanticipated expenses; and (3) paying for unforeseen emergency events. The established reserve targets defined herein provide guidance for long-term financial planning and maintaining the Town's long-term financial health. Adequate find reserves are of value to: (1) provide working capital to fund operating needs; (2) provide a financial cushion for dealing with unanticipated financial needs and emergencies; and (3) are a component of achieving favorable credit ratings which can help reduce the costs of issuing debt. This policy designates specific reserve accounts. For each reserve, this policy specifies the reserve purpose, the threshold amount, allowable uses of reserves, and replenishment of the reserve. This policy establishes committed and assigned reserves. Committed or Assigned reserves may be established, changed, applied, and deleted by Council resolution. Committed reserves may be used for one or more limited activities noted in the purpose or usage of the reserve. Assigned reserves are not limited to one single activity and may be used for any Town specific activity described in the purpose or usage of the reserve. This policy will be reviewed annually during the CAFR process to ensure conformance with the Town's goals and objectives and compliance with any changes in regulations or standards. In conjunction with the annual policy review, the Administrative Services Director will include updated calculated thresholds, review of use and replenishment of the reserves, and any anticipated changes to be included in the annual CAFR preparations. Committed Reserves Pension Contribution Reserve Purpose of the Reserve: The Pension Contribution Reserve is to provide for contingent liabilities identified by Ca1PERS actuaries in the most recent Actuarial Report that are not included in the most recent actuarial calculation of the Town's Past Unfunded Pas Service Liability reported in the Town's most recent Activities (or accrual) annual Statement of Position (balance sheet) found in its most recent CAFR. . Committed Reserves — continued Contingent Liabilities identified by CalPE.RS actuaries: Updated 2/18/21 -1- Resolution 06-21 Page 2 LOS ALTOS HILLS Town of Los Altos Hills CALIFORNIA Reserve Policy The most recent CalPERS actuarial report in the section titled Risk Analysis describe two risks: Discount Rate assumptions and Mortality Rate assumptions. Discount Rate assumptions are discussed here, and Mortality Rate assumptions are not discussed here because a 10% increase or decrease in the Mortality Rate which is approximately $250,000 would not significantly affect the Town's financial position. However, a 1 % change up or down in the Discount Rate can result in a change to the Town's financial position of approximately $ 3 million (as shown in the table below). As shown in the following table, the Discount Rate calculation used by CalPERS actuaries has two components: The Rate of Return on Assets, and the Inflation Rate. A 1% change (up or down) in both the Rate of Return assumption and in the Inflation, assumption changes the Unfunded Liability by approximately $3 million. These two assumptions are related as movement in one affects the other. The Rate of Return component is the most significant of the two. Therefore, for convenience, the likely changes in the Rate of Return assumption are used here to evaluate when adjustments are needed to this reserve. 17 ension F esery e i I I ,titration call ciAation- - Q020 Ca1PER'S ctuarid Report pa t7) _ - Direction of Change. 1 Pate of Retl>rn 1 Inflation 1 Ar1tFPr Favnrahl P: 1 As sumpti on Chang e i s I%r ' °tersauls. 0/0 Rate of return 2,073 70'% 1.7001 60°/a �. Inflation 8871 30%I.i3�40% � Total_ hag _. 2.9601100% 2,839,1004/0 I I Threshold of the Reserve: If the financial market prices are trending up, it is less likely that the Discount Rate assumption will be adjusted downward by CalPERS. Conversely, if the financial market prices are trending down, it is more likely that the Discount Rate assumption will be adjusted downward by CalPERS. In the recent past, to address this risk, CaIPERS' Board changed the Discount Rate assumption. More recently, CalPERS Board announced it will evaluate increasing Private Equity investments to protect the existing discount rate assumption of 7%. Therefore, when considering whether to change this reserve, the Town should consider available information including trend changes in the S&P 500, policy changes under consideration by CalPERS that are likely to affect the Discount Rate assumption, and input from the Town's independent actuary, Bartel & Associates. Annually, the Town's Finance and Investment Committee should address this matter and make a recommendation to the Town's Staff and Council. Committed Reserves — continued Usage of the Reserve: Updated 2/18/21 -2- Resolution 06-21 Page 3 LOS ALTOS HIGLSN10 MM02 � Town of Los Altos Hills CALIFORNIA Reserve Policy Presently the above-mentioned analysis, measurement and calculation is made during the annual Mid - Year Budget update cycle performed February and March. The most recent Ca1PERS actuarial report includes information updated to at least June 30, 2019 and for some items as late as January 2020 (see Subsequent Events discussion on page 8 of the CalPERS June 30, 2019 Actuarial Report). Replenishment of the Reserve: In conjunction with consideration of the factors noted in the Threshold discussion, above, the Town's Finance and Investment Committee should discuss and recommend needed changes to the Reserve to Council for its consideration along with similar inputs from the Town's Staff. Changes to the Discount Rate Assumption Reserve should be made after approval by Council. B. IT Equipment Replacement Reserve Purpose of the Reserve: The IT Equipment Replacement Reserve is to constrain funds for the Town's current and future IT equipment and software replacement needs. The Town maintains an IT equipment replacement schedule for all Town IT equipment. This schedule is updated as equipment is added or removed from service. Threshold of the Reserve: The threshold of the IT Replacement Reserve will be calculated each year during the annual CAFR cycle. This threshold will be calculated by the following: the sum of the amount determined for each piece of equipment or software on the IT replacement schedule based on the future replacement costs of the item divided by its useful life and multiplied by the number of years in service, but in no event greater than the future replacement cost. Usage of the Reserve: Eligible expenditures include IT equipment and software replacements purchased throughout the fiscal year. These expenditures will be determined on an annual basis. Replenishment of the Reserve: During the annual CAFR cycle, the IT Equipment Replacement Reserve will be adjusted up or down, as necessary, to equal the threshold. These adjustments will be approved by the City Council as part of the annual CAFR cycle. C. Vehicle and Equipment Replacement Reserves Purpose of the Reserve: The Vehicle and Equipment Replacement Reserve is to constrain funds for the Town's current and future vehicle and equipment replacement needs. The Town maintains a vehicle and equipment Updated 2/18/21 -3- Resolution 06-21 Page 4 LOS ALTOS MUS I WO Town of Los Altos Hills CALIFORNIA Reserve Policy Committed Reserves — continued replacement schedule for all Town vehicles and equipment. This schedule is updated as equipment is added or removed from service. Threshold of the Reserve: The threshold of the Vehicle and Equipment Replacement Reserve will be calculated each year during the annual CAFR cycle. This threshold will be the sum of the amount determined for each piece of equipment on the Vehicle and Equipment replacement schedule based on future replacement costs of the item divided by its useful life and multiplied by the number of years in service, but in no event greater than the future replacement cost. Usage of the Reserve: Eligible expenditures include vehicles and/or equipment replacements purchased throughout the fiscal year. These expenditures will be determined on an annual basis. Replenishment of the Reserve: During the annual CAFR cycle, the Vehicle and Equipment Replacement Reserve will be adjusted up or down, as necessary, to equal the threshold. Any adjustments will be approved by the City Council as part of the annual CAFR cycle.D. Facilities Replacement Reserves Purpose of the Reserve: The Facilities Replacement Reserve is to constrain funds for the Town's current and future facility improvement and replacement needs. The Town maintains a facility schedule for all Town facilities. Additions to the facilities schedule occur when Town facilities are either improved or new Town facilities are added. Deletions occur as Town facilities are demolished and removed from service. Threshold of the Reserve: The threshold of the Facilities Replacement Reserve will be calculated each year during the annual CAFR cycle. This threshold will be the sum of the amount determined for each facility/improvement on the facility replacement schedule based on future replacement costs of the item divided by its useful life and multiplied by the number of years in service, but in no event greater than the future replacement cost. Updated 2/18/21 -4- Resolution 06-21 Page 5 LOS ALTOS 1110 ffWftao"D= 11 Town of Los Altos Hills CALIFORNIA Reserve Policy Usage of the Reserve: Eligible expenditures include facilities improvements, renovations, or demolitions that occur throughout the fiscal year. These expenditures will be determined on an annual basis. Committed Reserves — continued Replenishment of the Reserve: During the annual CAFR cycle, the Facilities Replacement Reserve will be adjusted up or down, as necessary, to equal the threshold. Any adjustments will be approved by the City Council as part of the annual CAFR cycle. E. Town Emergency Contingency for Disasters Not Federally and/or State Declared Purpose of the Reserve: The Town Emergency Contingency for Disasters Not Federally and/or Stated Declared reserve is to constrain fiends for emergencies that may arise within the Town that have not been federally and or state declared disasters. To constitute a Town emergency, the disaster or emergency would be natural disasters (i.e. earthquakes, landslides, flooding) or temporary service outages of Town facilities and infrastructure (i.e. extensive debris cleanup from wind events that prohibits travel on Town roads). To be declared a Town Emergency, the Emergency Operations Center and team would be activated for any length of time. Town emergencies are smaller in nature than presidentially declared federal disasters and governor declared state disasters and are typically contained within the Town boundaries. Threshold of the Reserve: The Town Emergency Contingency for Disasters Not Federally and/or State Declared reserve shall maintain a balance not less than $1,250,000. This amount shall be adjusted up or down, as necessary, each year. Adjustments will be based on the risk assessment performed by the Town's emergency services personnel. Usage of the Reserve: The City Manager is the Director of Emergency Services. In the event of a Town emergency, the City Manager would determine eligible expenditures allowable for use of the reserve on a case-by-case basis. If expenditures are incurred, use of the reserve will be considered on an annual basis. Replenishment of the Reserve: During the annual CAFR cycle, the Town Emergency Contingency for Disasters Not Federally and/or State Declared Reserve will be adjusted as necessary to equal the threshold. Any adjustments will be approved by the City Council as part of the annual CAFR cycle. Updated 2/18/21 -5- Resolution 06-21 Page 6 IAS ALTOS NILIS ^ IM!, Town of Los Altos Hills CALIFORNIA Reserve Policy F. Self -Insurance Liability Purpose of the Reserve: To provide for self-insured liability claims (to be revised based on the most recent available annual PLAN JPA Deposit calculation. The Town ensures its liability risks through its membership in PLAN JPA, a Joint Powers Authority representing agencies (primarily but not limited to cities and towns in the San Francisco Bay Area). Threshold of the Reserve: 1. The deductible for two additional liability claims at $25,000 each, totaling $50,000. 2. The portion of existing claims not yet amortized into annual insurance deposit type premiums to PLAN JPA presently currently $140,000 (PLAN JPA Actuarial Report for 6/30/20 Exhibit 1, page 8). 3. As of 1/23/21 the Self Insurance Reserve should be $190,000. Usage and Replenishment of the Reserve: This reserve shall be adjusted upward or down annually during the mid -year budget review performed by Town Finance personnel based upon the foregoing description of the Reserve Threshold. Assigned Reserves A. Operating Contingency Reserve Purpose of the Reserve: This reserve is to provide funding to keep the Town's operations functional in the event of a major unexpected event like COVID-19. Since the nature and extent of such an event is both unexpected and unknown, the extent of damage, duration and recovery period are also unknown. Should such an even occur, the Town's most important assets are its professional staff without whom the Town would find it difficult to recover to normal operations (as recently by the COVID-19 epidemic). Therefore, the proposed Contingency Reserve is set an amount which is equal to the Town's personnel costs for 1 year. Threshold of the Reserve: The Town's personnel costs for 1 year should be based on the amount in the most recent published annual Town Budget (page 31 for 2021 Budget) which is $3.9 million. Usage of the Reserve: Allowable expenditures for use in this reserve shall be determined on a case by case basis. Examples of allowable expenditures include, but are not limited to, significant economic downturn that result in diminishing property taxes revenues, thus resulting in a need for use of the reserve to balance the annual. Assigned Reserves -continued Updated 2/18/21 Resolution 06-21 Page 7 IM ALTOS AILS I � •� Town of Los Altos Hills CALIFORNIA Reserve Policy Operating Contingency Reserve, continued general fiend in the CAFR. These expenditures will be recommended by the City Manager and approved by the City Council. If expenditures are recommended and approved, use of this reserve will be considered on an annual basis. Replenishment of the Reserve: During the annual CAFR cycle, the Operating Contingency reserve will be reviewed and updated based on the most recent audited and issued Comprehensive Annual Financial Report. Any adjustments will be approved by the City Council as part of the annual CAFR cycle. Updated 2/18/21 -7- Resolution 06-21 Page 8