65A - RECEIVE AND FILE REVENUE ESTIAMTES RELATED TO COVID-19

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Receive and File — Budget Update — Preliminary Financial Impact related to COVID-19 April 21, 2020 Page 5 threshold. Staff recently prepared a risk analysis, which actually suggests that 16.67% is a good threshold for Santa Ana. • The policy applies the 16.67% threshold to revenue or expenditures, which could produce different results. • The Economic Uncertainty Reserve policy is 1 % to 10% of revenue. We are currently maintaining 1 %. The sales tax consultant's recession scenario discussed in the Midyear Budget report suggested the Economic Uncertainty Reserve should be at least 2%. Considering the pandemic impact to General Fund revenue, we are not in a position to recommend an increase to the Economic Uncertainty Reserve this year. At this time, we will place a hold on recommendations to improve the policy. The Credit Rating agencies (e.g. Standard & Poor's, Fitch Ratings) are very critical of municipal debt issuers that do not follow their reserve policy, or make frequent policy changes. Per the City's Budget and Financial Policy, the City may access the Operating Reserve and the Economic Uncertainty Reserve for up to two years with declaration of a fiscal emergency, a two- thirds vote of the City Council, and a plan for replenishment. On March 17, 2020, the City Council declared a Local Emergency (Resolution No. 2020-016). Staff believes this satisfies the City Council's policy requirement to declare a fiscal emergency prior to using reserve balances. Staff recommends use of the $3.1 million Economic Uncertainty Reserve to help balance the FY20-21 budget; but does not recommend use of the $51.7 million Operating Reserve at this time. The City should only consider use of the Operating Reserve as a last resort, as it provides: • Necessary cash flow to cover expenditures when the majority of property tax is received in two installments per year (December and April); • The opportunity to pay the annual contribution to the unfunded pension liability upfront and obtain a 3.5% discount; • Coverage for other timing issues related to revenue collection; and • Funding for necessary infrastructure repairs due to a physical disaster such as an earthquake, not covered by insurance or FEMA. Pension Unfunded Liability The FY 2019-20 General Fund budget includes required contributions totaling $37.1 million, to pay for the unfunded employee pension liability (accrued benefits, less market value of plan assets). The General Fund contribution will increase to $41.1 million for FY 2020-21. Considering the recent CalPERS investment losses, the General Fund contributions may increase to $45.7 million for FY 2021-22, or 15% of the General Fund budget. The unfunded liability constitutes a debt requiring payment, even if all City operations ceased. Much like a home mortgage, the City can save "interest" cost by making larger payments. Considering the expected loss of revenue noted above, the City is not in a position to make larger payments. The City could consider the following options to reduce the payment: 65A-5