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Modifications to the City's Budget and Financial Policies June 6, 2017 Page 2 DISCUSSION On June 4, 2012, the City Council adopted the current Fiscal Policy. The policy was established in response to the 2008 recession that resulted in major revenue shortfalls and the depletion of City reserves. The policy's main objective is to ensure long-term financial sustainability through the establishment of reserve levels proposed by the Government Finance Officer Association (GFOA), ensure the ability to address short term variations in revenue with the establishment of an Economic Uncertainty Account, defining the use of one-time revenue for one-time or term specific expenditures, and providing budgetary guidelines. Since its approval, the City has achieved a 20% reserve level ($42.4 million) and has established an Economic Uncertainty Account ($3.8 million). However, the City has forecasted a structural deficit for FY 17-18 and FY 18-19. In order to address the deficit and allow for an opportunity to develop and implement strategies, staff recommends changes in the fiscal policy to allow the use of one-time revenue to balance the budget. On May 15, 2017, staff presented options for consideration for the Economic Development, Infrastructure, Budget and Technology Committee (Committee). The presentation provided an opportunity to review the current policy and discuss options. In terms of the City's Operating reserve, there was consensus that preserving the current dollar value ($42.3 million) was paramount to ensuring the City's financial sustainability and ensuring the City's AA rating issued by Standard & Poor's. As expenditures related to the General Fund budget grows a corresponding increase is required to continue maintenance of a 20% reserve level. To maintain the operating reserve level at 20% as of June 30, 2017, staff is projecting that an additional $2.6 million would be required. Best management practices by the GFOA, calls for a minimum of two months reserve. Therefore, the Committee recommended a range that includes a minimum reserve level of two months (16.67%) up to 20%. To further protect the reserves, the Committee is recommending a provision requiring that the use of the operating reserves be limited to financially declared emergencies. Furthermore regarding one-time revenue, the Committee clarified that one-time revenues are separate and distinct from the operating reserves. One-time revenues are primarily related to year-end operating balances and savings related to the completion of encumbered projects and programs. The Committee sought to ensure that the use of one-time revenue should be to fund one-time or term specific programs but recognized the need to include language that would allow the use of these revenues to balance the budget for FY 2017-18 and FY 2018-19. The Committee recommended additional language that would require a mid -year budget review, provide for the accounting of unspent funds as it relates to vacant positions. These items will be included as budget directives to the City Manager under the budget adoption actions. Furthermore staff is recommending adding language that would allow the terminology used in the fiscal policy to be consistent with the terms used in the City's Annual Comprehensive Financial Report. This would allow for greater transparency as it relates to the use of one-time revenue. 65C-2