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Analysis of City of Santa Ana Reserve Funds Page 3 KAMG also reviewed the City Council approved budgets for fiscal years 2013-14 through 2016-17. Each City Council budget was approved as a balanced budget. Each budget document approved by the City Council contain a detailed discussion about the Fiscal and Budget Policy. KAMG also reviewed the budgeting philosophies used by staff in preparing the budgets submitted to the City Council for their adoption. Budget concepts and assumptions were reviewed for reasonableness and accuracy. Fiscal and Budget Policy The City Council adopted a Fiscal and Budget Policy on June 4, 2012. This policy follows Government Finance Officers Association ("GFOA") recommended Best Practices by establishing two distinct reserve amounts. The first one is the Operating Reserve Account. It is accounted for in the Unassigned Reserve Account Section of the City's financial statements. This also follow's GFOA's recommended Best Practices. The Operating Reserve Policy established a minimum of 15% of General Fund operating expenditures be used as the target goal. The City Council set an additional goal for the Operating Reserve Account. Upon attaining the 15% benchmark, the City would strive to reach an operating reserve of 20% of operating expenditures. Any funds allocated to the Operating Reserve would not be used to fund/pay for any type of operating expenditures or to cover any budgetary shortfall other than to preserve ongoing cash flow needs of the City. In other words, these funds should not be used to balance a proposed budget, whether it is a structural unbalanced budget, or a budget that needs one time funds to balance it. The City of Santa Ana was able to reach the 15% benchmark goal by the end of the 2013-14 fiscal year. The City was also able to reach the 20% reserve goal during this period as well. (Not a mandated goal per the policy, but a goal for the City to strive for.) It is a GFOA recommendation that at least two months of operating expenditures be kept to ensure that the liquidity needs of the city are met. The two months benchmark is approximately 16.67% of expenditures. Since the 2013-14 fiscal year, the City has maintained the 20% reserve level. Based on the 2015-16 actual General Fund expenditures, the current reserve level should be close to $43 million. Currently the reserves are at $42.4 million. This is an acceptable amount. The City Council also established an Economic Uncertainty Reserve Account. This account was established to maintain a minimum reserve level of 1% to 10% of recurring General Fund revenues, with a goal of attaining the maximum 10%. Funds in this account should only be used to offset negative variations in projected revenues from the largest revenues sources in the City. It is common for this reserve account to be used of offset negative fluctuations in expenditure accounts. A downturn in the economy will usually effect revenues first, but can cause expenditures to increase as markets constrict. An example of this is the increase in cities PERS rates over the last few years, which have been due in part to CALPERS generating lower investment earnings than they had projected. LIRW