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Analysis of City of Santa Ana Reserve Funds Page 4 The Economic Uncertainty Reserve Fund was funded in Fiscal Year 2012-13 with a $3.85 million contribution. This was made possible by General Fund revenues exceeding General Fund expenditures at the end of the 2012-13 fiscal year. This reserve amount has not changed through the 2015-16 fiscal year. The current amount represents a 1.5% reserve level. Governmental Accounting Standards Board, ("GASB") Statement No. 54 states that governmental funds' fund balances should be classified based primarily on the extent of which the City is bound to honor the constraints on the specific purposes for which the amounts in the funds can be spent. Both the Operating Reserve Account and the Economic Uncertainty Account have been correctly classified as an Unassigned Fund Balance. An Unassigned Fund Balance is an amount that does not have legal or committed restrictions on its use. City staff has recently brought to the City Council for their consideration revisions to the Fiscal and Budget Policy. After reviewing the recommended changes, KAMG supports the changes. The revisions will keep the City of Santa Ana up to date with the current best practices for establishing and maintaining local government fund reserves. The City is recommending a target reserve balance of two months of operating expenditures. This equates to about 16.67% of operating expenditures and is an acceptable amount. In addition, KAMG recommends a five -to ten-year expenditure projection be prepared to forecast the growth in General Fund expenditures because the dollar amount tied to the 16.67% will grow with the increase in General Fund expenditures. Significant PERS rate increases are anticipated over the next five to ten years. Because pension costs are a large part of the General Fund budget, these potential rate increases will drive the total General Fund budget up. This will in turn drive up the two month operating reserve (16.67%) requirement. The more that funds have to be allocated to meet the operating reserve requirement, the more strain will be put on the overall General Fund budget to fund any other reserve accounts, or to fund any potential city project. By preparing the five to ten year financial projection, the City will be aware of what monetary commitments will be required annually to meet the reserve policy. This will impact the annual budget process. The City is not proposing any fiscal policy changes to the Economic Uncertainty Reserve.. The 10% reserve level is still the goal for the City. KAMG recommends that the City Council make it a priority to try and fund this reserve up to the 5% level. At June 30, 2016, the reserve is at 1.5%. The 3.5% increase would equate to an approximate contribution to reserves of $7 million, based on the 2015-16 actual expenditures. Putting the two reserve amounts together, the overall goal of the City would be to obtain a 21.67% (16.67% plus 5%) reserve level. This is a sound financial goal that meets best practices standards. LIMM