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Analysis of City of Santa Ana Reserve Funds Page 8 Findings/Recommendations In conclusion, based on the audited financial statements reviewed and the budgets adopted by the City Council, the following reflects KAMG's findings and recommendations regarding the status of the General Fund Reserves of the City of Santa Ana, at June 30, 2016: • The reserves identified in the June 30, 2016 Comprehensive Annual Financial Report "(CAFR" ), accurately reflect the financial activity of the City of Santa Ana through this date. The financial reserves are also correctly identified, per the Fiscal and Budget policy, at June 30, 2016. • The City of Santa Ana's General Fund reserves increased significantly between 2010-11 and 2015-16. • A new Budget and Fiscal policy was adopted in 2012. New reserve classifications were created to separate monies available for citywide needs and monies available for fiscal emergencies. Changes to the current policy have been discussed with the City Council. KAMG agrees with the proposed changes, but also recommends that the City Council fund the Economic Uncertainty Fund to 5%. • Since the 2013-14 fiscal year, the City has maintained the 20% reserve level in the Operating Reserve Account. Based on the 2015-16 actual General Fund expenditures, the current reserve level should be approximately $43 million. If the proposed changes to the Budget and Fiscal Policy are adopted, the Operating Reserve Account would be overfunded. KAMG recommends these potential excess funds stay in the Operating Reserve Fund. These excess funds will slowly evaporate (as a percentage of reserves), as the General Fund expenditures increase year over year. When the Operating Reserve Account, as a percentage, drops to 16.67%, the City will need to start funding this reserve. • The "Attrition Savings" process that was used during the budget adoptions redirected anticipated personnel savings into other programs and/or projects, but did so without reducing the number of funded personnel positions in the budget. KAMG recommends that if this process is to continue, the potential savings be based only on personnel savings, and that the specific number of funded personnel positions be clearly identified in the budget adoption process. 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. Regarding the potential changes to the Budget and Fiscal Policy, KAMG recommends City staff should closely monitor and project future cost increases that could dramatically affect the required reserve level amounts. KAMG appreciates the opportunity to work with the City of Santa Ana. Please feel free to contact us if you have any questions regarding this report or would like to discuss our findings and recommendations further. Respectfully submitted, KELLY ASSOCIATES MANAGEMENT GROUP, LLC om w •