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HomeMy WebLinkAboutItem 32 - Provide Direction for FY 2021-22 BudgetFinance and Management Services https://www.santa-ana.org/finance Item # 32 City of Santa Ana 20 Civic Center Plaza, Santa Ana, CA 92701 Staff Report March 16, 2021 TOPIC: Provide Direction for FY 2021-22 Budget AGENDA TITLE: Provide Early Direction for Preparation of the Fiscal Year 2021-22 Budget RECOMMENDED ACTION 1. Adopt the proposed Budget and Reserve Policy. 2. Direct staff to: a. Increase miscellaneous fees by 1.67%; OR b. Maintain miscellaneous fees at current rates. 3. In addition to Strategic Plan goals already identified, provide any further direction for the draft FY 2021-22 Budget and key priorities for federal funding from the American Rescue Plan Act of 2021. EXECUTIVE SUMMARY This report contains early information for the draft FY 2021-22 Budget, as well as additional Strategic Plan Goals prioritized by the City Council in closed session on February 12, 2021. Staff offers an updated Budget and Reserve Policy for City Council consideration, as well as an opportunity to provide direction to staff before reviewing the draft budget in May. A summary of early expectations for the General Fund budget follows. This report includes detailed information for expected changes. FY 2020-21 Midyear Budget Update Early Estimates of FY 2021-22 Changes Potential FY 2021-22 Revenue $323,588,143 $9,062,300 $332,650,443 Expenditures $ 334,521,033 $ 11,501,499 $ 346,022,532 Net Activity $ 10,932,890 $ 2,439,199 $ 13,372,089 Provide Direction for FY21-22 Budget March 16, 2021 Page 2 As of the Midyear Budget Update, the estimated available General Fund balance at June 30, 2021 is $13,846,139. DISCUSSION The FY 2021-22 budget process kicked -off in November and the City Council approved a budget calendar on December 15, 2020. Staff has been busy compiling a draft budget, and meetings between the City Manager and Directors will occur this month to review department -proposed changes. The draft budget will include support for Strategic Plan Goals. Strategic Plan Goals On June 16, 2020, the City Council adopted the Five -Year Strategic Plan. On February 12, 2021, the City Council met in closed session and created additional Strategic Goals for the City Manager to address. The Strategic Plan Priorities and new additions to goals follow. Strategic Plan Priorities NEW Goals Added Financial Stability Community Safety . School Partnerships Modern Facilities & Infrastructure . Bridge Digital Divide Efficient City Services Economic Diversification & Expansion . Address Housing Challenges • Parks, Open Space & Amenities Staff will develop additional performance measures as necessary, and any proposed increases to FY 2021-22 spending will support one or more Strategic Plan Goals. American Rescue Plan Act of 2021 & Economic Outlook The federal stimulus package includes a $350 billion Coronavirus State Local Fiscal Relief Fund that would provide approximately $65 billion in direct and flexible funding to cities for pandemic response and revenue replacement. The current estimate for the City's allocation is $143 million. The funding will be critical for recovery as we emerge from the pandemic. The City will receive the first allocation within 60 days after enactment. The City must spend the federal funding by December 31, 2024. Similar to the CARES Act, staff will develop a draft plan for "Revive Santa Ana" and return to City Council when we have more information on the federal spending guidelines. The public will have an opportunity to provide initial input during the Community Budget meeting on March 25. UCLA Anderson Forecast recently released its projections for the California economy, including 2022 statewide increases of 2.4% for CPI, 1.6% for taxable sales, and 2.9% for residential building permits. Although the overall outlook is positive, UCLA Anderson Forecast Director Jerry Nickelsburg expects the leisure and hospitality sectors in Santa Ana will have a slower recovery than other markets in California. Provide Direction for FY21-22 Budget March 16, 2021 Page 3 Update to Budget and Financial Policy The City Council adopted the Budget and Financial Policies on June 6, 2017 (Exhibit 3). The Policy document included guidelines for General Fund reserves and two internal service fund reserves. On April 21, 2020, as part of the FY 2020-21 budget process, staff reported the need for a policy update, but did not make a recommendation due to the unknown effects of the pandemic and the local emergency declared by the City Council with Resolution 2020-016 on March 17, 2020. Considering City Council direction to proceed with pension debt financing, staff proposes an updated policy to clarify ambiguities (Exhibit 1, proposed Budget and Reserve Policy). The primary purpose of a reserve is to mitigate risk and provide cash flow. As such, staff prepared a risk assessment and cash flow analysis to support the proposed General Fund Reserve policy amount (Exhibit 2). The following table compares the 2017 policy to the proposed version. 2017 Policy Comments Proposed Policy Operating Reserve of The City has maintained Reserve 18% of annual 16.67% to 20% of annual the minimum 16.67% recurring General Fund recurring General Fund requirement as applied to revenue, combining the revenue or expenditures annual recurring revenue former Operating Reserve and Economic Uncertainty Reserve Economic Uncertainty The City has maintained See above for the Reserve of 1 % to 10% of the minimum 1 % proposed combination of recurring General Fund requirement Reserves revenue General Liability and At June 30, 2020, the No change to policy; Workers Compensation General Liability fund however staff will develop internal service funds — balance was 80% of the a plan to achieve the Reserves of 80% of actuarial determined desired reserve balance actuarial determined liability, but the Workers over time liabilities Compensation fund balance was only 31 % of the liability No policy for other funds The City has many funds Individual Target Reserve critical to ongoing Balances for each internal operations service fund, and a target for all other funds (20% of annual operating costs), if allowed by restricted funding sources Provide Direction for FY21-22 Budget March 16, 2021 Page 4 Adoption of the proposed Policy would result in: 1. A slight increase in the minimum General Fund Reserve requirement, from 17.67% (16.67% Operating + 1 % Economic Uncertainty) to 18% of annual recurring revenue; and 2. The proposed Budget and Reserve Policy replacing the 2017 Budget and Financial Policies. Cost -Based Fees The City charges fees to recover its cost of providing service to an individual (e.g. building permit). Each year staff reviews fees to ensure they are compliant with state law, and proposes changes as needed. As part of the review process, staff typically proposes an overall increase by the Consumer Price Index (CPI) in an attempt to keep pace with the increasing cost of the City's workforce. The CPI increase for FY 2021-22 miscellaneous fees would be 1.67%, estimated to generate up to $200,000 of revenue. Over the last 8 years, the CPI increase has averaged 3.17%. The last low CPI was 1.55% in 2011, when the region was still feeling the effects of the Great Recession. Considering the impact the pandemic has had on household income and business activity in the City, the City Council may elect to refrain from a fee increase for FY 2021-22. Estimated Impacts to FY 2021-22 General Fund Revenue The following provides an early snapshot of expected FY 2021-22 revenue increases. Expected Change to FY 2021-22 budget Comments One -Time Items $(500,000) Remove one-time receipts from FY 2020- 21 estimated revenue, to arrive at a recurring revenue baseline Sales Tax Bradley $2,378,900 Based on latest "conservative" estimate Burns from sales tax consultant Sales Tax Measure X $1,762,400 Based on latest "conservative" estimate from sales tax consultant Property Tax $800,000 Based on 1.036% CPI increase to property assessments released by state Hotel Visitors Tax $2,200,000 Based on statewide partial recovery expected by League of California Cities Principal Fiscal Policy Advisor Business Tax $1,800,000 Based on a partial recovery of pandemic decrease Jail Revenue $621,000 Assumes third module opens by end of 2021, and we collect revenue for an additional 30 inmates at the rate of $115 per day for 180 days in the second half of FY 2021-22 Provide Direction for FY21-22 Budget March 16, 2021 Page 5 Net Expected $9,062,300 Increase Estimated Impacts to FY 2021-22 General Fund Expenditures & Net Transfers The following provides an early snapshot of increasing costs for FY 2021-22. Expected Change to FY 2021-22 budget Comments One -Time Items $(11,146,520) Remove one-time spending from FY20- 21 budgeted expenditures, to arrive at a recurring cost baseline Employee $7,024,636 Contractual obligation to employee Compensation bargaining groups, described in detail below Unfunded Pension $5,660,300 Contractually required CalPERS Liability Contribution contribution, does not take into consideration pension debt refinancing, described in detail below Orange County Fire $1,970,000 Contract maximum 4.5% increase Authority Phase out of COPS $826,251 COPS Hiring grant is temporary and Hiring Grant City's General Fund cost increases as the grant funding phases out Restore General Fund $5,323,349 FY20-21 public safety efforts redirected spending for Public to COVID-19 response, with federal Safety reimbursement for some costs Restore Civic Center $743,483 FY20-21 General Fund required Authority Contribution contribution to the joint powers authority was temporarily suspended for FY20-21 and must be restored SARTC Subsidy $1,100,000 FY20-21 budget included a one-time subsidy, which must become a recurring item to preserve service Net Expected $11,501,499 Increase Employee Compensation The draft FY 2021-22 budget will include funding for contractual compensation increases for the employee bargaining groups. The Santa Ana Police Officers Association (SAPOA) will receive a 2% wage increase and a one-time additional 2% contribution to retirement health savings. The Service Employees International Union (SEIU), Confidential Provide Direction for FY21-22 Budget March 16, 2021 Page 6 Association of Santa Ana (CASA), and Santa Ana Management Association (SAMA) employees will received 3.5% wage increases. The Santa Ana Police Management Association (SAPMA) Memorandum of Understanding (MOU) expires June 30, 2021. A summary of the estimated increases, as reported when approved by the City Council, follows. These increases will be included in the draft FY 2021-22 budget. General Fund Other Funds Total SAPOA $2,652,480 $82,035 $2,734,515 SEIU* $3,074,090 $2,689,382 $5,763,472 CASA $511,295 $235,817 $747,112 SAMA $786,771 $448,351 $1,235,122 Total $7,024,636 $3,455,585 $10,480,221 *SEIU estimates are for full-time employees. SEIU increases for part-time employees are immaterial. Pension Debt Refinancing On this same agenda, the City Council will consider approval of a resolution necessary to begin judicial validation proceedings for pension refinancing. If there is no contest to the validation and the City Council provides further approvals, the City may complete the refinancing later this calendar year. There are many ways to structure the refinancing, and rates will continue to fluctuate. Therefore, it is premature to include potential savings in the draft FY 2021-22 budget. Staff will have a better estimate of the savings after the judicial validation is complete. In the meantime, the draft FY 2021-22 budget will include the increased required contributions to the pension debt, net of the discount for paying in July. The total increase, before pension refinancing savings, is $6,381,871, with an estimated $5,660,300 paid from the General Fund. Plan FY20-21 FY 2021-22 Increase Safety $25,351,433 $29,101,640 $3,750,207 Miscellaneous $22,612,766 $25,244,430 $2,631,664 Total $47,964,199 $54,346,070 $6,381,871 General Fund $41,617,330 $47,277,630 $5,660,300 Other Funds $6,346,869 $7,068,440 $721,571 Total $47,964,199 $54,346,070 $6,381,871 Orange County Transportation Authority (OCTA) Measure M2 Maintenance of Effort MOE The OCTA imposes an MOE on cities receiving Measure M2 funds. For FY20-21, OCTA required the City to spend slightly more than $9 million of General Fund money for Provide Direction for FY21-22 Budget March 16, 2021 Page 7 roadway maintenance to satisfy the MOE. In light of the ongoing pandemic, OCTA is currently considering some form of MOE relief for cities in FY 2021-22. The FY20-21 MOE relief formula adopted by OCTA did not help the City of Santa Ana. If the OCTA MOE increases for Santa Ana, the increase will be included in the draft FY 2021-22 budget. Additional Demands on the General Fund There are additional demands for General Fund money, as described below. Once the City is ready to add savings from pension debt refinancing to the FY 2021-22 budget, staff may recommend additional spending from this list. • Internal Service Fund Charges: Some departments/divisions provide internal services to other departments (e.g. Building Maintenance), and account for costs of the service in a separate internal service fund. The funding source for these centralized service costs is charged to departments for their proportional use of the service. Departments pay the charges from their budgets, many of which are in the General Fund. Therefore, when costs to provide internal service increase, the result is an increase to General Fund expenditures. In prior years, internal service charges were sufficient for operations, and over time, the internal service funds accumulated fund balances from unspent allocations. As the General Fund budget constricted, internal service departments/divisions relied on their accumulated fund balances instead of increasing the charges to the General Fund. At least three internal service funds have completely exhausted accumulated money from prior years, and must increase charges to the General Fund to continue providing service. Additional analysis is required, and the City Manager needs to vet department budget requests. However, at this time, we believe there is a need to increase internal service charges to the General Fund by approximately $2 million. • Santa Ana Regional Transit Center (SARTC): The FY 2020-21 budget included a one-time $1.1 million General Fund subsidy for SARTC. With the Midyear Budget Update, staff reported an estimated negative fund balance of $2.2 million at June 30, 2021, as well as an ongoing budget deficit for SARTC. It is common for government to subsidize public transit centers as they provide external benefits such as stimulating economic development and reducing traffic congestion. For example, the City of Anaheim subsidizes its transit center with transfers from its convention and sports complexes. Although the City is exploring ways to increase tenant occupancy and lease revenue, the draft FY 2021-22 budget will likely include a proposed ongoing subsidy for operations. However, SARTC also needs a one-time General Fund subsidy to cure the negative fund balance. Provide Direction for FY21-22 Budget March 16, 2021 Page 8 • Parking Enterprise: As reported on November 17, 2020, December 15, 2020, and February 16, 2021, parking garage revenue has decreased significantly and the Parking Enterprise cannot fund all its commitments. Staff plans to propose a balanced FY 2021-22 budget for the Parking Enterprise. However, the Parking Enterprise needs a one-time General Fund subsidy to cure an estimated negative fund balance, currently estimated at $1 million. Next Steps The FY 2021-22 Budget Calendar includes the following steps for City Council and the public. 1. March 25 — Community Budget Meeting 2. May 4 — City Council Budget Workshop Session 3. May 18 — City Council Work Study Session 4. June 1 — City Council public budget hearing 5. June 15 — City Council second reading and adoption of budget ordinance ENVIRONMENTAL IMPACT There is no environmental impact associated with this action. FISCAL IMPACT There is no immediate fiscal impact related to the recommendations. The City Council is only providing direction for preparing the draft FY 2021-22 budget, scheduled for consideration in May and June. EXHIBIT(S) 1. Proposed Budget & Reserve Policy 2. Summary of 2020 General Fund Risk Assessment & Cash Flow Analysis 3. Budget and Financial Policies adopted by City Council on June 6, 2017 Submitted By: Kathryn Downs, Executive Director Finance and Management Services Approved By: Kristine Ridge, City Manager EXHIBIT 1 City of Santa Ana Council Policy Mayor's Authorization Subject Council Approval Date: BUDGET AND RESERVE POLICY This policy supersedes Budget and Financial Policies approved by City Council on June 6, 2017. PURPOSE This Budget and Reserve Policy includes directives to balance the budget and provide information to support long- range financial decisions, and Reserve requirements to mitigate risk and support cash flow. Development of this policy included a risk assessment and cash flow analysis, as well as best -practice recommendations from the Government Finance Officers Association (GFOA), a national non-profit organization providing training and interpretation of accounting and financial reporting standards applied to the government sector since 1906. This policy compliments budget requirements contained in the City's Charter and Municipal Code. UNRESTRICTED FUND BALANCE The City's audited financial statements of assets and liabilities are presented in two formats: the Government -wide Statement of Net Position (full -accrual accounting), and the Fund Financial Balance Sheet (modified accrual accounting focused on available resources and current liabilities). Both presentations include the concept of restricted balance and unrestricted balance. In the Fund Financial Balance Sheet, unrestricted balance is comprised of committed, assigned and unassigned amounts. Committed and assigned amounts are spending constraints self- imposed by the City. This policy refers to the Unrestricted Fund Balance as the Reserve amount. NON -RECURRING RESOURCES Non -recurring resources include Unrestricted Fund Balance and one-time revenue (e.g. legal settlement, sale of property, etc.). The City Council may elect to fund recurring costs with non -recurring resources in either of the following circumstances: 1. The City Council declares a fiscal emergency or local emergency. 2. The City Council approves the use with a two-thirds vote for documented loss of revenue pursuant to an economic downturn or unusual circumstance. GENERAL FUND Background The General Fund is the primary operating fund of the City. It accounts for all general purpose unrestricted revenues including sales tax, property tax, locally levied taxes, fees for service and fines. The General Fund accounts for the operating costs of core city services including public safety, recreation, land -use regulation, public facility maintenance, and governance. General Fund Budget Directives & Long -Range Planning To support the ongoing fiscal health of the General Fund, the following directives are established. • The City Manager shall annually present a balanced budget to the City Council for adoption, defined as proposed spending not exceeding available resources. • Non -recurring resources should only fund non -recurring or capital costs. Budget and Reserve Policy, March 2021 Page 1 • Revenue estimates will be conservative to avoid a resource shortfall for planned service delivery. • The City will continue to pursue internal operational efficiencies and strategies, such as technology modernization, to minimize City costs and enhance the accessibility of City services. • All proposals for new or upgraded capital facilities must include estimated costs to operate, maintain, and replace the facilities. • To assist the City Council with decision -making, staff shall annually prepare a minimum ten-year projection to identify long-term impacts to the General Fund budget. Reserve Reauirement To mitigate risk and support cash flow, the General Fund will maintain an Operating Reserve of the Unrestricted Fund Balance equivalent to a minimum of 18% of annual recurring revenue. As recurring revenue increases, so shall the Operating Reserve. A documented plan to replenish the Operating Reserve must accompany any City Council authorized use of the Operating Reserve, pursuant to the guidelines for use of non -recurring resources outlined above. A plan for replenishment may include reduction of expenditures, one-time money, favorable budget variances, and/or new revenue sources. INTERNAL SERVICE FUNDS Background The City utilizes Internal Service Funds to administer and account for centralized services provided by one City department/division to another City department/division. Examples include building maintenance, general liability insurance, and information technology. The centralized service divisions fund operations and equipment replacement with cost -recovery charges to the receiving department budget. Internal Service Fund Reserves provide a funding source for capital asset replacement (e.g. fleet vehicles), actuarial determined liabilities (e.g. workers compensation), and an operational cushion for unanticipated or extraordinary costs. This policy establishes general guidelines for target Reserve balances and cost -recovery rate structure to fund current operations and Reserve replenishment. Target Reserve Balances Internal Service Fund Target Central Services (mail, reprographics) 100% of capitalized equipment cost + 20% of annual operating costs Building Maintenance 100% of annual operating costs due to high risk of aged facilities Equipment Replacement for Vehicles 100% of the cost of capitalized equipment Fleet Vehicle Maintenance 20% of annual operating costs Stores & Property Control (fuel and warehouse inventory) 20% of annual operating costs Liability & Property Insurance 80% of liability, actuarially determined every two years Employee Group Insurance None, as this fund serves an accounting purpose only with zero net fiscal impact. Workers Compensation 80% of liability, actuarially determined every two years Information Services 100% of capitalized equipment cost + 20% of annual operating costs City Yard 20% of annual operating costs Public Works Engineering & Project Management None, as this fund serves an accounting purpose only with zero net fiscal impact. Public Works Administration & Planning None, as this fund serves an accounting purpose only with zero net fiscal impact. Budget and Reserve Policy, March 2021 Page 2 Cost Recovery Rate Structure Each year, the managing department shall estimate the cost of operations and any shortfall for the target Reserve balance. These estimates will serve as the basis for cross -department charges. Proportional use of the service will determine the allocation of estimated costs to departments/divisions. Employee compensation increases are limited to City Council approved agreements with bargaining groups. Any proposed workforce changes must follow the City's normal proposal and approval process. Other proposed cost increases, including Replenishment of Reserves, must be limited to the annual increase in the Consumer Price Index (CPI) at December 31, or otherwise submitted as a supplemental budget request subject to City Manager recommendation and City Council approval. The Budget Office may recommend spreading Reserve replenishment over a reasonable number of years to smooth the budget impact. OTHER FUNDS Other funds of the City account for revenues restricted to specific spending purposes. Many of these restrictions do not allow the City to carry a Reserve balance (e.g. federal grant funds). Funds with spending constraints self- imposed by the City (e.g. Cannabis Public Benefit Fund) do not need a Reserve, as the General Fund provides risk mitigation and cash flow. If allowed by external restrictions, the target Reserve balance for other funds shall be 20% of the fund's annual operating costs. Professionally developed rate studies for Enterprise Funds (e.g. Water, Sewer) may recommend a reserve requirement in excess of the 20% target. Budget and Reserve Policy, March 2021 Page 3 EXHIBIT 2 SUMMARY OF 2021 GENERAL FUND RISK ASSESSMENT & CASH FLOW ANALYSIS The General Fund Reserve mitigates risk and provides cash flow. The primary risk factors are economic recession and catastrophic events. The following summary is an assessment of the potential scope of financial risk and estimated cash flow needs. The assessment includes historical information and assumptions, and focuses on significant potential impacts to the General Fund. The assessment was not scientifically developed; and does not assess financial risk associated with general liability, workers compensation, or litigation. Every two years, a third -party actuary assesses the risk for general liability and workers compensation liability; and the City maintains separate funds with separate balances to address those liabilities. Based on the information presented below, and weighing the likelihood of multiple assumed scenarios occurring at the same time with the worst timing for cash flow purposes, a General Fund Reserve equivalent to 18% of annual revenue appears to be sufficient. Economic Recession The following summary illustrates historical revenue contraction for significant general purposes taxes. The table includes actual contraction for the Great Recession of 2008-2009, and estimated contraction for the COVID-19 pandemic. Sales Tax Property Tax Business Tax Hotel Visitors Tax Utility Users Tax Great Recession Actual Contraction 2008-2009 -14% COVID-19 Pandemic Estimated Contraction 2020-2021 0% 0% -29% -45 % 0% FY19-20 Actual Revenue as a percentage of Total General Fund 33% 23% 4% 2% 7% By calculating the worst -case scenario for each revenue as a weighted average for the General Fund, the total potential revenue contraction due to economic recession is 9% of annual General Fund revenue. Catastrophic Failure of Infrastructure The following scenario illustrates the scope of the City's potential out-of-pocket costs related to a catastrophic event, such as an earthquake. Per the 2020 Pavement Management Program, the City maintains 96 million square feet of streets; and the per -square -foot cost of repairing a failed street is $14.78. Assuming a 10% failure of City streets in an earthquake scenario, the total cost to repair could be $142 million. In such a circumstance, it is likely the City would receive federal and state emergency assistance. Using traditional emergency assistance matching formulas, the City would pay 6.25% or $9 million out of pocket; which is approximately 3% of annual General Fund revenue. The City has $202 million of capitalized buildings and building improvements, at historical costs. Assuming an average age of 32 years and annual inflation of 3%, the current cost to replace all buildings and building improvements may be $513 million. The City would receive some insurance proceeds, and some federal and state emergency aid. Assuming a 10% catastrophic failure rate and a City contribution rate of 10%, the City may pay $5 million out of pocket; which is less than 2% of annual General Fund revenue. The City has $40 million of capitalized storm drains, at historical costs. Assuming an average age of 32 years and annual inflation of 3%, the current cost to replace storm drains maybe $104 million. In the case of storm drains, the City may receive some federal and state emergency aid, but it will be more limited than with streets. Assuming a 10% failure rate and a City contribution rate of 30%, the City may pay $3 million out of pocket; which is approximately 1% of annual General Fund revenue. Other major infrastructure facilities include water and sewer pipelines. The City operates Water and Sewer Enterprises with separate reserve balances for emergencies. In summary, a catastrophic event resulting in a 10% infrastructure failure rate could result in a need for the City to contribute 6% of annual General Fund revenue for repairs. Cash Flow Needs With two notable exceptions, the City receives its General Fund revenue somewhat evenly over the fiscal year. The two exceptions follow. Property Tax 26% of annual General Fund revenue 50% received in December& January, and 42% received in April & May Business Tax 4% of annual General Fund revenue 79% collected January through June Using the weighted relationship and timing of these revenues, the General Fund must cash flow approximately 16% of its annual revenue. Maintaining at least 16% of annual revenue in the General Fund Reserve will satisfy the requirements of Charter Section 610 requiring a Stabilization Fund sufficient to meet the first five months of demands prior to receipt of tax revenues based on assessed value (ad valorem taxes). The City spends its General Fund expenditure budget somewhat evenly over the fiscal year. The City currently pays its annual contribution for the unfunded pension liability in July to obtain a discount, which is approximately 13% of annual General Fund revenue. However, the City is not required to pay in July, and can choose to spread the contribution evenly over twelve monthly installments. Furthermore, debt payment requirements will change if the City completes a pension debt refinancing. The only notable General Fund expenditure requiring cash flow is the contract for fire service. The Orange County Fire Authority requires a one -month advance payment, equivalent to 1% of annual General Fund revenue. In summary, a review of General Fund revenue and expenditures indicates the General Fund must cash flow approximately 17% of its annual revenue (16% for delayed revenue and 1% for advance expenditures). EXHIBIT 3 ��~�nm ^�� Santa �m� ��N� m�u ����nv�u� Ana Council Policy Mavor's Authorization Subject BUDGET AND FINANCIAL POLICIES Council Approval Date: Background The severity of the recent economic recession highlighted the need to establish and maintain adequate reserve policies to offset significant economic downturns and unforeseen rising costs more effectively. In 2002,The Government Finance Officers' Association (GFOA) recommended reserve levels equal to, a minimum of 5% to 15% of operating revenues or one to two months ofoperating expenditures as a basis to establish sound reserve levels. Adoption of formal City Budget and Reserve Poky will provide a basis to manage significant financial events more effectively inthe future. PURPOSE The Cbw s reserve policy will define the recommended level for reserves for the General Fund as well as internal and enterprise operations. The policy will outline atirnefname and plan that will assist the City in meeting the minimum General Fund requirements over the course of the next few years, it will also establish criteria for the use of reserves and establish a process bywhich to replenish, reserves if used. It is the intent to focus on the Genera} Fund initially and incorporate additional reserve policies for internal and enterprise funds over the next fisca|year. The General Fund is the general operating fund for the City. It accounts for all general revenues including sales tax, property tax, business tax, hotel visitor's tax, as well as other fees and charges. It is the basis to fund general ongoing City operations such as police, fire (contract service), recreation, planning and building as well as other general support services. Furthermore, the following budget policy directives are recommended to be continued/implemented in order to maintain positive operating reserve levels: Genens|Fund8m6getPmUcyD|reutk/es It shall be established that a balanced budget will be presented annually to the City Council for adoption. A balanced budget will be defined as ongoing recurring operating revenues matching ongoing recurring operating expenditures including debt service. - One time orte,nn specific funding can only be used to match one-time non-necurrin�gexpenditures with the exception of during a budget deficit, term specific projects and programs, as well as capital expenditures. - in order to ensure a balanced budget objective, the City will continue 10 pursue internal operational efficiencies and strategies, such astechnology, that minimize City costs and impacts toCity services. Budget & Financial Polices (Rev.6/2Q17) Page - In order to ensure proper maintenance of a continued balanced budget the City Council will adopt e compensation and retirement benefit directive that provides guidance and conforms with the established budget directives and reserve requirements asoutlined in this policy. One -Time Monies Fund Balance determined to be one-time in nature, indud�ng but not limited to: ending operating balance, una||ocatedfundba|anuaorum-appropriated°Assigned"fundba|anceishereino|assifiedas°Qne'Trnennonies". Utilization of one-time monies is allowable upon two-thirds approval by the City Council to be utilized in the event a structural budget deficit exists. Use of one-time funds is allowable for one-year and may be eligible for two consecutive years upon further consideration bythe City Council. Unassigned Fund Balance In accordance with Governmental Accounting Standards Board /GASEA 54 and continuing to ensure a continued orderly operation ofCity Government a,ndaddress any unforeseen economic occurrences, the City shall establish the following Reserve Accounts within the Unassigned Fund, Balance category: w Operating Reserve • Economic Uncertainty Reserve w Uma||ocatedAmount As a result of the GA5B 54, the following fund balance categories were also created- Non -Spendable; Restricted; Committed; Assigned and Unassigned. Operating Reserve Account As a olea�suna ofprudent fiscal health and recommendations made byGF0A, the City created an Operating Reserve Account, disclosing a range where two months (approximately 15.57%) up to twenty percent (2096) of recurring General Fund (011) operating revenues or expenditures (including transfers) are maintained. At no time is it perrmissib|efor the Operating Reserve requirement tofall below the above -referenced threshold range. Such Operating Reserves shall not be used to fund any form of operating expenditures or to cover any budgetary shortfall other than tnpreserve ongoing cash flow needs for the City. Ifatany point intime itisdeemed that the City budget is perfomming at a budgetary structural deficit and a "Fiscal Emergency" is declared, the use of the above -referenced Operating Reserve account is permissible for up to two consecutive fiscal years upon approval by two thirds of the City Council. The utilization of the Operating Reserve in Year Two (2) reqWres u plan to replenish the funds utilized. Asamatter of prudence and fiscal solvency and inthe event of a projected and/or realized structural deficit (budget bass),the City will utilize Economic Uncertainty (see below for account description) account funds prior to accessing the Operating Reserve account. Economic Uncertainty Acmount It is hereby established that upon fulfillment ofachieving a minimum Unassigned Reserve Account of1O94 the City shall consider the establishment of a reserve account for Economic Uncertainty. The reserve for Economic Uncertainty �s established to offset any major variations in tax receipts as well as fees and charges or unforeseen cost increases. |tishereby established the City maintain mminimum reserve level of1to1U%mfrecurring General Fund revenues with anobjective ofattaining a,maximum goal of1OY6. - Upon determination by the Finance Department, that negative variations in projected revenues from the largest revenue sources defined as Sales tax, Property tax, Property tax in Lieu, Utility Users tax, Business Tax, and Hote� Visitors tax exceed 296with no corresponding General Fund expenditure offset, then the Budget & Financial Pokes (Rev. 6/2017) Page 2 City Council may authorize use of the Economic Uncertainty Reserve by a two-thirds vote to offset the revenue loss prior to the close of the fiscal year end. 4 corresponding plan to replenish the reserve account must be adopted by the same vote. Upon determination by the Finance Department and report submission to the City Council that a structural deficit exists in the budgeted forecast of the upcoming fiscal year, the City Council may authorize use of the Economic Uncertainty Reserve to balance the budget by two thirds vote of the Council. However, autbor[zatimn to utilize the Economic Uncertainty Reserve beyond two consecutive years isstrictly prohibited. General Work Plan for Achieving General Fund Reserve Objectives The following work plan is intended to reach the unassigned reserve account of 15% in phases. The initial objective is to attain at least a GY6 threshold over the course of the following fiscal year and between 7% and 8Y6 over the subsequent fiscal year. Upon attainment of the phased objectives, a comprehensive review of the general financia� condition of the City will be completed and a new reserve work plan vuiU be developed and submitted for approval that outlines the next intermediate steps for meeting the main, objective of a reserve target level of 1596. Until such time that the General Fund Unassigned Reserve meets the minimum phased requirements as outlined above, the following budgetary and operational guidelines shall be used as a basis to achiev*the various minimum requirements. - Budget consideration, of new programs, personnel, or capital related expenditures shall only be considered lfasource offunding isidentified either through acorresponding cost reduction, anidentified generaY increase in general tax revenue, or a one-time revenue infusion. Source of funding should include consideration nfongoing general maintenance and operational costs. ' Departments will be encouraged to continually achieve savings through internal organizational efficiencies. Technology will be encouraged if it can be demonstrated that a one-time capital infusion can result in savings be,ing generated beyond two years. - Any General Fund savings generated at the fiscal year end can be considered either for term specific operational or capital needs but a minimum of 50% (up to 100%) of the savings shall be deposited into the unassigned reserve balance until such time that the phased reserve levels are met. - Any internal service fund that has funds in excess of the identified minimum reserve requirement as outlined in this policy, can be utilized as a means to meet the minimum General Fund Reserve requirements. Only unrestricted funds deenned1ransferab�Ae can be utilized, Any transfer tothe General Fund Unassigned Reserve Balance will be submitted to Council for consideration and approval. ln order bogenerate additional savings and until such time that the minimum level of reserves has been achieved, the Budget Office will only utilize a fiscally conservative profile for revenue projections. ' if the phased reserve target requirements asoutlined above have not been met itisrecommended that beginning in FY 14-15 a more conservative projection factor be used to generate forced budgetary savings: (NOTE: Each 1% equates to approximately $ 2m0Dom FY1I-l3: 1OOY6ofrecurr[ngrevenue projected; Budget & Financial Polices (Rev.6/2O17) Page FY 13-14: 100 % of recurring revenue projected; FY 14-15: 99 % of recurring revenue projected; Such factors shall be used to generate General Fund savings until such time that a 7%-8% unassigned General Fund reserve has been achieved. Any generated General Fund savings achieved after reaching between a 7%-8% unclesignated General Fund reserve shall be applied in the following order: Up to a max of 25% -Unassigned General Fund Reserve Up to a max of 25% -Economic Uncertainty Reserve Up to a max of 50% -Can be applied to term, specific programs, projects, personnel as well as deferred capital maintenance. Budget & Financial Polices (Rev. 6/2017) Page 4 Internal Service Funds Background Internal Service Funds are established to administer and, account for va,rious activities whose purpose is to provide for goods and services to support other departments, for their ongoing operational and programming needs. The delivery ofthese services isrecovered onacost recovery basis. Purpose It is the intent of the Internal Service Fund Reserve Policy to establish general guidelines as to the establishment of proper recovery rote structure and define an appropriate level of reserves for each internal Service Fund. It will also establish criteria for the use of reserves and establish a process by which to replenish reserves if utilized. Although this policy only addresses the Risk Management Funds (i.e. Liability and property Insurance and Workers Compensation Fund), it is the intent to build upon and include all internal service funds within this policy. Risk Management The Risk Management programs are established to protect the Ot/s assets through the administration of a properly funded liability c(a[m and insurance program and by minimizing the cost and effect of work -related injuries. Rates for these programs are established onabiennial actuarial basis. Reserves Reserves for these accounts will be funded at not less than 80% as defined in the actuarial study. In addit�om, three months of operational reserves will be included to address any variations related to revenues and expenditures. Any surplus amounts defined in these accounts from general agencies shall be available for transfer to the General Fund until such time that the General Fund reserve meets the minimum requirement of1596 or to establish the reserve for Economic Uncertainty. Transfers shall be submitted toCouncil for approval. There after any surplus can be used 1ofund any deficits identified in other Internal Service Fund reserves, as well as other unfunded capit�a\and deferred related maintenance. Budget & Financial PoHces (Rev, 6/2017) Page S EARLY DIRECTION FOR FY21 =22 CITY BUDGET City Council Meeting - March 16, 2021 LSAN�T�A ANA69 r TOPICS • Consider adopting the updated Budget and Reserve Policy • Direct staff to increase cost -based fees by 1.67% OR maintain current rates • Updates to the Strategic Plan Goals • Priorities for American Rescue Plan Act of 2021 • Early FY21-22 budget info, including expected revenue increases and contractually required spending increases • Next Steps 2 t4 'mac "V C-3 1-1 LLSAN�T�A ANAJ OC41) 4 GOALS 1. Balanced Budget 2. Development 3. Modernize Protect and enhance revenue streams while maintaining a healthy reserve balance to provide for the expenditure of funds in support of the long- term priorities of the City's strategic plan G GOALS 1 . Homelessness Response 2. Emergency Police Response 3. Safety & Perception of Safety 4. Community Policing 5. 2111 Century Policing Training b. Crime Prevention 7. School Partnerships NEW Provide a safe environment for residents and visitors while reducing crime and addressing the impacts of homelessness on our quality of life OC41) I . 2. 3. 6 GOALS Parks Master Plan Infrastructure Master Plans Bridge Digital Divide Ensure maintenance and preservation of City facilities and roadways to better serve the population and visitors G GOALS 1. Technology Modernization 2. Effective, Efficient Policies & Processes 3. Communication & Outreach Streamline the methods of providing services to help ensure doing business with the City is easier and more efficient. G GOALS 1. Reduce Homelessness 2. Increase Job Opportunities 3. Tourism & Visitors 4. Economic Development 5. Address Housing Challenges NEW 6. Parks, Open Space & Amenities NEW 8 Enhance economic vitality by growing revenue streams, attracting quality jobs, diverse businesses and desired amenities for residents AMERICAN RESCUE PLAN ACT OF 2021 • Estimate for Santa Ana is $143 million, to be spent by December2024 • Spending guidelines have not been published • Respond to public health emergency with respect to the COVID-19 or its negative economic impacts, including assistance programs • Government services to the extent of reduction in revenue • Necessary improvement in water, sewer, or broadband infrastructure 9 Revive Santa Ana - $142,09 M A Commitment to Protect and ASSIST our Community as we emerge from the impacts of the Pandemic • Efforts to address inequities of pandemic, outreach, testing, facilitation of vaccinations and education • Financial relief to those most impacted including businesses, workers and residents • Better address the enhancement of services and referral to permanent housing • Revitalize and enhance infrastructure/services to address community needs such as outreach, amenities, mobility and technology • Recover financial impacts of COVID-19 and restore staffing and programs FO BUDGET AND RESERVE POLICY • Updates definitions • Establishes requirement for General Fund 10-Year Projection • Create a single General Fund Reserve calculation based on Risk Assessment and Cash Flow Analysis • Establishes targets for all other funds MISCELLANEOUS FEES Includes permits, facility rental, and recreation programs • Annual miscellaneous fee update includes a CPI increase • FY21-22 CPI is 1.67% and could generate up to $200,000 of revenue 12 GENERAL FUND • Start with FY20-21 budget, and subtract one-time items to arrive at recurring baseline • Add early estimates of revenue increases • Add contractually required spending increases, restore spending for FY20-21 federal relief, and recommend ongoing SARTC subsidy FY20-21 Early Estimates Potential Midyear Budget Update of FY21-22 Changes FY21-22 Revenue 323,588,143 9,062,300 332,650,443 Expenditures & Transfers Out (334,521,033) (11,501,499) (346,022,532) Net Activity $ (10,932,890) $ (2,439,199) $(13,372,089) • Estimated available General Fund balance at June 30, 2021 is $13,846,139 • Not yet included • Savings from pension debt refinancing • Cures for internal service funds and negative fund balances 13 Next Steps March 25 Community Budget Meeting May 4 City Council Budget Workshop Session May 18 City Council Work Study Session June 1 City Council Public Hearing June 15 City Council Ordinance Adoption 14 QUESTIONS/COMMENTS LSAN�T�A ANA69 r