Westminster City Council
SUBJECT
Title
Strategic Plan Goal #1 - Achieve Financial Stability.
Strategic Plan Objective: Establish a policy to set priorities on the expenditures of new tax revenues, working with the Finance Department to take into account existing needs.
End
From: Christine Cordon, City Manager
Requested by: Administration
Prepared by: Erin Backs, Finance Director
____________________________________________________________
RECOMMENDED ACTION
Recommendation
Provide direction and adopt a Resolution entitled, "A RESOLUTION OF THE MAYOR AND CITY COUNCIL OF THE CITY OF WESTMINSTER, CALIFORNIA, ADOPTING THE FUND BALANCE POLICY."
end
BACKGROUND
On April 28, 2025, the City Council held a strategic planning workshop to develop the City’s second three-year strategic plan and identify priorities for the City. These include:
Goal #1: Achieve Financial Stability
Goal #2: Implement and Support Effective Land-Use Policies that Encourage Quality Development
Goal #3: Attract, Develop, and Retain Well-Qualified Staff Members
Goal #4: Improve Customer Service to the Community
Goal #5: Enhance Quality of Life and Beautification Throughout the City
The new goals stem from the first set of goals adopted in 2022, which included:
Goal #1: Achieve Financial Stability
Goal #2: Develop and Implement Specific Plans for Little Saigon, the Downtown District, and the Westside
Goal #3: Attract, Develop, and Retain Well Qualified Staff Members
Goal #4: Improve Customer Service Delivery to the Community
The recent workshop was an opportunity for the City Council to discuss the previous three-year strategic plan goals and objectives, reflect on lessons learned, and consider new priorities, concerns, and needs in establishing a new set of goals and objectives. The new three-year strategic plan includes previous goals that are being continued due to ongoing implementation of objectives, as well as new opportunities that have presented themselves since the previous planning period.
One of the objectives under Goal #1 - Achieve Financial Stability is to “Establish a policy to set priorities on the expenditures of new tax revenues, working with the Finance Department to take into account existing needs.”
The City of Westminster provides a wide range of services that impact the public safety and the quality of life of its residents and community members. The City seeks to maintain adequate reserve levels to protect against temporary cash flow shortages, unanticipated economic downturns or a local disaster in the general government fund types, enterprises (water) funds and internal service funds. The City’s reserve policy provides the framework to utilize City resources to respond to unexpected opportunities that may help a government achieve its goals.
To address the City Council objective, it is recommended that priorities for allocating any surplus funds be included in the fund balance policy, which is presented for review annually in June at the time of budget adoption. The Fund Balance Policy establishes the rules and responsibilities for maintaining healthy reserves. The Policy was originally approved June 28, 2017 and should be reviewed as part of the annual budget policy. The purpose of this policy is to secure the City's financial stability during a changing environment and establish a procedure for the allocation of unrestricted fund balance into adequate committed reserves. Fund balance shall be exclusive to all restrictions, commitments and assignments not available for use in emergencies and contingencies.
General Fund
Currently, the fund balance policy for the General Fund includes a Committed Emergency/Contingency Reserve to mitigate annual budget revenue shortfalls as a protection from a fluctuating economy, including financial hardships or downturns in the economy and/or Council-approved expenditures in excess of revenues. The level is set at 17% of the General Fund operating expenditure, in accordance with the recommendation of the Government Finance Officers Association (GFOA). The reserve may be utilized as needed to pay outstanding operating expenditures due to budgeted revenue shortfalls. Uses may include, but are not limited to:
• Significant decrease in property sales, transactions and use tax, or other revenues.
• Reductions in revenue due to actions by the state/federal government.
In addition to the Emergency Reserve and to address funding priorities for spending surplus funds as identified in the strategic plan, staff recommends adding a Budget Uncertainty Reserve and an Infrastructure Contingency Reserve to the fund balance policy:
|
Category |
Purpose |
Target |
|
Emergency/ Contingency Reserve |
To continue General Fund operations in the event of an emergency or other crisis situation. |
17% of General Fund Expenditures |
|
Budget Uncertainty Reserve |
To address unexpected expenses or revenue fluctuations and provide a short-term solution to maintain services until projected revenue growth or necessary expenditure reductions are achieved to balance the budget. |
10% of General Fund Expenditures |
|
Infrastructure Contingency Reserve |
These funds are reserved to address planning, development, or maintenance of city infrastructure. |
5% of General Fund Expenditures |
Adding a Budget Uncertainty Reserve to address unexpected expenses or revenue fluctuations in future years set at 10% of General Fund expenditures and adjusting the Emergency Contingency Reserve to be used only in situations of severe economic uncertainty adds an additional layer of protection to the city’s financial stability and provides a reserve that can be used in uncertain years or until new revenue sources are implemented and realized.
An Infrastructure Contingency reserve would provide funding to address planning, development, or maintenance of city infrastructure. Reserve funds could be used to address unforeseen maintenance and repairs, as well as unplanned replacements, within city-owned facilities.
All three reserves categories would be set during the audit process. This is part of the assigned balance in the city’s financial statements.
In addition to setting the above reserve levels, the City Council could allocate additional funds to the City’s 115 trust accounts in years where there is an actual audited surplus. The City currently has two 115 trust accounts, a PARS Pension Section 115 Trust and an Other Post Employment Benefits (OPEB) Fund Section 115 Trust. During the budget process, the savings from prepaying the CalPERS unfunded liability in July, approximately $500 thousand, is allocated to the pension trust and $250 thousand is allocated to the OPEB trust. These funds can only be used for pension and OPEB costs but can be used in any year the City Council chooses and can help offset budgetary shortfalls until additional revenue sources can be implemented and realized.
PARS Pension Section 115 Trust can only be used to pay pension costs. This would be recommended at completion of the annual audit and 20% of the actual audited surplus could be added to the PARS Pension Section 115 Trust in the following year the General Fund ends with a surplus balance. The transfer of these funds would be presented to the City Council for action as part of the review of the annual financial reports. As of June 30, 2024, the outstanding pension liability was $146 million, and the current trust has a balance of $6.2 million.
Other Post Employment Benefits (OPEB) Fund Section 115 Trust can only be used to pay OPEB costs. This would be recommended at completion of the annual audit and 10% of the actual audited general fund surplus could be added to the OPEB Section 115 Trust in the year following the year the General Fund ends with a surplus balance. The transfer of these funds would be presented to the City Council for action as part of the review of the annual financial reports. As of June 30, 2024, the outstanding OPEB liability was $43.4 million, and the current trust has a balance of $6.2 million.
Using FY 2023/24 actual ending balances as an example, the General Fund Reserves would be:
|
|
Actual 2023/24 |
Option |
|
Revenue |
84,440,843 |
84,440,843 |
|
Expenditures |
(77,337,285) |
(77,337,285) |
|
Balance/Surplus |
7,103,558 |
7,103,558 |
|
|
|
|
|
17% Emergency Contingency Reserve |
13,147,338 |
13,147,338 |
|
10% Budget Uncertainty Reserve |
- |
7,733,729 |
|
5% Infrastructure Contingency Reserve |
- |
3,866,864 |
|
Allocated to Capital Projects |
9,518,442 |
9,518,442 |
|
Unassigned |
31,218,046 |
19,617,453 |
|
Total Fund Balance/Reserve |
53,883,826 |
53,883,826 |
|
|
|
|
|
10% to Pension 115 Trust (allocated in following year) |
- |
710,356 |
|
5% to OPEB 115 Trust (allocated in following year) |
- |
355,178 |
The numbers shown in the above table are examples only. New reserve levels would be added as part of the FY 2024-25 year-end close.
Internal Service Funds
The only change made to the internal service funds reserve was to add inflation to the $500,000 reserve level starting in 2025. All internal service funds have a reserve target minimum of $500,000 to cover future obligations. Only two of the internal service funds currently meet this level.
FISCAL IMPACT
There is no fiscal impact associated with this item; however, the fund balance policy provides a framework for how the city manages fund balances and utilizes city surpluses and reserves.
LEGAL REVIEW
The City Attorney’s Office has reviewed as to form.
CONCLUSION
Strategic Plan Goal #1 - Achieve Financial Stability with an objective to “Establish a policy to set priorities on the expenditures of new tax revenues, working with the Finance Department to take into account existing needs.” This report and resolution provide the City Council the opportunity to set funding priorities by establishing targeted reserve levels. The proposed changes include best practice recommendations and add a 10% Budget Uncertainty Reserve, and a 5% Infrastructure Contingency Reserve in addition to the already established 17% Emergency Contingency Reserve. The policy also includes language adding 10% of any actual audited general fund surplus to the pension 115 Trust and 5% of the actual audited general fund surplus to the OPEB 115 Trust. The reserves would be added as part of the annual audit and year-end close. Any additional amounts to the 115 Trust accounts would be proposed with the review of the financial reports and would require City Council action.
ATTACHMENTS
1. Resolution - Fund Balance Policy
2. Fund Balance Policy Attachment
3. Redline Fund Balance Policy Attachment
REVIEWED BY
Erin Backs, Finance Director
City Attorney’s Office
Christine Cordon, City Manager