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HomeMy Public PortalAbout06. 2022-23 General Fund Financial Update and Revisions to the City's Reserve PolicyClaremont City Council Agenda Report File #:4875 Item No:6. TO:CITY COUNCIL FROM:ADAM PIRRIE, CITY MANAGER DATE:OCTOBER 10, 2023 Reviewed by: City Manager:AP SUBJECT: 2022-23 GENERAL FUND FINANCIAL UPDATE (UNAUDITED)AND PROPOSED REVISIONS TO THE CITY’S RESERVE POLICY SUMMARY Staff provides a financial update for the General Fund after the end of each fiscal year.The information in this report represents unaudited information for the General Fund.The audited financial statements for all-funds,including the General Fund for 2022-23,will be published at the end of this calendar year as part of the City’s Annual Comprehensive Financial Report (ACFR).In prior years,information provided in this report has generally not deviated materially from the final annual audited statements. At the close of 2022-23,a projected General Fund surplus of $7,514,564 was realized from General Fund operations for the fiscal year.Included in this surplus were $3,413,471 in proceeds from the sale of a City-owned property at 451 West Arrow Highway. The following report details the staff recommendation for the allocation of the 2022-23 General Fund surplus. RECOMMENDATION Staff recommends that the City Council: A.Direct staff to agendize a discussion at the next City Council Priorities Workshop on the allocation of the $3,413,471 in proceeds from the sale of the 451 West Arrow Highway property; B.Allocate and appropriate $1,000,000 of the 2022-23 General Fund surplus for an additional discretionary payment to CalPERS to pay down the unfunded liability on the City’s employee pension plans; C.Allocate $1,000,000 of the 2022-23 General Fund surplus for a contribution to fund the City’s Section 115 Pension Trust; D.Allocate $1,810,698 of the 2022-23 General Fund surplus to the City’s Operating and CLAREMONT Printed on 10/5/2023Page 1 of 5 powered by Legistar™ D.Allocate $1,810,698 of the 2022-23 General Fund surplus to the City’s Operating and Environmental Emergency Reserve,bringing the reserve balance to $9,337,719 or 30 percent of General Fund operating expenditures and transfers out; E.Approve the proposed amendment to the City’s Reserve Policy (Policy 10-25),increasing the Operating and Environmental Emergency Reserve minimum balance from 25 percent to 30 percent of General Fund operating expenditures and transfers out; and F.Allocate $290,395 or any remaining 2022-23 General Fund surplus after completion of the annual audit to the City’s Equipment and Facility Revolving Reserve. ALTERNATIVES TO RECOMMENDATION In addition to the staff recommendation, there is the following alternative: ·Request additional information. ·Do not approve recommendations. FINANCIAL REVIEW General Fund revenues for 2022-23 amounted to $39,622,685 compared with a full-year budget of $30,758,790. Expenditures in the General Fund were budgeted at $32,056,999.Actual expenditures amounted to $32,108,121. Based on revenues of $39,622,685 and expenditures of $32,108,121,an excess of revenues over expenditures (surplus)exists at the close of the 2022-23 fiscal year.The amount of this surplus is $7,514,564 and came about as a result of higher than estimated annual revenues in the General Fund, in addition to one-time revenue from the sale of City property. In previous years,General Fund surpluses have allowed the City to allocate funds to various set- asides such as adding to the City reserves and making additional payments to CalPERS and the Section 115 Pension Trust Fund. The staff cost to conduct research and prepare this report is estimated at $1,500 and is included in the operating budget of the Administrative Services Department. ANALYSIS General Fund Revenues General Fund revenues and transfers-in for 2022-23 totaled $39,622,685 against an adjusted full- year budget of $30,758,790.Actual revenues represent an excess of revenues relative to the adjusted budget of $8,863,895.Explanations of the major sources of additional revenue are described below: 1.Property Tax:Revenues for 2022-23 were approximately $622,000 higher than the full-year budget of $11,495,600.Growth in Property Tax is based on increases in the assessed value of taxable real property in Claremont,driven by the cost-of-living increase of up to two percent pursuant to Proposition 13,as well as the reassessment of property when it is sold.The growth in assessed value exceeded the four percent increase budgeted from the prior year, CLAREMONT Printed on 10/5/2023Page 2 of 5 powered by Legistar™ growth in assessed value exceeded the four percent increase budgeted from the prior year, resulting in additional revenues for 2022-23. 2.Sales Tax:Revenues for 2022-23 were budgeted at $6,725,000.Actual Sales Tax receipts for 2022-23 were $8,134,093,an excess of approximately $1,409,000 over the adopted budget. The increase in sales tax was a result of increases in auto sales,the addition of the new Claremont Mazda dealership,along with higher allocation of Sales Tax resulting from online sales via the County pool,increases in restaurant sales,and higher gas prices at fuel and service stations. 3.Utility User Tax (UUT):At $5,418,077,revenues for 2022-23 were approximately $1,043,000 higher than the budgeted figure of $4,375,000.The excess of revenues was largely caused by increased utility rates related to electricity and gas,with lower-than-budgeted revenues for UUT on water service due to drought-related watering restrictions. 4.Franchise Tax:Revenues for 2022-23 were approximately $93,000 higher than the budgeted amount of $720,000, again primarily due to higher utility rates for electricity and gas service. 5.Transient Occupancy Tax (TOT):Revenues of $1,607,804 were approximately $233,000 higher than the budget of $1,375,000 due to a return to pre-pandemic hotel activity during the fiscal year,in fact,revenues for 2022-23 represents the highest levels of TOT seen since the adoption of the tax. 6.Licenses and Permits:Revenues exceeded the budgeted amount of $945,500 by approximately $746,000 in 2022-23 due to increases in fees from building,grading and public works permits.Construction activities,related to residential,commercial and Colleges development remained strong during 2022-23, contributing to the excess of permit revenues. 7.Charges for Services:Revenues were higher than budgetary estimates by approximately $220,000 due to the collection of development review and plan check fees,again related to the development taking place throughout the City. 8.Use of Money and Property:This revenue category includes interest earnings on the City’s investment portfolio and the revenue associated with the rental of City Facilities.In 2022-23, revenues exceeded the budget of $572,698 by approximately $450,000.This was due in large part to interest earnings,which increased significantly as a result of higher interest earnings rates with the City’s investments in the State Controller’s Local Agency Investment Fund (LAIF)and Certificates of Deposit (CDs).High than expected building and park rentals also contributed to the excess of revenues in this category. 9.Sale of City Property:The City received unbudgeted revenues of $3,413,471 in net proceeds from the sale of the City-owned property at 451 West Arrow Highway.The property was purchased by the City from Successor Agency to the former Claremont Redevelopment Agency for $405,000 in 2018.It was sold in December 2022 to Village Partners Ventures,CLAREMONT Printed on 10/5/2023Page 3 of 5 powered by Legistar™ Agency for $405,000 in 2018.It was sold in December 2022 to Village Partners Ventures, LLC, one of the developers planning for the development of the Village South Project. General Fund Surplus Staff recommends the following actions relating to the General Fund surplus of $7.51 million for 2022 -23: 1.Proceeds from the Sale of 451 W.Arrow Highway Property:On December 13,2022,the City Council authorized the sale of a vacant City-owned parcel at 451 West Arrow Highway.The net proceeds from the sale amounted to $3.41 million.The parcel was originally acquired in 2003 by the former Claremont Redevelopment Agency for future development.Given the “one -time”nature of the funding that could be provided by the proceeds of the sale of the property, as well as the significant sum in question,staff believes a discussion by the City Council as its next Priorities Workshop is warranted to determine the best use of these funds moving forward.Accordingly,staff requests that the City Council direct staff to agendize a discussion on the use of these funds at the City Council Priorities Workshop to take place in early 2024. 2.Pension Funding:The City Council allocated $3.00 million in additional funding towards its unfunded pension liabilities from the General Fund surplus from the 2021-22 fiscal year.Staff recommends continuing this practice and proposes to direct $2.00 million of the General Fund surplus from 2022-23 to prefunding employee pensions. Staff recommends making a $1.00 million payment directly to CalPERS to reduce the unfunded accrued liabilities (UAL)on the City’s safety and miscellaneous employee pension plans and a $1.00 million contribution to the City’s Section 115 Trust.Funding in the Section 115 Trust allows local control over the investment of funds allocated for future pension payments;it offsets the Net Pension Liability reported in the City’s annual financial statements, and allows higher investment returns than in the City’s investment portfolio. 3.Operating and Environmental Emergency Reserve:The City’s current Operating and Environmental Emergency Reserve balance stands at $7.53 million representing 24.2% percent of 2023-24 General Fund expenditures and transfers-out.Staff recommends allocating an additional $1,810,698 of the surplus to the Operating and Environmental Emergency Reserve.Doing so would increase this reserve balance to $9,337,719 million,equal to 30 percent of 2023-24 General Fund expenditures and transfers-out. Further,staff recommends that the City Council approve an amendment to the City’s Reserve Policy,increasing the minimum reserve balance for the Operating and Environmental Emergency Reserve from 25 percent to 30 percent.As has been discussed publicly,the Operating and Environmental Emergency Reserve is intended to be available and used by the City to respond to natural or fiscal emergencies.Given the potential costs that could be associated with a large scale natural disaster such as a fire or earthquake,it is prudent to increase reserve balances to maximize the resources available for Claremont to respond to and recover from a natural disaster.A redlined version of the Reserve Policy is included as Attachment A,and shows the proposed policy revisions.A clean copy of the proposed Reserve Policy is also included as Attachment B. 4.Equipment and Facility Revolving Reserve:In 2012,the City Council established the Equipment and Facility Revolving Reserve to set aside funding for equipment and facility maintenance expenses above those included in the City’s operating budget.Eligible CLAREMONT Printed on 10/5/2023Page 4 of 5 powered by Legistar™ maintenance expenses above those included in the City’s operating budget.Eligible expenditure of these reserve funds include renovation projects,replacement and refurbishments of furniture and equipment,and facility enhancements.The current balance in this reserve is $843,068.Staff recommends allocating $290,395 or any remaining surplus after the completion of the 2022-23 audit to this reserve.The allocation of $290,395 would increase its balance to approximately $1,133,463.The reserve will be available to fund equipment replacements or facility improvements with City Council approval.Potential projects could include a roof replacement at City Hall,as well as seismic and safety improvements or the construction of a women’s locker room at the Claremont Police Facility. RELATIONSHIP TO CITY PLANNING DOCUMENTS Staff has evaluated the agenda item in relationship to the City’s strategic and visioning documents and finds the item relates to Council Priorities,the Economic Sustainability Plan,the General Plan, and the 2022-24 Budget. CEQA REVIEW This item is not subject to environmental review under the California Environmental Quality Act (CEQA). PUBLIC NOTICE PROCESS The agenda and staff report for this item have been posted on the City website and distributed to interested parties. If you desire a copy, please contact the City Clerk’s Office. Submitted by: Adam Pirrie City Manager Attachments A - Proposed Reserve Policy - REDLINE B - Proposed Reserve Policy - CLEAN CLAREMONT Printed on 10/5/2023Page 5 of 5 powered by Legistar™ Administrative Policy Manual Policy No. 10-25 Date: January 12, 2013October 10, 2023 Approved: ______________ SUBJECT: RESERVE POLICY PURPOSE: To establish a policy for Reserves. General Policy: Sound financial management includes a practice of maintaining appropriate reserves to provide for natural or fiscal emergencies, building renovations, equipment replacement, continuation of services, non-covered liability claims, special projects and other unanticipated expenditures. This policy outlines the different reserve accounts that are maintained. Any use of these reserve funds is at the sole discretion of the City Council, and specific City Council action is required to authorize the use of any of the funds listed in this policy. Provisions: All appropriations from the Reserve Policy are to be considered in accordance with the following priorities: A. Operating and Environmental Emergency Reserve - 2530 Percent Funds in this reserve are to be used in the case of natural or fiscal emergencies. It is the goal of the City Council to maintain a minimum reserve of 2530 percent of the General Fund operating expenditures. B. Enterprise and Internal Service Fund Reserves (Motor Fleet, Technology, Sanitation and Sewer Funds) - 15 percent In order to provide sufficient capital for enterprise and internal service fund operations, it is the goal that the cash equivalent to 15 percent of budgeted operating expenditures be reserved. Prudent vehicle and equipment replacement schedules shall be maintained and reviewed annually; and, appropriate replacement reserves established. In some cases reserves may be established at a higher level based upon the nature of the fund. C. Maintenance of Operations Reserve These funds are intended to stabilize the impacts of unanticipated projects or costs, emergency safety, insurance and liability claim issues, and PERS or other benefit rate increases. The Maintenance of Operations reserve will be used for the following types of expenditures: Reserve Policy Policy No. 10-25 Page 2 of 3 a. City Council directed projects. b. Capital projects. c. Liability costs not covered by the city’s insurance policies. d. Unanticipated changes in PERS or other benefit rates. e. Cyclical revenue downturns and operating cost increases that are temporary and not within the City's ability to adjust in the short-term. f. Or any other municipal purpose that the City Council deems prudent or necessary. D. Equipment and Facility Revolving Reserve Equipment and Facility Revolving Reserve was established to create a funding source for equipment and facility expenditures. The Equipment and Facility Revolving Reserve shall be used for the following types of purchases: a. Renovation projects pertaining to existing City buildings, b. Replacement and refurbishment of furniture and other equipment utilized in City facilities. c. Minor enhancement of City buildings, parks, and other facilities. d. Safety equipment, emergency response equipment, recreation facilities equipment, etc. Proposed expenditures of the Equipment and Facility Revolving Reserve shall be evaluated according to the following criteria: a. Disrepair/Inoperability – Equipment that is no longer operable or in a state of disrepair is eligible for replacement using the Equipment and Facility Revolving Reserve. Facility improvements to correct disrepair are also eligible. b. Safety/Liability Concerns – The replacement of equipment or the repair of City facilities that pose safety hazards, or that expose the City to a higher than normal level of liability are eligible for funding by the reserve. Additionally, projects that will allow the City to more effectively manage emergency situations are also eligible. c. Program Necessity – The replacement or refurbishment of equipment and facilities that are integral to the operation of a City program or function are eligible for funding by the reserve. d. Excessive Cost of Maintenance – Equipment or facilities that require excessive maintenance, even if they are still operable, are eligible for funding by the reserve. The cost of excessive maintenance may make equipment replacement a cost-effective solution. Reserve Policy Policy No. 10-25 Page 3 of 3 e. Previously Identified But Unfunded Items – In developing the Capital Improvement Program (CIP) budget, staff maintains a list of projects for which funding is not available through the regular budget process. Should the need arise to complete a project on the unfunded list, funding from the reserve would be eligible for use. E. Unassigned Fund Balance This results from residual positive net resources of the General Fund in excess of what can properly be classified in one of the other reserve accounts. F. Investment of Reserve Funds All Reserve funds shall be invested according to the City’s Investment Policy (Administrative Policy 50-15), which shall be reviewed annually. Reserve Fund Replenishment: The City’s replenishment or minimum reserve balance priority for reserve funds is listed below. A. Priority 1: Replenish or maintain a fund balance of at least 2530 percent of the annual General Fund operating expenditures in the Operating and Environmental Emergency Reserve Fund. B. Priority 2: Replenish or maintain cash equivalent to 15 percent of budgeted operating expenditures for the Enterprise and Internal Service Reserve Funds. Remaining Fund Surplus Distribution: Annually, upon identification of a General Fund surplus, staff will make recommendations to the City Council to achieve the following: 1. Contribute a portion of any annual surplus to the Maintenance of Operations Reserve Fund. 2. Contribute a portion of any annual surplus to the Equipment and Facility Revolving Reserve Fund. 3. Allocate the remaining surplus at the City Council’s discretion. Revisions: 02-02-1998 10-17-2009 05-22-2012 01-12-2013 10-10-2023 Administrative Policy Manual Policy No. 10-25 Date: October 10, 2023 Approved: ______________ SUBJECT: RESERVE POLICY PURPOSE: To establish a policy for Reserves. General Policy: Sound financial management includes a practice of maintaining appropriate reserves to provide for natural or fiscal emergencies, building renovations, equipment replacement, continuation of services, non-covered liability claims, special projects and other unanticipated expenditures. This policy outlines the different reserve accounts that are maintained. Any use of these reserve funds is at the sole discretion of the City Council, and specific City Council action is required to authorize the use of any of the funds listed in this policy. Provisions: All appropriations from the Reserve Policy are to be considered in accordance with the following priorities: A. Operating and Environmental Emergency Reserve - 30 Percent Funds in this reserve are to be used in the case of natural or fiscal emergencies. It is the goal of the City Council to maintain a minimum reserve of 30 percent of the General Fund operating expenditures. B. Enterprise and Internal Service Fund Reserves (Motor Fleet, Technology, Sanitation and Sewer Funds) - 15 percent In order to provide sufficient capital for enterprise and internal service fund operations, it is the goal that the cash equivalent to 15 percent of budgeted operating expenditures be reserved. Prudent vehicle and equipment replacement schedules shall be maintained and reviewed annually; and, appropriate replacement reserves established. In some cases reserves may be established at a higher level based upon the nature of the fund. C. Maintenance of Operations Reserve These funds are intended to stabilize the impacts of unanticipated projects or costs, emergency safety, insurance and liability claim issues, and PERS or other benefit rate increases. The Maintenance of Operations reserve will be used for the following types of expenditures: Reserve Policy Policy No. 10-25 Page 2 of 3 a. City Council directed projects. b. Capital projects. c. Liability costs not covered by the city’s insurance policies. d. Unanticipated changes in PERS or other benefit rates. e. Cyclical revenue downturns and operating cost increases that are temporary and not within the City's ability to adjust in the short-term. f. Or any other municipal purpose that the City Council deems prudent or necessary. D. Equipment and Facility Revolving Reserve Equipment and Facility Revolving Reserve was established to create a funding source for equipment and facility expenditures. The Equipment and Facility Revolving Reserve shall be used for the following types of purchases: a. Renovation projects pertaining to existing City buildings, b. Replacement and refurbishment of furniture and other equipment utilized in City facilities. c. Minor enhancement of City buildings, parks, and other facilities. d. Safety equipment, emergency response equipment, recreation facilities equipment, etc. Proposed expenditures of the Equipment and Facility Revolving Reserve shall be evaluated according to the following criteria: a. Disrepair/Inoperability – Equipment that is no longer operable or in a state of disrepair is eligible for replacement using the Equipment and Facility Revolving Reserve. Facility improvements to correct disrepair are also eligible. b. Safety/Liability Concerns – The replacement of equipment or the repair of City facilities that pose safety hazards, or that expose the City to a higher than normal level of liability are eligible for funding by the reserve. Additionally, projects that will allow the City to more effectively manage emergency situations are also eligible. c. Program Necessity – The replacement or refurbishment of equipment and facilities that are integral to the operation of a City program or function are eligible for funding by the reserve. d. Excessive Cost of Maintenance – Equipment or facilities that require excessive maintenance, even if they are still operable, are eligible for funding by the reserve. The cost of excessive maintenance may make equipment replacement a cost-effective solution. Reserve Policy Policy No. 10-25 Page 3 of 3 e. Previously Identified But Unfunded Items – In developing the Capital Improvement Program (CIP) budget, staff maintains a list of projects for which funding is not available through the regular budget process. Should the need arise to complete a project on the unfunded list, funding from the reserve would be eligible for use. E. Unassigned Fund Balance This results from residual positive net resources of the General Fund in excess of what can properly be classified in one of the other reserve accounts. F. Investment of Reserve Funds All Reserve funds shall be invested according to the City’s Investment Policy (Administrative Policy 50-15), which shall be reviewed annually. Reserve Fund Replenishment: The City’s replenishment or minimum reserve balance priority for reserve funds is listed below. A. Priority 1: Replenish or maintain a fund balance of at least 30 percent of the annual General Fund operating expenditures in the Operating and Environmental Emergency Reserve Fund. B. Priority 2: Replenish or maintain cash equivalent to 15 percent of budgeted operating expenditures for the Enterprise and Internal Service Reserve Funds. Remaining Fund Surplus Distribution: Annually, upon identification of a General Fund surplus, staff will make recommendations to the City Council to achieve the following: 1. Contribute a portion of any annual surplus to the Maintenance of Operations Reserve Fund. 2. Contribute a portion of any annual surplus to the Equipment and Facility Revolving Reserve Fund. 3. Allocate the remaining surplus at the City Council’s discretion. Revisions: 02-02-1998 10-17-2009 05-22-2012 01-12-2013 10-10-2023