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Consider adopting updated General Fund General Reserve and Contingency Policies
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Published Notice Required? Yes ____ No _X _
Public Hearing Required? Yes ____ No _X _
DEPARTMENTAL RECOMMENDATION:
The County Administrator’s Office (CAO) recommends the Board of Supervisors consider adopting updated General Fund General Reserve and Contingency Policies as presented in Attachment A.
SUMMARY:
A review of the County’s General Fund General Reserve and Contingency Policies was performed to determine the adequacy of the reserve/designation level necessary to meet the risks of Solano County. At the January 30, 2025 Pension and Debt Advisory Committee meeting, it was concluded that these Policies required the changes recommended in this report.
The current General Fund General Reserve and Contingency Policies were established by the Board on February 13, 2007. On June 14, 2011, the Board approved changes to the County’s Fund Balance Policy, which includes the General Fund General Reserve Policy (Reserve Policy), to conform to Government Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. These changes primarily impacted reporting and not budgeting. The current Reserve Policy requires that the General Reserve be maintained at a level equal to 10 percent of the County’s total budget excluding transfers between funds (Operating Transfers-Out/In), with a minimum balance of $20 million at all times. This level was recommended in order to provide the County with sufficient working capital and a comfortable margin to support one-time costs for the following purposes:
• When the County faces economic recession / depression and the County must take budget action.
• When the County is impacted by a natural disaster or any other emergency.
• When the County experiences unexpected declines in revenues and/or when unpredicted large one-time expenditures arise.
The current General Fund Contingency Policy (Contingency Policy) requires a level equal to 10 percent of the General Fund total budget. This level was recommended based on average Contingency levels during the development of the Policy. Appropriations for Contingencies are legal authorizations granted by the Board to be used for one-time unexpected needs that arise outside of the regular budget planning process.
Since these Policies were adopted, the Board has adopted financial policies and established additional reserves. These changes have helped to partially mitigate the risks originally identified in the current Policy. In addition, the Government Finance Officers Association (GFOA) has updated guidelines regarding reserve levels for general purpose governments. Therefore, it is recommended that the Board adopt updated Policies that reflect the County’s current financial management strategy, policies, and risks as well as current guidance from GFOA.
FINANCIAL IMPACT:
The approval of this item will require the Board to establish a General Reserve funding strategy over the next several years to achieve the desired target reserve levels.
DISCUSSION:
While there is no nationally uniform standard regarding the appropriate level of unreserved fund balance local governments should maintain, GFOA recommends that local governments maintain reserves equal to two months of operating revenue, which would equate to 16.7 percent of annual revenue. The current policy requires that the General Reserve be maintained at a level equal to 10 percent of the County’s total budget. For reference, based on the FY2024/25 Budget, this would require a Reserve level of approximately $130.5 million. Based on GFOA’s recommendation to maintain reserves no less than two months of operating revenue, the County’s required Reserve amount would be $58 million. The County’s current Reserve is $48 million.
Changes to Reserves since the adoption of the County’s General Fund General Reserve Policy
Since FY2011/12, or when the Policy was last revised, the County’s Reserves have averaged 5.4 percent of the County’s total budget. While this level falls short of the previously approved target goal of 10 percent, the Board has since adopted financial policies and established additional reserves. In June 2014, the Board approved the Pension Funding Policy. The goals of this Policy were to achieve higher funding ratios for both the County’s Safety and Miscellaneous CalPERS Plans and to stabilize annual contributions. To achieve these goals, the Board approved the establishment of a CalPERS Pension Reserve as well as a Section 115 Pension Trust. Together, these sources of funding partially mitigate the risk associated with unpredicted increases in pension costs; partially alleviating the County’s General Reserve of this burden. The County’s current CalPERS Pension Reserve is $27.4 million, and the balance of the PARS Section 115 Trust is $33.5 million.
To align the Policy with the current recommendations of GFOA, staff recommends revising the Reserve Policy to align target levels with the amount of operating revenue needed to sustain County operations.
In summary, staff recommends the following change to the General Reserve Policy:
• Revise the Reserve Policy to maintain reserves equal to two to three months, or 16.7 to 25 percent of General Fund operating revenues. This target level would maintain the General Reserve at or above GFOA’s minimum target level of no less than two months of General Fund operating revenues.
The County’s current General Reserve Policy states that 1) a minimum of $20 million balance must be maintained at all times and that, 2) to the extent possible, the spending down of the General Fund General Reserve should not exceed $6 million a year. Staff recommends keeping these restrictions.
Based on the FY2024/25 Working Budget, these recommendations would set a target reserve level of between $58 and $87 million. If the Board chooses to fund at the recommended level, this reserve would have to be funded / increased over time. Recommendations to increase General Reserve funding would be brought forward for Board consideration during the annual budget process.
GFOA does not currently provide a target level for a General Fund Contingency, it is recommended that an agency establish an amount based on “expectations for the potential of unplanned, unavoidable costs in the normal course of doing business during the year.” Therefore, instead of establishing an arbitrary fixed amount of ten percent, staff recommends revising the Contingency Policy to require a fixed range of between $10 and $25 million. This range would allow staff to recommend and establish a Contingency level during the annual budget process based on current expectations and knowledge of potential unavoidable expenditures.
Maintaining a practical level of reserves is a critical factor considered by rating agencies evaluating the credit worthiness of the County resulting in savings in borrowing costs on bond insurance and interest payments. These recommended changes will allow the County to maintain a prudent level of reserves while ensuring that rating agencies evaluate the County’s financial position based on County’s current financial management strategy, policies, and risks.
ALTERNATIVES:
The Board could elect to not update the County’s General Fund General Reserve and Contingency Policies, choose a different target reserve level, or provide staff with additional direction and ask to bring the item back before the Board. These alternatives are not recommended as our current Policies and target levels are outdated and do not reflect the County’s current financial management strategy, policies, and risks.
OTHER AGENCY INVOLVEMENT:
At the January 30, 2025 Pension and Debt Advisory Committee meeting, it was concluded that the Reserve and Continency Policies require the changes recommended in this report. KNN Public Finance, LLC, the County’s municipal finance advisor, has also reviewed the proposed changes and supports the recommendation.
CAO RECOMMENDATION:
APPROVE DEPARTMENTAL RECOMMENDATION