SUBJECT:
Title
A Resolution of the Board of Trustees of the Town of Erie Repealing Resolution 10-40, the Resolution Establishing the General Fund Stabilization Reserve Account
Body
DEPARTMENT: Administration
Department
PRESENTER: Malcolm Fleming, Town Administrator
First Name, Last Name, Title
TIME ESTIMATE: 10 minutes
only required for non-consent items
POLICY ISSUES:
Repealing Resolution 10-40 will remove the requirement for the Town maintain a General Fund Stabilization Account of $7.5 million. Instead of maintaining that $7.5 million separate reserve, staff proposes updating the Town’s reserve policy as proposed below and in the attached DRAFT resolution. The policy issues to consider are (1) what is the appropriate level of reserves to maintain the Town’s ability to respond effectively when faced with unanticipated economic events or opportunities without maintaining unnecessarily high reserves (which could be better allocated for projects of benefit to the community or reduced through lower levels of taxation), and (2) what is the best structure for the reserve so funding is available when needed and if used it is replenished in a reasonable period of time?
STAFF RECOMMENDATION:
Recommendation
Approve resolution repealing resolution 10-40 dated March 9, 2010
End
SUMMARY AND BACKGROUND OF SUBJECT MATTER:
Staff believes current reserve levels are higher than necessary for responsible fiscal planning. This perspective is informed by a report published this year by the Government Finance Officers Association (GFOA) titled Should We Rethink Reserves <https://gfoaorg.cdn.prismic.io/gfoaorg/cd9544c4-8db9-49e6-beb1-3c39815fc464_Rethinking+ReservesR2.pdf>? This report summarizes GFOA’s and various universities’ research on new opportunities for local governments to get the best value from their reserve strategies. The report lists four reasons to rethink reserve policies:
First, we live in an increasingly volatile and uncertain world. More uncertainty gives rise to more risk. Reserves are one of the tools used to manage risk, chiefly by “self-insuring” against certain risks. More risk means we need better reserve strategies. Second, the public has lower trust in government and experts. This means that governments will face more pressure to justify holding reserves and will be less able to appeal to claims of professional expertise as justification. Third, government is becoming more resource constrained, which means that all dollars, including reserves, must be used with increasing savvy. Fourth, technology makes it easier to analyze reserve strategies and optimize the strategy to the conditions faced by each local government.
The GFOA also published a Reserve Calculation Worksheet. This worksheet enables local governments to calculate their relative risk and set reserve ratios to reflect that risk. Staff entered the Town’s data on the numerous factors considered by the GFOA-which include likelihood of extreme events, revenue stability, growth, capital projects and other factors-to calculate the Town’s relative level of risk and apply the GFOA’s guidance on reserve policies based on that risk.
The GFOA Worksheet (attached) suggests the Town has a score of 19, which puts it solidly in the 17-24 range category of “Low to Moderate level of risk”. GFOA’s guidance on reserves for cities and towns with this level of risk is:
You face a low to moderate level of risk to retain through reserves. Consider adopting a reserve target somewhat higher than the GFOA minimum (e.g. 17-25% of revenues/expenditures). Since risk is low, do not invest excessive analytical effort in determining an exact target amount. Consider a short, informal benchmarking study with peer agencies to provide guidance.
While no two municipalities have the same circumstances, Erie currently has the highest reserve requirements as shown in the table below:
|
Municipality |
Reserve Target |
Additional Requirement |
|
Boulder |
20% |
|
|
Brighton |
22 - 27% |
|
|
Broomfield |
10 - 18% |
|
|
Denver |
12 - 17% |
|
|
Erie |
25% |
$7.5 million |
|
Firestone |
25% |
|
|
Frederick |
25% - 50% |
|
|
Lafayette |
25% |
|
|
Longmont |
11 - 19% |
|
|
Louisville |
15% |
|
|
Loveland |
20% |
$1.5 million |
|
Thornton |
17% |
|
|
Westminster |
15 - 20% |
|
This review leads staff to recommend repealing the requirement established by Resolution 10-40 (attached) to maintain a separate $7.5 million Stabilization Reserve, while still maintaining a target reserve requirement of 25% of General Fund operating expenditures. However, staff also believes the Town should structure the reserves to provide for clear elements within the 25% target. Additionally, staff recommends establishing a designated source of funding for capital improvements, equipment replacement, maintenance needs, and repayment of bonds issues for such purposes.
The Town Code provides guidance on these issues. Erie Municipal Code Section 2-1-3.D.4, specifies the Town of Erie will maintain minimum reserves or fund balances in its General Fund of 25 percent of the current year's budgeted operating expenditures. Additionally, Erie Municipal Code Sections 2-1-3.B.2 and 3 specify the Town will maintain five-year plans for capital improvements and equipment replacement and maintenance needs. Finally, Erie Municipal Code Section 2-11-3.B, provides for a Capital Improvement Fund used solely to provide capital improvements for the Town or for the repayment of bonds issued for such purposes.
Consistent with these policies, and to maintain the Town’s ability to respond effectively to emergencies, to continue providing General Fund services during economic downturns, and to provide a designated source of funding for capital improvements, equipment replacement, maintenance needs, and repayment of bonds issues for such purposes, portions of the General Fund fund balance shall be designated as follows:
a. 3% TABOR Reserve that may be appropriated only for “emergencies” as allowed under Article X Section 20 of the Colorado Constitution.
b. 12% Emergency Reserve that may be appropriated only for emergencies declared by the Board of Trustees.
c. 10% Stabilization Reserve that may be appropriated by the Board of Trustees during times of reduced revenues due to economic conditions to allow the Town to continue providing General Fund services throughout an economic downturn. Appropriations from the Stabilization Reserve shall be contingent on a plan specifying the expected duration of the economic conditions requiring use of the Stabilization Reserve and specific actions and a timeline for replenishing the Stabilization Reserve.
d. After making appropriations for all other General Fund purposes, the Year-End Fund Balance Exceeding 25% shall be transferred to the Capital Improvement Fund. Appropriations from the Capital Improvement Fund shall only be used for capital improvements, equipment replacement, maintenance needs, or for the repayment of bonds issued for such purposes.
The attached DRAFT resolution reflects this proposed policy. If the Board approves repealing Resolution 10-40, then staff will bring this DRAFT Resolution back in final form and ask the Board to adopt it as part of the multiple actions the Board will take after the 2nd public hearing on the budget on November 14.
Based on review of Moody’s Rating Framework (see below), staff believes adopting this new reserve policy will not adversely affect the Town’s bond ratings, and may even enhance them. This is because fund balance is only one of many factors the ratings agencies use to conduct their ratings analysis, and “Institutional Framework” is among those factors. Staff believes a more structured reserve policy tailored to Erie’s specific fiscal and economic factors will improve the rating agencies perception of the Town’s “Institutional Framework”.
For all these reasons, staff recommends repealing Resolution 10-40 and adopting a new reserve policy reflected in the attached DRAFT Resolution.
Historical Background.
On Dec. 9, 2003, the Board of Trustees passed Ordinance 826, establishing Financial Policies for the Town of Erie. These policies established a reserve requirement of 25% of the current year’s budgeted operating expenditures as well as a TABOR reserve of 3% of fiscal year spending. In February 2010 the Board requested staff prepare a resolution to reserve a portion of the General Fund balance as a “rainy day” fund that could be used “…during times of less economically prosperous, lean years to maintain service levels.” Staff completed this request and on March 9, 2010, Resolution 10-40 was approved establishing a General Fund Stabilization Reserve (GFSR) account.
For several years staff has been evaluating whether current economic conditions in the Town warrant continuing to maintain the Town’s $7.5 Stabilization Reserve. The Town has a history of very solid reserves with the requirement of a minimum of 25% of General Fund expenditures plus the additional $7.5 million. In 2022 this translated into actual reserves of more than $39 million on operating expenditures of $36 million; effectively more than a 100% reserve requirement. As the Town Administrator said during the Board’s October 3 and 17 meetings, maintaining that much funding in reserves is not necessary to manage likely risks and is instead providing more benefit to the Town’s bankers than it is to Town residents.
BOARD PRIORITY(S) ADDRESSED:
ü Prosperous Economy
ü Effective Governance
ü Fiscally Responsible
ATTACHMENT(S):
1. GFOA Reserve Calculation Worksheet
2. Resolution 23-122
3. DRAFT Reserve Policy
4. Resolution 10-40
5. Ordinance 826