SUBJECT:
Title
A Resolution of the Board of Trustees of the Town of Erie, Colorado Designating Portions of General Fund Reserves for Specific Purposes.
Body
DEPARTMENT: Administration
Department
PRESENTER(S): Malcolm Fleming, Town Administrator
First Name Last Name, Title
TIME ESTIMATE: 40 minutes (for all Budget related actions)
only required for non-consent items
FISCAL SUMMARY:
Consistent with applicable provisions in the Erie Municipal Code and State law, this resolution specifies the Town’s policy on General Fund reserves 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.
POLICY ISSUES:
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 enabling the Town to reduce taxes), 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 the resolution.
End
SUMMARY AND BACKGROUND OF SUBJECT MATTER:
On October 24, 2023, consistent with staff’s recommendation and the Government Finance Officers Association (GFOA) best practices, the Board of Trustees repealed Resolution 10-40. That Resolution, adopted in 2010, required maintaining a $7.5 million additional General Fund reserve on top of the requirement to maintain 25% of General Fund current year's budgeted operating expenditures. The 25% reserve requirement is specified by Erie Municipal Code Section 2-1-3.D.4. Given the Board’s action, staff proposes adopting a new reserve policy to structure the General Fund reserves to provide for clear elements within the 25% requirement. 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. As noted above, 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% 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, the proposed Reserve Policy would designate portions of the General Fund fund balance 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 Resolution reflects this proposed policy. Staff recommends the Board adopt the Resolution 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 adopting the new reserve policy reflected in the attached 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 an additional 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 Attractive Community Amenities
ü Engaged and Diverse Community
ü Prosperous Economy
ü Well-Maintained Transportation Infrastructure
ü Small Town Feel
ü Safe and Healthy Community
ü Effective Governance
ü Environmentally Sustainable
ü Fiscally Responsible
ATTACHMENT(S):
1. Proposed resolution
2. GFOA Reserve Calculation Worksheet