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RES-11528 ESTABLISHING A FINANCIAL RESERVE POLICY AND PENSION FUNDING POLICY - REPEALS RESOLUTION NO. 11304 - FEB 13, 2024RESOLUTION NO. 11528 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ORANGE ESTABLISHING A FINANCIAL RESERVE POLICY AND PENSION FUNDING POLICY WHEREAS,the City of Orange is dedicated to prudent management of public funds; and WHEREAS, the City Council is dedicated to ensuring fiscal responsibility and accountability in the expenditure of City funds; and WHEREAS,on February 9,2021,the City Council established a Financial Reserve Policy and Pension Funding Policy, which designated fund balance be set aside for operating contingencies and catastrophic events; and WHEREAS, Governmental Accounting Standards Board Statement No. 54 defines how fund balances are to be reported in financial statements and establishes standards upon which those reserves must be defined; and WHEREAS, the City Council desires to establish a comprehensive financial reserve policy, which defines reserve types, how those reserves are to be used, and how they are to be replenished; and WHEREAS, the City Council recognizes the fiscal challenges presented by unfunded pension obligations; and WHEREAS, absent comprehensive changes to State law or court precedent, existing pension obligations must be retired in accordance to the rules and regulations of the California Public Employees' Retirement System; and WHEREAS, the City Council desires to adopt policies in order to minimize the current and future costs of pension obligations. NOW,THEREFORE,BE IT RESOLVED by the City Council of the City of Orange as follows: 1. Resolution No. 11304 the Financial Reserve Policy and Pension Funding Policy, established on February 9, 2021, is hereby rescinded. 2. The Financial Reserve Policy,attached to this Resolution,is approved and incorporated by reference as Exhibit"A." 3. The Pension Funding Policy,attached to this Resolution, is approved and incorporated by reference as Exhibit"B." 4. This Resolution takes effect February 13, 2024. ADOPTED this 13th day of February 2024. iel R. Slater, Mayor, City of Orange ATTEST: Pamela Coleman, City Clerk, City of Orange APPROVED AS TO FORM: Mik igliotta, City Attorney STATE OF CALIFORNIA ) COUNTY OF ORANGE ) ss. CITY OF ORANGE I, PAMELA COLEMAN, City Clerk of the City of Orange, California, do hereby certify that the foregoing Resolution was duly and regularly adopted by the City Council of the City of Orange at a Regular Meeting thereof held on the 13th day of February 2024,by the following vote: AYES: COUNCILMEMBERS: Barrios, Dumitru, Tavoularis, Gyllenhammer, Bilodeau, and Slater NOES: COUNCILMEMBERS: None ABSENT: COUNCILMEMBERS: Gutierrez etLC Pamela Coleman, City Clerk, City of Orange Attachments: Exhibits A&B Resolution No. 11528 2 EXHIBIT "A" FINANCIAL RESERVE POLICY PURPOSE The purpose of this policy is to establish adequate reserves for the City to continue to meet its financial obligations in the event of economic uncertainty, catastrophes, or other unforeseen circumstances. This policy will be reviewed annually during the preparation of the City's budget and recommended changes will be presented to the City Council for consideration with the adoption of the budget. BACKGROUND It is essential for governments to maintain adequate levels of fund balance to mitigate current and future risks (e.g. revenue shortfalls and unanticipated expenditures) and to support long- term fmancial plans. This policy establishes the reserve levels for various City funds. The policy covers the General Fund Group (which includes the General Fund, Building Records Management Fee Fund, Business Investment Fund, and Capital Projects Fund), Internal Service Funds (which includes Vehicle and Equipment Maintenance and Replacement Funds, General Liability and Workers Compensation Funds, Employee Accrued Liability Fund, and Computer Maintenance and Replacement Funds), the Water Fund, and the Sanitation Fund. For purposes of this policy, the General Fund Group includes the Business Investment Fund, and Capital Projects Fund, since the resources maintained in these funds originated from the General Fund. The General Fund Group also includes the Building Records Management Fee Fund, since this fund is included with the General Fund for financial reporting purposes. Unless otherwise specified,appropriations from fund balance will continue to be made as they are under both existing policies and the Orange Municipal Code. For the General Fund Group, fund balances are considered to be unrestricted and available for use at the discretion of the City Council,unless the fund balances have been designated as non-spendable or restricted. Nonspendable are amounts that are not in a spendable form (such as inventory) or are required to be maintained intact (such as the corpus of an endowment fund). Restricted are amounts constrained to specific purposes by their providers (such as grantors, bondholders, and higher levels of government),through constitutional provisions,or by enabling legislation. Under GASB Statement 54 - Fund Balance Reporting and Governmental Fund Type Definitions, unrestricted fund balances may be categorized as committed, assigned and unassigned. To be categorized as Committed, amounts can be used only for the specific purposes determined by the highest level of decision-making authority (i.e. the City Council). The City Council has the authority to establish a fund balance commitment,through the action of a resolution or an ordinance, and must use the same action to modify or rescind that commitment. To be categorized as Assigned, amounts are identified to reflect the City's intended use of those resources. Such intent is to be established by the City Council; however, the City Council may designate that authority to another body or official. All special revenue funds,will be classified as assigned, unless they qualify as restricted or committed. GASB 54 requires the governing body to take action on fund balance classifications prior to fiscal year end. In other words, Commitments and Assignments appearing on the June 30 balance sheet must be acted on or before the last City Council meeting prior to June 30. The action does not need to include the exact dollar amount but should provide clear directions to determine the amount once the City's books are closed for the fiscal year. GASB 54 recommends that the City Council take formal action either by resolution or ordinance to Commit fund balance. GASB 54 allows the governing body to delegate a level of authority to Assign fund balance. All General Fund fund balance resources that cannot be properly classified into the non-spendable, restricted, committed or assigned category will be categorized as Unassigned. GENERAL FUND GROUP The City Council may Commit or Assign unrestricted fund balances in the General Fund,Building Record Management Fee Fund, Business Investment Fund, and Capital Projects Fund for two primary purposes: (1) to ensure the continued orderly operation of City government, while maintaining the stability of tax and fee structures in the event of unforeseen occurrences or emergencies outside of the City's control; and (2) to allow for the setting aside of funds for particular purposes that will be spent in future years. General Fund Catastrophic Reserve Definition & Purpose: To address unforeseen occurrences or emergencies. Unforeseen occurrences or emergencies may include uncertainties related to local economic downturns, State and/or Federal actions affecting local revenues, uninsured losses, errors in actuarial liability estimates,and other financial risks outside the control of the City. The City Council commits these balances for Contingencies in the financial records and on the annual audited financial statements. Fund Balance Classification: Restricted Minimum Reserve Level: 16.6% (i.e. 60 days) of annual General Fund expenditures for the respective fiscal year. Required Action for Use: City Council Resolution Re-establishing minimum balance: If the balance falls below the minimum reserve level,the City Manager shall be required to formulate a plan to restore the balance to the minimum amount required within a 2-year period. General Fund Encumbrances Definition & Purpose: To report outstanding and purchase order commitments at the end of the fiscal year. The City Council assigns these balances as Encumbrances in the financial records and on the annual audited financial statements.This reserve is for financial statement reporting purposes only and will be allocated to expenditure appropriations as applicable in the subsequent year. Resolution No. 11528 Exhibit A Page 2 Fund Balance Classification: Committed Minimum Reserve Level:None. Required Action for Use: The City Council defers authority to staff to determine the amount of outstanding contract and purchase order commitments at the end of every fiscal year. Re-establishing minimum balance.:Not applicable. General Fund Unencumbered Carryover Appropriations Definition & Purpose: To establish an assignment of fund balance for continuing appropriations, as approved along with the budget. The City Council will determine this amount along with the adoption of the subsequent year's budget and assign these balances as Carryover Appropriations in the financial records and on the annual audited financial statements. This reserve is for financial statement reporting purposes only and will be allocated to expenditure appropriations as applicable in the subsequent year. Fund Balance Classification: Assigned Minimum Reserve Level: None. Required Action for Use: Appropriation by City Council. Re-establishing minimum balance: Not applicable. Building Records Management Fee Fund Balance Definition&Purpose: This fund is maintained as a separate fund for budgetary purposes to record revenues and expenditures related to the maintenance and management of building records. The City Council assigns this fund balance as Building Records Management in the financial records and on the annual audited financial statements within the General Fund. Fund Balance Classification: Assigned Minimum Reserve Level: None. Required Action for Use: Appropriation by City Council. Re-establishing minimum balance: Not applicable. Business Investment Fund Balance Definition & Purpose: This fund is maintained as a separate fund for budgetary purposes to track payments related to certain tax sharing agreements, and to set aside funds to attract new businesses to the City in the future. The primary funding source for the Business Investment Resolution No. 11528 Exhibit A Page 3 Fund is transfers from the General Fund. The City Council assigns this fund balance as Business Investment in the financial records and on the annual audited financial statements within the General Fund. Fund Balance Classification: Assigned Minimum Reserve Level: None—set annually by City Council upon budget adoption. Required Action for Use: Appropriation by City Council. Re-establishing minimum balance: Not applicable. Capital Proiects Fund Balance Definition & Purpose: This fund is maintained as a separate fund for budgetary and financial reporting purposes for capital projects that are funded by the General Fund. The primary funding source for the Capital Projects Fund is transfers from the General Fund. The City Council assigns this fund balance as Capital Improvements in the financial records and on the annual audited financial statements. Fund Balance Classification: Assigned Minimum Reserve Level: The annual average of the five-year Capital Improvement Plan budgeted expenditures, or 50% of single highest year in the five-year CIP, whichever is higher. This will be calculated on an annual basis as part of the budget preparation and adoption. Required Action for Use: The City Council appropriates funds from the fund balance in conjunction with the adoption of the annual budget. At other times, fund balance may be appropriated by City Council under existing policies. Re-establishing minimum balance: As directed by the City Council during the budget process. INTERNAL SERVICE FUNDS Internal service funds are used to efficiently allocate costs of various internal functions to the City's individual departments and funds. These services include equipment maintenance and replacement, self-insurance funds, employee accrued liabilities, and information technology maintenance and replacement. Internal service funds utilize proprietary accounting. As such, the classifications of fund balance described above do not apply to the internal service funds. Reserve levels will be determined on a current resource basis (current assets less current liabilities) and established from a strictly budgetary perspective. Resolution No. 11528 Exhibit A Page 4 Vehicle Replacement Fund Definition & Purpose: To provide a source of funding for the acquisition and replacement of all rolling stock and equipment, including vehicles, heavy machinery and equipment, and trailers. The funding source for this fund is charges to user departments. Fund Balance Classification: Assigned Minimum Reserve Level: The annual average of the prior three years' of actual vehicle and equipment expenditures. Required Action for Use: Appropriation by City Council. Re-establishing minimum balance: As directed by the City Council during the budget process. Major Building Improvements Fund Definition & Purpose: To provide a source of funding for major building improvements. The primary funding source for the Major Building Improvements Fund is transfers from the Capital Projects Fund. Fund Balance Classification: Assigned Minimum Reserve Level: None. Required Action for Use: Appropriation by City Council. Re-establishing minimum balance: Not applicable. Workers' Compensation Self-Insurance Fund Definition&Purpose:To provide funding for the City's workers'compensation insurance program, which includes limited self-insurance. Fund Balance Classification: Assigned Minimum Reserve Level: One hundred fifty percent(150%)of the annual average of the prior three years' of actual workers' compensation claims paid. Required Action for Use: Appropriation by City Council. Re-establishing minimum balance: If the balance falls below the minimum reserve level,the City Manager shall be required to formulate a plan to restore the balance to the minimum amount required within a 2-year period. Resolution No. 11528 Exhibit A Page 5 General Liability Self-Insurance Fund Definition & Purpose: To provide funding for the City's general liability insurance program, which includes limited self-insurance. Fund Balance Classification: Assigned Minimum Reserve Level: One hundred fifty percent(150%)of the annual average of the prior three years' of actual general liability claims paid. Required Action for Use: Appropriation by City Council. Re-establishing minimum balance: If the balance falls below the minimum reserve level,the City Manager shall be required to formulate a plan to restore the balance to the minimum required amount within a 2-year period. Computer and Technology Replacement Fund Definition & Purpose: To provide a source of funding for the acquisition and replacement of the City's information technology infrastructure and related equipment. Fund Balance Classification: Assigned Minimum Reserve Level: The annual average of the prior three years' of actual computer and technology capital expenditures. Required Action for Use: Appropriation by City Council. Re-establishing minimum balance: As directed by the City Council during the budget process. CITY COUNCIL DISCRETIONARY RESERVE In order to ensure adequate liquidity for emergencies and imbalances in cash flow, the combined Restricted and Assigned fund balances of the General Fund Catastrophic Reserve, Building Records Management Fee Fund, Business Investment Fund, Capital Projects Fund, Vehicle Replacement Fund,Major Building Improvements Fund,Pension Stabilization/Employee Accrued Liability Fund, Computer and Technology Replacement Fund, and unassigned General Fund balance, collectively known as the City Council Discretionary Reserve, shall be maintained at a minimum level of 30%of General Fund expenditures in the respective fiscal year. ENTERPRISE FUNDS Enterprise funds are maintained for funds whose primary source of revenue is charges for services. The City maintains enterprise funds for two functions: Water and Sanitation. The California Constitution restricts revenues generated by the user charges to be used only for the purposes for which the fees are collected. Enterprise funds utilize proprietary accounting. As such, the classifications of fund balance described above do not apply to the enterprise funds. Reserve levels Resolution No. 11528 Exhibit A Page 6 will be determined on a current resource basis (current assets less current liabilities) and established from a strictly budgetary perspective. Water Fund Operating Reserve Definition & Purpose: To provide a contingency reserve for the Water Fund in the event of unexpected increases in expenses, shortfalls in revenue, or catastrophic events. Fund Balance Classification: Restricted Minimum Reserve Level: Twenty-five percent (25%) of budgeted operating expenses in the respective fiscal year. Required Action for Use: Appropriation by City Council. Re-establishing minimum balance: If the balance falls below the minimum reserve level,the City Manager shall be required to formulate a plan to restore the balance to the minimum required amount within a 2-year period. Sanitation Fund Operating Reserve Definition & Purpose: To provide a contingency reserve for the Sanitation Fund in the event of unexpected increases in expenses, shortfalls in revenue, or catastrophic events. Fund Balance Classification: Restricted Minimum Reserve Level: Twenty-five percent (25%) of budgeted operating expenses in the respective fiscal year. Required Action for Use: Appropriation by City Council. Re-establishing minimum balance: If the balance falls below the minimum reserve level,the City Manager shall be required to formulate a plan to restore the balance to the minimum required amount within a 2-year period. Sanitation Capital Fund Definition & Purpose: This fund is maintained separately for budgetary purposes to account for the sanitation infrastructure fee. The revenue generated from this charge is to be used for capital improvements to the City's sewer infrastructure. It is combined with the Sanitation Fund for financial reporting purposes. Fund Balance Classification: Restricted Minimum Reserve Level:None. Required Action for Use: Appropriation by City Council. Resolution No. 11528 Exhibit A Page 7 Re-establishing minimum balance: Not applicable. EXCESS FUND BALANCE At the end of each fiscal year, the Finance Department reports on the audited year-end financial results. Should actual General Fund revenues exceed expenditures encumbrances, and continuing appropriation a year-end operating surplus shall be reported. Any year-end surplus that results in the General Fund unrestricted fund balance, after providing funding necessary to achieve the minimum reserve levels required by this reserve policy, shall be available for allocation for the following, subject to City Council approval: Offset projected future deficits Anticipated intergovernmental fiscal impacts One-time funding, non-recurring needs Loan repayment acceleration Upon funding of the above, the division of remaining surplus balances shall be recommended to the City Council by the City Manager or designee, between the City Council Discretionary Reserve and Pension Stabilization Fund Reserve (as described in Exhibit "B"), based on most critical needs at that time. REPORTING OF FUND BALANCES The City Council delegate the authority to assign fund balances in the Annual Comprehensive Financial Report (ACFR) to the City Manager and the Finance Director. This delegation of authority does not change the current practice but rather formalize the reporting process to meet the GASB 54 requirements and added transparency to the annual financial report. Resolution No. 11528 Exhibit A Page 8 EXHIBIT "B" PENSION FUNDING POLICY PURPOSE The purpose of this policy is to establish a framework to address current and future pension obligations in order to minimize the fiscal impact of such obligations. BACKGROUND As demonstrated in Exhibit "A" of this Resolution, the City seeks to achieve a strong financial position by maintaining adequate levels of reserves and working capital necessary to provide financial flexibility to weather unexpected circumstances and economic downturns. The City also seeks to reduce its unfunded CalPERS liabilities in the most cost-effective manner possible. The City acknowledges that addressing retirement costs is a dynamic process: unfunded liabilities change each year, due to actual investment performance, changes in actuarial assumptions, changes in benefit levels or criteria, and annual contribution levels. As such, the City will be required to continually monitor unfunded CalPERS liability costs. These policies are designed to provide a framework for decision-making as well as general guidelines for the application of additional monies or"Additional Discretionary Payments"toward the City's unfunded CalPERS liability costs. Timing of Annual Unfunded Accrued Liability Payment CalPERS offers a discount for the annual unfunded accrued liability(UAL)payment if paid in one lump sum in July. Based on the current 7% discount rate, this results in a 3% savings on the payment. To the extent that City investments are yielding less than the rate of savings, the City shall endeavor to make the payment as a lump sum each fiscal year. Cost Sharing by Employees The City Council has established, by agreement with the City's employee collective bargaining units, pension cost sharing, to the extent that such cost sharing is allowed to be imposed under State law. As of adoption of this policy,Classic Miscellaneous members contribute 8%toward the normal cost, Classic Safety members contribute (or will contribute by the end of their current contracts) 12% toward the normal cost, and all New (i.e. PEPRA) members contribute 50% of normal cost. This policy does not preclude bargaining units or any other employees from contributing a greater amount toward their pension benefits through the collective bargaining process. Pension Obligation Bonds (POBs) The City may, from time-to-time, use bonds to "refinance" a portion of its unfunded pension liability. Bonds shall be issued as part of a comprehensive plan to address the City's unfunded liabilities. Since these bonds are issued on a taxable basis, they carry a higher interest rate than traditional municipal"tax-exempt"debt. The City shall adhere to the following general criteria to address Government Finance Officers Association(GFOA) concerns: The bonds shall not be structured to defer payments or extend the final maturity date. Bonds shall be structured with standard call provisions (e.g., 100%-102% in 10 years). Bonds shall not finance current or normal costs; they shall only be used to refinance unfunded pension liabilities. The true interest cost on bonds shall be at least 2.5% less than the current /projected CalPERS Discount Rate. Bonds should provide demonstrated cash flow savings - a target minimum of 20% net present value (NPV) savings (except for refunding bonds). Additional Discretionary Payments Beginning in FY 2022-23 or sooner, assuming the City issues POBs, the City shall calculate the normal cost contribution rate for a discount rate that is at least 0.25% less than the CalPERS discount rate. The difference between the CalPERS contribution rate and the calculated contribution rate shall be added to the bi-weekly payroll and deposited into the Pension Stabilization Fund. In April of every year, accumulated funds from these deposits shall be paid to CalPERS as an ADP toward the unfunded liability. These payments shall be applied toward the CalPERS amortization base(s)with the longest remaining term. Additionally,ad-hoc payments may be made from time to time. These payments may be budgeted, or be made from the Pension Stabilization Fund. These payments shall require City Council approval. These payments shall be applied toward the CalPERS amortization base(s) with the longest remaining term. Pension Stabilization Fund The City shall establish a Pension Stabilization Fund. To the extent that the City has: excess reserves, unspent budget monies at year-end,unspent proceeds from a capital project, and/or one- time revenues, the City shall endeavor to apply 50% of such monies toward the Pension Stabilization Fund. The Pension Stabilization Fund shall be used to maximize interest costs savings by liquidating unfunded liability amortization bases(i.e. Additional Discretionary Payments as described above) and to address future amortization bases. Use of the Pension Stabilization Fund shall be recommended by the City Manager and approved by the City Council through the budget adoption process. The City Council, at its discretion, may establish a Section 115 Trust to house the Pension Stabilization Fund. Resolution No. 11528 Exhibit B Page 2