PRIMERA REVISIÓN

As part of the 2006 LTFP, a commitment was made to address the long-term funding requirements for the City’s Water, Sewer, and Storm Drain infrastructure reserves due to the significant funding gaps identified at that time. The City also realized that achieving fully funded reserves would take multiple fiscal years.

In the 2009 LTFP, the reserve funding targets were modified from five years of projected costs to three years of projected costs. This change was based on the typical two-year cycle of major capital projects, which are appropriated (fully funded) by the Capital Improvement Budget funded from the depreciation reserves, but have construction cycles which cover multiple fiscal years. The combination of the funded capital projects and the targeted three years of projected future costs in the reserves represent funding for five years of capital project costs.

The following discussion addresses the current City Council Fiscal Policy for the Enterprise Reserves and addresses each of the Enterprise Depreciation Reserves individually.

City Council Fiscal Policy: The City will establish a Water, Sewer, Storm Drain and Golf Depreciation Reserve for costs associated with the major maintenance and capital improvement costs included in the Enterprise Fund budgets. The minimum reserve level shall be at a level equal to the projected three-year costs.

Water Depreciation Reserves

Assessment of the current situation/conclusions: The water infrastructure reserves have been under funded for a long period of time. In previous years, Council took steps to make additional contributions based on the asset model to narrow this significant funding gap.

The projected ending depreciation reserve balance at June 30, 2015 is $7.7 million. The three- year capital costs total $12.7 million. Therefore, the Depreciation Reserve is under funded by $5.0 million.

The City is making progress toward funding three years worth of capital activity based on depreciation contributions, asset model contributions, and the interest earned on the reserve amounts. The Water Operating Fund contributed depreciation amounts of $1.2 million based on the estimated useful life of the water capital assets. The asset model contribution amount of $2.0 million was identified to address past underfunding, major maintenance costs and set aside funds for assets that are not owned by the City, such as joint agency assets. The underfunding of this reserve has fluctuated by year, but has not made significant funding progress during the last three years. Based on this lack of improvement and the weak interest rate environment which has lowered investment earnings on this higher dollar reserve, staff is recommending the asset model contribution amount be $2.2 million in FY 2016 (increased from $2.0 million).

Recommendation: Maintain annual depreciation fund charges and modify the asset model contributions to $2.2 million (from $2.0 million) charged to the Water Operating fund to achieve three years worth of future capital projects.

Sewer Depreciation Reserve

Assessment of the current situation/conclusions: The projected ending balance at June 30, 2015 is $8.3 million and the three-year capital costs total $9.2 million. Therefore, the Sewer Depreciation Reserve is currently underfunded by $0.9 million.

The Sewer Operating Fund currently contributes $2.6 million based on depreciation and $0.3 million to set aside funds for assets that are not owned by the City. The depreciation funding amount is based on the estimated useful life of the capital assets. The City is funding capital activity based on these contributions. The reserves underfunding level has improved over time. Recommendation: None. Maintain annual depreciation fund charges to the Sewer Operating fund to maintain three years worth of future capital projects.

Storm Drain Depreciation Reserve

Assessment of the current situation/conclusions: The projected ending balance at June 30, 2015 is $1.9 million and the three-year capital costs total $1.9 million. Therefore, the Depreciation Reserve is currently funded.

The Storm Drain Depreciation Fund will contribute $800,000 based on depreciation funding and an additional reserve contribution of $80,000 for a total contribution of $880,000 in FY 2016. The depreciation funding amount is based on the estimated useful life of the capital assets. The additional contribution is estimated to fund past costs of the reserve.

Recommendation: None. Maintain annual depreciation fund charges and a Storm Drain Depreciation Reserve contribution to achieve funding for three years worth of future capital projects.

Golf Course Depreciation Reserve

Assessment of the current situation/conclusions: The Golf Depreciation Reserve is utilized for setting aside amounts for buildings, machinery, and equipment replacements, which can have lives between 5-50 years. The available ending balance projected at June 30, 2015 is $620,000. This amount does not include the receivable from an internal loan to Golf Operating, which is not considered available. Projected capital expenses for the next three years total $300,000. Therefore, the Depreciation Reserve is currently funded. Annual amounts placed into this reserve are based on the depreciation of the assets.

Recommendation: None. Maintain depreciation contributions to the reserve to keep the Golf Course Depreciation reserve at an adequate level.

Golf Capital Improvement Reserve

City Council Fiscal Policy: The City will maintain a Golf Capital Improvement Reserve for costs associated with capital improvements budgeted in the Golf Course Fund. The reserve will be maintained at a level at least equal to the projected three-year costs.

Assessment of the current situation/conclusions: The Golf Capital Improvement Reserve was established to set aside funds for capital improvements in the Golf Course Fund. The Improvement Reserve is to provide funds for green and tee reconstruction, fencing and other

miscellaneous golf improvements based on depreciation of these improvement assets. The Golf Capital Improvement Reserve at June 30, 2015 is projected to have an ending balance of $406,000. Projected capital expenses for the next three years total $360,000. Therefore, the Improvement Reserve is currently funded. Annual amounts placed into this reserve are based on the depreciation of the assets.

Recommendation: None. Maintain depreciation contributions to the reserve to keep the Golf Course Capital Improvement reserve at an adequate level.

Council Action:

MOTION BY COUNCILMEMBER BROWN, SECOND BY COUNCILMEMBER DONCHAK, CARRIED 5-0, to take action as follows:

1. Maintain the Sustainability Reserve at $10 million.

2. Maintain the General Fund Emergency Reserve at a level of 9% of operating expenditures.

3. Maintain the Enterprise funds emergency reserve level at 12% of operating expenses. 4. Establish a new Fiscal Policy creating a California Water State Revolving Fund (CWSRF) Debt Service Reserve setting aside cash in the Water Operating Fund, as required under the financing agreement.

5. Establish a Pension Reserve to set aside funds to address large pension rate increases by establishing a restricted reserve in the General Fund to offset any pension rate increase related to the City’s conversion to the California Public Employees Retirement System (CalPERS) for General employees. The reserve will be funded in FY 2015 as a result of the approval of creation of the reserve in the 2014 Long Term Financial Plan.

6. Draw the remaining balance of the Vista Hermosa Sports Park (VHSP) Reserve to partially subsidize the net cost of operating the VHSP during the 1st _{Quarter of FY 2016,}

fully utilizing the VHSP Reserve.

7. Transfer $160,000 from the General Fund unassigned fund balance to the Accrued Leave Reserve for FY 2016.

8. Authorize General Liability charges to City Funds in the amount of $2.4 million as listed in Attachment “A” in the Reserve Analysis Long Term Financial Plan paper.

9. Retain the proceeds from the Bellota land sales to comply with the General Liability Fund’s reserve policy and fund the payment of the retrospective liability.

10.Authorize the worker’s compensation rates as listed in “Attachment A” in the Reserve Analysis Long Term Financial Plan paper.

11.Maintain contributions for the replacement of the City fleet vehicles and equipment to keep the reserve at an adequate level.

12.Transfer $110,000 from the General Fund to the Capital Equipment Replacement Reserve for FY 2016 and maintain current contributions to fund the Capital Equipment Reserve.

13.Transfer $50,000 from the General Fund to the Facilities Maintenance Reserve for FY 2016 and maintain current contributions to fund the Facilities Maintenance Reserve. 14.Transfer $50,000 from the General Fund to the Park Asset Replacement Reserve for FY

2016 and maintain current contributions to fund the Park Asset Replacement Reserve. 15.Maintain model contributions to $2.2 million charged to the Water Operating fund to

achieve three years worth of future capital projects.