City Council Work Session

Lake Havasu City Lake Havasu City Police Facility 2360 McCulloch Blvd North Work Session Minutes - Final Lake Havasu City, Arizona 86403 www.lhcaz.gov City Council Work Session Tuesday, October 28, 2014 5:00 PM 1. CALL TO ORDER Mayor Nexsen called the meeting to order at 5:00 p.m. 2. PLEDGE OF ALLEGIANCE The mayor led in the Pledge of Allegiance. 3. ROLL CALL Councilmember Brister appeared telephonically. Present 7- Mayor Mark S. Nexsen, Vice Mayor Dean Barlow, Councilmember Crystal Alger, Councilmember David McAtlin, Councilmember Don Callahan, Councilmember Donna Brister, and Councilmember Jeni Coke 4. CALL TO THE PUBLIC There were no requests to address the Council. 5. PUBLIC HEARING 5.1 ID 14-0539 Presentation and Discussion of Budget Stabilization Reserve Funds Administrative Services Director Valerie Fenske said tonight’s presentation is on the arrangements, fund balance reporting, and how the Council and staff want to move forward with the Budget Stabilization Reserve (BSR) Funds. She said the presentation also addresses the following questions that staff has put together for clarification and what staff would like to come away with tonight: - Purpose for a Budget Stabilization Reserve? - When should it be used? - Perpetual or fixed length of time? - How much should it be? - How high should the balance grow? - How low would the balance be allowed to go? Lake Havasu City Page 1 City Council Work Session Work Session Minutes - Final October 28, 2014 Ms. Fenske provided a brief history of the BSR. She said two and a half years ago the City was able to set aside $2.5 million from the dissolution of the Employee Benefit Trust (EBT), which staff and Council has used during the budget discussions as having that layer of “fund balance” set aside. She said this opened the door for discussion; however, nothing has ever been formalized. Ms. Fenske noted that the BSR has also been referred to as the “Rainy Day Fund” in the past. Ms. Fenske provided some information on the current Fiscal Sustainability Policy calculation for the General Fund. She said the current policy looks back at the last five years of actual revenues, including lease proceeds, and requires a minimum of five percent in fund balance, with a five percent contingency layer and an additional 10 percent as the minimum fund balance reserve. Ms. Fenske said when looking back at the previous five years of actuals, the required minimum fund balance based on the City’s current Fiscal Sustainability Policy is nearly $5.5 million. Ms. Fenske said this calculation is to give some context as to where we are and what we have in terms of meeting the City’s current policy. Ms. Fenske provided information on the June 30, 2014 Comprehensive Annual Financial Report (CAFR) statement. She said the $2.5 million in fund balance is included in the “unassigned” balance of the $23 million. She stated that after tonight’s meeting, staff is hoping for clarification on how the Council wants to treat this in the future and what category this can fall into if a BSR fund is established. Ms. Fenske explained that the funding is really limited to two categories “restricted” or “committed” and there are some different nuances that go along with that. She said if the Council wanted to pull the funding from the “unassigned” line and placed into a different line there is different criteria of how it fits into the two available categories. Councilmember Barlow asked Ms. Fenske for more clarification on the fund balances and five categories: “non-spendable,” “restricted,” “committed,” “assigned,” and “unassigned,” to which Ms. Fenske explained that the “non-spendable” is comprised of items that are nonmonetary or not expected to be converted into cash. She said these items could be found on a balance sheet, like prepaid items and inventory, and the City is required to report them as “non-spendable.” Ms. Fenske said the “restricted” category is for items that are restricted by external covenant, such as special revenue, grant funds, or some other specific external restrictions. She said the “committed” category is for funds that are typically the encumbrances at year-end and are committed on a contractual basis. Ms. Fenske went on to explain the “assigned” and “unassigned” categories. She said the “unassigned” category on the worksheet has no other funding other than the $23 million in General Fund which goes back to the Governmental Accounting Standards Board Statement Number 54 (GASB 54) that the General Fund is the only fund that is allowed to have unassigned in a category. Ms. Fenske said previously, fund balance was reported as reserved, designated, or undesignated and in GASB’s view and other external users’ views, that category is often questioned in terms of Lake Havasu City Page 2 City Council Work Session Work Session Minutes - Final October 28, 2014 what governments put into those lines and is not very consistent across all government financials. She said if the City were to move forward with creating a BSR, essentially the $2.5 million that has been talked about during the budget work sessions is part of the $23 million and it cannot really be moved into a different line item unless the Council was to adopt a resolution. She further explained that the City would be required by GASB 54 to report it in “unassigned” unless there was a formal action or something that would cause it to fall under a different category; however, the “restricted” category is the only other option. Mayor Nexsen wanted to point out that the categories from “non-spendable” down to “unassigned” are ordered by level of restrictions. He said the difference between “committed” and “assigned” is that “committed” requires a commitment by the highest level of government, the Council, and “assigned” does not require any level of restriction, whereas “unassigned” is really whatever is left. Ms. Fenske added that the “unassigned” category is not an option to categorize any BSR funds because the GASB statement is very specific in that in no instance can a budget stabilization arrangement fall into that category. She said staff has been looking into what categories are available, what is the purpose of the BSR, and what levels the City would want those funds in, as well as some other nuances that staff discussed with the external auditors regarding exactly how specific the purpose or policy language would need to be. Councilmember Callahan asked if Council was able to spend the “unassigned” category in almost any way they wanted to, to which Ms. Fenske replied yes. She added that the General Fund is the only fund in the governmental funds that can have an “unassigned” category. Ms. Fenske noted that none of the categories apply to the Enterprise Funds, only the governmental fund types. Councilmember Barlow asked why the City would want to place the funds in anything other than “unassigned” because it seems to have the most flexibility, to which Ms. Fenske agreed and reviewed the restrictions within the other categories. There was discussion regarding the five percent contingency level of fund balance. Ms. Fenske said this percentage is different than the amount the City appropriates as a contingency line item in the budget. She said the contingency level of fund balance is required by policy and should be required in any policy rewrite. She clarified that even though it is using the same word, “contingency,” what the five percent is referring to is the layer of fund balance that relates to what the City has previously required to maintain in fund balance in the event of contingent items or emergencies. Councilmember Barlow questioned whether any of these funds have to do with the money that must be kept aside for the sewer loans, to which Mrs. Fenske replied no. Mayor Nexsen clarified that tonight’s discussion does not apply to water or wastewater. Ms. Fenske added that the sewer debt covenants and calculations are entirely different. Lake Havasu City Page 3 City Council Work Session Work Session Minutes - Final October 28, 2014 Councilmember Callahan asked for clarification on whether the City will have $26 million in the General Fund after fiscal year 2014, to which Ms. Fenske said that amount is the General Fund balance; however, what is really left is $23 million because the other amounts are “committed” or “restricted.” She added that the idea behind GASB 54 was an attempt to give a clearer picture of the components of fund balance and what is really available and not available. City Manager Charlie Cassens asked Ms. Fenske if the Council elected to restrict the BSR to a specific formula for its use, would it be required to go into a different category or could it stay in “unassigned,” to which Ms. Fenske said it would have to stay in “unassigned” unless it fits the components of “restricted” or “committed.” She said if the Council was to adopt a formula or calculation, the City would disclose it within the financial statements, which is similar to what the City has already been doing with the $2.5 million during the budget work session discussions. Mr. Cassens said the policy discussion then is how much control does the Council want to have over how the BSR is managed and, does the Council get control by placing the funds in one of the other categories. Ms. Fenske explained that there is also control if it is a component of the “unassigned” in that a BSR has been established and can be addressed through a fund balance or fiscal sustainability policy. Ms. Fenske said by doing this, it would be somewhat less restricted because the City could bring the policy back to the Council. Ms. Fenske reviewed the following initial criteria proposed for the BSR: - Revenue Increase 0-5% = 25% of increase allocated to BSR - Revenue Increase of more than 5% = 50% of increase allocated to BSR - Revenue Decrease 0-5% = no transfer made to BSR - Revenue Decrease more than 5% = 25% value of decrease may be transferred from the BSR to General Fund Mayor Nexsen said the handout he prepared and provided to the Council also gives an “aggressive” approach that calculates a decrease of more than 5% would allow you to take 50% of the value of the decrease, which is being a little more aggressive to move funds. Ms. Fenske reviewed a sample BSR calculation using actuals, forecasted revenues, and dedicated amounts to the BSR for Fiscal Years 2012 through 2019. Mayor Nexsen added that he prepared two worksheets; the first a more “aggressive” use of the stabilization reserve, and the second a more “moderate” use. He said the worksheets also provide a description of each use and only use the following four categories of revenues that are most susceptible to recession: intergovernmental revenue (state shared revenue), franchise taxes, property taxes, and sales taxes. Mayor Nexsen said his examples only go back to 2002-2003 because that year was pre-recession and he wanted to see whether the examples worked pre-recession, during recession, and post-recession and how it impacted the BSR. Mayor Nexsen said after doing the math, both examples worked. The “aggressive” approach would have reserved Lake Havasu City Page 4 City Council Work Session Work Session Minutes - Final October 28, 2014 $4 million over a 12 year period, with a low of around $500,000, and today would have $1.8 million in reserve. He said the more “moderate” approach would have taken $2 million out of BSR to help the General Fund during the recession, and today would have around $2.3 million in reserve. He said in comparison the City currently has $2.5 million in reserve; however, that money was shifted from the EBT and has nothing to do with these comparisons. Mayor Nexsen said the Council has to decide how aggressive they want to be with putting money in and taking money out. He said his opinion is that in no event shall the BSR be greater than 20% of current budgeted revenues because it is a waste of taxpayers’ money that should be put to good use. Mayor Nexsen noted that in both the “aggressive” and “moderate” examples the City would have survived the recession and lessened the impact on services to the community. Mayor Nexsen said the question boils down to what the Council wants to do in terms of committing to a BSR. He said he has not had the opportunity to sit down with the auditors; however, his thoughts are that the Council should do two things: 1) resolve to have a BSR and, 2) determine how money will be put in and taken out based on recessionary pressures. Mayor Nexsen questioned if the money is then considered “committed,” and said if a BSR is created, the money could never be categorized under “assigned” but could be under “committed” or “restricted;” however, “restricted” would require a voter initiative. Ms. Fenske said that was correct because there is a component of the “restricted” category that it requires enablings legislation. Mayor Nexsen said assuming the BSR is categorized under “committed,” which would require an action of the Council, it would also allow any future Council to change how the BSR is used and also change the formula; however, he said if it was “restricted” it would always be up to the voters through the initiative process. He said “committed” gives future Council all the control and “restricted” gives the Council no control. Mayor Nexsen said even if the Council were to commit $2.5 million to the BSR fund with the following formulas to restrict it there is still no certainty that the auditors would classify the funds under the “committed” category, to which Ms. Fenske said that was correct. Mayor Nexsen added that if the City were able to get it to “committed” then the Council could only take or add to the fund in accordance with the resolution adopted by the Council; however, future councils could change that resolution. Councilmember Alger said it comes down to electing the right people, to which Mayor Nexsen agreed, but said some people would argue that if you want to do it in a very restrictive formula then it should go to the voters. Councilmember Alger said she agrees with some of the restrictions but having to bring it to a vote to use any funding would require the City to pay additional money to hold an election to use the City’s own money. She said she would rather see the funding in the “committed” category. Lake Havasu City Page 5 City Council Work Session Work Session Minutes - Final October 28, 2014 Mayor Nexsen said there is question as to whether passing a resolution is enough to move the BSR to “committed,” because auditors argue that to get to “committed” the BSR has to be reserved for a “specific purpose,” which he said the BSR is for a “specific purpose” but it cannot be used routinely or “per routine.” Ms. Fenske added that there are some nuances with the “committed” category but if the Council wanted to go that route the City would just need some guidance from the auditors on the specifics and language needed to fit into the “committed” category. She added that the “committed” category also states that to be “un-committed,” to use it, it must be done by the same action that it was committed by so another resolution may need to be done if it needs to be used and fits the stabilization policy based on whatever criteria is laid out. Ms. Fenske said the issue is how to fit it under “committed” and how specific it needs to be. She said one example she came across was just labeling it “in the event of an economic downturn” was not specific enough. Mayor Nexsen said he thought his two examples were closer to the category of “committed” because they are tied to specific percentages in the event of an economic downfall. Mayor Nexsen said if the City was able to get to the level of “committed” then the BSR would show as a line item in the financials, and if not, then the funds would appear under “unassigned” combined with all the other “unassigned” funds; however, there would be a separate footnote for the BSR funds. Councilmember McAtlin said the two formulas, “aggressive” and “moderate,” could be combined depending on the economy until the City was able to meet a certain threshold, to which Mayor Nexsen agreed but thought the 20% should then be lowered to decrease the amount of money just sitting around waiting to be used. Mr. Cassens said staff is looking for policy decisions from the Council tonight. He said one key decision that is critical to how the policy will be written is, once the BSR is in place, does the Council want it to be completely available for other things such as special projects and borrow from it when needed. Councilmember Alger said she looks at the BSR as a “rainy day fund” that should be completely restricted and used for emergencies only as a last resort. Mayor Nexsen agreed and said if the Council is able to use the funding for special projects and other things then they are really losing the value of a having a BSR. There was a consensus of the Council that the funding be restricted for emergencies only. Mr. Cassens asked the Council if there should be a cap on how high the BSR would be allowed to grow, to which Mayor Nexsen said he thought 20%. Councilmember Alger said she would like to see it at 10%, to which Mayor Nexsen suggested that it be higher and meet in the middle around 15%. Mr. Cassens said he liked the idea of having a formula to contribute to the BSR, but thought there Lake Havasu City Page 6 City Council Work Session Work Session Minutes - Final October 28, 2014 should be more flexibility on the ability to use it under certain parameters or circumstances as opposed to a formula. He asked the Council if they were interested in applying a formula to contributing money and/or taking money from the BSR as they would be tying any formulas into the Fiscal Sustainability Policy. Councilmember McAtlin said he thought in order to have a true “rainy day fund” there really needs to be a mechanism in place for contributing and taking funds from the BSR. Mayor Nexsen agreed and said by tying a formula to both in and out it takes any emotion out of the equation. Councilmembers Callahan and Alger agreed. Mayor Nexsen said before any decisions are made on whether to go with the “aggressive” or “moderate” approach he would like to sit down with staff and the auditors to discuss what the Council has to do to get to the “committed” category, if that is what the Council wants to do. Mr. Cassens said another question for the auditors is whether the Council has to adopt another resolution to use the funding or if the first resolution can be used for both. Councilmember Brister said the Council needed to look at what is best for the city and the citizens, and thanked Mayor Nexsen and City staff for their hard work in preparing the materials and presentation tonight. Mayor Nexsen said in summary, after staff has an opportunity to meet with the auditors, it really comes down to: 1) what action will the Council need to take, and 2) whether to apply an “aggressive” or “moderate” approach, combination of both, or a completely different formula. Mr. Cassens stated that having a BSR fund is similar to having an insurance policy with many benefits, and added that thankfully the City was able to front fund it with EBT funds. He said in the future, during any economic downturns, if BSR funds are starting to be used that will be the first red flag to staff and Council that something is not right as to not become dependent on using BSR funds. Mr. Cassens added that another benefit of having a BSR in place fully funded and available, is that the Council may be more comfortable using the fund balance for any projects knowing that the BSR is there in the event of any catastrophic drop in revenues. Councilmember Brister agreed with Mr. Cassens. There was a consensus of the Council to work towards the “committed” category with City staff and auditors, and find out what action needs to be taken, if any, and then come back before the Council for a final decision. 6. ADJOURN Upon motion by Councilmember Callahan and seconded, the meeting adjourned at 5:53 p.m. CERTIFICATION I hereby certify that the foregoing is a full and true copy of the Work Session Minutes of the Lake Havasu City Council held on the 28th day of October, 2014. I further certify that the meeting was Lake Havasu City Page 7 City Council Work Session Work Session Minutes - Final October 28, 2014 duly called and posted, and that a quorum was present. ____________________________________ Kelly Williams, City Clerk Lake Havasu City Page 8