HomeMy WebLinkAbout65A - RECEIVE AND FILE REVENUE ESTIAMTES RELATED TO COVID-19REQUEST FOR
COUNCIL ACTION
CITY COUNCIL MEETING DATE:
APRIL 21, 2020
TITLE:
RECEIVE AND FILE UPDATED REVENUE
ESTIMATES RELATED TO COVID-19;
AFFIRM HIRING FREEZE FOR ALL CITY
POSITIONS; APPROVE APPROPRIATION
ADJUSTMENT TO TRANSFER MONIES
FROM THE REFUSE FUND TO THE
GENERAL FUND; DIRECT STAFF TO
PREPARE A DRAFT BUDGET FOR FY 2020-
21 UTILIZING ONE-TIME FUNDING;
PROVIDE PRELIMINARY BUDGET
DIRECTION; AND DIRECT STAFF TO
PROVIDE A FEASIBILITY ANALYSIS
RELATED TO ISSUANCE OF A PENSION
OBLIGATION BOND
/s/Kristine
CITY MANAGER
CLERK OF COUNCIL USE ONLY:
F-ITUNTIETWirs,
❑ As Recommended
❑ As Amended
❑ Ordinance on 1"Reading
❑ Ordinance on 2nd Reading
❑ Implementing Resolution
❑ Set Public Hearing For_
CONTINUED TO
I11I1111111110MIl 1gC7
RECOMMENDED ACTION
1. Receive and file report relating to updated FY 2019-20 General Fund revenue estimates.
2. Affirm the hiring freeze for all City vacant positions as of March 23, 2020.
3. Approve an Appropriation Adjustment to transfer $6.6 million of General Fund revenue from
the Refuse Enterprise fund to the General Fund during the current fiscal year.
4. Direct staff to prepare a draft budget for FY 2020-21 to include the use of the Economic
Uncertainty Reserve in the General Fund.
5. Direct Staff to return with a feasibility analysis for issuing Pension Obligation Bonds to
reduce the cost of the existing CalPERS Unfunded Actuarial Liability (UAL).
DISCUSSION
The COVID-19 pandemic will affect the City's financial outlook. Based upon the best information
the City has from multiple sources, staff expects the financial impactto continue through September
2020, with a gradual recovery thereafter.
Loss of Revenue
General Fund
Sales tax is the single largest source of revenue to the City. The FY 2019-20 revenue estimate
prior to the COVID-19 pandemic was $111.5 million, or approximately one-third of the General
Fund budget. The stay-at-home order, loss of wages, closure of restaurants, retail and many other
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April 21, 2020
Page 2
businesses will have a significant impact on sales tax revenue. The state's decision to allow small
business to keep sales tax in the short term as a bridge loan will also affect sales tax revenue.
With the Mid -Year Budget report, staff reported that the City's sales tax consultant had prepared a
recession scenario indicating a $7 million loss of revenue. The consultant based the scenario upon
data from the Great Recession of 2008-2009. During the Great Recession, GDP decreased by
4.3% and unemployment hit a high of 12.2% in California.
The COVID-19 pandemic could have a greater impact on sales tax than the Great Recession.
UCLA Anderson Forecast is projecting a 6.5% loss of GDP through June, and another 1.9%
through September. Fitch Ratings assumes that for every 1 % loss of GDP, local municipal revenue
decreases by 2.5%. If UCLA Anderson Forecast and Fitch Ratings are both correct, the City could
lose $50+ million of revenue by the end of 2020.
At this time, based upon the best information the City has received, staff is projecting a $12.4 million
loss of revenue in FY 2019-20 and a $15.1 million loss of revenue in FY 2020-21. As the City
receives more information, the projection may worsen and revised estimates will be prepared for
City Council consideration.
The following revenue sources are those the City believes will be most impacted by the pandemic
during the current and next fiscal year.
Potential Impacted
FY19-20
FY19-20
FY19-20
FY20-21
FY20-21
Revenue Sources
Budget
NEW
Estimated
Potential
Estimated
Estimate
Loss
Loss
Sales Tax
$111,509,900
$108,550,600
$2,959,300
$107,132,000
$4,377,900
Hotel Visitors' Tax
$9,500,000
$6,700,000
$2,800,000
$6,500,000
$3,000,000
Business License
$13,000,000
$11,000,000
$2,000,000
$9,750,000
$3,250,000
Tax
Permit & Plan
$7,881,000
$5,381,000
$2,500,000
$5,381,000
$2,500,000
Check Fees
Zoo, Recreation &
$2,691,000
$1,900,000
$791,000
$2,000,000
$691,000
Library Fees
Parking Fines
$5,245,700
$3,945,700
$1,300,000
$4,000,000
$1,245,700
Total Estimated
$12,350,300
$15,064,600
Loss
The pandemic could affect Property Tax collections this year, which results in a timing issue, not a
budget impact. The impact of reduced property values and property owner appeals will likely affect
Property Tax revenue in FY 2021-22. In the year following the Great Recession, Santa Ana
property assessments decreased by 9.8%. Considering the UCLA Anderson Forecast noted
above, the City may expect FY 2021-22 assessments to decrease by 20%, an impact of $15+
million.
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At this time, the City has no information to suggest the pandemic will affect Utility Users' Tax (UUT)
revenue or the various Cannabis tax revenue(s).
Other Funds Revenues
The City also expects the stay-at-home order to affect Gas Tax and Measure M (a half -cent sales
tax). The previous estimate for Gas Tax revenue was $14.1 million, which pays for traffic signal
and street light maintenance, median landscape maintenance, and sidewalk and pothole repairs.
The Gas Tax Fund has an estimated accumulated fund balance of more than $14 million, which is
sufficient to cover any loss of revenue over the next six months.
At this time, the City has a preliminary estimate of the impact to Measure M revenue, which pays
for street improvements. The annual Local Fair Share revenue is normally approximately $5.6
million, but may decrease by $1.3 million. The FY 2019-20 budget includes Measure M
appropriations totaling $22.5 million, funded with Local Fair Share and competitive awards. Prior
to City Council consideration of the budget in May, Public Works staff can prepare
recommendations for placing projects on hold due to the expected loss of revenue.
Draft FY 2020-21 Budget
Effective March 23, 2020, the City stopped all efforts to hire new employees. As of February 29,
there were 153 full-time vacancies, with 82 paid by the General Fund. With a hiring freeze, the City
may expect to save $7.0 million of General Fund money through June 2020.
The City Council's reserve policy for the General Fund has enabled the City to set aside money for
emergencies. The following General Fund summary reflects a potential loss of $12.4 million of
revenue, hiring freeze savings of $7.0 million, $6.6 million one-time transfer from the Refuse
Enterprise, and the $0.7 million of special election cost appropriated after the Midyear Budget
re po rt.
General Fund
FY19-20
Reported
at Midyear
FY19-20
Updated
Beginning Balance
$67.0
$67.0
Revenue
$323.2
$310.8
Expenditures & Transfers to/from other funds
$ 323.0
$ 310.0
Ending Balance
$67.2
$67.8
Operating Reserve 16.67% of Revenue
$53.9
$51.7
Economic Uncertainty Reserve (1% of
Revenue
$3.2
$3.1
Available Reserve
$10.1
$13.0
Ending Balance
$67.2
$67.8
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For FY 2020-21, the City is expecting the following expenditure increases, which may total $19.9
million:
• Employee pension cost increase of $6.0 million. CalPERS investment losses in FY 2019-
2E will impact contributions for FY 2022-23. The FY 2020-21 contributions were set with the
June 30, 2018 actuarial valuation reports issued in 2019.
• Negotiated employee compensation increases of $6.5 million.
• Orange County Fire Authority contract increase of $2.5 million.
• Additional General Fund spending of $1.3 million to maintain compliance with the Orange
County Transit Authority Maintenance of Effort requirement, which increases for FY 2020-
21.
• The General Fund will need to subsidize the Santa Ana Regional Transit Center by at least
$1.1 million to maintain operations (discussed in detail below).
• The City's self-insurance funds will need to increase charges to the General Fund by $2.5
million to maintain a prudent balance for claims activity (discussed in detail below).
The following options are available to help mitigate the expected $15.1 million revenue loss in FY
2020-21, and the additional $19.9 million of costs (expenditures) outlined above. These options
include one-time measures:
• Use of the estimated Unappropriated Fund Balance of approximately $13.0 million at June
30, 2020. Utilizing unappropriated fund balance is a one-time resource, and does not cure
a budget deficit.
• Use of the Economic Uncertainty Reserve of $3.1 million. Per the policy, this requires a two-
thirds vote by City Council, as well as a plan for replenishment.
• Remove all one-time expenditures from the General Fund budget, totaling $10.3 million.
• Continue the hiring freeze throughout FY20-21 to save $8.6 million.
• Pursue Pension Obligation Bonds (discussed in detail below) to save as much as $7 million.
• Seek concessions with the City's employee bargaining groups.
Refuse to Transfer to the General Fund
As part of developing the Request for Proposals for Refuse Collection, staff analyzed the
associated franchise fee revenue. The Refuse Enterprise Fund has accumulated approximately
$6.6 million of General Fund revenue over the last 10 years. Staff recommends transferring this
money to the General Fund by June 30, 2020.
Budget and Financial Policy (Exhibit 1)
The City Council adopted its General Fund reserve policy as part of the Budget and Financial Policy
in June 2017. Prior to the COVID-19 pandemic, staff was planning to re -visit the policy during this
budget process to improve the following:
• The Operating Reserve is 16.67% to 20% of recurring General Fund revenue or
expenditures. We are currently maintaining 16.67% of revenue.
• The City Council established the Operating Reserve in accordance with Government
Industry best practices. However, there was no risk analysis performed to establish the
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threshold. Staff recently prepared a risk analysis, which actually suggests that 16.67% is a
good threshold for Santa Ana.
• The policy applies the 16.67% threshold to revenue or expenditures, which could produce
different results.
• The Economic Uncertainty Reserve policy is 1 % to 10% of revenue. We are currently
maintaining 1 %. The sales tax consultant's recession scenario discussed in the Midyear
Budget report suggested the Economic Uncertainty Reserve should be at least 2%.
Considering the pandemic impact to General Fund revenue, we are not in a position to
recommend an increase to the Economic Uncertainty Reserve this year.
At this time, we will place a hold on recommendations to improve the policy. The Credit Rating
agencies (e.g. Standard & Poor's, Fitch Ratings) are very critical of municipal debt issuers that do
not follow their reserve policy, or make frequent policy changes.
Per the City's Budget and Financial Policy, the City may access the Operating Reserve and the
Economic Uncertainty Reserve for up to two years with declaration of a fiscal emergency, a two-
thirds vote of the City Council, and a plan for replenishment. On March 17, 2020, the City Council
declared a Local Emergency (Resolution No. 2020-016). Staff believes this satisfies the City
Council's policy requirement to declare a fiscal emergency prior to using reserve balances. Staff
recommends use of the $3.1 million Economic Uncertainty Reserve to help balance the FY20-21
budget; but does not recommend use of the $51.7 million Operating Reserve at this time.
The City should only consider use of the Operating Reserve as a last resort, as it provides:
• Necessary cash flow to cover expenditures when the majority of property tax is received in
two installments per year (December and April);
• The opportunity to pay the annual contribution to the unfunded pension liability upfront and
obtain a 3.5% discount;
• Coverage for other timing issues related to revenue collection; and
• Funding for necessary infrastructure repairs due to a physical disaster such as an
earthquake, not covered by insurance or FEMA.
Pension Unfunded Liability
The FY 2019-20 General Fund budget includes required contributions totaling $37.1 million, to pay
for the unfunded employee pension liability (accrued benefits, less market value of plan assets).
The General Fund contribution will increase to $41.1 million for FY 2020-21. Considering the recent
CalPERS investment losses, the General Fund contributions may increase to $45.7 million for FY
2021-22, or 15% of the General Fund budget.
The unfunded liability constitutes a debt requiring payment, even if all City operations ceased.
Much like a home mortgage, the City can save "interest" cost by making larger payments.
Considering the expected loss of revenue noted above, the City is not in a position to make larger
payments.
The City could consider the following options to reduce the payment:
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• Pay the entire annual contribution in July, rather than monthly, to save approximately 3.5%.
The City already did this in FY 2019-20 for the safety plan; and the City is planning to add
the miscellaneous plan to this strategy in FY 2020-21, to save an additional $0.5 million.
• Issue Pension Obligation Bonds (POBs) to "re -finance" the debt with lower interest cost.
Instead of the balance accruing 7% each year, a debt issue may cut that rate in half.
The City should consider the following before pursuing Pension Obligation Bonds.
1. The unfunded liability was $681.1 million at June 30, 2018. It's anticipated to increase as of
June 30, 2020. Such a large debt issue may not receive a high credit rating, which would
result in higher interest costs and decreased savings. A smaller debt issue with a strategic
targeted payment to CalPERS may be a better option.
2. CalPERS will receive the bond proceeds. If the CalPERS investment portfolio loses money
again, some of the City's bond proceeds will be lost.
3. Any year the CalPERS assumptions are not met (e.g. investments earn less than 7%,
employees live longer than expected, etc.), the unfunded pension liability will continue to
grow. Issuing Pension Obligation Bonds does not "pay-off" the debt.
The City has an analysis that suggests issuing $315 million of debt with a targeted payment strategy
could generate annual General Fund savings of $7 million (citywide savings of $8.3 million). The
bond market is extremely volatile right now. Any attempt to offer a large debt issue should occur
after the market settles. In addition, the legal validation process for POB's usually takes 90 days.
Depending on available court services over the next several months, this process could take longer.
Santa Ana Regional Transit Center
The FY 2019-20 SARTC Enterprise budget includes revenue of $0.8 million and expenditures of
$1.9 million. The fund started the year with a fund balance of negative $1.5 million; and staff
expects the fund to have a negative balance of $2.6 million at June 30. To continue operating, this
fund will need a General Fund subsidy of at least $1.1 million for FY 2020-21, and a plan to cure
the negative fund balance. The proposed FY 2020-21 budget will include a General Fund subsidy
to SARTC.
Hiring Freeze
Due to the pandemic, the City implemented a hiring freeze in March. At the time of the hiring freeze
declaration, there were 153 full-time vacancies, with 82 paid by the General Fund. We anticipate
savings of $7.0 million through June 2020 and an additional $8.6 million (annualized savings) for
FY 2020-21.
STRATEGIC PLAN ALIGNMENT
Approval of this item supports the City's effort to meet Goal #4 - City Financial Stability, Objective
#1 (maintain a stable, efficient and transparent financial environment).
FISCAL IMPACT
A summary of the FY 2019-20 fiscal impact including updated revenue estimates, the hiring freeze,
and the transfer of $6.6 million appears as Exhibit 2 of this report.The proposed FY 2020-21 budget
will include the expected impact of the pandemic, as well as pre -determined expenditure increases
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described above (e.g. CalPERS increase, OCFA increase, negotiated employee compensation
increases).
Exhibits: 1. Budget and Financial Policy
2. Fiscal Impact
65A-7
.. City of Santa Ana
d� Council Policy
Mayor's Authorization
Subject
BUDGET AND FINANCIAL POLICIES
Council Approval Date:
June 6,2017
Background
The severity of the recent economic recession highlighted the need to establish and maintain adequate reserve
policies to offset significant economic downturns and unforeseen rising costs more effectively. In 2002, The
Government Finance Officers' Association (GFOA) recommended reserve levels equal to a minimum of 5%to 15%
of operating revenues or one to two months of operating expenditures as a basis to establish sound reserve
levels. Adoption of a formal City Budget and Reserve Policy will provide a basis to manage significant financial
events more effectively in the future.
PURPOSE
The City's reserve policy will define the recommended level for reserves for the General Fund as well as internal
and enterprise operations. The policy will outline a timeframe and plan that will assist the City in meeting the
minimum General Fund requirements over the course of the next few years. It will also establish criteria for the
use of reserves and establish a process by which to replenish reserves if used. It is the intent to focus on the
General Fund initially and incorporate additional reserve policies for internal and enterprise funds over the next
fiscal year.
GENERALFUND
The General Fund is the general operating fund for the City. It accounts for all general revenues including sales
tax, property tax, business tax, hotel visitor's tax, as well as other fees and charges. It is the basis to fund general
ongoing City operations such as police, fire (contract service), recreation, planning and building as well as other
general support services. Furthermore, the following budget policy directives are recommended to be
continued/implemented in order to maintain positive operating reserve levels:
General Fund Budget Policy Directives
It shall be established that a balanced budget will be presented annually to the City Council for adoption.
A balanced budget will be defined as ongoing recurring operating revenues matching ongoing recurring
operating expenditures including debt service.
- One time or term specific funding can only be used to match one-time non -recurring expenditures with
the exception of during a budget deficit, term specific projects and programs, as well as capital
expenditures.
- In order to ensure a balanced budget objective, the City will continue to pursue internal operational
efficiencies and strategies, such as technology, that minimize City costs and impacts to City services.
Budget & Financial Polices (Rev. 6/2017) 65A-8 Page 1
In order to ensure proper maintenance of a continued balanced budget, the City Council will adopt a
compensation and retirement benefit directive that provides guidance and conforms with the established
budget directives and reserve requirements as outlined in this policy.
One -Time Monies
Fund Balance determined to be one-time in nature, including but not limited to: ending operating balance,
unallocated fund balance or un-appropriated "Assigned" fund balance is herein classified as "One -Time monies".
Utilization of one-time monies is allowable upon two-thirds approval by the City Council to be utilized in the event
a structural budget deficit exists. Use of one-time funds is allowable for one-year and may be eligible for two
consecutive years upon further consideration by the City Council.
Unassigned Fund Balance
In accordance with Governmental Accounting Standards Board (GASB) 54 and continuing to ensure a continued
orderly operation of City Government and address any unforeseen economic occurrences, the City shall establish
the following Reserve Accounts within the Unassigned Fund Balance category:
• Operating Reserve
• Economic Uncertainty Reserve
• Unallocated Amount
As a result of the GASB 54, the following fund balance categories were also created: Non -Spendable; Restricted;
Committed; Assigned and Unassigned.
Operating Reserve Account
As a measure of prudent fiscal health and recommendations made by GFOA, the City created an Operating
Reserve Account, disclosing a range where two months (approximately 16.67%) up to twenty percent (20%) of
recurring General Fund (011) operating revenues or expenditures (including transfers) are maintained. At no time
is it permissible for the Operating Reserve requirement to fall below the above -referenced threshold range.
Such Operating Reserves shall not be used to fund any form of operating expenditures or to cover any budgetary
shortfall other than to preserve ongoing cash flow needs for the City. If at any point in time it is deemed that the
City budget is performing at a budgetary structural deficit and a "Fiscal Emergency" is declared, the use of the
above -referenced Operating Reserve account is permissible for up to two consecutive fiscal years upon approval
by two thirds of the City Council. The utilization of the Operating Reserve in Year Two (2) requires a plan to
replenish the funds utilized.
As a matter of prudence and fiscal solvency and in the event of a projected and/or realized structural deficit
(budget basis), the City will utilize Economic Uncertainty (see below for account description) account funds prior
to accessing the Operating Reserve account.
Economic Uncertainty Account
- It is hereby established that upon fulfillment of achieving a minimum Unassigned Reserve Account of 10%, the
City shall consider the establishment of a reserve account for Economic Uncertainty. The reserve for Economic
Uncertainty is established to offset any major variations in tax receipts as well as fees and charges or unforeseen
cost increases. It is hereby established the City maintain a minimum reserve level of 1 to 10% of recurring General
Fund revenues with an objective of attaining a maximum goal of 10%.
- Upon determination by the Finance Department, that negative variations in projected revenues from the
largest revenue sources defined as Sales tax, Property tax, Property tax in Lieu, Utility Users tax, Business
Tax, and Hotel Visitors tax exceed 2% with no corresponding General Fund expenditure offset, then the
Budget & Financial Polices (Rev. 6/2017) 65A-9 Page 2
City Council may authorize use of the Economic Uncertainty Reserve by a two-thirds vote to offset the
revenue loss prior to the close of the fiscal year end. A corresponding plan to replenish the reserve
account must be adopted by the same vote.
Upon determination by the Finance Department and report submission to the City Council that a
structural deficit exists in the budgeted forecast of the upcoming fiscal year, the City Council may
authorize use of the Economic Uncertainty Reserve to balance the budget by two thirds vote of the
Council. However, authorization to utilize the Economic Uncertainty Reserve beyond two consecutive
years is strictly prohibited.
General Work Plan for Achieving General Fund Reserve Objectives
The following work plan is intended to reach the unassigned reserve account of 15% in phases. The initial
objective is to attain at least a 5% threshold over the course of the following fiscal year and between 7% and 8%
over the subsequent fiscal year. Upon attainment of the phased objectives, a comprehensive review of the
general financial condition of the City will be completed and a new reserve work plan will be developed and
submitted for approval that outlines the next intermediate steps for meeting the main objective of a reserve
target level of 15%. Until such time that the General Fund Unassigned Reserve meets the minimum phased
requirements as outlined above, the following budgetary and operational guidelines shall be used as a basis to
achieve the various minimum requirements.
- Budget consideration of new programs, personnel, or capital related expenditures shall only be
considered if a source of funding is identified either through a corresponding cost reduction, an identified
general increase in general tax revenue, or a one-time revenue infusion. Source of funding should include
consideration of ongoing general maintenance and operational costs.
Departments will be encouraged to continually achieve savings through internal organizational
efficiencies.
- Technology will be encouraged if it can be demonstrated that a one-time capital infusion can result in
savings being generated beyond two years.
- Any General Fund savings generated at the fiscal year end can be considered either for term specific
operational or capital needs but a minimum of 50% (up to 100%) of the savings shall be deposited into the
unassigned reserve balance until such time that the phased reserve levels are met.
Any internal service fund that has funds in excess of the identified minimum reserve requirement as
outlined in this policy, can be utilized as a means to meet the minimum General Fund Reserve
requirements. Only unrestricted funds deemed transferable can be utilized. Any transfer to the General
Fund Unassigned Reserve Balance will be submitted to Council for consideration and approval.
- In order to generate additional savings and until such time that the minimum level of reserves has been
achieved, the Budget Office will only utilize a fiscally conservative profile for revenue projections.
- If the phased reserve target requirements as outlined above have not been met it is recommended that
beginning in FY 14-15 a more conservative projection factor be used to generate forced budgetary
savings:
(NOTE: Each 1% equates to approximately $ 2 million)
FY 12-13: 100 % of recurring revenue projected;
Budget & Financial Polices (Rev. 6/2017) 65A-1 0 Page 3
FY 13-14: 100 %of recurring revenue projected;
FY 14-15: 99 % of recurring revenue projected;
Such factors shall be used to generate General Fund savings until such time that a 7%-8% unassigned
General Fund reserve has been achieved.
Any generated General Fund savings achieved after reaching between a 7%-8% undesignated General
Fund reserve shall be applied in the following order:
Up to a max of 25%-Unassigned General Fund Reserve
Up to a max of 25%-Economic Uncertainty Reserve
Up to a max of 50% -Can be applied to term specific programs, projects, personnel as well as deferred
capital maintenance.
Budget & Financial Polices (Rev. 6/2017) 65A-1 1 Page 4
Internal Service Funds
Background
Internal Service Funds are established to administer and account for various activities whose purpose is to provide
for goods and services to support other departments for their ongoing operational and programming needs. The
delivery of these services is recovered on a cost recovery basis.
Purpose
It is the intent of the Internal Service Fund Reserve Policy to establish general guidelines as to the establishment
of a proper recovery rate structure and define an appropriate level of reserves for each Internal Service Fund. It
will also establish criteria for the use of reserves and establish a process by which to replenish reserves if utilized.
Although this policy only addresses the Risk Management Funds (i.e. Liability and Property Insurance and Workers
Compensation Fund), it is the intent to build upon and include all internal service funds within this policy.
Risk Management
The Risk Management programs are established to protect the City's assets through the administration of a
properly funded liability claim and insurance program and by minimizing the cost and effect of work -related
injuries. Rates for these programs are established on a biennial actuarial basis.
Reserves
Reserves for these accounts will be funded at not less than 80% as defined in the actuarial study. In addition,
three months of operational reserves will be included to address any variations related to revenues and
expenditures. Any surplus amounts defined in these accounts from general agencies shall be available for transfer
to the General Fund until such time that the General Fund reserve meets the minimum requirement of 15% or to
establish the reserve for Economic Uncertainty. Transfers shall be submitted to Council for approval. There after
any surplus can be used to fund any deficits identified in other Internal Service Fund reserves, as well as other
unfunded capital and deferred related maintenance.
Budget & Financial Polices (Rev. 6/2017) 65A-1 2 Page 5