Special Notice / Hearing: None__
Vote Required: 4/5ths
To: Honorable Board of Supervisors
From: Michael P. Callagy, County Executive
Roberto Manchia, County Chief Financial Officer
Subject: Update of County Reserves Policy
RECOMMENDATION:
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Adopt a resolution approving an updated County Reserves Policy to increase reserve requirements, set maximum reserve amounts, and establish procedures for additional oversight, as set forth in Attachment A.
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BACKGROUND:
Maintenance of appropriate fiscal reserves are critical to the County’s capacity to manage revenue volatility. The County’s Fund Balance and Reserves policies help reduce the negative impact of economic downturns and potential loss of funding from other governmental agencies. Fund Balance and Reserves are generally only used for one-time purposes or as part of a multi-year financial plan to balance the budget.
To establish and ensure consistent reserves policy for the General Fund and across County departments, the Board of Supervisors approved the County Reserves Policy in April 1999. In February 2010, the policy was updated after the Board directed staff to review and revise the policy following the 2008 economic crisis. Among other elements, the current County Reserves policy sets a minimum General Fund reserves level at 10% and requires County departments to maintain reserves at 2% of their respective Net County Appropriations. The policy has not been updated since that time.
DISCUSSION:
To ensure continued sound management of the County’s finances in view of increased expenditures, inflation and risk of revenue volatility, staff is proposing that the Board approve an updated County Reserves Policy. The updated policy was prepared by a staff workgroup which analyzed the current Fund Balance and Reserves policies, including departmental and non-departmental reserves, and trends in ongoing expenditures. The updates to the County Reserves Policy are designed to strengthen the County’s financial position and make available additional strategies for the County Executive to manage reserves. The proposed revised policy will help the County maintain fiscal stability and support long-term financial planning amid a volatile economic environment.
The recommended changes to the County Reserves Policy (as set forth in Attachment A to this memorandum), summarized as follows, are to:
• Increase the overall minimum General Fund reserve requirement from 10 to 15 percent of County Net Appropriations which is inclusive of minimum requirements for Departmental Reserves (4%), Non-Departmental Reserves (6%) and General Fund appropriation for Contingencies (5%). As a result of this change, Departmental Reserve requirements will increase from 2% of County Appropriations to 4%.
• Use Contingencies and Reserves as a proportion of Net Appropriations to determine the maximum percentage of Fund Balance a department can retain for Reserves or one-time projects and ensure that amounts in excess of this amount are reallocated. There are two tiers to this calculation. They include:
1) If the department's adopted Contingencies and Reserves are less than 25 percent of the prior year’s Net Appropriations and less than 50% of the prior year’s Net County Cost, then the department can keep 50% of the year-end fund balance.
2) If the department's adopted Contingencies and Reserves are 25 percent or more of the prior year’s Net Appropriations or 50 percent or more of the prior year’s Net County Cost, then the remaining fund balance must be reallocated to Non-Departmental Services and/or such other fund as the County Executive Officer may direct in consultation with the department.
• Establish special procedures to ensure increased departmental oversight from the County Executive in the event a department’s Reserves fall below two percent of Net Appropriations, which include:
1) The County Executive may remove a department’s ability to approve contracts of $200,000 or less, requiring them to submit all such contracts to the County Executive’s Office for review and approval before they are finalized.
2) If the County Executive’s Office provides funds to help a department meet Reserve or Fund Balance requirements or cover an operating deficit, the department must work with the County Executive’s Office and commit to a plan to repay the funds over five fiscal years.
3) Departments are required to report quarterly to the County Executive’s Office on the status and progress of their repayment and reserve replenishment plans.
4) If a department has an operating deficit for two out of five fiscal years, the County Executive’s Office may require for the next five years that the department’s fiscal staff report to the CEO and follow its direction on financial matters. The department’s proposed budgets will also require County Executive approval before being submitted to the Board of Supervisors.
The County Attorney has reviewed the proposed resolution as to form.
EQUITY IMPACT
The updated County Reserves Policy promotes equity by ensuring financial stability, allowing the County to maintain essential services, particularly for underserved communities, during economic downturns. By safeguarding funds for public health, housing, and social services, the policy helps protect vulnerable populations and supports equitable access to critical programs.
FISCAL IMPACT:
Based on the County’s FY 2024-25 Adopted Budget, the revised policy would require a minimum General Fund reserve requirement of $475.2 million (or 15 percent of Net Appropriations). The County’s General Fund reserves balance is currently $507.4 million (or 16 percent of Net Appropriations).