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MEASURE W ECONOMIC UNCERTAINTY FUND
recommended action
This item is for information only; no action is recommended.
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This item is provided in response to a request by the Measure W Oversight Committee for information on the Measure W Fund reserve policy.
SUMMARY
The Stockton City Council, in Resolution No. 04-0595 (2004), approved program guidelines for the Stockton, Safe Neighborhood Gang and Drug Prevention Police/Fire Response ballot initiative (Measure W), which included the following provisions related to a reserve:
• That an Economic Uncertainty Fund, defined as: “a contingency/reserve fund adequate to assure that services are maintained in the event sales tax revenues decline” be maintained.
• That the reserve level be 25 percent of annually-budgeted revenues.
• That City Council can make changes to the program guidelines, including the reserve level.
DISCUSSION
Background
Reserve practices are supported not only by governments themselves but also by governmental financial and management organizations, including the Government Finance Officers Association (GFOA) and the International City/County Management Association. Reserves are used to fund one-time purchases, cover revenue shortfalls, or address unanticipated costs.
Reserve levels vary because each agency, fund and revenue source can be subject to a unique set of circumstances. The GFOA recommends that governments maintain a reserve of 16.67 percent (or 2 months) of General Fund revenues or expenditures, dictated by whichever is more predictable in a government’s particular set of circumstances. A 2016 survey by the National League of Cities reported that 2015 municipal fund balances were generally near 24 percent of General Fund expenditures.
Measure W reserves were established to be 25 percent of budgeted revenues, which is higher than the GFOA-recommended minimum because sales taxes as a sole source of revenue are more volatile than a mix of general government revenues that typically include property and utility taxes. For perspective, four years after Measure W passed, its tax revenues experienced a 3-year decline during the Great Recession that capped at 19 percent but then took nine years to recover from fully. While the Measure W reserve was not sufficient to maintain service levels for a nine-year sustained decline, what had accumulated by the onset of the decline allowed the City time to adjust revenue forecasts, negotiate with labor unions to reduce costs and mitigate layoffs, and implement the layoff process defined in labor agreements. In effect, the reserve protected taxpayers and employees from immediate, unexpected changes in financial conditions.
Present Situation
At the August Measure W Committee meeting, the Committee asked for additional information regarding this reserve and changing the reserve level. Changes to the reserve level can lead to short and long-term service level implications. An increase in the reserve would decrease what is available for services. The effect of a static revenue source and rising costs are apparent in the current fiscal year when sworn staff afforded by the estimated tax revenue dropped from 50 to 49 (The General Fund supported one Police Department position rather than Measure W). With over 95 percent of Measure W resources used to fund staff, existing equipment and vehicles, associated maintenance, and contractual tax administration costs, the City cannot increase the reserve without a corresponding reduction in staffing or increased General Fund costs. Conversely, a decrease in the reserve would provide less resiliency to respond to adverse economic conditions, which the Fund has already experienced.
Reserve Funding
The calculation for the FY 2017-18 Measure W Fund reserve is:
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2017-18 Reserve Calculation |
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Budgeted Revenue |
$10.3 million |
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Reserve ($10.3m x 25%) |
$2.6 million |
The FY 2017-18 Budget fund balance is $2.7 million, which is consistent with the projected prior year-end figure and is sufficient to fund the Economic Uncertainty Fund. City staff review compliance with the Economic Uncertainty Fund provision during annual budget development and with the presentation of the year-end audit reports to City Council and Council Audit Committee. If the Budget fully funds the reserve, the City can use those additional revenues for supplemental public safety activities such as the purchase of a fire engine in FY 2015-16.