Long Term Financial Policies

June 9, 2014

Martin Lyons Asst. City Managerwww.cityofevanston.org

Current City Financial Policies

• Fund Reserve Policies– General – Water– Sewer– Parking

• Budget Policies– Pages 35-44 of 2013 Budget– Covers Timetable, Processes, etc

• Debt Policy– Covers Debt Limit– Provides definitions of debt

Financial Sustainability

The Three Pillars of Sustainability

Environmental

Economic

Social

Sustainable

Fund Reserve Policies

• Sustainability has become a defining term for municipalities that are successful in accomplishing their missions at a high level and on a consistent basis.

• GFOA has also adapted to the ideal of sustainability when addressing long-term financial policies.

• City is ahead of curve on Social and Environmental sustainability.

Fund Reserve Policies

• Current Reserve Policies set prior to 2008

• More volatile economy means a higher reserve level is advisable

• GFOA Best Practices

General Operating Funds

• GFOA Recommends a minimum unrestricted fund balance of two months (16.6%) regardless of city size.

• Area Communities vary from this minimum due to size and circumstance, with many having higher than 3 months reserve.

• Recommend City Increase General Fund Reserve to GFOA minimum.

• No revenue increase is required for 2014.

Enterprise Funds

• Recommend Enterprise fund reserve requirement be moved from 10% to 16.6% as well.

• Recommend additional reserve be established for implementation of projects each year as a budget alternative to funding depreciation, which is GFOA recommended practice.

• Will result in varying fund balance reserves since each enterprise fund has different capital and operating levels.

Internal Service Funds

• Each Fund varies in mission and structure• Maintenance Fund to maintain a positive balance.• Equipment Replacement Fund to build reserves for the

ongoing replacement of vehicles, funded by department transfers, reserve should not exceed accumulated depreciation of vehicles.

• Insurance Fund:– Liability Insurance program to maintain reserve of 25% of

outstanding claims or twice the annual SIR level, which ever is greater.

– Health Insurance program to maintain three months reserve of annual expenses due to volatility in health care costs.

TIF Funds

• Fund reserves to be based on outstanding debt-service requirements and/or multi-year development agreements in place.

• Funds to be designated for these purposes prior to being released for future development projects or surplus distribution.

Fund Operating Policies

• The Annual Budget contains summaries of the City’s Budget Policies for several critical funds.

• Many City funds can operate with fairly simple policies, however, some that include both capital and operating activities may require more dynamic policies that reflect the changing needs for operations vs. capital expenses over time.

General Fund

• Current - The General Fund budget will be balanced with property tax, only after all other revenue sources and expenditure reductions have been exhausted. In addition, all new unfunded mandates must be itemized within the budget. One-time revenues shall not be used to fund current operations.

• Proposed – The General Fund budget will be balanced each year, subject to the current Fund Reserve level. In the event the General Fund Reserve balance is below the minimum level of 16.6%, the fund may be structured with a surplus budget in order to bring reserves up to the minimum. In the event the fund reserve is above the 20% recommended maximum, the budget may be structured in a deficit to account for the transfers out to other funds as noted in the reserve policy.

Enterprise Funds

• No Change to Parking and Water Policies

• Sewer Fund– Current - This is an enterprise fund and as such is expected to be self-

sufficient. As a result, rates should be scheduled to increase to meet costs of sewer programs. Transfers to other funds for administrative expenses should be maintained to reflect true program costs.

– Proposed - This is an enterprise fund and as such is expected to be self-sufficient. As a result, rates should be scheduled to increase to meet costs of sewer operations, debt service and capital projects. Transfers to other funds for administrative expenses should be maintained to reflect true program costs.

Enterprise Funds

•Solid Waste Fund– Current – There is no current policy.– Proposed - This is an enterprise fund and as such is expected to be

self-sufficient. As a result, rates should be scheduled to increase to meet costs of solid waste operations, debt service and capital projects. Transfers to other funds for administrative expenses should be maintained to reflect true program costs.

Internal Service Funds

• Insurance Fund– Fund Policy changed to reference Self-funded Benefits program– Benefits Program to be operated with a goal to keep insurance cost

increases below the medical rate of inflation.

• Fleet Maintenance Fund – Policy changed to reflect the removal of vehicle purchases to the Equipment Replacement Fund.

• Equipment Replacement Fund – – Interfund transfers from operating departments shall be established

to replace vehicles within two years of the expiration of their useful life as determined by the Fleet Maintenance Division.

– General Obligation debt shall only be used for vehicles with an expected life equal to or greater than 15 years and with a purchase price $250,000.

Other Funds

• Motor Fuel Tax Fund – Include a 25% reserve to ensure the efficient start up of roadway projects each year.

• No change is recommended to the Debt Service Fund policy due to the ongoing discussion of the City’s Capital Improvements Program. If the City moves toward a more balanced utilization of current revenues for infrastructure and bond proceeds for facilities replacement, then there is the potential for this policy to be amended to include a lower total cap for Tax-Supported General Obligation Debt.

• Economic Development Fund• Current - Expenditures for the Economic Development Fund should not

exceed projected Hotel Tax Revenues.• Proposed – Expenditures in the Economic Development Fund will be for

development activities as directed by the Economic Development Committee and City Council. Funds may be accumulated from year to year for major development activities.

•

City Debt Background

• City has historically been Aa1 or Aaa rated– Solid Property Tax Base– Home Rule– Consistent Payment Record and Management

• City has used alternative debt forms– General Obligation Bonds– Revenue Bonds– Variable Bonds– IEPA Loans– Lines of Credit

• PENSION DEBT

Five Year History of Debt

• Why Five Years?– Everything changed in 2008 in Debt World– City adopted new approach to Pension Funding

– Does not include other debt (e.g. IEPA Loans)

Fiscal Year Total Bond Debt Total Pension DebtTotal Bond and Pension Debt

FY 2003-04 $ 190,740,000 $ 78,939,178 $ 269,679,178

FY 2008-09 $ 174,110,000 $ 187,712,291 $ 361,822,291

FY 2009-10 $ 151,470,000 $ 203,246,731 $ 354,716,731

FY 2010-11 $ 153,535,000 $ 168,243,070 $ 321,778,070

FY 2011 $ 157,695,000 $ 173,913,528 $ 331,608,528

FY 2012 $ 154,159,999 $ 177,493,388 $ 331,653,387

Current Govt and Business Bonds

Future Considerations/Strategy

• City Pension Funding will require continued high funding levels.

• City Infrastructure (roads, water mains, sewer lines, etc) are on minimum replacement schedules currently – difficult to stretch any further.

• City Facilities in need of repair and/or replacement which will increase debt or current revenues to fund.

• To address both Capital needs, debt will still be needed.

Basic Capital Funding Strategy

• Split capital funding into two categories• Infrastructure systems moved gradually to

current revenue or “pay as you go” funding.• Facilities maintenance/ongoing upkeep also

covered through current revenues.• Facilities renovation/replacement funded

through long-term debt issuance.• Grants, and all other revenue will be

aggressively pursued.

Current Debt Plus Capital Improvements “Pay as You Go”

--

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034

Fiscal and Calendar Year Ending December 31st

CapitalImprovements2013A (Abated)

Abated DebtService2013A (Levy)

Sources of “Pay as You Go”

• Gradual reduction of bond issuance, with difference in Debt Levy becoming a new Capital Levy or other ongoing revenue source.

• One-time Revenues.

– Used as reserve set aside for future facilities replacement

– Used to “catch up” on infrastructure replacement

– Not used as a replacement for other revenue sources.

• Increasing ratio of Capital expenses compared to Operating expenses without increasing revenues.

• New Revenues or increases in the rates of current revenues, dedicated to Capital Funds only.

Implementation

• Gradual reduction of bond issuance, with difference in Debt Levy becoming a new Capital Levy.

• Gradual Increase in new capital revenue sources.

• Mix of Debt and “Pay as you Go” funding.

Projected Debt Service Debt and Capital Levy

--

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034

Fiscal and Calendar Year Ending December 31st

Levy Suported Debt Service 2013A (Levy)

Abated Debt Service 2013A (Abated)

Pay as You Go Debt ServiceLevel New Capital Levy-No Debt

Projected Debt Service Debt Only Funding for Capital

--

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034

Fiscal and Calendar Year Ending December 31st

Levy Suported Debt Service 2013A (Levy)

Abated Debt Service 2013A (Abated)

Debt only

26

Comparison of Debt Service vs. Debt Service and Capital Levy

Next Steps

• Update Inventory of Facilities/Needs– Current Facilities Status Report– Utilization by Facilities

• Prioritization• Determine if alternatives exisit

• Update Infrastructure Replacement Schedules– Roadway/Sidewalk/Alley– Trees– Water/Sewer/Parking

QUESTIONS?