After years of proposals and discussions, Berkeley City Council on Tuesday unanimously agreed on a new General Fund Reserve policy, often called a rainy day fund. The new policy will immediately raise the reserve to a minimum 13.8% of fiscal year 2017 general fund revenues and aim to hit the city auditor’s recommended 16.7% by the end of FY2020 (previous city policy set an 8% unallocated fund balance, not really a reserve). A long-term goal of a 30% reserve is planned to be achieved within no more than 10 years.
“It’s incredibly important that we have a reserve policy,” said Mayor Jesse Arreguín. “Having a clear policy that moves us towards a 30% goal, that gets us to 16.7% in one year, is a major step forward.”
City auditor Ann-Marie Hogan issued a report on general fund reserve policy in February 2016, citing Aesop’s fable about the frivolous grasshopper and the industrious ant. In her telling, Berkeley was the grasshopper – doomed to starve when winter comes – rather than the ant who had prudently stored food for hard times. The auditor’s report recommended immediate adoption of the Government Finance Officers Association (GFOA) minimum benchmark of a 16.7% reserve (two months spending), with a goal of reaching 30% or beyond.
In a presentation to the Council last night, deputy city manager Jovan Grogan said there were several key reasons for a general fund reserve: to help the city maintain vital services during an economic downturn, to address state and federal actions that may result in revenue reductions, and to help achieve the goal of long-term fiscal stability and mitigate the negative impacts of disasters such as earthquakes, fires and floods.
The reserve fund will be built by allocating 50% of the city’s annual general fund surplus, so-called “excess equity,” to the reserve. City manager Dee Ridley-Williams had recommended an immediate 16.7% reserve as well as requiring a two-thirds majority vote for accessing the fund, and then only on a set of specified criteria.
The proposal agreed by the Council starts below 16.7% and, following some debate among councilmembers, retains the two-thirds majority for accessing the fund, but requires only a simple majority to change the allocation of excess equity.
According to Hogan, the Council plan makes sense.
“I think in the very short term, the timing for getting to 16.7% immediately is difficult in terms of where we are in the budget cycle,” she said. “They need to get to that 16.7% swiftly, but I don’t think it’s feasible to get to it this year. That would be a lot of dislocation in the departments and in the workforce.”
“I wanted to adopt a policy that was realistically achievable,” Arreguín said. “Given where we are, setting a goal of 16.7% now would be unattainable. These are very attainable goals that can grow our reserve.”
“Berkeley has really shown leadership in taking this particular step,” Hogan said. “This is not a run of the mill thing that everyone is doing that we’re late to do.
The reserve will have two elements: 55% will be a Stability Reserve, used to mitigate loss of service delivery and financial risks associated with unexpected revenue shortfalls; and a Catastrophic Reserve (45% of the fund), used for one-time expenses related to a public emergency.
“I don’t know whether we’re going to be able to count on FEMA in the future,” said Councilwoman Susan Wengraf, emphasizing the importance of the Catastrophic Reserve. “I heard the president say today that Alabama is a special place, that Georgia is a special place. Do you think he’s going to say Berkeley is a special place?”
During the Council debate, there was some discussion of whether the policy would help Berkeley’s bond rating, currently AA. Bond ratings determine the interest the city pays on its borrowings. Both Arreguín and Hogan agreed that the agreed reserve policy would help.
“We’re near the top tier of what we need to do to get a AAA rating,” Hogan said. “But it’s also important that we put something in place that protects the rating we have – and possibly could improve the rating.”
Councilwoman Lori Droste together with Susan Wengraf supported adopting the city manager’s plan. But when Wengraf withdrew to support a council consensus, Droste agreed.
“It’s higher than our current policy, so that’s a good thing. I think it’s meaningful,” Droste said. “I couldn’t live with myself if our city suffered a catastrophic event and then we were unable to provide for our citizens.”
Droste said that it remains crucial to develop criteria for accessing the reserves, something proposed by Councilwoman Linda Maio, and agreed by the Council’s vote.
This is long overdue,” said Arreguín. “I think it will help the city potentially in the storm we’re going through with the new administration.”