City Reserves and Long-term Funding Commitments
Why doesn’t the City use reserves to fund ongoing services?
Each year, the City hires an outside auditing firm to thoroughly evaluate the City’s finances. Based on the auditors’ work, the City releases an annual financial report called the Comprehensive Annual Financial Report (otherwise known as the “CAFR”) which shows all revenues, expenditures, assets, and liabilities for all City activities from the previous fiscal year. The most recent CAFR showed that the City’s net position improved by $25.9 million compared to the prior year (from $396.1 million to $422.0 million). Importantly, 79% of the City’s net financial position reflects the value of capital assets such as land, buildings, machinery and equipment. The City’s net position improved in the last year because funds were set aside for long-term City commitments such as improvements to roads, parks, libraries, water and sewer infrastructure; equipment replacement; and annual debt payments for bonds issued in the past.
Most of these funds are legally restricted for specific purposes, and cannot be used to pay operating expenses such as public safety, parks and recreation, and library services. This can be confusing, particularly as the City has identified challenges related to funding ongoing City services.
This blog seeks to explain why reserves and restricted funds set aside for future needs are not surplus funds available to pay for ongoing City services.
Long-Term and Legally Required Funding Commitments
The funding commitments listed in the CAFR are not surplus funds because they cannot be used for operating expenses such as public safety, parks, and libraries. Instead, these funds are set aside to support long-term commitments. In most cases, the City is legally restricted from using these funds for general ongoing operating costs such as public safety, parks and recreation, and library services.
Restricted funds, also known as enterprise funds, account for $20.4 million of the $25.9 million change in net position. These activities include parking operations, the sewer utility, the water utility, and the Port of Redwood City. Revenues collected for these activities can only be used to pay for these activities. For example, $10.5 million of the $25.9 million is within the Sewer Fund. When customers pay sewer charges, those payments go to the Sewer Fund and Sewer Fund resources can only be used for sewer operations, including sewer maintenance. Sewer Fund revenues cannot be used for other City activities, such as public safety.
To view a financial breakdown of the $25.9 million in long-term funding commitments and restricted uses, see below:
To view the CAFR Fiscal Year Ended June 30, 2017 in detail, go here.
Funding Long-Term Costs Versus Funding City Services
Each June, the City adopts a balanced operating budget for the following fiscal year (July 1-June 30), using ongoing revenues to pay for ongoing service costs. The City is consistently rated by auditors and outside experts as having excellent financial planning, discipline and management best‑practices. Unfortunately, most cities in California, including Redwood City, face a growing structural deficit in their operating budget due to new state mandates to fund retirement obligations. Most of the City’s increased pension costs are to fund benefits for already-retired employees.
In anticipation of these cost increases, the City has been proactive in containing costs, including implementing benefit reforms, increasing efficiencies, and increasing fees for services. This has included reducing pension benefits for employees hired after 2011, increasing employee payments for pension benefits, implementing shared-service approaches to reduce overhead costs, and reducing staffing. In June 2018, the City Council voted to cut $3.7 million from the 2018–19 operating budget. In addition, the City Council voted unanimously to place two revenue measures on the November ballot for voter consideration, including a measure to increase the City’s sales tax and a separate measure to establish a cannabis business tax on all cannabis businesses operating in Redwood City. If approved, the sales tax measure would generate approximately $8 million annually for essential public safety and community services, and the cannabis measure would provide an estimated $210,000 annually in locally controlled funding for city services. The cannabis tax would only apply to cannabis businesses operating in Redwood City and would not increase taxes for Redwood City residents.
Most City operations are funded through property and sales tax revenues. These revenues have increased in the last several years, particularly downtown: the City receives $7 million more annually in downtown property and sales tax than it did five years ago. However, even though the City has received additional revenue, it has not been enough to cover the rising costs to provide services and to fund benefits for already-retired employees as well as current employees. Without additional revenue, operating costs will have to be reduced. Given that 82% of the City’s budget is dedicated to public safety, parks and recreation and libraries, these services will be affected. To learn more about the City’s current fiscal situation, go here. For more about the one-half of one percent sales tax measure or Measure RR, go here.
Other City Budget Resources
For other City budget resources, check out the following blog series about the City’s current fiscal situation:
For the City’s Fiscal Year 2018–19 Operating Budget, go here.
For the City’s Five Year Capital Improvement Program, go here.
For the City’s fiscal update web page and other information about the City’s current budget challenges, go here.