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June 16, 2022 TO: Mayor Julie Moore Wolfe & Decatur City Council Members FROM: Scot Wrighton, City Manager A RE: General Fund Restricted Cash Reserve Policy In May, the City Council requested that the June meeting include discussion and possible action to amend the council's existing General Fund restricted cash reserve policy. Proposed policy language options are attached, and discussed in this memo. One of the primary reasons for establishing a General Fund restricted cash reserve policy is to provide sufficient cash flow to meet operating needs throughout periods of financial disruption and community emergency, and to give the governing body added flexibility to make large unanticipated outlays to deal with special needs—particularly when such outlays are not included in the city's annual budget. Local government revenues are often cyclical in nature. But cities must consistently meet their financial obligations year-round, month-in and month-out. There are varying philosophies of how much reserve is enough, or whether the city could potentially have too much in General Fund restricted cash reserves. The terms "reserves" and "fund balance" are often used interchangeably, but the terms are not synonymous. An account's fund balance is constantly fluctuating and is the level of available unencumbered cash at any given time. The restricted reserve is that portion of the fund balance that has been formally set aside by action of the corporate authorities and held as a "rainy day savings" fund, which can only be expended or transferred by action of the corporate authorities. A fund balance and reserve policy sets minimum levels for designated funds to ensure stable service delivery, meet future needs, and protect against financial instability. Decatur's financial reserve policies apply principally to the General Fund and are fairly simple. The Government Finance Officers Association's (GFOA) best practice recommendation has changed over the years to consider the many variables of local government, but at a minimum the fund balance for the general fund should be no less than what will meet the average cash flow needs of the city. According to the GFOA, this is typically no less than 60 days or two months (about 16.5%-16.7%) of operating expenditures (excluding deferable capital) for the general fund and 45 days (about 12.3%) for the enterprise (utility) funds, excluding capital and infrastructure. However, this recommendation is for operating costs and does not consider impacts of debt and various local economic circumstances. For cash basis entities where debt service is frequently paid from operating funds, consideration should also be given to timing of debt payments in setting reserve policies. Each government has its own unique set of circumstances that may require different reserve thresholds. Even within the same governmental entity, different funds may require different levels of fund balance/reserve control due to differences in cash flow or risk.