29 Palms Opens 60 Percent Of Reserves For City’s Ongoing Operations

In a concession to encroaching fiscal reality, the City of Twentynine Palms has dis-erected the firewall between the money in its reserve accounts and that in its general fund.
On May 22, following the presentation of a labyrinthine staff report detailing the city’s hand-to-mouth financial reality, the city council agreed to the somewhat unconventional strategy of utilizing $3.2 million of the city’s reserves to pay off 100 percent of its unfunded accrued former city employees pension liability, use available reserve money to augment $12 million in bond proceeds for the Project Phoenix undertaking already generated from the issuance and sale of tax allocation bonds in 2011, and use another $350,000 in reserve funding for road improvements at the intersection of Adobe Road and Twentynine Palms Highway.
Like virtually all of California’s 481 other municipalities, Twentynine Palms seeks to salt a certain percentage of its revenue collected on an annual basis into a reserve account for use during lean years or to deal with unanticipated issues that may manifest.
Because such unanticipated contingencies can emerge quickly, most cities have a policy of safeguarding the reserve money in a sequestered account or sequestered accounts in which roughly 25 percent of the money can be accessed relatively easily – utilizing the signatures of two of four city officials, including the mayor, city manager, finance director or city treasurer – at short notice. This leaves roughly 75 percent of a typical city’s reserves inaccessible for immediate use, such that gaining access to that funding commonly entails a detailed report by the city manager and finance director, the acquiescence of the city treasurer and a majority vote of the city council.
Though William C. Statler, the City of Twentynine Palm’s fiscal policy and financial planning analyst and advisor, stopped short of outright recommending that the city tap into its financial reserves at this time, he did deliver a report which contained language by which the council was able to justify following the advice of city manager Frank Luckino, who is charged with running the city on a day-to-day basis, and grant him authority to utilize 60-to-65 percent of the city’s reserve money on some pressing needs.
Statler identified eight risk factors, consisting of “vulnerability to extreme events and public safety concerns; revenue source stability; expenditure volatility; leverage, such as unfunded pensions and asset maintenance; liquidity; dependence of other funds on the general fund; revenue and expenditure imbalance; and unfunded high priority capital projects,” which he said represented needs pressing enough to tap into the city’s reserves.
Based upon standards set forth by the Government Finance Officers Association of the United States and Canada, Statler suggested that a typical city should be able to tap into money equivalent to that needed for two months operations or 16.6 percent of its annual budget at the drop of a hat. If a city faces certain potential financial or cash flow challenges, Statler said, having access to an amount from its reserves equal to 35 percent of its annual budget might be warranted. And some cities, Statler related, might want quick access to more than that. “Based on the city’s circumstances, the Government Finance Officers Association’s structured methodology recommends a target higher than 35 percent,” according to Statler. “Based on the city’s need to maintain reserves at 25 percent just to meet cash flow needs during the year, the recommended policy is 55% to provide appropriate flexibility in addressing economic uncertainties, such as downturns in the economy and external revenue hits (like state takeaways); responding to local disasters; contingencies for unforeseen operating or capital needs; and strategic opportunities.”
According to Twentynine Palm’s most recent audit for the fiscal year ended June 30, 2017, the city had an unassigned general fund balance of $11.3 million, which is 135.8 percent of actual expenditures. The 2017-18 Budget projects that the ending unassigned general fund balance will be $11.5 million, equivalent to 130.1 percent of expenditures.
While under ideal circumstances it is desirable to keep the city’s reserves fully intact, Statler addressed the anticipated future reality in which the city’s reserves will be less than the target amount, recommending that the city have a policy of striving to restore reserves to the policy minimum within five years. As revenues versus expenditures improve, the policy recommends that the city allocate at least half to reserve restoration, simultaneously recognizing that utilizing a portion of the city’s income to pay down certain debts and carry out certain maintenance and provide crucial services may be a more prudent use of the money than keeping it for undesignated purposes later. Statler said he deemed it acceptable to use up to half of the city’s revenue in excess of the cost of providing basic services for funding asset replacements, meeting unfunded liabilities, engaging in capital improvement projects, making service level restorations, and funding new operating programs. Statler said allowing the city’s reserves to dip below policy levels from time to time by making a portion of the reserve money immediately available for use would also be justified if the using those reserves is intended to meet cash flow needs during the fiscal year, close a projected short-term revenue-expenditure gap, respond to unexpected expenditure requirements or revenue shortfalls, make investments in unfunded liability reductions, economic development and/or revenue base improvements, effectuate productivity improvements or seize other strategic opportunities that will strengthen city revenues, reduce future costs or achieve high-priority city goals.
Statler further indicated a case for tapping into the city’s reserve funds could be made in circumstances where a fiscal forecast shows an ongoing structural gap, and utilizing available money might provide what he termed “a strategic bridge to the future.”
Simultaneously, Statler said, “The city should avoid using reserves to fund ongoing costs or projected systemic ‘gaps.’ Reserves can only be used once, so their use should be restricted to one-time (or short-term) uses.” Statler asserted that reserves should not be thought of as a normal stream of revenue in the city’s budget. “Non-spendable and externally restricted funds are not readily available to meet the risks that the reserve is intended to mitigate,” he stated.
Caught between a rock and a hard place, Twentynine Palms City Manager Frank Luckino last month asked for the council to divert money out of the city’s reserve accounts and allow him to utilize it for purposes that arguably fall within the rubric of what Statler’s policy pronouncement indicates the money could used for. Luckino reasoned that the city might safely do so. “The city has an unusually high reserve amount of 128 percent, whereas most cities are around 25 percent-to-50 percent,” Luckino told the Sentinel. Thus, Luckino suggested, use of the money in question is not likely to draw down the city’s reserves to the point that it will be left in a precarious position if a major fiscal emergency arises in the near term.
Still, the expenditures are going toward expenses and uses that financial conservatives might not find to be acceptable, and some have suggested that the move betrays a certain lack of fiscal discipline that they are not entirely happy with.
Complying with Luckino’s request, the city council voted to make 60 percent-to-65 percent of its reserves accessible for use in city operations. Of particular concern to some was that a significant portion of the city’s rainy day fund – $3.2 million – would go to payments into the retirement fund endowing the pensions of city employees no longer working for the city. Also questioned was how Luckino defined money he earmarked for use in the Project Phoenix effort as fitting within the rubric of acceptable uses of reserve money outlined by Statler.
Project Phoenix is an undertaking by the Twentynine Palms Redevelopment Agency aimed at constructing a community center, classrooms, a civic plaza, a park, a paseo, residential units, a wastewater treatment plant, and improvements to the downtown fire station. The undertaking was first conceived of in 2010 and initiated by the city’s former redevelopment agency in 2011. That project was threatened with shuttering by the advent of Assembly Bill XI 26 and Assembly Bill XI 27, which passed in 2011 and closed out redevelopment agencies in all of the state’s municipalities. Twentynine Palms, in a protracted legal effort quarterbacked by City Attorney A. Patrick Muñoz, challenged the state’s action and eventually obtained, more than four years later, clearance to proceed with Project Phoenix. More than three years have gone by since the city prevailed in that effort, and the project has yet to begin in earnest. Some question why Luckino is committing an unspecified amount of city reserve money toward the completion of the project while the city yet has in excess of $11 million of the bond money available to undertake it.
-Mark Gutglueck

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