With the adoption of the City of Garden Grove Fiscal Years 2019-21 biennial budget on June 25, 2019, the City Council directed staff to develop a reserve policy and establish a minimum General Fund reserve level, designate specific portions of the reserve for stabilization and catastrophic purposes, as well as the application of special one-time revenues.

A General Fund Reserve, or commonly known as the “rainy day fund,” ensures a government’s ability to maintain vital services to the community during times of economic uncertainty or catastrophic loss.

The City of Garden Grove is committed to achieving long-term fiscal stability and mitigating the impacts of extraordinary risk such as natural disasters and economic volatility.  Establishing an adequate reserve policy will allow the City to navigate through challenging times and achieve long-term fiscal success.

The City follows the best practice guidelines published by the Government Finance Officers Association (GFOA), Fund Balance Guidelines for the General Fund, develops and maintains Policy Number 200-07, General Fund Reserve Policy (the Policy), to ensure that financial resources are managed responsibly. 

GFOA recommends, at a minimum, that general-purpose governments, regardless of size, maintain unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.  The Policy establishes a reserve level at the minimum of 16.7%, or two months of the General Fund’s operating revenues, with the goal of reaching 30% over time. In addition to determining the appropriate reserve levels, GFOA recommends defining the specific purposes for the reserve fund.  The Garden Grove General Fund Reserve Policy categorizes the reserve into three types, Stability Reserve, Catastrophic Reserve, and Designated Revenue Reserve.

The Policy is also developed in the context of Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions (GASB 54).  GASB 54 requires fund balance be reported in the following five components:

•  Non-spendable Fund Balance – represents amounts that cannot be spent because they are either not in spendable form or legally/contractually required to be maintained intact.

•  Restricted Fund Balance – the restriction on use of these funds are externally imposed by creditors, grantors, contributors, or laws and regulations.

•  Committed Fund Balance – the restrictions on use are self-imposed by the government’s highest level of decision-making authority, such as City Council.

• Assigned Fund Balance – represents amounts that are constrained by the government’s intent to be used for specific purposes, but are neither restricted nor committed.

• Unassigned Fund Balance – the residual net resources is considered unassigned.

The first two components listed above are not addressed in the Policy due to the inherent nature of their restrictions.  The Policy establishes three categories of reserve within the Committed Fund Balance.  Therefore, the use of any of the three reserve categories requires formal actions from the City Council.  The three categories of reserve reported in the Committed Fund Balance are:

Catastrophic Reserve

Catastrophic Reserve is resources set aside to mitigate impact associated with public emergency such as natural disaster or other unforeseen catastrophic events.  Catastrophic Reserve is to be funded after the Stability Reserve is fully funded at the minimum level of 16.7% of the General Fund’s operating revenues. Together with the Stability Reserve, the combined reserve balance is targeted at 30% of the General Fund operating revenues.

Stability Reserve

A Stability Reserve is maintained to mitigate financial risks associated with unexpected revenue shortfalls due to changes in the economic environment.  In times of economic downturn, if revenues are insufficient to meet the normal operating requirements of essential services, funds contained in the Stability Reserve may be used if authorized by two-third vote of the City Council.  The funding level for the Stability Reserve is set at 16.7%, or two months of regular General Fund operating revenues.

Designated Revenues Reserve

Designated Revenues are inflow or sources that are not associated with the City’s normal, routine operations.  They are one-time in nature, and are usually the result of sale of City owned properties, major settlements, one-time contribution/donation, or other non-recurring projects and/or transactions.  Due to the nature of these revenues, it is a prudent fiscal practice to exclude them from available sources that fund normal on-going operating costs.  The Policy authorized the City Council to commit the Designated Revenues as a committed reserve, and upon request from the City Manager, the City Council may authorized the use of Designated Revenues by a two-third vote. 

Funds contained in the Designated Revenues Reserve should not count towards the minimum or targeted reserve level.

The General Fund reported $47.4 million as Unassigned Fund Balance as of June 30, 2019, the City’s most recent audited financial statement date.  Fiscal Year 2019-20’s adopted General Fund’s budget showed estimated operating revenue in the amount of $134.2 million, 16.7% of which is $22.4 million.  It is recommended that the City Council approve reclassifying $22.5 million from the Unassigned Fund Balance to the newly established Stability Reserve as of July 1, 2019.  The reclassification of Unassigned Fund Balance to Committed Fund Balance does not require appropriation.

It is recommended that the City Council:

• Adopt the attached Resolution establishing the City of Garden Grove General Fund Reserve Policy.

• Approve the reclassification of $22,500,000 from the Unassigned fund balance to the newly established Stability Reserve, reported as a category within the Restricted fund balance component.