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2024-03-12 Council FIN MinutesFINANCE COMMITTEE MEETING March 12, 2024 Elected Officials Present Staff Present Councilmember Will Chen (Chair) Dave Turley, Administrative Services Director Councilmember Jenna Nand Kim Dunscombe, Deputy Admin. Serv. Director Council President Vivian Olson (ex-officio) Nicholas Falk, Deputy Clerk Councilmember Michelle Dotsch Councilmember Susan Paine CALL TO ORDER The Edmonds City Council Finance Committee meeting was called to order virtually and in the City Council Conference Room, 121 — 5` Avenue North, Edmonds, at 5:31 pm by Councilmember Chen. 2. COMMITTEE BUSINESS 1. Electronic Funds Transfer (EFT) Policy Ms. Dunscombe explained the State Auditor's Office (SAO) recommends the City implement a written policy in accordance with RCW 39.58.750 for all electronic funds. She highlighted elements required by the RCW: 1. Implementation of bank -offered security measures to prevent unauthorized individuals from initiating or modifying a transfer. Each user initiating or approving bank transactions must have a separate banking user ID. Addressed in Section 6.0 Internal Controls 2. Define the process for creating, securing, sending, and authenticating direct deposit transmittal files to prevent unauthorized modification or submission. Addressed in Section 6.0 Internal Controls — Transfer Verification and Approval and Segregation of Duties 3. Policies and procedures should be in place to validate these authorizations to protect resources being transferred electronically. Ms. Dunscombe highlighted additional revisions as a result of discussion with Councilmember Chen today: • First bullet under 5.0 Electronic Funds Transfer — add Accountant and Director as positions authorized to make transfers • Third bullet under 5.0 Electronic Funds Transfer — Revise to read, " GGO Rts Payable One-time EFT: Once -time vender EFTs are..." Questions and discussion followed regarding support for the changes to strengthening internal controls, fraud the state experienced, how long the City has been doing EFTs, bank practices related to EFTs, limited EFTs, Munis' ability to do EFTs, dollar amounts that are considered high and low, director preapproved templates, reasons not to include a dollar amount in policy, whether the policy should specifically disallow tools that banks offer such as distributed ledger technology, having the finance chair or council president sample EFTs annually before the audit, concern it is not the council's role to audit Finance, and the council's ability to authorize and fund an independent audit. Committee recommendation: Policy with amendments on agenda at next Finance Committee meeting 2. Fund Balance/Reserve Policv Amendment Discussion Councilmember Chen explained a Fiscal Policy Work Group was formed consisting of himself and Councilmember Nand and community members Dave Teitzel, Diane Buckshnis, Darrol Haug and Thatcher Baudendistel to suggest revisions to strengthen the existing reserve policy that was established in 2019. 03/12/24 Finance Committee Minutes, Page 2 Councilmember Chen shared proposed revisions to the policy and committee members and staff provided input: Goals The goals of this Fund Reserve Policy is to provide clear guidance for the appropriate level of Fund Balance Reserve for our city, set reporting and monitoring requirements, define the appropriate triggering warning mechanism, set Council approval before any Restricted Reserve can be used, define replenishment timeline and requirements, obtain consensus between Council and Administration that our city's finances should be managed responsibly, and that uncommitted fund balances should not be spent down to the ceiling of the General Fund reserve level, and earn a consistent AAA bond rating from the bond rating agencies. Discussion followed regarding concern with the language, "...obtain consensus between council and admin that our city's finances should be managed responsibly," intent of that language to be an aspirational statement not criticism, a suggestion to revise the last sentence in the "Policy" paragraph to read, "In addition, this policy incorporates provisions of Government Accounting Standards Board Statement (GASB) no. 54, Fund Balance Reporting and Government Fund Type Definitions for financial reporting on an annual basis." ARTICLE III COMNUTTED GENERAL FUND BALANCE RESERVES POLICY This Policy shall establish a committed fund balance reserve , define funding levels and call the reserve the General Fund Operating Reserve. The purpose of the reserve is for meeting economic uncertainties, and unanticipated expenses or revenue shortfalls. This Policy requires the City to establish and maintain a General Fund Operating Reserve, , in an amount equal to or greater than 16% of the General Fund's Adopted Annual Operating Expenditure Budget. If it is determined that the reserve balances are not adequate, the Mayor shall propose an amendment to these policies. The General Fund Operating Reserve Fund shall be a separate fund outside of the General Fund. This is to achieve its visibility, much like the Contingency Reserve Fund. Fund number 011 shall be the designated fund number for The General Fund Operating Reserve. Discussion followed regarding the intent of removing "within the General Fund" is to establish a separate fund for 16% portion of reserve so it is easier for the administration to manage, whether establishing a separate reserve funds is legal and concern it would not be easier for administration, whether the operating reserve is within the General Fund in other cities, need to choose a different fund number as 011 is an existing fund, segregating funds within General Fund to achieve goals of the new paragraph without creating a separate fund, goal of the work group to create segregation between the reserve and the rest of the General Fund, concern the council was unaware when the reserve was used in the past, the goal to provide notification when the operating reserve is being utilized, and timeline in which the mayor is legally obligated to notify the council that the operating reserve is being utilized. A detailed accounting of this reserve account will be maintained by the Finance Department to show deposits, withdrawals (when authorized pursuant to policies contained herein) and interest earned. All accounting for these accounts shall be recorded in the City's ERP system theugM we have sinee implemented a e .. . I A detailed report, prepared by the Finance Department, shall be presented annually to the Council. In addition, a monthly report by the Finance Department shall be presented to Council showing a projection of end of year general fund balance. If in any two consecutive months, this report indicates the City's end of year fund balance will be less than 2521% of budgeted operating expenditures, the Mayor shall implement measures to ensure the end of year general fund balance does not drop below 2016% of adopted budgeted operating expenditures unless Council explicitly approves use of general fund committed reserves. Note: A 5% of the budgeted general fund operating expenditures is built in as the warning mechanism. During the time when the restricted reserve is already below the required 16%, the 5% warning mechanism is waived. The Mayor and the administration shall focus on rebuilding the reserve back to its required 16% level. 03/12/24 Finance Committee Minutes, There was no input on the above revisions. The Mayor has the power to declare a fiscal emergency based upon one of the tollowing: 1) A natural catastrophe_; 2) An immediate threat to health and public safety; or ILA significant decline in General Fund revenues. Or 3) 4) Unexpected expenditures that outpaced General Fund revenue. The fiscal emergency declared by the Mayor must be approved by a simple majority of the City Council._ Discussion followed regarding a comparator city that uses "market forces" instead of unexpected expenditures. Tr-ANsWOR p9hey Getineil adeptien of this pekey will tfigge net less than 16,04 of the General Fund's There was no input on the above revisions. ARTICLE IV CONTINGENT RESERVE FUND BALANCE POLICY This Policy shall establish a fund and define funding levels for a committed Fund Balance Reserve to be called the Contingent Reserve Fund The primary purpose of the reserve is for meeting emergencies of the City and, secondarily, if the General Fund Operating Reserve have been exhausted, the Contingent Reserve Fund can be use in times of economic uncertainties, and for unanticipated expenses or revenue shortfalls. The target balance of the Reserve shall I) not exceed the limitations set forth by RCW 35A.33.145, which sets the statutory maximum at $0.375 per $1,000 of assessed valuation and 2) not pwr-,Ppd o Budget. In other- weEds, if the Genterall. Fund Opera&Wg Resmwe balanee equals 0 9,a of operating - budget then the Contingent Reserve Fund balance cannel exceed shall be 4% of the General Fund expenditures operating budget. The actual dollar amount shall be determined based on the annual adopted General Fund expenditures. It further requires a simple majority vote of Council with a statement declaring the reason for their use. Discussion followed regarding a suggestion to revise "General Fund expenditures" to "General Fund operating expenditures." A detailed accounting of the Fund shall be maintained by the Finance Department to show deposits, withdrawals (when authorized pursuant to policies contained herein) and be presented semi -annually - in February and August to the Council. The Mayor has the power to declare a fiscal emergency based upon one of the following: 1) A natural catastrophe; 2) An immediate threat to health and public safety; or 2LA significant economic decline in General Fund revenues. 3)4) Unexpected expenditures that outpaced General Fund revenue. The fiscal emergency declared by the Mayor must be approved by a simple majority of the City Council. - Note: if the mayor is unable to act or refuses to act to declare a fiscal emergencv when any one of these three conditions are present, City Council may declare a fiscal emergency by a simple maiority vote. Discussion followed regarding requiring council approval when the mayor is aware the 16% reserve or the 4% contingency reserve is being utilized, changing "unexpected expenditures" to "market forces," when council is required to declare a fiscal emergency, whether the mayor has the ability to shut down spending, and the Limitations of Fund Use section of the policy related to use of contingency reserves. 03/12/24 Finance Committee Minutes, Page 4 ARTICLE V ANNUAL FUND BALANCE TYPES -STATUS REPORT Once a year, in August, the Mayor shall present to the Council Finance Committee a comprehensive report on the City's fund balance reserve types as of June 30th. The report shall include an updated fund balance reserve level for each fund balance type. This report shall include the following funds: 1. General Fund Operating Reserve balance; 2. Contingency Reserve Fund balance. Discussion followed regarding whether annual or mid -year review is appropriate, intent of the Fiscal Policy Work Group and the Mayor's Blue Ribbon Panel, and requirement for budget adjustments with a biennial budget. ARTICLE VI FINqg VEkRANNUAL RESERVE RATE REVIEW Every five yeaFsOnce a year, during the annual budget hearings, the Mayor, based upon a comprehensive financial and economic review of all City fund balance types and in consultation with the City Finance Director, and Department Directors as necessary, shall make recommendations to the City Council for either maintaining existing fund balance reserve polices or revising fund balance reserve policies including percentage ranges established by category herein and replenishment requirements by categories established herein. Discussion followed regarding a suggestion to do a review every 2 years, difficulty replenishing reserves, possibly reducing the 16% reserve level, long term financial planning, not changing the reserve level while reserves are being replenished, GFOA policies related to determining the right reserve level, and whether reserves are a factor in the City's credit rating. Committee recommendation: Work group continue refining the policy 3. January Monthly Report Mr. Turley highlighted • REET revenue is up $7,650 compared to last year, but below budget • Sales tax is up $95,000 compared to last year o Increasing but just keeping pace with inflation • Development services revenue is up $59,000 compared to last year • Total interest earning is up $102,790 compared to last year Questions and discussion followed regarding whether to revise revenue projections to address fluctuations in REET, IT fund expenditures higher than last year due to significant software price increases, shoutout to Senior Accountant Marrisa Cain and Ms. Dunscombe for improvements in the monthly report, the 2024 Genal Fund (001) Cash Flow Forecast (packet page 140), suggested changes to the Cash Flow Forecast, council approval required for use of contingency reserve, Mr. Taraday's opinion regarding annual review of the fund balance reserve policy, appreciation to Finance for developing the Cash Flow Forecast, the Cash Flow Forecast assisting council with prioritization, limitations on the use of contingency reserve funds in the existing policy, whether the City is currently spending contingency reserve funds, how long the declaration of a fiscal emergency lasts, and whether declaration of a fiscal emergency covers use of contingency funds. Committee recommendation: Received for Filing 3. ADJOURNMENT The meeting was adjourned at 7:13 pm.