Fiscal Year 2013-2015 Special Budget Meeting

HONORABLE MAYOR AND CITY COUNCIL Subject: Proposed FY 13-15 Proposed Policy Budget Date: May 13,2013 Page 13 Internal Services Funds (ISFs), for example, 4100 and 4400, are funds used to centralize certain services and then allocate the costs of those services within the City. U.S. Generally Accepted Accounting Principles ("GAAP") permit the use of internal service funds for the reporting of any activity that provides goods or services to the government on a cost reimbursement basis. The goal of an internal service fund should be to measure the full cost (including cost of capital assets) of providing goods or services for the purpose of fully recovering that cost through fees or charges. A number of the City's ISFs have grown negative fund balances as a result of under collecting reimbursements over a long period of time. Repayment schedules for these negative funds were established originally in the FY 2005-07 policy budget, which attempted to cure the intemal service funds deficit by fiscal . year 2014-15. However, the repayment schedule put in place in FY 2006 and 2007 were not implemented accordingly due to the lack of general fund resources to make the required annual payments. As such, the City restructured the repayment schedule as part of the FY 2009-11 policy budget. The new repayment schedule will cure the net assets deficit of intemal service funds by FY 2018-19. In FY 2008-09, the External Auditors issued a material weakness finding on the intemal service funds deficit because the City's accumulated intemal borrowings had reached $50.8M as of June 30, 2009. The Auditors recommended the following: "that the City monitor the progress of its restructured repayment plan very closely to ensure its feasibility. If it is determined that the plan is not feasible and the City does not intend to or cannot recover the fUll cost ofproviding goods or services within a reasonable period of time, then the use of internal service funds is no longer appropriate under GAAP and should not be usedfor financial reporting purposes. " In FY 2009-10, the City maintained its repayment plan and the intemal borrowing has been reduced to $45.6M as of June 30, 2010, from $50.8M in FY 2008-09. In FY 2010-11 and 2012, the deficit was reduced to $39.8M and $34.4M respectively. In FY 2012-13 the deficit is projected to be reduced by another $3.0M to a projected $31.4M in accumulated intemal service funds borrowing. The City has been able to maintain its repayment plan and in the FY 2010-11 audit, the auditors considered the repayment plan implemented. At this time, the City Administration considers the repayment plan pmdent, necessary, and good for the long-term fiscal stability of the City and recommends niaintaining the repayment plan. Also, if the City does not continue with the repayment plan, the extemal auditors will recommend for the City to discontinue the use of internal service funds for financial reporting purposes because they are no longer appropriate under GAAP. For example, if this occurred in FY 2012-13 with the ISFs accumulated borrowing or deficit at estimated $31.4M, General Purpose Fund (GPF) would be absorbed approximately 60% or ($18.84 million of the $31.4 million) of the ISFs deficit and hence would reduce GPF fund balance in one year instead on the gradual repayment plan. The table below demonstrates the repayment plan included in the Policy Budget for some of the negative funds for the next two fiscal years. The complete repayment schedule is listed on page DlOl of the Proposed Budget, which includes ISFs, the Self-Insurance Fund and the Kaiser Convention Fund: