The city budget gets a lot of attention when it’s adopted in the spring, but the City Council makes important financial decisions all year long, including this week when they approved something called “carry forwards.”

As we’re about to wrap up the first quarter of the new fiscal year, we are also doing the final close out of the last fiscal year.

• The city operates on a fiscal year running from July 1 through June 30.
• One of those final steps is making strategic use of what we call “carry forward” money.
• Carry forward funds refers to money from the previous budget year that has not been spent.
• Some of the reasons we might have money left over at the end of the fiscal year could be that needs have changed, staff found new efficiencies, projects have been reprioritized or revenues came in higher than expected.

Budget policies

In recent years, the City Council has put several new budget policies in place. Together, they formalize best practices for long-term fiscal health and help ensure it’s easy for the public to track how taxpayer money is being used.

One of these policies puts a framework in place for how to use any funds left over at the end of the budget year:

Priority 1 – Ensure we have enough money in our rainy day fund

• Just like the personal finance advice to try to keep six months of living expenses in your savings account in case of emergency, the city maintains cash reserves for that same purpose.
• The City Council’s policy is to keep an amount equal to at least 40% of the annual General Fund operating budget in this reserve account. For example, for every $100 in our budget, we should have another $40 set aside for emergencies.
• Keeping cash on hand is critical to ensuring we can maintain city services in case of an emergency or other unforeseen need.
• This fund is treated like a lock box, with, you guessed it, a policy for how that money can be used.
• So, the first thing we check at the end of the fiscal year is our general fund reserve balance. If it’s less than the 40% target, we use unspent money to bring the fund up to this target.
• This year, our General Fund reserve is healthy, at 65% of the current year’s operating budget.
• So, we then go to the next priority. 

Priority 2 – Reduce long-term pension costs 

Pension funding is a complicated and important topic, but here are some highlights. 

• When city employees retire, they get pension benefits instead of full social security benefits. 
• Similar to a 401k program, cities and employees make contributions to their future pension benefits.
• Most California cities are part of the state pension system called CalPERS, which stands for California Public Employees' Retirement System. 
• CalPERS invests these contributions and uses the returns to help fund pension benefits for retirees. 

It’s important to make sure that the amount of money available to meet pension obligations doesn’t fall too far behind the long-term needs. When it does, this is called pension debt.

If CalPERS’ investment returns fall short of expectations, this debt can suddenly increase, to the tune of tens of millions of dollars. 

The City Council has two policies related to managing pension costs: one sets a goal of keeping the city’s pension 80% funded; the other established a separate pension trust account where the city can manage how funds are invested.

• The new trust account allows the city to put money into a separate trust where we can control how the funds are invested, and it still counts toward our funding ratio.
• Because keeping our pension well-funded ends up saving money in the long run, this policy is expected to save the city about $8 million over the next five years.
• At Tuesday’s meeting, the City Council approved using $7.5 million of last year’s unspent funds to make a contribution to our pension trust account.
• This keeps us on track with our policy and is the reason we have among the best funded pensions in the region.
  
  

Priority 3: One-time expenses for other needs

• Finally, if there is money remaining after the first two priorities are met, the city looks at other funding needs.
• These must be one-time expenses rather than ongoing services, programs or personnel costs.
• These needs are compared against the goals of the City Council’s Five-Year Strategic Plan to ensure we are putting resources toward the community’s highest priorities. 
  For example, on Tuesday, the City Council approved using unspent funds for public safety equipment, a pilot program to support local businesses and economic development, and traffic safety projects. 

The City Council also approved carrying forward the $5.2 million it had set aside last year to work with SANDAG and NCTD on a Railroad Crossing Elimination Grant. If awarded, this money would go toward the project to lower the railroad tracks below street level roughly between the Agua Hedionda Lagoon and Buena Vista Lagoon. The $5.2 million could be used as matching funds, which are often a requirement of grants.

See the full list of funding approved Tuesday. You can also learn more about the budget and see all the policies we use to safeguard the city’s financial health.