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HomeMy WebLinkAbout5M 2017 Severance Fund Budget Amendments Report 4646 Dakota Street SE Prior Lake, MN 55372 CITY COUNCIL AGENDA REPORT MEETING DATE: APRIL 24, 2017 AGENDA #: 5M PREPARED BY: DON URAM, FINANCE DIRECTOR PRESENTED BY: DON URAM AGENDA ITEM: CONSIDER APPROVAL OF A RESOLUTION AUTHORIZING A TRANSFER FROM GENERAL FUND RESERVES TO THE SEVERANCE COMPENSATION FUND (701) DISCUSSION: Introduction The purpose of this agenda item is to consider authorizing a transfer from General Fund reserves to the Severance Compensation Fund to increase the level of fund- ing for the severance benefits offered by the City to eligible employees who leave employment. Severance compensation includes accrued vacation and a percent- age of unused sick leave. History For years cities, have received direction from their auditors and through GASB to maintain a severance compensation fund to be used for payment of employees eli- gible to certain benefit payments upon termination of employment in good standing. Accordingly the city established such a fund. The Severance Fund (701) was established in 2011 because the existing sever- ance fund (203) did not meet the GASB reporting requirements for an internal ser- vice fund. Assets and liabilities of $562,000 and $840,000 respectfully were trans- ferred from Fund 203 to Fund 701 per resolution 12-041. The initial funding level was calculated at 67%. Current Circumstances Due to the number of long-tenured employees retiring or accepting other employ- ment, the City has paid out more than $200,000 since 2015 resulting in a 2016 year-end assets of $305,960. Based on the City’s severance policy (described be- low), the accrued liability totals $872,718 resulting in a funding percentage of about 35%. Employees who leave in good standing as identified in the City’s Personnel Policy may be eligible for severance compensation. Regular full-time and regular part- time employees who leave before completing five (5) years of service can receive their accrued vacation time in pay or in time-off before their termination date, at the discretion of the City Manager. Regular full-time or part-time employees who leave employment with the City in good standing after five (5) years of continuous service will be paid at their current base rate of pay for 50% of their unused sick leave and 100% of any vacation hours. This severance is paid out of Fund 701. There are two primary sources of revenue for Fund 701 including compensated leave charges and interest earnings. As an Internal Service Fund, the Severance 2 Compensation fund has an annual funding mechanism of .5% of payroll which is approved as part of the annual operating budget. This is the compensated leave charges which are approximately $25,000 annually. Interest earnings add between $6,000 to $8,000. Staff recommends a funding level of 50% with a plan to gradually increase that level over time. This is consistent with what the City auditor has seen in their expe- rience. Conclusion The Council should consider authorizing a transfer of $100,000 from the General Fund Reserve to the Severance Fund (701) to increase the percent funding level from 35% to 46%. ISSUES: Within the next five years, we have projected retirements of 14 staff with severance payouts of about $400,000. To ensure that the Severance Fund maintains a fund- ing level of 50% or greater an initial cash contribution and an increase in the annual funding level is necessary. FINANCIAL IMPACT: For 2016, General Fund revenues exceeded expenditures by about $560,000 re- sulting in a fund balance of $6.68 million or a 51.1% reserve level. The City’s Com- prehensive Financial Policy recommends a level between 40 and 50%. Budget amendments for 2016 and 2017 have reduced that amount by $390,000. The im- pact of transferring an additional $100,000 from the General Fund to the Severance Fund is shown below: Current % Proposed % Fund Balance Funded Transfer* Balance Funded General 6,684,919 51.1% (490,000) 6,194,919 47.4% Severance 304,562 34.9% 100,000 404,562 46.4% *Budget amendments plus transfer to Severance Fund In addition to the transfer in to the severance fund, the annual contribution must also increase from the current level of about $25,000 to $100,000. Increasing this amount will be addressed as part of the 2018 budget process. ALTERNATIVES: 1. Motion and second as part of the consent agenda to approve a resolution ap- proving the transfer of $100,000 from the General Fund (101) to the Severance Fund (701). 2. Motion and a second to remove this item from the consent agenda for additional discussion. RECOMMENDED MOTION: Alternative #1. 4646 Dakota Street SE Prior Lake, MN 55372 RESOLUTION 17-___ A RESOLUTION AUTHORIZING A TRANSFER FROM GENERAL FUND RESERVES TO THE SEVERANCE FUND (F7010) TO INCREASE THE PERCENT FUNDED LEVEL Motion By: Second By: WHEREAS, Severance Compensation Fund (F701) was established in 2011 as an Internal Service Fund to provide funding for vacation and sick leave payouts to eligible employees leaving their employment with the City; and WHEREAS, Due to the number of long-tenured employees retiring or accepting other employment, the City has paid out over $200,000 since 2015 resulting in a 2016 year-end fund balance of $305,960. WHEREAS, Based on the City’s severance policy, the accrued liability totals $872,718 resulting in a funding percentage of about 35%. WHEREAS, The City’s auditor has suggested a base funding level of 50% with a plan in place to increase that level over time. WHEREAS, A transfer of $100,000 from the General Fund Reserve to the Severance Fund (701) will increase the percent funding level from 35% to 46% NOW THEREFORE, BE IT HEREBY RESOLVED BY THE CITY COUNCIL OF PRIOR LAKE, MINNESOTA as follows: 1. The recitals set forth above are incorporated herein. 2. A transfer of $100,000 is authorized from General Fund reserves to the Severance Fund (F701) to increase the percent funded level from 34% to 46%. PASSED AND ADOPTED THIS 24th DAY OF APRIL 2017. VOTE Briggs McGuire Thompson Braid Burkart Aye ☐ ☐ ☐ ☐ ☐ Nay ☐ ☐ ☐ ☐ ☐ Absent ☐ ☐ ☐ ☐ ☐ Abstain ☐ ☐ ☐ ☐ ☐ ______________________________ Frank Boyles, City Manager