AgdaPkt 2010-03-08 - Laserfiche WebLink

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Attachment 2 6.3C Page 7 subsequent fiscal year. One comment for the 2004/05 fiscal year addressed the City's liability for compensated absences (e.g. accrued vacation, sick leave earned but not paid) primarily in the City's general fund. The interpretation of accounting rules, which has evolved over the past few years, now dictates that only those liabilities relating to employees who have actually terminated as of the close of the fiscal year (June 30) and which have not yet been paid out by June 30 can be accrued as a liability. The City's practice has been to accrue a liability for all anticipated leave payouts for the upcoming January (compensatory time. sick leave and administrative holiday buyout). As the City's interpretation is not in line with the industry's interpretation, the City must change its accounting practice. This change in accounting practice will free..up approximately $1.4 million in the general fund which has previously been tied up in the compensated absences liability. Staff does not anticipate that these funds will be needed to cover leave payouts, as the general fund has been able to cover payouts out of the general fund operating budget each year. The Finance Director has discussed this change with the Audit Committee, and staff and the Audit Committee recommend that these funds be designated for the general fund's portion of the other post employment benefit liability. It is recommended that this $1.4 million be used over a four year periOd to support the general fund's cost of funding the ARC. Using these funds over a four year period (from 2008/09 to 2011/12) is preferred as opposed to initially transferring the total amount of these funds to an irrevocable trust as the general fund would retain liquidity should an emergency arise and the funds are required to be used elsewhere. Recommendation General Fund Given the above information, staff is recommending that the City Council adopt a formal plan for progressive funding of the ARC in the general fund over a five year period beginning in FY 2007/08 through charges to City departments via the payroll system (in a similar manner in which other benefits are charged to departments). As previously mentioned, it is recommended that the funds available from the reduction of the compensated absences liability be used to reduce the impact on the general fund. Staff is not recommending full funding of the ARC in FY 2007/08 as this would unnecessarily tie up funds, when a more moderate funding schedule is likely sufficient to address the concerns of the bond rating agencies that the City has a solid plan in place to address funding the OPEB. Water and Sewer Funds (Enterprise Funds) Since the enterprise funds (sewer, water, parking) utilize the full-accrual basis of accounting. the full cost of the ARC must be expensed regardless of whether the ARC is funded (cash paid out). Any part of the ARC which is not funded must then be reflected as a liability on the balance sheet of the enterprise funds. Due to this difference in accounting treatment and the fact that payroll costs are a lower percentage of total costs it is recommended that the ARC be fully funded in FY 2007/08 in the enterprise funds. All Other Funds As with the recommendation above for the general fund, it is anticipated that the other funds (including Redevelopment Agency, capital outlay funds. etc.) will be charged at a progressive rate as a percentage of payroll as listed in the table below. However, this rate will be higher than the proposed rate for the general fund as 2