Petaluma council moves to shore up reserve fund

Petaluma City Council members on Monday agreed to put the city on a potentially long and painful -- but ultimately more secure -- financial track.

In a special meeting, the council informally agreed to create a policy that rebuilds the rainy day fund to healthy levels and assures revenues will be set aside each year to keep the fund robust.

In 2005, reserves were at nearly 22 percent of the city's general fund spending. But every year since, the city has drawn from the fund to stave off even more drastic cuts to services and staff during the recession.

Over the next six years, the council drained the emergency fund to its low point of 1 percent in 2011, an amount city leaders acknowledged was "precariously low."

A 1 percent reserve equates to about five days of expenditures, city Finance Director Bill Mushallo said.

Last year, the reserve fund sat at just under 4 percent, which could fund about 14 days of city operations.

As part of a new five-year budgeting process, Mushallo and City Manager John Brown sought guidance from the council on how to fund the reserves long-term.

Councilwoman Teresa Barrett supported an aggressive policy.

Using the reserves during the toughest financial times "allowed us to keep our heads above water," she said. "If we didn't have those, we'd be with Stockton, I guess." A federal court ruled last week that the Central Valley town of Stockton can file for bankruptcy.

The council agreed to shoot for a reserve fund of 15 to 17 percent of expenditures, or about $5.6 million, which Mushallo said may be achievable within five years.

A survey of nine area cities, including Santa Rosa, Healdsburg, Rohnert Park, Novato and Napa, showed an average reserve fund policy of 18 percent.

Cities with healthy reserves receive more favorable lending rates. According to the credit rating service Moody's, the top-rated cities have a median of 32 percent in their rainy day funds.

Moody's recently downgraded Petaluma's rating, in part due to depleted reserves. With a better rating, the city could refinance current debt and receive better interest rates for new loans.

Councilman Gabe Kearney wanted a clear replenishing plan should the council dip into the reserves in the future.

"Before we go down that road," he said, "I want to make sure we have a map to get us back."

The council also agreed to add $1.1 million in one-time revenues to reserves, set aside 15 percent of all new revenues to the emergency fund and create a one- to three-year replenishment plan if reserves are borrowed.

You can reach Staff Writer Lori A. Carter at 762-7297 or lori.carter@pressdemocrat.com.