Maximizing the Use of Special Funds
2022 Financial Report
On March 1, 2022, the Controller’s office issued the Revenue Forecast Report for Fiscal Years 2022-2023, which warned that increased expenses coupled with the loss of one-time federal pandemic dollars spells trouble for the next fiscal year’s budget. The facts brought to light underscore the importance of this report, which covers the City’s 621 special purpose funds (special funds). Special funds represent approximately $4.59 billion, or 36 percent, of the City’s entire cash balance. These funds are created by ordinance and City Council action to pay for specific purposes or projects, including grant programs, capital projects, fee-supported activities, debt service and more.
During the pandemic, the City borrowed $200 million from its special funds to soften the pandemic’s strain on the General Fund and pay for urgent COVID-19 expenses. The loans were later repaid using federal assistance funds. Because the City will be tight on funds in the next fiscal year, it is even more important to maximize the use of special funds now so that the City can maintain programs and services as much as possible.
General Fund vs. Special Funds
Depicted in the visual below, the annual General Fund cash balance increased over time by 5.2 percent compared to 2014. Over that same period, special fund cash balances grew by an annual average of 4.5 percent. Although revenues and expenditures have increased in the General Fund and special funds, only General Fund cash reverts to the Reserve Fund at the end of each fiscal year. Uncommitted special funds and unspent encumbrances from prior years remain in their funds until expended. Use the drop down menu to toggle between General Fund and special fund views.
This report is guided by the City’s experience over the past two years. From March 2020 to June 30, 2021, the City of L.A.’s COVID-19 expenditures were $729.9 million. Offsetting these costs were Federal Emergency Management Agency (FEMA) reimbursements of $39 million, and the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in the amount of $694.4 million.
At the time of the preparation of this report, City departments have spent more than $1.1 billion on programs, supplies, homeless housing, regular and overtime staff hours, emergency rental assistance, testing and vaccination efforts.
Of that amount spent, $200 million was borrowed from various special funds to front the cash needed by City departments to pay for immediate COVID-19 expenses. These loans were repaid using federal financial assistance funding from the CARES Act and the American Rescue Plan Act (ARPA) received in 2020 and 2021.
By the end of fiscal year 2021, four new special funds were created to account for various COVID-19 spending programs. These funds had a combined cash balance of $716.8 million on June 30, 2021.
Below is more detailed information about special funds, followed by recommendations on what to do to maximize their use today.
Although special fund revenue has increased annually by an average of 6.7 percent over the past seven years, in fiscal year 2021 revenue increased by 5.9 percent. The Housing and Homelessness function and Debt Service revenues contributed greatly to this, with an increase of 46.5 percent and 44.5 percent respectively. Federal funding for the Economic Development function also added to the rise.
Average annual special fund expenditures grew by 6.9 percent. Expenditures in 2021 were 18.4 percent higher than in 2020. The largest jump was in the form of pandemic spending in the Economic Development function by 588.6 percent.
- Cash Balance
Although the average annual cash balance was 4.1 percent, the 2021 cash balance decreased by 5.7 percent as a result of Special Fund expenditures of $6.41 billion exceeding $6.09 billion in revenues. Primarily, the decrease was from City COVID-19 special fund expenditures in the amount of $846.6 million.
- Ongoing State of Idle Special Funds
Idle special funds are hereafter defined as funds which have had no spending for more than two years. In 2018, this office released a list of 123 special funds with a combined balance of $28 million that sat dormant (C.F. 18-0270). As a result of this office’s work with the Budget and Finance Committee and through CAO recommendations that were adopted by the City Council, a significant amount of idle special funds were addressed. Since the 2018 report, 63 special funds were closed and seven became active. However, 134 special funds have been added to the list as they have hit the two-year inactivity threshold, for a current total of 187 idle special funds with a total cash balance of $54.9 million.
The City still faces fiscal uncertainty in 2021 due to the evolving status of the coronavirus pandemic and its effects on the economy. Further, the lack of once available one-time funding from the federal government will leave gaps of funding for important City programs. However, this is an opportune time for the City to take inventory of special funds and how they can be maximized. As such, we make the following recommendations:
- Continue leveraging special funds to relieve the burden on the General Fund.
- Instruct the City Administrative Officer (CAO) to work with relevant departments to report on how special funds could be used to assist with or complement General Funded public safety issues and social or economic development programs.
- Identify creative ways to expand the use of special funds.
- Instruct the CAO and relevant departments, with the assistance of the City Attorney, to analyze their special funds and report on the feasibility of expanding the use of the fund by changing the original language establishing the Special Fund.
- Improve the City’s accountability and management of special funds.
- Request the City Attorney to draft an ordinance to repeal previously closed special funds (listed in Schedule 6) so that their corresponding ordinances can be removed from the Administrative Code.
- Request the City Attorney, with the assistance of the CAO, to identify whether interest earnings from new special funds can legally first go towards the General Fund and to subsequently, provide the steps necessary to implement this potential change, if legally allowable.
- Instruct the CAO to develop a policy to automatically disencumber outstanding special fund encumbrances three years or older.
- Request the City Attorney to incorporate a sunset clause for new special fund ordinances.
- Instruct the CAO to create a Departmental Special Fund Creation Form and require Departments to submit this form to summarize the intent and nature of the new special fund being requested.
- Instruct the CAO to establish a policy that allows the removal of old and obsolete grant idle special funds, especially when there is insufficient documentation available to keep them.
- Instruct the CAO and relevant Departments, with the assistance of the City Attorney, to report on the item found under the Additional Actions to Consider column listed for each idle special fund in Schedule 8.
- Instruct the CAO to evaluate the recommendations in this report and to report back on which should be included in the City’s financial policies.