Dear Ms. Grey,
Thank you for this helpful preview of the FY 25 Budget expenses. Two requests:
(1) Establishing Fund
As part of this budget's adoption, I think it would follow best practice to establish a set of permanent, policy-driven funds. Specifically:
General Reserve. This is our reserve to cover unexpected emergencies and revenue shortfalls for the corporation's administrative overhead. Because we do not have a dedicated tax-based funding stream, I think it should be a healthy multiple of the Government Finance Officers of America's recommendation of 17% of the "general fund" (operating budget). As a starting point, I'd suggest a policy of 50% of the previous year's operating budget.
Litigation Settlement Fund. A fund for litigation settlements. As a starter policy, I suggest the average of the last 5 years of legal settlements by SHFC or $250,000, whichever is larger.
Portfolio Reserve. This is a fund to support natural portfolio transactions and opportunistic improvements to our existing properties. This one may require a complicated formula that takes into account the age of our LIHTC properties (and when partners may wish to exit), as well as our overall unit count. Just based on recent transactions I feel comfortable placing at least $1.5m into this fund. But I would welcome staff guidance on the specific policy language.
Operational Endowment. Over the 10 years, we will build an endowment capable of covering 33% of personnel expenses or roughly $1 on an annual basis. For example, at an assumed 3% income yield, we would need a ~$35m endowment. Along with new deal income and income from real estate assets, this will help fund overhead. The investment policy on this endowment would be more aggressive than our other funds as it is not intended to be transferred out of the fund at any point. We would want to avoid correlation between its investments and Austin housing.
Housing Acquisition and Production Fund. These funds would be used for acquiring or developing new units into our portfolio. It could be used as equity, to provide construction loans, or other creative deals/instruments.
In terms of triage among the funds with our current balance sheet and any near-term infusions, the Board would ultimately vote on allocations but it makes sense to start by filling the general reserves and litigation funds, and then adding to our portfolio reserve and annual operational endowment contribution, with the final balance being placed into housing acquisition and production.
This is an initial sketch and I very much welcome feedback from staff or Directors on this topic.
