HomeMy WebLinkAbout(2004, 04/13) - F-2 - AmendedRESERVES/ DESIGNATIONS OF FUND BALANCE
PURPOSE
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To establish City Council policy for the administration of financial reserves and fund
balances.
DISCUSSION
A. Background. Prudent financial management dictates that some portion of the
funds available to the City be reserved for future use. Future uses are
categorized as either pre - planned projects or unforeseen financial emergencies.
For clarification, the City also has a number of Special Revenue Funds. These
Funds are somewhat similar to reserves in that they act as a repository for money
that can only be used for specific purposes. Reserves are generally distinguished
from Special Revenue Funds in that decisions regarding the purpose and /or the
amounts to be set aside, as well as the circumstances for use, normally fall within
the authority of the City Council. That authority normally rests largely with an
external entity in the case of Special Revenue Funds.
B. Structure and Funding of Reserves. This Policy establishes Reserve Accounts or
designated Fund Balance levels for moneys being held in reserve. In addition,
the sources and eventual use of Reserve Funds are set forth.
It is the policy of the City Council that each Reserve identified herein is to be
fully funded as part of the annual budget process. If operational or other
considerations require the City Council to temporarily override this policy
during any fiscal year, the City Manager will recommend to the City Council a
plan to restore any Reserves falling below required minimum levels. Reserve
levels will be restored as soon as practical, but in not more than 5 years.
Each of the City's fiscal reserves is established and maintained for one of four
purposes listed in general order of importance below. If the reserve
requirements of this policy are unmet in any fiscal year, the City Manager will
recommend funding prioritization to the City Council as part of the Budget.
Use of Reserves. The City Council decides whether to appropriate funds from
Reserve Accounts. Even though a project or other expenditure qualifies as a
proper use of Reserves, the Council may decide that it is more beneficial to use
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current year operating funds or bond proceeds instead, thereby retaining the
Reserve funds for future use. Reserve Funds will not be spent for any function
other than the specific purpose of the Reserve Account from which they are
drawn without a separate City Council Resolution approving that specific action.
Information regarding Annual Budget Adoption and Administration is
contained in City Council Policy F -3.
C. Categories of Reserves.
1. Accounting Reserves. Generally accepted governmental accounting
practices require identification of generic reserve funds for certain
purposes. These accounts represent the unspendable portions of fund
balance, such as inventories and long -term receivables, as well as funds
that are legally restricted by some external source, such as debt service
reserves and encumbrances. Reserving funds for a contract awarded in
one year but not completed until a succeeding year is one example of an
accounting reserve for encumbrance.
2. Contingency Reserves. Contingency Reserves represent funds for •
unexpected financial emergencies. One example requiring the use of this
Reserve is the adverse impact of natural disasters such as earthquake or
flooding on revenue availability, as well as increased demand for City
services. Other examples are unexpected loss or reduction of a key
revenue source; special projects, programs, or price changes mandated by
another government entity; and emergency capital projects needed to deal
with unforeseen structural failure.
3. Designated Reserves. These Reserves are designated for known or
anticipated events. Such events require large, non - recurring financial
outlay, such as the replacement of systems and equipment or major capital
improvements.
4. Stabilization Reserves. Stabilization Reserves enhance the orderly
management of the Operating Budget by stabilizing revenues and
expenditures, which fluctuate beyond the ability of City staff to control or
predict. One example is the annual change in retirement contribution
rates mandated by the Public Employee Retirement System (PERS). Other
examples are changing prices for utilities and fuel, market value
adjustment for investment earnings, and volatility in certain special
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program funding. These Reserves provide stability by "smoothing out"
year -to -year volatility in the City's finances.
FUNCTION AND ADMINISTRATION OF RESERVE ACCOUNTS
Reserves are identified below by fund, category and specific function. The specific
numbers of accounts where these Reserves are physically located change from time to
time as the overall account structure is updated and modified. However, the Fund
Balance Statement, which is available for ready reference in the City's Annual Budget
document, identifies balances, past -year activity, and projected current year activity for
each of these Reserves.
A. General Fund.
1. Accounting Reserves.
a. Reserve for Inventories. The value of inventories purchased by the
City but not yet issued to the operating Departments is reflected in
this account.
b. Reserve for Debt Service. Funds are placed in this Reserve at the
time debt is issued. The provisions governing the Reserve are
established in the Bond Indenture, and the Reserve itself is
controlled by the Trustee.
C. Reserve for Long Term Receivables. This Reserve is used to
identify and segregate that portion of the City's financial assets
which are not due to be received for an extended period, so are not
available during the budget year.
d. Reserve for Encumbrances. This Reserve accommodates spending
for contracts or other items, which are legally committed but not
expended by fiscal year end.
2. Contingency Reserve. This Reserve has a target balance of not less than
ten percent (10 %) of annual General Fund expenditures. The City Council
authorizes expenditures from this Reserve.
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3. Designated Reserves.
a. Capital Improvement. Generally accepted governmental
accounting practices do not provide for the depreciation of assets of
Governmental Funds such as the General Fund. Therefore, special
procedures are required to set aside money (a "sinking fund ") for
replacement or renovation of fixed assets such as, but not limited
to, City Hall and Police Department buildings, Fire Stations, and
Library Branches.
The Capital Improvement Reserve will accumulate funds only for
infrastructure items financed through the General Fund.
Infrastructure assets of Enterprise Funds, as well as those of
Governmental Fund, for which non - general fund money is
available, are not components of this Reserve. Funds from this
Reserve are restricted to replacement or acquisition of periodic,
major projects or improvements typically exceeding 0.7 percent
0.7 %) of the annual General Fund Operating Budget (not including
capital projects). Projects for which this Reserve is intended •
generally have the effect of extending the useful lives of
infrastructure items.
The City Manager will update the status of items of the General
Fund infrastructure inventory on an annual basis. Included as part
of the City Managers budget proposal will be a plan to fund this
Reserve at a level of not more than one hundred percent (100 %) of
the replacement cost of each asset by the year in which replacement
is anticipated.
b. Senior Citizen Site. This Reserve is established by Council Policy
I -5, which specifies that ten percent (10 %) of revenue collected from
rental of facilities at the Oasis Center be set aside for equipment
replacement and /or refurbishment at the Center.
C. Park Fees. This Reserve contains Park Fees collected by the
construction permit process. Use of Park Fees is governed by
Council Policy 1 -1, which limits their expenditure to park, open
space, and recreational facilities.
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d. Off Street Parking. Newport Beach Municipal Code 12.44.025
establishes this Reserve and governs its administration. Fifty
percent (50 %) of parking meter revenue collected in designated
areas is set aside for acquisition, development, and improvement of
off street parking facilities within those areas.
e. Paramedic Prog am (Hoag). This Reserve was established by the
City in conjunction with debt issuance agreements with Hoag
Hospital. In addition to the original amount(s) deposited to this
reserve, effective July 1, 2000, any excess revenues generated by
this program, after accounting for General City Overhead of fifteen
percent (15 %), shall be deposited to this reserve account for future
paramedic related purposes, to a maximum of $250,000. Funds in
this reserve account may be used for any paramedic related
purpose as directed by the City Council. Target level for this
reserve is twenty-five percent (25 %) of the annual budget for
operations and capital expenditures.
f. Recreational Instruction Reserve. City Council Policy I -2
establishes reserves for surfboard replacement and refurbishment,
development of tennis courts, and development of new recreational
activities. The Policy requires twenty percent (20 %) of gross annual
revenues derived from specified recreational classes be set aside.
g. In Lieu Parking Reserve. This Reserve is established by NBMC
12.44.125. The City requires commercial businesses to provide
adequate off - street parking. In some cases where this is not
possible, businesses are afforded the opportunity to pay an annual
fee and use parking spaces in a municipal lot, providing such a lot
is located within specified proximity to the business. This Reserve
is the repository for these fees. Special purposes of the use of these
funds have not been established by the City Council.
h. Park In Lieu Reserve. This Reserve was established by NBMC
19.52. The City requires dedication of land or payment of fees for
park or recreational purposes in conjunction with residential
development. When fees are paid, the funds are placed in this
Reserve. Specific guidance regarding use of the funds is contained
in 19.52.030 and 19.52.070.
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i. Neighborhood Enhancement Reserve A. This Reserve was
established by NBMC 12.44.027, which directs that Revenues from
parking meters in Zone 9 shall be apportioned to this Reserve.
Funds in the Reserve will then be used for the purpose of
enhancing and supplementing services to the West Newport area.
Both the nature of the supplemental services and the definition of
the area served are set forth in the Code Section above.
j. Neighborhood Enhancement Reserve B. This Reserve is almost the
same as Reserve A above. The difference is that this Reserve
pertains to the Balboa Peninsula, and it specifies that fifty percent
50 %) of the parking meter revenue will be apportioned to the
Reserve. Specific details are contained in the Code Section.
k. Ocean Front Restoration Reserve. In the early 1990's, it was
discovered by survey that improvements to several ocean front
parcels were encroaching onto the public beach. The encroachment
was relatively minor. The negotiated solution was for the property
owners to pay a permit fee each year to the City. Revenue thus •
generated may only be used for ocean front restoration projects and
incidental costs of improvements and maintenance to enhance
public access and use of ocean beaches as approved by the City
Council. This Reserve is the repository for those funds. City
Council Policy L -12 contains additional background and details
about the encroachment issue. NBMC 12.44.027 establishes this
Reserve Account, governs its administration, and defines areas in
and purposes for which funds in the account may be spent.
Other Designated Reserves. The Administrative Services Director
may add additional designated reserves as required. This will
normally be done in response to new programs or policies
established by the City Council or another government entity
providing funds to the City. Examples are the Oil Spill Recovery
Reserve and the Public Library Fund Reserve.
4. Stabilization Reserves.
a. General Fund Stabilization Reserve. This Reserve has a target
balance of two percent (2 %) of the budgeted expenditures within
the General Fund. Each year, the City Manager will analyze •
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uncontrollable revenues and expenditures. When expenditures are
required from this Reserve, the City Manager will note the reasons
in the preliminary and final budget. The Stabilization Reserve may
have subdivisions.
b. Reserve for Appropriations. This is a temporary repository for
funds not yet fully appropriated in the annual budget. It is
normally used during the budget process to set aside funds for
known or strongly anticipated expenses that will need to be
addressed by budget amendment during the budget year.
Sometimes the dollar amount and /or appropriate account
breakdown for such expenses cannot be specifically identified at
the time the budget is adopted, even though the funds will be
needed. In such cases, the funds will normally be budgeted to the
Reserve for Appropriations.
C. Change in Fair Market Value of Investments. As dictated by GASB
31, the City is required to record investments at their fair value
market value). This accounting practice is necessary to insure that
the City's investment assets are shown at their true value on the
balance sheet. However, in a fluctuating interest rate environment,
this practice records market value gains or losses which may never
be actually realized. In any case, it causes the gains or losses to be
recorded well ahead of actual cash flows. Therefore, although
actual cash investment earnings may be relatively stable,
investment income recorded on the City's books will often be
artificially volatile.
From a budgeting standpoint, actual cash investment earnings
should be considered as available for the annual budgeting process,
whereas market value fluctuations should not. Therefore in order
to mitigate any such adverse budgetary impact, the City records
two Stabilization Reserves related to Market Value fluctuation:
Reserve for Prior Year Unrealized Market Value Gains: This is a
known value that will be reserved annually during the City's
closing process since the early recognition of investment earnings
will reduce the investment earnings potential in the new year.
Target Balance = to Prior Year MV Gain)
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Reserve for Potential Current Year Market Fluctuation: This is a
defensive reserve that may be utilized to avail resources during the
next budgeting cycle if interest rates rise sharply relative to the
investment portfolio's current stated return. (Target should be 2%
of General Fund's position in total Investment portfolio).
d. PERS Rate Reserve. This Special Subdivision of the Stabilization
Reserve has been established for the specific purpose of helping to
smooth out (for internal budgeting purposes) the year -to -year
fluctuations in PERS rates. PERS rates have been one of the most
volatile and unstable elements on the expense side of the City's
annual budget process. The long -term goal is to budget the normal
cost of PERS rates, setting aside the extra money in this Reserve
when actual rates are below that level. Conversely, when actual
rates are above that level, funds from this Reserve can be drawn
upon. At this writing (2003) significant PERS rate increases in the
out years are anticipated. Therefore extra funds will be placed in
this Reserve, subject to availability.
B. Tide and Submerged Land Fund. Within this Special Revenue Fund, special •
Designated Reserves have been created.
Upper Newport Bay Restoration Reserve. This reserve is the repository for funds
mandated by S13573, as well as special fees charged to permit holders as an
alternative to meeting certain specified mitigation criteria. In addition to the
mitigation fees, 10% of Beacon bay lease revenue is placed in this Reserve. Funds
in the Reserve are designated for Upper Newport Bay restoration projects.
Oil and Gas Designated Reserve. This designation was established by the City
with the intent to build a reserve that will provide funding to abandon wells and
facilities as they go out of service. Annually, $40,000 will be set aside from the oil
and gas field production revenues to fund this reserve.
C. Permanent Endowment Fund_LRobinson Skinner Annuity). Similar to the above
Fund, there is a Designated Reserve within this special purpose Fund.
The Newport Bay Dredging Reserve (Robinson- Skinner Annuity). This Reserve
is the repository for the Robinson - Skinner Annuity funds. In general, the
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endowment specifies that the principal amount will not be depleted, but that
investment earnings may be used for dredging projects in Newport Bay.
D. Water Fund.
City Council Policy L -20 contains additional information concerning budgeting
and rate setting within the Water Fund.)
1. Accounting Reserves. The same four Accounting Reserves identified in
the General Fund will also be used in the Water Fund.
2. Continency Reserve.
Water System Reserve. This Reserve is used for emergency repair to the
water system. The target level for this Reserve is thirty -five percent (35 %)
of the annual budget for operations.
3. Designated Reserves.
Future Water Infrastructure Reserve. This Reserve is used for large
designated projects that are part of the water distribution system. System
replacement/ upgrade and most improvement/ major maintenance
projects are funded within that amount. However, certain large -scale
projects are projected on a ten -year horizon, which is updated and refined
each year. The purpose of this Reserve is to set aside partial funding for
those projects in advance.
Included as part of the City Manager's annual budget proposal will be a
plan to fund this Reserve at a level of not more than one hundred percent
100 %) of the projected cost of planned projects by the year in which
contract award is anticipated. Projected future costs notwithstanding, a
minimum of ten percent (10 %) of the annual budget for operations will be
set aside to this reserve each year. The City Council must approve the
ultimate fund transfer from this Reserve to a designated Water Enterprise
Fund Capital Project Account as part of the Budget process.
No new funds will be added to Designated Reserves unless Contingency
and Stabilization Reserves are fully funded.
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4. Stabilization Reserve.
Water Rate Stabilization Reserve. This Reserve is used for water rate or
fee stabilization to offset large expenditures changes such as water
purchase, energy or treatment costs. The intent of the Reserve is to
provide funds to offset cost increases that are projected to be short - lived,
thereby partially eliminating the volatility in annual rate adjustments. It is
not intended to offset ongoing, long -term pricing structure changes. The
target level of this reserve is twenty -five percent (25 %) of the annual
budget for operations. Funds will be set aside only if target Contingency
Reserve level is met. The City Council must approve use of these funds,
based on City Manager recommendation. See also City Council Policy L-
20.
Change in Fair Market Value of Investments. This Reserve will be used in
the Water Fund in the same manner it is used in the General Fund.
E. Wastewater Fund.
1. Accounting Reserves. The same four Accounting Reserves identified in •
the General Fund will also be used in the Wastewater Fund.
2. Contingency Reserve.
Wastewater System Reserve. This Reserve is used for emergency repair to
the Wastewater system. The target level for this Reserve is seventy
percent (70 %) of the annual budget for operations.
3. Designated Reserve.
Future Wastewater Infrastructure Reserve. This Reserve is used for large
designated projects that are part of the City's Wastewater system. Funds
are reserved for large -scale future projects, which cannot be
accommodated within the annual budget of the year in which they are
planned. In the years prior to estimated contract award, the City
Manager's budget proposal will include a plan to set money aside in this
Reserve sufficient to accumulate not more than one hundred percent
100 %) of the projected cost of such projects. Projected future costs
notwithstanding, a minimum of ten percent (10 %) of the annual budget
for operations will be set aside to this reserve each year. The City Council •
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must approve the ultimate fund transfer from this Reserve to a designated
Wastewater Enterprise Fund Capital Project Account as part of the Budget
process.
4. Stabilization Reserve.
Wastewater Rate Stabilization Reserve. This Reserve is used for
wastewater rate or fee stabilization to offset large expenditure changes
such as energy or operational costs. The intent of the Reserve is to
provide funds to offset cost increases that are projected to be short - lived,
thereby partially eliminating the volatility in annual rate adjustments. It is
not intended to offset ongoing, long -term pricing structure changes. The
target level of this reserve is twenty-five percent (25 %) of the annual
budget for operations. Funds will be set aside only if target Contingency
Reserve level is met. The City Council must approve use of these funds,
based on City Manager recommendation.
Change in Fair Market Value of Investments. This Reserve will be used in
the Wastewater Fund in the same manner it is used in the General Fund.
F. Internal Service Funds.
Internal Service Funds receive moneys from departmental operating budgets.
There are two Internal Service Funds: the Equipment Maintenance and
Replacement Fund, and the Insurance Reserve Fund.
One of the functions of Internal Service Funds is to act as reserve accounts.
1. Equipment Maintenance and Replacement Fund. The Equipment
Maintenance and Replacement Fund receives operating moneys from the
Departments to provide equipment maintenance and to fund the regular
replacement of major pieces of equipment (mostly rolling stock) at their
economic obsolescence.
a. Equipment Maintenance Account. In order to provide adequate
funds for unexpected extraordinary costs due to damage or
mechanical failure to a large piece of equipment, five percent (5 %)
of the total annual budget for equipment maintenance is retained in
the Fund.
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b. Equipment Replacement Account. Departmental operating funds
are charged amounts sufficient for the replacement of rolling stock
in accordance with Council Policy F -9. Equipment replacement
needs vary from year to year; therefore the year -end Fund balance
will fluctuate. It will increase substantially in the years preceding
major purchases or when an unusually large percentage of the fleet
is scheduled for replacement. The City Manager annually
determines and adjusts the rates for collection of funds from the
Departments based on pricing, future replacement schedules, and
other variables.
2. Insurance Reserve Fund. The operating budgets of City's Departments
are charged for Liability, Workers' Compensation, and Compensated
Absences.
a. Liability and Workers' Compensation Accounts. These accounts
each serve three purposes:
Payment of insurance premiums; •
Payment of the deductible (self- insured retention) for liability or
workers' compensation claims;
Reserve for future claims.
i. Collection of Funds. Each year, the City Manager will
determine and adjust the internal collection rates from the
Departments.
ii. Short Term Expenditures. The Budget will account for
projected expenditures during the coming year.
iii. Future Costs. Money will be set aside each year to
accommodate projected long -term cash outflow. The annual
funding level will be sufficient to offset the estimated cost of
known claims. Resolution of most claims falls within a
three -year window. At this time, the target fund balance
each year is eighty percent (80 %) of the estimated overall
liability for known or anticipated claims, based on the City's
general experience in the past. •
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3. Compensated Absences Fund.
a. Background. Employee benefits such as accumulated flex leave,
vacation leave, and sick leave, have a cash value. Accounting
practices require that the book value of the City's compensated
absences liability reflect the cash outflow as if all absences were
cashed out immediately. Much of this cash outflow will never
occur, since the benefits will be taken in the form of time off, rather
than cash. Additionally, the cash outflow could occur all at once
only if the City dissolved and made full payment for all
accumulated leave amounts.
The largest portion of leave -to -cash conversion is at an employee's
retirement. That amount can be estimated with reasonable
accuracy.
b. Policy and Practice. The City will fund an appropriate amount, but
not the entire long -term book liability, for compensated absences.
i. Each year, the City Manager will project the amount of
expected short -term cash liability for compensated absences
and budget expenditures from the Compensated Absences
Account.
ii. The City Manager will establish a target closing balance that
will fund not less than twenty -five percent (25 %) of the long-
term liability for compensated absences.
4. Retiree Medical Fund Reserve. The City has established a special program
whereby medical insurance costs of its retirees are partially offset by
limited contributions from the City and members of the active duty
workforce. In addition to covering each years required costs on a "pay as
you go" basis, a special Reserve has been established for the long -term
accumulation of money to offset the unfunded liability of this program.
The City contributes $20 per full -time active employee per month to this
Reserve, and each full -time active employee contributes $10 per month.
This Reserve is the repository for these long -term accumulation funds.
Money in this Reserve is not to be used to partially offset annual costs of
the program at any time until the unfunded liability of the program is
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fully covered by the balance in the Reserve. At that point, funds in the
reserve may be depleted for use in paying annual expenses, or replenished
each year if inadequate, depending on the status of the unfunded liability.
The goal is for the balance in the Reserve to cover the unfunded liability
on an ongoing basis.
Adopted -January 24,1994
Amended - April 10, 1995
Amended - April 27,1998
Amended - March 14, 2000
Amended - May 8, 2001
Amended - April 23, 2002
Amended - April 13, 2004
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