HomeMy WebLinkAbout(1998, 04/27) - 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:
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.
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. Governing parameters regarding use of funds in Reserve Accounts
is established by Council Policy F -3. 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 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.
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CATEGORIES OF RESERVES.
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.
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.
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.
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, as well as the volatility in certain special 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 (sample attached), 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.
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GENERAL FUND
Accounting Reserves.
Reserve for Inventories. The value of inventories purchased by the City but not
yet issued to the operating Departments is reflected in this account.
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.
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.
Reserve for Encumbrances. This Reserve accommodates spending for contracts
or other items which are legally committed but not expended by fiscal year
end.
Contingency Reserve. This Reserve has a target balance of one - twelfth (1/12) of
General Fund operating expenditures. The City Council authorizes expenditures
from this Reserve.
Designated Reserves.
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 .7% of the annual
General Fund Operating Budget (not including capital projects). Projects for
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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
Manager's 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.
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.
Park Fees. This Reserve contains Park Fees collected by the construction
permit process. Use of Park Fees is governed by Council Policy I -1 which
limit their expenditure to park, open space, and recreational facilities.
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.
Neighborhood Enhancement Reserve. Newport Beach Municipal Code 12.44.027
establishes this account and governs its administration. Funds for the
Neighborhood Enhancement Reserve are derived from designated parking
meters and used for enhancement of services to designated areas.
Helicopter Replacement. Each year the Police Department will budget
operating funds sufficient for the orderly replacement of police helicopter
assets. These funds will be transferred to the Helicopter Replacement
Reserve until eventually appropriated by the City Council for a replacement
helicopter.
Paramedic Program (Hoag). This Reserve was established by the City in
conjunction with a debt issuance agreement with Hoag Hospital. Funds may
be used for any paramedic related purpose as directed by the City Council.
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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.
Stabilization Reserve. The Stabilization Reserve has a target balance of two percent
2 %) of the budgeted expenditures within the General Fund. Each year, the City
Manager will analyze 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.
WATER FUND
City Council Policy L -20 contains additional information concerning budgeting and
rate setting within the Water Fund.)
Contingency Reserve.
Water System Reserve. This Reserve is used for emergency repair to the water system.
The target level for this Reserve is 25% of the annual budget for operations and
capital expenditures.
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 five percent (5 %) of the
annual budget for operations and capital expenditures will be set aside to this
reserve each year. The City Council must approve the ultimate fund transfer from
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this Reserve to a designated Water Enterprise Fund Capital Project Account as part
of the Budget process.
WASTEWATER FUND
Contingency Reserve.
Wastewater System Reserve.. This Reserve is used for emergency repair to the
Wastewater system. The target level for this Reserve is 33% of the annual budget for
operations and capital expenditures.
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.
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.
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.
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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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.
Insurance Reserve Fund. The operating budgets of City's Departments are charged
for Liability, Workers' Compensation, and Compensated Absences.
Liability and Workers' Compensation Accounts. These accounts each serve three
purposes.
1) Payment of insurance premiums;
2) Payment of the deductible (self- insured retention) for liability or
workers' compensation claims;
3) Reserve for future claims.
0 Collection of Funds. Each year, the City Manager will determine and adjust
the internal collection rates from the Departments.
0 Short Term Expenditures. The Budget will account for projected
expenditures during the coming year.
0 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 fall within a
three year window. At this time, the target fund balance each year is fifty
percent (50 %) of the estimated overall liability for known or anticipated
claims, based on the City's general experience in the past.
Compensated Absences.
0 Background. Employee benefits such as accumulated flex leave, vacation
leave, and sick leave, have a cash value. Accounting practices require that the
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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.
0 Policy and Practice. The City will fund an appropriate amount, but not the
entire long -term book liability, for compensated absences.
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.
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.
Adopted - January 24,1994
Amended - April 10, 1995
Amended - April 27,1998
W.J