HomeMy WebLinkAbout(2001, 05/08) - F-2 - Amendeda
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RESERVES /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.
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.
C. 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
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.
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D. 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, 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, which is available for ready reference in the City's Annual Budget
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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.
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.
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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 percent 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 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.
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 I -1, which limit their expenditure to park, open
space, and recreational facilities.
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. 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.
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f. 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.
g. Paramedic Program (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 15
percent, 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 25 percent of the annual budget for operations and
capital expenditures.
h. 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.
4. 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.
B. Water Fund.
City Council Policy Lr20 contains additional information concerning budgeting
and rate setting within the Water Fund.)
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1. Contingency Reserve.
a. Water System Reserve. This Reserve is used for emergency repair
to the water system. The target level for this Reserve is 25 percent
of the annual budget for operations and capital expenditures.
2. Designated Reserves.
a. 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 this Reserve to a designated Water
Enterprise Fund Capital Project Account as part of the Budget
process.
C. Wastewater Fund.
1. Contingency Reserve.
a. Wastewater System Reserve. This Reserve is used for emergency
repair to the Wastewater system. The target level for this Reserve is
33 percent of the annual budget for operations and capital
expenditures.
2. Designated Reserve.
a. Future Wastewater Infrastructure Reserve. This Reserve is used for
large designated projects that are part of the City's Wastewater •
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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.
D. 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.
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.
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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.
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 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.
3. Compensated Absences.
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
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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.
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°x) of the long-
term liability for compensated absences.
Adopted - January 24,1994
Amended - April 10, 1995
Amended - April 27,1998
Amended - March 14, 2000
Amended - May 8, 2001
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