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HomeMy WebLinkAbout(2002, 04/23) - F-2 - AmendedF -2 RESERVES /DESIGNATIONS OF FUND BALANCE PURPOSE 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. 1 F -2 • 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 • 2 4 F -2 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. e. Reserve for Appropriations. This is a temporary repository for funds not yet fully appropriated in the annual budget. It is normally used only during the budget process. 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 3 F -2 • 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 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 Parkin e. 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 • 4 is F -2 Reserve are derived from designated parking meters and used for enhancement of services to designated areas. 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. i. 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 In Lieu Parking Reserve, Oil Spill Recovery Reserve, and the Public Library Fund Reserve. 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 5 F -2 11 Manager will note the reasons in the preliminary and final budget. The Stabilization Reserve may have subdivisions. B. Water Fund. City Council Policy L -20 contains additional information concerning budgeting and rate setting within the Water Fund.) 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. WWI F -2 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 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. E uipment 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 %) 7 F -2 • of the total annual budget for equipment maintenance is retained in the Fund. b. EE uiUment 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 fall within a three - year window. At this time, the target fund balance each year • 8 F -2 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 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. Adopted - January 24,1994 Amended - April 10, 1995 Amended - April 27,1998 Amended - March 14, 2000 Amended - May 8, 2001 Amended - April 23, 2002 I