Exhibit B-Reserve Policy - Clean Version
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Exhibit B Reserve Policy The purpose of the Reserve Policy is to ensure the City remains a financially stable organization by maintaining appropriate reserves. Adequate reserves position an organization to effectively plan for cash funded needs, as well as unplanned needs caused by significant economic downturns, manage the consequences of outside agency actions that may result in revenue reductions, and address unexpected emergencies, such as natural disasters, catastrophic events caused by human activity, or excessive liabilities or legal judgments against the organization. In concert with the City’s other financial policies, the City’s Reserve Policy serves as an important tool to guide the use of City resources in meeting the City’s financial commitments and provides a framework for addressing unexpected future events in a fiscally prudent manner. This policy documents the City’s approach to establishing and maintaining adequate reserves (target levels) based on consideration of risks to operations, in the budgetary fund balance across a spectrum of City operations in various funds. The budgetary fund balance represents the one- time amount accumulated from prior years, which is different than the fund balance under Generally Accepted Accounting Principles (GAAP), but includes the same constraints on spending. Governmental Accounting Standards Board (GASB) Statement No. 54 defines five reserve classifications of fund balance based on the level of restrictions placed on the specific purposes for which amounts can be spent: nonspendable fund balance, restricted fund balance, committed fund balance, assigned fund balance, and unassigned fund balance. The last three classifications are termed Unrestricted Fund Balance since the constraint on spending is imposed by the government itself, therefore subject to this reserve policy. Additionally, contingencies and reserves can be appropriated and unappropriated, depending if the City would like the reserve to be available for spending in the current budget year or not. General Fund Reserve Policy The General Fund is the main operating fund that pays for general services provided by the City, such as public safety, parks, and library services. The General Fund accounts for all general revenues of the City and for expenditures related to the rendering of the City’s general services. The General Fund is considered to have a high level of risk to operations due to its dependence on revenue streams that are susceptible to economic downturns and revenue reduction impacts from outside agency actions. In addition, the General Fund is the main funding source when responding to unexpected events or emergencies. Consideration of potential risk and other drivers influence the targeted minimum level of total Unrestricted Fund Balance that should be maintained. The Government Finance Officers Association (GFOA) recommends no less than two months of General Fund Unrestricted Budgetary Fund Balance. The City desires to maintain a prudent level of reserves based on the revenue impacts described above and the City’s desire to maintain strong bond ratings to minimize borrowing costs. This reserve policy sets the targeted minimum level at four months of budgeted ongoing General Fund operating revenues, excluding one-time transfers in, to provide stability and flexibility to respond to unexpected adversity and/or opportunities. Should the minimum reserve level fall below its target, a plan will be formulated to restore within a three-year period. The Unrestricted Budgetary General Fund Balance can include the following contingency and reserve types. General Fund Contingencies/Reserves (Type/ Appropriated or Not/ GASB 54 Classification) General Fund Contingency / Appropriated / Unassigned: This Contingency will be maintained equal to 15% of General Fund operating revenues, excluding one-time transfers in. Acceptable contingency reserve uses are emergency situations, unexpected one-time opportunities, and appropriation transfers to allow spending in other funds. Use of this reserve requires Council approval unless delegated in the Budget Resolution. The 15% General Fund Contingency reserve must be replenished annually. Council Contingency / Appropriated / Unassigned: This Contingency will be created annually for use by Mayor and Council during the Council budget amendment process or during the year for initiatives identified. Budget Stabilization Reserve / Not Appropriated / Assigned: This reserve may be created to offset operating deficits that result from economic downturns and revenue reduction impacts from outside agency actions that can create adverse service impacts, allowing time to reduce spending and/or find other ongoing revenue opportunities. Council may add to the reserve from time to time but not draw from it for more than three consecutive fiscal years. This reserve is included within the targeted minimum level of four months of budgeted ongoing General Fund operating revenues, excluding one-time transfers in. Capital and Economic Development Reserves / Appropriated and/or Not Appropriated / Assigned: These reserves may be created to fund economic development opportunities, planned new and redevelopment capital projects and capital maintenance projects to sustain existing City infrastructure and minimize additional borrowing to help manage tax rate impacts. Personnel and Operating Reserves / Appropriated and/or Not Appropriated / Assigned: These reserves may be created to fund specific operating expenditure areas that are susceptible to economic fluctuations and to fund personnel costs that can be reasonably estimated and are short- term in nature. Other Fund Reserve Policies Other funds have been identified as needing reserves due to one or more of the following reasons: self-supporting nature, the potential for unanticipated revenue or expense changes that can negatively affect operations, to help maintain a stable fee structure, or to cover the potential of unanticipated events threatening the public health, safety, or welfare. Reserves have been created in Enterprise Operating Funds (i.e., Water, Wastewater, Solid Waste, and Airport), Highway User Revenue Fund (HURF), Self-Insurance Funds and Replacement Funds (i.e., Vehicle and Technology). Targeted reserves will be maintained as described below. A portion of the reserve will be appropriated annually for each applicable fund to provide for unanticipated revenue shortfalls and/or unexpected expense increases in the current year. Reserves should only be utilized after all other budget sources have been examined for available funds. Should the minimum target level for any of the funds identified fall below its target, a plan will be formulated to restore within the next year, but not to exceed a three-year period. Water Operating Enterprise Fund accounts for specific services funded directly by fees and charges to City Water customers. The fund is intended to be self-supporting and will maintain a minimum target reserve of 20% of operating revenues. Other Water reserves may be created when deemed appropriate (i.e., fuel, utilities, lump sum). Wastewater Operating Enterprise Fund accounts for specific services funded directly by fees and charges to City Wastewater customers. The fund is intended to be self-supporting and will maintain a minimum target reserve of 20% of operating revenues. Other Wastewater reserves may be created when deemed appropriate (i.e., fuel, utilities, lump sum). Reclaimed Water Operating Enterprise Fund accounts for specific services funded directly by fees and charges to City Reclaimed Water customers. The fund is intended to be self-supporting and will maintain a minimum target reserve of 20% of operating revenues. Other Reclaimed Water reserves may be created when deemed appropriate (i.e., fuel, utilities, lump sum). Solid Waste Operating Enterprise Fund accounts for specific services funded directly by fees and charges to City Solid Waste customers. The fund is intended to be self-supporting and will maintain a minimum target reserve of 15% of operating revenues. Other Solid Waste reserves may be created when deemed appropriate (i.e., fuel, utilities). A Landfill Post-Closure Compliance Reserve will also be maintained as required by State and Federal law. Airport Operating Enterprise Fund accounts for specific services funded directly by fees and charges to City Airport customers. The fund is not currently intended to be self-supporting, and depends on General Fund to fund a portion of operating and capital costs; therefore a minimum target reserve is not a reasonable expectation until the Airport is determined as self-sustainable by Council. Highway User Revenue Fund (HURF) accounts for Highway Users Tax received and spent on street and highway maintenance and construction projects. The fund will maintain a minimum target reserve of 15% of operating revenues. Other HURF reserves may be created when deemed appropriate (i.e., fuel, utilities). Self-Insurance Funds - Insured Liability Fund (Risk) reserve will be maintained at a level, together with purchased umbrella insurance policies, that will adequately indemnify the City’s property and liability risk. A qualified actuarial firm shall be retained on an annual basis in order to recommend an appropriate reserve level. Health Benefits Trust and Workers Compensation and Employee Liability Trust Self-Insurance Funds reserves are maintained based on the Trust documents approved by Council. Qualified actuarial firms shall be retained on an annual basis in order to recommend appropriate funding levels. The contributions to Self-Insurance Funds (i.e., Insured and Uninsured Liability Funds, Workers Compensation and Employee Liability Trust Fund, Health Benefits Trust Fund, Short-Term Disability Fund and Dental Fund) will be reassessed annually and incorporated into the budget process, in order to ensure that the targeted goal is met in a manner that is balanced with other budget priorities. Vehicle Replacement Fund will maintain a minimum target reserve of 10% of the total City fleet replacement value. A fleet management vehicle replacement plan will be reviewed annually by the Fleet Advisory Committee to ensure systematic replacement of vehicles based on a combination of miles driven, repairs and maintenance schedules, and years of service. Technology Replacement Fund will maintain a minimum target reserve of 10% of the total City technology asset replacement value.