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Fund Reserve PoliciesMasterpiece on the Mississippi TO: The Honorable Mayor and City Council Members FROM: Michael C. Van Milligen, City Manager SUBJECT: Fund Reserve Policies DATE: August 27, 2013 Dubuque band AI- America City IIIii! 2007 • 2012 • 2013 Budget Director Jennifer Larson is recommending City Council approval of Fund Reserve Policies. This policy will ensure that the City maintains adequate fund balances and reserves in order to: 1. Provide sufficient cash flow for daily financial needs, 2. Secure and maintain bond rating as discussed in the City's debt management policy, 3. Offset significant economic downturns or revenue shortfalls, and 4. Provide funds for unforeseen expenditures related to emergencies. The most significant components of the proposed Fund Reserve Policies include the following: A. General Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures not including interfund transfers in the General Fund less (b) the amounts levied in the Trust and Agency fund and the Tort Liability Fund. The City may increase the minimum fund balance by a portion of any operating surplus above the carryover balance of $200,000 that remains in the General Fund at the close of each fiscal year. The City may continue to add to the General Fund minimum balance when additional funds are available until 20 percent of Net General Fund Operating Cost is reached. B. Section 8 Fund The City will maintain fund balance equivalent to any unspent housing assistance payments received from the U.S. Department of Housing and Urban Development which will still be available for use for the purpose of those funds. C. The reserve for the Sanitary Sewer Utility Operating Fund, the Stormwater Utility Operating Fund, the Parking Enterprise Operating Fund, the Water Utility Operating Fund and the Refuse Enterprise Collection Fund shall each be as follows: The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures, not including interfund transfers, less (b) debt service in the Fund (including general obligation debt service the levies of which the City abates annually). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. D. The reserve for the Road Use Tax Fund, the Sales Tax Fund and the Passenger Facility Charge Fund shall be as follows: The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. E. Health Reserve Fund The City will maintain a minimum fund balance as determined by a consulting actuary that is based on the actuarial requirements of the State of Iowa, make good and sufficient provisions for all unpaid claims and other actuarial liabilities under the terms of the Plan and include appropriate provision for all actuarial items which ought to be established. F. Worker's Compensation Reserve Fund The City will maintain a minimum fund balance to cover medical and indemnity claims. G. The reserve for the Dubuque Industrial Center West Tax Increment Financing Fund, the Greater Downtown Tax Increment Financing Fund and the Technology Park Tax Increment Financing Fund shall be as follows: The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. Reserve levels will be reviewed annually during the budget process. Any recommended adjustments to reserve levels will be presented to City Council for its consideration during the annual budget process. 2 I concur with the recommendation and respectfully request Mayor and City Council approval. Michael C. Van Milligan MCVM:jh Attachment cc: Barry Lindahl, City Attorney Cindy Steinhauser, Assistant City Manager Teri Goodmann, Assistant City Manager Jennifer Larson, Budget Director 3 Masterpiece on the Mississippi TO: Michael C. Van Milligen, City Manager FROM: Jennifer Larson, Budget Director SUBJECT: Fund Reserve Policies DATE: August 26, 2013 Dubuque blend AI- America City IIIii! 2007 • 2012 • 2013 INTRODUCTION The purpose of this memorandum is to request approval of Fund Reserve Policies. BACKGROUND The City of Dubuque has historically adopted a general fund reserve policy as part of the Fiscal and Budget Policy Guidelines which is adopted each year as part of the budget process. The proposed Fund Reserve Polices broadens the Fund Reserve Polices to include more than just the general fund. Reserves are a prudent fiscal policy and an important credit factor in the analysis of financial analysis and management. Local governments can experience volatility in their financial stability due to the economy, natural disasters, terrorist attacks and actions taken by state government which reduce local government revenues. Sound financial management includes the practice and discipline of maintaining adequate reserve funds for known and unknown contingencies. Such contingencies include, but are not limited to: cash flow requirements, economic uncertainties including downturns in the local, state or national economy, local emergencies and natural disasters, loss of major revenue sources, unanticipated operating or capital expenditures, uninsured losses, tax refunds, future capital projects, vehicle and equipment replacement, and capital asset and infrastructure repair and replacement. DISCUSSION This policy is created in consideration of unanticipated events that could adversely affect the financial condition of the City and jeopardize the continuation of necessary public services. This policy will ensure that the City maintains adequate fund balances and reserves in order to: 1. Provide sufficient cash flow for daily financial needs, 2. Secure and maintain bond rating as discussed in the City's debt management policy, 3. Offset significant economic downturns or revenue shortfalls, and 4. Provide funds for unforeseen expenditures related to emergencies. The most significant components of the proposed Fund Reserve Policies include the following: A. General Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures not including interfund transfers in the General Fund less (b) the amounts levied in the Trust and Agency fund and the Tort Liability Fund ( "Net General Fund Operating Cost "). The City may increase the minimum fund balance by a portion of any operating surplus above the carryover balance of $200,000 that remains in the General Fund at the close of each fiscal year. The City may continue to add to the General Fund minimum balance when additional funds are available until 20 percent of Net General Fund Operating Cost is reached. B. Section 8 Fund The City will maintain fund balance equivalent to any unspent housing assistance payments received from the U.S. Department of Housing and Urban Development which will still be available for use for the purpose of those funds. C. Sanitary Sewer Utility Operating Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures for Sanitary Sewer not including interfund transfers less (b) debt service in the Sanitary Sewer Operating Fund (including general obligation debt service the levies of which the City abates annually with revenues from the Sanitary Sewer Utility). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. D. Stormwater Utility Operating Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures for Stormwater not including interfund transfers less (b) debt service expense in the Stormwater Operating Fund (including general obligation debt service the levies of which the City abates annually with revenues from the Storm Sewer Utility). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. E. Parking Enterprise Operating Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures for Parking not including interfund transfers less (b) debt service expense in the Parking Operating Fund (including general obligation debt service the levies of which the City abates annually with revenues from the Parking Enterprise). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. F. Water Utility Operating Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures for Water not including interfund transfers less (b) debt service expense in the Water Operating Fund (including general obligation debt service the levies of which the City abates annually with revenues from the Water Utility). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. G. Refuse Enterprise Collection Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures for Refuse Collection not including interfund transfers less (b) debt service expense in the Refuse Collection Fund (including general obligation debt service the levies of which the City abates annually with revenues from the Refuse Enterprise). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. H. Road Use Tax Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. I. Sales Tax Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. J. Passenger Facility Charge Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. K. Health Reserve Fund The City will maintain a minimum fund balance as determined by a consulting actuary that is based on the actuarial requirements of the State of Iowa, make good and sufficient provisions for all unpaid claims and other actuarial liabilities under the terms of the Plan and include appropriate provision for all actuarial items which ought to be established. L. Worker's Compensation Reserve Fund The City will maintain a minimum fund balance to cover medical and indemnity claims. M. Dubuque Industrial Center West Tax Increment Financing Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. N. Greater Downtown Tax Increment Financing Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. O. Technology Park Tax Increment Financing Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. Reserve levels will be reviewed annually during the budget process. Any recommended adjustments to reserve levels will be presented to City Council for its consideration during the annual budget process. RECOMMENDATION I respectfully recommend the adoption of the attached fund reserve policies. JML Attachment cc: Barry Lindahl, City Attorney Cindy Steinhauser, Assistant City Manager Teri Goodmann, Assistant City Manager Kenneth TeKippe, Finance Director City of Dubuque Fund Reserve Policies 1. BACKGROUND: Reserves, rainy -day funds, or contingency funds are a prudent fiscal policy and an important credit factor in the analysis of City financial condition and management. Local governments can experience volatility in their financial stability due to the economy, natural disasters, terrorist attacks and actions taken by state government which reduce local government revenues. Sound financial management includes the practice and discipline of maintaining adequate reserve funds for known and unknown contingencies. Such contingencies include, but are not limited to: cash flow requirements, economic uncertainties including downturns in the local, state or national economy, local emergencies and natural disasters, loss of major revenue sources, unanticipated operating or capital expenditures, uninsured losses, tax refunds, future capital projects, vehicle and equipment replacement, and capital asset and infrastructure repair and replacement. The City has had a general fund reserve policy adopted as part of the Budget and Fiscal Policy Guidelines adopted each year as part of the budget process. The establishment of written prudent financial reserve policies is important to ensure the long -term financial health of the City. 2. DEFINITIONS: The following definitions will be used in reporting activity in governmental funds across the City. The City may or may not report all fund types in any given reporting period, based on actual circumstances and activity. The general fund is used to account for all financial resources not accounted for and reported in another fund. Special revenue funds are used to account and report the proceeds of specific revenue sources that are restricted or committed to expenditures for specific purposes other than debt service or capital projects. Debt Service funds are used to account for all financial resources restricted, committed or assigned to expenditure for principal and interest. Capital project funds are used to account for all financial resources restricted, committed or assigned to expenditure for the acquisition or construction of capital assets. Permanent funds are used to account for resources restricted to the extent that only earnings, and not principal, may be used for purposes that support the City purposes. Fund balance will report in governmental funds under following categories using the definitions provided by GASB Statement Number 54: City of Dubuque Fund Reserve Policies Nonspendable fund balance includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. Nonspendable amounts will be determined before all other classifications and consist of the following items (as applicable in any given fiscal year): a. The City will maintain a fund balance equal to the balance of any long -term outstanding balances due from others (including other funds of the City) b. The City will maintain a fund balance equal to the value of inventory balances and prepaid items (to the extent that such balances are not offset with liabilities and actually result in fund balance) c. The City will maintain a fund balance equal to the corpus (principal) of any permanent funds that are legally or contractually required to be maintained intact d. The City will maintain a fund balance equal to the balance of any land or other nonfinancial asset held for sale. Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation. Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the City's highest level of decision - making authority (i.e., City Council). Commitments will only be used for specific purposes pursuant to a formal action of the City Council. A majority vote is required to approve a commitment and to remove a commitment. Assigned fund balance includes amounts intended to be used by the City for specific purposes but do not meet the criteria to be classified as restricted or committed. In government funds, other than general fund, assigned fund balance represents the remaining amount that is not restricted or committed. The City Council delegates to the City Manager, Budget Director or Finance Director the authority to assign amounts to be used for specific purposes, per resolution 195- 11. Such assignments cannot exceed the available (spendable, unrestricted, uncommitted) fund balance in any particular fund. Unassigned fund balance includes the residual classification of the City's general fund and includes all spendable amounts not contained in the other classifications. In other funds, the unassigned classification should be used only to report a deficit balance from overspending for specific purposes for which amounts had been restricted, committed, or assigned. City of Dubuque Fund Reserve Policies 3. POLICY: The City utilizes a variety of accounting funds for accounting and budgeting for revenues and expenditures of the City. Appropriations lapse at each fiscal year -end. The City Council authorizes continued appropriations for certain incomplete capital projects, other one -time projects and services which have not been billed. Remaining dollars left in each fund that are undesignated and unencumbered constitute available reserves of the City. It is appropriate that reserve policies for the City be established for each of the various funds, that the purpose of these reserves be designated, and that dollars available in excess of the reserve amounts be appropriately and effectively utilized. This policy is created in consideration of unanticipated events that could adversely affect the financial condition of the City and jeopardize the continuation of necessary public services. This policy will ensure that the City maintains adequate fund balances and reserves in order to: 1. Provide sufficient cash flow for daily financial needs, 2. Secure and maintain bond rating as discussed in the City's debt management policy, 3. Offset significant economic downturns or revenue shortfalls, and 4. Provide funds for unforeseen expenditures related to emergencies. This policy and the procedures promulgated under it supersede all previous regulations regarding the City's fund balance and reserve policies. This policy governs the City's reserves on a cash basis as of June 30 of each year as follows: A. General Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures not including interfund transfers in the General Fund less (b) the amounts levied in the Trust and Agency fund and the Tort Liability Fund ( "Net General Fund Operating Cost "). The City may increase the minimum fund balance by a portion of any operating surplus above the carryover balance of $200,000 that remains in the General Fund at the close of each fiscal year. The City may continue to add to the General Fund minimum balance when additional funds are available until 20 percent of Net General Fund Operating Cost is reached. Bond Debt Service Reserve Funds will be held pursuant to the bond resolution that authorized said reserve, and shall not be held in the General Fund. If a Bond Debt Service Reserve Fund is created by the City but not required by any particular bond resolution, then said reserve shall be held in the bond reserve fund directed by the City Council, and not the General Fund. B. Section 8 Fund The City will maintain fund balance equivalent to any unspent housing assistance payments received from the U.S. Department of Housing and Urban Development which will still be available for use for the purpose of those funds. C. Sanitary Sewer Utility Operating Fund 3 City of Dubuque Fund Reserve Policies The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures for Sanitary Sewer not including interfund transfers less (b) debt service in the Sanitary Sewer Operating Fund (including general obligation debt service the levies of which the City abates annually with revenues from the Sanitary Sewer Utility). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. D. Stormwater Utility Operating Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures for Stormwater not including interfund transfers less (b) debt service expense in the Stormwater Operating Fund (including general obligation debt service the levies of which the City abates annually with revenues from the Storm Sewer Utility). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. E. Parking Enterprise Operating Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures for Parking not including interfund transfers less (b) debt service expense in the Parking Operating Fund (including general obligation debt service the levies of which the City abates annually with revenues from the Parking Enterprise). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. F. Water Utility Operating Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures for Water not including interfund transfers less (b) debt service expense in the Water Operating Fund (including general obligation debt service the levies of which the City abates annually with revenues from the Water Utility). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. G. Refuse Enterprise Collection Fund The City will maintain a minimum fund balance of at least 10 percent of the sum of (a) annual operating expenditures for Refuse Collection not including interfund transfers less (b) debt service expense in the Refuse Collection Fund (including general obligation debt service the levies of which the City abates annually with revenues from the Refuse Enterprise). In addition, any bond reserve required for outstanding debt will be maintained as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. City of Dubuque Fund Reserve Policies H. Road Use Tax Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. I. Sales Tax Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. J. Passenger Facility Charge Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. K. Health Reserve Fund The City will maintain a minimum fund balance as determined by a consulting actuary that is based on the actuarial requirements of the State of Iowa, make good and sufficient provisions for all unpaid claims and other actuarial liabilities under the terms of the Plan and include appropriate provision for all actuarial items which ought to be established. L. Worker's Compensation Reserve Fund The City will maintain a minimum fund balance to cover medical M. Dubuque Industrial Center West Tax Increment Financing Fund The City will maintain any bond reserve required for outstanding the bond resolution or City Debt Management Policy, whichever debt reserve to the extent allowed by applicable tax law. and indemnity claims. debt as required by requires the highest N. Greater Downtown Tax Increment Financing Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. 0. Technology Park Tax Increment Financing Fund The City will maintain any bond reserve required for outstanding debt as required by the bond resolution or City Debt Management Policy, whichever requires the highest debt reserve to the extent allowed by applicable tax law. Reserve levels will be reviewed annually during the budget process. Any recommended adjustments to reserve levels will be presented to City Council for its consideration during the annual budget process. City of Dubuque Fund Reserve Policies 4. COMMITMENTS AND ASSIGNMENTS OF FUND BALANCE: A. Committed Fund Balance Fund balance may be committed to specific purposes by the City Council. It is the City Council's policy that commitments of fund balance for a fiscal year must be adopted by resolution prior to fiscal year end. Amounts that have been committed by the City Council cannot be used for any other purposes unless the City Council adopts another resolution to remove or change the constraint. B. Assigned Fund Balance The General Fund balance may be assigned for amounts the City Council intends to use for a specific purpose. It is the City Council's policy that assignments of fund balance for a fiscal year must be approved by City Council which can be after year- end based on final figures for the reporting period. Any changes to assignments must also be approved by the City Council. Fund balance classifications depict the nature of the net resources that are reported in a governmental fund. An individual governmental fund may include nonspendable resources and amounts that are restricted, committed, or assigned, or any combination of those classifications. The general fund may also include an unassigned amount. Encumbering amounts for specific purposes for which resources have already been restricted, committed or assigned should not result in separate display of encumbered amounts. Encumbered amounts for specific purposes for which amounts have not been previously restricted, committed or assigned, will be classified as committed or assigned, as appropriate, based on the definitions and criteria set forth in GASB Statement No. 54. It is the City Council's policy to spend classified fund balance in the following order when amounts in more than one classification are available for a particular purpose: 1. Restricted Fund Balance — amounts constrained to specific purpose by their providers through constitutional provisions or enabling legislation. Examples include grants, bond proceeds and pass- through revenue from other levels of government. 2. Committed Fund Balance — amounts constrained to specific purpose by resolution of the City Council. 3. Assigned Fund Balance — amounts in the General Fund which are intended to be used for a specific purpose, approved by City Council. 4. Unassigned Fund Balance — amounts available for any purpose in the General Fund.