HomeMy WebLinkAbout09 - Amending City Council Reserve Policy F-2CITY OF
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NEWPORT BEACH
City Council Staff Report
September 25, 2018
Agenda Item No. 9
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Dan Matusiewicz, Finance Director - 949-644-3123,
dmatusiewicz@newportbeachca.gov
PREPARED BY: Steve Montano, Deputy Finance Director,
smontano@newportbeachca.gov
PHONE: 949-644-3240
TITLE: Resolution No. 2018-72: Amending City Council Reserve Policy F-2
ABSTRACT:
The Finance Committee ("Committee") recently considered the appropriateness of the
General Fund Contingency Reserve ("the Reserve") level. A study by the Government
Finance Officer's Association (GFOA) was commissioned to assess risks. Based on the
findings identified in the report and other factors, staff and the Committee recommends
to maintain the current Reserve funding level at 25% of operating expenditures. The
Committee also recommends a change in how the annual contributions to the Reserve is
calculated. In the past two years, the City Manager has recommended, and the City
Council has approved, the exclusion of additional discretional pension payments (ADP)
to CalPERS from the annual reserve calculation because doing so inflates the required
Reserve contribution thereby leaving less appropriations available for program funding.
The Committee recommends codifying this exclusion in Council Reserve Policy F-2
("F-2").
RECOMMENDATION:
a) Determine this action is exempt from the California Environmental Quality Act (CEQA)
pursuant to Sections 15060(c)(2) and 15060(c)(3) of the CEQA Guidelines because
this action will not result in a physical change to the environment, directly or indirectly;
and
b) Adopt Resolution No. 2018-72, A Resolution of the City Council of the City of Newport
Beach, California, Amending City Council Reserve Policy F-2.
FUNDING REQUIREMENTS:
There are no direct expenditures associated with the policy amendment.
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Resolution No. 2018-72: Amending City Council Reserve Policy F-2
September 25, 2018
Page 2
DISCUSSION:
The GFOA recently assisted staff with analyzing risks through an analytical framework
intended to determine a Reserve level appropriate for the City of Newport Beach. GFOA,
working closely with staff, facilitated staff's thorough examination of the City's primary and
secondary risk factors that generally influence the amount of reserves the City should
hold. These factors included risk from earthquakes, floods, fires, and decreased revenues
and increased pension costs due to an economic downturn over a ten-year period.
GFOA determined that the range at which the Reserve would produce the best value for
the City is between $14.8 million and $25.5 million. This range is far below the current
Reserve balance of just over $50 million, which, pursuant to F-2, is equivalent to 25% of
budgeted expenditures.
GFOA recommends, at a minimum, that general-purpose governments, regardless of
size, maintain unrestricted fund balance in their General Fund of no less than two months
of regular General Fund operating revenues or expenditures, which is equivalent to a
16% Reserve in Newport Beach. According to the GFOA, the adequacy of the General
Fund unreserved fund balance should be assessed based upon a government's own
specific circumstances.
The GFOA analysis was not inclusive of every risk the City could possibly face and credit
rating agencies value fund balance as a measure of financial flexibility. Pension benefit
levels and pension losses subsequent to the 2008 recession has and will continue to
absorb a significant level of the City's financial capacity over the many years to come.
Credit rating agencies also consider an adequate level of "fund balance" to be a credit
strength because the level of fund balance measures the flexibility of an issuer to meet
essential services during transitionary periods. On this basis staff recommended, and the
Committee agreed, to maintain the current Reserve level of 25% of operating
expenditures.
While the Committee recommended no changes to the Reserve level, the Committee did
recommend a change in how the annual contributions to the General Fund Contingency
Reserve is calculated.
Purpose of the Reserve and How Annual Contributions to the Reserve are
Determined
The purpose of F-2 is to establish City Council policy for the administration of Reserves
defined as fund balances in governmental funds and net working capital in proprietary
funds. The policy was last amended by the City Council on May 12, 2015. F-2 contains
the policy that governs the use of the Reserve. The basic purpose of the Reserve (a.k.a.
rainy day reserve) is to protect the budget from unexpected or unforeseen fiscal
disruptions such as catastrophic loss of critical infrastructure, unanticipated revenue
shortfalls, and actions by another government that eliminates or shifts revenues from the
City. Appropriations and access to these funds are reserved for emergencies only, but
may be accessed by Council by simple budget appropriation.
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Resolution No. 2018-72: Amending City Council Reserve Policy F-2
September 25, 2018
Page 3
Examples may include but are not limited to the following:
a. A catastrophic loss of critical infrastructure.
b. A State or Federally declared state of emergency.
c. Any settlement arising from a claim or judgment.
d. Deviation from budgeted revenue projections.
e. Any action by another government that eliminates or shifts revenues from the City.
f. Inability of the City to meet its debt service obligations in any given year.
g. Other circumstances deemed necessary by City Council to meet the claims and
obligations of the City.
Should the Reserve be used, the City Manager shall present a plan to City Council to
replenish the reserve within five years.
As mentioned above, F-2 indicates that the Reserve shall have a target balance of twenty
five percent (25%) of General Fund "Operating Budget" as originally adopted. For
purposes of calculating the annual contributions to the Reserve, the operating budget
includes planned expenditure appropriations and excludes capital improvement projects
and transfers out. They are excluded because, unlike operating expenditures, they are
discretionary in nature and can vary from year to year, especially during downturns in
economic cycles.
Excluding the Additional Unfunded Pension Liability Contributions from the
Annual Reserve Calculation
F-2 directs the City to: 1) amortize the unfunded actuarial liability in accordance with the
actuary's funding recommendations; and 2) make an effort at maintaining its unfunded
actuarial liability within a range that is considered acceptable to actuarial standards. Our
actuary indicates that an 80% funded ratio is a good target, leaving room for market value
adjustments in either direction. F-2 further prescribes that the City Council shall consider
increasing the annual CalPERS contribution should the Unfunded Actuarial Liability (UAL)
status fall below acceptable actuarial standards.
To that end, the City has contributed additional discretionary pension payments (ADP) to
CalPERS in recent years. An ADP of $8.8 million was applied towards the UAL in Fiscal
Year 2018-2019. In so doing, the City is addressing the escalating nature of UAL costs
by increasing the City's funded ratio (currently 69%). In the past two years, the City
Manager has recommended, and the City Council has approved, the exclusion of ADP
contributions from the annual reserve calculation because it inflates the required reserve
contribution thereby leaving fewer resources available for program funding. The
Committee recommends that this exclusion continue in the development of subsequent
budgets and recommends the following change (underlined) F-2:
Contingency Reserve: The Contingency Reserve shall have a target balance of
twenty five percent (25%) of General Fund "Operating Budget" as originally
adopted. Operating Budget for this purpose shall include current expenditure
appropriations and shall exclude Capital Improvement Projects, Transfers Out,
and additional discretionary payments to the City's unfunded pension liability.
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Resolution No. 2018-72: Amending City Council Reserve Policy F-2
September 25, 2018
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ENVIRONMENTAL REVIEW:
Staff recommends the City Council find this action is not subject to the California
Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) (the activity will not
result in a direct or reasonably foreseeable indirect physical change in the environment)
and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA
Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no
potential for resulting in physical change to the environment, directly or indirectly.
The agenda item has been noticed according to the Brown Act (72 hours in advance of
the meeting at which the City Council considers the item).
ATTACHMENTS:
Attachment A — Resolution No. 2018-72 (redline version)
Attachment B — Resolution No. 2018-72 (clean version)
Attachment A
Resolution No. 2018-72 authorizing revisions to Council Policy F-2 (Redline Version)
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RESOLUTION NO. 2018-72
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
NEWPORT BEACH, CALIFORNIA, AMENDING CITY
COUNCIL RESERVE POLICY F-2
WHEREAS, the City Council of the City of Newport Beach ("City") has a long and
established history of being good guardians and stewards of the public's money,
WHEREAS, appropriations, expenditures and other budgetary matters are a
primary concern of the City Council,
WHEREAS, the City Council has adopted various policies regarding financial
matters,
WHEREAS, the City Council has adopted City Council Reserve Policy F-2 for the
administration of "Reserves." which are defined within the policy as fund balances in
governmental funds and net working capital in proprietary funds,
WHEREAS, on December 12, 1994, the City Council adopted Resolution No. 94-
110 establishing the Finance Committee, whose duties and responsibilities have been
amended throughout the years to further protect and safe guard the public's money,
WHEREAS, the existing Finance Committee is charged with a variety of tasks,
including, but not limited to: reviewing and monitoring events and issues which may affect
the financial status of the City, and making recommendations to the City Council
regarding amendments to financial and budgetary policies, and
WHEREAS, the Finance Committee has recommended an amendment to City
Council Reserve Policy F-2 that excludes the additional discretionary payments to the
City's unfunded pension liability from the annual Contingency Reserve calculation.
NOW, THEREFORE, the City Council of the City of Newport Beach resolves as
follows:
Section 1: The City Council hereby amends theCi Council Reserve Policy F-2
as described in Attachment "A," which is attached hereto and incorporated herein by
reference.
Section 2: The City Council hereby repeals all prior versions of rese{utaeNs-relate
to -City Council Reserve Policy F-2 that are in conflict with this resolution.
Section 3: If any section, subsection, sentence, clause or phrase of this
resolution is for any reason held to be invalid or unconstitutional, such decision shall not
affectthe validity or constitutionality of the remaining portions of this resolution. The City
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Resolution 2018-
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Council hereby declares that it would have passed this resolution and each. section,
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subsection, sentence, clause or phrase hereof, irrespective of the fact that any one or
more sections, subsections, sentences, clauses ora444 phrases be declared invalid or
unconstitutional.
Section 4: The recitals provided in this resolution are true and correct and are
incorporated into the substantive portion of this resolution.
Section 5: The City Council find the adoption of this resolution and the
amendment of City Council Reserve Policy F-2 is not subject to the California
Environmental Quality Act ("CEQA") pursuantto Sections 15060(c)(2) (the activitywill not
result in a direct or reasonably foreseeable indirect physical change in the environment)
and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA
Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no
potential for resulting in physical change to the environment, directly or indirectly.
Section 6: This resolution shall take effect immediately upon its adoption by the
City Council, and the City Clerk shall certify the vote adopting this resolution.
ADOPTED this 25th day of September, 2018.
Marshall "Duffy" Duffield
Mayor
,ATTEST: Formatted: Font: Bold
Leilani I. Brown,
City Clerk
APPROVED AS TO FORM: Formatted: Font: Bold
Aaron C. Harp
City Attorney
Attachment A: Amended Reserve City Council Policy F -2F RaRGR -AFRFR #RR ^^S^F Pt an
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RESERVE POLICY
PURPOSE
F-2
To establish City Council policy for the administration of Reserves defined as
fund balances in governmental funds and net working capital in proprietary
funds.
BACKGROUND
Prudent financial management dictates that some portion of the funds available
to the City be reserved for future use.
As a general budget principle concerning the 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 revenues 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 specific direction in
the annual budget; or by a separate City Council action. Information regarding
Annual Budget Adoption and Administration is contained in City Council Policy
F-3.
GOVERNMENTAL FUNDS AND FUND BALANCE DEFINED
Governmental Funds including the General Fund, Special Revenue Funds,
Capital Projects Funds, Debt Service Funds and Permanent Funds have a short-
term or current flow of financial resources, measurement focus and basis of
accounting and therefore, exclude long-term assets and long-term liabilities. The
term Fund Balance, used to describe the resources that accumulate in these funds,
is the difference between the fund assets and fund liabilities of these funds. Fund
Balance is similar to the measure of net working capital that isxxsecelis used in
private sector accounting. By definition, both Fund Balance and Net Working
Capital exclude long-term assets and long-term liabilities.
PROPRIETARY FUNDS AND NET WORKING CAPITAL DEFINED
Proprietary Funds including Enterprise Funds and Internal Service Funds have
a long- term or economic resources measurement focus and basis of accounting
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F-2
and therefore, include long-term assets and liabilities. This basis of accounting is
very similar to that used in private sector. However, instead of Retained
Earnings, the term Net Assets is used to describe the difference between fund
assets and fund liabilities. Since Net Assets include both long-term assets and
liabilities, the most comparable measure of proprietary fund financial resources
to governmental Fund Balance is Net Working Capital, which is the difference
between current assets and current liabilities. Net Working Capital, like Fund
Balance, excludes long-term assets and long-term liabilities.
GOVERNMENTAL FUND RESERVES (FUND BALANCE)
For Governmental Funds, the Governmental Accounting Standards Board
("GASB") Statement No. 54 defines five specific classifications of fund balance.
The five classifications are intended to identify whether the specific components
of fund balance are available for appropriation and are therefore "Spendable."
The classifications also are intended to identify the extent to which fund balance
is constrained by special restrictions, if any. Applicable only to governmental
funds, the five classifications of fund balance are as follows:
CLASSIFICATIONS NATURE OF RESTRICTION
Non -spendable Cannot be readily converted to cash
Restricted Externally imposed restrictions
Committed City Council imposed commitment
Assigned City Manager assigned
purpose/intent
Unassigned
Residual balance not otherwise
restricted
A. Non -spendable fund balance: That portion of fund balance that includes
amounts that are either (a) not in a spendable form, or (b) legally or
contractually required to be maintained intact. Examples of Non -spendable
fund balance include:
1. Reserve for Inventories: The value of inventories purchased by the City
but not yet issued to the operating Departments is reflected in this
account.
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F-2
2. Reserve for Long Term Receivables and Advances: This Reserve is used
loidentify 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
for appropriation during the budget year.
3. Reserve for Prepaid Assets: This reserve represents resources that have
been paid to another entity in advance of the accounting period in which
the resource is deducted from fund balance. A common example is an
insurance premium, which is typically payable in advance of the
coverage period.
Although prepaid assets have yet to be deducted from fund balance,
they are no longer available for appropriation.
4. Reserve for Permanent Endowment - Bay Dredging: The endowment
specifiesthat the principal amount will not be depleted and represents the
asset amounts to be held in the Bay Dredging Fund.
Reserve for Permanent Endowment - Ackerman Fund: The exbmimt
specifies that the principal amount will not be depleted and represents
the asset amount to be held in the Ackerman Fund.
B. Restricted fund balance: The portion of fund balance that reflects constraints
placed on the use of resources (other than non -spendable items) that are either
(a) externally imposed by creditors, grantors, contributors, or laws or
regulations of other governments; or (b) imposed by law through
constitutional provisions or enabling legislation. Examples of restricted fund
balance are:
1. Reserve for Debt Service: Funds are placed in this Reserve at the time
debt is issued. The provisions governing the Reserve, if established, are
in the Bond Indenture and the Reserve itself is typically controlled by the
Trustee.
2. Affordable Housing: A principal provision of the Newport Beach
Housing Element requires developers to provide housing units for lower
income households, the number of which is to be negotiated for each
development project. In lieu of constructing affordable housing,
developers have paid into this reserve which is used at the City Council's
discretion to provide alternate methods for the delivery of affordable
housing for lower income households.
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F-2
3. Park In Lieu: Per NBMC 19.52 and California Government Code Section
664777 (The 1975 "Quimby Act"), a dedication of land or payment of fees
for park or recreational purposes in conjunction with residential
development is required. The fees collected can only be used for specific
park or recreation purposes as outlined in NBMC 19.52.030 and 19.52.070.
4. Upper Newport Bay Restoration Reserve: This reserve is the repository
for funds mandated by S13573, as well as special fees charged to permit
holders as an alternative to meeting certain specified mitigation criteria.
In addition to the mitigation fees, ten percent (10%) of Beacon Bay lease
revenue is placedin this Reserve. Funds in the Reserve are restricted for
Upper Newport Bay restoration projects.
5. Permanent Endowment for Bay Dredging: The endowment also
specifies that the interest earnings on the principal amount can only be
used for dredging projects in the Newport Bay.
6. Permanent Endowment for Ackerman Fund: The endowment also
specifies that the interest earnings on the principal amount can only be
used for scholarships provided by the City and high-tech library
equipment.
7. Oceanfront Encroachment Reserve: In the early 1990's, it was discovered
by survey that improvements to several ocean front parcels were
encroaching onto the public beach. The encroachment was relatively
minor. The negotiated solution was for the property owners to pay a
permit fee each year to the City. Revenue thus generated may only be
used for ocean front restoration projects and incidental costs of
improvements and maintenance to enhance public access and use of
ocean beaches as approved by the City Council. This Reserve is the
repository for those funds. City Council Policy L- 12 contains additional
background and details about the encroachment issue The external
restriction on this balance is imposed by the Local Coastal Plan (LCP).
C. Committed fund balance: That portion of a fund balance that includes
amounts that can only be used for specific purposes pursuant to constraints
imposed by formal action by the government's highest level of decision
making authority, and remain binding unless removed in the same manner.
The City considers a resolution to constitute a formal action for the purposes
of establishing committed fund balance. The action to constrain resources
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F-2
must occur within the fiscal reporting period; however the amount can be
determined subsequently. City Council imposed Commitments are as follows:
1. Facilities Financial Planning (FFP) Fund: In conjunction with the City's
Facilities Financial Plan, a sinking fund has been established to amortize
the cost of critical City facilities such as, but not limited to, the Civic
Center, Police Department buildings, Fire Stations, Library Branches
and otherFacility Improvement Projects.
The Facilities Financial Planning Program establishes a level charge to
the General Fund that will perpetually replenish the cash flows
necessary to finance the construction of critical City facilities. This plan
will be updated annually as part of the budget process, or as conditions
change. The City shall strive to maintain fund balance in the Facilities
Financial Planning Reserve at a level equal to or greater than the
maximum annual debt service on existing obligations.
The eligible uses of this reserve include the cash funding of public facility
improvements or the servicing of related debt.
2. Off Street Parking: Per NBMC 12.44.025 the City Council may direct
revenues into the off-street parking facilities fund for purposes of the
acquisition, development and improvement of off street parking facilities,
and for any expenditures necessary or convenient to accomplish such
purposes.
3. In Lieu Parking: Per NBMC 12.44.125 the City requires commercial
businesses to provide adequate off-street parking or where this is not
possible, businesses are afforded the opportunity to pay an annual fee and
use parking spaces in a municipal lot, providing such a lot is located within
specified proximity to the business. These funds can only be used to
provide additional parking.
4. Neighborhood Enhancement - A: Funds previously accumulated to
Neighborhood Enhancement Area"A" pursuant to a prior version of
NBMC 12.44.027 shall continue to be used only for the purpose of enhancing
and supplementing services to the West Newport area. Both the nature of
the supplemental services and the definition of the area served are set forth
in NBMC 12.44.027.
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F-2
5. Neighborhood Enhancement - B: Funds previously accumulated to
Neighborhood Enhancement Area "B" pursuant to a prior version of
NBMC 12.44.027 shall continue to be used only for the purpose of enhancing
and supplementing services in the Balboa Peninsula. Both the nature of the
supplemental services and the definition of the area served are set forth in
NBMC 12.44.027.
6. Cable Franchise: Pursuant to the provisions of the Newport Beach
Municipal Code, Title 5, Business Licenses & Regulations, Chapter 5.44, in
return for the use of the City's streets and public ways for the purpose of
installing, operating, maintaining, or reconstructing a cable system to
provide cable service, fees are collected by the City from cable providers.
Those fees are to be used by the City for support of Public, Education, and
Government access programming only.
7. Oil and Gas Reserve: The annual $40,000 which is being set aside from the
oil and gas field production revenues is to be used to fund abandoned wells
and facilities as they go out of service.
8. Capital Reappropriation: This reserve represents an administrative
procedure that recognizes a portion of fund balance is not readily available
to fund new endeavors because it has been reappropriated through the
budget adoption process or amendment process.
D. Assigned fund balance: That portion of a fund balance that includes
amounts that are constrained by the City's intent to be used for specific
purposes but that are not restricted or committed. This policy hereby
delegates the authority to the City Manager or designee to modify or create
new assignments of fund balance. Constraints imposed on the use of
assigned amounts may be changed by the City Manager or his designee.
Appropriations of balances are subject to Council Policy F-3 concerning
budget adoption and administration.
E. Unassigned fund balance
Conten enc Keserve: lne Contrngency Keserve shall nave a tar et Formatted: Not
balance of twenty five percent (25%) of General Fund "Operating Formatted: Not
Budget" as originally adopted. Operating Budget for this purpose shall
include current expenditure appropriations and shall exclude Capital
Improvement Projects.Transfers Out, and additional discretionary
payments to the City's unfunded pension liability. Appropriation and/
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F-2
or access to these funds are generally reserved for emergency or
unforeseen situations but may be accessed by Council by simple budget
appropriation. Examples may include but are not limited to the
following:
a. A catastrophic loss of critical infrastructure.
b. AState or Federally declared state of emergency.
c. Any settlement arising from a claim or judgment.
d. Deviation from budgeted revenue projections.
e. Any action by another government that eliminates or shifts revenues
from the City.
I. Inability of the City to meet its debt service obligations in any given
year.
g. Other circumstances deemed necessary by City Council to meet the
claims and obligations of the City.
Should the Contingency Reserve be used, the City Manager shall present
a plan to City Council to replenish the reserve within five years.
2. Residual Fund Balance: The residual portion of available fund balance that
is not otherwise restricted, committed or assigned and is above and
beyond the Contingency Reserve target reserve balance.
PROPRIETARY FUND RESERVES (NET WORKING CAPITAL)
In the case of Proprietary Funds (Enterprise and Internal Service Funds),
Generally Accepted Accounting Principles ("GAAP") does not permit the
reporting of reserves on the face of City financial statements. However, this does
not preclude the City from setting policies to accumulate financial resources for
prudent financial management of its proprietary fund operations. Since
proprietary funds may include both long-term capital assets and long-term
liabilities, the most comparable measure of liquid financial resources that is
similar to fund balance in proprietary funds is net working capital which is the
difference between current assets and current liabilities. For all further references
to reserves in Proprietary Funds, Net Working Capital is the intended meaning.
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F-2
A. Water Enterprise Fund
1. Stabilization and Contineency Reserve: This Reserve is used to provide
sufficient funds to support seasonal variations in cash flows and in more
extreme conditions, to maintain operations for a reasonable period of time
so the City may reorganize in an orderly manner or effectuate a rate
increase to offset sustained cost increases. The intent of the Reserve is to
provide funds to offset cost increases that are projected to be short-lived,
thereby partially eliminating the volatility in annual rate adjustments. It is
not intended to offset ongoing, long-term pricing structure changes. The
target level of this reserve is fifty percent (50%) of the annual operating
budget. This reserve level is intended to provide a reorganization period
of 6 months with zero income or 24 months at a twenty-five percent (25%)
loss rate. The City Council must approve the use of these funds, based on
City Manager recommendation. Funds collected in excess of the
Stabilization reserve target would be available to offset future rate
adjustments, while extended reserve shortfalls would be recovered from
future rate increases. Should catastrophic losses to the infrastructure
system occur, the Stabilization and Contingency Reserve may be called
upon to avoid disruption to water distribution.
2. Infrastructure Replacement Funding Policy: This funding policy is
intended to be a temporary repository for cash flows associated with
the funding of infrastructure replacement projects provided by the
Water Master Plan. The contribution rate is intended to level -amortize
the cost of infrastructure replacement projects over a long period. The
annual funding rate of the Water Master Plan is targeted at an amount that,
when combined with prior or future year contributions, is sufficient to
provide for the eventual replacement of assets as scheduled in the plan.
This contribution policy is based on the funding requirements of the most
current Water Master Plan. There are no minimum or maximum balances
contemplated by this funding policy. However, the contributions level
should be reviewed periodically or as major updates to the Water Master
Plan occur. Annual funding is contingent on many factors and may
ultimately involve a combined strategy of cash funding and debt issuance
with the intent to normalize the burden on Water customer rates.
B. Wastewater Enterprise Fund
1. Stabilization and Contineency Reserve: This Reserve is used to provide
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F-2
sufficient funds to support seasonal variations in cash flows and in more
extreme conditions, to maintain operations for a reasonable period of time
so the City may reorganize in an orderly manner or effectuate a rate
increase to offset sustained cost increases. The intent of the Reserve is to
provide funds to offset cost increases that are projected to be short-lived,
thereby partially eliminating the volatility in annual rate adjustments. It is
not intended to offset ongoing, long-term pricing structure changes. The
target level of this reserve is fifty percent (50%) of the annual operating
budget. This reserve level is intended to provide a reorganization period of
6 months with zero income or 24 months at a twenty-five percent (25%) loss
rate. The City Council must approve use of these funds, based on City
Manager recommendation. Funds collected in excess of the Stabilization
reserve target would be available to offset future rate adjustments, while
extended reserve shortfalls would be recovered from future rate increases.
Should catastrophic losses to the infrastructure system occur, the
Stabilization and Contingency Reserve may be called upon to avoid
disruption to wastewater service.
2. Infrastructure Replacement Funding Policy: This funding policy
is intended to be a temporary repository for cash flows associated
with the funding of infrastructure replacement projects provided by the
Wastewater Master Plan. The contribution rate is intended to level -
amortize the cost of infrastructure replacement projects over along period
of time. The annual funding rate of the Wastewater Master Plan is
targeted at an amount that, when combined with prior or future year
contributions, is sufficient to provide for the eventual replacement of
assets as scheduled in the plan. This contribution policy should be updated
periodically based on the most current Wastewater Master Plan. There are
no minimum or maximum balances contemplated by this funding policy.
However, the contributions level should be reviewed periodically or as
major updates to the Wastewater Master Plan occur. Annual funding is
contingent on many factors and may ultimately involve a combined
strategy of cash funding and debt issuance with the intent to normalize the
burden on Wastewater customer rates.
C. Internal Service
Funds Background.
Internal Service Funds are used to centrally manage and account for specific
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program activity in a centralized cost center. Their revenue generally comes
from internal charges to departmental operating budgets rather than external
revenue sources. They have several functions.
--They work well in normalizing departmental budgeting for programs that
have life -cycles greater than one year; thereby facilitating level budgeting for
expenditures that will, by their nature, be erratic from year to year. This also
facilitates easier identification of long term trends.
--They act as a strategic savings plan for long-term assets and liabilities.
--From an analytical standpoint, they enable appropriate distribution of city-
wide costs to individual departments, thereby more readily establishing true
costs of various operations.
Since departmental charges to the internal service fund duplicate the ultimate
expenditure from the internal service fund, they are eliminated when
consolidating entity -wide totals.
The measurement criteria, cash flow patterns, funding horizon and
acceptable funding levels are unique to each program being funded. Policy
regarding target balance and/ or_contribution policy, gain/loss
amortization assumption, source data, and governance for each ofthe City's
Internal Service Funds is setforth as follows:
1. For all Internal Service Funds: The Finance Director may transfer part or
all of any unencumbered fund balance between the Internal Service Funds
provided that the withdrawal of funds from the transferred fund would
not cause insufficient reserve levels or insufficient resources to carry out
its intended purpose. This action is appropriate when the decline in cash
balance in any fund is precipitated by an off -trend non-recurring event.
The Finance Director will make such recommendations as part of the
annual budget adoption or through separate Council action.
2. Equipment Maintenance Fund and Equipment Replacement Fund: The
Equipment Maintenance and Replacement Funds receive operating money
from the Departments to provide equipment maintenance and to fund the
regular replacement of major pieces of equipment (mostly vehicles) at their
economic obsolescence.
a. Equipment Maintenance Fund: The Equipment Maintenance Fund acts
solely as a cost allocation center (vs. a pre -funding center) and is funded
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on a pay- as -you -go basis by departmental maintenance charges by vehicle
type and usage requirement. Because of this limited function, the target
year-end balance is zero.
Contribution rates (departmental charges) are set to include the direct costs
associated with maintaining the City vehicle fleet, including fleet
maintenance employee salary and benefits, operating expenses and
maintenance related capital outlay. Administrative overhead and
maintenance facility improvements and replacement costs are to be
provided outside of this cost unit.- Governance is achieved through annual
management adjustment of contriution rates on the basis of maintenance
cost by vehicle and distribution of costs based on fleet use by department.
b. Equipment Replacement Fund: Operating Departments are charged
annual amounts sufficient to accumulate funds for the replacement of
vehicles, communications equipment, parking equipment and other
equipment replacement determined appropriate by the Finance Director.
The City Manager recommends annual rate adjustments as part of
the budget preparation process. These adjustments are based on
pricing, future replacement schedules and other variables.
The age and needs of the equipment inventory vary from year to year.
Therefore the year-end fund balance will fluctuate in direct correlation to
accumulated depreciation. In general, it will increase in the years
preceding the scheduled replacement of relatively large percentage of the
equipment, on a dollar value basis. However, rising equipment costs,
dissimilar future needs, replacing equipment faster than their expected life
or maintaining equipment longer than their expected life all contribute to
variation from the projected schedule.
Target funding levels shall be determined by the Finance Director after
considering the age, expected life and cash flow anticipated by the
replacement equipment being funded. If departmental replacement
charges for equipment prove to be excessive or insufficient with regard to
this target funding level, new rates established during the next budget
cycle will be adjusted with a view toward bringing the balance back to the
target level over a three-year period.
3. Insurance Reserve Funds: The Insurance Reserve funds account for the
activities of general liability and workers' compensation claims.
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Background
The City employs an actuary to estimate the liabilities associated with the
general liability and workers compensation activities. The costs typically
associated with these programs include: claims administration, legal
defense, insurance premiums, self insured retention and the establishment
of appropriate loss reserves including "incurred -but -not reported" (IBNR)
claims. Ina prescribed measurement methodology, the Actuary estimates
the liabilities in conformity with Generally Accepted Accounting Principles
(GAAP).
The Actuary refers to this measurement level in his report as the "Expected
Level." However, because actuarial estimates are subject to significant
uncertainties, actuaries typically recommend that a target funding level be set
at an amount in excess of expected liability as a margin to cover contingencies.
A typical target funding level would be set to obtain a specified confidence
level (the percent chance that resources set-aside will be sufficient to cover
existing claims).
Full funding of the Actuary's "Target Funding Level" establishes a seventy-
five percent (75%) confidence there will be sufficient resources (including
projected interest) to pay the full amount of existing claims without future
contributions. Funding at the "Expected Level" produces a confidence level of
only fifty percent to sixty-five percent (50%-65% ). Therefore, the target
funding of insurance reserves should exceed the "Expected Level" to account
for adverse estimate deviation.
Policy & Practice.
The City should target funding of its risk management obligations at not less
than the Expected Level, described above; and not more than an amount
sufficient to establish a seventy-five percent (75%) Confidence Level.
Actuarial losses should be recovered over a rolling3-year basis while actuarial
gains should be amortized over a rolling 5 -year basis. As part of the operating
budget, each department will be charged a rate equal to its proportionate
share of the total "revenue" required to fund the Insurance Reserve Fund at
this level.
To lessen the impact of short-term annual rate change fluctuation, City
management may implement one-time fund transfers (rather than
department rate increases) when funding shortfalls appear to be due to
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unusually sharp and non-recurring factors. Excess reserves in other areas may
be transferred to the internal service fund in these instances but such transfers
should not exceed the funding necessary to reach a seventy-five (75%)
confidence level interval.
4. Compensated Absences
Fund: Background.
The primary purpose of flex leave, vacation leave and sick leave is to provide
compensated time off as appropriate and approved. However, under certain
circumstances, typically at separation from service, some employees have the
option of receiving cash -out payments for some accumulated leave balances.
The Compensated Absences Fund is utilized primarily as a budget smoothing
technique for any such leave bank liquidations. The primary purpose of the
Compensated Absences Fund is to maintain a balance sufficient to facilitate
this smoothing.
Policy and Practice.
The contribution rate will be set to cover estimated annual cash flows based
on a three-year trailing average.
The minimum cash reserve should not fall below that three-year average. The
maximum cash reserve should not exceed fifty percent (50%) of the long term
liability. The target cash reserve shall be the median difference between the
minimum and maximum figures.
Each department will make contributions to the Compensated Absences
Fund through its operating budget as a specified percentage of salary. The
Finance Director will review and recommend adjustments to the percentage
of salary required during the annual budget development process. This
percentage will be set so as to maintain the reserve within the parameters
established above.
5. Post Retirement Funding Policies:
a. Pension Funding:
(i) California Public Employees Retirement System (CalPERS): The City's
principal Defined Benefit Pension program is provided through
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contract with Ca1PERS. The City's contributions to the plan include an
actuarially determined employer contribution that fluctuates each year
based on an annual actuarial plan valuation. This variable rate employer
contribution includes the normal cost of providing the contracted
benefits plus or minus an amortization of plan changes and net
actuarial gains and losses since the last valuation period.
It is the City's policy to make contributions to the plan equaling at least
one hundred percent (100%) of the actuarially required contribution
(annual pension cost). Because the City pays the entire actuarially
required contribution each year, by definition, its net pension obligation
at the end of each year is $0. Any unfunded actuarial liability (UAL) is
amortized and paid in accordance with the actuary's funding
recommendations. The City will strive to maintain its UAL within a
range that is considered acceptable to actuarial standards. The City
Council shall consider increasing the annual Ca1PERS contribution
should the UAL status fall below acceptable actuarial standards.
(u) Laborer's International Union of North America (LIUNA): The Gb
provides funds to support a supplemental pension plan for some
employee associations through contract with LIUNA. This is funded at
a fixed percentage of total compensation on a pay-as-you-go basis. The
City is not contractually required to guarantee the level of the ultimate
LIUNA benefit to retirees, nor does it do so. Therefore the City's liability
for this program is full funded each year.
b. Other Post Employment Benefits (OPEB
Funding): Background.
The City's OPEB funding obligations consists of two retiree medical plans.
New Plan. Effective January 2006, the City and its employee associations
agreed to major changes to the Post Employment Healthcare Plan. New
employees and all current employees participate in a program that requires
certain defined employee and employer contributions while the employee
is in active service. However, once the contributions have been made to the
employee's account, the City has transferred a substantial portion of the
funding risk to the employee.
Old Plan. Eligible employees who retired prior to the "New Plan" and
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certain active employees were eligible to continue to receive post-
retirement medical benefits (a defined benefit plan). The cost was
divided among the City, current employees and retirees. In the past, this
program was largely funded on a pay-as-you-go basis, so there was a
significant unfunded liability. Recognizing this problem, the City
began contributing to this obligation in 2001. In 2008, these assets were
placed in a pre -funding trust. The City's intention is to amortize the
remaining unfunded liability within 20 years.
Policy & Practice.
New Plan. Consistent with agreements between the City and Employee
Associations, the new defined contribution plan will be one hundred
percent (100%) funded, on an ongoing basis, as part of the annual
budget process. Funds to cover this expenditure will be contained
within the salary section of each department's annual operating
budget.
Old Plan. The City's policy is to pre fund the explicit (cash subsidy)
portion of the Actuarial Accrued Liability (AAL) of the remnants of the
old plan over a 20 -year amortization period, or less. This amount will
be based on the Annual Required Contribution (ARC) determined by a
biennial actuarial review; subject to review and analysis by the City. The
City will strive to maintain a funded status that will be within a range
that is considered acceptable to actuarial standards. The City Council
shall consider increasing the annual OPEB contribution should the
funded status fall below acceptable actuarial standards.
Adopted -
January 24, 1994
Amended
- April 10, 1995
Amended
- April 27, 1998
Amended
- March 14, 2000
Amended
- May 8, 2001
Amended
- April 23, 2002
Amended
- April 13, 2004
Amended
- September 15,
2008
Amended-
November 12,
2008
Amended
- May 24, 2011
Amended - September 27, 2011
Amended - May 14, 2013
15
Formatted
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Amended- June 10, 2014
Amended - May 12, 2015
Amended - September 25,
2018
F-2
16
Formatted: Indent Left: 0"
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Attachment B
Resolution No. 2018-72 authorizing revisions to Council Policy F-2 (Clean Version)
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RESOLUTION NO, 2018-72
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
NEWPORT BEACH, CALIFORNIA, AMENDING CITY
COUNCIL RESERVE POLICY F-2
WHEREAS, the City Council of the City of Newport Beach ("City") has a long and
established history of being good guardians and stewards of the public's money;
WHEREAS, appropriations, expenditures and other budgetary matters are a
primary concern of the City Council;
WHEREAS, the City Council has adopted various policies regarding financial
matters;
WHEREAS, the City Council has adopted City Council Reserve Policy F-2 for the
administration of "Reserves," which are defined within the policy as fund balances in
governmental funds and net working capital in proprietary funds;
WHEREAS, on December 12, 1994, the City Council adopted Resolution No. 94-
110 establishing the Finance Committee, whose duties and responsibilities have been
amended throughout the years to further protect and safe guard the public's money;
WHEREAS, the existing Finance Committee is charged with a variety of tasks,
including, but not limited to: reviewing and monitoring events and issues which may affect
the financial status of the City; and making recommendations to the City Council
regarding amendments to financial and budgetary policies; and
WHEREAS, the Finance Committee has recommended an amendment to City
Council Reserve Policy F-2 that excludes the additional discretionary payments to the
City's unfunded pension liability from the annual Contingency Reserve calculation.
NOW, THEREFORE, the City Council of the City of Newport Beach resolves as
follows:
Section 1: The City Council hereby amends City Council Reserve Policy F-2 as
described in Attachment 'A" which is attached hereto and incorporated herein by
reference.
Section 2: The City Council hereby repeals all prior versions of City Council
Reserve Policy F-2 that are in conflict with this resolution.
Section 3: If any section, subsection, sentence, clause or phrase of this
resolution is for any reason held to be invalid or unconstitutional, such decision shall not
affect the validity or constitutionality of the remaining portions of this resolution. The City
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Resolution 2018 -
Page 2 of 2
Council hereby declares that it would have passed this resolution and each section,
subsection, sentence, clause or phrase hereof, irrespective of the fact that any one or
more sections, subsections, sentences, clauses or phrases be declared invalid or
unconstitutional.
Section 4: The recitals provided in this resolution are true and correct and are
incorporated into the substantive portion of this resolution.
Section 5: The City Council find the adoption of this resolution and the
amendment of City Council Reserve Policy F-2 is not subject to the California
Environmental Quality Act ("CEQA") pursuant to Sections 15060(c)(2) (the activity will not
result in a direct or reasonably foreseeable indirect physical change in the environment)
and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA
Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no
potential for resulting in physical change to the environment, directly or indirectly.
Section 6: This resolution shall take effect immediately upon its adoption by the
City Council, and the City Clerk shall certify the vote adopting this resolution.
ADOPTED this 25th day of September, 2018.
Marshall "Duffy" Duffield
Mayor
ATTEST:
Leilani I. Brown,
City Clerk
APPR V AS TO FORM:
Aaron . arp
City Attorney
Attachment A: Amended City Council Reserve Policy F-2
001
RESERVE POLICY
PURPOSE
F-2
To establish City Council policy for the administration of Reserves defined as
fund balances in governmental funds and net working capital in proprietary
funds.
BACKGROUND
Prudent financial management dictates that some portion of the funds available
to the City be reserved for future use.
As a general budget principle concerning the 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 revenues 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 specific direction in
the annual budget; or by a separate City Council action. Information regarding
Annual Budget Adoption and Administration is contained in City Council Policy
F-3.
GOVERNMENTAL FUNDS AND FUND BALANCE DEFINED
Governmental Funds including the General Fund, Special Revenue Funds,
Capital Projects Funds, Debt Service Funds and Permanent Funds have a short-
term or current flow of financial resources, measurement focus and basis of
accounting and therefore, exclude long-term assets and long-term liabilities. The
term Fund Balance, used to describe the resources that accumulate in these funds,
is the difference between the fund assets and fund liabilities of these funds. Fund
Balance is similar to the measure of net working capital that is used in private
sector accounting. By definition, both Fund Balance and Net Working Capital
exclude long-term assets and long-term liabilities.
PROPRIETARY FUNDS AND NET WORKING CAPITAL DEFINED
Proprietary Funds including Enterprise Funds and Internal Service Funds have
a long- term or economic resources measurement focus and basis of accounting
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and therefore, include long-term assets and liabilities. This basis of accounting is
very similar to that used in private sector. However, instead of Retained
Earnings, the term Net Assets is used to describe the difference between fund
assets and fund liabilities. Since Net Assets include both long-term assets and
liabilities, the most comparable measure of proprietary fund financial resources
to governmental Fund Balance is Net Working Capital, which is the difference
between current assets and current liabilities. Net Working Capital, like Fund
Balance, excludes long-term assets and long-term liabilities.
GOVERNMENTAL FUND RESERVES (FUND BALANCE)
For Governmental Funds, the Governmental Accounting Standards Board
("GASB") Statement No. 54 defines five specific classifications of fund balance.
The five classifications are intended to identify whether the specific components
of fund balance are available for appropriation and are therefore "Spendable."
The classifications also are intended to identify the extent to which fund balance
is constrained by special restrictions, if any. Applicable only to governmental
funds, the five classifications of fund balance are as follows:
CLASSIFICATIONS NATURE OF RESTRICTION
Non -spendable
Restricted
Committed
Assigned
Unassigned
Cannot be readily converted to cash
Externally imposed restrictions
City Council imposed commitment
City Manager assigned
purpose/ intent
Residual balance not otherwise
restricted
A. Non -spendable fund balance: That portion of fund balance that includes
amounts that are either (a) not in a spendable form, or (b) legally or
contractually required to be maintained intact. Examples of Non -spendable
fund balance include:
1. Reserve for Inventories: The value of inventories purchased by the City
but not yet issued to the operating Departments is reflected in this
account.
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2. Reserve for Long Term Receivables and Advances: This Reserve is used
toidentify 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
for appropriation during the budget year.
3. Reserve for Prepaid Assets: This reserve represents resources that have
been paid to another entity in advance of the accounting period in which
the resource is deducted from fund balance. A common example is an
insurance premium, which is typically payable in advance of the
coverage period.
Although prepaid assets have yet to be deducted from fund balance,
they are no longer available for appropriation.
4. Reserve for Permanent Endowment - Bay Dredging: The endowment
specifiesthat the principal amount will not be depleted and represents the
asset amounts to be held in the Bay Dredging Fund.
5. Reserve for Permanent Endowment - Ackerman Fund: The ffdymet
specifies that the principal amount will not be depleted and represents
the asset amount to be held in the Ackerman Fund.
B. Restricted fund balance: The portion of fund balance that reflects constraints
placed on the use of resources (other than non -spendable items) that are either
(a) externally imposed by creditors, grantors, contributors, or laws or
regulations of other governments; or (b) imposed by law through
constitutional provisions or enabling legislation. Examples of restricted fund
balance are:
1. Reserve for Debt Service: Funds are placed in this Reserve at the time
debt is issued. The provisions governing the Reserve, if established, are
in the Bond Indenture and the Reserve itself is typically controlled by the
Trustee.
2. Affordable Housing: A principal provision of the Newport Beach
Housing Element requires developers to provide housing units for lower
income households, the number of which is to be negotiated for each
development project. In lieu of constructing affordable housing,
developers have paid into this reserve which is used at the City Council's
discretion to provide alternate methods for the delivery of affordable
housing for lower income households.
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3. Park In Lieu: Per NBMC 19.52 and California Government Code Section
664777 (The 1975 "Quimby Act"), a dedication of land or payment of fees
for park or recreational purposes in conjunction with residential
development is required. The fees collected can only be used for specific
park or recreation purposes as outlined in NBMC 19.52.030 and 19.52.070.
4. Upper Newport Bay Restoration Reserve: This reserve is the repository
for funds mandated by S13573, as well as special fees charged to permit
holders as an alternative to meeting certain specified mitigation criteria.
In addition to the mitigation fees, ten percent (10%) of Beacon Bay lease
revenue is placed in this Reserve. Funds in the Reserve are restricted for
Upper Newport Bay restoration projects.
5. Permanent Endowment for Bay Dredging: The endowment also
specifies that the interest earnings on the principal amount can only be
used for dredging projects in the Newport Bay.
6. Permanent Endowment for Ackerman Fund: The endowment also
specifies that the interest earnings on the principal amount can only be
used for scholarships provided by the City and high-tech library
equipment.
7. Oceanfront Encroachment Reserve: In the early 1990's, it was discovered
by survey that improvements to several ocean front parcels were
encroaching onto the public beach. The encroachment was relatively
minor. The negotiated solution was for the property owners to pay a
permit fee each year to the City. Revenue thus generated may only be
used for ocean front restoration projects and incidental costs of
improvements and maintenance to enhance public access and use of
ocean beaches as approved by the City Council. This Reserve is the
repository for those funds. City Council Policy L- 12 contains additional
background and details about the encroachment issue The external
restriction on this balance is imposed by the Local Coastal Plan (LCP).
C. Committed fund balance: That portion of a fund balance that includes
amounts that can only be used for specific purposes pursuant to constraints
imposed by formal action by the government's highest level of decision
making authority, and remain binding unless removed in the same manner.
The City considers a resolution to constitute a formal action for the purposes
of establishing committed fund balance. The action to constrain resources
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must occur within the fiscal reporting period; however the amount can be
determined subsequently. City Council imposed Commitments are as follows:
1. Facilities Financial Planning (FFP) Fund: In conjunction with the Cit)A
Facilities Financial Plan, a sinking fund has been established to amortize
the cost of critical City facilities such as, but not limited to, the Civic
Center, Police Department buildings, Fire Stations, Library Branches
and other Facility Improvement Projects.
The Facilities Financial Planning Program establishes a level charge to
the General Fund that will perpetually replenish the cash flows
necessary to finance the construction of critical City facilities. This plan
will be updated annually as part of the budget process, or as conditions
change. The City shall strive to maintain fund balance in the Facilities
Financial Planning Reserve at a level equal to or greater than the
maximum annual debt service on existing obligations.
The eligible uses of this reserve include the cash funding of public facility
improvements or the servicing of related debt.
2. Off Street Parking: Per NBMC 12.44.025 the City Council may direct
revenues into the off-street parking facilities fund for purposes of the
acquisition, development and improvement of off street parking facilities,
and for any expenditures necessary or convenient to accomplish such
purposes.
3. In Lieu Parking: Per NBMC 12.44.125 the City requires commercial
businesses to provide adequate off-street parking or where this is not
possible, businesses are afforded the opportunity to pay an annual fee and
use parking spaces in a municipal lot, providing such a lot is located within
specified proximity to the business. These funds can only be used to
provide additional parking.
4. Neighborhood Enhancement - A: Funds previously accumulated to
Neighborhood Enhancement Area "A" pursuant to a prior version of
NBMC 12.44.027 shall continue to be used only for the purpose of enhancing
and supplementing services to the West Newport area. Both the nature of
the supplemental services and the definition of the area served are set forth
in NBMC 12.44.027.
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5. Neighborhood Enhancement - B: Funds previously accumulated to
Neighborhood Enhancement Area "B" pursuant to a prior version of
NBMC 12.44.027 shall continue to be used only for the purpose of enhancing
and supplementing services in the Balboa Peninsula. Both the nature of the
supplemental services and the definition of the area served are set forth in
NBMC 12.44.027.
6. Cable Franchise: Pursuant to the provisions of the Newport Beach
Municipal Code, Title 5, Business Licenses & Regulations, Chapter 5.44, in
return for the use of the City's streets and public ways for the purpose of
installing, operating, maintaining, or reconstructing a cable system to
provide cable service, fees are collected by the City from cable providers.
Those fees are to be used by the City for support of Public, Education, and
Government access programming only.
7. Oil and Gas Reserve: The annual $40,000 which is being set aside from the
oil and gas field production revenues is to be used to fund abandoned wells
and facilities as they go out of service.
8. Capital Reappropriation: This reserve represents an administrative
procedure that recognizes a portion of fund balance is not readily available
to fund new endeavors because it has been reappropriated through the
budget adoption process or amendment process.
D. Assigned fund balance: That portion of a fund balance that includes
amounts that are constrained by the City's intent to be used for specific
purposes but that are not restricted or committed. This policy hereby
delegates the authority to the City Manager or designee to modify or create
new assignments of fund balance. Constraints imposed on the use of
assigned amounts may be changed by the City Manager or his designee.
Appropriations of balances are subject to Council Policy F-3 concerning
budget adoption and administration.
E. Unassigned fund balance:
1. Contingency Reserve: The Contingency Reserve shall have a target
balance of twenty five percent (25%) of General Fund "Operating
Budget" as originally adopted. Operating Budget for this purpose shall
include current expenditure appropriations and shall exclude Capital
Improvement Projects, Transfers Out, and additional discretionary
payments to the City's unfunded pension liability. Appropriation and/
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or access to these funds are generally reserved for emergency or
unforeseen situations but may be accessed by Council by simple budget
appropriation. Examples may include but are not limited to the
following:
a. A catastrophic loss of critical infrastructure.
b. A State or Federally declared state of emergency.
e. Any settlement arising from a claim or judgment.
d. Deviation from budgeted revenue projections.
e. Any action by another government that eliminates or shifts revenues
from the City.
f. Inability of the City to meet its debt service obligations in any given
year.
g. Other circumstances deemed necessary by City Council to meet the
claims and obligations of the City.
Should the Contingency Reserve be used, the City Manager shall present
a plan to City Council to replenish the reserve within five years.
2. Residual Fund Balance: The residual portion of available fund balance that
is not otherwise restricted, committed or assigned and is above and
beyond the Contingency Reserve target reserve balance.
PROPRIETARY FUND RESERVES (NETWORKING CAPITAL)
In the case of Proprietary Funds (Enterprise and Internal Service Funds),
Generally Accepted Accounting Principles ("GAAP") does not permit the
reporting of reserves on the face of City financial statements. However, this does
not preclude the City from setting policies to accumulate financial resources for
prudent financial management of its proprietary fund operations. Since
proprietary funds may include both long-term capital assets and long-term
liabilities, the most comparable measure of liquid financial resources that is
similar to fund balance in proprietary funds is net working capital which is the
difference between current assets and current liabilities. For all further references
to reserves in Proprietary Funds, Net Working Capital is the intended meaning.
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A. Water Enterprise Fund
1. Stabilization and Contingency Reserve: This Reserve is used to provide
sufficient funds to support seasonal variations in cash flows and in more
extreme conditions, to maintain operations for a reasonable period of time
so the City may reorganize in an orderly manner or effectuate a rate
increase to offset sustained cost increases. The intent of the Reserve is to
provide funds to offset cost increases that are projected to be short-lived,
thereby partially eliminating the volatility in annual rate adjustments. It is
not intended to offset ongoing, long-term pricing structure changes. The
target level of this reserve is fifty percent (50%) of the annual operating
budget. This reserve level is intended to provide a reorganization period
of 6 months with zero income or 24 months at a twenty-five percent (25%)
loss rate. The City Council must approve the use of these funds, based on
City Manager recommendation. Funds collected in excess of the
Stabilization reserve target would be available to offset future rate
adjustments, while extended reserve shortfalls would be recovered from
future rate increases. Should catastrophic losses to the infrastructure
system occur, the Stabilization and Contingency Reserve may be called
upon to avoid disruption to water distribution.
2. Infrastructure Replacement Funding Policy: This funding policy is
intended to be a temporary repository for cash flows associated with
the funding of infrastructure replacement projects provided by the
Water Master Plan. The contribution rate is intended to level -amortize
the cost of infrastructure replacement projects over a long period. The
annual funding rate of the Water Master Plan is targeted at an amount that,
when combined with prior or future year contributions, is sufficient to
provide for the eventual replacement of assets as scheduled in the plan.
This contribution policy is based on the funding requirements of the most
current Water Master Plan. There are no minimum or maximum balances
contemplated by this funding policy. However, the contributions level
should be reviewed periodically or as major updates to the Water Master
Plan occur. Annual funding is contingent on many factors and may
ultimately involve a combined strategy of cash funding and debt issuance
with the intent to normalize the burden on Water customer rates.
B. Wastewater Enterprise Fund
1. Stabilization and Contingency Reserve: This Reserve is used to provide
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sufficient funds to support seasonal variations in cash flows and in more
extreme conditions, to maintain operations for a reasonable period of time
so the City may reorganize in an orderly manner or effectuate a rate
increase to offset sustained cost increases. The intent of the Reserve is to
provide funds to offset cost increases that are projected to be short-lived,
thereby partially eliminating the volatility in annual rate adjustments. It is
not intended to offset ongoing, long-term pricing structure changes. The
target level of this reserve is fifty percent (50%) of the annual operating
budget. This reserve level is intended to provide a reorganization period of
6 months with zero income or 24 months at a twenty-five percent (25 %) loss
rate. The City Council must approve use of these funds, based on City
Manager recommendation. Funds collected in excess of the Stabilization
reserve target would be available to offset future rate adjustments, while
extended reserve shortfalls would be recovered from future rate increases.
Should catastrophic losses to the infrastructure system occur, the
Stabilization and Contingency Reserve may be called upon to avoid
disruption to wastewater service.
2. Infrastructure Replacement Funding Policy: This funding policy
is intended to be a temporary repository for cash flows associated
with the funding of infrastructure replacement projects provided by the
Wastewater Master Plan. The contribution rate is intended to level -
amortize the cost of infrastructure replacement projects over a long period
of time. The annual funding rate of the Wastewater Master Plan is
targeted at an amount that, when combined with prior or future year
contributions, is sufficient to provide for the eventual replacement of
assets as scheduled in the plan. This contribution policy should be updated
periodically based on the most current Wastewater Master Plan. There are
no minimum or maximum balances contemplated by this funding policy.
However, the contributions level should be reviewed periodically or as
major updates to the Wastewater Master Plan occur. Annual funding is
contingent on many factors and may ultimately involve a combined
strategy of cash funding and debt issuance with the intent to normalize the
burden on Wastewater customer rates.
C. Internal Service
Funds Background.
Internal Service Funds are used to centrally manage and account for specific
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program activity in a centralized cost center. Their revenue generally comes
from internal charges to departmental operating budgets rather than external
revenue sources. They have several functions.
--They work well in normalizing departmental budgeting for programs that
have life -cycles greater than one year; thereby facilitating level budgeting for
expenditures that will, by their nature, be erratic from year to year. This also
facilitates easier identification of long term trends.
--They act as a strategic savings plan for long-term assets and liabilities.
--From an analytical standpoint, they enable appropriate distribution of city-
wide costs to individual departments, thereby more readily establishing true
costs of various operations.
Since departmental charges to the internal service fund duplicate the ultimate
expenditure from the internal service fund, they are eliminated when
consolidating entity -wide totals.
The measurement criteria, cash flow patterns, funding horizon and
acceptable funding levels are unique to each program being funded. Policy
regarding target balance and/ or contribution policy, gain/loss
amortization assumption, source data, and governance for each of the City's
Internal Service Funds is set forth as follows:
1. For all Internal Service Funds: The Finance Director may transfer part or
all of any unencumbered fund balance between the Internal Service Funds
provided that the withdrawal of funds from the transferred fund would
not cause insufficient reserve levels or insufficient resources to carry out
its intended purpose. This action is appropriate when the decline in cash
balance in any fund is precipitated by an off -trend non-recurring event.
The Finance Director will make such recommendations as part of the
annual budget adoption or through separate Council action.
2. Equipment Maintenance Fund and Equipment Replacement Fund: The
Equipment Maintenance and Replacement Funds receive operating money
from the Departments to provide equipment maintenance and to fund the
regular replacement of major pieces of equipment (mostly vehicles) at their
economic obsolescence.
a. Equipment Maintenance Fund: The Equipment Maintenance Fund acts
solely as a cost allocation center (vs. a pre -funding center) and is funded
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on a pay- as -you -go basis by departmental maintenance charges by vehicle
type and usage requirement. Because of this limited function, the target
year-end balance is zero.
Contribution rates (departmental charges) are set to include the direct costs
associated with maintaining the City vehicle fleet, including fleet
maintenance employee salary and benefits, operating expenses and
maintenance related capital outlay. Administrative overhead and
maintenance facility improvements and replacement costs are to be
provided outside of this cost unit. Governance is achieved through annual
management adjustment of contribution rates on the basis of maintenance
cost by vehicle and distribution of costs based on fleet use by department.
b. Equipment Replacement Fund: Operating Departments are charged
annual amounts sufficient to accumulate funds for the replacement of
vehicles, communications equipment, parking equipment and other
equipment replacement determined appropriate by the Finance Director.
The City Manager recommends annual rate adjustments as part of
the budget preparation process. These adjustments are based on
pricing, future replacement schedules and other variables.
The age and needs of the equipment inventory vary from year to year.
Therefore the year-end fund balance will fluctuate in direct correlation to
accumulated depreciation. In general, it will increase in the years
preceding the scheduled replacement of relatively large percentage of the
equipment, on a dollar value basis. However, rising equipment costs,
dissimilar future needs, replacing equipment faster than their expected life
or maintaining equipment longer than their expected life all contribute to
variation from the projected schedule.
Target funding levels shall be determined by the Finance Director after
considering the age, expected life and cash flow anticipated by the
replacement equipment being funded. If departmental replacement
charges for equipment prove to be excessive or insufficient with regard to
this target funding level, new rates established during the next budget
cycle will be adjusted with a view toward bringing the balance back to the
target level over a three-year period.
3. Insurance Reserve Funds: The Insurance Reserve funds account for the
activities of general liability and workers' compensation claims.
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Background.
The City employs an actuary to estimate the liabilities associated with the
general liability and workers compensation activities. The costs typically
associated with these programs include: claims administration, legal
defense, insurance premiums, self insured retention and the establishment
of appropriate loss reserves including "incurred -but -not reported" (IBNR)
claims. Ina prescribed measurement methodology, the Actuary estimates
the liabilities in conformity with Generally Accepted Accounting Principles
(GAAP).
The Actuary refers to this measurement level in his report as the "Expected
Level." However, because actuarial estimates are subject to significant
uncertainties, actuaries typically recommend that a target funding level be set
at an amount in excess of expected liability as a margin to cover contingencies.
A typical target funding level would be set to obtain a specified confidence
level (the percent chance that resources set-aside will be sufficient to cover
existing claims).
Full funding of the Actuary's "Target Funding Level" establishes a seventy-
five percent (75%) confidence there will be sufficient resources (including
projected interest) to pay the full amount of existing claims without future
contributions. Funding at the "Expected Level" produces a confidence level of
only fifty percent to sixty-five percent (50%-65% ). Therefore, the target
funding of insurance reserves should exceed the "Expected Level" to account
for adverse estimate deviation.
Policy & Practice.
The City should target funding of its risk management obligations at not less
than the Expected Level, described above; and not more than an amount
sufficient to establish a seventy-five percent (75%) Confidence Level.
Actuarial losses should be recovered over a rolling 3 -year basis while actuarial
gains should be amortized over a rolling 5 -year basis. As part of the operating
budget, each department will be charged a rate equal to its proportionate
share of the total "revenue" required to fund the Insurance Reserve Fund at
this level.
To lessen the impact of short-term annual rate change fluctuation, City
management may implement one-time fund transfers (rather than
department rate increases) when funding shortfalls appear to be due to
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unusually sharp and non-recurring factors. Excess reserves in other areas may
be transferred to the internal service fund in these instances but such transfers
should not exceed the funding necessary to reach a seventy-five (75%)
confidence level interval.
4. Compensated Absences
Fund: Background.
The primary purpose of flex leave, vacation leave and sick leave is to provide
compensated time off as appropriate and approved. However, under certain
circumstances, typically at separation from service, some employees have the
option of receiving cash -out payments for some accumulated leave balances.
The Compensated Absences Fund is utilized primarily as a budget smoothing
technique for any such leave bank liquidations. The primary purpose of the
Compensated Absences Fund is to maintain a balance sufficient to facilitate
this smoothing.
Policy and Practice.
The contribution rate will be set to cover estimated annual cash flows based
on a three-year trailing average.
The minimum cash reserve should not fall below that three-year average. The
maximum cash reserve should not exceed fifty percent (50%) of the long term
liability. The target cash reserve shall be the median difference between the
minimum and maximum figures.
Each department will make contributions to the Compensated Absences
Fund through its operating budget as a specified percentage of salary. The
Finance Director will review and recommend adjustments to the percentage
of salary required during the annual budget development process. This
percentage will be set so as to maintain the reserve within the parameters
established above.
5. Post Retirement Funding Policies:
a. Pension Funding:
(i) California Public Employees Retirement System (CalPERS): The City's
principal Defined Benefit Pension program is provided through
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contract with CaIPERS. The City's contributions to the plan include an
actuarially determined employer contribution that fluctuates each year
based on an annual actuarial plan valuation. This variable rate employer
contribution includes the normal cost of providing the contracted
benefits plus or minus an amortization of plan changes and net
actuarial gains and losses since the last valuation period.
It is the City's policy to make contributions to the plan equaling at least
one hundred percent (100%) of the actuarially required contribution
(annual pension cost). Because the City pays the entire actuarially
required contribution each year, by definition, its net pension obligation
at the end of each year is $0. Any unfunded actuarial liability (UAL) is
amortized and paid in accordance with the actuary's funding
recommendations. The City will strive to maintain its UAL within a
range that is considered acceptable to actuarial standards. The City
Council shall consider increasing the annual CalPERS contribution
should the UAL status fall below acceptable actuarial standards.
(ii) Laborer's International Union of North America (LIUNA): The Gly
provides funds to support a supplemental pension plan for some
employee associations through contract with LIUNA. This is funded at
a fixed percentage of total compensation on a pay-as-you-go basis. The
City is not contractually required to guarantee the level of the ultimate
LIUNA benefit to retirees, nor does it do so. Therefore the City's liability
for this program is full funded each year.
b. Other Post Employment Benefits (OPEB
Funding): Background.
The City's OPEB funding obligations consists of two retiree medical plans.
New Plan. Effective January 2006, the City and its employee associations
agreed to major changes to the Post Employment Healthcare Plan. New
employees and all current employees participate in a program that requires
certain defined employee and employer contributions while the employee
is in active service. However, once the contributions have been made to the
employee's account, the City has transferred a substantial portion of the
funding risk to the employee.
Old Plan. Eligible employees who retired prior to the "New Plan" and
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certain active employees were eligible to continue to receive post-
retirement medical benefits (a defined benefit plan). The cost was
divided among the City, current employees and retirees. In the past, this
program was largely funded on a pay-as-you-go basis, so there was a
significant unfunded liability. Recognizing this problem, the City
began contributing to this obligation in 2001. In 2008, these assets were
placed in a pre -funding trust. The City's intention is to amortize the
remaining unfunded liability within 20 years.
Policy & Practice.
New Plan. Consistent with agreements between the City and Employee
Associations, the new defined contribution plan will be one hundred
percent (100%) funded, on an ongoing basis, as part of the annual
budget process. Funds to cover this expenditure will be contained
within the salary section of each department's annual operating
budget.
Old Plan. The City's policy is to pre fund the explicit (cash subsidy)
portion of the Actuarial Accrued Liability (AAL) of the remnants of the
old plan over a 20 -year amortization period, or less. This amount will
be based on the Annual Required Contribution (ARC) determined by a
biennial actuarial review; subject to review and analysis by the City. The
City will strive to maintain a funded status that will be within a range
that is considered acceptable to actuarial standards. The City Council
shall consider increasing the annual OPEB contribution should the
funded status fall below acceptable actuarial standards.
Adopted - January 24,1994
Amended - April 10, 1995
Amended - April 27,1998
Amended - March 14, 2000
Amended - May 8, 2001
Amended - April 23, 2002
Amended - April 13, 2004
Amended - September 15,
2008
Amended- November 12,
2008
Amended - May 24, 2011
Amended - September 27, 2011
Amended - May 14, 2013
Amended- June 10, 2014
Amended - May 12, 2015
Amended - September 25, 2018
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