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HomeMy WebLinkAbout05 - Council Policies F-2 & B-2CITY OF NEWPORT BEACH City Council Staff Report June 10, 2014 Agenda Item No. 5. TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Dan Matusiewicz, Finance Director — (949) 644 -3123, dmatusiewicz @newportbeachca.gov PREPARED BY: Rukshana Virany, Accounting Manager PHONE: (949) 644 -3146 TITLE: Changes to Council Policies: F -2 (Reserve Policy) and B -2 (Recreation Fees and Related Equipment Replacement Reserves) ABSTRACT: Staff is recommending several changes to City Council "Reserve" Policy (F -2) including a significant adjustment to the City's Contingency Reserve. Due to the timing of the FY 2014 -15 Proposed Budget adoption, staff believes it is advantageous to implement changes to both policies. The policy revisions were reviewed by Finance Committee on April 29, 2014 and all recommendations were incorporated in the amended policy attached. RECOMMENDATION: Adopt Resolution No. 2014 -49, A Resolution of the City Council of the City of Newport Beach Amending Council Policy F -2 (Reserve Policy) and Council Policy B -2 (Recreation Fees and Related Equipment Replacement Reserves), as attached to the staff report. FUNDING REQUIREMENTS: There are no direct expenditures associated with the policy amendments. However, an increase to the General Fund, Contingency reserve policy from 15% to 25% will cause the Contingency reserve to increase approximately $19 million and will be funded by surplus reserves that would otherwise remain unassigned. DISCUSSION: These are changes that can be made easily and amended with the adoption of the FY 2014 -15 Proposed Budget or by no later than June 30, 2014: 1. Changes to the Contingency Reserve a. In fiscal year 2010 -11, the City adopted Government Accounting Standards Board ( "GASB ") Statement No. 54 which required local governments to a new standard of reporting tie] fund balances. The new standard was intended to enhance the reader's understanding of the availability of fund balance (for spending) and the level of restriction placed on fund balance (if any). GASB 54 places certain requirements on "Stabilization Arrangements" which the City commonly refers to as Contingency Reserves. For Contingency Reserves to be classified as "Committed" fund balance to be used for specific purposes, constraints had to be imposed by formal action by the government's highest level of decision making authority and would remain binding unless removed in the same manner. Staff recommends removing the restrictive parameters from the reserve requirement by formal action of the City Council so that the balance will be reported as Unassigned versus Committed, thus giving further assurance to creditors and rating agencies that the Contingency Reserve is indeed available should a financial necessity arise. b. Increase the Contingency Reserve Balance from 15% to 25 %. The City maintains a reserve for contingencies in the spirit of planning for what you cannot foresee. As a minimum balance for this reserve, the City sets aside 15% of its operating expenditures for this purpose. The Government Finance Officers Association (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 regular General Fund operating revenues or expenditures, which is equivalent to a 17% contingency reserve. Credit rating agency Standard and Poors (S &P) considers 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. Maintaining an operating reserve or rainy day fund is perhaps the most effective practice an issuer can use to enhance its credit rating. It is also the most frequently implemented practice, adopted by both large and small local government issuers. After conducting a survey of cities in California similar to Newport Beach, staff found contingency reserve requirements mostly in excess of 15% and in the range of 20% to 25% of operating budget. A financial reserve may be used to address unanticipated revenue shortfalls or unanticipated expenditures. This provides the first defense against deficit spending and helps maintain liquidity when budgeted draw -downs become inevitable. In order to maintain an adequate level of creditworthiness among credit rating agencies and considering the current planned spend down of unassigned reserves, staff believes that increasing the contingency reserve to 25% of General Fund operating budget is a prudent action at this time. 2. Expand the Use of the Equipment Replacement Fund and Eliminate Specified Reserve Categories The Equipment Replacement, internal service fund model has proven to be an effective means to set funds aside for periodic capital replacement needs. Funds are set -aside based on an annual assessment of the equipment's age, condition and anticipated future replacement date and cost. These funds are subsequently made available for the replacement of equipment after reaching its useful life. Much of the current reserve policy pertains to small and relatively insignificant reserve categories that are derived through a percentage allocation of certain revenue sources. Reserve policies that can be eliminated at this time by utilizing the Equipment Replacement Fund include: a. Recreation Facility Rental Reserve (based on 10% facility rental service revenue): This reserve was intended to replace certain facility equipment and furniture due to the wear and tear associated with facility rentals. b. Recreation Classes (based on 10% to 20% of recreational class revenue and 100% of revenue for use of the 29th Street public dock): This reserve was intended to replace 31 certain recreation equipment utilized in recreation classes such as surfboards, sailboats or development of other waterfront activities. It was also intended to periodically resurface tennis courts used during public tennis lessons. c. Senior Fitness Center Reserve (based on 10% of fitness center membership fees): This reserve was established for the purpose of purchasing and replacing fitness equipment. d. Paramedic Program (based on prior Hoag Hospital contributions and program income): This reserve was intended to acquire and replace equipment utilized in paramedic services. e. START Program (based on revenue generated by the sale of training videos /materials): The START program reserve was intended to periodically fund costs associated with the paramedic triage video and EMT related equipment. 3. Staff also recommends the following changes to the Reserve Policy: a. Realigning the Oceanfront Encroachment Reserve as a Restricted Reserve rather than a Council Commitment. b. Add language describing the administrative process of reappropriating Capital Improvement Projects (CIPs). c. Eliminate the examples referenced in the policy relating to City Manager assignments since they can vary from year to year. d. Add additional flexibility in determining appropriate funding levels for different types of equipment. 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 envi ronment, directly or indirectly. NOTICING: 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 Description Attachment A - Resolution No. 2014 -49 Attachment B - Council Policy F -2, Reserves Policy (Clean Version) Attachment C - Council Policy F -2, Reserves Policy (Strikeout Version) Attachment D - Council Policy 6-2, Recreation Fees and Equipment Replacement Reserves (Clean Version) Attachment E - Council Policy B -2. Recreation Fees and Eauipment Replacement Reserves (Strikeout Version) 32 ATTACHMENT A RESOLUTION NO. 2014- A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH AMENDING COUNCIL POLICY F -2 (RESERVE POLICY) AND COUNCIL POLICY B -2 (RECREATION FEES AND RELATED EQUIPMENT REPLACMENT RESERVES) WHEREAS, the City Council has previously adopted Council Policy F -2 (Reserve Policy) related to the administration of reserves and fund balances; WHEREAS, the City Council desires the City Manager to prepare City Financial Statements in conformity with Generally Accepted Accounting Principles (GAAP); WHEREAS, Governmental Accounting Standard Board (GASB) issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, to be implemented for FY beginning June 15, 2011; WHEREAS, the implementation of GASB Statement No. 54 is intended to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied; and will shift the focus of fund balance reporting from the availability of fund resources for budgeting to "the extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent ;" WHEREAS, it is desirous to remove restrictions placed on Contingency Reserve by City Council (the highest level of this government), referred to and defined as "Commitments" by GASB 54; WHEREAS, it is desirous to move Contingency Reserve from the "Committed" classification to" Unassigned" classification of fund balance; and WHEREAS, the City Council has previously adopted Council Policy B -2 (Recreation Fees and Related Equipment Replacement Reserves) establishing specified reserve categories and ongoing contributions. NOW, THEREFORE, the City Council of the City of Newport Beach resolves as follows: Section 1: The City Council approves and adopts the amended Council Policy F -2 as attached hereto and incorporated by reference herein. All prior versions of Council Policy F -2 are hereby repealed. 1- 33 Section 2: The City Council approves and adopts the amended Council Policy B -2 as attached hereto and incorporated by reference herein. All prior versions of Council Policy B -2 are hereby repealed. Section 3: The City Council finds 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. Section 4: This resolution shall take effect immediately upon its adoption by the City Council, and the City Clerk shall certify the vote adopting the resolution. ADOPTED this 10th day of June, 2014. ATTEST: Leilani I. Brown City Clerk Rush N. Hill, II Mayor 2 34 ATTACHMENT B 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 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 1 35 F -2 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. 2. Reserve for Long Term Receivables and Advances: This Reserve is used to identify and segregate that portion of the City's financial assets which are not due to be received for an extended period, so are not available 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 01 36 F -2 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 specifies that 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 endowment 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. 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. 3 37 F -2 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. 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 must occur within the fiscal reporting period; however the amount can be determined subsequently. City Council imposed Commitments are as follows: 1. Contingency Reserve: The Contingency Reserve shall have a target balance of fifteen percent (15 %) of General Fund "Operating Budget" as originally adopted. Operating Budget for this purpose shall include current expenditure appropriations and shall exclude Capital Improvement Projects and Transfers Out. Appropriation and /or access to these funds are reserved for emergency situations only. The parameters by which the Contingency Reserve could be accessed would include the following circumstances: a. A catastrophic loss of critical infrastructure requiring an expenditure of greater than or equal to five percent (5 %) of the General Fund, Operating Budget, as defined above. b. A State or Federally declared state of emergency where the City response or related City loss is greater than or equal to five percent (5 %) of the General Fund, Operating Budget. c. Any settlement arising from a claim or judgment where the loss exceeds the City's insured policy coverage by an amount greater than or equal to five percent (5 %) of the General Fund, Operating Budget. d. Deviation from budgeted revenue projections in the top three General Fund revenue categories, namely, Property Taxes, Sales Taxes and Transient Occupancy Taxes in a cumulative amount greater than or equal to five percent (5 %) of the General Fund, Operating Budget. 0 m F -2 e. Any action by another government that eliminates or shifts revenues from the City amounting to greater than or equal to five percent (5 %) of the General Fund, Operating Budget. f. Inability of the City to meet its debt service obligations in any given year. g. Any combination of factors 1) a. -f. amounting to greater than or equal to five percent (5 %) of the General Fund, Operating Budget in any one fiscal year. Use of the Contingency Reserve must be approved by the City Council. Should the Contingency Reserve commitment be used, the City Manager shall present a plan to City Council to replenish the reserve within five years. 2. Facilities Financial Planning Reserve: 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 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 debts of existing obligations. The eligible uses of this reserve include the cash funding of public facility improvements or the servicing of related debt. 3. 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. 4. Senior Center and Recreation Facility Rental Reserve: City Council Policy B -2 requires ten percent (10 %) of gross revenues derived from OASIS Senior Center 5 39 F -2 and Recreation facilities rental fees to be set aside annually for equipment replacement and /or facility refurbishment. 5. Off Street Parking: Per NBMC 12.44.025 fifty percent (50 %) of parking meter revenue collected in designated areas is set aside for acquisition, development and improvement of off street parking facilities within those areas. 6. Paramedic Program (Hoag): In addition to the debt issuance agreements with Hoag Hospital which required an original deposit, effective July 1, 2000, any excess revenues generated by this program, after accounting for General City Overhead of fifteen percent (15 %), were to be accumulated for future paramedic related purposes. Funds accumulated may be used only for paramedic related purposes as directed by the City Council. 7. Recreational Instruction: City Council Policy B -2 requires ten percent (10 %) to twenty percent (20 %) of gross annual revenues derived from specified recreational classes to be set aside for the refurbishment of certain recreational facilities, fee -based activity programs and equipment used in connection with fee -based recreation classes. 8. Senior Fitness Center Reserve: City Council Policy B -2 requires ten percent (10 %) of the gross annual revenues derived from fitness center membership fees to be set aside and used for new or replacement fitness equipment. 9. 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. 10. Neighborhood Enhancement - A: NBMC 12.44.027 directs revenues from parking meters in Zone 9 shall be apportioned to this Neighborhood Enhancement A. Funds accumulated will only be used 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 the Code Section above. 11. Neighborhood Enhancement - B: NBMC 12.44.027 directs that fifty percent (50 %) of revenues from parking meters in the Balboa Peninsula be apportioned to this Neighborhood Enhancement B. Funds accumulated will only be used for the purpose of enhancing and supplementing services in the Balboa Peninsula. Specific details are contained in the Code Section. 6 M F -2 12. 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. 13. START Program: The Fire Department's START Program developed by the Fire Department and Hoag Hospital helps prepare emergency personnel to quickly organize their resources to handle multi - casualty emergencies. Training video and training materials are sold to other agencies. Any excess revenues generated by this program shall only be used for production expenses related to future START training materials and to enhance paramedic, EMT, and MICN pre - hospital education as directed by the City Council. 14. 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. 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. Examples of assigned fund balance may include but are not limited to: 1. Appropriations Reserves: This is a temporary repository for funds not yet fully appropriated in the annual budget. It is normally used during the budget process to set aside funds for known or strongly anticipated expenses that will need to be addressed by budget amendment during the budget year. Sometimes the dollar amount and /or appropriate account breakdown for such expenses cannot be specifically identified at the time the budget is adopted, even though the funds will be needed. In such cases, the funds will normally be budgeted to the Reserve for Appropriations. 2. Change in Fair Market Value of Investments: As dictated by GASB 31, the City is required to record investments at their fair value (market value). This accounting practice is necessary to insure that the City's investment assets are shown at their true value as of the balance sheet. However, in a fluctuating 7 41 F -2 interest rate environment, this practice records market value gains or losses which may never be actually realized. The City Manager may elect to reserve a portion of fund balance associated with an unrealized market value gain. However, it is impractical to assign a portion of fund balance associated with an unrealized market value loss. 3. PERS Rate Reserve: This Reserve may be established for the specific purpose of helping to smooth out the year -to -year fluctuations in PERS rates. When the City Manager or his designee authorizes a change in General Fund, Assigned Fund Balance, City Council shall be notified quarterly. E. Unassigned fund balance: The residual portion of available fund balance that is not otherwise restricted, committed or assigned. 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. 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 8 42 IM 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 PolicX: 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 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. 9 43 F -2 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 program activity in a centralized cost center. Their revenue generally comes from internal charges to departmental operating budgets rather than direct appropriations. 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 10 Crl F -2 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 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. Because of the limited purpose of this fund, a gain /loss assumption is not needed. Source data is ongoing city fleet inventory and maintenance cost information. 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, 11 45 F -2 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. In light of the above, the target funding level is not established in terms of a flat dollar figure or even a percentage of the overall value of the equipment inventory. It is established at fifty percent (50 %) of the current accumulated depreciation value of the equipment inventory, calculated on a replacement value basis. This will be reconciled annually as part of the year -end close out process by the Finance Department. 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. 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. In a 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 12 M IM 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 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. 13 47 IM 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 contract with CaIPERS. The City's contributions to the plan include a fixed employer paid member contribution and 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. 14 M F -2 (ii) Laborer's International Union of North America ( LIUNA): The City 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 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. 15 M F -2 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 16 50 ATTACHMENT C 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 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 51 F -2 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. 2. Reserve for Long Term Receivables and Advances: This Reserve is used to identify and segregate that portion of the City's financial assets which are not due to be received for an extended period, so are not available 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. 52 F -2 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 specifies that 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 endowment 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. 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. Unver Newport Bay Restoration Reserve: This reserve is the repository for funds mandated by SB573, 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. 53 F -2 5. Permanent Endowment for Bay Dredsine: 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. Fr.T(Dceanfront 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 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 b; the 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 L( CP) r -- Formatted: List Pa2graph, Lek, No bullets or numbering -- Formatted: Indent: Left: OLW No bullets or numbering 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 must occur within the fiscal reporting period; however the amount can be determined subsequently. City Council imposed Commitments are as follows: 54 F -2 t! �c�re�n�nseeTe >���e!e.eaexe!rasn+I�ex�s. MMI Iffiffiffillm aa_ 2-1.Facilities Financial Planning_(FFP) ReseneeFund: 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 other Facility Improvement Projects. Formatted: Outline numbered + Level: 3 + Numbering Style: a, b, c, ... + Start at: 1 + Alignment: Left + Aligned at: 0.5" + Indent at: 0.75" The Facilities Financial Planning Program establishes a level charge to the-- Formatted: Indent. Left : 0.59" 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 of-on existing obligations. . - -- Formatted: Indent: Left: 0.19" The eligible uses of this reserve include the cash funding of public facility- ­[Formatted: Indent. Left: a59' improvements or the servicing of related debt. 55 F -2 5 2.Off Street Parking: Per NBMC 12.44.025 fifty percent (50 %) of parking meter revenue collected in designated areas is set aside for acquisition, development and improvement of off street parking facilities within those areas. �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. Formatted: Indent: Left: 0.69 ", No bullets or numbering 56 F -2 1&4. Neighborhood Enhancement - A: NBMC 12.44.027 directs revenues from parking meters in Zone 9 shall be apportioned to this Neighborhood Enhancement A. Funds accumulated will only be used 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 the Code Section above. 41-5. Neighborhood Enhancement - B: NBMC 12.44.027 directs that fifty percent (50 %) of revenues from parking meters in the Balboa Peninsula be apportioned to this Neighborhood Enhancement B. Funds accumulated will only be used for the purpose of enhancing and supplementing services in the Balboa Peninsula. Specific details are contained in the Code Section. 42-6. 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. -- Formatted: list Paragraph, Lek, No bullets or 14.1. Capital Reannropriation: This reserve represents an administrative numbering 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. 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 57 F -2 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. D. Unassigned fund balance: —_ Formatted: Outline numbered + Level: I + Numbering Style: A, B, C, ... + Start at: 1 + Alignment: Left + Aligned at: 0" + Indent at: 0.25" r— Formatted: Indent: Left: 0.25 ", No bullets or 1 Contingency Reserve: The Contingency Reserve shall have a target balance of nurn ring fifteen 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 and Transfers Out. Appropriation and /or access to these funds are generally reserved for emergency or unforeseen situations but may be accessed by Council by simple budget appropriation. Examnles may include but are not limited to the following: m F -2 a. A catastrophic loss of critical infrastructure. b. A State or Federally declared state of emergency. -- Formatted: List Paragraph, L741 No bullets or c. Any settlement arising from a claim or judgment. numbering d. Deviation from budgeted revenue projections. Anv action by another government that eliminates or shifts revenues from the C 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 Formatted: Indent: Left: 0.5", No bullets or plan to City Council to replenish the reserve within five years. numbering €2. Besidual Fund Balance: The residual ortion of available fund balance that- Formatted: Underline is not otherwise restricted, committed or assigned and is above and beyond the Formatted: List Paragraph, amine numbered Contingency Reserve target reserve balance.- g Y g +Lavl:2+ Numbering Style: 1, 2,$._+ Staft at: I +Alignment: Left +Allgnetl at 0.25"+ Indent at: 0.5" PROPRIETARY FUND RESERVES (NET WORKING CAPITAL) Formatted: Font: Book Antiqua, 12 pt Formatted: Font: Book Antiqua, 12 pt 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. 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 59 F -2 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 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 10 •/ F -2 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 program activity in a centralized cost center. Their revenue generally comes from internal charges to departmental operating budgets rather than direct appropriations. 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. 11 61 F -2 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 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. 12 62 F -2 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. equipment inventory, calculated on a replacement value basis. This will he reconciled annually as part of the year en I ,.1...... ,. ... I the L':....nce PepaFtmeaA—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. Background. The City employs an actuary to estimate the liabilities associated with the general liability and workers compensation activities. The costs typically associated with 13 63 F -2 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. In a 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. Policv & 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 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. 14 M F -2 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. Policv 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 Fundine Policies a. Pension Fundin (i) California Public Employees Retirement System (CalPERS): The City's principal Defined Benefit Pension program is provided through contract with CaIPERS. The City's contributions to the plan include a-- fixed • 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 15 65 F -2 (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 CAPERS contribution should the UAL status fall below acceptable actuarial standards. (ii) Laborer's International Union of North America (LIUNA): The City 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 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. M •• F -2 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 - 17 67 ATTACHMENT D RECREATION FEES AND RELATED EQUIPMENT REPLACEMENT RESERVES The instructional recreational programs for children and adults provided by the Recreation & Senior Services Department will be conducted for a fee to offset associated cost with managing such programs. Registration fees will be based on an amount sufficient to acquire independent contractors, class materials and the administrative overhead and a facility use fee. Occasionally, it may be necessary to conduct programs in which revenues are not sufficient to be self - supporting as authorized by Chapter 3.36 of the Municipal Code. The Recreation & Senior Services Director or designee is authorized to enter into agreements for securing independent contractors for approved instructional recreation activities. Certain fee based activities create additional wear and tear on equipment and facilities. In these cases, it is appropriate to set aside a portion of the annual fees to replace or mitigate the accelerated aging of the equipment or facility being used. Following is a comprehensive list of Reserves serving as repository for these funds and ongoing contribution amounts. As the need arises, City Council approval for expenditures of funds from these Reserves, for the purposes intended, will be requested by the City Manager. Facility Rental Fees A sum of money equivalent to 10% of the gross annual revenues derived from park and facility rental fees shall be set aside annually for equipment replacement and or facility refurbishment. Recreation Classes Surfing Reserve: A sum of money equivalent to 10% of the gross annual revenues derived from the instructional classes in surfing shall be set aside and used for the purpose of purchasing new or replacement surfboards or development of aquatic and surf related activities. Tennis Court Reserve: A total of 20% of the registration fees from tennis instructional classes shall be set aside annually for refurbishment or development of courts or development of new recreational programs or facilities. Sailing Reserve: A total of 20% of the registration fees from the sailing instructional classes and 100% of the proceeds from the agreement for the use of the 29th Street 1 .: l public dock shall be set aside annually for refurbishment and replacement of the recreation sail boat fleet and development of waterfront activities program. Senior Fitness Center Reserve: A sum of money equivalent to 10% of the gross annual revenues derived from fitness center memberships shall be set aside and used for the purpose of purchasing new or replacement fitness equipment. Adopted - October 1963 Amended - August 30,1966 Amended - November 25,1968 Amended - March 1970 Amended - April 12,1971 Amended - August 9,1971 Amended - February 14,1972 Amended - March 13,1972 Amended - November 11, 1974 Amended - March 24,1975 Formerly I -6 Formerly I -2 Amended - December 8,1975 Amended - November 27,1978 Amended - November 28,1988 Reassigned - January 24,1994 Amended - February 27,1995 Amended - December 14,1998 Amended - May 8, 2001 Amended - April 8, 2003 Amended - April 13, 2004 Amended - September 13, 2005 Amended - October 10, 2006 Amended - September 27, 2011 .• ATTACHMENT E Rte►] The instructional recreational programs for children and adults provided by the Recreation & Senior Services Department will be conducted for a fee to offset associated cost with managing such programs. Registration fees will be based on an amount sufficient to acquire independent contractors, class materials and the administrative overhead and a facility use fee. Occasionally, it may be necessary to conduct programs in which revenues are not sufficient to be self- supporting as authorized by Chapter 3.36 of the Municipal Code. The Recreation & Senior Services Director or designee is authorized to enter into agreements for securing independent contractors for approved instructional recreation activities. �MPTIM29riw,EPTrnPRrUP"MMMMesesre Mrcreaerr.IMUMPE semOLMN �ee�s:e!ri r�.rresess.�rs� �e!s�r�ov,�sr� ee� r- - 70 �. �MPTIM29riw,EPTrnPRrUP"MMMMesesre Mrcreaerr.IMUMPE semOLMN �ee�s:e!ri r�.rresess.�rs� �e!s�r�ov,�sr� ee� r- - 70 Ma Adopted - October 1963 Amended - August 30,1966 Amended - November 25,1968 Amended - March 1970 Amended - April 12,1971 Amended - August 9,1971 Amended - February 14,1972 Amended - March 13,1972 Amended - November 11, 1974 Amended - March 24,1975 Formerly I -6 Formerly I -2 Amended - December 8,1975 Amended - November 27,1978 Amended - November 28,1988 Reassigned - January 24, 1994 Amended - February 27,1995 Amended - December 14,1998 Amended - May 8, 2001 Amended - April 8, 2003 Amended - April 13, 2004 Amended - September 13, 2005 Amended - October 10, 2006 Amended - September 27, 2011 71