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HomeMy WebLinkAbout10 - Reserve Policy Update - F-2SEW PpQT CITY OF NEWPORT BEACH City Council Staff Report Agenda Item No. 10 May 24, 2011 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Administrative Services Department Tracy McCraner, Administrative Services Director /Treasurer 949 - 644 -3123, tmccraner @newportbeachca.gov PREPARED BY: Dan Matusiewicz, Deputy Administrative Services Director APPROVED: ki,,.._1(.�4/1\ V TITLE: Reserve Policy (F -2) Update ABSTRACT: Governmental Accounting Standards Board Statement 54 (GASB 54) is required to be implemented by the close of fiscal year 2010 -11. This Statement is intended to provide clearer fund balance classifications enhancing the usefulness of fund balance information. Staff is recommending several changes to City Council 'Reserve" Policy (F -2) to better conform to the requirements of the accounting standard and incorporate recommended changes to the Enterprise fund reserves as a result of the water rate study that was completed in September of 2009. The policy revisions were reviewed by Finance Committee on May 9, 2011 and all recommendations were incorporated in the amended policy attached. RECOMMENDATION: Adopt Resolution 2011 -_ revising Council Policy F -2 as attached hereto and incorporated by reference herein. FUNDING REQUIREMENTS: There are no direct expenditures associated with the policy amendments. However, an increase to the General Fund, Contingency reserve policy from 12% to 15% will cause the Contingency reserve to increase approximately $2 million and will be funded by surplus reserves that would otherwise remain unassigned. Reserve Policy (F -2) Update May 24, 2011 Page 2 DISCUSSION: FUND BALANCE CLASSIFICATIONS Effective fiscal year 2010 -11, Governmental Accounting Standards Board ( "GASB ") Statement No. 54, requires local governments to conform to a new standard of reporting of fund balances. The new standard is 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). The new standard applies to Governmental Funds only (General Fund, Special Revenue funds, Debt Service Funds, Capital Projects funds and Permanent Funds) and does not apply to Proprietary funds (Internal Service and Enterprise Funds). GASB 54 does not change the manner in which fund balance is calculated. However, it does change how fund balance will be classified in the City's financial statements. The new standard establishes fund balance classifications that comprise a hierarchy primarily based on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in a governmental fund 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 Nonspendable fund balance represents the component that cannot readily be converted to cash (e.g. Inventory balances or Long -term Receivables) or is legally required to maintain in tact (e.g. the principal component of a permanent endowment). Restricted fund balance represents the component that is externally imposed by creditors, grantors, contributors, or laws or other governments; or is restricted by law through constitutional provisions or enabling legislation. Committed fund balance represents the component that can only be used for specific purposes pursuant to constraints imposed by formal action of the government's highest level of decision - making authority. Reserve Policy (F -2) Update May 24, 2011 Page 3 Assigned fund balance represents the component that is constrained by the government's "intent" to be used for specific purposes, but are neither restricted nor committed. Unassigned fund balance is the residual classification for the general fund. This classification for the fund balance that has not been assigned to other fund and that has not been restricted, committed or assigned to specific purposes within the general fund. A comparative illustration of how these reserve classifications would be applied in our Comprehensive Annual Financial Report (CAFR) and in our Budget can be reviewed in attachment A of this report. GENERAL FUND CONTINGENCY RESERVE GASB 54 places additional requirements on "Stabilization Arrangements" which the City commonly refers to Contingency reserves. In order for stabilization arrangements to meet the criteria of a "Committed" fund balance, formal action by the government must be taken by City Council to impose, identify and describe the specific circumstances under which the a need for stabilization arises. Staff is recommending the following constraints on the General Fund, Contingency Reserve policy: 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 Improvements 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 (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 (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 Reserve Policy (F -2) Update May 24, 2011 Page 4 Occupancy Taxes in a cumulative amount greater than or equal to five percent (5 %) of the General Fund, Operating Budget e. Any action by another government eliminating or shifting revenues from the City amounting to greater than or equal to(5 %) of the General Fund, Operating Budget f. Any combination of the above factors 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. Because Capital Improvement Projects (CIP) have a tendency to fluctuate significantly from year to year, and the former definition of the minimum balance of the Contingency reserve included a percentage of total General Fund budget, staff is recommending the formula be increased from 12% to 15 % and exclude CIPs from the calculation. Available fund balance of 8 -15% is considered to be "Strong" and 15% or more is considered to be "Very Strong" by Standard & Poor's comparison metrics. ASSIGNMENTS OF FUND BALANCE The Finance Committee may wish to delegate the authority to the City Manager or his designee to create and or amend "Assignments" of fund balance in order to aid his /her fiscal planning efforts. Assignments simply express the City's intent. City Council still retains the authority to appropriate expenditures and amend and /or undo any assignments that are created by the City Manager or designee. When the City Manager or his designee authorizes a change in General Fund, Assigned Fund Balance, City Council shall be notified quarterly. DRAFT MODIFICATIONS TO ENTERPRISE RESERVES In 2009, a Water Rate Study was being conducted by Red Oak consulting. Working with the consultant, staff also reviewed the reserve policies of the Water Enterprise Fund. The Finance Committee has previously reviewed and discussed the nature of proposed reserve policy changes but deferred action until the study was complete. We have now incorporated the previously proposed changes to the Council Reserve policy along with the GASB 54 revisions. The recommendations are identical to previous proposal except that staff has eliminated the "Capital Contingency Reserve" from further consideration. Staff has also mirrored the Water Fund recommendations to also apply to the Wastewater Fund. Reserve Policy (F -2) Update May 24, 2011 Page 5 The Water Fund Reserve Policy recommendations are as follows: Stabilization & 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 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 water distribution. 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 of time. The funding rate of the Water Master Plan is targeted at $3.5 million per year (Base Year = Fiscal Year 2009 -10) escalating at 3.5% per year. The contribution policy shall be updated periodically based on the most current Water Master Plan. There are no minimums or maximums 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. 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. Reserve Policy (F -2) Update May 24, 2011 Page 6 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). Submitted by: Tracy McCra_nbr Administrative Services Director/Treasurer Attachments: A. GASB 54 Crosswalk Illustration B. Resolution 2011 with Exhibit 1 Council Policy F -2, Reserves Policy (Clean Version) and Exhibit 2 Council Policy F -2, Reserves Policy (Strikeout Version) ATTACHMENT A GASB 54 CROSSWALK ILLUSTRATION FORMER CLASSIFICATIONS NEW CLASSIFICAT10N5 Reserved I Unavailable (Not Readily convertible to cash) 2 Restricted (Externally Restricted) 2 Unreserved, Designated =Committed (Council Restricted) 4 ASS, ned (City Manager earmarked /intent) 3 Unreserved, Undesi nated I 5 Unassi ned (No other level of restriction) 54 GENERALFUND FY 2010 GENERALFUND FY 2010 Reserved r Nonspendable Encumbrances 2 Desixinated 77,048,636 434,137 2 Restricted 1,557,773 3 Unreserved, Undesi nated 238,274 Prepaid Items 3 Committed 50,054,639 Total General Fund, Fund Balance 62,023,106 238,274 4 Assigned 11,973,733 471,250 5 Unassigned 17,293,299 82,157,866 Pre GENERALFUND FY 2010 GENERALFUND FY 2010 Reserved Nonspendable Encumbrances 2,273,036 Prepaid Items 434,137 Affordable Housing 1,557,773 Inventories 238,274 Prepaid Items 434,137 Long Term Receivable 471,250 Inventories 238,274 Total Unavailable 1,143,661 Long Term Receivable 471,250 Total Reserved 4,974,470 Restricted Affordable Housing 1,557,773 Unreserved, Designated Hoag Agreement 134,760 Paramedic Program 479,366 Total Restricted 1,692,533 Surfboards 266,622 Sailing 104,057 Committed Tennis Courts 49,053 Contingency Reserve (12 %) 18,895,125 Senior Citizen Site 23,790 Facilities Replacement Plan 27,500,000 Parks 760,759 Paramedic Program 479,366 Off Street Parking - Surfboards 266,622 Neighborhood Enhancement -A 184,855 Sailing 104,057 Neighborhood Enhancement -B 50,651 Tennis Courts 49,053 Park In -Lieu - Senior Citizen Site 23,790 Oceanfront Encroachment 10,488 Parks 760,759 Start Video 373,730 Off Street Parking - Facilities Replacement Plan 27,500,000 Neighborhood Enhancement -A 184,855 Rev for PIERS Rate Change 5,000,000 Neighborhood Enhancement -B 50,651 Cable Franchise PEG Grant 1,356,143 Park In -Lieu - Fair Market Value Gain 707,200 Oceanfront Encroachment 10,488 Contingency Reserve (12 %) 18,895,125 Stan Video 373,730 Appropriations Reserve - Capital 3,993,497 Cable Franchise PEG Grant 1,356,143 Appropriations Reserve - Operating 17,293,299 Total Committed 50,054,639 Total Designations 77,048,636 Assigned Unreserved, Undesignated Appropriations Reserve - CIP 3,993,497 Encumbrances 2,273,036 Total General Fund Balance 82,157,866 PERS Reserve 5,000,000 Fair Market Value Gain 707,200 Total Assigned 11,973,733 Unassigned Appropriations Reserve - Operating 17,293,299 Total General Fund Balance 82,157,866 ATTACHMENT B RESOLUTION NO. 2011- A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH AMENDING COUNCIL POLICY F -2 (RESERVE POLICIES) WHEREAS, the City Council has previously adopted Council Policy F -2 administration of reserves and fund balances; and WHEREAS, the City Council desires City Manager to prepare City Financial Statements in conformity with Generally Accepted Accounting Principles (GAAP); and 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; and 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 "; and WHEREAS, it is desirous to reaffirm restrictions placed on fund balance by City Council (the highest level of this government), referred to and defined as "Commitments" by GASB 54; and WHEREAS, it is desirous to authorize the City Manager to create "Assignments" of fund balance as defined by GASB 54. 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. Section 2: The City Council finds this action is not subject to the California Environmental Quality Act ( "CEQX) 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. -1- Section 3: 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 24th day of May, 2011. ATTEST: Leilani Brown, City Clerk Michael F. Henn, Mayor WQl Exhibit 1 RESERVE POLICY PURPOSE lva 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 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 2 F -2 assets have yet to be deducted from fund balance, they are no longer available for appropriation. 4. Reserve for Permanent Endowment - Bay DredtinQ: 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 nonspendable 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. Upper 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, 10% of Beacon Bay lease revenue is placed in this Reserve. Funds in the Reserve are committed to Upper Newport Bay restoration projects. 4. Permanent Endowment for Bay DredginQ: The endowment also specifies that the interest earnings on the principal amount can only be used for dredging projects in the Newport Bay. 5. 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. 3 F -2 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 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 (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 (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 e. Any action by another government eliminating or shifting revenues from the City amounting to greater than or equal to(5 %) of the General Fund, Operating Budget f. Any combination of factors 1) a.- e. 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. n F -2 2. Facilities Replacement Plan Reserve: In conjunction with the City's Facilities Replacement Plan, a sinking fund has been established to amortize the cost of critical City facilities such as, but not limited to, City Hall and Police Department buildings, Fire Stations, Library Branches and other Facility Improvement Projects. The Facilities Replacement Plan 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 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 Citizen Site: Council Policy B -5, which specified that ten percent (10 %) of revenue collected from rental of facilities at the OASIS Center be set aside for equipment replacement and /or refurbishment at the Center. This policy was replaced by a Cooperative Agreement with the Friends of OASIS on May 10, 2005 (Contract # C- 3772). This agreement constituted a significant change from the formal City Council policy. Although no new funds are being accumulated, these funds can only be spent for equipment replacement and /or refurbishment at the Center. 5. Off Street king Par: 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 61 F -2 related purposes. Funds accumulated may be used only for paramedic related purpose 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 and equipment used in connection with fee -based recreation classes. 8. 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. 9. Park In Lieu: Per NBMC 19.52, the City requires dedication of land or payment of fees for park or recreational purposes in conjunction with residential development. The fees collected can only be used for specific park or recreation purposes as outlined in NBMC 19.52.030 and 19.52.070. 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. 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. A training video 11 F -2 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 be 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 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. 7 F -2 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 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 funding rate of the Water Master 8 F -2 Plan is targeted at $3.5 million per year (Base Year = Fiscal Year 2009 -10) escalating at 3.5% per year. This contribution policy is based on the funding requirements of the most current Water Master Plan. There are no minimums or maximums 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 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 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 funding rate of the Wastewater Master Plan is targeted at $500,000 per year (Base Year = Fiscal Year 2011 -12) escalating at 3.5% per year. 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. E F -2 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 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. 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 rolling stock) 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. Off F -2 Contribution rates (departmental charges) are set to include the direct costs associated with maintaining the City 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 rolling stock in accordance with Council Policy F -9, City Vehicle/ Equipment Replacement Guidelines. The City Manager approves 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 fleet 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 fleet, on a dollar value basis. However, rising vehicle costs, dissimilar future needs, replacing vehicles faster than their expected life or maintaining vehicles 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 fleet. It is established at 50% of the current accumulated deprecation value of the fleet, calculated on a replacement value basis. This will be reconciled annually as part of the year -end close out process by Administrative Services. If departmental replacement charges for each vehicle 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. 11 F -2 2. Insurance Reserve Funds. The Insurance Reserve funds account for the activities of general liability and claims workers' compensation. 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 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 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 50 % -65 %. 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 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 12 F -2 funding necessary to reach a 75% confidence level interval. The City Council will be informed at the first City Council meeting following such transfer action. 3. 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 plus a margin to provide sufficient resources to fund high cash flow years, as further described below. The minimum cash reserve should not fall below that three -year average, plus the maximum annual variance. The maximum cash reserve should not exceed 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 Administrative Services 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. In addition, if the cash reserve falls below the target floor, the Administrative Services Director may implement a one -time cash infusion. This action is appropriate when the decline in cash balance is precipitated by an off - trend non - recurring event. If the size of the infusion is greater than $500,000, the City Council will be advised at the first City Council meeting following such action. 4. Post Retirement Funding Policies. a. Pension Funding. 13 F -2 (i) California Public Employees Retirement System (CaIPERS). The City's principal Defined Benefit Pension program is provided through contract with Ca1PERS. 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 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. (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 no further funding obligation to the plan. 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 M. F -2 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 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 annual target reserve balance will be established and maintained through this process. City policy is to not separately fund any actuarially defined liability for "implied subsidy" because the City will not incur an additional cash flow with this premise, outside of active employee salary and benefits. However, the City plans to meet all other contributions connected with this retiree benefit as defined by GASB 45. Costs of administering this program will be contained within the Human Resources Department's annual operating budget. 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 15 Exhibit 2 C �/ •_ RONRy rte, E_ _ N, ■ 41 M PURPOSE F -2 To establish City Council policy for the administration of Reserves defined as —f finaneial fund balances in governmental funds and net working capital in proprietary funds. DiSC-�3SSI9 0ACKGROUND Bar=keFeund — Prudent financial management dictates that some portion of the funds available to the City be reserved for future use. A, As a general budget principle concerning the use of reserves, the City Council decides whether to appropriate funds from Reserve aAccounts. 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 €ufkdsrevenues or bond proceeds instead, thereby retaining the Reserve fpunds for future use. Reserve Munds will not be spent for any function other than the specific 1urpose of the Reserve aAccount 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.Fu#&r_ _=__ __ __._o_F__d as either- stFate ' . grams for- pre plamed pr-9jeets or- funds set aside fer- 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, F -2 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 includes 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 FUNDS RESERVES (FUND BALANCE) For Governmental Funds, the Governmental Accounting Standards Board ( "GA5B ") 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 in fund-s are in for diseretienary addifien, Some "Non maintained „ me—ans; thatsome r-esepve non extemal entity is that requiring diser-etien to the funds in E*amples funds hand tise but any other way. are still on funding fer already eantfaetually encumbered; er- provided speeifleally -a Funds. These Funds te i-n- that they fer are sirMl-;;-r fe-seffvess aet as a r-epesitery 2 ON M. F -2 .. .... ... • _ . _ .. .. .. MA .. .... ... • _ . _ .. .. .. F -2 t• . ... .. • ... _ ... .. Y.. • ... _nIIIIj�!1:jI;jI!!II!! 111111!111111 1_a Reserve for Inventories —_The value of inventories purchased by the City but not yet issued to the operating Departments is reflected in this account. 2_e. 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 1_a Reserve for Inventories —_The value of inventories purchased by the City but not yet issued to the operating Departments is reflected in this account. 2_e. 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 F -2 due to be received for an extended period, so are not available for appropriation during the budget year. 3. Reserve for PreRaid 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 specifies that the principal amount will not be depleted and represents the asset amounts to be held in the Bay Dred&S Fund. WE 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. e Restricted fund balance: The portion of fund balance that reflects constraints placed on the use of resources (other than nonspendable items) that are either U externally imposed by creditors, grantors, contributors, or laws or 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 methods for the delivery of affordable housing for lower income households. 3. Upper 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 5 F -2 alternative to meeting certain specified mitigation criteria. In addition to the mitigation fees, 10% of Beacon Bay lease revenue is placed in this Reserve. Funds in the Reserve are committed to Upper Newport Bay restoration projects. 4. 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. 5. 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 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— : Thine Contingency Reserve shall hasve a target balance of not less than twee efifteen percent (1 15 %) of annual General Fund "Operating Budget" as originally adopted. Operating Budget for this purRose 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. 9#1;efA -State or Federally declared state of emergency where the City response or related City loss is greater than or equal to (5 %) of the General Fund, Operating Budget, as defined above c. Any settlement arising fromer- a claim or judgment where the loss exceeds the City's - -ffh%x4mHn- insuredanee policy eeveragecoverage by an amount greater than or equal to (5 %) of the Ggeneral Fund, -0eperating Bbudget as defined abeam. F -2 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, ^Fna� ,g, Budget as defined ..1.oy Operating Budget e. Any action by another government eliminating or shifting revenues from the City amounting to greater than or equal to(5 %) of the General Fund. Operating Budget f. Any combination of factors 1) a.- e. 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 yeara.e*pendmitwes. Geuneil. 2. Facilities Replacement Plan Reserve: In coniunction with the Citv's Facilities Replacement Plan, a sinking fund has been established to amortize the cost of critical City facilities such as, but not limited to, City Hall and Police Department buildinss, Fire Stations, Library Branches and other Facility Improvement Projects. The nwte-rFacilities Replacement Plan 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 eligible uses of this reserve include the cash funding of public facility improvements or the servicing of related debt. 7 F -2 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 proiects 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 Citizen Site —: This Resefve was established and funded by feFme Council Policy B-5, which specified that ten percent (10 %) of revenue collected from rental of facilities at the 9asis -OASIS Center be set aside for equipment replacement and /or refurbishment at the Center. This policy was replaced by a Cooperative Agreement with the Friends of OASIS on May 10, 2005 (Contract # C- 3772). This agreement constituted a significant change from the formal City Council policy. -No- Although no new funds are being added to this ..e-e- e at this thne. Faccumulated these funds in the reserve are available f^- an only be spent for equipment replacement and /or refurbishment at the Center. e:S.Off Street Parking —: Per Newper-tBeael; Mufk4pal-Cede 12.44.025 establishes 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. d-b. Paramedic Program (Ho W iln eenjtmetien--addition v4h to the debt issuance agreements with Hoag Hospital_. in addition te4hemtLch required an original ametint(s) deposited-4e Okis reserve effective July 1, 2000, any excess revenues generated by this program, after accounting for General City Overhead of fifteen percent (15 %), shall were to be deposited to this Faccumulated for future paramedic related purposes. Funds in accumulated may be used only for any-paramedic related purpose as directed by the City Council. 7. Recreational Instruction =,_City Council Policy B -2 requires ten percent (10 %) to twentv percent (20 %) of gross annual revenues derived from specified recreational classes to be set aside establishes -esery s for the refurbishment of certain recreational facilities and equipment used in connection with fee -based recreation classes. 3 F -2 f.8. In Lieu ParkinQAZese Per NBMC 12.44.125 the City requires commercial businesses to provide adequate off -street parking: In seme cases- 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. In ie pfeeeeds of tThese fees-funds can only be €ff-used Ito Wig- r� ovide additional parking. . .9. Park In Lieu ReseFve -_ This Reserve was established b- -Per NBMC 19.52: T-,the City requires dedication of land or payment of fees for park or recreational purposes in conjunction with residential development. View-The fees are paid the hands are placed in this ReseFve. Speeifie guidanee ollected can only be used sf the hands is eentaine Ifor specp ific park or recreation 121irposes as outlined in NBMC 19.52.030 and 19.52.070. 1,10. Neighborhood Enhancement ter- A— This Reserve was established b. -NBMC 12.44.027, -w4wlt - directs that Rrevenues from parking meters in Zone 9 shall be apportioned to this ReserveNeighborhood Enhancement A. Funds in the ReseFve will d=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. i-11. Neighborhood Enhancement tee- B —: NBMC 12.44.027 directs that fifty percent (50%) of revenues from parking meters inTw��� same as Rese -., n ah-e ,, The difference is that fhir n,...,._..e pertains to the Balboa Peninsula, (50%) of the PaAdag mete revenue will be apportioned to thethis Neighborhood Enhancement '3-ReseF:e. Funds accumulated will onlv be used for the purpose of enhancing and supplementing services in the Balboa Peninsula. - Specific details are contained in the Code Section. 9 &a - - . - - - OPINION— - WM 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 QPf!s-Ci '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 o *. 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. A 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. Off 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 !hey 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 sub iect to Council Policy F -3 concerning budget adoption and administration. Examples of assigned fund balance may include but are not be limited to: 1: 10 F -2 a1. 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_b r'hange 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 en-as of the balance sheet. However, in a fluctuating interest rate environment, this practice records market value gains or losses which may never be actually realized. in any case, it eausesthe gains er ' •-e investment ear-pdngs may be relatively stable, investment ineeme reeer-ded en City's books %411 often be wrfifieially velatile.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) 11 F -2 In the case of Proprietary Funds (Enterprise and Internal Service Funds), Generals 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 fr om setting policies to accumulate financial resources for prudent financial management of 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 m Proprietary Funds, Net Working Capital is the intended meaning. .. . . _ Y_ �. WWWWWA t MH J r r _ _ ..._.. _ .._. .. 1 _ ... • NO Un •. W.M. . _ ... Mill Ill Y. 901 1 IN 12 F -2 depleted, but that kwestment eamipts may be used fer dredging pr-ojeets in Bay. D-.A. Water Enterprise Fund-. 1. 2—.—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 Rercent (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 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. 13 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 Water Master Plan. The contribution rate is intended to level - amortize the cost of infrastructure replacement projects over a long period. The funding rate of the Water Master Plan is targeted at $3.5 million per year (Base Year = Fiscal Year 2009 -10) escalating at 3.5% per year. This contribution policy is based on the funding requirements of the most current Water Master Plan. There are no minimums or maximums 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. 14 WR 14 F -2 • Y. Y_ Y. B. 13— Wastewater Fund: — Stabilization and identified in the General Fund will alse be used in the WastewatepT-aftd, 1. 2. Contingency Reserve: This Reserve is used to provide sufficient funds to sport 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 25% loss rate. The Cit_v 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 M F -2 r_ placement projects over a long period of time. The funding rate of the Wastewater Master Plan is targeted at $500,000 per year (Base Year = Fiscal Year 2011 -12) escalating at 3.5% per year. 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. u I 16 F -2 C. 1LIntemal Service Funds: 1— 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 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: 2. Equipment Maintenance Fund and Equipment Replacement Fund. L--The Equipment Maintenance and Replacement Funds receives operating money from the Departments to provide equipment maintenance and to fund the regular replacement of major pieces of equipment (mostly rolling stock) at their economic obsolescence. —a. Equipment Maintenance Fund. 17 F -2 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 (Depar *enta47departmental charges) are set to include the direct costs associated with maintaining the City 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. b. Operating Departments are charged annual amounts sufficient to accumulate funds for the replacement of rolling stock in accordance with Council Policy F -9, City Vehicle/ Equipment Replacement Guidelines. The City Manager approves 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 fleet 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 fleet, on a dollar value basis. However, rising vehicle costs, dissimilar future needs, replacing vehicles faster than their expected life or maintaining vehicles 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 fleet. It is established at 50% of the current accumulated deprecation value of the fleet, F -2 calculated on a replacement value basis. This will be reconciled annually as part of the year -end close out process by Administrative Services. If departmental replacement charges for each vehicle 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. 2. 3 Insurance Reserve Funds, The Insurance Reserve funds account for the activities of general liability and claims workers' compensation. a. 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 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 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 50 % -65 %. 1—.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 an 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 19 F -2 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 75% confidence level interval. The City Council will be informed at the first City Council meeting following such transfer action. 3. 4 Compensated Absences Fund. aBack_rg ound. 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. AM F -2 13,.--Policy and Practice. The contribution rate will be set to cover estimated annual cash flows based on a three -year trailing average plus a margin to provide sufficient resources to fund high cash flow years, as further described below. The minimum cash reserve should not fall below that three -year average, plus the maximum annual variance. The maximum cash reserve should not exceed 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 Administrative Services 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. In addition, if the cash reserve falls below the target floor, the Administrative Services Director may implement a one -time cash infusion. This action is appropriate when the decline in cash balance is precipitated by an off - trend non - recurring event. If the size of the infusion is greater than $500,000, the City Council will be advised at the first City Council meeting following such action. 4. G —Post Retirement Funding Policies. a. 47—Pension Funding. a. California Public Employees Retirement S, stem (Ca1PERS). f i —The City's principal Defined Benefit Pension program is provided through contract with CalPERS. 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 100% of the actuarially required contribution (annual pension cost). Because the City pays the entire actuarially required contribution each 21 F -2 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. b. Laborer's International Union of North America ( LIUNA). ii 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). a 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 no further funding obligation to the plan. 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 100% funded, on an ongoing basis, as part of the annual budget process. Funds to cover this 22 F -2 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 annual target reserve balance will be established and maintained through this process. City policy is to not separately fund any actuarially defined liability for "implied subsidy" because the City will not incur an additional cash flow with this premise, outside of active employee salary and benefits. However, the City plans to meet all other contributions connected with this retiree benefit as defined by GASB 45. Costs of administering this program will be contained within the Human Resources Department's annual operating budget. 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 23 Agenda Item No. 10 Exhibit 1 May 24, 2011 RESERVE POLICY allw In 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 lei 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 2 VM 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 nonspendable 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. Upper 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 %J of Beacon Bay lease revenue is placed in this Reserve. Funds in the Reserve are committed to Upper Newport Bay restoration projects. 4. 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. 5. 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. 3 IM 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 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: �q ` 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 ep rcent (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 e. Any action by another government eliminating or shifting revenues from the City amounting to greater than or equal to five percent (5 %) of the General Fund, Operating Budget f. Any combination of factors 1) a.- e. amounting to greater than or equal to five percent (5 %) of the General Fund, Operating Budget in any one fiscal year. 9 VVJ 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 Replacement Plan Reserve: In conjunction with the City's Facilities Replacement Plan, a sinking fund has been established to amortize the cost of critical City facilities such as, but not limited to, City Hall and Police Department buildings, Fire Stations, Library Branches and other Facility Improvement Projects. The Facilities Replacement Plan 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 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 Citizen Site: Council Policy B -5, which specified that ten percent (10 %) of revenue collected from rental of facilities at the OASIS Center be set aside for equipment replacement and /or refurbishment at the Center. This policy was replaced by a Cooperative Agreement with the Friends of OASIS on May 10, 2005 (Contract # C- 3772). This agreement constituted a significant change from the formal City Council policy. Although no new funds are being accumulated, these funds can only be spent for equipment replacement and /or refurbishment at the Center. 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. 5 Imoi 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 purpose 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 and equipment used in connection with fee -based recreation classes. 8. 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. 9. Park In Lieu: Per NBMC 19.52, the City requires dedication of land or payment of fees for park or recreational purposes in conjunction with residential development. The fees collected can only be used for specific park or recreation purposes as outlined in NBMC 19.52.030 and 19.52.070. 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. 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. M lei 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. A 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. A 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 be- 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 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. N rm 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 *wmi 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. D. Im 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 funding rate of the Water Master Plan is targeted at $3.5 million per year (Base Year = Fiscal Year 2009 -10) escalating at 3.5 percent (3.5%1 per year. This contribution policy is based on the funding requirements of the most current Water Master Plan. There are no minimums or maximums 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 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. 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 funding rate of the Wastewater Master Plan is targeted at $500,000 per year (Base Year = Fiscal Year 2011 -12) escalating at 3.5 percent (3.5 %) per year. This contribution policy should be updated periodically based on the most current Wastewater Master Plan. 9 rm 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 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. 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 rolling stock) at their economic obsolescence. 10 rm 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 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 rolling stock in accordance with Council Policy F -9, City Vehicle /Equipment Replacement Guidelines. The City Manager approves 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 fleet 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 fleet, on a dollar value basis. However, rising vehicle costs, dissimilar future needs, replacing vehicles faster than their expected life or maintaining vehicles 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 fleet. It is established at fifty percent (50 %) of the current accumulated degfecatieedepreciation value of the fleet, calculated on a replacement value basis. This will be reconciled annually as part of the year -end close out 11 VVJ process by Administrative Services. If departmental replacement charges for each vehicle 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. 2. Insurance Reserve Funds. The Insurance Reserve funds account for the activities of general liability and claims workers' compensation. 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 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 %). 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. 12 lei 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. The City Council will be informed at the first City Council meeting following such transfer action. 3. Compensated Absences Fund. Background. 5 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 plus a margin to provide sufficient resources to fund high cash flow years, as further described below. The minimum cash reserve should not fall below that three -year average, plus the maximum annual variance. 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 Administrative Services 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. In addition, if the cash reserve falls below the target floor, the Administrative Services Director may implement a one -time cash infusion. This action is appropriate when the decline in cash balance is precipitated by an off- 13 VM trend non - recurring event. If the size of the infusion is greater than $500,000, the City Council will be advised at the first City Council meeting following such action. 4. Post Retirement Funding Policies. a. Pension Funding. (i) California Public Employees Retirement System (CaIPERS). 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 %J 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. (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 14 1V►] 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 no further funding obligation to the plan. 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 k100 %J 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 annual target reserve balance will be established and maintained through this process. City policy is to not separately fund any actuarially defined liability for "implied subsidy" because the City will not incur an additional cash flow with this premise, outside of active employee salary and benefits. However, the City plans to meet all other contributions connected with this retiree benefit as defined by GASB 45. Costs of administering this program will be contained within the Human Resources Department's annual operating budget. Adopted - January 24,1994 Amended - April 10, 1995 15 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 F -2 16