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HomeMy WebLinkAbout12 - Council Policy F-2 - Reserves & Designations of Fund BalanceCITY OF NEWPORT BEACH CITY COUNCIL STAFF REPORT Agenda Item No. 12 June 10, 2003 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Administrative Services Department Dennis C. Danner, Administrative Services Director, (949) 644 -3123 ddanner @city.newport- beach.ca.us SUBJECT: Proposed update of City Council Policy F -2, Reserves /Designations of Fund Balance RECOMMENDATION: Approve proposed revisions to City Council Policy F -2. DISCUSSION: Background: In compliance with the procedure established by Council Policy D -3, the City Council considered and approved revisions to 34 different Council Policies during its regular meeting of April 8, 2003. At the request of Council Member Webb, action on Policy F -2 was postponed pending related NBMC revisions. Those revisions having now been completed, changes to Policy F -2 are re- submitted for adoption. A number of additions and modifications are being proposed for this Policy. However, most of the changes are simply recognition of what has already been put into practice, such as setting aside funds for anticipated PERS rate hikes and the segregation of Neighborhood Enhancement into two separate reserves. The overall purpose of these changes is to provide a more comprehensive and descriptive breakout of the various monies being set aside for special purposes by the City. Other changes represent new initiatives, such as changing the target amounts for Contingency and Designated Reserves in the Water and Wastewater Funds, as well as adding Stabilization Reserves in those Funds. Although the changes are fairly numerous, from a policy perspective they do not represent a change in direction. They are intended to provide more definition and specific guidance regarding application of the policy concepts reviewed in detail by the Finance Committee several months ago. Environmental Review: Not Applicable. Public Notice: Posted as required. Funding Availability: Not Applicable. Alternatives: Modify recommended changes. Prepared by: Richard Kurth, Deputy Director Proposed Update of Council Policy F -2 June 10, 2003 Page 2 Submitted by: O- /Lr.�% C'• � /i�i�c -lam/ Dennis Danner, Director Attachments: Proposed new version of City Council Policy F -2. Strike Out/Underline version of Policy showing proposed changes. RESERVES/ DESIGNATIONS OF FUND BALANCE PURPOSE F -2 To establish City Council policy for the administration of financial reserves and fund balances. DISCUSSION A. Background. Prudent financial management dictates that some portion of the funds available to the City be reserved for future use. Future uses are categorized as either pre - planned projects or unforeseen financial emergencies. For clarification, the City also has a number of Special Revenue Funds. These Funds are somewhat similar to reserves in that they act as a repository for money that can only be used for specific purposes. Reserves are generally distinguished from Special Revenue Funds in that decisions regarding the purpose and /or the amounts to be set aside, as well as the circumstances for use, normally fall within the authority of the City Council. That authority normally rests largely with an external entity in the case of Special Revenue Funds. B. Structure and Funding of Reserves. This Policy establishes Reserve Accounts or designated Fund Balance levels for moneys being held in reserve. In addition, the sources and eventual use of Reserve Funds are set forth. It is the policy of the City Council that each Reserve identified herein is to be fully funded as part of the annual budget process. If operational or other considerations require the City Council to temporarily override this policy during any fiscal year, the City Manager will recommend to the City Council a plan to restore any Reserves falling below required minimum levels. Reserve levels will be restored as soon as practical, but in not more than 5 years. Each of the City's fiscal reserves is established and maintained for one of four purposes listed in general order of importance below. If the reserve requirements of this policy are unmet in any fiscal year, the City Manager will recommend funding prioritization to the City Council as part of the Budget. 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 1 F -2 current year operating funds 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 a separate City Council Resolution approving that specific action. Information regarding Annual Budget Adoption and Administration is contained in City Council Policy F -3. C. Categories of Reserves. 1. Accounting Reserves. Generally accepted governmental accounting practices require identification of generic reserve funds for certain purposes. These accounts represent the unspendable portions of fund balance, such as inventories and long -term receivables, as well as funds that are legally restricted by some external source, such as debt service reserves and encumbrances. Reserving funds for a contract awarded in one year but not completed until a succeeding year is one example of an accounting reserve for encumbrance. 2. Contingency Reserves. Contingency Reserves represent funds for unexpected financial emergencies. One example requiring the use of this Reserve is the adverse impact of natural disasters such as earthquake or flooding on revenue availability, as well as increased demand for City services. Other examples are unexpected loss or reduction of a key revenue source; special projects, programs, or price changes mandated by another government entity; and emergency capital projects needed to deal with unforeseen structural failure. 3. Designated Reserves. These Reserves are designated for known or anticipated events. Such events require large, non - recurring financial outlay, such as the replacement of systems and equipment or major capital improvements. 4. Stabilization Reserves. Stabilization Reserves enhance the orderly management of the Operating Budget by stabilizing revenues and expenditures, which fluctuate beyond the ability of City staff to control or predict. One example is the annual change in retirement contribution rates mandated by the Public Employee Retirement System (PERS). Other examples are changing prices for utilities and fuel, as well as the volatility in certain special program funding. These Reserves provide stability by "smoothing out" year -to -year volatility in the City's finances. 2 F -2 FUNCTION AND ADMINISTRATION OF RESERVE ACCOUNTS Reserves are identified below by fund, category and specific function. The specific numbers of accounts where these Reserves are physically located change from time to time as the overall account structure is updated and modified. However, the Fund Balance Statement, which is available for ready reference in the City's Annual Budget document, identifies balances, past -year activity, and projected current year activity for each of these Reserves. A. General Fund. 1. Accounting Reserves. 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. b. Reserve for Debt Service. Funds are placed in this Reserve at the time debt is issued. The provisions governing the Reserve are established in the Bond Indenture, and the Reserve itself is controlled by the Trustee. C. Reserve for Long Term Receivables. 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 during the budget year. d. Reserve for Encumbrances. This Reserve accommodates spending for contracts or other items, which are legally committed but not expended by fiscal year end. 2. Contingency Reserve. This Reserve has a target balance of not less than ten percent (10 %) of annual General Fund expenditures. The City Council authorizes expenditures from this Reserve. 3. Designated Reserves. a. Capital Improvement. Generally accepted governmental accounting practices do not provide for the depreciation of assets of 3 J F -2 Governmental Funds such as the General Fund. Therefore, special procedures are required to set aside money (a "sinking fund ") for replacement or renovation of fixed assets such as, but not limited to, City Hall and Police Department buildings, Fire Stations, and Library Branches. The Capital Improvement Reserve will accumulate funds only for infrastructure items financed through the General Fund. Infrastructure assets of Enterprise Funds, as well as those of Governmental Fund, for which non - general fund money is available, are not components of this Reserve. Funds from this Reserve are restricted to replacement or acquisition of periodic, major projects or improvements typically exceeding 0.7 percent (0.7 %) of the annual General Fund Operating Budget (not including capital projects). Projects for which this Reserve is intended generally have the effect of extending the useful lives of infrastructure items. The City Manager will update the status of items of the General Fund infrastructure inventory on an annual basis. Included as part of the City Managers budget proposal will be a plan to fund this Reserve at a level of not more than one hundred percent (100 %) of the replacement cost of each asset by the year in which replacement is anticipated. b. Senior Citizen Site. This Reserve is established by Council Policy I -5, which specifies 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. C. Park Fees. This Reserve contains Park Fees collected by the construction permit process. Use of Park Fees is governed by Council Policy I -1, which limits their expenditure to park, open space, and recreational facilities. d. Off Street Parking. Newport Beach Municipal Code 12.44.025 establishes this Reserve and governs its administration. 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. 4 F -2 e. Paramedic Pro am (Hoag). This Reserve was established by the City in conjunction with debt issuance agreements with Hoag Hospital. In addition to the original amount(s) deposited to this reserve, effective July 1, 2000, any excess revenues generated by this program, after accounting for General City Overhead of fifteen percent (15 %), shall be deposited to this reserve account for future paramedic related purposes, to a maximum of $250,000. Funds in this reserve account may be used for any paramedic related purpose as directed by the City Council. Target level for this reserve is twenty-five percent (25 %) of the annual budget for operations and capital expenditures. f. Recreational Instruction Reserve. City Council Policy I -2 establishes reserves for surfboard replacement and refurbishment, development of tennis courts, and development of new recreational activities. The Policy requires twenty percent (20 %) of gross annual revenues derived from specified recreational classes be set aside. g. In Lieu Parking Reserve. This Reserve is established by NBMC 12.44.125. The City requires commercial businesses to provide adequate off - street parking. In some cases 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. This Reserve is the repository for these fees. Special purposes of the use of these funds have not been established by the City Council. h. Park In Lieu Reserve. This Reserve was established by NBMC 19.52. The City requires dedication of land or payment of fees for park or recreational purposes in conjunction with residential development. When fees are paid, the funds are placed in this Reserve. Specific guidance regarding use of the funds is contained in 19.52.030 and 19.52.070. i. Neighborhood Enhancement Reserve A. This Reserve was established by NBMC 12.44.027, which directs that Revenues from parking meters in Zone 9 shall be apportioned to this Reserve. Funds in the Reserve will then be used for the purpose of enhancing and supplementing services to the West Newport area. 5 F -2 Both the nature of the supplemental services and the definition of the area served are set forth in the Code Section above. j. Neighborhood Enhancement Reserve B. This Reserve is almost the same as Reserve A above. The difference is that this Reserve pertains to the Balboa Peninsula, and it specifies that fifty percent (50 %) of the parking meter revenue will be apportioned to the Reserve. Specific details are contained in the Code Section. k. Ocean Front Restoration 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. NBMC 12.44.027 establishes this Reserve Account, governs its administration, and defines areas in and purposes for which funds in the account may be spent. 1. Other Designated Reserves. The Administrative Services Director may add additional designated reserves as required. This will normally be done in response to new programs or policies established by the City Council or another government entity providing funds to the City. Examples are the Oil Spill Recovery Reserve and the Public Library Fund Reserve. 4. Stabilization Reserves. a. General Fund Stabilization Reserve. This Reserve has a target balance of two percent (2 %) of the budgeted expenditures within the General Fund. Each year, the City Manager will analyze uncontrollable revenues and expenditures. When expenditures are required from this Reserve, the City Manager will note the reasons in the preliminary and final budget. The Stabilization Reserve may have subdivisions. 0 F -2 b. Reserve for Appropriations. 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. C. Change in Fair Value of Investments. The City is required to adjust annual investment earnings up or down each year for the difference between their investments valued on a "Cost Basis" and their relative "Fair Market Value." On one hand, this market value adjustment is valuable because it provides an indication of what the portfolio is worth if it has to be liquidated on short notice. On the other hand, it sometimes generates artificial volatility in apparent annual earnings and leads to confusion about how much real cash revenue is being generated for use in the annual budget process. The purpose of this Reserve is to identify the difference between the Fair Market Value based revenue and actual cash revenue. This difference is "set aside" on the Fund Balance Statement before detail work on the annual budget begins. It may be either a positive or negative number, depending on the Fair Market Value adjustment made in the CAFR each year. d. PERS Rate Reserve. This Special Subdivision of the Stabilization Reserve has been established for the specific purpose of helping to smooth out (for internal budgeting purposes) the year -to -year fluctuations in PERS rates. PERS rates have been one of the most volatile and unstable elements on the expense side of the City's annual budget process. The long -term goal is to budget the normal cost of PERS rates, setting aside the extra money in this Reserve when actual rates are below that level. Conversely, when actual rates are above that level, funds from this Reserve can be drawn upon. At this writing (2003) significant PERS rate increases in the out years are anticipated. Therefore extra funds will be placed in this Reserve, subject to availability. �I F -2 B. Tide and Submerged Land Fund. Within this Special Revenue Fund, a special Designated Reserves has been created. 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 designated for Upper Newport Bay restoration projects. C. Permanent Endowment Fund (Robinson Skinner Annuity). Similar to the above Fund, there is a Designated Reserve within this special purpose Fund. The Newport Bay Dredging Reserve (Robinson- Skinner Annuity). This Reserve is the repository for the Robinson - Skinner Annuity funds. In general, the endowment specifies that the principal amount will not be depleted, but that investment earnings may be used for dredging projects in Newport Bay. D. Water Fund. (City Council Policy L -20 contains additional information concerning budgeting and rate setting within the Water Fund.) 1. Contingency Reserve. Water System Reserve. This Reserve is used for emergency repair to the water system. The target level for this Reserve is thirty-five percent (35 %) of the annual budget for operations. 2. Designated Reserves. Future Water Infrastructure Reserve. This Reserve is used for large designated projects that are part of the water distribution system. System replacement/ upgrade and most improvement/ major maintenance projects are funded within that amount. However, certain large -scale projects are projected on a ten -year horizon, which is updated and refined each year. The purpose of this Reserve is to set aside partial funding for those projects in advance. Included as part of the City Manager's annual budget proposal will be a plan to fund this Reserve at a level of not more than one hundred percent 8 n F -2 (100 %) of the projected cost of planned projects by the year in which contract award is anticipated. Projected future costs notwithstanding, a minimum of ten percent (10 %) of the annual budget for operations will be set aside to this reserve each year. The City Council must approve the ultimate fund transfer from this Reserve to a designated Water Enterprise Fund Capital Project Account as part of the Budget process. 3. Stabilization Reserve. Water Rate Stabilization Reserve. This Reserve is used for water rate or fee stabilization to offset large expenditures changes such as water purchase, energy or treatment costs. 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 twenty-five percent (25 %) of the annual budget for operations. Funds will be set aside only if target Contingency Reserve level is met. The City Council must approve use of these funds, based on City Manager recommendation. See also City Council Policy L- 20. E. Wastewater Fund. 1. Contingency Reserve. Wastewater System Reserve. This Reserve is used for emergency repair to the Wastewater system. The target level for this Reserve is seventy percent (70 %) of the annual budget for operations. 2. Designated Reserve. Future Wastewater Infrastructure Reserve. This Reserve is used for large designated projects that are part of the City's Wastewater system. Funds are reserved for large -scale future projects, which cannot be accommodated within the annual budget of the year in which they are planned. In the years prior to estimated contract award, the City Manager's budget proposal will include a plan to set money aside in this Reserve sufficient to accumulate not more than one hundred percent (100 %) of the projected cost of such projects. D F -2 3. Stabilization Reserve. Wastewater Rate Stabilization Reserve. This Reserve is used for wastewater rate or fee stabilization to offset large expenditure changes such as energy or operational costs. 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 twenty -five percent (25 %) of the annual budget for operations. Funds will be set aside only if target Contingency Reserve level is met. The City Council must approve use of these funds, based on City Manager recommendation. See also City Council Policy L- 20. F. Internal Service Funds. Internal Service Funds receive moneys from departmental operating budgets. There are two Internal Service Funds: the Equipment Maintenance and Replacement Fund, and the Insurance Reserve Fund. One of the functions of Internal Service Funds is to act as reserve accounts. 1. Equipment Maintenance and Replacement Fund. The Equipment Maintenance and Replacement Fund receives operating moneys 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 Account. In order to provide adequate funds for unexpected extraordinary costs due to damage or mechanical failure to a large piece of equipment, five percent (5 %) of the total annual budget for equipment maintenance is retained in the Fund. b. Equipment Replacement Account. Departmental operating funds are charged amounts sufficient for the replacement of rolling stock in accordance with Council Policy F -9. Equipment replacement needs vary from year to year; therefore the year -end Fund balance will fluctuate. It will increase substantially in the years preceding major purchases or when an unusually large percentage of the fleet 10 F -2 is scheduled for replacement. The City Manager annually determines and adjusts the rates for collection of funds from the Departments based on pricing, future replacement schedules, and other variables. 2. Insurance Reserve Fund. The operating budgets of City's Departments are charged for Liability, Workers' Compensation, and Compensated Absences. a. Liability and Workers' Compensation Accounts. These accounts each serve three purposes: Payment of insurance premiums; Payment of the deductible (self- insured retention) for liability or workers' compensation claims; Reserve for future claims. i. Collection of Funds. Each year, the City Manager will determine and adjust the internal collection rates from the Departments. ii. Short Term Expenditures. The Budget will account for projected expenditures during the coming year. iii. Future Costs. Money will be set aside each year to accommodate projected long -term cash outflow. The annual funding level will be sufficient to offset the estimated cost of known claims. Resolution of most claims falls within a three -year window. At this time, the target fund balance each year is eighty percent (80 %) of the estimated overall liability for known or anticipated claims, based on the City's general experience in the past. 3. Compensated Absences Fund. a. Background. Employee benefits such as accumulated flex leave, vacation leave, and sick leave, have a cash value. Accounting practices require that the book value of the City's compensated 11 F -2 absences liability reflect the cash outflow as if all absences were cashed out immediately. Much of this cash outflow will never occur, since the benefits will be taken in the form of time off, rather than cash. Additionally, the cash outflow could occur all at once only if the City dissolved and made full payment for all accumulated leave amounts. The largest portion of leave -to -cash conversion is at an employee's retirement. That amount can be estimated with reasonable accuracy. b. Policy and Practice. The City will fund an appropriate amount, but not the entire long -term book liability, for compensated absences. L Each year, the City Manager will project the amount of expected short -term cash liability for compensated absences and budget expenditures from the Compensated Absences Account. ii. The City Manager will establish a target closing balance that will fund not less than twenty-five percent (25 %) of the long- term liability for compensated absences. 4. Retiree Medical Fund Reserve. The City has established a special program whereby medical insurance costs of its retirees are partially offset by limited contributions from the City and members of the active duty workforce. In addition to covering each yea's required costs on a "pay as you go' basis, a special Reserve has been established for the long -term accumulation of money to offset the unfunded liability of this program. The City contributes $20 per full -time active employee per month to this Reserve, and each full -time active employee contributes $10 per month. This Reserve is the repository for these long -term accumulation funds. Money in this Reserve is not to be used to partially offset annual costs of the program at any time until the unfunded liability of the program is fully covered by the balance in the Reserve. At that point, funds in the reserve may be depleted for use in paying annual expenses, or replenished each year if inadequate, depending on the status of the unfunded liability. The goal is for the balance in the Reserve to cover the unfunded liability on an ongoing basis. 12 LI Adopted - January 24, 1994 Amended - April 10, 1995 Amended - April 27,1998 Amended - March 14, 2000 Amended - May 8, 2001 Amended - April 23, 2002 F -2 13 i J RESERVES /DESIGNATIONS OF FUND BALANCE PURPOSE F -2 To establish City Council policy for the administration of financial reserves and fund balances. DISCUSSION A. background_ _Prudent financial management dictates that some portion of the• Deleted: A.. funds available to the City be reserved for future use. Future uses are Formatted: Bullets and Numbering categorized as either pre - planned projects or unforeseen financial emergencies. For clarification, the City also has a nuntber of Special Revenue Funds. These Funds are somewhat sintilar to reserves in that they act as n repository for inonc y that can only hr used Jir specific purposes. Rescrues nre generally distinguished front ,Special Revenue Funds in that decisions regarding the purpose and /or the tunownts to he Set aside, as well as the circumstances./or use, normally fi7R within the nuthorihl e f the C�( u n City Cocil, That Deleted: authority normally rests largely with an external entity hi the case t7 Special RCZT1111V Deleted: in the case of reserves Funds. B. r tructure and Funding of-Reserves.. This Policy establishes_ Reserve_ Accounts or---, - Deleted: B.. designated Fund Balance levels for moneys being held m m reserve. In addition, Foratted: Bullets and Numbering the sources and eventual use of Reserve Funds are set forth. It is the policy of the City Council that each Reserve identified herein is to be fully funded as part of the annual budget process. If operational or other considerations require the City Council to temporarily override this policy during any fiscal year, the City Manager will recommend to the City Council a plan to restore any Reserves falling below required minimum levels. Reserve levels will be restored as soon as practical, but in not more than 5 years. Each of the City's fiscal reserves is established and maintained for one of four purposes listed in general order of importance below. If the reserve requirements of this policy are unmet in any fiscal year, the City Manager will recommend funding prioritization to the City Council as part of the Budget„ _ _ _ _ - - Deleted: I Use_ of Reserves_ _ The City Council decides whether to appropriate funds from _ , - Deleted: I 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 C. F -2 current year operating funds 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 a separate City Council Resolution approving that specific action. Information regarding Annual Budget Adoption and Administration is contained in City Council Policy F -3 Deleted: q ,Categories Of Reserves-_____________________ _________________________ _ __ - -- Deleted: - - - - -- -rage Break- - - - - -- - Deleted: D.. 1. Accounting Reserves. Generally accepted governmental accounting practices require identification of generic reserve funds for certain purposes. These accounts represent the unspendable portions of fund balance, such as inventories and Joag_terw receivables, as well as funds Deleted: longterm that are legally restricted by some external source, such as debt service reserves and encumbrances. Reserving funds for a contract awarded in one year but not completed until a succeeding year is one example of an accounting reserve for encumbrance. 2. Contingency Reserves. Contingency Reserves represent funds for unexpected financial emergencies. One example requiring the use of this Reserve is the adverse impact of natural disasters such as earthquake or flooding on revenue availability, as well as increased demand for City services. Other examples are unexpected loss or reduction of a key revenue source; special projects, programs, or price changes mandated by another government entity; and emergency capital projects needed to deal with unforeseen structural failure. 3. Designated Reserves. These Reserves are designated for known or anticipated events. Such events require large, non - recurring financial outlay, such as the replacement of systems and equipment or major capital improvements. 4. Stabilization Reserves. Stabilization Reserves enhance the orderly management of the Operating Budget by stabilizing revenues and expenditures, which fluctuate beyond the ability of City staff to control or predict. One example is the annual change in retirement contribution rates mandated by the Public Employee Retirement System (PERS). Other examples are changing prices for utilities and fuel, as well as the volatility in certain special program funding. These Reserves provide stability by "smoothing ut" car -to-I ear volatili m the Ci 's finances. Deleted: year to year g 1L L ty ty---------- - - - --- F -2 FUNCTION AND ADMINISTRATION OF RESERVE ACCOUNTS Reserves are identified below by fund, category and specific function. The specific numbers of accounts where these Reserves are physically located change from time to time as the overall account structure is updated and modified. However, the Fund Balance Statement, which is available for ready reference in the City s Annual Budget document, identifies balances, past -year activity, and projected current year activity for each of these Reserves. A. General Fund. 1. Accounting Reserves. 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. It. Reserve for Debt Service. Funds are placed in this Reserve at the time debt is issued. The provisions governing the Reserve are established in the Bond Indenture, and the Reserve itself is controlled by the Trustee. C. Reserve for Long Term Receivables. This Reserve is used to identify and segregate that portion of the City's financial 47sscfs - - - Deleted: assets which which are not due to be received for an extended period, so are not Deleted:, available during the budget year. d. Reserve for Encumbrances. This Reserve accommodates spending for contracts or other items, which are legally committed but not expended by fiscal year end. - - j Deleted: I -- --- - -- ----- - - - --- - - -- - - -- 2. Contingency Reserve. This Reserve has a target balance of not less than Deleted: e.. ten percent (10 %) of annual General Fund expenditures. The City Council Deleted: Reserve for authorizes expenditures from this Reserve. Aporomiation. This is a temporary repository for funds not yet fully appropriated in the annual budget. It 3. Designated Reserves. is normally used only during the budget process.Q a. vital Improvement. Generally accepted governmental•_ - Deleted: a.. accounting practices do not provide for the depreciation of assets of Formatted: Wlets and Numbering i F -2 Governmental Funds such as the General Fund. Therefore, special procedures are required to set aside money (a "sinking fund ") for replacement or renovation of fixed assets such as, but not limited to, City Hall and Police Department buildings, Fire Stations, and Library Branches. The Capital Improvement Reserve will accumulate funds only for infrastructure items financed through the General Fund. Infrastructure assets of Enterprise Funds, as well as those of Governmental Fund, for which non - general fund money is available, are not components of this Reserve. Funds from this Reserve are restricted to replacement or acquisition of periodic, major projects or improvements typically exceeding 0.7 percent (0.7 %) of the annual General Fund Operating Budget (not including capital projects). Projects for which this Reserve is intended generally have the effect of extending the useful lives of infrastructure items. The City Manager will update the status of items of the General Fund infrastructure inventory on an annual basis. Included as part of the City Manager's budget proposal will be a plan to fund this Reserve at a level of not more than one hundred percent (100 %) of the replacement cost of each asset by the year in which replacement is anticipated. (. t 2nior Citizen Site. This Reserve is established by Council_Policy Deleted: b.. I -5, which specifies that ten percent (10 %) of revenue collected from Formatted: Buiiets and Numbering rental of facilities at the Oasis Center be set aside for equipment replacement and /or refurbishment at the Center. c. ark Fees. This Reserve contains Park Fees collected by the_ -., Deleted: c_ construction permit process. Use of Park Fees is governed by Formatted: Bullets and Numbering Council Policy I -1, which limits their expenditure to park, open space, and recreational facilities. d. Off Street Parking Newport Beach Municipal Code 12.44.025• Deleted: d.. establishes this Reserve and governs its administration. Fifty Formatted: Buiiet and Numbering 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. 4 g F -2 paramedic Program (Hoag). This Reserve was established by the- - City in conjunction with debt issuance agreements with Hoag Hospital. In addition to the original amount(s) deposited to this reserve, effective July 1, 2000, any excess revenues generated by II this program, after accounting for General City Overhead of fifteen �t ,percent (15%), shall be deposited to this reserve account for future paramedic related purposes, to a maximum of $250,000. Funds m ;g this reserve account may be used for any paramedic related purpose as directed by the City Council. Target level for this reserve is poentl_rnre_ percent (25 %) of the annual budget for_ operations and capital expenditures. .Recreational Instruction Reserve. City Council Policy I -2- establishes reserves for surfboard replacement and refurbishment, i, '•.'r'. development of tennis courts, and development of new recreational activities. The Policy requires twenty percent (20 %) of gross annual revenues derived from specified recreational classes be set aside. In Lieu Parking, Resent(. This Rcsen,e is established by NBMC -• 12.44.125. The City requires commercial businesses to provide. adegaaie off- stre.dt parking. In 0111e Crises Where this is not possible, businesses are afforded the opportuniti to pity art annual tee and use parking spares 111 it municipal lot, providing such it lot is located iuithin specified prenrilnity to the business. This Reserve is the repository filr these fells. Special purposes of the t +se of these fiords have not been established by the City Council. Deleted: <p>e.. Neighborhood Enhancement Reserve. Newport Beach Municipal Code 12.W27 establishes this account and governs its administration. Funds for the Neighborhood Enhancement Reserve are derived from designated parking meters and used for enhancement of services to designated areas.¶ 9 L >f: Helicopter Replacement. Each year the Police Department will budget operating funds sufficient for the orderly replacement of police helicopter assets. These funds will be transferred to the Helicopter Replacement Reserve unfit eventuahy appropriated by the City Council for a replacement heficopter.9 9 Deleted: v Deleted: f.. Inserted: <a >. Formatted: Bullets and Numbering Inserted: f Deleted: 15 Deleted: 25 Deleted: h Formatted: Bullets and Numbering Deleted: g.. Inserted: g Formatted: Bullets and Numbering h. Pork h+ Lien Resemo. This R"cive Was established by NBMC 19.52. The - - - Formatted: Bullets and Numbering Cih/ requires dedicoticnt of land or pa nicia of /ces for park or n'crentional purposes in conjunction veith residential development. When fees are paid; the finds are placed in this Reserve.. Specific: guidance regardim; use of the finds is contained in 19.52.030 and 19.52.070. Neighborhood F:uh oo'cineut Reserve A. This Resolve runs established by- - - - Formatted: Bullets and Numbering NBMC 12.44.027, zuhich dirccis that Revenues ji'cnn rmiriug> meters to - Deleted: P Zone 9 shall be apportioned to this Reserve. Funds in the Reserve will Deleted:M then be itself for the purpose of enhancing and supplementing r enting services t the West Ncurport area. Both the nature of the supplelneutal services and the definition of tire nrea semcd are set forth in tire Code Section. above. F -2 Neighborhood Enhancement Reseive B. 77nis Reserve is almost the Suine -- - - - Formatted: Bullets and Numbering as Reserve A above. The difference is that this Reserve pertains to the Formatted: Bullets and Numbering Balboa Peninsula, and it specifies that fifhl percent (50') of the imrking , -- Deleted:P pich_r 1"eveme will be-aldrortioned to the Reset ue. Specific details me ... Deleted: M Coll tat lied ill till'. Code Section. - Deleted: R k. Ocean Front_ Restoration Reseive._ Jn the earhl IJ ffs, it tons discovered- _. - Deleted:I Iny quiv y that inliprovennents to Several ocean) front parcel' went' Formatted: Bullets and Numbering encroaching onto the pnblic bench. 77ic encroacluuent zoos relatively Deleted:.. minor. The negotiated solution zoas for the properhl owners t0 pay a pecan fee each year to the City. Revenne Huts generated umy only be. Deleted: y used for ocean front restoration projects and. incidental costs of Formatted: Bullets and Numbering innprovenuents and mnintrnancr to enhance pnblic access and use of oceann Deleted: beaches as approved by the Cihy, Council. This Reserve is lhe. repository for those Bolds. City Council. Policy L -12 contains additional background and dOtall5 ,Malt tilt' cueroachnie t issue. NBAQC 12.44.027 establishes this Reserve Account, governs its adminiatratizni, and defines areas in and purposes for which funds in tine account luny be spent. _Other Designated Reserves. The Administrative Services Director- - - - Formatted: Bullets and Numbering may add additional designated reserves as required. This will normally be done in response to new programs or policies established by the City Council or another government entity providing funds to the City. Examples are the Oil Spill Recovery Deleted: to ueu Parking Reserve. Reserve, and-the-Public Library Fund Reserve. - . - Deleted:. 4. rtabilization Reserves. ----------"-------------------------------- De eted: a.. Formatted: Bullets and Numbering a. General Fluid Stabilization Reserve. This Reserve has a target balance - ,. - f Deleted: A of two percent (2/0) of the budgeted expenditures within the t Formatted: Bullets and Numbering General Fund. Each year, the City Manager will analyze Deleted: The uncontrollable revenues and expenditures. When expenditures are required from this Reserve, the City Manager will note the reasons in the preliminary and final budget The Stabilization Reserve may have subdivisions. Deleted: y h. Resen3' hlr APropriationb. This is a ternrporNy repository for f tmis not- - - - Formatted: Bullets and Numbering )yet rally appropriated in the annual budget. It is normally useet during _ . - - Deleted: the budget process to set aside funds for knomi or strongly anticipated expenses that will need to be addressed lay budget amendment during the M F -2 budget hear. Sometimes the dollar aniount and /or appropriate ncionut breakdown for such expenses cannot be. sheclflcalhl identified at the time the budget is adopted, (•seen though the funds will be needed. In such case's, III(' funds will normally be budgeted to the Reserve for Appropriations. Deleted: Formatted: Bullets and Numbering Deleted:" Inserted: ^Cost Basis Deleted: " Inserted:" and their relative C. Change in Fail' Value of Investments. the City_ is relfuired to eldjust•' '.,'. Deleted:" annual investment earnings up or down each year for the differe ce Inserted: "Fair Market Value." On one hand this market value adjustment is valuable because it provides an indication of what the between their investments valued oil a ".Cost Basis" and their relative l' air Market Value." Ou one hand, this market name: adjustment is _�_-__ _____________- _- _---- 1_- ______� valuable because It provides all indication of what the portfolio 1s 7001'th If it ias to be lnuldnted on short notice. Oil the other hand, it Sometimes l generates artificial volatility in apparent annual earnings and leads to portfolio is worth if it has to be Hquidated on short notice. On the other hand, it sometimes generates eonfnsion about how nlueh Peal Cash revenue is being generated for use in the annual budget process. The purpose' of this Reserve: is to idelltlfll the artificial volatility in apparent annual earnings and leads to confusion about how much real cash revenue is being difference between the Fair Market Value based rei'enue atld actual cash r VC11rl C. This difference is "set aside" Oil the Fund Balance Statement generated for use in the annual budget process. The purpose of this Reserve is to identify the difference before detail work on the awuual budget begins. It iuny be either a positive or negative number, dependiog oil the Fair Market Value adjustment between the Fair Market Value based revenue and actual cash revenue. This difference is "set aside" on the made ill the CAFR ench year. Fund Balance Statement before detail work on the annual budget begins. It d. PERS Rate Reserve. This Special Subdivision of the Stabilization Reserv(», may be either a positive or negative number, depending on the Fair has been established lot' the specific purpose of helping to Smooth out (for , internal budgeting purposes) the hear -to -dear flucllatimns in PERS rates. Market Value adjustment made in the CAFR each year. I I PERS rates irate been One Of the most volatile and in astable Clements On - - - - - - the expense side of the City's annual budget process. The long -urea goal is to budget the normal cost of PERS fates, setting aside the extra money ',' PERS Rate Reserve. This Special Subdivision of the Stabilisation Reserve has been established for the specific purpose of helping to 1 Deleeted: in this Reserve when actual rates are below that level, Conversely, when actual rotes are abOVe that Ieuel, f ludS /Will this Rescroc cart be draten Formatted: Bullets and Numbering Deleted: In the past ten years, upon. At this writing (2003) significant PERS rate increases in the out Deleted: "seed" money years are nu titivated. 77jeref Ire extra hills will be placed in this Rese lve, - - subject toavailabilih/. Deleted: Deleted: I Tide mud Submerged Lond Fund. Within this Special Revenue Fund, a special., - -'- _ _ _ . _ . _ Designated Racmcs has been created. Deleted: B.. Deleted: Formatted: Bullets and Numbering L�('r Newport Ball Restoration Reserve'. This lYSe'1ve is the 1 "epository for hinds mandated by SB573, as well as,s pecml as char ed to permit holders ?s alt alteinati ve to 7 - " - - f - - - - - g - - }' - - - - meeting certain specified mitigation crite'r'ia. In addition) to the 111 itigatioll fees, I0 % -of - -- Beacon bay lease revenue, is placed in this Reserve. Funds iu the Reserve are designated for Upper Newport Bay restoration projects. Deleted: fees collected Deleted: who cannot mitigate certain imp acts Huh ?. inserted: Huh? inserted:. F -2 Cv - - Pennaneut Endnwntertt Fund (Robinson Skinner Annuity). Similar to the above. Fund, _ -- Deleted: there is a Designated Reserve roithin this special purpose Fund. 7'he Newport Bail Dt''rl�inq Reserve (Robinson - Skinner Annuity This P.escroe is the repository (or the Robinson- Skinner Anntihl fitnds. In general, the endowment specifies that the principal mnotutt will not be. depleted, but that investment earnings may be used fin dredging projects in Neenpnrt Bad. -------------------------------- - D. Water Fund. - - - J Formatted: Bullets and Numbering Deleted: is (City Council Policy L -20 contains additional information concerning budgeting and rate setting within the Water Fund.) 1. Contingency Reserve. Water System Reserve. This Reserve is used for emergency repair to the_ Deleted: a.. water system. The target level for this Reserve is Jhirty-fine percent (3.5 %) 1 Deleted: z5 of the annual budget for operations, Deleted: 35 Inserted: 35 2. Designated Reserves. Deleted: and capitalezpend ores ,Euture Water Infrastructure Reserve. This Reserve is used for large Deleted: a.. designated projects that are part of the water distribution system. System replacement/ upgrade and most improvement/ major maintenance projects are funded within that amount However, certain large -scale projects are projected on a ten -year horizon, which is updated and refined each year. The purpose of this Reserve is to set aside partial funding for those projects in advance. Included as part of the City Manager's annual budget proposal will be a plan to fund this Reserve at a level of not more than one hundred percent (100 %) of the projected cost of planned projects by the year in which contract award is anticipated. Projected future costs notwithstanding, a minimum of Jon percent (}0 %) of the annual budget for operations will be . - Deleted: five set aside to this reserve each year. The City Council must approve the Deleted:5 ultimate fund transfer from this Reserve to a designated Water Enterprise j Deleted: and capital espendinues Fund Capital Project Account as part of the Budget process„ Deleted: y I . Stabilization Rtseive. -- lDeleted: ----- - -page Break - - - - -- J E. F -2 Water Rate Stabilization Reserve. This Reserve is used for water rate or fee stabilization to offset large expenditures changes such as mater Purchase, energy_ gr treatntenf cost,. The intent of the Reserve is to provide furuls to offset-cost- increases that are Projected to be short -hued, thercln/ partially eliminating Fire volatility in annual rate adjustnents. It is not intended to offset ou;oing, long- term Pricing structure changes. The target level of this reserve is jioenhlfi:e Percent (25 %) of the annual budget for operations. Funds will be set aside only if target Contingency Reserve level is met. Tine City Council must approve use cf these funds, based on City Manager reconnmendation. See also City Council Polio/ L -20. Wastewater Fund. _ 1. Contingency Reserve. Wastewater System Reserve. _ This Reserve is used for emergency repair to _ the Wastewater system. The target level for this Reserve is�seveuh/ percent (70%) of the annual budget for operations _ - 2. Designated Reserve. ,Future Wastewater Infrastructure Reserve. This Reserve is_ used for large_ designated projects that are part of the City's Wastewater system. Funds are reserved for large -scale future projects, which cannot be accommodated within the annual budget of the year in which they are planned. In the years prior to estimated contract award, the City Manager's budget proposal will include a plan to set money aside in this Reserve sufficient to accumulate not more than one hundred percent (100 %) of the projected cost of such projects. 3. Stabilization Reserve. Wastewater Rate Stabilization Reserve. This Reserve is used for wastewater rate or fee stabilization to offset large expuulifurc�_chauges_sucla as_ energy _,dn- operational costs. The intent of the Res ds erve is to provide fun to c ffset cost increases that are projected to be short - lived, thereby partially eliminating the volatility in annual rate adjastnnents. It is not intended to offset ongoing, long - tenn pricing structure changes. The target level of this reserve is jwenh /-five percent (25 %) of the annual budget for operations. Funds will be set aside only if Deleted: costs Deleted: costs Dele[etl: Deleted: 25 Deleted: a.. Deleted: s Deleted: costs Deleted: 25 J F. F -2 targrt Contingency Resolve level is vutt. The City Council must approve list, of these fiends, based oil Ciht Manager recornnu.ndation. See. also City Council Poling L -20. Jnternal Service Funds. Internal Service Funds receive moneys from departmental operating budgets. There are two Internal Service Funds: the Equipment Maintenance and Replacement Fund, and the Insurance Reserve Fund. One of the functions of Internal Service Funds is to act as reserve accounts. Equipment Maintenance and Replacement Fund. The Equipment Maintenance and Replacement Fund receives operating moneys 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 Account. In order to provide adequate funds for unexpected extraordinary costs due to damage or mechanical failure to a large piece of equipment, five percent (5 %) of the total annual budget for equipment maintenance is retained in the Fund. b. Equipment Replacement Account Departmental operating funds are charged amounts sufficient for the replacement of rolling stock in accordance with Council Policy F -9. Equipment replacement needs vary from year to year; therefore the year -end Fund balance will fluctuate. It will increase substantially in the years preceding major purchases or when an unusually large percentage of the fleet is scheduled for replacement. The City Manager annually determines and adjusts the rates for collection of funds from the Departments based on pricing, future replacement schedules, and other variables. 2. Insurance Reserve Fund. The operating budgets of City's Departments are charged for Liability, Workers' Compensation, and Compensated Absences. IN Deleted: D.. Formatted: Bullets and Numbering Deleted: E. Inserted: E. C, F -2 a. Liability and Workers' Compensation Accounts. These accounts each serve three purposes: Payment of insurance premiums; Payment of the deductible (self - insured retention) for liability or workers' compensation claims; Reserve for future claims. i. Collection of Funds. Each year, the City Manager will determine and adjust the internal collection rates from the Departments. ii. Short Term Expenditures. The Budget will account for projected expenditures during the coming year. iii. Future Costs. Money will be set aside each year to accommodate projected JunS_term cash outflow. The _annual - -- Deleted: long teem funding level will be sufficient to offset the estimate d cost of known claims. Re.4olutiou of wNt clNfl /5 t dis within a three- fall Deleted: Resolution of most claims _ _ _ year window. At this time, the target fund balance _ -year year is yiShty percent (FO %) of the estimated overall liability for , - - Deleted: fifty known or anticipated claims, based on the City s general Deleted: s experience in the past. 3. Compensated Absences Fund. a. Background. Employee benefits such as accumulated flex leave, _ , - - Deleted:, vacation anrrtion leave, and sick leave, have a cash value. Accounting practices require that the book value of the City's compensated absences liability reflect the cash outflow as if all absences were cashed out immediately. Much of this cash outflow will never occur, since the benefits will be taken in the form of time off, rather than cash. Additionally, the cash outflow could occur all at once only if the City dissolved and made full payment for all accumulated leave amounts. 11 F -2 The largest portion of leave -to -cash conversion is at an employee's retirement. That amount can be estimated with reasonable accuracy. b. Policy and Practice. The City will fund an appropriate amount, but not the entire long -term book liability, for compensated absences. Each year, the City Manager will project the amount of expected short -term cash liability for compensated absences and budget expenditures from the Compensated Absences Account ii. The City Manager will establish a target closing balance that will fund not less than twenty-five percent (25 %) of the long- term liability for compensated absences. d. Retiree Medical Fund Reserve. The City has established a special program - whereby ruedical insurance costs cf its retirees are partially offset by limited contributions from the Cihy and members of the active duty workforce. In nddition to covering enclo year's m1nired costs on a "pay n; ,you go" basis, a special Reserve has been estnblislmri Jin the long -term occunnthrtion of utonr71 to offset the un/iutded liability of this program. Vie City contributes $20 per fall -_ time active employee per month to this Reserve, told each frdl -tune active_ employee contributes $10 per month. Tiris Reserve is the repository /iv these long -term accmuulotioa funds. 41oney in this Reserve is not to be used to partially offset annual costs of the program at any time until tla' unfnrrded liability o1 the progrtnu is filly couered by the balance in the Reserve. At that point, fonds ill the reserve army be depleted for rise in paying arum di expenses, or replraished each year if inadequate, depeudiug ml the status of tic unfunded liability. The goal is fv the balmrce in the Reserve to cover the nnfturded liability Oil au ou;oiug basis. Adopted - January 24,1994 Amended - April 10, 1995 Amended - April 27,1998 Amended - March 14, 2000 Amended — May 8, 2001 Amended — April 23, 2002 12 - - Formatted: Bullets and Numbering Deleted: by Deleted: Deleted: Deleted: Page 7: [3] Inserted Dick Kurth 03/01/2003 1:28 PM "Fair Market Value." On one hand, this market value adjustment is valuable because it provides an indication of what the portfolio is worth if it has to be liquidated on short notice. On the other hand, it sometimes generates artificial volatility in apparent annual earnings and leads to confusion about how much real cash revenue is being generated for use in the annual budget process. The purpose of this Reserve is to identify the difference between the Fair Market Value based revenue and actual cash revenue. This difference is "set aside' on the Fund Balance Statement before detail work on the annual budget begins. It may be either a positive or negative number, depending on the Fair Market Value adjustment made in the CAFR each year. PERS Rate Reserve. This Special Subdivision of the Stabilization Reserve has been established for the specific purpose of helping to smooth out (for internal budgeting purposes) the year -to -year fluctuations in PERS rates. In the past ten years, PERS rates have been one of the most volatile and unstable elements on the expense side of the City's annual budget process. The long -term goal is to budget the normal cost of PERS rates, setting aside the extra money in this Reserve when actual rates are below that level. Conversely, when actual rates are above that level, funds from this Reserve can be drawn upon. At this writing (2003) significant PERS rate increases in the out years are anticipated. Therefore extra "seed" money �' L