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BURBANK HOUSING AUTHORITYTuesday, June 14, 2005Agenda Item - 2 |
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BURBANK HOUSING AUTHORITYTuesday, June 14, 2005Agenda Item - 2 |
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PURPOSE
Staff requests that the City Council approve updates and revisions to the City of Burbank Financial Policies.
BACKGROUND
The City Council adopted the original Financial Policies on January 9th, 1990. Subsequently, Council amended them on January 2, 1996, and May 28, 1998 (see Attachment A). Additionally, the City Council adopted a Burbank Water and Power (BWP) Financial Reserves Policy on June 10, 2003. These financial policies serve as a solid foundation in guiding elected City officials and staff with respect to managing all the City�s resources.
After the initial adoption, the policies established were modified in response to recommendations that were made by financial consulting firms that were engaged by the City. These firms provided valuable guidance and input. In the late 1990�s, Barrington-Wellesley was engaged to review the utility operations, and in 2003, Public Financial Management (PFM) assisted BWP in establishing the BWP Financial Reserves Policy.
ANALYSIS
As part of the fiscal year 2004-05 City Council work program, Financial Services staff have reviewed and updated the Financial Policies (see Attachment B and C). The changes proposed are designed to enhance and strengthen the policies that will ultimately result in a better fiscal position for the City. Many of the changes were based on input from publications by the Government Finance Officers Association (GFOA), surveys and analysis of the policies in our neighboring cities, as well as other industry articles from rating agencies such as Fitch�s and Standard and Poor�s. The policies have been presented to the City�s Management Advisory Committee (MAC), as well as other affected departments. The 14 updated polices are:
Highlights of some of the proposed changes are as follows:
The Financial Policies will provide a framework for future compliance and will formally establish many of the fiscal practices that are already currently in place. Council direction, as well as available resources will always impact the extent that these policies are fully realized.
FISCAL IMPACT
The update of the City�s Financial Policies should strengthen the City of Burbank�s financial condition. Staff believes that these revisions will have a positive impact with bond rating and insurance agencies, which could lead to lower interest payments related to City debt.
RECOMMENDATION
Staff recommends that the City Council adopt the proposed resolution approving the updated City of Burbank Financial Policies.
Attachments:
A: 1998 Adopted Financial Policies B: Updated Financial Policies-June 2005 C: Updated Policies-Redlined Version
EXHIBIT A
September 1, 1998
Honorable Mayor and Members of the City Council,
At its regular meeting of May 28, 1998, the City Council unanimously approved a revision to the City's Financial Policy VII which reduced the 45-day working capital reserve to 30 days. These policies were originally adopted by the City Council on January 9, 1990, and, subsequently, amended January 2, 1996.
Combined with the City Treasurer's formal Investment Policies, these Financial Policies serve as a solid foundation in guiding both elected City officials and staff with respect to managing the City's resources. Continued adherence to these Financial Policies will help the City avoid operating practices which could have adverse financial consequences.
Respectfully submitted,
ROBERT R. OVROM DEREK HANWAY City Manager Financial Services Director
CITY OF BURBANK FINANCIAL POLICIES
As Revised by the City Council May 28, 1998
I. We will maintain a designated General Fund working capital reserve equivalent to 15% of the General Fund's operating budget and a designated emergency reserve equivalent to 5% of the General Fund's operating budget.
II. We will maintain a balanced operating budget for all governmental funds with on-going revenues equal to or greater than on-going expenditures. Appropriations of available fund balance will only be permitted for "one-time" non-recurring expenditures.
III. We will assume that normal revenue inflation and/or growth will go to pay normal inflation expenditures. In no event will normal expenditure increases be approved which exceed normal revenue inflation and/or growth. Any new or expanded programs will be required to identify new funding sources and/or off-setting reductions in expenditures in other programs.
IV. We will require that all Enterprise Funds have revenues (customer charges, interest income, and all other income) sufficient to meet all cash operating expenses, depreciation expense (excluding depreciation from assets acquired through aid-in-construction), prescribe cash reserves per financial policies, and debt service coverage requirements set forth in any related bond covenants.
V. We will require that all Vehicle and Equipment Internal Service Funds have revenues, (City user charges, interest income, and all other income) sufficient to meet all cash operating expenses, depreciation expenses, and the related inflation factor for replacement purposes. The related revenues should also be sufficient to maintain cash reserves which approximate the balance in accumulated depreciation.
VI. We will maintain appropriate reserves in the General Liability Insurance Fund and the Workers' Compensation Fund to meet statutory requirements and actuarially projected needs.
VII. We will maintain a cash working capital reserve which could support 30 days of operations for each Enterprise Fund. In addition, a cash capital improvement reserve will be maintained for each Enterprise Fund on an individual basis, as approved by the City Council.
VIII. We will maintain a long-range fiscal perspective through the use of an annual operating budget and a five-year business plan.
IX. Major capital improvements and acquisitions will be made using long-term financing methods or from cash accumulated in excess of policy requirements.
X. We will require each budget appropriation request to include a fiscal impact analysis.
XI. We will comply with all the requirements of "Generally Accepted Accounting Principles."
XII. We will continue to pay competitive market level compensation to our employees.
- I -
We will maintain a designated General Fund working capital reserve equivalent to 15% of the General Fund's operating budget and a designated emergency reserve equivalent to 5% of the General Fund's operating budget.
� General Fund
Unforeseen developments and crises occur more often than not in any given budget year. Maintaining reserves is considered a prudent management practice and can be used for numerous unforeseen situations. Examples include:
In an effort to ensure the continuance of sound financial management of public resources, the City Council has directed staff to maintain a 20% unappropriated General Fund reserve amount. This reflects a "working capital" reserve of 15% and an "emergency contingency" reserve of 5%. It should be clarified that the 20% reserve amount is to be applied to the General Fund's recurring operating budget only. One-time (non-recurring) expenditures would not be used to calculate the 20% reserve amount.
If unforeseen circumstances occur which cause the reserves to drop below their prescribed levels, then staff will immediately present the City Council with various options for curing the deficiency(ies).
15% "Working Capital" Reserve
The City Council has directed staff to maintain a "working capital" reserve in the General Fund. This reserve represents an amount necessary to fund 55 days (nearly two months) of the General Fund's operations. In the event that the State or Los Angeles County failed to remit revenues to the City or a major/regional natural disaster occurred which would delay the payment of revenues, maintaining such a reserve would allow the City to be able to provide General Fund services for roughly two months. A common "working capital" reserve standard that bond rating agencies and bond insurance companies look for ranges anywhere from 45 to 60 days.
5% "Emergency Contingency" Reserve
The City Council has also directed staff to maintain a separate 5% "emergency contingency" reserve in the General Fund. This reserve represents the minimum "emergency contingency" reserve the bond rating agencies and bond insurance companies recommend cities maintain to deal with local disasters, emergencies, and/or unexpected appropriation needs.
Example:
If the General Fund operating budget for a year were $100,000,000, (recurring salaries and benefits, material, service and supplies; and capital outlay purchases) a total of $20,000,000 (20%) must be maintained in designated reserves. These reserves, if drawn down, will be replenished first out of operating surpluses, if any. If necessary, unappropriated fund balances may be used as an interim measure until expenditure levels versus reserves are brought back into balance. Drawing down on such reserves (below the 20% threshold) can only take place after receiving City Council authorization to do so. The 20% reserve amount, in this case $20,000,000, would be adjusted at the beginning of each fiscal year, depending on the size of the new budget. For example, if the operating budget grew to $110,000,000 in the following year, the reserve would have to be increased to $22,000,000 (20% of $110,000,000).
We recommend that reserves for transportation be adopted at the same levels as the General Fund as long as they do not interfere with legal or grantor requirements.
We recommend that reserve levels be established as prescribed by the bond covenants adopted at the time of issuance of debt.
- II -
We will maintain a balanced operating budget for all governmental funds with on-going revenues equal to or greater than on-going expenditures. Appropriations of available fund balance will only be permitted for "one-time" non-recurring expenditures.
General Fund
This policy requires that in any given fiscal year we do not budget appropriations in excess of the revenue we expect to receive in the same year. This "pay as you go" approach mandates that any increase in expenditures, decreases in revenues, or combination of the two that would result in a budget imbalance will require cost cutting and/or revenue enhancement, rather than spending unappropriated surpluses or designated reserves to support ongoing operations. Cost cutting measures may include reductions in capital improvement projects or purchases, reductions in staff (either through attrition, hiring freezes, or actual lay-offs), or reductions in expenditures for materials, services, and supplies. Expenditure reductions may very well result in reduced service levels.
Revenue enhancement would generally be in the form of new or increased taxes and fees. Any year-end operating surpluses will revert to unappropriated balances for use in maintaining policy-set reserve levels, and the remaining balances will be available for one-time carry-over expenditures, including capital improvement projects, purchases, or limited term expenditures.
In the Special Revenue Funds, Transportation, Capital Outlay, Community Development Block Grant, State Gas Tax, and Federal Disaster Assistance, we recommend formal adoption of our current balanced budget policy, as long as it does not interfere with legal or grantor requirements. Balances in these funds are either committed to approved projects or are to be applied to projects or programs within Federal, State, or County guidelines. In some cases, the funds could be used to meet some of the needs on the Capital list.
The resources of the Debt Service Funds are legally designated for, and restricted to, payment of long-term debt. Our current reserving policy should be maintained.
- III -
We will assume that normal revenue inflation and/or growth will go to pay normal inflation expenditures. In no event will normal expenditure increases be approved which exceed normal revenue inflation and/or growth. Any new or expanded programs will be required to identify new funding sources and/or off-setting reductions in expenditures in other programs.
Normal revenue inflation and/or growth, increased amounts from existing sources, may not always increase at a rate equal to or faster than the expenditures/expenses they support. As a result, the City Council has directed staff to avoid using such revenue as start-up revenue for new projects or programs that have ongoing costs. The City Council has stated that increases in service levels should be supported by new revenue sources or reallocation of existing resources. If normal revenue inflation and/or growth does not keep up with expenditure/expense inflation, we will decrease expenditures/expenses or seek new revenue sources. If long-term revenues grow at a rate faster than expenditure/expense inflation, the City Council can consider expanding service levels accordingly or reducing tax rates and fees under their jurisdiction.
- IV -
We will require that all Enterprise Funds have revenues (customer charges, interest income, and all other income) sufficient to meet all cash operating expenses, depreciation expense (excluding depreciation from assets acquired through aid-in-construction), prescribed cash reserves per financial policies, and debt service coverage requirements set forth in any related bond covenants.
The City's four Enterprise Funds (Water Reclamation & Sewer; Golf; Public Service Department [Electricity and Water]; and Refuse Collection & Disposal) will be supported solely by revenue derived from the enterprise's operations and its interest earned on cash deposits and investments. None of these funds will be supported or subsidized by the City's General Fund. However, each Enterprise Fund will be required to reimburse the General Fund, and/or other applicable funds, for the full cost of general government support services provided to the Enterprise Fund (such as computer support, accounting, and general administration).
- V -
We will require that all vehicle and equipment Internal Service Funds have revenues, (City user charges, interest income, and all other income) sufficient to meet all cash operating expenses, maintenance costs, depreciation expenses, and the related inflation factor for replacement purposes. The related revenues should also be sufficient to maintain cash reserves which approximate the balance in accumulated depreciation.
The City uses Internal Service Funds as an internal accounting and budget mechanism to equitably distribute vehicle and equipment replacement and maintenance costs among City user departments and to help assure that adequate funding is on hand to replace/maintain the Fund's assets and pay liabilities. The City currently maintains a 1) Vehicle Equipment Replacement Fund; 2) Office Equipment Replacement Fund; 3) Municipal Buildings Maintenance Fund; 4) Communication Equipment Replacement Fund; and, 5) Park Maintenance Fund. These funds charge rates to the City user departments which are generally sufficient to cover depreciation, operations and maintenance costs, and an annually adjusted inflation factor for asset replacement purposes, based upon the Los Angeles area Consumer Price Index (CPI).
Vehicle and Equipment Internal Service Funds
When a new asset is added to the vehicle fleet or equipment stock, the user department must budget for the full cost of the asset and transfer the funds to the applicable Internal Service Fund for acquisition purposes. The user department will then begin paying a monthly rate or charge for the use, maintenance, and eventual replacement of that asset. As a result, in the first year of a newly added asset, the recurring budgetary impacts to the user department can be significant.
Municipal Buildings Maintenance Fund
The rates charged to support the Municipal Buildings Maintenance Fund are based on a formula which takes into consideration such factors as the building's life span, usage, square footage, maintenance requirements, etc. Many of the City facilities are over 20 years old and the rate formula used to pay for eventual replacement has only been in place in recent years. As a result, adequate replacement funds are not expected to be on hand for a number of years.
Parks Maintenance Fund
A Parks Maintenance Fund is used to accumulate funds to maintain the City's parks. As per City Council policy, 1/2% of the prior year's General Fund budget is to be appropriated (transferred) from available fund balance into the Parks Maintenance Fund. It must be stressed that the annual appropriation will be funded only to the extent that adequate General Fund annual operating surpluses (recurring revenues greater than recurring expenditures) exist each year. Unlike other Internal Service Funds, this fund is used exclusively for maintenance costs.
- VI -
We will maintain appropriate reserves in the General Liability Insurance Fund and the Workers' Compensation Fund to meet statutory requirements and actuarially projected needs.
General Liability Insurance Fund and Workers' Compensation Fund reserves are maintained in a sufficient manner to meet membership requirements for ACCEL (Association of California Cities for Excess Liability) and meet our statutory requirements for Workers' Compensation.
In order to meet the requirements of this proposed policy, the City must maintain sufficient cash reserves to meet the demands of the self-insured retention levels as required by ACCEL auditors and the State. In addition, an actuary shall make an annual analysis of the self-insurance cash reserves in light of actuarially determined fund liabilities for current and future claims. The insurance rates charged to City departments are adjusted up or down based on the surplus or deficiency of cash reserves as determined by the actuary.
If the reserves drop below levels prescribed by this policy and cannot be readily replenished through increased user rates, then staff will bring the matter to the City Council's attention. In discussing the reserve inadequacy with the City Council, staff will make every effort to give the City Council viable options in choosing the best course of corrective action.
- VII -
We will maintain a cash working capital reserve which could support 30 days of operations for each Enterprise Fund. In addition, a cash capital improvements reserve will be maintained for each Enterprise Fund on an individual basis as approved by the City Council.
The City Council has directed staff to ensure that each Enterprise Fund maintains a 30-day "working capital" reserve which is sufficient to provide enough funds to allow the City Council to react and adopt a financial plan which can adequately deal with a variety of adverse economic circumstances which may materialize. A common "working capital" reserve standard for Enterprise Fund operations that bond rating agencies and bond insurance companies look for ranges anywhere from 30 to 45 days. Applicable cash capital improvement reserves are also maintained in each Enterprise Fund. The actual capital improvement reserves will be determined by the City Council on a case-by-case basis, and are intended as a reserve for replacing or repairing significant capital items which become inoperable and are essential for the enterprise's operations. These items would generally be of an unanticipated emergency nature that could not readily be funded by other sources.
Because of unforeseen circumstances, if the working capital or capital improvement reserves drop below levels prescribed by this policy, then staff will present the City Council with various options for curing the deficiency(ies).
- VIII -
We will maintain a long-range fiscal perspective through the use of an annual operating budget and a five-year business plan.
A long-range financial perspective is essential to provide a more comprehensive and thorough overview of the City's long-term financial needs. Components of this plan include the use of an annual operating budget and a five-year Business Plan with revenue and expenditure projections. This approach will be supported by staff's use of historical data and comparative data from other cities. In addition, a five-year Capital Improvement Program will be maintained and annually updated to help the City Council better understand the potential long-term funding sources and cost impacts on the City's operating budget. - IX -
Major capital improvements and acquisitions will be made using long-term financing methods, or from cash accumulated in excess of policy requirements.
The traditional method for a local government to obtain funds for Capital Improvements has been to issue long-term debt instruments such as municipal bonds, which mature 20 to 30 years from the date of issuance. In general, a municipal bond issue's maturity should approximate the useful life of the asset being financed.
Long-term capital improvement needs should be financed, as much as possible, with long-term debt (bonds). Short-term capital improvements needs should be financed with short-term debt (short-term lease-purchase, revenue anticipation notes, etc.) The City Council has also stated that it is acceptable to use cash which has been accumulated in excess of policy requirements to pay for either long-term and/or short-term capital improvements. The actual use of accumulated cash for such projects will be determined by the City Council on a case-by-case basis. It is the City's practice to use whatever financing mechanism(s) that best meets the goals and objectives of the applicable capital replacement or acquisition.
Specifically, the following general rules will be used in determining what to finance and how:
A. Capital improvement projects of less than $100,000 should be financed out of operating revenues (or accumulated cash).
B. Projects in excess of $100,000, or inter-related projects in excess of $100,000, should be made a part of the 5-year Capital Improvement Program, and all such projects should be grouped to allow effective use of financing mechanisms or other funding sources.
C. On-going expenses related to Capital Improvement Program project (e.g. maintenance and staffing costs) must be identified and the source of on-going revenues to support those costs must be identified. Debt financing will not be used to support on-going operating costs. - X -
We will require each budget appropriation request to include a fiscal impact analysis.
Throughout any budget year there are many items brought before the City Council for consideration. The decisions it makes on these items often require the expenditure of funds. If the decision results in approval of funds already appropriated in the budget, the fiscal impact is already known. But, if the decision includes spending more than anticipated in the budget or requires a whole new appropriation, the fiscal impact needs to be thoroughly analyzed. To this end, the City Council now requires that all requests to Council for new or supplemental budget appropriations must be accompanied by a "Fiscal Impact Statement." This should include:
� Amount of Funds Requested
� Source of Funds Requested � New revenue � Reallocation of existing revenue � Unappropriated Fund Balance � Designated Reserve
� Impact of Request/as Applicable � New rates or fees � Decrease in any activity to support more activity � Why would we use reserves versus new or reallocation revenue?
- XI -
We will comply with all the requirements of "Generally Accepted Accounting Principles."
This policy is self-explanatory. We sometimes hear stories of how public or private entities use "creative accounting" to paint a more positive picture than might really exist. As per City Council direction, staff will always conduct the City's financial affairs and maintain records in accordance with Generally Accepted Accounting Principles as established by the Government Accounting Standards Board. This process should help in maintaining accuracy and public confidence in the City's financial reporting systems.
- XII -
We will continue to pay competitive market level compensation to our employees.
In determining "market level" compensation the City takes into consideration: 1) The general state of the economy; 2) the cost-of-living, measured by the Los Angeles area Consumer Price Index; 3) the City's ability to pay; and, 4) an evaluation of the "survey average" from the "standard five comparison cities" of Glendale, Inglewood, Pasadena, Santa Monica, and Torrance.
In using a market survey of similar positions in comparable cities, the City is committed to paying the simple average of these five cities. Our employees will not lead the group nor will they ever be last, but they will always be competitive. Fair compensation helps to assure not only quality candidates for Burbank jobs, but also provides stability for the City's labor relations environment. The logical consequence of this philosophy is that when resources are scarce, the City will continue to pay competitive wages. However, the City may have to employ fewer people or reduce other line item expenses.
In addition, the City follows a philosophy of "pay for performance." The concept of "pay for performance" versus a system that pays more simply for years of service is one that is generally stressed in the City's labor agreements. It is the intent of this system to financially reward those who perform at significantly greater levels than others. The combination of the dual commitment to use "market level" compensation and "pay for performance" helps assure a continuation of high-quality employees and a rational framework for compensation.
EXHIBIT B
CITY OF BURBANK FINANCIAL POLICIES
1. We will maintain a designated General Fund working capital reserve equivalent to 15% of the General Fund's operating budget and a designated emergency reserve equivalent to 5% of the General Fund's operating budget.
2. We will maintain a balanced operating budget for all governmental funds with recurring revenues equal to or greater than recurring expenditures. Appropriations of available fund balance will only be permitted for "one-time" non-recurring expenditures.
3. We will assume that normal revenue inflation and/or growth will go to pay normal inflation expenditures. In no event will normal expenditure increases be approved which exceed normal revenue inflation and/or growth. Any new or expanded programs will be required to identify new funding sources and/or off-setting reductions in expenditures in other programs.
4. We will require that all Enterprise Funds have revenues (customer charges, interest income, and all other income) sufficient to meet all cash operating expenses, depreciation expense, and prescribed cash reserve policies per financial policies as recommended for each enterprise activity. Additionally, each Enterprise Fund will maintain debt service coverage requirements set forth in any related bond covenants.
5. We will require that each Internal Service Fund which includes vehicles, equipment, and building maintenance have revenues, (City user charges, interest income, and all other income) sufficient to meet all cash operating expenses and depreciation expenses. . The related revenues should also be sufficient to maintain cash reserves which provide sufficient cash to replace vehicles and equipment in accordance with replacement policies.
6. We will maintain appropriate reserves in the Risk Management Self- Insurance Fund and the Workers' Compensation Self � Insurance Fund to meet statutory requirements and actuarially projected needs.
7. We will maintain a general operating reserve which will support operations for each Enterprise Fund during times of financial emergencies. The amount of the general operating reserves will be determined based on a risk assessment of each Enterprise Fund.
8. We will maintain other Enterprise Fund reserves such as debt reduction and capital funding reserves, fleet replacement reserves, and general plant reserves (in addition to the general operating reserve and other reserves) as necessary and prudent for the operation of the specific Enterprise Fund. Such reserves will be reviewed as necessary during the annual budget process, or at least every two years.
9. We will maintain a long-range fiscal perspective through the use of an annual operating budget, a five-year capital improvement plan, and a five-year financial forecast.
10. We will use
long-term financing methods or
11. We will issue bonds or incur other terms of indebtedness only for appropriate purposes and only if the debt service does not effect the City�s ability to meet future operating, capital and reserve requirements.
12. We will require each budget appropriation request to include a fiscal impact analysis.
13. We will comply with all the requirements of �Generally Accepted Accounting Principles.�
14. We will strive to pay competitive market level compensation to our employees.
-1-
We will maintain a designated General Fund working capital reserve equivalent to 15% of the General Fund's operating budget and a designated emergency reserve equivalent to 5% of the General Fund's operating budget.
General Fund
Unforeseen developments and crises occur more often than not in any given budget year. Maintaining reserves is considered a prudent management practice and can be used for numerous unforeseen situations. Examples of potential uses and drawdowns include:
In an effort to ensure the continuance of sound financial management of public resources, the City Council has directed staff to maintain a 20% unappropriated General Fund reserve amount. This reflects a "working capital" reserve of 15% and an "emergency contingency" reserve of 5%. It should be clarified that this 20% minimum reserve amount is to be applied to the General Fund's recurring operating budget only. One-time (non-recurring) expenditures, as well as internal service fund rates will not be used to calculate the 20% reserve amount.
If unforeseen circumstances occur which cause the reserves to drop below their prescribed levels, then staff will immediately present the City Council with various options for curing the deficiency(ies).
15% "Working Capital" Reserve
The City Council has directed staff to maintain a "working capital" reserve in the General Fund. This reserve represents an amount necessary to fund 55 days (nearly two months) of the General Fund's operations. In the event that the State or Los Angeles County failed to remit revenues to the City or a major/regional natural disaster occurred, which would delay the payment of revenues, maintaining such a reserve would allow the City to be able to provide General Fund services for roughly two months. A common "working capital" reserve standard that bond rating agencies and bond insurance companies look for ranges anywhere from 45 to 60 days. Additionally, this % driven reserve provides a reserve that will grow as the budget grows.
5% "Emergency Contingency" Reserve
The City Council has also directed staff to maintain a separate 5% "emergency contingency" reserve in the General Fund. This reserve represents the minimum "emergency contingency" reserve the bond rating agencies and bond insurance companies recommend cities maintain to deal with local disasters, emergencies, and/or unexpected appropriation needs.
If the General Fund operating budget for a year were $100,000,000, (recurring salaries and benefits, material, service and supplies; less internal service fund rates) a total of $20,000,000 (20%) must be maintained in designated reserves. Drawing down on such reserves (below the 20% threshold) can only take place after receiving City Council authorization to do so. These reserves, if drawn down, will be replenished out of available budgetary savings until replenished. The 20% reserve amount, in this case $20,000,000, would be adjusted at the beginning of each fiscal year, depending on the size of the new budget. For example, if the operating budget grew to $110,000,000 in the following year, the reserve would have to be increased to $22,000,000 (20% of $110,000,000).
Special Revenue Funds
Reserve levels are established as appropriate for the specific fund. Reserve levels for the Prop A, Prop C, and Gas Tax funds will be maintained at the same levels as the General Fund; while the other special revenue funds will maintain reserves as appropriate and or according to grantor requirements.
Debt Service Reserve Funds
Reserve levels will be established as prescribed by the bond covenants adopted at the time of issuance of debt.
-2- We will maintain a balanced operating budget for all governmental funds with recurring revenues equal to or greater than recurring expenditures. Appropriations of available fund balance will only be permitted for "one-time" non-recurring expenditures.
General Fund
This policy requires that in any given fiscal year we do not budget recurring appropriations in excess of the revenue we expect to receive in the same year. This "pay as you go" approach mandates that any increase in expenditures, decreases in revenues, or combination of the two that would result in a budget imbalance will require cost cutting and/or revenue enhancement, rather than spending unappropriated surpluses or designated reserves to support ongoing operations. Cost cutting measures may include reductions in staff (either through eliminating vacant positions, attrition, hiring freezes, or actual lay-offs), or reductions in expenditures for materials, services, and supplies. Expenditure reductions may very well result in reduced service levels.
Revenue enhancement would generally be in the form of new or increased taxes and fees. Any year-end operating surpluses will revert to unappropriated balances for use in maintaining policy-set reserve levels, and the remaining balances will be available for one-time carry-over expenditures, including capital improvement projects, or limited term expenditures.
Budget Stabilization Fund
In order to better deal with budget challenges that may arise, a Budget Stabilization Fund has been established. At City Council direction, annual budget savings at the end of the fiscal year may be placed into this stabilization fund. This fund is designed as a safety valve to help mitigate short-term budget deficits.
PERS Stabilization Fund
Due to the volatility of PERS retirement rates, a PERS Stabilization Fund has been established to address future rate increases. The PERS Stabilization Fund is funded by budgeting PERS rates in excess of the actual PERS rates to prepare for future increases. The budgetary PERS rates will never fall below the normal cost of the PERS retirement plan. This fund will assist in smoothing the impact of fluctuating PERS rates.
Utility Users Tax (UUT) & In-Lieu Tax (ILT) Set Aside Account
These funds relate to UUT and ILT revenues, in addition to the related interest earnings on these amounts, generated from electric rates which are projected to decrease in the future. Traditionally, at City Council direction, these revenues have been used for one-time projects. As a result of recent budget challenges, these revenues are also used to assist in balancing the budget.
Pension Obligation Bond (POB)
During fiscal year 2003-2004, the City established a $10 million Pension Obligation Bond reserve. The POB paid the City�s Public Employees Retirement System (PERS) Police and Fire Unfunded Accrued Actuarial Liability (UAAL) as of the issuance date of the POB. The result of the transaction reduced the City�s average annual pension costs by approximately $520,000. The POB reserve will serve to mitigate the future risk of rising interest rates. Interest associated with the $10 million will be credited to the POB reserve and will increase as interest rates rise. The City also maintains the flexibility to use the $10 million reserve fund to prepay the variable rate POB every 30 days based on City Council direction.
Infrastructure Replacement Reserve
To address citywide infrastructure needs, $2 million of non-recurring General Fund monies have been placed in an Infrastructure Replacement Reserve in fiscal year 2004-05. The goal is to fund $1 million per year out of excess budget savings if available.
Special Revenue Funds
In the Special Revenue Funds, (Prop A* and Prop C Transportation*, Air Quality Management District, Housing Vouchers, Supplemental Law Enforcement Services, Community Development Block Grant, Drug Asset Forfeiture, State Gas Tax*, Disaster Relief, Public Improvement (Developer Impact Fees), Home Program, Street Lighting, and Youth Endowment Services). We recommend formal adoption of our current balanced budget policy, as long as it does not interfere with legal or grantor requirements. Balances in these funds are either committed to approved projects or are to be applied to projects or programs within Federal, State, or County guidelines. In some cases, the funds could be used to meet some of the needs related to our capital improvement program. As recommended above, the funds noted by * have 15% working capital, and 5% emergency reserves recommended.
Debt Service Funds
The resources of the Debt Service Funds (Golden State, City Centre, West Olive, South San Fernando, Public Financing Authority, and Parking Authority) are legally designated for, and restricted to, payment of long-term debt. Debt Service Reserve amounts will be dictated by the bond indenture.
- 3 -
We will assume that normal revenue inflation and/or growth will go to pay normal inflation expenditures. In no event will normal expenditure increases be approved which exceed normal revenue inflation and/or growth. Any new or expanded programs will be required to identify new funding sources and/or off-setting reductions in expenditures in other programs.
Normal revenue inflation and/or growth, increased amounts from existing sources, may not always increase at a rate equal to or faster than the expenditures/expenses they support. As a result, the City Council has directed staff to avoid using such revenue as start-up revenue for new projects or programs that have ongoing costs. The City Council has stated that increases in service levels should be supported by new revenue sources or reallocation of existing resources. If normal revenue inflation and/or growth does not keep up with expenditure/expense inflation, we will decrease expenditures/expenses or seek new revenue sources. If long-term revenues grow at a rate faster than expenditure/expense inflation, the City Council can consider expanding service levels accordingly or reducing tax rates and fees under their jurisdiction.
- 4 -
We will require that all Enterprise Funds have revenues (customer charges, interest income, and all other income) sufficient to meet all cash operating expenses, depreciation expense, and prescribed cash reserves per financial policies as recommended for each enterprise activity. Additionally, each enterprise fund shall maintain debt service coverage requirements set forth in any related bond covenants.
The City's Enterprise Funds (Water Reclamation & Sewer; Golf; Electric, Water, and Refuse Collection & Disposal) will be supported solely by revenue derived from the enterprise's operations and its interest earned on cash deposits and investments. None of these funds will be supported or subsidized by the City's General Fund. However, each Enterprise Fund will be required to reimburse the General Fund, and/or other applicable funds, for the full cost of general government support services provided to the Enterprise Fund (such as, but not limited to, computer support, accounting, legal, human resources, records management and general administration).
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We will require that each Internal Service Fund, which includes vehicles, equipment, and building maintenance, have revenues, (City user charges, interest income, and all other income) sufficient to meet all cash operating expenses, and depreciation expenses. The related revenues should also be sufficient to maintain cash reserves which provide sufficient cash to replace vehicles and equipment in accordance with replacement policies.
The City uses Internal Service Funds as an internal accounting and budget mechanism to equitably distribute vehicle and equipment replacement and maintenance costs among City user departments and to help assure that adequate funding is on hand to replace/maintain the Fund's assets and pay liabilities. The City currently maintains a 1) Vehicle and Equipment Replacement Fund; 2) Office Equipment Replacement Fund; 3) Municipal Buildings Maintenance Fund; 4) Communication Equipment Replacement Fund; and, 5) Computer Equipment Replacement Fund. These funds (with the exception of the Municipal Buildings Maintenance Fund) charge rates to the City user departments which are generally sufficient to cover depreciation, operations and maintenance costs, and asset replacement.
Vehicle and Equipment Internal Service Funds
When a new asset is added to the vehicle fleet or equipment stock, the user department must budget for the full cost of the asset and transfer the funds to the applicable Internal Service Fund for acquisition purposes. The user department will then begin paying a monthly rate or charge for the use, maintenance, and eventual replacement of that asset. As a result, a newly added asset can have a significant recurring budgetary impact.
Municipal Buildings Maintenance Fund
The Municipal Buildings Maintenance Fund receives $950,000 from the General Fund plus 5% of sales tax receipts to maintain the general governmental facilities including parks. Available funds can be used for new building projects as requested through the annual budget process.
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We will maintain appropriate reserves in the Risk Management Self-Insurance Fund and the Workers' Compensation Self-Insurance Fund to meet statutory requirements and actuarially projected needs.
General Liability and Workers' Compensation reserves are maintained in a sufficient manner to meet actuarially computed self-insurance liabilities, membership requirements for self-insurance pools and our statutory requirements for Workers' Compensation.
In order to meet the requirements of this proposed policy, the City must maintain sufficient cash reserves to meet the demands of the self-insured retention levels as required by self-insurance pools and the State. In addition, an actuary shall make an analysis every two years of the self-insurance cash reserves in light of actuarially determined fund liabilities for current and future claims. The insurance rates charged to City departments are adjusted up or down based on the surplus or deficiency of cash reserves as determined by the actuary.
If the reserves drop below levels prescribed by this policy and cannot be readily replenished through increased user rates, then staff will bring the matter to the City Council's attention. In discussing the reserve inadequacy with the City Council, staff will make every effort to give the City Council viable options in choosing the best course of corrective action.
The General Liability Insurance Fund currently appropriates $100,000 a year for Accidental Death and Dismemberment and $500,000 for earthquake insurance in-lieu of paying insurance premiums. The $100,000 functions as a revolving fund and will be replenished if all or a portion is used. The $500,000 per year for earthquake insurance will be set aside until $10 million is accumulated for major disasters to City facilities.
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We will maintain a general operating reserve which will support operations for each Enterprise Fund during times of financial emergencies. The amount of the general operating reserves will be determined based on a risk assessment of each Enterprise Fund.
The City Council has directed staff to ensure that each Enterprise Fund maintains sufficient reserves to provide enough funds to allow the City Council to react and adopt a financial plan which can adequately deal with a variety of adverse economic circumstances which may materialize. A common �general operating� reserve standard for Enterprise Fund operations that bond rating agencies and bond insurance companies look for ranges anywhere from 30 to 60 days. Applicable cash capital improvement and equipment replacement reserves are also maintained in each Enterprise Fund.
Because of unforeseen circumstances, if the working capital or capital improvement reserves drop below levels prescribed by this policy, then staff will present the City Council with various options for curing the deficiency (ies).
Current general operating reserve requirements for the Enterprise funds are as follows:
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We will maintain other Enterprise Fund reserves such as debt reduction and capital funding reserves, fleet replacement reserves, and general plant reserves (in addition to the general operating reserve and other reserves) as necessary and prudent for the operation of each specific Enterprise Fund. Such reserves will be reviewed annually as necessary during the budget process, or at least every 2 years.
The actual reserves listed above will be determined on a fund by fund basis. These reserves are intended to reduce outstanding debt and, fund major capital projects, fund ongoing fleet replacements, and provide for replacement, improvement, modernization, and or expansion of the general plant infrastructure and facilities that would generally be of an unanticipated nature and that could not readily be funded by other sources.
Because of unforeseen circumstances, if any of the reserves listed above drop below levels prescribed by this policy, then staff will present the City Council with various options for replenishment.
Current debt reduction and capital reserves, fleet replacement, and general operation reserve requirements for the Enterprise Funds are as follows:
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We will maintain a long-range fiscal perspective through the use of an annual operating budget, a five-year capital improvement plan, and a five-year financial forecast.
A long-range financial perspective is essential to provide a more comprehensive and thorough overview of the City�s long-term financial needs. Components of this plan include the use of an annual operating budget and a five-year financial forecast with revenue and expenditure projections. The approach will be supported by staff�s use of historical data, current economic trends and identification of future financial events. In addition, a five year Capital Improvement Program will be maintained and annually updated to help the City Council better understand the potential long-term funding sources and capital improvement needs, as well as operational impacts related to the capital improvement projects.
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We will use long-term financing methods or cash accumulated in excess of policy requirements for major capital improvements and acquisitions. These improvements will be planned via the annual capital improvement plan process.
The traditional method for a local government to obtain funds for Capital Improvements has been to use accumulated resources or to issue long-term debt instruments such as municipal bonds, which mature 20 to 30 years from the date of issuance. In general, a municipal bond issue's maturity should approximate the useful life of the asset being financed.
Major long-term capital improvement needs should be financed, as much as possible, with long-term debt. Short-term capital improvements needs should be funded with accumulated cash balances or if needed short-term debt. The City Council has also stated that it is acceptable to use cash which has been accumulated in excess of policy requirements to pay for either long-term and/or short-term capital improvements. The actual use of debt financing or accumulated cash for such projects will be determined by the City Council during the annual budget process. It is the City's practice to use whatever financing mechanism(s) that best meets the goals and objectives of the applicable capital replacement or acquisition.
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We will issue bonds or incur other forms of indebtedness only for appropriate purposes and only if the debt service does not affect the City�s ability to meet future operating, capital and reserve requirements.
Each debt issuance must accomplish an appropriate purpose. Potential reasons for debt financing include:
The City�s ability to afford the debt must always be measured both in terms of the requirements of its various bond indentures and its continued ability to meet all of its on-going operating, capital and reserve requirements.
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We will require each budget appropriation request to include a fiscal impact analysis.
Throughout any budget year there are many items brought before the City Council for consideration. The decisions it makes on these items often require the expenditure of funds. If the decision results in approval of funds already appropriated in the budget, the fiscal impact is already known. But, if the decision includes spending more than anticipated in the budget or requires a whole new appropriation, the fiscal impact needs to be thoroughly analyzed. To this end, the City Council now requires that all requests to Council for new or supplemental budget appropriations must be accompanied by a "Fiscal Impact Statement." This should include:
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We will comply with all the requirements of "Generally Accepted Accounting Principles�.
This policy is self-explanatory. We sometimes hear stories of how public or private entities use "creative accounting" to paint a more positive picture than might really exist. As per City Council direction, staff will always conduct the City's financial affairs and maintain records in accordance with Generally Accepted Accounting Principles as established by the Government Accounting Standards Board. This process should help in maintaining accuracy and public confidence in the City's financial reporting systems.
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We will strive to pay competitive market level compensation to our employees.
In determining "market level" compensation the City takes into consideration: 1) The general state of the economy; 2) the cost-of-living, measured by the Los Angeles Riverside � Orange County Urban Wage Earners and Clerical Workers Consumer Price Index; 3) the City's ability to pay; and, 4) an evaluation of the "survey average" from the "standard comparison cities" as negotiated with the City�s labor associations. .
In using a market survey of similar positions in comparable cities, the City is committed to paying the simple average of the surveyed cities. Our employees will not lead the group nor will they ever be last, but they will always be competitive. Fair compensation helps to assure not only quality candidates for Burbank jobs, but also provides stability for the City's labor relations environment. The logical consequence of this philosophy is that when resources are scarce, the City will continue to pay competitive wages. However, the City may lag behind the survey average or have to employ fewer people or reduce other line item expenses. .
In addition, the City follows a philosophy of "pay for performance." The concept of "pay or performance" versus a system that pays more simply for years of service is one that is generally stressed in the City's labor agreements. It is the intent of this system to financially reward those who perform at significantly greater levels than others. The combination of the dual commitment to use "market level" compensation and "pay for performance" helps assure a continuation of high-quality employees and a rational framework for compensation.
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