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HomeMy WebLinkAbout2019-08-27; City Council; ; Consideration of City Council Policy No. 87 - General Fund Surplus Policy@ CITY COUNCIL Staff Report Meeting Date: August 27, 2019 Mayor and City Council To: From: Scott Chadwick, City Manager CA Review <,VU Staff Contact: Laura Rocha, Deputy City Manager, Administrative Services laura.rocha@carlsbadca.gov or 760-602-2415 Subject: Consideration of City Council Policy No. 87 -General Fund Surplus Policy Recommended Action Adopt a Resolution approving City Council Policy No. 87 to establish a General Fund Surplus Policy. Executive Summary At the June 18, 2019 City Council meeting, staff presented to City Council a General Fund Surplus Policy No. 87 and a revision to the General Fund Reserve Policy No. 74 for City Council consideration. At that time, the City Council did not approve the General Fund Surplus Policy No. 87 and adopted the General Fund Reserve Policy No. 74 presented by staff with revisions requested by the City Council (CC Reso No. 2019-099). Staff is bringing back a new proposed General Fund Surplus Policy No. 87 for City Council consideration and the revised General Fund Reserve Policy No. 74, based on City Council actions at the June 18, 2019 City Council meeting for review. Discussion General Fund Surplus Policy -City Council Policy No. 87 Due to various factors including economic expansion, prudent operations, or changes to various projects and programs, the City of Carlsbad (city) may end a fiscal year with a surplus of revenues over expenditures, encumbrances and commitments. Surplus funds are those funds that result after closing the city's accounting records as defined by the results of the annual fiscal year audit. A General Fund surplus policy is a prudent governance practice to support other financial management policies allowing the city to meet its reserve policies and avoid or reduce its long-term liabilities, such as pension debt. The General Fund Surplus Policy No. 87 (Policy No. 87) sets guidelines for the appropriation of surplus funds resulting from General Fund actual revenues exceeding total actual expenditures, plus any unspent and unencumbered expenditure budget for a given year. Policy No. 87 commits the city to first use all surplus funds generated to meet reserve policies and the avoidance or reduction of long term liabilities. For City Council reference, the final revised August 27, 2019 Item #11 Page 1 of 8 General Fund Reserve Policy No. 74 is attached (Exhibit 2). In addition, the city will not use year-end surplus funds to fund ongoing operations unless approved by City Council. Please see Attachment A to the Resolution titled City Council Policy No. 87 -General Fund Surplus Policy. Fiscal Analysis There is no immediate fiscal impact to adopting and reviewing these financial management policies. Institutionalizing good financial management practices promotes stability and continuity. They define a shared understanding of how an organization will develop its financial practices and manage its resources to provide the best value to the community. Next Steps The new and revised financial management policies will be implemented by staff. Environmental Evaluation (CEQA) Pursuant to Public Resources Code Section 21065, receiving a report does not constitute a "project" within the meaning of CEQA in that it has no potential to cause either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment, and therefore does not require environmental review. Public Notification and Outreach This item was noticed in accordance with the Ralph M. Brown Act and was available for public viewing and review at least 72 hours prior to the scheduled meeting date. Exhibits 1. City Council Resolution 2. Council Policy No. 74 Dated 6/18/2019 August 27, 2019 Item #11 Page 2 of 8 RESOLUTION NO. 2019-153 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA, APPROVING CITY COUNCIL POLICY NO. 87 TO ESTABLISH A GENERAL FUND SURPLUS POLICY. WHEREAS, the City Council of the City of Carlsbad, California believes financial policies are central to a strategic, long-term approach to financial management; WHEREAS, the City Council desires to establish a General Fund surplus policy to support its other financial management policies allowing the city to meet its reserve and pension funding policies. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as follows: 1. That the above recitations are true and correct. 2. That the City Council hereby approves the new City Council Policy No. 87 titled General Fund Surplus Policy as shown in Attachment A. 3. PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of Carlsbad on the 27th day of August 2019, by the following vote, to wit: AYES: Hall, Bhat-Patel, Blackburn, Schumacher, Hamilton. NAYS: None. ABSENT: None. MATT HALL, Mayor -{c/BARBARA ENGLESON, City Clerk (SEAL) 11111111111111/////l ~,,~o~''f CAii}''''~ §" .,.ft~ ~~---··· ··• .. \J~~ /J...../ \~ % (o(~)!»J ~ ' .. ~'f~. ~ ~ •, ..... ,n,•~ .. • ~ ~"'•· ' .... ~ ¾ '"~, ·············~,"r.# ~//,,/,./FOf' ~,,,,~ I/IJ//////11111\\\\I August 27, 2019 Item #11 Page 3 of 8 {city of Carlsbad Council Policy Statement Category: FINANCIAL MANAGEMENT POLICIES Specific Subject: General Fund Surplus Policy /;?@p PURPOSE: ,:/ii/fl',, Policy No. Date Issued: Effective Date: Resolution No. Cancellation Date: Supersedes No. 87 08-27-2019 08-27-2019 2019- N/A N/A ~;/,:-~,-,i{/%~ ,,:,; '¼'/~'·?,;0.?,. To establish a City Council policy for the appropriation of ~u rplus fu~<:ls._resulting from General Fund ·, ';(,e7 ~/~,;/, actual revenues exceeding total actual expenditures,-P,Jus any unspenfahc;i unencumbered , _,,,,,-: > ~: ....... expenditure budget for a given fiscal year. , .· c$',,,,' <)}%,, __ ~t:~1/ ;:f.4,-.. :,f« ?' ij$g,-. BACKGROUND.. , ~;. /1/,0·. ,, /1'/4 '❖//~ ,fm?'. ,;.;-;, •,;1~~,// , i01/. ,#1/,k . ·,){/,: .,,»;,/ .,;z,,1/,?,'.·✓ , ·¾·0 Due to various factors including econor.ti ic expansion, prticlen.,t;ioheFations, or changet fc various ,;.1h-~;-',/,',., ,·,;~J( :X. -y/ .,.,. projects and programs, the City of Carlsoadt,(~ity) may end a~:fjscal year with a surplus of revenues over ·,,••t>'.,'•.,.;;z,;z,, . '•::S:0,;;;-. expenditures, encumbrances and comnii~JV,en'(sj ?,U,[plus funds•'ici1;f)hose funds that result after closing the city's accounting records as d~fit:ted t:>9\ae:·r,esults of fttf::annual fiscal year audit. C',;;f" '"-:c~_,@> . -.;~,. It is the intent of the cit{tolifU:J11 s.u.rplus f:~lis·:gener:t[@?«ineet. ::ttrve policies, and the / 1/~;i:;,..._.. , ·.-7,.-:.-:;~ • /,1 ,f%;// ;~::.:,,--.~,:,:.;:,;y27 avoidance or reduction of long term~liabilities. Tn~,P_ -i~~will not·'.us,'e;Y,-ear-end surplus funds to fund ongoing operations ~~rl~s-otherwisg~~pproved bt clt{council. -:-:/ J; ":%?> -,z~.,...· .~;:,;, .,.,~1p~'.;?,-.✓-:f{~f ~/, . :(:1/,(///, .;,;i%;•,:,o·,, <?.'«: From tim;;4?,i!JW,~l rt. city -~~,,~:~:~fJti!B:a\1(\~Bw ~en[i~}he City Council the use of surplus funds consisteritWith'tlie',us·e·s;,identifiec;I, iD this polici ~,,-· :=·~ ,,.«~:,,:z..-,..:,-·,07~;?.,• ·,/>.'/-,;~~ '-~·f//~f;;; -./,/},-· :,.,.,.,:.'/ ·'h1/.,%·/,z . ( -•V''½" ··? -',1/f/.1_,. rz;;/f~;,.-'" . ·,;;~:?> -~1}(~);_;, '✓ .-?1/,~ ... ; //7,,<,;~, ✓.,,~~::.Jt· -'.:_, /,1, ... 5; -. >:/ Pollcv:t,;,;;-,,,., ·~;fl'", ";'¼;.-~~~'~ ·~M~ o~~ ~/~ ..::(,.,.~}, ··:;;,;?I";, . ~/%@:--.. ,,,z1,% ,,;,,:,;,:, c:;;; ,_ ·•<i0¼'• . ,;.;:;;;;,, :,Nt,, For the purp6S'es·of this policy, t,l)e,.term "surplus" refers to any actual revenues less actual "{;·~1~ ½;'~ expenditures, irl"~'giyen fiscal ye.fr;it;>lus any unspent and unencumbered expenditure budget. To achieve the purpo°lt6fthis policy1the city will take the following actions: ·..-;~~~/.. } ½.,, 1 "-~:~~~1;?❖ . /4, %? ;,f 1. The city will use surplu?funqsio replenish any General Fund reserve deficiencies, up to the <( ,,<,-:7>' minimum level as set forth'in the City Council General Fund Reserve Policy No. 74 and then any pension liability deficiencies, as defined in City Council Policy No. 86, Pension Funding Policy. 2. If the reserve and pension funding policies have been met as stated above, the city manager is authorized to approve the carry forward of any unspent and unencumbered budget for a particular item equal to or less than $100,000 into the following fiscal year. These items will be one-time expenditures and not for on-going services, programs or personnel. Page 1 of2 Attachment A August 27, 2019 Item #11 Page 4 of 8 Policy No. 87 3. Any remaining surplus funds in excess of reserve and pension liability deficiencies, and items equal to or greater than $100,000, as stated above, will be brought forward for City Council approval. 4. One-time funds, such as grant proceeds, will be used for one-time expenditures; therefore, the City Council may not use one-time revenues and surplus funds in a way that creates new on-going expenditure requirements, unless the City Council can demonstrate that adequate resources exist to support the on-going expenditure requirements. 5. After the close of the fiscal year, in preparation of the annual financial audit, city staff will demonstrate accountability and transparency by communicating compliance with the General Fund Reserve and Pension Funding Policy requirements in order for City Council to approve the staff recommended use of surplus funds. Page 2 of2 August 27, 2019 Item #11 Page 5 of 8 {city of Carlsbad Council Policy Statement Category: Specific Subject: General Fund Reserve Policy PURPOSE: Policy No. Date Issued: Effective Date: Resolution No. Cancellation Date: Supersedes No. 74 EXHIBIT 2 74 6/18/2019 6/18/2019 2019-099 N/A 11-30-2010 The purpose of this policy is to establish a target minimum level of designated reserves in the General Fund to: • Reduce the risk of financial impacts resulting from a natural disaster or other catastrophic events; • Respond to the challenges of a changing economic environment, including prolonged downturns in the local, state, or national economy; and • Demonstrate continued prudent fiscal management and creditworthiness. ' This policy also sets forth guidelines for establishing a plan to replenish reserve deficiencies to include both how such replenishment is to be funded, and the period over which the replenishment is to occur. BACKGROUND: A key attribute of a financially stable organization is appropriate reserves. Strong reserves, often referred to as fund balances in governmental funds, position an organization to weather significant economic downturns more effectively; manage the consequences of outside agency actions that may result in revenue reductions; and address unexpected emergencies, such as natural disasters, catastrophic events caused by human activity, or excessive liabilities or legal judgments against the organization. A reserve policy serves as policy framework to deploy city resources to meet the city's financial commitments and address unexpected future events in a fiscally prudent manner. The Government Finance Officers Association (GFOA), an international organization that promotes the professional management of governments for public interest, recommends maintaining at least two months of operating expenditures or 15% reserves. According to the GFOA, the methodology used to create the reserves depends on the circumstances ofthe individual organizations. Reserves are typically assessed based on a city's unique circumstances or risk levels, and operating expenditures are generally the basis for such reserve . The General Fund is the main operating fund that pays for general services provided by the city, such as public safety, parks, and library services. The General Fund accounts for all general revenues of the city not specifically levied or collected for other city funds, and for expenditures related to the delivery of the city's general services. Page 1 of 3 August 27, 2019 Item #11 Page 6 of 8 Policy No. 74 The city endeavors to maintain adequate reserves for its General Fund as a matter of fiscal prudence and sound financial management. Establishing and maintaining General Fund reserves will guide the city in: • Planning for contingencies and unexpected events; • Maintaining good standing with credit rating agencies; • Ensuring cash availability when revenue is unavailable; and • Deciding when to use reserves and how to replenish reserves if they have been spent. As a general budget principle concerning use of reserves, the City Council decides whether or not to appropriate funds from reserves. Reserve funds will not be spent for any function other than the specific purpose of the reserve account from which they are drawn without specific direction in the annual budget; or by a separate City Council action. Per current Governmental Accounting Standards No. 54 (GASB 54), issued by the Governmental Accounting Standards Board, fund balances are divided into five classifications in the financial statements: Classification Nature of Restriction Non-Spendable Cannot be readily converted to cash or cannot be legally spent Externally imposed (by granting agencies, governmental Restricted entities, etc.) restrictions on spending City Council formally-imposed (by resolution or other action) Committed restrictions on spending Funds reserved by City Council direction for designated Assigned purposes Unassigned Residual balance not classified in any of the above categories These five classifications are applicable only to governmental funds, which includes the General Fund, and are intended to identify the extent to which fund balance (or a reserve) is constrained by special restrictions, if any. The city commits to preparing financial reports which accurately categorize fund balance in compliance with GASB 54 . Fund balance levels are a crucial consideration in long-term financial planning. POLICY: For purposes of this policy, the term "reserve" refers to any unassigned fund balance in compliance with GASB 54. It is the policy of the City of Carlsbad to maintain reserves for unforeseen emergencies or catastrophic impacts, and for significant changes to the economic environment. The city commits to maintaining General Fund reserves at a target of 40% of General Fund annual operating expenditures. The total reserve level will be calculated using the prior fiscal years adopted General Fund budgeted expenditures. Reserves will be evaluated annually in conjunction with the development of the city's annual operating budget process. Staff will report to City Council annually on the status of the reserve levels relative to this policy. Page 2 of 3 August 27, 2019 Item #11 Page 7 of 8 Policy No. 74 At the discretion of the City Council, reserve levels in excess of the 40% target requirement, may be used for one-time opportunity cost purposes. For example, one-time expenditures resulting in future efficiencies, infrastructure, special projects, or key economic development opportunities that provide savings or efficiencies where no funding source otherwise exists. These types of one-time opportunity costs may only be authorized by formal City Council action where findings have been made as to what constitutes the savings or how efficiencies will be achieved. In the event the reserve level is reduced below the amount established by this policy, the City Manager or Deputy City Manager of Administrative Services shall promptly prepare a plan as conditions warrant to replenish the required reserve level. The plan for replenishing any reserve deficiencies will include how such replenishment is to be funded and the period over which the replenishment is to occur. Page 3 of 3 August 27, 2019 Item #11 Page 8 of 8 GENERAL FUND SURPLUS POLICY Laura Rocha Deputy City Manager, Administrative Services Aug. 27, 2019 Item #11 Agenda To consider City Council Policy No. 87, General Fund Surplus Policy 2 General Fund Surplus Policy Purpose of Policy: •To establish the use of surplus funds resulting from General Fund actual revenues exceeding total actual expenditures, plus any unspent and unencumbered expenditure budget for a given fiscal year. 3 General Fund Surplus Policy Policy actions: –City will use surplus funds first to replenish any GF reserve deficiencies defined in City Council Policy No. 74 and then any pension liability deficiencies, as defined in City Council Policy No. 86. –City will not use year-end surplus funds to fund ongoing operations unless approved by City Council. –City manager is authorized to approve carry forwards of any unspent and unencumbered budget for items equal to or less than $100,000 into the following year. 4 General Fund Surplus Policy Policy actions (cont.) •City Manager may recommend the use of surplus for City Council approval, to address unforeseen and non-recurring circumstances of fiscal concern or other matters as deemed necessary. •City will demonstrate accountability and transparency by communicating and reporting after the close of each fiscal year all information necessary for assessing city’s progress toward meeting policy objectives. 5 Recommended Action •Adopt a Resolution approving City Council Policy No. 87 to establish a General Fund Surplus Policy. 6 Thank you 7 GENERAL FUND SURPLUS* LAST FIVE FISCAL YEARS FY 2013-14 FY 2014-15 FY 2015-16 FY 2016-17(1)FY 2017-18(2) Budgeted Surplus $ 1,337,495 $ 4,344,380 $ 2,467,351 $ 4,376,374 $ 7,739,840 Actual Surplus 6,660,623 17,357,258 14,894,568 (22,036,326)7,668,897 Difference $ 5,323,128 $ 13,012,878 $ 12,427,217 $ (26,412,700)$ (70,943) *Surplus is calculated on a modified accrual basis for comparison purposes only. (1) Includes a transfer of $10.5M to fund Fire Station No. 2 CIP project and a payment of $14.8M of golf course bonds. (2) Includes additional CalPERS payments of $11M.