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HomeMy WebLinkAbout2019-06-18; Council Policy No. 74 - General Fund Reserve Guidelines Page 1 of 3 Council Policy Statement Category: Specific Subject: General Fund Reserve Policy PURPOSE: 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 of the 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. Policy No. 74 Date Issued: 6/18/2019 Effective Date: 6/18/2019 Resolution No. 2019-099 Cancellation Date: N/A Supersedes No. 74 11-30-2010 Policy No. 74 Page 2 of 3 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 Restricted Externally imposed (by granting agencies, governmental entities, etc.) restrictions on spending Committed City Council formally-imposed (by resolution or other action) restrictions on spending Assigned Funds reserved by City Council direction for designated 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. Policy No. 74 Page 3 of 3 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.