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HomeMy WebLinkAboutReso 46-21 Revised Internal Service Funds Reserve PolicyRESOLUTION NO. 46-21 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF MORRO BAY, CALIFORNIA, RESCINDING RESOLUTION NO. 85-18 IN ITS ENTIRETY, AND RE-ESTABLISHING AN INTERNAL SERVICE FUNDS RESERVE POLICY THE CITY COUNCIL City of Morro Bay, California WHEREAS, on October 23, 2018, the City Council adopted Resolution No. 85-18 establishing various reserve policies, including the Internal Service Funds Reserve Policy, which demonstrates the City's commitment to fiscal responsibility and prudent management and is consistent with Government Accounting Standards; and WHEREAS, on May 26, 2021, at the Budget Study Session the City Council appointed an ad -hoc committee of Mayor John Heading and Councilmember Robert Davis to review this and other financial policies to ensure the polices are up to date, aligned with current conditions, and reflect best practices; and WHEREAS, the ad -hoc committee of Mayor Heading and Councilmember Davis reviewed this policy and believe a revision is warranted given the lessons learned by other communities as it relates to the heightened need to protect against cybersecurity threats the continuation of escalating operating costs such as pension costs and pay to attract and retain dedicated city personnel; and WHEREAS, the ad -hoc committee of Mayor Heading and Councilmember Davis recommend that once the City s capital replacement needs are better understood that a policy concerning appropriate accumulation levels return to the Council for consideration; and WHEREAS, the ad -hoc committee of Mayor Heading and Councilmember Davis recommend a reserve level for the Information Technology Fund that would allow the city to implement additional cybersecurity measures as needed; and WHEREAS, staff recommends the City Council rescind Resolution No. 85-18 and adopt separate resolutions for each of its financial policies; and NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Morro Bay, California: 1. Resolution No. 85-18 is hereby rescinded; and 2. The City Council wishes to revise the Information Technology Services Fund reserve policy to increase the level of minimum and target reserves as follows: This Information Technology Services Fund outlines minimum and target funding levels. Minimum Level: $200,000 Target Level: $300,000 3. The "Internal Service Funds Reserve Policy," as set forth in Exhibit A, attached hereto and incorporated herein, is hereby approved. PASSED AND ADOPTED, by the City Council of the City of Morro Bay, at a regular meeting thereof held on the 22' day of June 2021, by the following vote. AYES' Headding, Addis, Barton, Davis, Heller NOES. None ABSENT: None ABSTAIN: None JOHN ADDI G;-Mar-or ATTEST: DANA SWANSON, City Clerk EXHIBIT "A" CITY OF MORRO BAY INTERNAL SERVICE FUNDS RESERVES POLICY Policy Statement Internal Service Funds are established to provide centralized cost centers for shared expenses and services in order to efficiently track costs and manage resources. Costs are then allocated back to the operational programs based on usage to more accurately determine cost of services The City of Morro Bay's internal service funds include eight internal service/support funds* Information Technology, facility maintenance, vehicle replacement capital replacement, compensable leave and three equipment replacement funds, one each for the water, sewer and harbor enterprise funds. In addition, the City of Morro Bay (City) has one insurance internal service fund, Risk Management, which includes worker's compensation As each fund is accounted for as a separate entity, operational revenues less expenditures result in either a positive or negative fund balance at any given point in time — Internal Service Funds are similar to the separate checking and savings accounts a person may use for different purposes. At year end, each fund's net balance is represented at the "Fund Balance Reserve." The City Council sets legislative financial management policies, as recommended by staff and advisory committees. This Internal Service Fund Reserves Policy (Policy) is designed to establish guidelines to ensure fiscal stability for the City, accumulating funds and maintaining adequate reserves to repair and replace infrastructure, equipment and/or insurance needs that may be either planned or unexpected, and provides guidance to staff in the financial management of the City. Purpose A properly designed reserve policy is not only a financial best practice, but also sends a positive signal to constituents, investors, regulatory, and credit rating agencies that the City is committed to maintaining the long -run fiscal strength. Strong and transparent financial policies, including maintaining prudent reserves for emergencies, working capital, and capital improvements, are consistent with Government Accounting Standards and are important to the City as they help to: • Maintain the short-term and long term financial health of the City • Fund unanticipated expenditure contingencies • Ensure funds exist for unexpected and planned infrastructure, equipment and insurance needs • Ensure cash exists for the timely payment of bills • Act as a significant positive credit factor in bond ratings The intent of the Internal Service Funds Reserves is twofold: 1 To ensure sufficient resources exist in each internal service fund to pay for annual ongoing expenses while maintaining a reasonable reserve to fund replacement purchases (i e annual vehicle replacement)* and, 2 Establish a fund balance level for each fund that is reasonable and prevents the over - accumulation of resources beyond what is needed for normal operating needs plus any amount required for emergency or contingency needs. hold appropriate levels of reserves to support cash flow needs and minimize interfund loans, as well as maintain a reasonable fund balance for contingency purposes. Therefore, this policy will enumerate minimum fund balance levels for each Internal Service Fund based on specific fund -type metrics. This Policy will also address the, use, and replenishment of those types of unrestricted reserves. The Internal Service Funds Reserves will be accounted for within individual and specific funds designated for each reserve. Information Technology Services Fund Information Technology Services provide for the delivery of technology -based services throughout the City's operations, including maintenance of the City's information systems and infrastructure, program implementation, Internet, landline, and wireless communications systems, cloud -based technology, and support of all existing information technology as well as new technology initiatives. For technology oversight security, and efficiency, information technology costs are managed collectively and funded through a charge -back to the various funds and departments. At year end unspent funding flows into Unrestricted Net Position. Accumulated funds are held in the Information Technology Services Fund for working capital cash flow. Requests for use of the reserve are approved by Council through budget adoption or by a Council approved budget adjustment Resolution during the year. This Information Technology Services Fund outlines minimum and target funding levels. Minimum Level: $200,000 Target Level: $300,000 The target reserve level should allow for periodic upgrades and enhancements to the City's collection of information and communications technology, while also providing sufficient funds to meet annual operating costs Vehicle Replacement and Enterprise Fund Equipment Replacement Funds The Vehicle and Equipment Maintenance program provides for the maintenance, and servicing of the City's fleet and major equipment to ensure all vehicles and equipment comply with manufacturer's recommendations and safety requirements. The Vehicle Replacement Fund is for all General Fund -owned equipment such as the City's Police, Fire, Public Works, Recreation and pooled vehicles. The City has three equipment maintenance funds, one each for the enterprise funds of water, sewer and harbor Each individual enterprise fund supports their own equipment maintenance fund and those funds are restricted to the specific enterprise activity. To fund the program, vehicle & equipment replacement costs transfers into the funds are accounted for through the budget process. The enterprise fund operating revenue funds account for the enterprise fund equipment replacement funds while the General Fund is the primary funding source for the Vehicle Replacement Fund. Accumulated funds will be held in the Vehicle and Equipment Replacement Funds for working capital cash flow. At year end, unspent funding flows into Unrestricted Net Position. Requests for use of the reserve are approved by Council through budget adoption or by a Council approved budget adjustment resolution during the year. The Vehicle Replacement Fund, to be funded by the General Fund, minimum and target funding levels are as follows: Minimum Level: Equal to twenty percent of the replacement value of the general fund fleet. Target Level: Equal to thirty-three percent of the replacement value of the general fund fleet. The Enterprise Equipment Replacement Funds, to be funded by the specific enterprise fund, minimum and target funding levels are as follows: Minimum Level: Equal to twenty percent of the replacement value of the respective enterprise fund fleet. Target Level Equal to thirty-three percent of the replacement value of the respective enterprise fund fleet. The replacement value shall be calculated based on the most recently updated Vehicle Insurance Coverage list, or other internal tracking list developed by staff. The target reserve level will provide sufficient funds should there be a need for a one-time, larger than normal expenditure related to fleet services. State and Federal reimbursements for use of City -owned equipment, i.e., for fire strike -team support, shall be placed in the appropriate vehicle or equipment replacement fund to support future maintenance or replacement of those vehicles. Facility Maintenance Fund The Facility Maintenance Fund provides for maintenance and non -major repairs and building improvement services for all City -owned facilities that are not part of an enterprise fund (i e. water, sewer or harbor). Additionally, the fund supports the maintenance and repair needs of the tenants of City -leased buildings and properties as defined in the lease agreements. The program's funding has primarily been derived from rental income from City -owned leased facilities; however, the City is transitioning to funding the program through charge backs to departments based on building space usage. Accumulated net operations are held in the Facility Maintenance Fund for working capital cash flow. At year end, unspent funding flows into Unrestricted Net Position Requests for use of the reserve are approved by Council through budget adoption or by a Council approved budget adjustment resolution during the year. The Facility Maintenance Fund, to be funded by the General Fund, minimum and target funding levels are as follows: Minimum Level: $50,000 Target Level: $75,000 Given the age of the City's facilities, increased maintenance needs are anticipated. The target funding level of $75,000 represents a reasonable contingency for unanticipated maintenance issues which do not rise to the capital project level. Compensated Absences Reserves Under the Unassigned Fund Balance classification, the Compensated Absences Reserve is established to smooth expenditure fluctuations resulting from the payout of accrued leave to employees at service separation and distribution payouts. Use of the reserve occurs when total annual compensated absences payouts exceed budgeted salary funds. Large payouts decrease the compensated absences liability at year-end, thereby supporting the practice of utilizing the reserve as needed. Year-end reconciling allocations to and from the reserve are approved through Council's budget resolution adoption each fiscal year, with the liability and resulting reserve amounts determined as part of the year-end close process It is the City s policy to maintain Compensated Absences Reserve funds for the General Fund, Harbor Fund, Water Fund, and Sewer Fund Each fund shall be maintained separately within the minimum and target levels defined below. The Compensated Absences Reserve minimum and target funding levels are defined as follows: Minimum Level: Equal to thirty percent of the compensated absences liability that is established at year-end Target Level: Equal to thirty-five percent of the compensated absences liability that is established at year-end. City staff will report to Council on Fund Reserve levels in comparison to the minimum and target funding levels defined by this policy during the annual budget adoption process. Reserve funding in excess of one-third (thirty-three percent) of the liability will be available for the Council to allocate during the budget process Withdrawal & Replenishment of Accumulation Reserves The City will treat the minimum levels as practical reserve floors and allow reserves to increase or decrease within the minimum and target levels, as approved by City Council during the annual budget process. To the extent moneys in any of the above funds are above the target levels, the Council has the flexibility to direct staff to utilize those available funds to pay for other capital needs, other one-time expenditures or pay down liabilities as long as the funds legally support that purpose. Reserve levels below the minimum target reserves would leave the City exposed to operational risks. If the City draws down the reserves below the minimum targeted level then the City Manager, in conjunction with the Finance Department, will implement plans to return cash accumulation reserves to their minimum target levels within three years and subject to approval by City Council Reporting and Oversight The Internal Service Funds Reserve levels will be monitored during the fiscal year and reported in the quarterly financial reports, as provided by the Finance Department. Internal Service Fund Reserves minimum and target levels will be analyzed annually by the Finance Department and an over/under reserve determination shall be made in conjunction with year-end financial results. Those results will be reported to the City Council as part of the year-end financial report presentation and annual budget adoption process. If Internal Service Fund Reserves levels need adjustment due to new risk factors or changes in the industry, then information will be brought to the City Council as part of the year-end report or sooner, as determined by the Finance Department. This Policy will be reviewed during the City's annual budget process, and updated, if needed, as a result of material changes in the risk exposures or new conditions that required changes in this Policy.