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HomeMy WebLinkAboutReso 37-22 Adopting Revised City Reserve PolicyRESOLUTION NO. 37-22 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF MORRO BAY, CALIFORNIA TO RESCIND RESOLUTION NOs. 46-18, 45-21, 46-21, 48-21, AND 51-21, AND AMEND THE CITY RESERVE POLICY THE CITY COUNCIL City of Morro Bay, California WHEREAS, Resolution Nos. 46-18, 45-21, 46-21, 48-21, and 51-21, established various individual reserve policies for several City funds, with overlapping content; and WHEREAS, the City desires to simplify and consolidate reserve policies into one document for clarity, improved public information, and ease of policy implementation; and WHEREAS, enterprise fund reserves should be tracked within enterprise operating funds consistent with Government Finance Officers Association best practices and the reserve policy is updated to clarify this accounting change; and WHEREAS, the City Council goal of fiscal sustainability outlines an action item to address the City's unfunded pension liability which can be done in part by establishing and following a pension reserve policy and Council wishes to add the pension reserve policy to the City reserve policy; and WHEREAS, a Council ad -hoc committee reviewed in detail and updated City reserve policies in 2021 to ensure the polices are up to date, aligned with current conditions, and reflect best practice, and made significant updates at that time; and WHEREAS, minor revisions have been made to the policy to ensure there is consistency throughout; and WHEREAS, no other substantive changes are needed at this time; and NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Morro Bay, California. 1. Resolution Nos. 46-18, 45-21, 46-21, 48-21, and 51-21 are rescinded and replaced in their entirety with the passage of this Resolution; 2. The City Council approves the revised City of Morro Bay Reserve Policy as contained in Exhibit A herewith. PASSED AND ADOPTED by the City Council of the City of Morro Bay at a regular meeting thereof, held on the 26th day of April 2022, by the following vote: AYES. Headding, Addis, Barton, Ford, Heller NOES: None ABSENT: None ABSTAIN: None ATTEST: a. DANA SWANSON, City Clerk City Council Policy: City of Morro Bay Reserve Policy Last updated: April 2022 Policy Statement The City of Morro Bay (City) is a full -service city, providing essential services to over 10,000 residents related to public safety, planning, building, public works and recreation. In addition, the City has a vibrant tourism industry, attracting thousands of visitors annually, all of whom utilize City services in some fashion. As such, it is prudent for the City to establish and maintain reserve funds to mitigate a variety of emergency situations and ensure that core, essential services are maintained. The City first established reserve policies in the early 1990s and they are periodically reviewed and updated by Council resolution, most recently in 2021. The City Council has been proactive in setting aside emergency reserves and recognizing the need to utilize reserves during recessionary periods. The City Council sets legislative financial management policies, as recommended by staff and advisory committees. This City of Morro Bay Reserve Policy (Policy) is designed to establish guidelines to ensure fiscal stability of the City and provide guidance to staff in the financial management of City operations. Purpose A properly designed reserve policy is not only a financial best practice, but also sends a positive signal to ratepayers, investors, regulators, and credit rating agencies the City is committed to maintaining the long - run fiscal strength of the City. 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 Tong -term financial health of the City • Maintain stable user fees for customers and help ensure manageable rate increases • Fund unanticipated expenditure contingencies, including emergencies • Ensure funds exist for system and infrastructure improvements • Ensure cash exists for the timely payment of bills • Act as a significant positive credit factor in bond ratings Definitions Annual Comprehensive Financial Report (ACFR) —The ACFR is the City's audited comprehensive set of financial reporting documents that are prepared and presented to City Council each year. The report complies with Government Accounting Standards Board (GASB) and with Government Finance Officers Association (GFOA) best practices in reporting. The ACFR includes fund balances for governmental funds (categorized as nonspendable, restricted, committed, assigned, or unassigned per GASB 54 requirements), and includes net position reporting for proprietary (enterprise) and internal service funds. Compensated Absences Fund —The Compensated Absences Fund is funded by the General Fund and grouped with the General Fund in the audit. Under the General Fund Unassigned Fund Balance classification, the Compensated Absences Reserve is used 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, 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. Compensated absences for enterprise funds covered by the enterprise funds' reserve policies. Facility Maintenance Fund — The Facility Maintenance Fund is funded by the General Fund and grouped with the General Fund in the audit. It provides for maintenance and non -major repairs and building improvement services for all City -owned facilities that are not part of an enterprise fund (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. Accumulated net operations are held in the Facility Maintenance Fund for working capital cash flow. At year end, unspent funding flows into unassigned fund balance. Requests for use of the reserve are approved by Council through budget adoption or by a Council approved budget adjustment resolution during the year. General Fund Emergency Reserve ("GFER") - When referring to the GFER no other unassigned fund balances accounted for in the General Fund shall be included in this total except for any excess revenue over expenditures at the end of each fiscal year. This includes General Fund Vehicle Replacement Fund, Capital Maintenance, Project Accumulation, Facilities Maintenance, and the Compensable Leave Fund. While these unassigned fund balances could be reallocated by City Council action it is the policy of the City that those specialized reserves be excluded from reporting on the fund balance of the GFER. Harbor Fund — The Harbor Fund is administered by the Harbor Department, which is responsible for the management of the City's Tidelands Trust stewardship of the State -granted tidelands in Morro Bay, providing for waterfront property and lease management, public service, public safety, and municipal code enforcement on the waterfront, waters and beaches of Morro Bay. The Harbor Department is also responsible for the Harbor facilities maintenance, repair, capital improvement and replacement. Internal Service Funds — Internal Service Funds are established to provide centralized cost centers for shared expenses and services to efficiently track costs and manage resources. Costs are then allocated back to the operational programs based on usage to determine cost of services more accurately. The City of Morro Bay's primary internal service funds include the Information Technology and Risk Management Funds. As each fund is accounted for as a separate entity, operational revenues less expenditures result in either a positive or negative fund balance. At year end, each fund's balance is represented at the "Fund Balance Reserve." • Information Technology Fund - The Information Technology Fund provides technology -based services throughout the City's operations, including maintenance of the City's information systems and infrastructure, program implementation, internet, Iandline, 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. • Risk Management Fund - The City of Morro Bay's Risk Management Fund accounts for the City's self -insured liability program and for the purchase of various types of property and casualty insurance protection and fund damages not covered by that insurance. The funds are used to pay any liability losses, program operating costs, insurance premiums and insurance deductibles. Revenues for this fund are generated from assessments made to all City departments for their pro rata share of the total costs of the insurance administration program. The City of Morro Bay is a member of the California Joint Powers Insurance Authority (CJPIA), which is a pooled insurance program that allows the City of Morro Bay, as a small city, to receive insurance coverage at a reasonable cost. At year end, unspent funding flows into Unrestricted Net Position. Accumulated net operations are held in the Risk Management Fund for cash flow to help offset unexpected increases in insurance premiums, claims costs paid directly by the City, including personnel related claims and workers compensation expenses. Requests for use of the reserve are approved by Council through budget adoption or by a Council approved budget adjustment resolution during the year. U nrestricted-Undesignated Reserve - The reserve polices outlined below are classified as "Unrestricted- U ndesignated Reserves," representing funding that is being set aside to provide temporary financing for budget stabilization caused by fiscal downturns, unanticipated extraordinary expenditures related to a n atural disaster or calamity, or from an unexpected liability or funding decrease created by a legislative action. Those moneys may be used for any lawful purpose, as approved by the City Council, and have not been designated for specific capital and operating needs. The Reserve Policies outlined address the level, u se and replenishment of those types of unrestricted cash. Vehicle Replacement Fund - The Vehicle Replacement Fund is for all General Fund -owned equipment such as the City's Police, Fire, Public Works, Recreation and pooled vehicles. Each individual enterprise fund (Water, Sewer, and Harbor) supports their own equipment maintenance in the enterprise funds. Accumulated funds will be held in the Vehicle Replacement Fund. Requests for use of the reserve are approved by Council through budget adoption or by a Council approved budget adjustment resolution. Water & Sewer Funds —The Water & Sewer Funds are enterprise funds managed by the City of Morro Bay Public Works Department. The funds track the finances associated with the collection and treatment of wastewater for over 5,000 customers within City limits and delivery of potable water to a similar number of customers. Working Capital — Enterprise or proprietary funds are required to be reported on differently according to Governmental Accounting Standards (reporting is on net position rather than the various types of fund balance that are reported on for governmental funds). Therefore, working capital is the definition utilized and recommended by the Government Finance Officers Association (GFOA) to track reserve balances in e nterprise funds. Working capital is defined as current assets over current liabilities in enterprise funds. The GFOA recommends that cities adopt a target amount of working capital to maintain in each enterprise fund according to the characteristics of each fund. The policy below outlines that level for the City's three major enterprise funds, which include the Water, Sewer, and Harbor funds. City Reserve Policies Fund(s) General Fund Emergency Reserve Policy Pension Reserve Policy (General Fund, Water Fund, Sewer Fund, Harbor Fund) Facility Maintenance Reserve (General Fund) Reserve Level The reserve is intended to maintain or improve the City's credit ratings, ensure operating and maintenance costs will be paid in a timely manner, pay debt service obligations, invest in needed capital improvements and equipment replacement on a timely basis, minimize impacts from economic downturns, departmental expenditure freezes due to market volatility, other economic impacts on demands, contingencies, and regulatory changes. In calculating the minimum and target funding level, one-time expenditures and transfers out are not considered in the base for determining the operating expenditures. The minimum and target funding levels are intended to ensure sufficient resources to pay budgeted operating and maintenance expenses, recognizing the timing differences between payment of expenditures and receipt of revenues. Minimum and Target Levels equate to four months and six months of operating expenses, respectively. It also provides a source of funding to allow the City to operate during short term fluctuations in revenues and/or expenditures. • Minimum: 33% of on -going operating expenses in both the General Fund and Measures Q & E Fund (excluding transfers out) • Target: 50% of ongoing operating expenses in both the General Fund and Measures Q & E Fund (excluding transfers out) Upon completion of the prior year's ACFR, if the GFER balance meets the minimum target established in the policy herein (currently 33%), the General Fund will contribute 33% of the audited year's realized year-end General Fund surplus to address pension liabilities in the form of a contribution to a section 115 pension trust in the following year's budget cycle. In years where Enterprise Funds (Water, Sewer, and Harbor) have also met their minimum reserve policies for the prior fiscal year (defined by current assets over current liabilities), they shall also contribute their fair share toward a section 115 trust commensurate with the General Fund's contributions to date. Funds will be held in a restricted section 115 pension trust and only utilized for one of two purposes: • Saving toward a significant pay -down of the CaIPERS unfunded liability with the City's staff, financial advisors and ultimately Council deem that most advantageous in the future; or • In years of economic distress only, at the direction of City Council, contributing toward the City's ongoing employer's "Normal cost" portion of pension costs, if other funds are unavailable. Given the age of the City's facilities, increased maintenance needs are anticipated. The target funding level of $75,000 represents a contingency for unanticipated maintenance issues which do not rise to the capital project level. • Minimum: $50,000 • Target: $75,000 Tracking Fund 051 balance and Unassigned Fund balance in Fund 001 To be tracked in a restricted section 115 pension trust held by a third -party trust administrato r that will be selected by the City with Council approval Fund 052 fund balance (reported with General Fund in ACFR) Fund Vehicle Replacement Reserve (Gen eral Fund) Compensate d Absences Reserve (Gen eral Fund) Information Technology Reserve (Inte rnal Service Fund) Risk Management Fund Reserve (Inte rnal Service Fund) Harbor Fund (Enterprise Fund) Fund Reserve Level The reserve will provide sufficient funds should there be a need for a one-time, larger than normal expenditure related to fleet services. • Minimum: 20% of replacement value of General Fund fleet or of each Enterprise Fund's fleet based on the most recently updated Vehicle Insurance Coverage list, or other internal tracking list developed by staff. • Target: 30% of replacement value of General Fund fleet or of each Enterprise Fund's fleet based on the most recently updated Vehicle Insurance Coverage list, or other internal tracking list developed by staff. • The Compensated Absences Reserve is used to smooth expenditure fluctuations resulting from the payout of accrued leave to employees at service separation and distribution payouts • Minimum: 30% of compensated absences liability established at year-end. • Target: 35% of compensated absences liability established at year-end. The reserve 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. • Minimum: $200,000 • Target: $300,000 The reserve should ensure sufficient resources exist to purchase various types of property and casualty insurance protection for the City, including liability losses, program operating costs and insurance premiums and deductibles; and to support current and future liability claims as well as any catastrophic event. • Minimum: $700,000 • Target: $1,000,000 The reserve is intended to maintain or improve Harbor credit ratings, ensure operating and maintenance costs will be paid in a timely manner, pay debt service obligations, invest in needed capital improvements and equipment replacement and other uses on a timely basis. In addition, the Harbor Accumulation Fund Reserve will maintain sufficient cash accumulation to minimize user fee increases and departmental expenditure freezes due to market volatility, economic impacts on demands, contingencies, and regulatory changes. In calculating the minimum target funding level, one-time expenditures are not considered in the base for determining operating expenditures. The minimum target funding level is intended to ensure sufficient resources to pay budgeted operating and maintenance expenses, recognizing the timing differences between payment of expenditures and receipt of revenues. It also provides a source of funding to allow the Harbor Department to operate during short-term fluctuations in revenues and expenditures. • Minimum: 15% of annual operating expenses based on the most recent adopted budget. • Target: 25% of annual operating expenses based on the most recent adopted budget. Reserve Level Tracking Fund 050 fund balance (reported with General Fund in ACFR) Fund 005 fund balance (reported with General Fund in ACFR) Fund balance in Fund 450 Fund balance in Fund 430 Working capital in Fund 331, consistent with industry standards Tracking Water & Sewer Funds (Enterprise Fund) The Operating/Maintenance (Working Capital) component: intended to ensure sufficient resources to pay budgeted operating and maintenance expenses, recognizing the timing differences between payment of expenditures and receipt of revenues. It also provides a source of funding to allow the Water and Sewer Divisions to operate during short term fluctuations in revenues and/or expenditures. • Minimum: 25% of annual operating expenses based on the most recent adopted budget. • Target: 35% of annual operating expenses based on the most recent adopted budget. Rate Stabilization Reserve: 5% of prior fiscal year's water and sewer serve revenues to help minimize significant potential fluctuations in the Water and Sewer rates for the system operations. The Rate Stabilization component can be treated as a coverage stabilization tool enabling transfers into and out of the Water and Sewer Revenue Funds, as determined necessary by the Finance Director, after consultation with recommendation of the Water and Sewer Divisions' personnel and Public Works Director. Debt Service Reserve: held in accordance with requirements of the debt issuance to ensure the ability to make debt service payments. Vehicle Replacement Reserve: - • Minimum: 20% of replacement value of each Enterprise's fleet • Target: 30% of replacement value of each Enterprise's fleet Working capital in Fund 311 and 321, consistent with industry standards Tracked in working capital calculation Tracked in fund balance model Tracked as a CIP for Equipment Replacement in each Enterprise CIP Fund, consistent with replacement schedules 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 cash in the fund balances is above the target reserve levels outlined above, the Council has the flexibility to direct staff to utilize those available funds to fund one-time operating needs, capital projects, or pay down liabilities in accordance with this policy as defined in the purpose statement above. Reserve levels below the minimum target reserves could leave the City exposed to operational risks. The City may only draw down the reserve levels with Council approval. The City Manager, in conjunction with the Administrative Services Department, will develop and implement plans to return cash accumulation reserves to their minimum target levels as quickly is reasonable given the financial circumstances facing the City, ideally within three years. This plan to replenish reserves is subject to approval by City Council, typically through the adoption of the annual budget. Reporting and Oversight Reserve Levels will be monitored throughout the fiscal year and reported on as part of the annual budget development process. Updated fund balance and net positions will also be reported on annually in the audited Annual Comprehensive Financial Report (ACFR). This Policy will be reviewed during the City's annual budget process, and updated, if needed, because of material changes in the risk exposures, changes in the industry, or new conditions that require changes.