HomeMy WebLinkAboutUpdates Financial Policies in place since 1992, Recommended WITY OF HUNTINGTON BE I o4 — C-
MEETING DATE: April 16, 2001 DEPARTMENT ID NUMBER:
Council/Agency Meeting Held: o�1'Ib—a)
Deferred/Continued to:
A roved ❑ Conditi ally Approved ❑ Denied De -Cit ler 's ignature
Council Meeting Date: April 16, 2001 Department ID Number:
CITY OF HUNTINGTON BEACH
REQUEST FOR COUNCIL ACTION
SUBMITTED TO: HONORABLE MAYOR AND CITY COUNCIL MEMBERS
SUBMITTED BY: RAY SILVER, CITY ADMINISTRATORa4?
PREPARED BY: CLAY MARTIN, DIRECTOR OF ADMINISTRATIVE SERVIC
SUBJECT: ADOPT REVISED FINANCIAL POLICIES
Statement of Issue,Funding Source,Recommended Action,Alternative Action(s),Analysis,Environmental status,Attachment(s)
Statement of Issue:
The city has maintained a list of Financial Policies since 1992, and the City Council recently
held a workshop to review and expand the Policies. The revised Financial Policies are
being brought to the City Council for adoption.
Funding Source:
Not applicable.
Recommended Action: g
Motion to:
1. Adopt the revised financial policies. o='ti
D
Alternative Action(s):
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The City Council may make the following alternative motion(s): C'
1. Do not approve the recommended action and provide staff with appropriate
direction.
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4/11101 9:40 AM
*QUEST FOR COUNCIL ACON
MEETING DATE: April 16, 2001 DEPARTMENT ID NUMBER:
Analysis:
BACKGROUND
�At the March 16, 2001 City Council workshop at the city's Central Library, staff presented
33 Financial Policies to the City Council for its consideration. At that meeting, staff
answered questions and received input from the City Council regarding the proposed
financial policies.
The original 33 Financial Policies and one addition (#26 — regarding enterprise fund fees)
are being brought before the City Council for formal adoption.
PURPOSE
The Financial Policies serve as the basis for the overall financial management of the city's
resources. The Policies represent industry-wide best practices and are intended to guide
the City Council and staff in making sound financial decisions and maintaining Huntington
Beach's fiscal stability.
GOALS
The Financial Policies have been created to achieve four primary goals:
• To ensure that the city is able to continue to deliver quality services
• To provide continuity over time as City Council and staff change
• To establish reserves necessary to meet future obligations
• To formalize and communicate parameters for financial decision making
OVERVIEW
The 34 recommended policies include the five policies that the City Council adopted in
1992 and modified in 1998 and 2000. The city's existing Financial Policies are included as
Attachment 2.
The new recommended policies formalize long-time staff practice and ensure that the city's
financial operations reflect best practices from California and across the country.
The Financial Policies are included as Attachment 1 and fall into six categories:
1. Financial, Accounting, & Budgeting Standards Financial Policies 1-7
2. Operating Budget Policies Financial Policies 8-20
3. Capital & Enterprise Fund Policies Financial Policies 21-28
4. Debt Policies Financial Policies 29-30
5. User Fees & Charges Financial Policies 31-32
6. Capital Management Policies Financial Policies 33-34
The Financial Policies relating to Financial, Accounting, & Budgeting Standards are
designed to ensure the consistent, timely, and proper preparation of the city's financial
documents. This includes preparing the annual Operating Budget, five-year Capital
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4/11/01 9:40 AM
*QUEST FOR COUNCIL ACION
MEETING DATE: April 16, 2001 DEPARTMENT ID NUMBER:
Improvement Plan, and Comprehensive Annual Financial Reports in a manner consistent
with state and national government finance and accounting standards.
The Operating Budget Policies help ensure a balanced budget and contain fund balance
and unanticipated/unbudgeted revenue policies that were reviewed and recommended by
the IPC. Noteworthy new policies included in this group are:
#12 Fund Balance — allocates 50 percent for capital projects and 50 percent for
future expenditures.
#14 Una nticipated/unbudgeted Revenue — requires these funds will be allocated
pursuant to the city's financial policy regarding the allocation of prior year-end
General Fund balance.
#17 Department Retained Savings — allows departments to retain a portion of their
savings (appropriations minus expenditures) and carry those funds into the
next fiscal year.
Developing Capital & Enterprise Fund Policies ensures that these moneys are expended
for their intended purpose, and formalizes the role of the Capital Improvement Plan in the
budget process. Policies #21-24 were reviewed and recommended to the City Council by
the Infrastructure Planning Committee (IPC).
One new policy has been added to this section as a result of the City Council's review on
March 16. The new policy, #26, reads:
The city will adjust user fees as necessary to ensure that enterprise funds
do not collect revenues at a rate in excess of the fund's operating, capital,
and reserve requirements.
The proposed Debt Policies formalize long-standing City Treasurer and City Administrator
practices and express the city's strong preference for "pay-as-you-go" financing of capital
projects. These policies were also reviewed and recommended to the City Council by the
IPC.
By developing User Fees & Charges policies, the city makes certain it is maximizing
revenue recovery efforts and that fees and charges are properly updated, applied,
collected, and allocated in the budget.
The final group of Financial Policies relate to Capital Management. These policies are
intended to facilitate the completion of projects identified in the Integrated Infrastructure
Management Program. The existing Maintenance Impact Statement is also incorporated
here to guarantee that staff evaluates the potential maintenance and replacement costs of
an infrastructure project prior to undertaking it. These policies were also reviewed and
recommended to the City Council by the IPC.
Please note that as a result of the tentative decision on the city's retirement tax rate, the
city may be unable to achieve the seven percent General Fund reserve called for in the
Financial Policies.
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4/11/01 9:40 AM
*QUEST FOR COUNCIL ACAN
MEETING DATE: April 16, 2001 DEPARTMENT ID NUMBER:
EXCEPTIONS TO THE PROPOSED FINANCIAL POLICIES
Financial Policy #11 calls for the city to maintain a reserve equal to at least seven percent
of the annual General Fund budget at adoption. As a result of the tentative decision on the
city's retirement tax rate, the city may be unable to achieve the General Fund reserve
called for in the Financial Policies. Attachment 3 provides addition detail regarding the
impact of the tentative decision.
This is the only anticipated exception to the proposed Financial Policies.
CONCLUSION
The revised Policies are being proposed as part of the city's efforts to modernize and
improve its accounting, budgeting, and cash management systems. The Policies formalize
many existing city practices and align the city's financial guidelines and operations with the
best practices in California and national municipal finance.
Staff recommends that the City Council adopt the revised Financial Policies.
Attachment(s):
City Clerk's
Page Number No. Description
1. Recommended Revised Financial Policies
2. Existing Financial Policies
3. Memorandum Regarding Impacts of the Retirement Tax Rate Decision
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� Attachment 1
0 •
RECOMMENDED REVISIONS TO FINANCIAL POLICIES
FINANCIAL REPORTING AND ACCOUNTING STANDARDS
1. The city's accounting system will be maintained in accordance with
generally accepted accounting practices and the standards of the
Government Accounting Standards Board and the Government Finance
Officers Association.
2. The city will contract for an annual audit by a qualified independent certified
public accounting firm.
3. The city will strive for an unqualified audit opinion.
4. The independent audit firm will be selected through a competitive process at
least once every five years. The contract period will be for an initial period
of three years, with two one-year options at staffs discretion.
5. The annual financial report will be prepared within six months of the close of
the previous fiscal year. The city will use generally accepted accounting
principles in preparing the annual financial statements and will attempt to
qualify for the Government Finance Officers Association's Excellence in
Financial Reporting program.
OPERATING BUDGET
6. The city will prepare a two-year budget, with the first year submitted to the
City Council for legal adoption, and the second year presented as a
planning document.
7. The budget will be prepared consistent with the standards developed by the
Government Finance Officers Association and California Society of
Municipal Finance Officers.
8. The city will maintain a balanced operating budget for all funds with
revenues being equal to, or greater than, expenditures.
9. On-going revenues will support on-going expenditures.
10. Revenues from one-time or limited duration sources will not be used to
balance the annual operating budget.
GENERAL FUND RESERVE
11. The General Fund reserve will be a minimum of seven percent (7%) of the
annual General Fund budget at adoption.
ALLOCATION OF PRIOR YEAR-END GENERAL FUND BALANCE
12. Fund balance in excess of the reserve will be allocated as follows:
• 50 percent for capital projects (transferred to the Capital Projects
Fund)
0 0
• 50 percent for future expenditures (combined with the General Fund
Reserve)
APPROPRIATIONS FROM THE GENERAL FUND RESERVE
13. All supplemental/unbudgeted appropriations from the General Fund must
meet one of the three following criteria:
• It is an unanticipated emergency
• It is required to implement labor negotiations
• It is a new expense that is offset by related revenues
ALLOCATION OF UNANTICIPATED/UNBUDGETED REVENUES
14. The city may receive unanticipated/unbudgeted revenues during the course
of a fiscal year. If the unanticipated/unbudgeted revenues are not restricted
for a specific purpose, the funds will be allocated pursuant to the city's
financial policy regarding the allocation of prior year-end General Fund
balance.
APPROPRIATION AUTHORITY/CARRY FORWARD OF FUNDS
15. Appropriation authority expires at the end of each fiscal year. All funds
carried forward must be approved by the City Council. Departments
requesting to carry funds forward must identify the source of funds, reason
for the carry forward, and indicate if the carry forward is an encumbered
purchase order, an encumbrance with no liability, or unencumbered funds.
The list of proposed carry forwards is presented to the City Council at its
first public hearing on the proposed budget. The final list of carry forwards
is adopted along with the annual operating budget.
16. Appropriation authority for capital projects identified in the city's Capital
Improvement Plan lapses three fiscal years after adoption. Capital projects
that have been funded but not initiated will be identified in the Capital
Improvement Plan.
RETAINED SAVINGS
17. General Fund departments may retain a portion of their savings
(appropriations minus expenditures) and carry those funds into the next
fiscal year. Retained savings must be appropriated in the next fiscal year's
budget and may only be used for one-time expenses.
This policy promotes long-term planning and prudent use of General Fund
resources and counteracts a "use it or lose it" mentality that can result in
unnecessary spending.
NON-DEPARTMENTAL BUDGETS
18. The city maintains non-departmental budgets to account for expenditures
that are of a citywide nature or are shared by several departments.
�j�-/� 0 l
• •
Responsibility for managing these accounts lies with the Administrative
Services Director and City Administrator.
19. Personal services (excluding vacation and sick leave pay outs) will not be
budgeted in non-departmental budgets.
20. Support functions are to be assigned to the department from which they are
managed.
OPERATION OF THE CAPITAL PROJECTS FUND
21. The Capital Projects Fund will only be used to budget for, and construct,
capital improvement projects identified in the city's five year Capital
Improvement Plan.
22. Savings from capital improvement projects will be retained for use on other
infrastructure projects.
23. Interest earned on idle funds in the Capital Projects Fund will be retained for
use on other infrastructure projects.
24. Transfers to the Capital Projects Fund from other funds' fund balance will be
recorded on the first business day of each fiscal year.
ENTERPRISE FUNDS
25. The city will set users fees for each enterprise fund at a rate that fully
recovers the direct and indirect costs of providing service.
26. The city will adjust user fees as necessary to ensure that enterprise funds
do not collect revenues at a rate in excess of the fund's operating, capital,
and reserve requirements.
27. Enterprise funds will be supported by their own rates and not subsidized by
the General Fund.
28. Enterprise funds will pay their share of overhead services provided by the
General Fund.
DEBT ISSUANCE & MANAGEMENT
29. The city will not use long-term debt to pay for current operations.
30. The city will strive to construct capital improvements using pay-as-you-go
financing. Debt financing will only be considered for capital and
infrastructure improvements under the following circumstances:
• When the term of the debt does not extend beyond the useful life of the
improvements it financed; or,
• When project revenues or specific resources will be sufficient to
service the long-term debt.
Z/-
/6 -0/
• •
CHARGES & USER FEES
31. Charges and user fees will be examined annually to ensure that they
recover all direct and indirect costs of service, unless the City Council
determines that full cost recovery would be excessively burdensome, or
determines that subsidizing a program or service is in the public interest.
32. Fees for infrastructure improvements attributable to new development will
be reviewed annually to ensure that the fees recover development related
expenditures.
CAPITAL MANAGEMENT
33. The city will prepare a five year Capital Improvement Plan. The plan will be
developed biannually and updated annually. The Capital Improvement Plan
will include current operating maintenance expenditures, funding to support
repair and rehabilitation of deteriorating infrastructure, and the construction
of new infrastructure projects.
34. Prior to planning the construction of new infrastructure, the improvement's
future operating, maintenance, and replacement costs will be forecast and
matched to available revenue sources in the operating budget.
Attachment 2
EXISTING FISCAL POLICIES
Adopted 1992— Modified 2000
• On-going expenditures should be supported by on-going revenues
• General Fund reserves should be 7 percent (7%) (modified in 2000)
• No new capital improvements should be approved until associated
operating costs are funded by recurring revenues
• Each enterprise fund should reflect the true cost of operation including
direct and indirect costs supported by the General Fund
• If the city's budget is balanced, General Fund reserves in excess of seven
percent (7%) should be transferred to the Capital Improvement Project
Fund on an annual basis (modified in 2000)
City of Huntington Beach General Fund Appropriations Policy
Adopted 1998
All supplemental appropriations from the General Fund must meet one of the
three following criteria:
1. It is an unanticipated emergency
2. It is required to implement labor negotiations
3. It is a new expense that is offset by related revenues
Attachment 3
0
•
CITY OF HUNTINGTON BEACH =
INTERDEPARTMENTAL COMMUNICATION i
_ y
Huntington Beach = c7
10
TO: Ray Silver, City Administrator
Q0�
FROM: Clay Martin, Director of Administrative Services
SUBJECT: IMPACT OF THE HOWARD JARVIS LAWSUIT -Lv� a
DATE: April 9, 2001
Pursuant to your request, the Budget & Research and Accounting Divisions of
the Administrative Services Department has analyzed the impact of the Judgment
in the Howard Jarvis lawsuit which falls into the following categories:
• Past exposure prior to the date of the Superior Court judgment.
• Future impact to current and future budget.
PAST EXPOSURE
Table 1 describes the elements of the Superior Court judgment. It uses, for
convenience, a period from July 1, 1997 to March 31, 2001. Further, it should be
noted that the information presented corresponds to the State's fiscal year(July 1
to June 30) rather than the city's or federal fiscal year (October 1 to September
30).
The estimated total exposure for the period prior to the Superior Court decision is
approximately $17 million. The following lists important assumptions and notes
relative to the estimated total exposure.
• This assumes that the employer contribution to PERS is not impacted by
the final Superior Court judgment or a decision on appeal. That is, it is
assumed the tax is allowed to the extent it was used to pay employer
contributions, without distinguishing between pre and post — 1978
retirement benefits.
• This assumes that the City Council determines that all taxpayers receive
refunds consistent with the Howard Jarvis lawsuit judgment as if they filed
a claim seeking refunds retroactively to tax year 1997/98.
Future exposure will be mitigated by the city's holding revenue associated with
the Property Tax Override for the remainder of this year (April 1, 2001 through
September 30, 2001) in a separate fund. The projected amount of this revenue
is approximately $4 million.
Table 2 describes the estimated total exposure including interest beginning on
April 1, 2001. For the purposes of this calculation the appropriate interest rate is
assumed to be five percent. An amount equal to approximately $25 million would
be required to cover the return of all revenue impacted by the Jarvis lawsuit.
This does not include any administrative costs associated with returns.
FUTURE IMPACT
Table 3 describes the future impact to the current and future budget. The chart
makes the following assumptions:
• The General Fund will stop using all Property Tax Override revenue
starting April 1, 2001 and hold this revenue in a separate fund pending the
final outcome of the Jarvis Lawsuit.
• All departments will reduce their budgets by 5% across-the-board in the
FY 2001-02 Budget.
• All infrastructure expenditures/transfers using General Fund revenue will
average at 15% over a five-year period starting with FY 2001-02.
The table does not include two major General Fund revenue sources that are in
immediate danger of being reduced or cut. Both revenue sources are in jeopardy
because of the state of the electrical crisis in California. The Utility Users Tax
(UUT) is in danger of being capped at FY 1999-00 levels through State legislative
action. This would result in a loss of revenue estimated at $2 million in the
current fiscal year to $10 million in the 2005-06 fiscal year. In addition, the
Vehicle License Fee (VLF) backfill is in danger of being discontinued beginning
as early as the current fiscal year. This would result in a loss of revenue
estimated at $3 million in the current fiscal year to $7 million in the 2005-06 fiscal
year. The combined effect of these two revenue losses would be nearly as much
as the possible impact of the Jarvis Lawsuit.
c: William P. Workman, Assistant City Administrator
Department Heads
Attachments
Table 1. Estimated Past Exposure prior to the Superior Court Judgment
Net Revenue
Revenue associated Employer associated with Expenditures„at
issue"with Jarvis
Fiscal Year with Property Tax Contribution to Property Tax
(July 1 -June 30) Override PERS Override Lawsuit
A B C •
JARVIS LAWSUIT EXPOSURE12) A-B=C
1997-98 6,588,212 4,494,050 2,094,162 6,238,800
1998-99 6,995,177 4,063,388 2,931,789 6,335,832
1999-00 7,702,617 1,192,074 6,510,543 7,098,013
2000-01(') 5,816,710 0 5,816,710 3,430,183
TOTAL 27,102,716 9,749,5121111
R" 23,102,828
NOTES:
(')July 1,2000 through March 31,2001. All data is estimated and does not reflect a complete year.
(21 Exposure assumes that the employer contribution is an acceptable use of property tax override revenue.
Table Z Estimated Total Exposure from the Jarvis Lawsuit
Net Revenue
Fiscal Year associated with Cumulative Interest
(July 1 -June 30) Property Tax Calculation(1)
Override
1997-98 2,094,162
1998-99 2,931,789 5,025,951 •
1999-00 6,510,543 11,536,494
2000-002) 10,000,000 21,805,700
2001-02 0 22,895,985
2002-03 0 24,040,784
2003-04 0 `.
NOTES:
(')Assumes 5%interest rate
(2)Includes revenue for entire fiscal year
13)Assumes payment in the 2003-04 fiscal year
Table 3. Future Budget Impact from the Jarvis Lawsuit
DESCRIPTION FY 99/00 FY 00/01 FY 01/02 FY 02/03 FY 03/04 FY 04/05 FY 05/06
ENDING BUDGETED ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE
General Fund Revenue 139,942,607 138,852,838 144,250,098 150,068,275 152,272,152 155,797,720
General Fund Expenditure 128,986,307 126,580,209 133,341,441 140,973,391 146,341,043 151,036,333
General Fund Balance 7,900,000 10,956,300 12,272,629 10,908,657 9,094,884 5,931,109 4,761,387 •
Reserve Percentage 6.22% 8.49% 9.70% 8.18% 6.45% 4.05% 3.15%
NOTES:
Property Tax Override Revenue(April 1, 2001 -September 30, 2001)is approximately$4 million. This revenue is not included above.
Assumes$2.5 million added to expenditure beginning in FY 03/04 for bond debt service for estimated total exposure from the Jarvis lawsuit.
Assumes$4 million annual expenditure for unanticipated or emergency expenditures.
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RCAIZOUTING § HEET
INITIATING DEPARTMENT: Administration
SUBJECT: Financial Policies
COUNCIL MEETING DATE: Aril 16, 2001
RCA. ATTACHMENTS STATUS
Ordinance (w/exhibits & legislative draft if applicable) Not Applicable
Resolution (w/exhibits & legislative draft if applicable) Not Applicable
Tract Map, Location Map and/or other Exhibits Not Applicab
Contract/Agreement (w/exhibits if applicable)
(Signed in full by the City Attome ) t App cable
Subleases, Third Party Agreements, etc.
(Approved as to form by City Attome o114pIicable
Certificates of Insurance (Approved by the City Attorney) of Applicable
Financial Impact Statement (Unbud et, over $5,000) Not Applicable
Bonds (If applicable) Not Applicable
Staff Report (If applicable) Attached
Commission, Board or Committee Report (If applicab Not Applicable
Find in s/Conditions for Approval and/or Denial Not Ap licable
EXPLANATION FOR MISSING ACHMENTS;
REVIEWED I ETUI NED DF WARDW:::
Administrative Staff 01
Assistant City Administrator Initial
City Administrator (Initial)
City Clerk
eXPLANATIOM FOR RETURN Oje ITEM;
Only)(Below Space For City Clerk's Use
RCA Author: Grant