HomeMy WebLinkAboutBudget and Reserve Policy Item #32City of Santa Ana
Council Policy
Mayor's Authorization
Subject
Council Approval Date:
BUDGET AND RESERVE POLICY
March 16, 2021
This policy supersedes Budget and Financial Policies approved by City Council on June 6, 2017.
PURPOSE
This Budget and Reserve Policy includes directives to balance the budget and provide information to support long-
range financial decisions, and Reserve requirements to mitigate risk and support cash flow. Development of this
policy included a risk assessment and cash flow analysis, as well as best -practice recommendations from the
Government Finance Officers Association (GFOA), a national non-profit organization providing training and
interpretation of accounting and financial reporting standards applied to the government sector since 1906. This
policy compliments budget requirements contained in the City's Charter and Municipal Code.
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The City's audited financial statements of assets and liabilities are presented in two formats: the Government -wide
Statement of Net Position (full -accrual accounting), and the Fund Financial Balance Sheet (modified accrual
accounting focused on available resources and current liabilities). Both presentations include the concept of
restricted balance and unrestricted balance. In the Fund Financial Balance Sheet, unrestricted balance is comprised
of committed, assigned and unassigned amounts. Committed and assigned amounts are spending constraints self-
imposed by the City. This policy refers to the Unrestricted Fund Balance as the Reserve amount.
NON -RECURRING RESOURCES
Non -recurring resources include Unrestricted Fund Balance and one-time revenue (e.g. legal settlement, sale of
property, etc.). The City Council may elect to fund recurring costs with non -recurring resources in either of the
following circumstances:
1. The City Council declares a fiscal emergency or local emergency.
2. The City Council approves the use with a two-thirds vote for documented loss of revenue pursuant to an
economic downturn or unusual circumstance.
GENERAL FUND
Background
The General Fund is the primary operating fund of the City. It accounts for all general purpose unrestricted revenues
including sales tax, property tax, locally levied taxes, fees for service and fines. The General Fund accounts for the
operating costs of core city services including public safety, recreation, land -use regulation, public facility
maintenance, and governance.
General Fund Budget Directives & Long -Range Planning
To support the ongoing fiscal health of the General Fund, the following directives are established.
The City Manager shall annually present a balanced budget to the City Council for adoption, defined as
proposed spending not exceeding available resources.
Non -recurring resources should only fund non -recurring or capital costs.
Budget and Reserve Policy, March 2021 - Page 1
• Revenue estimates will be conservative to avoid a resource shortfall for planned service delivery.
• The City will continue to pursue internal operational efficiencies and strategies, such as technology
modernization, to minimize City costs and enhance the accessibility of City services.
• All proposals for new or upgraded capital facilities must include estimated costs to operate, maintain, and
replace the facilities.
• To assist the City Council with decision -making, staff shall annually prepare a minimum ten-year projection
to identify long-term impacts to the General Fund budget.
Reserve Requirement
To mitigate risk and support cash flow, the General Fund will maintain an Operating Reserve of the Unrestricted
Fund Balance equivalent to a minimum of 18%of annual recurring revenue. As recurring revenue increases, so shall
the Operating Reserve. A documented plan to replenish the Operating Reserve must accompany any City Council
authorized use of the Operating Reserve, pursuant to the guidelines for use of non -recurring resources outlined
above. A plan for replenishment may include reduction of expenditures, one-time money, favorable budget
variances, and/or new revenue sources.
INTERNAL SERVICE FUNDS
Background
The City utilizes Internal Service Funds to administer and account for centralized services provided by one City
department/division to another City department/division. Examples include building maintenance, general liability
insurance, and information technology. The centralized service divisions fund operations and equipment
replacement with cost -recovery charges to the receiving department budget.
Internal Service Fund Reserves provide a funding source for capital asset replacement (e.g. fleet vehicles), actuarial
determined liabilities (e.g. workers compensation), and an operational cushion for unanticipated or extraordinary
costs. This policy establishes general guidelines for target Reserve balances and cost -recovery rate structure to
fund current operations and Reserve replenishment.
Target Reserve Balances
Internal Service Fund
Target
Central Services (mail, reprographics)
100% of capitalized equipment cost +20% of annual operating costs
Building Maintenance
100% of annual operating costs due to high risk of aged facilities
Equipment Replacement for Vehicles
100% of the cost of capitalized equipment
Fleet Vehicle Maintenance
20% of annual operating costs
Stores & Property Control (fuel and
warehouse inventory)
20% of annual operating costs
Liability & Property Insurance
80% of liability, actuarially determined every two years
Employee Group Insurance
None, as this fund serves an accounting purpose only with zero net
fiscal impact.
Workers Compensation
80% of liability, actuarially determined every two years
Information Services
100% of capitalized equipment cost+ 20% of annual operating costs
City Yard
20% of annual operating costs
Public Works Engineering & Project
Management
None, as this fund serves an accounting purpose only with zero net
fiscal impact.
Public Works Administration & Planning
None, as this fund serves an accounting purpose only with zero net
fiscal impact.
Budget and Reserve Policy, March 2021 Page 2
Cost Recovery Rate Structure
Each year, the managing department shall estimate the cost of operations and any shortfall for the target Reserve
balance. These estimates will serve as the basis for cross -department charges. Proportional use of the service will
determine the allocation of estimated costs to departments/divisions. Employee compensation increases are
limited to City Council approved agreements with bargaining groups. Any proposed workforce changes must follow
the City's normal proposal and approval process. Other proposed cost increases, including Replenishment of
Reserves, must be limited to the annual increase in the Consumer Price Index (CPI) at December 31, or otherwise
submitted as a supplemental budget request subject to City Manager recommendation and City Council approval.
The Budget Office may recommend spreading Reserve replenishment over a reasonable number of years to smooth
the budget impact.
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Other funds of the City account for revenues restricted to specific spending purposes. Many of these restrictions
do not allow the City to carry a Reserve balance (e.g. federal grant funds). Funds with spending constraints self-
imposed by the City (e.g. Cannabis Public Benefit Fund) do not need a Reserve, as the General Fund provides risk
mitigation and cash flow. If allowed by external restrictions, the target Reserve balance for other funds shall be
20% of the fund's annual operating costs. Professionally developed rate studies for Enterprise Funds (e.g. Water,
Sewer) may recommend a reserve requirement in excess of the 20% target.
Budget and Reserve Policy, March 2021 Page 3