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HomeMy WebLinkAbout174-02 RESOLUTIONi • RESOLUTION NO. 174-02 A RESOLUTION TO ESTABLISH A MINIMUM UNRESERVED GENERAL FUND BALANCE BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF FAYETTEVILLE, ARKANSAS: Section 1. That the City Council of the City of Fayetteville, Arkansas hereby establishes a minimum, unreserved General Fund Balance of Three Million Four Hundred Thirty -Five Thousand Dollars ($3,435,000.00) or sixty (60) days of annual regular general fund operating expenditures, whichever is greater. This minimum unreserved General Fund Balance cannot be reduced without specific City Council Resolution. PASSED and APPROVED this 5th day of November, 2002. ATTEST: By: �f eather Woodruff, City C APPROVED: By: DAN COODY, May NAME OF FILE: CROSS REFERENCE: Item # Date Resolution No.174-02 Document • 1 11/05/02 Resolution # 174-02 2 10/21/02 Staff review form 3 12/05/02 Memo from Heather Woodruff, City Clerk to Marsha Farthing NOTES: • X AGENDA REQUEST CONTRACT REVIEW GRANT REVIEW • STAFF REVIEW FORM 0 For the Fayetteville City Council Meeting c f. November 5, 2002 • FROM: Marsha Farthing Name Accounting and Audit Administrative Services Division Department Staff is seeking Council approval of a policy to set a minimum General Fund Balance requirement. COST TO CITY: No costs $ Cost of this request Account Number Project Number Category/Project Budget Program Category / Project Name Funds Used to Date Program / project Category Name Remaining Balance Fund Name BUDGET REVIEW: Liudget Mana Budgeted Item Budget Adjustment Attached / 0 -, 2 - a L - Date Administrative Services Director Date CONTRACT/GRANT/LEASE REVIEW: /447/62 <f a rIc)it-t1or Date =nternal Aifys tor Date l0) i?loi, Ci -v Attorney Date =DA Coordinator Date Pur_hasing Manager I0\nlba Date =rant Coordinator Date STAFF RECOMMENDATION: Division Head Date Cross Reference New Item: Yes No Deotment Director Date Previous Ord/Res#:. Orig. Contract Date Orig. Contract Number Adni ni s ative Services Director I Agn:AA Date t • Description • • Staff Review Form - Page 2 Comments: Budget Manager Accounting Manager City Attorney Purchasing Manager ADA Coordinator Internal Auditor Grants Coordinator Meeting Date November 5, 2002 Reference Comments: FAYETTEVI L�.E THE CITY OF FAYETTEVILLE, ARKANSAS DEPARTMENTAL CORRESPONDENCE • To: Steve Davis, Interim Administrative Service Director From: Marsha Farthing, Accounting Manager Date: October 11, 2002 Subject: General Fund Reserve Fund Balance In the past the City of Fayetteville has had an informal policy of keeping unreserved General Fund Balance at an amount equal to 60 days of annual expenditures. Maintaining a minimum fund balance protects the City from unforeseen economic downtums and will help provide sufficient liquidity in such times. The financial presentations made to City Council by staff over the past year and one half have been based on a 60 day retention of General Fund Balance. The provision (60 days of expenditures in unrestricted cash and investments) is a requirement of the City's Water and Sewer Bond issues. Adopting a formal policy is a recommended practice of the Governmental Finance Officers Association (GFOA) and other organizations including credit rating agencies (see attachments). The Administrative Services staff is recommending adopting a formal policy to maintain unreserved General Fund Balance at 60 days of annual regular general fund operating expenditures or $3,000,000, whichever is greater. Only by City Council approval would staff be allowed to reduce General Fund Balance below this level. er Moody's InilItors Service Municipal Credit Research February 2002 • Contact Phone New York John Incorvaia Bill Leech Linda Hird Lipnick 1.212.553.0501 1.212.553.4132 1.212.553.1617 Your General Fund Balance - One Size Does Not Fit All ! Special Comment This special comment protides a broad overview of Moody's approach to General Fund balance analysis. Questions relating to fund balances are probably the most frequent of all questions asked to a credit analyst. However, fund balance is only one part of the financial analysis, and finances only one of many factors considered in the rating. Financial health is also not just focused on General Fund balance, but the financial integrity of all funds. For the purpose of this comment, however, we will focus solely on General Fund balance, or reserves. For a more encompassing overview of J'loody :r Financial analysis please refer to:Woody's Special Conmzent. ' 3loody's Approach To Local Govern- ment Financial Analysis" dated January 2002. A municipality's prudent fiscal policies should include some plan or policy related to reserves. The accumulation of prudent reserves in more favorable economic times could be a resource to sustain communities in the inevitable downturn. \loody's believes that operating reserves (or fund balance) is not only a prudent fiscal management tool, but also an important credit factor in the analysis of financial flexibility. continued on page • • Need for Reserves Recessions have demonstrated how municipal budges can be hurt by declines in economically sensitive rev- enues (e.g., sales taxes, income taxes, interest income. and bed taxes), and unanticipated cuts in state revenue sharing funds. Additional factors of an even more unpredictable nature can also drain budgets. These have typically been associated with natural disasters such as hurricanes. earthquakes, and floods. Some have learned from these economic cycles and natural disasters and have established separate funds, or reserves, sized to their needs. Others continue to flounder amid the vagaries in these cycles and events. The former speaks to strong management, while the latter leaves a community open to the whims of self- serving political officials. Factors Influencing Accumulation of Reserves Pressures. which may impact the level of reserves that can be accumulated, include: statutory limitations, political pressure (e.g. concern of re-election), resident sensitivity, unions. and operating or capital needs. Reseryes are not to be viewed as competing or contradictory to these limitations, but as a means of helping municipalities achieve these as well as other ends. Benefits of Maintaining Adequate Reserves Maintaining adequate reserves has several internal and external benefits. Internally, reserves can provide for cash Clow needs until major revenues are received, reducing or eliminating the need for cash flow borrowing; provide funds to leverage state or federal grants; and provide for the unexpected. Externally, reserves tend to be viewed favorably by investors, rating agencies, and local banks with which a municipality does business, thus benefiting ratings and the potential need for lines of credit. How Much is Enough? Administrators struggle to determine the reserve amount that would be universally accepted by investors, residents. rating agencies, and governing officials. In truth, no figure can satisfy all these concerns given their varied interests. The level of reserves should be predicated on items such as cyclical vulnerability of revenue streams, likelihood of natural disasters, and volatility of expenditure items (e.g. Medicaid, Social Services. Health Care). Depending on which vulnerabilities are more significant in each situation. should dictate whether to uti- lize a number of days of operating expenses, or a flat percentage in formulating reserve levels. In the former case a minimum of one to two months of operating expenses is considered reasonable, while in the latter instance a minimum level of between 5% to 10% should targeted. However, determining which end of the spectrum is best suited to a municipality's needs must be governed by the sensitivity of revenue streams and the potential for natural disasters or other unforeseen budget fluctuations. Other factors that should be included in the final determination of reserve balances are: the level of bud- getary fixed costs, the amount of non -voted debt supported by traditional operating funds, historical delays in adoption of state budgets, proximity to operating limits, ocher statutory Limitations on revenues, and tim- ing on reception of major revenue sources. In these situations, greater reserves should be considered. Formal Policy or Targeted Goal? Many municipalities have inquired whether resen-es. or General Fund balance, should be governed by for- mal policy (ordinance, inclusion in local charters), or could targeted levels suffice. Moody's analysis considers the formality of reserve policies, and the more formal policies are viewed more favorably because they minimize political considerations of adequate reserve levels and keep the municipalities more focused on providing structural balance in their operations, with less dependence on one-time reserves. There have been instances where a municipality has demonstrated a long -tern adher- ence to more informal policies, or targets, which :\loodv's has felt comfortable relying upon. But more often than not. informal policies have been associated with uneven long-term financial performance. Formal poli- cies, when part of a comprehensive financial management program, can be an effective operating tool. Moody's Special Comment 3 • • How "Real" is Your Fund Balance? There are fund balances and there are fund balances. Sometimes targets or policies are predi- cated on total balances that include questionable items such as reserves for encumbrances, inven- tories_ and subsequent years' expenditures, while undesignated balances tend to be narrow and fluctuate wildly. Sometimes operating reserves include receivables and accrued items which tend to present a Tess than accurate representation of fund balance. Moody's considers the amount of available cash in the composition of fund balance, and how much of that actually falls to the unreserved/undesignated portion of fund balance. The more cash. the more liquid the balance and the more operating flexibility is maintained by the munici- PaER'. Conclusion Mooch -'s views those credits which adhere to a fund balance strategy as being more pro -active and retiecting positively on management. Sometimes an education process is required, either for local officials or residents, on the value of maintaining reserves. Reserve levels should be deter- mined locally, but based logically on factors considered in this comment Whether reserves are set-aside in the form of rainy day funds, stabilization funds, or just plain undesignated balances, operating fund balances are an important part of credit assessment. To order reprints of this report (100 copies minimum), please :4111 212.5c i. 1658. Report Number: 74269 4 Moody's Special Comment GFOA's GUIDANCE OF APPROPRIATE LEVEL OF GENERAL FUND BALANCE Page 47; Add new text at the end of the subsection devoted to "Fund bal- ance" to incorporate new guidance from GFOA on the appropriate level of unreserved fund balance that should be maintained in the general fund. An adequate level of unreserved fund balance in the general fund is essential to mitigate current and future risks and to ensure stable tax rates and service levels. It also is a crucial consideration in long-term financial planning. For these reasons, laws and regulations often govern the appropriate levels of fund balance and unreserved fund balance in the general fund. Likewise, fund balance and unreserved fund balance are carefully monitored by credit rating agencies. It is recommended that the appropriate policy -setting body within a gov- ernment establish a formal policy on the level of unreserved fund balance to be maintained in the general fund.'°This policy ought to provide both a temporal framework and specific plans for increasing or decreasing the level of unre- served fund balance if it is inconsistent with that policy." If reserved fund balance includes resources available to finance items that typically would require the use of unreserved fund balance, those resources should be included as part of un- reserved fund balance for purposes of this policy.'° The adequacy of unreserved fund balance in the general fund should be as- sessed based upon a government's own specific circumstances. Nevertheless, it is recommended, at a minimum, that general-purpose local governments, re - The adoption of similar policies is encouraged for other types of governmental funds as well. While all governmental funds report fund balance, the goals for fund balance will differ among fund t pes and individual funds For example, a high level of fund balance may be expected in a permanent fund used to account for an endowment, whereas no fund balance at all might be anticipated in a special revenue fund used ex- clusively to account for expenditure -driven grants. Accordingly, a government's pol- icy for fund balance in the general fund may differ from its policy for fund balance in other governmental fund types and individual funds. By its very nature, unreserved fund balance is subject to unexpected fluctuations. Therefore, a well designed policy will provide specific guidance on what actions a gov- ernment will take (and over what period) to adjust levels of unreserved fund balance that fall outside the parameters set by policy as the result of such fluctuations. An example might be a legally required contingency reserve. See * for specific guidance on fund balance levels • • CLASSIFICATION AND TERMINOLOGY • 15 * gardless of size, maintain unreserved fund balance in their general fund of either 1) no less than 5 to 15 percent of regular general fund operating revenues, or 2) no less than one to two months of regular general fund operating expendi- .tures." A government's particular situation, of course. may require levels of unreserved find balance in the §eneral fund significantly in excess of these rec- ommended minimum levels. Because fund balance is subject to unforeseeable fluctuations, it normally would be a mistake to draw conclusions based solely on fund balance at any one point in time. Furthermore, such measures should be applied within the context of long-term forecasting, thereby avoiding the risk of placing too much emphasis upon the level of unreserved fluid balance in the general fund at any one time. As already noted, environmental factors will affect the appropriate level of unreserved fund balance in the general fund. Examples of such factors include the following: • The predictability of its revenues and the volatility of its expenditures (i.e., higher levels of unreserved fund balance may be needed if signifi cant revenue sources are subject to unpredictable fluctuations' or if op- erating expenditures are highly volatile). • The availability of resources in other funds, as well as the potential drain upon general fund resources from other funds (i.e., the availability of re- sources in other funds may reduce the amount of unreserved fund bal- ance needed in the general fund, just as deficits in other funds may require that a higher level of unreserved fund balance be maintained in the general fund). • Liquidity (i.e., a disparity between when financial resources actually be come available to make payments and the average maturity of related li- abilities may require that a higher level of resources be maintained). • Designations (i.e., governments may wish to maintain higher levels of unreserved fund balance to compensate for any portion of unreserved fund balance already designated for a specific purpose)." The point of comparison for measuring unreserved fund balance may be either operat- ing revenues or operating expenditures The choice between the two is likely to be dic- tated by which is more predictable in a government's particular circumstances. In either case, unusual items that would distort trends (e.g., one-time revenues and ex- penditures) should be excluded, whereas recurring transfers should be included. A rapidly growing government that uses expenditures as its point of comparison may wish to use the current or future year's appropriation for this purpose. Once the deci- sion has been made to compare unreserved fund balance to either revenues or expendi- tures, that decision should be followed consistently from period to period. • In practice, levels of unreserved fund balance, expressed as a percentage of reve- nues/expenditures or as a multiple of monthly expenditures, typically are less for larger governments than for smaller governments because of the magnitude of the amounts involved for larger governments and because the diversification that is typi- cal of the revenues and expenditures of larger governments often results in a lower de- gree of volatility. For example, state aid. ▪ Other factors that could affect the level of unreserved fund balance that is needed in- clude 1) location in a region prone to natural disasters (e.g., hurricanes) 2) heavy reli- ance upon a single corporate taxpayer or upon a group of corporate taxpayers in the same industry, 3) revenues that are not level, and 4) rapidly growing budgets. FAYETTEVIeLE THE CITY OF FAYETTEVILLE, ARKANSAS DEPARTMENTAL CORRESPONDENCE To: Marsha Farthing From: Heather Woodruff, City Clerk Date: December 5, 2002 Attached is a copy of Resolution # 174-02 to approve the City of Fayetteville debt management policy. The original will be microfilmed and filed with the City Clerk. cc: Nancy Smith, Internal Auditor