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HomeMy WebLinkAbout2017-02-28 Council Packet - Work SessionA. Call to Order AGENDA CITY COUNCIL WORK SESSION FEBRUARY 28, 2017 — 6:00 P.M. KENAI CITY COUNCIL CHAMBERS 210 FIDALGO AVENUE, KENAI, AK 99611 http://www.kenai.city B. Introduction — Mayor Gabriel C. Public Comment (limited to 3 minutes per speaker; 30 minutes' aggregate) D. Presentation of Proposed Fund Balance Policy — City Manager Ostrander & Finance Director Eubank E. Council Discussion F. Adjournment MA To: Mayor Gabriel Council Members "Villaye with a Past, Ci� with a Future" FINANCE DEPARTMENT 210 Fidalgo Avenue, Kenai, Alaska 99611 -7794 Telephone: 907 - 283 -7535 / FAX: 907 - 283 -3014 Thru: Paul Ostrander, City Manager ?. O �/ From: Terry Eubank, Finance Director Date: February 8, 2017 Re: City of Kenai General Fund, Fund Balance Policy Attached for your consideration is a fund balance policy for the City's General Fund. A fund balance policy is a tool for management of a governmental fund. The purpose of a fund balance policy is to ensure that there will be adequate liquid resources to serve as a financial "cushion" against the potential shock of unanticipated circumstances and events (e.g. revenue shortfalls, unanticipated expenditures). A good policy also ensures the accumulation of resources does not become excessive. Development of a fund balance policy by a government is a recommended best practice of the Government Finance Officers Association of the United State and Canada (GFOA) and the National Advisory Council on State and Local Budgeting (NACSLB). The proposed policy creates a minimum level of fund balance, the Budget Stabilization Reserve, which should be achieved and maintained to assure the long -term stability of the City's General Fund operations. Use of the Budget Stabilization Reserve is not prohibited but it would require five affirmative votes of council. This is an attempt to balance what council would determine to be a true need and the temptation to use this balance for one time projects or operations that are not supported by reoccurring revenues. This use of this reserve will also require a plan for replenishment should it be utilized. A base amount equal to three months expenditures is then adjusted by applying factors related to the historical volatility of each of the fund's revenue sources. After volatility adjustment, the budget stabilization reserve should be equal to 3.9681 months expenditures. Beyond this minimum level of reserves it is proposed to have a secondary amount for other operational and capital contingencies, the Operational and Capital Contingency Reserve. This upper limit begins at four months expenditures and is also adjusted for revenue volatilities. After volatility adjustment, the Operational and Capital Contingency Reserve should be equal to 5.2903 months expenditures. Any amount in excess of 5.2903 months of General Fund expenditures is unassigned and available. Assignment of the unassigned balance could be to capital improvements, other one -time expenditures, establishment or increase of debt service reserves, or operating expenditures provided financial projections show revenues will be available in the future in order to sustain the new expenditures. Should Council approve this concept, the administration will prepare an ordinance to make the needed KMC changes to codify the policy and its administration. Your consideration of this policy is appreciated and a work session is being recommended for February 23rd to provide a more detailed explanation of the proposed policy. GENERALFUND FUND BALANCE POLICY BACKGROUND The City of Kenai maintains its financial operations in a manner consistent with sound financial management principles, which require that sufficient funds be retained by the City to provide a stable financial base at all times. An adequate fund balance level is an essential element in both short-term and long -term financial planning. It serves to mitigate current and future risks, sustain operations during economic downturns, provides cash flow liquidity for the City's general operations, and enhances creditworthiness. Maintenance of sufficient levels of fund balance enables the City to stabilize funding for operations, stabilize taxes and fees, and realize cost savings in issuing debt. While adequate levels of fund balance are important, the City strives to maintain an appropriate amount that is geither too high nor low. PURPOSE This policy establishes a target level of fu sustain financial stability and to provide // reserves. This policy establishes a procc5 level of fund balance and the priont for This policy shall also provide a for balan� for the General Fund in order to rudent management of the City's financial for,4'eaching and or maintaining the targeted @ use of resources in excess of the target. m for monitoring and reporting the City's General Fund Balance. This polic only- pplies to the General Fund. DEFINITIONS AND CLAS,SIFICATIO( S Fund balance is a surpfugs of) funds `accrued from unexpended operating budgets and unanticipated revenue It is calculated as the difference between the assets and liabilities reported iin a govern ental fund. Fund balance co lists of five classifications that comprise a hierarchy based primarily on the extent to whi the'City is bound to honor constraints on the specific purpose for which amount a spent. The five classifications of fund balance applicable to the General Fund are defined as follows. Restricted Fund Balance Components: Nonspendable fund balance amounts that are not in a spendable form (e.g., inventory) or legally or contractually required to be maintained. There is no minimum funding requirement for this account. Restricted fund balance amounts that can be spent only for the specific purposes stipulated by external parties either constitutionally, through enabling legislation, or through other legally binding restrictions (e.g., proceeds from the sale of or mineral royalties paid for property deeded to the City by the Daubenspeck's). There is no minimum funding requirement for this account. General Fund Fund Balance Policy Page 2 of 4 Unrestricted Fund Balance Components: • Committed fund balance amounts that can only be used for the specific purposes determined by a formal action of the City Council. Commitments may be changed or lifted only by referring to the formal action that imposed the constraint originally (e.g., the City of Kenai stabilization account). • Assigned fund balance amounts intended to be used by the government for specific purposes. Intent can be expressed by the City Council or by a designee to whom Council designates the authority. No formal ordinance or resolution is required to form intent. There is no minimum funding requirement for this account. • Unassigned fund balance consists of the remaining funds not segregated above. These funds may be used for new pro rams or positions desired outside of the current and established budget or for ne -time capital investments. There is no minimum funding requirement for this - account. '` POLICY Designating Funds: The responsibility for designating fu\ ds to specific classifications shall be as follows: • Committed fund b lancg — Thte City Council is the City's highest decision making authority, an formal action that is required to be taken to establish, modify, or rescind a funA balance commitment is an ordinance approved by the Council. Commitmegts a�thorized in Kenai Municipal Code include: o Compe ate Absences — Actual accumulated employees' vacation balances the end of each fiscal year. o Encumbrances — Amounts encumbered at year -end by contract, including purchase order, or encumbered by some other means shall be classified as committed. o Budget Appropriation —Amounts appropriated in the annual budget, or in supplemental appropriations, for expenditures in ensuing fiscal year shall be classified as committed. o Budgetary Stabilization Reserve— An amount created by this policy equal to a risk adjusted three months of operating expenditures and transfers. • Assigned fund balance —The City Council has retained authority to assign fund balance to a specific purpose as approved by this fund balance policy. The following assignment is created by this policy. o Assigned for Operational and Capital Contingencies Reserve —An amount General Fund Page 3 of 4 Fund Balance Policy created by this policy in excess of a risk adjusted three months of expenditures and transfers but less than a risk adjusted four months of expenditures and transfers. Fund Balance Policy: It is the policy of the City of Kenai to commit to a budgetary stabilization reserve a minimum amount of fund balance in the general fund equal to a risk adjusted three months of General Fund expenditures and transfers measured on a General Accepted Accounting Principles (GAAP) basis. A risk adjusted three months of general fund budgeted expenditures and transfers is prudent based upon an evaluation of the City's operating characteristics, diversity of tax base, reliability of non - property tax sources, working capital needs, impact on bond rating, state and local economic outlooks, emergency and disaster risk, and other contingencies. In the event that the unassigned fund balance drops below this minimum level, the City will develop a plan, implemented through the annual budgetary process, to bring the balance back to the target level over a pie jdd of no more than three (3) fiscal years. C The City Council has imposed on itself a le regOiring ah affirmative vote by at least five members of the Council in order to appro riate undesignated fund balances below the established minimum level. Tl.(rls appropri'a ely balances the need to make such monies available if truly necessary i the�"edge ent of the elected City leaders, and the need to protect againpt -the te;. tion'to use this balance to meet recurring operating needs when rurrin operating revenues are not sufficient. Fund balance in e�eess of aYjsk adjusted three months of expenditures and transfers but less than W�hisk adj sted\kour months of expenditures and transfers shall be assigned for ope; tional a d capital contingencies. Fund balance in exxxceeens of a risk adjusted four months of General Fund expenditures and transfers measured on a (GAAP) basis shall be unassigned and available for capital improvements identified in the five -year capital improvement plan or other one -time expenditures or debt service reserves. Unassigned fund balance may be utilized for operating expenditures provided financial projections show the expenditures will be supported by revenues, other than a use of fund balance, within 3 years and at no time shall fund balance drop below this policy's Budgetary Stabilization Reserve amount. Policy Administration The City Manager will report to the City Council an estimated, unaudited balance of the Budgetary Stabilization Reserve, Operational and Capital Contingencies Reserve, and unassigned Fund Balance during the annual budget submission process. The City Manager is required to propose a budget with the following requirements: 1. A budget with a projected ending level of fund balance sufficient for commitment of the full Budgetary Stabilization Reserve over a period of no more than three General Fund Page 4 of 4 Fund Balance Policy (3) fiscal years. A budget showing any use of Budgetary Stabilization Reserves shall require five affirmative votes of Council to adopt. 2. A budget including a prioritization for commitment or use of unassigned fund balance including a five year capital priority list. 3. A budget with financial projections showing operational expenditures for which unassigned fund balance is a revenue source will be supported by revenues, other than the use of fund balance, within three (3) fiscal years and at no time shall fund balance drop below this policy's Budgetary Stabilization Reserve amount. Annually during the Comprehensive Annual Financial Report (CAFR) presentation, the Finance Director shall report the City's fund balance and the classification of the various components in accordance with GAAP and this policy.` f City of Kenai FY17 Fund Balance Policy Compliance Calculation FY17 Policy Calculations Ending Fund Balance 6/30/16 $ 10,418,100 Nonspendable $ Restricted Athletics - Daubenspeck Donation $ (588,937) Committed Accrued Compensated Absences $ (715,861) Outstanding Encumbrances (40,309) Subsequent Year Expenditures (590,274) * Budgetary Stabilization Reserve 3.9681 (5,098,986) Total Committed $ (6,445,430) Assigned Health Insurance Reserve $ (100,000) * Operational and Capital Contingencies Reserve 1.3222 (1,698,982) Total Assigned (1,798,982) Unassigned $ 1,584,751 * Newly created fund balance categories. L City of Kenai General Fund — Fund Balance Policy /J What is Fund Balance? ■ On the Income Statement - Fund Balance is comprised of the Excess (Deficiency) of Revenues Over Expenditures for the Fiscal Year combined with the Beginning Fund Balance. ■ On the Balance Sheet — Fund Liabilities section and is the Liabilities. Balance is presented below the difference between Assets and ■ Fund Balance does not represent cash savings. Categories of Fund Balance Non - Spendable Restricted GASB 54, implemented in FY2011 created Committed these categories of Fund Balance. Assigned Unassigned Non - Spendable ■ Amounts that cannot be spent because: • They are not in spendable form. • Legally or contractually required to remain intact. ■ "Not in spendable form" means: ■ Not expected to be converted into cash. ■ Example: Inventory or Prepaid Items. Restricted ■ Amounts constrained to being used for a specific purpose by: • External parties ■ Example: Daubenspeck property earnings. • Imposed by law through constitutional provisions or enabling legislation. ■ Example: City Charter provisions. Committed ■ Amounts segregated based on Council action. ■ Pursuant to constraints imposed by formal action of the Government's highest level of decision making. ■ The City Council passes an Ordinance or creates /amends City Code. ■ Commitments must occur prior to Year End. Assigned ■ In the General Fund: amounts intended to be used for a specific purpose. ■ Intent is expressed by Governing body or their designee. ■ Does not require an Ordinance. Can be done through resolution. ■ All remaining ositive amounts in the Governmental Funds other than the General Fund General Fund — Fund Balance June 30, 2016 Total Fund Balance $10,418,100 Non - Spendable Restricted — Athletics (Daubenspeck) Committed: Capital Improvements (KMC 7.25.100) Working Capital (KMC 7.25.060) Subsequent year's expenditures (Ordinance 2890 -2016) Assigned: Self- insurance Compensated absences Unassigned Fund Balance -0- (588,937) (9,746) (400,000) (590,274) (103,475) (715,861) What is a Fund Balance Policy? • A tool for the fiscal management of a Governmental Fund. • Governments, like businesses and individuals, need some sort of financial "cushion" against the potential shock of unanticipated circumstances and events (e.g., revenue shortfalls, unanticipated expenditures). • Use of a Fund Balance policy by local government is a recommended "Best Practice" of the Government Finance Officers of America and Canada (GFOA) and the National Advisory Council on State and Local Budgeting (NACSLB). What are the key components of a Fund Balance Policy? • Determining the appropriate level of Fund Balance to be maintained in the Fund (generally a range showing a minimum and maximum amount); • Circumstances when amounts above the maximum, between the maximum and minimum, or below the minimum can be "spent down"; and • The policy for replenishing deficiencies. Determining the appropriate level. • At a minimum, GFOA recommends not less than two months of operating revenues or expenditures. • GFOA further recommends adjustment to that two months for each governments specific exposure to the following: • Significant volatility in revenues or expenditures; • Potential drain on resources from other funds facing financial difficulties; • Exposure to natural disasters; • Reliance on a single taxpayer or industry; • Rapidly growing budgets; or • Disparities in timing between revenue collections an expenditures. Proposed Policy Base Amount • At a minimum, GFOA recommends not less than two months of operating revenues or expenditures. • The proposed policy recommends a base amount equal to a minimum of three months and a maximum of four months of operating expenditures and transfers. Base Amount Adjustments Significant volatility in revenues or expenditures: The administration analyzed the annual volatility of the following General Fund revenue categories from FY1995 through FY2016. Volatility was defined as the annual percentage increase or decrease in each category measured at one standard deviation (66% of all occurrences). For example, sales tax revenue increased or decreased annually by 5.76% two - thirds of the time. Not significantly volatile when compared to Federal Grants which increase or decreased by 169% annually two - thirds of the time. Base Amount Adjustments - continued Volatility @ Revenue Source 1 Stan. Dev. Sales Tax 5.76% Property Tax 10.49% Federal Grants 169.28% State Grants 24.65% PERS On- behalf 60.98% Licenses & Permits 49.36% Land Rents & Leases 28.06% Ambulance Billings 111.22% Investment Earnings 62.52% Transfers & Administrative Fee 16.58% Other 29.53% Total Volatility 7.77% Base Amount Adjustments - continued Total 100.00% Percentage Revenue Source of Revenue Sales Tax 45.56% Property Tax 20.08% Federal Grants 0.37% State Grants 6.48% PERS On- behalf 3.39% Licenses & Permits 0.78% Land Rents & Leases 0.60% Ambulance Billings 2.12% Investment Earnings 4.11% Transfers & Administrative Fee 10.68% Other 5.82% Total 100.00% Base Amount Adjustments - continued Base Factor Base Factor Volatility Level Multiplier Volatility Level Multiplier > 5% 1.00 < 55% and > 60% 2.10 < 5% and > 10% 1.10 < 60% and > 65% 2.20 < 10% and > 15% 1.20 < 65% and > 70% 2.30 < 15% and > 20% 1.30 < 70% and > 75% 2.40 < 20% and > 25% 1.40 < 75% and > 80% 2.50 < 25% and > 30% 1.50 < 80% and > 85% 2.60 < 30% and > 35% 1.60 < 85% and > 90% 2.70 < 35% and > 40% 1.70 < 90% and > 95% 2.80 < 40% and > 45% 1.80 < 95% and > 100% 2.90 < 45% and > 50% 1.90 < 100% 3.00 < 50% and > 55% 2.00 Risk Adjusted 3 Months Calculation Percentage Base Volatility Weight Adjusted Revenue Source of Revenue Factor Adjustment Value Sales Tax 45.56% 0.250 1.10 0.125 Property Tax 20.08% 0.250 1.20 0.060 Federal Grants 0.37% 0.250 3.00 0.003 State Grants 6.48% 0.250 1.40 0.023 PERS On- behalf 3.39% 0.250 2.20 0.019 Licenses & Permits 0.78% 0.250 1.90 0.004 Land Rents & Leases 0.60% 0.250 1.50 0.002 Ambulance Billings 2.12% 0.250 3.00 0.016 Investment Earnings 4.11% 0.250 2.20 0.023 Transfers & Administrative Fee 10.68% 0.250 1.30 0.035 Other 5.82% 0.250 1.50 0.022 Total 100.00% 0.331 of a year Risk Adjusted 4 Months Calculation Percentage Base Volatility Weight Adjusted Revenue Source of Revenue Factor Adjustment Value Sales Tax 45.56% 0.333 1.10 0.167 Property Tax 20.08% 0.333 1.20 0.080 Federal Grants 0.37% 0.333 3.00 0.003 State Grants 6.48% 0.333 1.40 0.030 PERS On- behalf 3.39% 0.333 2.20 0.024 Licenses & Permits 0.78% 0.333 1.90 0.005 Land Rents & Leases 0.60% 0.333 1.50 0.003 Ambulance Billings 2.12% 0.333 3.00 0.021 Investment Earnings 4.11% 0.333 2.20 0.030 Transfers & Administrative Fee 10.68% 0.333 1.30 0.046 Other 5.82% 0.333 1.50 0.029 Total 100.00% 0.441 of _ • o e a year Base Amount Adjustments - continued • Potential drain on resources from other funds facing financial difficulties. No adjustment recommended. • Exposure to natural disasters. Based on City's insurance levels and FEMA relief, no adjustment recommended. • Reliance on a single taxpayer or industry. Exposure exists to large retailers but no adjustment recommended at this time. • Rapidly growing budgets. N/A - No adjustment recommended. • Disparities in timing between revenue collections an expenditures. N/A - No adjustment recommended. Base Amount Adjustments - continued Risk Adjusted 3 Months = 0.331 of a year or 3.968 months. Risk Adjusted 4 Months = 0.441 of a year or 5.290 months. Fund Balance Policy Amounts FY17 Policy Calculations Ending Fund Balance 6/30/16 $ 10,418,100 Nonspendable $ - Restricted - Athletics - Daubenspeck Donation $ (588,937) Committed: Outstanding Encumbrances $ (40,309) Subsequent Year Expenditures (590,274) Health Insurance Reserve (100,000) • Budgetary Stabilization Reserve 3.9681 (5,098,986) • Operational and Capital Contingencies Reserve 1.3222 (1,698.982) Total Committed $ (7,528,551) Assigned - Accrued Compensated Absences $ (715.861) Unassigned $ 1.584.751 Newly created fund balance categories. Fund Balance Policy Components Budget Stabilization Reserve will be classified as committed fund balance and is an amount equal to a risk adjusted 3 months of budgeted expenditures and operating transfers. • The minimum level of recommended fund balance for the City's General Fund. • Requires an affirmative vote of at least 5 Council Members to be utilized. This appropriately balances the need to make such monies available if truly necessary in the judgement of the elected City leaders, and the need to protect against the temptation to use this balance to meet recurring operating needs when recurring operating revenues are not sufficient. • If fund balance drops below this minimum level a plan will be developed, and implemented through the annual budgetary process, to replenish fund balance to this minimum level within a three year period including the year for which the budget is being adopted. Fund Balance Policy Components - continued Operational and Capital Contingencies Reserve will be classified as committed fund balance and is an amount equal to a risk adjusted 3 months of budgeted expenditures and operating transfers. • When combined with the Budgetary Stabilization Reserve represents the maximum level of recommended fund balance for the City's General Fund. • Requires an affirmative vote of at least 4 Council Members to be utilized. • If being utilized for recurring expenditures, budget projections must show the expenditures will be supported by revenues, other than a use of fund balance, within 3 years, inclusive of the current budget year, and at no time shall fund balance drop below the Budgetary Stabilization Reserve level. Fund Balance Policy Components - continued Unassigned Fund Balance is what remains of fund balance after deducting all Non - spendable, Restricted, Committed, and Assigned amounts. Utilization of Unassigned Fund Balance is authorized for the following: • If being utilized for recurring expenditures, budget projections must show the expenditures will be supported by revenues, other than a use of fund balance, within 3 years, inclusive of the current budget year, and at no time shall fund balance drop below the Budgetary Stabilization Reserve level. • Funding of capital improvement projects identified in the City's five -year capital improvement plan. • Funding of other one -time expenditures. • Funding of debt service reserves. Budget Requirements Currently KMC 7.25.010 requires the proposed expenditures set forth in the budget proposal shall not exceed the expected revenues of the City. • Prohibits the City Manager from presenting a budget utilizing fund balance. • Is a very conservative approach but limits flexibility to recommend the use fund balance during temporary economic downturns. • Requires a Council member to propose utilization of fund balance. • Policy works well in times of stable or growing revenues and moderately increasing expenditures. • Policy limits the administration in times of shrinking revenues, significantly increasing expenditures, or proposing use of fund balance for capital projects. Proposed Budget Requirement Changes KMC 7.25.010 will be amended requiring the City Manager to present a budget to Council meeting the following conditions: 1. A budget with a projected ending level of fund balance sufficient for commitment of the full Budgetary Stabilization Reserve over a period of no more than three (3) fiscal years, inclusive of the current budget year. A budget showing any use of Budgetary Stabilization Reserves shall require five affirmative votes of Council to adopt. 2. A budget including a prioritization for commitment or use of unassigned fund balance including a five year capital priority list. 3. A budget with projections showing recurring expenditures, for which unassigned fund balance is a revenue source, will be supported by revenues, other than the use of fund balance, within three (3) fiscal years, inclusive of the current budget year, and at no time shall fund balance drop below this policy's Budgetary Stabilization Reserve amount. KMC Amendments for Implementation To fully implement the proposed Fund Balance Policy amendments will need to be made to various section of the Kenai Municipal Code. The implementing ordinance will provide for amendment to the following sections of Chapter 7.25 City Budget: • 7.25.010 Adoption procedure. Amendment for proposed changes in requirements of the proposed City Manger budget. • 7.25.060 Working Capital Reserve. This section will be eliminated as consideration for working capital needs are made in the base value of 3 months expenditures and operating transfers. • 7.25.090 & 7.25.100 will be eliminated and replaced with the new five year capital improvement plan. 7.25.090, the new five year capital improvement plan will be prepared and maintained by the administration and ratified by Council annually as part of the budget adoption process. 7.25.100 will be used to define the newly created Budget Stabilization Reserve and 7.25.105 will be used to define the newly created Operational & Capital Contingency Reserve. What will the Fund Balance Policy look like? $11,000,000 $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 GENERAL FUND - FUND BALANCE 2016 Actual 2017 Adopted 2017 Estimated 2016 Proposed 2019 Projected Minimum Fund Balance • Maximum Fund Balance —Total Fund Balance Note: This is a graphical example only and does not represent actual plans or projections. $11,000,000 $10,000,000 $9,000,000 $6,000,000 $7,000,000 $6,000,000 $5,000,000 Policy Areas GENERAL FUND - FUND BALANCE 2016 Actual 2017 Adopted 2017 Estimated 2016 proposed 2019 prgecled Minimum Fund Balance • Maximum Fund Balance —Total Fund Balance Amounts in this area are above the maximum recommended fund balance and should be used for one -time expenditures or recurring where revenues are projected to cover within 3 years. The appropriate range of recommended fund balance. Use should be for one -time expenditures or recurring where revenues are projected to cover within 3 years. Amounts in this area are below the minimum recommended fund balance. Amounts can only be appropriated with 5 affirmative votes and total fund balance must exceed this amount within three budget years including the fiscal year for which the appropriation is being made. Note: This is a graphical example only and does not represent actual plans or projections. Summary The proposed will produce a policy as recommended by both the GFOA and NACSLB. The proposed policy addresses the three GFOA recommended components of a comprehensive fund balance policy. 1. The policy determines the appropriate level of unrestricted fund balance to be maintained in the fund; 2. The policy determines the circumstances in which each category of fund balance can be "spent down "; and 3. The policy established the requirements for replenishing deficiencies in the minimum fund balance level.