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HomeMy WebLinkAboutOrdinance No. 2943-2017M Suggested by: Administration CITY OF KENAI ORDINANCE NO. 2943 -2017 AN ORDINANCE OF THE COUNCIL OF THE CITY OF KENAI, ALASKA, AMENDING KENAI MUNICIPAL CODE 7.25 - CITY BUDGET FOR AMENDMENTS NEED TO IMPLEMENT A GENERAL FUND, FUND BALANCE POLICY. WHEREAS, 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); and, WHEREAS, the City goal is to maintain an appropriate amount of reserves that is neither too high nor low; and, WHEREAS, a fund balance policy for the City's General Fund will be the tool used achieve this goal; and, WHEREAS, components of an appropriate amount of reserves will include a Budget Stabilization Reserve, an Operational and Capital Contingency Reserve, other Council commitments or assignments, and other Generally Accepted Accounting Principle (GAAP) required classifications; and, WHEREAS, the Budgetary Stabilization Reserve is equivalent to a risk adjusted three (3) months of General Fund expenditures and operating transfers; and, WHEREAS, the sum of the Budget Stabilization Reserve, Council created commitments or assignments, and other GAAP required classifications of fund balance is the minimum recommended level of City General Fund, Fund Balance; and, WHEREAS, the Operational and Capital Contingency Reserve is equivalent to one (1) risk adjusted month of General Fund Expenditures; and, WHEREAS, when combined, the Budgetary Stabilization Reserve and the Operational and Capital Contingency Reserve shall equal a risk adjusted four (4) months of General Fund expenditures and operating transfers; and, WHEREAS, should the City's General Fund, Fund Balance ever fall below the minimum recommended level or exceed the maximum recommended level, the proposed policy would require a plan to correct such deficiencies or excesses in a period not to exceed three (3) years, inclusive of the proposed budget year; and, Ordinance No. 2943 -2017 Page 2 of 8 WHEREAS, the proposed policy will amend the City Manager budget submittal requirements of KMC 7.25.010 and create a self - imposed Council restriction on the spending of the minimum recommended level of reserves; and, WHEREAS, the self - imposed Council restriction attempts to balance what council would determine to be a true need and the temptation to utilize reserves from the minimum required amount for one -time projects or recurring expenditures, that are not supported by reoccurring revenues, by requiring five affirmative votes of Council for passage of any appropriating ordinance that would utilize reserves from the minimum required amount; and, WHEREAS, establishment of a Fund Balance Policy which determines a minimum and maximum level of General Fund, Fund Balance, establishes the circumstances in which each category of fund balance can be appropriated, and establish the requirements for replenishing deficiencies or eliminating excess is a GFOA and NACSLB recommended best practice and in the best interest of the City's residents and businesses. NOW, THEREFORE, BE IT ORDAINED BY THE COUNCIL OF THE CITY OF KENAI, ALASKA, as follows: Section 1. Form: That this is a code ordinance. Section 2. That KMC 7.25 - City Budget, shall be amended as follows: 7.25.010 Adoption procedure. (a) During or prior to the sixth week preceding the first day of the fiscal year, the City Administrator presents to Council a budget proposal for the next fiscal year. Such budget proposal shall set forth the City Administrator's recommendations, and be accompanied by an analysis of the anticipated income and expenditures of the City during the next fiscal year, together with comparative figures showing the estimated corresponding amounts for the current year and comparisons with the previous year. [THE PROPOSED EXPENDITURES SET FORTH IN THE BUDGET PROPOSAL SHALL NOT EXCEED THE EXPECTED REVENUES OF THE CITY. UNENCUMBERED FUNDS REMAINING AT THE END OF THE CURRENT FISCAL YEAR MAY BE REALLOCATED FOR PURPOSES SET FORTH IN THE BUDGET PROPOSAL.] (b) The Proposed budget shall project the ending level of fund balance greater than the amount calculated in 7.25.050(a) but less than the amount calculated in 7.250.060(a) in a period of not more than three (3) years inclusive of the proposed budget year. (c) Should the proposed budget project to expend any amount of fund balance for recurring expenditures, the City Manager must also present a Plan demonstrating future revenues, either new or from existing sources, will be sufficient to support the recurring expenditures within three (3) years, inclusive of proposed budget year. New Text Underlined; [DELETED TEXT BRACKETED] Ordinance No. 2943 -2017 Page 3 of 8 (d) Should the proposed budget project to expend any amount of fund balance for a one-time expenditure the City Manager must present a plan to assure compliance with section 7.25.01011?1. (b) The budget proposal shall be reviewed by the Council and be available for public inspection at the City Clerk's office. (c) The Council shall set a date for a public hearing on the budget proposal. Notice of the hearing shall be published in a newspaper of general circulation in the City not less than one (1) week before the hearing. (d) After the public hearing and not later than the tenth day of June, the Council shall, by ordinance, adopt a budget for the following fiscal year and make an appropriation of the money needed therefor, and shall, by resolution, fix the rate of levy of tax in accordance with KMC 7.05.010(b). 7.25.020 City budget control. (a) After approval by the Finance Director as to availability of unencumbered balances, transfers in amounts less than five thousand dollars ($5,000.00) may be made in line item accounts within the General Fund, Special Revenue Funds, Debt Service Funds, Enterprise Funds and Internal Service Funds without approval by the City Council. The City Clerk may make such transfers within the General Fund Department of the City Clerk, and the City Attorney may make such transfers within the General Fund Department of Law. The City Manager may make such transfers in all other areas except in the Legislative Department. The budgetary level of control will be the project level for Capital Project Funds. Object level transfers of five thousand dollars ($5,000.00) or more within a project will be reported to the Council on a monthly basis. (b) The City Council, by resolution, may make transfers in any amounts of unencumbered balances of line item accounts within a Department or within a fund. (c) The City Administrator is directed to charge all disbursements to "cost centers" established by the budget. A "cost center" is de -fined as a provision for expenditure specified by the budget of the City of Kenai for a department or activity specifically so recognized. 7.25.030 Unbudgeted appropriations. For any expenditures not provided an authorization in the budget for the fiscal year, the Council shall authorize such expenditures by ordinance, making the required appropriation. 7.25.035 Treatment of year -end encumbrances. Encumbrances outstanding at the end of any fiscal year are designated as non - lapsing appropriations, and are not classified as expenditures or liabilities of the current period. Without any direct action of the City Council, the subsequent New Text Underlined; [DELETED TEXT BRACKETED] Ordinance No. 2943 -2017 Page 4 of 8 year's annual budget shall be increased by the sum of such year -end encumbrances in the appropriate line of the budget. 7.25.040 Interfund borrowing or transfers. Interfund transfers shall be administered as follows: (a) Funds established by bond ordinances or covenants in such ordinances shall control such funds in accordance with the mandate of the applicable ordinance. (b) For short term borrowing between funds, also sometimes known as interfund transfers, the Council shall authorize such borrowing by ordinance. Such borrowing shall comply with the Charter of the City of Kenai, Section 6 -2. 7.25.050 Budgetary Stabilization Reserve be classified as committed fund balance. General Fund, Fund Balance. Appropriation of fund balance which requires use of the minimum recommended level in 7 25 050(a) requires an affirmative vote of at least five (5) Council Members. New Text Underlined; ]DELETED TEXT BRACKETED] Ordinance No. 2943 -2017 Page 5 of 8 [7.25.060 WORKING CAPITAL RESERVE. THERE SHALL BE ESTABLISHED IN THE GENERAL FUND A WORKING CAPITAL RESERVE. SUCH RESERVE SHALL BE FUNDED BY RESERVING A PORTION OF THE GENERAL FUND BALANCE AT JUNE 30, 1977. SUCH RESERVE SHALL BE LIMITED TO FOUR HUNDRED THOUSAND DOLLARS ($400,000.00), WHICH MONIES SHALL BE USED FOR THE PURPOSE OF MEETING THE CASH FLOW REQUIREMENTS NECESSARY FOR THE NORMAL DAILY OPERATIONS OF THE CITY WITHIN THE GENERAL FUND. USE OF THE MONIES DEDICATED IN THIS SECTION FOR ANY PURPOSE OTHER THAN AS PROVIDED IN THIS SECTION MAY BE MADE ONLY AFTER OPPORTUNITY FOR PUBLIC HEARING ON SUCH OTHER USE HAS BEEN AFFORDED AND FIVE (5) MEMBERS OF THE COUNCIL HAVE VOTED IN FAVOR OF SUCH OTHER USE AT A REGULAR MEETING. THIS SECTION MAY BE AMENDED OR REPEALED ONLY BY NON - EMERGENCY ORDINANCE.] 7.25.[070]090 Revenues from interest and sale of non -trust land. (a) [ALL REVENUES EARNED FROM CITY INVESTMENTS SHALL BE RECORDED IN THE GENERAL FUND. THOSE EARNINGS DERIVED FROM CASH HELD IN FUNDS THAT ARE REQUIRED BY FEDERAL OR STATE STATUTE OR OTHER APPROPRIATE AUTHORITY TO BE ALLOCATED TO SPECIFIC FUNDS SHALL BE TRANSFERRED TO THOSE RESPECTIVE FUNDS. REMAINING REVENUES SHALL BE TRANSFERRED FIRST TO GENERAL OBLIGATION DEBT SERVICE FUNDS IN THE AMOUNT OF THEIR RESPECTIVE ANNUAL DEBT SERVICE REQUIREMENTS, UNTIL SUCH TIME THAT A FUND'S ACCUMULATED UNRESERVED FUND BALANCE EQUALS OR EXCEEDS ITS REMAINING DEBT REQUIREMENTS. ANY REMAINING REVENUES ARE AVAILABLE TO THE GENERAL FUND, EITHER FOR DEDICATION TO GENERAL FUND OPERATIONS OR FOR DEDICATION TO THE GENERAL FUND CAPITAL IMPROVEMENT RESERVE AS PROVIDED BY COUNCIL.] All revenues earned from City investments shall be recorded in the General Fund or in funds that are required by federal or state or other appropriate authority. General find investment earnings shall be transferred first to General Obligation Debt Service Funds in the amount of their respective annual debt service requirements until such time that s fund's accumulated unreserved fund balance equals or exceeds its remaining debt requirements. Any remaining revenues are available to the General Fund. (b) The principal proceeds from sales of City - owned, non -trust lands shall be recorded in a separate City account. Monies in this account may not be spent or appropriated but rather invested. Revenues earned on monies in this account may be used for any lawful purpose. For this purpose, non -trust lands are defined as lands owned by the City other than lands held in trust by the City under the terms of conveyance thereof to the City. Proceeds from sales of lands received on foreclosure for special assessments or for taxes shall first be reduced by necessary amounts for payments of such assessments, taxes, and related costs. New Text Underlined; [DELETED TEXT BRACKETED] Ordinance No. 2943 -2017 Page 6 of 8 I(C) REVENUES DEDICATED TO THE GENERAL FUND RESERVE FOR CAPITAL IMPROVEMENTS IN THIS SECTION MAY NOT BE APPROPRIATED FOR ANY PURPOSE OTHER THAN FOR PURCHASES OR IMPROVEMENTS OF A CAPITAL NATURE EXCEPT BY NON - EMERGENCY ORDINANCE PASSED AT A REGULAR COUNCIL MEETING (AFTER OPPORTUNITY FOR PUBLIC HEARING ON SUCH OTHER PURPOSE HAS BEEN AFFORDED) ON THE FAVORABLE VOTE OF AT LEAST FIVE (5) MEMBERS OF THE COUNCIL. THIS SECTION MAY BE AMENDED OR REPEALED ONLY BY NON - EMERGENCY ORDINANCE.] [7.25.080 PROHIBITION OF USE OF CAPITAL IMPROVEMENT RESERVES FOR AIRPORT IMPROVEMENTS. USE OF MONIES FROM THE CAPITAL IMPROVEMENT RESERVE FOR AIRPORT OR AIRPORT LANDS IMPROVEMENTS IS SPECIFICALLY PROHIBITED EXCEPT WHERE THERE ARE NO MONIES (OR INSUFFICIENT MONIES) AVAILABLE FOR SUCH IMPROVEMENTS, IN WHICH CASE MONIES FROM THE FUND DEDICATED HEREIN CAN BE ADVANCED FOR SUCH IMPROVEMENTS AS A LOAN TO BE REIMBURSED FROM AIRPORT SOURCES OF INCOME. 7.25.090 WHEN VOTER RATIFICATION REQUIRED FOR USE. NO CAPITAL PROJECT APPROVED BY COUNCIL WHICH REQUIRES MUNICIPAL FINANCING (EXCLUDING GOVERNMENT GRANTS AND AMOUNTS TO BE REIMBURSED FROM BENEFITED PROPERTIES) TO BE PAID FROM CAPITAL IMPROVEMENT RESERVE MONIES IN EXCESS OF FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) SHALL BE CONTRACTED UNLESS THE DESIRABILITY OF SUCH PROJECT IS RATIFIED BY THE VOTERS AT A GENERAL OR SPECIAL ELECTION. 7.25.100 AUTHORIZED USE OF CAPITAL IMPROVEMENT RESERVES. SUBJECT TO THE ABOVE PROVISIONS, AND IN ADDITION TO THE PROVISIONS OF KMC 7.25.070(C), SUCH MONIES MAY BE USED AT THE DISCRETION OF COUNCIL: (a) TO PROVIDE MUNICIPAL FINANCING FOR CAPITAL IMPROVEMENT PROJECTS IN AN APPROVED ASSESSMENT DISTRICT WITH THE BALANCE OF THE NECESSARY FINANCING TO BE APPORTIONED TO THE BENEFITED PROPERTIES IN ACCORDANCE WITH THE PROVISIONS OF THE CHARTER AND THE ORDINANCES ENACTED PURSUANT THERETO; (b) TO USE IN LIEU OF BONDING TO PROVIDE FOR THAT PORTION OF FINANCING OF AN APPROVED ASSESSMENT DISTRICT TO BE ULTIMATELY PAID BY OWNERS OF BENEFITED PROPERTIES, WITH SUCH FINANCING TO BE REIMBURSED FROM COLLECTIONS OF ASSESSMENTS OR SALES OF LAND FORECLOSED FOR SUCH COLLECTIONS WITHIN SAID ASSESSMENT DISTRICT; New Test Underlined; [DELETED TEXT BRACKETED] Ordinance No. 2943 -2017 Page 7 of 8 (c) TO PROVIDE MUNICIPAL FINANCING FOR ANY PROJECTS FOR WHICH ASSESSMENT DISTRICTS ARE NOT AUTHORIZED AND FOR WHICH NO STATE OR FEDERAL GRANTS ARE AVAILABLE; (d) TO PROVIDE THE MUNICIPAL SHARE OF FINANCING FOR PROJECTS FOR WHICH STATE, FEDERAL, OR STATE AND FEDERAL GRANTS ARE AVAILABLE AND TO PROVIDE ADVANCE FINANCING TO BE REFUNDED FROM SUCH GRANTS.] 7.25.[110]100 Equipment Replacement Fund. (a) A fund entitled Equipment Replacement Fund is created. The fund shall be an internal service fund as defined by generally accepted accounting principles. The purpose of the fund is to provide financing for equipment which is anticipated to cost in excess of fifty thousand dollars ($50,000.00) and which would otherwise be financed by the General Fund. (b) The Equipment Replacement Fund is not required to have an annual budget; however, any cash outlay for equipment purchases from the Equipment Replacement Fund shall be approved by resolution of the City Council. (c) The Equipment Replacement Fund shall be allocated interest earnings on all cash balances in the fund. Proceeds from the sale of surplus equipment will be deposited in the Equipment Replacement Fund if the fund will be financing the replacement of the equipment, or if the equipment was purchased with fund assets. Any transfer of Equipment Replacement Fund assets to another fund shall be accomplished by ordinance. (d) The City Manager will maintain a schedule of all equipment owned by the Equipment Replacement Fund and shall make recommendations to the City Council when equipment is to be purchased by the fund. 7.25.[120]110 Setting fee schedules. The Council may adopt and amend a fee schedule specifying the rates, charges, or fees imposed by the City. Unless otherwise provided in the Kenai Code of Ordinances, any rates, charges, or fees imposed by the City of Kenai shall be set by the City Manager and shall be effective upon approval by resolution of the Council. Section 3. That pursuant to KMC 1.15.070(f) this Ordinance shall take effect 30 days after enactment. ENACTED BY THE COUNCIL OF THE CITY OF KENAI, ALASKA, this 5th day of April, 2017. BRIAN GAB EL, SR., MAYOR New Text Underlined; [DELETED TEXT BRACKETED] Ordinance No. 2943 -2017 Page 8 of 8 ATTEST: Sandra M di i; C erk Approved by in .?r Introduced: March 15, 2017 Adopted: April 5, 2017 Effective: May 5, 2017 New Text Underlined; [DELETED TEXT BRACKETED] POLICY No. 17 -03 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 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 neither too high nor too low. PURPOSE This policy establishes a target level of Kd I sustain financial stability and to provide�`�ru reserves. This policy establishes a rocess`fo, level of fund balance and the prioiity for the This policy also provides a mechanism f r mi Fund Balance. This policy gnty apple s to the a�ance r the General Fund in order to ent management of the City's financial reaching and or maintaining the targeted s`e of resources in excess of the target. nitoring and reporting the City's General 3eneral Fund. DEFINITIONS AND CLA SIFICATION5 Fund balance is a surplu of funds accrued from unexpended operating budgets and unanticipated r4ven es. Ns calculated as the difference between the assets and liabilities reporte `in a govve /rnmental fund. Fund balance consists 6f five (5) classifications that comprise a hierarchy based primarily on the extent'to which the City is bound to honor constraints on the specific purpose for which amounts can be spent. The five (5) 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 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. 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. Assigned fund balance amounts intended to be used by the government for specific purposes. Intent can be expressed by the City Councilor 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 programs or positions desired outside of the current and established budget or for, ne -time capital investments. There is no minimum funding requirement for tHsaccount. POLICY Designating Funds: The responsibility for designating fu ds to; specific classifications shall be as follows: • Committed fund balance — T4e City Council is the City's highest decision making authority, an -,the/f/ormal action required to establish, modify, or rescind a fund balance com itment is an ordinance passed by the Council. Commitme fs author; ed�lry Kenai Municipal Code include: o Encumb�ance� — Amounts encumbered at year -end by contract, including purchase`order, or encumbered by some other means shall be classified as committed. Budget Appropriation — Amounts appropriated in the annual budget, or in supplemental appropriations, for expenditures in the ensuing fiscal year shall be classified as committed. o Budgetary Stabilization Reserve —An amount created by this policy equal to a risk adjusted three (3) months of operating expenditures and transfers. Assigned fund balance — The City Council has retained authority to assign fund balance to a specific purpose. Assignments will be made by action of the Council. An ordinance is not required for assignment of fund balance. Annually, at budget adoption, Council will review and confirm existing assignments. Examples include: General Fund Page 3 of 4 Fund Balance Policy o Operational and Capital Contingencies Reserve — An amount created by this policy in excess of a risk adjusted three (3) months of expenditures and transfers but less than a risk adjusted four (4) months of expenditures and transfers. o Compensated Absences — Actual accumulated employee annual leave balances at the end of each fiscal year. Fund Balance Policy. It is the policy of the City of Kenai to commit to a budgetary stabilization reserve an amount of fund balance equal to a risk adjusted three (3) months of General Fund expenditures and transfers measured on a General Accepted Accounting Principles (GAAP) basis. The sum total of the budgetary stabilization reserve, other Council commitments and assignments, and fund balance reservations required by GAAP, will equal the minimum recommended fund balance rthe City's General Fund. This amount is prudent based upon an evaluation of e City's operating characteristics, diversity of tax base, reliability of non -pro pe ax ources, working capital needs, impact on bond rating, state and locale nomic ou oks, emergency and disaster risks, and other contingencies. In the ev&Qt thXthe fu balance drops below this minimum level, the City will deve p a n, implemented through the annual budgetary process, to bring the b nce back the target level over a period of no more than three (3) fiscal years, inc s`v�f the dget year which is to be adopted. The City Council has im sed n itse a rule requiring an affirmative vote by at least five (5) members of the ouil . in o er to appropriate fund balances below the established mini level. This appropriately balances the need to make such monies availab if neceary ' the judgement of the elected City Council, with the temptation to u this b ance to meet recurring operating needs when recurring operating revenue tre sufficient. Fund balance equal to a risk adjusted one (1) month of expenditures and transfers shall be assigned for an operational and capital contingencies reserve. The sum total of the budgetary stabilization reserve, the operational and capital contingencies reserve, other Council commitments and assignments, and fund balance reservations required by GAAP, will equal the maximum recommended fund balance for the City's General Fund. Fund balance in excess of this policy's maximum amount 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 recurring expenditures provided financial projections show the expenditures will be supported by revenues, other than a use of fund balance, within three (3) years, inclusive of the budget year which is to be adopted. Policy Administration The City Manager will report to the City Council an estimated, unaudited balance of General Fund Page 4 of 4 Fund Balance Policy General Fund, Fund Balance during the annual budget submission process. Fund balance must be reported by appropriate category and demonstrate compliance with this policy. The City Manager is required to propose a budget that meets the following requirements: 1. A projected ending level of fund balance at or above the minimum level established by this policy over a period of no more than three (3) fiscal years inclusive of the budget year being adopted. A budget showing any use of this policy's minimum amount of fund balance shall require five (5) affirmative votes of Council to adopt. 2. Include a prioritization for commitment or use of unassigned fund balance including a five (5) year capital priority list. 3. Financial projections showing recurring e: the revenue source, will be supported by balance, within three (3) fiscal years, incly Annually during the Comprehensive AnnuallItir Finance Director shall report the City's fund ba components in accordance with GAA and this =noaf'ures, for which fund balance is ;V6nues, other than the use of fund ,e olthe budget year being adopted. yal Report (CAFR) presentation, the a and the classification of the various icy. To: Mayor Gabriel Council Members "Villaye with a Past, C# 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 -�! V From: Terry Eubank, Finance Director,5f R ✓� K Date: March 9, 2017 Re: Adoption of a General Fund, Fund Balance Policy via Ordinance 2943 -2017 The purpose of this memo is to recommend passage of Ordinance 2943 -2017. Ordinance 2943 -2017 will codify the City's new General Fund, Fund Balance Policy. 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). Through the development of this new policy, the administration completed the following items: 1. Development of a new General Fund, Fund Balance Policy which included: a. Review of published best practices for policy development. b. Detailed analysis of each General Fund revenue source and their historical volatility. c. Detailed review of current classifications of General Fund, Fund Balance. d. Analysis of other risk factors impacting the City and its need for increased reserves. e. Establishment of replenishment and reduction guidelines. 2. Development of recommended changes to budget submission requirements of the City Manager. 3. Review and recommended updates to KMC 7.25 for implementation of the new policy, changed budget submission requirements of the new City Manager, and other recommended amendments. Fund Balance Policy Development GFOA and NACSLB best practices for development of a fund balance policy include: 1. The policy should establish a minimum and maximum range of recommended fund balance. 2. The policy should establish the circumstances in which each category of fund balance can be appropriated. 3. The policy should establish guidelines for replenishing deficiencies or eliminating excesses in fund balance. The proposed policy creates a minimum level of fund balance, the sum of Council established commitments and assignments, fund balance classifications required by Generally Accepted Accounting Principles (GAAP) and the policy's Budget Stabilization Reserve, which should be achieved and maintained to assure the long -term stability of the City's General Fund operations. Use of fund balance below the policy's minimum 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 need and the temptation to use this balance for one time projects or operations that are not supported by reoccurring revenues. Use of reserves below the minimum required level will also require a plan for replenishment. The Budget Stabilization Reserve is equal to a risk adjusted three months of General Fund expenditures and operating transfers. Risk adjustment occurs by calculating the average annual volatility for each revenue class over a 20 year period at one standard deviation. For FY2017 the base of three months becomes 3.8219 months after adjustment for risk. 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. Adding the Operational and Capital Contingency Reserve to minimum required fund balance will establish the maximum recommended fund balance amount. The Operational and Capital Contingency Reserve is equal to one month of risk adjusted General Fund expenditures and operating transfers. After risk adjustments, one month becomes 1.2735 months. Application of the policy to the June 30, 2016 General Fund, Fund Balance of $10,418,000 produces a policy minimum of $6,946,578, a maximum of $8,582,989, and unassigned fund balance of $1,835,111. 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 3.8219 (4,911,197 Total Committed (5,641,780) Assigned: Accrued Compensated Absences (715,861) * Operational and Capital Contingencies Reserve 1.2735 (1,636,411 Total Assigned (2,352,272 Unassigned S 1.835.111 Unassigned balances 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. The policy requires a plan to be implemented over not more than three years, inclusive of the budget year being proposed, for achievement of the policy's minimum or maximum fund balance amount should the actual fund balance fall outside this range. Attachment A graphically depicts the policy by showing the different classifications of fund balance, the policy minimum and maximum, and actual fund balance. Attachment B depicts the restrictions placed upon the use of each fund balance above the policy maximum, within the policy's appropriate range, and below the policy's minimum. The proposed policy follows GFOA and NACSLB best practices by determining a minimum and maximum range of fund balance, establishes criteria for appropriation of fund balance in different ranges of the policy, and establishes a guidelines for adjustment to fund balance when the balance falls outside the appropriate policy range. City Manager Budget Submission Guidelines Currently KMC 7.25.010 prohibits expenditures set forth in the budget proposal from exceeding the expected revenues of the City. KMC 7.25: 1. Prohibits the City Manager from presenting a budget utilizing fund balance. 2. Is a very conservative approach but limits flexibility to recommend the use of fund balance during temporary economic downturns. 3. Requires a Council member to propose utilization of fund balance. 4. Policy works well in times of stable or growing revenues and moderately increasing expenditures. 5. Policy limits the administration in times of shrinking revenues, significantly increasing expenditures, or proposing use of fund balance for capital projects. The administration's recommendation is for the City Manager's proposed budget to show compliance with the fund balance policy within three years, inclusive of the year for which the budget is being proposed. Should the City Manager propose the use of fund balance for recurring expenditures, future revenue projections must demonstrate sufficiency to support the recurring expenditures within three years, inclusive of the year for which the budget is being proposed. A budget proposing the use of fund balance for non - recurring expenditures must project fund balance above the policy minimum within three years, inclusive of the year for which the budget is being proposed. Any budget proposing the use of fund balance below the policy minimum would require five affirmative votes of Council. It should be noted that what is being proposed is less restrictive than what was discussed at the February 28, 2017 work session on the policy. At the suggestion of Council Member Navarre the administration has removed the prohibition on the City Manager presenting a budget that utilizes fund balance below the policy's minimum level. The policy would still require five affirmative votes of Council to appropriate fund balance below the policy minimum but provides the City Manager the ability to recommend what he or she would believe is the best recommendation to Council. KMC 7.25 Code Amendments 725.010 The administration is recommending amendment to KMC 7.25 to provide greater flexibility in presenting a budget where fund balance is utilized but includes safeguards to constrain the use of fund balance for one -time and recurring expenditures. 7.25.020 — 7.25.040 No proposed amendment. 7.25.050 — 7.25.080 New sections of code created for the implementation of the policy. 1. 7.25.050 establishes the Budget Stabilization Reserve and defines the minimum fund balance recommended. 2. 7.25.060 establishes the Capital and Operating Contingency Reserve and defines the maximum fund balance recommended. 3. 7.25.070 defined unassigned fund balance. 4. 7.25.080 describes the appropriation requirements for fund balance below the policy minimum level. 7.25.060 The original 7.25.060 was eliminated because the Budget Stabilization Reserve is intended to include the working capital needs of the City, and there no longer needs to be a separate commitment for working capital. 725.070 — 7.25.100 7.25.070 was renumbered to 7.25.090 and was amended to eliminate the General Fund Capital Improvement Reserve. 7.25.080 — 7.25.100 are proposed to be eliminated. The current balance of the General Fund Capital Improvement Reserve is $9,746 and there have been no contributions to the reserve since the issuance of the library's expansion bonds because interest earning have not exceed debt service requirements. Elimination of the reserve has effectively occurred over time with its reduction to less than $10,000. The proposed amendment will eliminate the General Fund Capital Improvement Reserve. 7.25.110 This section has been renumbered to 7.25.100. 7.25.120 This section has been renumbered to 7.25.110. KMC 7.25 Code As Proposed The following shows how Chapter 7.25 would read if the proposed new language is adopted by Council. Deleted language is not provided for ease of readability, new language is underlined. 7.25.010 Adoption Procedure. (a) During or prior to the sixth week preceding the first day of the fiscal year, the City Administrator presents to Council a budget proposal for the next fiscal year. Such budget proposal shall set forth the City Administrator's recommendations, and be accompanied by an analysis of the anticipated income and expenditures of the City during the next fiscal year, together with comparative figures showing the estimated corresponding amounts for the current year and comparisons with the previous year. [ (b) The proposed budget shall proiect the ending level of fund balance greater than the amount calculated in 7.25.050(a) but less than the amount calculated in 7 25 060(a) in a period of not more than three (3) years inclusive of the proposed budget year. (c) Should the proposed budget project to expend any amount of fund balance for recurring expenditures the City Manager must also present a plan demonstrating future revenues either new or from existing sources, will be sufficient to support the recurring expenditures within three (3) years inclusive of the proposed budget year. (d) Should the proposed budget project to expend any amount of fund balance for a one-time expenditure the City Manager must present a plan to assure compliance with section 7.25.010(b). ([tl The budget proposal shall be reviewed by the Council and be available for public inspection at the City Clerk's office. (fl The Council shall set a date for a public hearing on the budget proposal. Notice of the hearing shall be published in a newspaper of general circulation in the City not less than one (1) week before the hearing. (gi After the public hearing and not later than the tenth day of June, the Council shall, by ordinance, adopt a budget for the following fiscal year and make an appropriation of the money needed therefor, and shall, by resolution, fix the rate of levy of tax in accordance with KMC 7.05.010(b). 7.25.020 City budget control. (a) After approval by the Finance Director as to availability of unencumbered balances, transfers in amounts less than five thousand dollars ($5,000.00) may be made in line item accounts within the General Fund, Special Revenue Funds, Debt Service Funds, Enterprise Funds and Internal Service Funds without approval by the City Council. The City Clerk may make such transfers within the General Fund Department of the City Clerk, and the City Attorney may make such transfers within the General Fund Department of Law. The City Manager may make such transfers in all other areas except in the Legislative Department. The budgetary level of control will be the project level for Capital Project Funds. Object level transfers of five thousand dollars ($5,000.00) or more within a project will be reported to the Council on a monthly basis. (b) The City Council, by resolution, may make transfers in any amounts of unencumbered balances of line item accounts within a Department or within a fund. (c) The City Administrator is directed to charge all disbursements to "cost centers" established by the budget. A "cost center" is defined as a provision for expenditure specified by the budget of the City of Kenai for a department or activity specifically so recognized. 7.25.030 Unbudgeted appropriations. For any expenditures not provided an authorization in the budget for the fiscal year, the Council shall authorize such expenditures by ordinance, making the required appropriation. 7.25.035 Treatment of year -end encumbrances. Encumbrances outstanding at the end of any fiscal year are designated as non - lapsing appropriations, and are not classified as expenditures or liabilities of the current period. Without any direct action of the City Council, the subsequent year's annual budget shall be increased by the sum of such year end encumbrances in the appropriate line of the budget. 7.25.040 Interfund borrowing or transfers. Interfund transfers shall be administered as follows: (a) Funds established by bond ordinances or covenants in such ordinances shall control such funds in accordance with the mandate of the applicable ordinance. (b) For short term borrowing between funds, also sometimes known as interfund transfers, the Council shall authorize such borrowing by ordinance. Such borrowing shall comply with the Charter of the City of Kenai, Section 6 -2. budgeted General Fund expenditures and operating transfers and will be classified as committed fund balance. (a) The sum of the Budget Stabilization Reserve Council created commitments or assignments, and other Generally Accepted Accounting Principle required classifications of fund balance is the minimum recommended level of City General Fund, Fund Balance. (b) Should General Fund Fund Balance be less than the amount in 7.25.050(a), Council shall adopt a plan to replenish the reserves to at least the minimum level of 7.25.050(a). The plan must project reserves above the minimum level within three years, inclusive of the budget year which is being adopted. month of budgeted General Fund expenditures and operating transfers an d will be classified as assigned fund balance. (a) The sum of the Budgetary Stabilization Reserve the Operational and Capital Contingency Reserve other Council created commitments or assignments and other Generally Accepted Accounting Principle required classifications of fund balance will equal the maximum recommended level of General Fund Reserves. (b) Should General Fund Fund Balance be more than the amount in 7.25.060(a). Council shall adopt a plan to reduce the reserves to at least the maximum level of 7.25.060(a). The plan must project reserves below the maximum level within three years inclusive of the budget year which is being adopted. amount calculated in 7 25 060(a) from total General Fund. Fund Balance. 7 25 080 Appropriation of General Fund Fund Balance Below the Recommended Minimum Level. Appropriation of fund balance which requires use of the minimum recommended level in 7 25 050(a) requires an affirmative vote of at least five (5) Council Members. 7.25.090 Revenues From Interest and Sale of Non -trust Land. (a) All revenues earned from City investments shall be recorded in the General Fund. Those earnings derived from cash held in funds that are required by federal or state statute or other appropriate authority to be allocated to specific funds shall be transferred to those respective funds. Remaining revenues shall be transferred first to General Obligation Debt Service Funds in the amount of their respective annual debt service requirements, until such time that a fund's accumulated unreserved fund balance equals or exceeds its remaining debt requirements. Any remaining revenues are available to the General Fund (b) The principal proceeds from sales of City- owned, non -trust lands shall be recorded in a separate City account. Monies in this account may not be spent or appropriated but rather invested. Revenues earned on monies in this account may be used for any lawful purpose. For this purpose, non -trust lands are defined as lands owned by the City other than lands held in trust by the City under the terms of conveyance thereof to the City. Proceeds from sales of lands received on foreclosure for special assessments or for taxes shall first be reduced by necessary amounts for payments of such assessments, taxes, and related costs. 7.25.100 Equipment Replacement Fund. (a) A fund entitled Equipment Replacement Fund is created. The fund shall be an internal service fund as defined by generally accepted accounting principles. The purpose of the fund is to provide financing for equipment which is anticipated to cost in excess of fifty thousand dollars ($50,000.00) and which would otherwise be financed by the General Fund. (b) The Equipment Replacement Fund is not required to have an annual budget; however, any cash outlay for equipment purchases from the Equipment Replacement Fund shall be approved by resolution of the City Council. (c) The Equipment Replacement Fund shall be allocated interest earnings on all cash balances in the fund. Proceeds from the sale of surplus equipment will be deposited in the Equipment Replacement Fund if the fund will be financing the replacement of the equipment, or if the equipment was purchased with fund assets. Any transfer of Equipment Replacement Fund assets to another fund shall be accomplished by ordinance. (d) The City Manager will maintain a schedule of all equipment owned by the Equipment Replacement Fund and shall make recommendations to the City Council when equipment is to be purchased by the fund. 7.25.110 Setting Fee Schedules. The Council may adopt and amend a fee schedule specifying the rates, charges, or fees imposed by the City. Unless otherwise provided in the Kenai Code of Ordinances, any rates, charges, or fees imposed by the City of Kenai shall be set by the City Manager and shall be effective upon approval by resolution of the Council. Your support for adoption of the proposed policy and suggest amendments to KMC 7.25 is appreciated. T V_ p O C �- Y IvJ O m +T+ CO U 1 Q 3 Y LL c v d E � L LL V M io Q c v C7 v @ v Y w C m Q E O O c d z o P, O O O O O O O O O O q O O O O O O a a O q O O O �y N ✓� h N V1 N y C m a u c m a c E E .H I c d z o P, d d o a K d VC ¢ O q a � N m O � a a q � I I v E y m ` ' I N v � d d a d O d 6 C m y s N V C d n W V `m d a c r _q c � � o d q O N e n m O � I N W q a w d N q a a` d V { d w m E s a v c v 5 � O ¢ Q ry C m a u c m a c E E .H I c q o P, ¢ o a N d ¢ e c a � � c q q O � L � I I C m a u c m a c E E .H I A u '0 c 0 Y u O N Y (Q U -p � C CO O Y LL C � w c E 7 i LL U t0 10 Y L a� w l7 L N w w > d w a .� o w E 7 r 10 C 'C Y w L? 0 C a N X.0 ntm no c w x a m a c w ? u E o .t c w o N m •c '; £ E n y E w c o d E y $ C c w o° v o y c o �p c N p w Y p 0 C 7 C N N Y a w w> C o w'o C V C a M h X 0 w O w w 0 a w a " H L i L =c E m CL C m a° •N w .,, N o 7> w Y E w CL t^my E e c' m C u c r O p O w w N v Y u E u L> U IO L r a° E- a o 3 3 a w to a w E E up a awi C N 'O W a 0 0 E C L p c o 0 C Y Ad LO c 3 C v� M Y d E O O w o = u c o w E 3 a E > « c O w c O m . c a R 0 x c 0 w N m r a c N t H a N Ct . m m o 3 E v1 a > o• 2 C W C m v N w m a w c E a a O p w K u a a c L d C m 2 Y 3 a w E E up a awi C N v d .O n` m 0 N a Y W n N 0 N a E E W n 2 d e s' .d. A a m' v 3 a c v n v r c 'v d 0 N d C d a` E V W c °c d Li O 1 N C d a a d A c d E u° d i Q d c A 2 a m Q 'O W 0 0 0 o O 0 Q p O O O O O O O O O O j N c O N C O Ct v1 N 2 ' Q v d .O n` m 0 N a Y W n N 0 N a E E W n 2 d e s' .d. A a m' v 3 a c v n v r c 'v d 0 N d C d a` E V W c °c d Li O 1 N C d a a d A c d E u° d i Q d c A 2 a m Q 'O W O I Q e`1 Q N c O N C O Ct y3 V 2 ' Q U d V d t0 n d rt e1 C K o d �d d ry a � ry S � c � � L d p I u "Villaye with a Past C# with a Future 210 Fidalgo Avenue, Kenai, Alaska 99611 -7794 Telephone: 907 - 283 -7535 / Fax: 907 - 283 -3014 www.kenai.city MEMORANDUM TO: Mayor Brian Gabriel and Kenai City Council THROUGH: Paul Ostrander, City Manager FROM: Terry Eubank, Finance Director DATE: March 29, 2017 SUBJECT: Ordinance 2943 -2017 The purpose of this memo is to provide examples of how compliance with the proposed fund balance policy will be communicated to Council. Compliance with the policy will be measured annually when the City Manager's proposed budget is presented to Council. Compliance will be demonstrated by providing a detailed list of each component of fund balance and its specific purpose. Following this listing will be a graphical representation of the City's fund balance and the appropriate range of fund balance as defined by the policy. If the City Manager's proposed budget is in compliance with the fund balance policy the projected fund balance will be less than the maximum level of the proposed KMC 7.25.060(a) and more than the minimum level of the proposed KMC 7.25.050(a). While the majority of focus is on fund balance dropping below the minimum of KMC 7.25.050(a), it is equally important to consider and be concerned should fund balance exceed the maximum level of KMC 7.25.060(a). Sound financial management will consider taxing policies, fee policies, and spending policies to assure sufficient reserves are maintained but do not become excessive. Attachment A is a graphical representation showing the allowable range of fund balance and fund balance over the budget projection period. attachment L Attachment A Ending Fund Balance 6130116 Nonspendable Restricted - Athletics - Daubenspeck Donation Committed: Outstanding Encumbrances Subsequent Year Expenditures Health Insurance Reserve Capital Improvement Plan Reserve Budgetary Stabilization Reserve Total Committed Assigned - Accrued Compensated Absences Operational and Capital Contingencies Reserve Total Assigned Unassigned $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 City of Kenai Fiscal Year 2018 Operating Budget General Fund Fund Balance Policy Compliance FY2016 FY2017 FY2018 FY2019 FY2020 Actual Projected Proposed Projected Projected $ 10,418,100 $ 10,094,348 $ 10,062,654 $ 9,943,807 $ 9,923,705 $ (588,937) $ (618,706) $ (624,937) $ (660,937) $ (696,937) $ (40,309) $ (50,000) $ (50,000) $ (50,000) $ (50,000) (590,274) (590,274) (771,178) (873,261) (790,721) (100,000) (100,000) - - - (1,000,000) (1,000,000) (1,000,000) (1,000,000) 3.8219 (4,859,154) (4,911,197) (4,818,173) (4,916,511) (5,023,065) $ (5,589,737) $ (6,651,471) $ (6,639,351) $ (6,839,772) $ (6,863,786) $ (715,861) $ (715,861) $ (730,178) $ (744,782) $ (759,678) 1.2735 (1,619,070) (1,653,788) (1,605,415) (1,638,181) (1,673,685) $ (2,334,931) $ (2,369,649) $ (2,335,593) $ (2,382,963) $ (2,433,363) $ 1,904,495 $ 454,522 $ 462,773 $ 60,135 $ (70,381) $ 2016Actual FY2017 Projected FY2018 Proposed FY2019 Projected FY2020 Projected —Mlmimum Fund Balance —Maximcm Fund Balance Actual Fund Balance "'villaye with a Past, C# with a Future" 210 Fidalgo Avenue, Kenai, Alaska 99611 -7794 Telephone: 907 - 283 -7535 / Fax: 907 - 283 -3014 www.kenai.city APPROVED BY COUNCIL. Date: 4 � 5-. R-I m MEMORANDUM TO: Mayor Brian Gabriel and Kenai City Council THROUGH: Paul Ostrander, City Manager {FROM: Terry Eubank, Finance Director DATE: April 5, 2017 SUBJECT: Requested amendment to Ordinance 2943 -2017 The purpose of this memo is to respectfully request amendment to Ordinance 2943 -2017. In response to a question raised by Councilman Molloy, it has been determined Kenai Municipal Code (KMC) does not accurately depict the current practice of investment earning allocation used by the Finance Department. The end result of current practice and KMC are the same but the method of reaching the end are different. Strictly following the KMC would require all investment revenue to be recorded in the General Fund and then transfers budgeted and made out of the General Fund to move the appropriate share of earnings to eligible funds. Eligible funds include the following: 1. Airport Special Revenue Fund 2. Airport funded capital project funds 3. Water & Sewer Special Revenue Fund 4. Water & Sewer funded capital project funds 5. Personal Use Fishery Special Revenue Fund 6. Personal Use Fishery funded capital project funds 7. Vintage Point Enterprise Fund 8. Vintage Pointe funded capital project funds 9. Equipment replacement fund 10. The City's two (2) permanent funds 11. Daubenspeck donation balance 12. Funds being invested for the Kenai Community Foundation The process of budgeting and transferring would require significant estimates and likely revisions via ordinance annually as investment earnings cannot be projected at the level of accuracy needed to assure transfer amounts are accurate. To avoid this multiple step process, investment earnings are allocated and recorded directly into each eligible fund at year end when the actual investment earnings are known. As stated earlier, the end result is the same amount of investment earnings being recorded in each fund with simply fewer steps to get there. In order to align current practice and the KMC the following amendment is respectfully requested. Amend KMC 7.25.090(a) of Ordinance 2934 -2017 to read the following: 7.25.090 Revenues From Interest and Sale of Non -trust Land. (a) All revenues earned from City investments shall be recorded in the General Fund or in funds that are required by federal or state statute or other appropriate authority. General fund investment earnings shall be transferred first to General Obligation Debt Service Funds in the amount of their respective annual debt service requirements, until such time that a fund's accumulated unreserved fund balance equals or exceeds its remaining debt requirements. Any remaining revenues are available to the General Fund. r