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HomeMy WebLinkAboutBUDGET AND FISCAL POLICY (REVISED) - 4-2017� 4 +00N • •_ CITY COUNCIL MEETING DATE: APRIL 18, 2017 TITLE: REVISED BUDGET AND FISCAL POLICY {STRATEGIC PLAN NO 4, 1d} CITY IMANAGP�' RECOMMENDED ACTION Adopt the revised Budget and Fiscal Policy. DISCUSSION CLERK OF COUNCIL USE ONLY: APPROVED ❑ As Recommended ❑ As Amended ❑ Ordinance on 18` Reading ❑ Ordinance on 2nd Reading ❑ Implementing Resolution ❑ Set Public Hearing For_ CONTINUED TO FILE NUMBER On June 4, 2012 the City Council approved the City's Budget and Fiscal Policy (Policy). The objective of the Policy was to establish General Fund Reserve limits as well as budgetary guidelines. The Policy was developed as a result of the 2008 recession that caused a major economic downturn and resulted in significant revenue shortfalls for many governmental agencies. The policy maintains base elements of providing a balanced budget including that ongoing revenues should match ongoing expenditures, as well as that one time funds may only be used for one -time non - recurring expenditures or term specific projects or programs. The revised policy addresses times that the City may encounter structural challenges. In addition, the policy will now include terminology and define one -time funds such as the ending operation balance, operating reserve account, and the unallocated fund (amount). With the attainment of the 20 percent reserve limit, staff is recommending modernizing the fiscal policy to include definitions consistent with the Governmental Accounting Standards Board on depicting fund balances and activities. In addition, staff recommends establishing a minimum reserve limit consistent with the Government Finance Officers' Association recommendation of no less than two months or 16.67 percent of General Fund operating revenues and expenditures. The resulting effect of this change will be increasing the current minimum level from 15 percent to 16.67 percent. In addition, the attainment of the 20 percent reserve level will now only be a recommended option. In addition, the recommended limits for the Economic Uncertainty fund will 65C -1 Amendment to the Budget and Fiscal Policy April 18, 2017 Page 2 be reduced from 10 percent to 5 percent of operating expenditures. Finally, the policy also allows the use of one time funds to be used for balancing the budget if a structural budget deficit has been identified. STRATEGIC PLAN ALIGNMENT Approval of this item supports the City's efforts to meet Goal #4 City Financial Stability — Objective #1 (maintain a stable, efficient and transparent financial environment), Strategy D (develop a fiscal health analysis tool that informs a department of its financial position in order to assist in its decision making process). FISCAL IMPACT Revision of the Fiscal Policy will allow the City to utilize one time funds to address structural budget challenges over the next few years. ��ll¢ecc�r /B �r sue* J� Francisco Gutierrez Executive Director Finance & Management Services Agency Exhibit 1: Budget and Financial Policy (Revised — 2017) Exhibit 2: Budget and Financial Policy (June 2012) Exhibit 3: Government Finance Officers Association — Best Practice recommendation 65C -2 EXHIBIT 1 City of Santa Ana (D Council Policy Mayor's Authorization Subject Council Approval Date: BUDGET AND FINANCIAL POLICIES Rev. 04/2017 BACKGROUND Recent economic recessions highlighted the need to establish and maintain adequate reserve policies to offset significant economic downturns and unforeseen rising costs, more effectively. During September 2015, the Government Finance Officers' Association (GFOA) recommended reserve levels, regardless of size of government, to be no less than 2 months of general fund operating revenues or expenditures. Thus, the adoption of a formal City Budget along with a Reserve Policy will provide a basis to manage significant financial events more effectively in the upcoming fiscal years. PURPOSE The City's Budget and Financial Policies ( "Reserves' or "Policy ") will define the recommended level for reserves for the General Fund as well as internal and enterprise operations. Additionally, it will also establish a criteria for the use of reserves and a process by which to replenish them if utilized. It is the intent to focus on the General Fund and incorporate additional reserve policies for internal and enterprise funds over the following fiscal year(s). GENERAL FUND The General Fund is the City's chief operating fund. It accounts for all general revenues including sales tax, property tax, business tax, hotel visitor's tax, as well as other fees and charges. It is the basis to fund general ongoing City operations such as police, fire (contract services), recreation, planning and building as well as other general support services. Furthermore, the following budget policy directives are recommended to be continued /implemented in order to maintain a positive operating reserve levels: General Fund Budget Policy Directives 1) It shall be established that a balanced budget will be presented annually to the City Council for adoption. A balanced budget will be defined as ongoing recurring operating revenues matching ongoing recurring operating expenditures including debt service. 2) Budget consideration of new programs, personnel, or capital related expenditures shall only be considered if a source of funding is identified either through a corresponding cost reduction, an identified general increase in general tax revenue. Source of funding should include consideration of ongoing general maintenance and operational costs. 3) In order to ensure a balanced budget objective, the City will continue to pursue internal operational efficiencies and strategies, such as technology, which minimize costs and impacts to City services. 4) Departments will be encouraged to continually achieve savings through internal organizational efficiencies. 5) Technology will be encouraged if it can be demonstrated that a one -time capital infusion can result in savings being generated beyond two fiscal years. 65C -3 Page 2 GENERAL FUND (continued) General Fund Budget Policy Directives (continued) 6) One time or term specific funding may only be used to match one -time non- recurring expenditures, term specific projects and programs, as well as capital expenditures unless specifically authorized by the Mayor and City Council. 7) In order to ensure proper maintenance of a continued balanced budget, the City Council should adopt a compensation and retirement benefit directive that provides guidance and conforms with established budget directives and reserve requirements as outlined in this policy. Unassigned Fund Balance In accordance with Governmental Accounting Standards Board (GASB) 54 and continuing to ensure a continued orderly operation of City Government and address any unforeseen economic occurrences, the City shall establish the following Reserve Accounts within the Unassigned Fund Balance category: • Operating Reserve • Economic Uncertainty Reserve • Unallocated Amount Operating Reserve Account As a measure of strong fiscal health and recommendations made by GFOA the City created an Operating Reserve Account, disclosing where two months (approximately 16.67 %) of recurring General Fund (011) operating revenues or expenditures (including transfers) are maintained. At no time is it permissible for the Operating Reserve requirement to fall below the above - referenced threshold. However, it is the intent of the City to ensure a significant Operating Reserve position is maintained and permitting should strive for a maximum amount of 20% for the Unassigned Reserve Account. Such Operating Reserves shall not be used to fund any form of operating expenditures or to cover any budgetary shortfall other than to preserve ongoing cash flow needs for the City. If at any point in time it is deemed that the City budget is performing at a structural deficit, the use of the unassigned fund balance account(s) is permissible upon approval by two thirds of the City Council. If approved, a corresponding plan to replenish the reserves should be adopted by the same vote. Use of the Operating Reserve account beyond two consecutive years is strictly prohibited unless a corresponding plan to balance the budget is submitted for approval to the Mayor and City Council. As a matterof prudence and fiscal solvency and in the event of a projected and /or realized structural deficit (budget basis), the City will utilize Economic Uncertainty (see below for account description) account funds prior to accessing the Operating Reserve account. Economic Uncertainty Account The reserve for Economic Uncertainty is established to offset any major variations in tax receipts as well as fees and charges or unforeseen cost increases. It is hereby established the City maintain within its Economic Uncertainty account a minimum level of 1% to 5% of recurring General Fund revenues with an objective of attaining a maximum goal of 5 %. Upon determination by the Finance Department, that negative variations in projected revenues from the largest revenue sources defined as Sales tax, Property tax, Property tax in Lieu, Utility Users tax, Business Tax, and Hotel Visitors tax exceed 2% with no corresponding General Fund expenditure offset, then the City Council may authorize use of the Economic Uncertainty Reserve by a two - thirds vote to offset the revenue loss prior to the close of the fiscal year end. A corresponding plan to replenish the reserve account must be adopted by the same vote. Budget and Financial Polices 65C -4 Page 3 GENERAL FUND (continued) Economic Uncertainty Account (continued) Upon determination by the Finance Department and report submission to the City Council that a structural deficit exists in the budgeted forecast of the upcoming fiscal year, the City Council may authorize use of the Economic Uncertainty Reserve to balance the budget by two thirds vote of the Council. However, authorization to utilize the Economic Uncertainty Reserve beyond two consecutive years is strictly prohibited unless a corresponding plan to balance the budget is submitted for approval to the Mayor and City Council. o Funding of the Eco no mic Uncertainty account wi I I beach ieved via a I location of excess fund balance, as determined /calculated at fiscal year -end (June 30). Specifically, funding will occur only if the Operating Reserve requirement has been met first, for an amount up to $500,000 annually. Unallocated Amount The Unallocated amount is defined as the General Fund's excess fund balance beyond the Operating Reserve (two months operating revenues and /or expenditures) and Economic Uncertainty goals ($500,000 available) funding /objectives are met. Amounts denoted in the unallocated account are to be used as additional funds to ensure that the City's minimum operating reserve requirement are met for future fiscal years. Additionally, this amount will be determined at year -end upon conclusion of the City's audit cycle. However, if at any point in time the City is determined to have excess balances resulting from project close -out or savings, encumbrance liquidations and or other savings, the amount should remained within the Unallocated amount available for assignment into the above - referenced fund balance categories. Ending Operating Balance The City's fiscal year -end (June 30) position otherwise known as Ending Operating Balance is calculated as follows: Operating Revenues (Total Revenues) Plus Other Financing Sources (Transfersln) Less: < Operating Expenditures> >( Total Expenditures)> Less: < Other Financing Sources> <( Transfers Out)> Ending Operating Balance Specifically if the operating balance is Positive, Operating Revenues and Transfers In is greater than Operating Expenditures and Transfers Out, fund balance is generated to fund either the Operating Reserve, Economic Uncertainty or Unallocated accounts. Conversely, if the Ending Operating Balance is negative, Operating Revenues and Transfers In is lower than Operating Expenditures and Transfers Out, no additional fund balance is generated to fund the above - referenced accounts. In addition the Unassigned Fund balance is reduced by the shortfall (negative amount). Upon meeting the above - referenced reserve requirements, any excess operating balances shall be provided to City Council for consideration, with a minimum of fifty percent (50 %) allocated for deferred maintenance, ensuring maintenance of pension stability, with the remaining balance to be utilized for non - recurring expenditures. Any General Fund ending operating balance, as determined at year -end, may be available to be assigned to the above - referenced Unassigned Fund Balance accounts. Any internal service fund that has funds in excess of the identified minimum reserve requirement as outlined in this policy, can be utilized as a means to meet the minimum General Fund Reserve requirements. Budget and Financial Polices 65C -5 Page 4 INTERNAL SERVICE FUNDS Background Internal Service Funds are established to administer and account for various activities whose purpose is to provide for goods and services to support other departments for their ongoing operational and programming needs. The delivery of these services is recovered on a cost recovery basis. Purpose It is the intent of the Internal Service Fund Reserve Policy to establish general guidelines as to the establishment of a proper recovery rate structure and define an appropriate level of reserves for each Internal Service Fund. It will also establish criteria for the use of reserves and establish a process by which to replenish reserves if utilized. Although this policy only addresses the Risk Management Funds (i.e. Liability and Property Insurance and Workers Compensation Fund), it is the intent to build upon and include all internal service funds within this policy. Operating Reserves Reserves for these accounts will be funded at target level approximating 80% of the claims payable (long -term liability) as defined in the actuarial study. In addition, one to two months of operational reserves will be included to address any variations related to revenues and /or expenditures (internal cost /cross charges). In the event a positive operating balance is generated, amounts defined in these accounts from general agencies shall be available for transferto the General Fund until such time that the General Fund reserve meets the minimum requirement of 15% or to establish the reserve for Economic Uncertainty. Transfers shall be submitted to Council for approval. Thereafter, any additional positive operating balances generated may be utilized to fund any deficits identified within other Internal Service Funds, as well as other unfunded capital and deferred related maintenance. Risk Management The Risk Management programs are established to protect the City's assets through the administration of a properly funded liability claim and insurance program and by minimizing the cost and effect of work - related injuries. Rates for these programs are established on a biennial actuarial basis. Deferred Maintenance Capital or deferred maintenance related funds should also maintain a one to two month operating reserve in order to minimize the impact of revenue and /or expenditures fluctuations year over year. In addition, Internal Service Funds, with the responsibility to maintain, replace, and /or repair facilities and /or equipment should develop a rate structure which supports capital replacement within the said funds. Reporting for the fund(s) capital replacement should be reported in a separate fund and /or accounting unit. The use of these funds for expenditures that do not include capital replacement requires two - thirds (2/3) vote from the City Council. Budget and Financial Polices 65C -6 EXHIBIT 2 City of Santa Ana Council Policy _. Mayor's Authorization Subject Council Approval Date: BUDGET & FINANCIAL POLICIES June A, 2012 Background The severity of the recent economic recession highlighted the need to establish and maintain adequate reserve policies to offset significant economic downturns and unforeseen rising costs more effectively. In 2002, The Government Finance officers' Association (GFOA) recommended reserve levels equal to a minimum of 5 % to 15% of operating revenues or one to two months of operating expenditures as a basis to establish sound reserve levels. Adoption of a formal City Budget and Reserve Policy will provide a basis to manage significant financial events more effectively in the future. PURPOSE The City's reserve policy will define the recommended level for reserves for the General Fund as well as internal and enterprise operations. The policy will outline a timeframe and plan that will assist the City in meeting the minimum General Fund requirements over the course of the next few years. It will also establish criteria for the use of reserves and establish a process by which to replenish reserves if used. It is the intent to focus on the General Fund initially and incorporate additional reserve policies for internal and enterprise funds over the next fiscal year. ^ [C'= The General Fund is the general operating fund for the City. It accounts for all general revenues including sales tax, property tax, business tax, hotel visitor's tax, as well as other fees and charges, it is the basis to fund general ongoing City operations such as police, fire (contract services), recreation, planning and building as well as other general support services. General Fund Budget Policy Directives - it shall be established that a balanced budget will be presented annually to the City Council for adoption. A balanced budget will be defined as ongoing recurring operating revenues matching ongoing recurring operating expenditures including debt service. One time or term specific funding can only be used to match one -time non recurring expenditures, term specific projects and programs, as well as capital expenditures. In order to ensure a balanced budget objective, the City will continue to pursue Internal operational efficiencies and strategies, such as technology, that minimize City costs and impacts to City services. in addition, no language shall be adopted that requires the City to maintain a minimum or required level of staffing and overtime. Budget & Financial Polices 650-7 Page 1 In order to ensure proper maintenance of a continued balanced budget, the City Council will adopt a compensation and retirement benefit directive that provides guidance and conforms with the established budget directives and reserve requirements as outlined in this policy. General Fund Reserves In order to ensure a continued orderly operation of City Government and to address any unforeseen economic occurrences the City shall establish two General Fund Reserve Accounts: An Unassigned Reserve Account and an Economic Uncertainty Reserve Account. Unassigned Reserve Account -In accordance with GFOA and in order to maintain the highest level of fiscal health, the City will maintain under the Unassigned Reserve Account designation a minimum reserve level of between 5 and 15% of recurring General Fund operating expenditures. At no time Is it permissible for the reserve requirement to fall below 5 %. However, it is the intent of the City to ensure a significant reserve position of at least 15 %. Upon attainment of 15 %, the City shall consider and if approved continue to strive for an overall goal of 20% for the Unassigned Reserve Account. Such reserves shall not he used to fund any form of operating expenditures or to cover any budgetary shortfall other than to preserve ongoing cash flow needs for the City. if at any point in time It is deemed that the City budget is performing at a structural deficit, the use of the Unassigned Reserve Account to balance the budget is strictly prohibited unless approved by two thirds of the City Council. If approved, a corresponding plan to replenish the reserves must be adopted by the same vote. Economic Uncertainty Reserve Account - It is hereby established that upon fulfillment of achieving a minimum Unassigned Reserve Account of 10 %, the City shall consider the establishment of a reserve account for Economic Uncertainty. The reserve for Economic Uncertainty is established to offset any major variations in tax receipts as well as fees and charges or unforeseen cost Increases. It is hereby established the City maintain a minimum reserve level of 1 to 10% of recurring General Fund revenues with an objective of attaining a maximum goal of 10%. - Upon determination by the Finance Department, that negative variations in projected revenues from the largest revenue sources defined as Sales tax, Property tax, Property tax in Lieu, Utility Users tax, Business Tax, and Hotel Visitors tax exceed 2% with no corresponding General Fund expenditure offset, then the City Council may authorize use of the Economic Uncertainty Reserve by a two-thirds vote to offset the revenue loss prior to the close of the fiscal year end. A corresponding plan to replenish the reserve account must be adopted by the same vote. Upon determination by the Finance Department and report submission to the City Council that a structural deficit exists in the budgeted forecast of the upcoming fiscal year, the City Council may authorize use of the Economic Uncertainty Reserve to balance the budget by two thirds Vote of the Council. However, authorization to utilize the Economic Uncertainty Reserve beyond two consecutive years is strictly prohibited. General Work Plan for Achieving General Fund Reserve Obiectives The following work plan is Intended to reach the unassigned reserve account of 15% in phases. The initial objective is to attain at least a 5% threshold over the course of the following fiscal year and between 7% and 8% ,> . Budget & Financial Polices 65C -8 Page 2 over the subsequent fiscal year. Upon attainment of the phased objectives, a comprehensive review of the general financial condition of the City will be completed and a new reserve work plan will be developed and submitted for approval that outlines the next intermediate steps for meeting the main objective of a reserve target level of 15 %. Until such time that the General Fund Unassigned Reserve meets the minimum phased requirements as outlined above, the following budgetary and operational guidelines shall be used as a basis to achieve the various minimum requirements. Budget consideration of new programs, personnel, or capital related expenditures shall only be considered If a source of funding is identified either through a corresponding cost reduction, an identified general increase in general tax revenue, or a one -time revenue infusion, Source of funding should include consideration of ongoing general maintenance and operational costs. Departments will be encouraged to continually achieve savings through internal organizational efficiencies. Technology will be encouraged if it can be demonstrated that a one -time capital infusion can result in savings being generated beyond two years. Any General Fund savings generated at the fiscal year end can be considered either for term specific operational or capital needs but a minimum of 5o% (up to 1001yo) of the savings shall be deposited Into the unassigned reserve balance until such time that the phased reserve levels are met, Any internal service fund that has funds In excess of the identified minimum reserve requirement as outlined in this policy, can be utilized as a means to meet the minimum General Fund Reserve requirements. Only unrestricted funds deemed transferable can be utilized. Any transfer to the General Fund Unassigned Reserve Balance will be submitted to Council for consideration and approval. In order to generate additional savings and until such time that the minimum level of reserves has been achieved, the Budget Office will only utilize a fiscally conservative profile for revenue projections. If the phased reserve target requirements as outlined above have not been met it is recommended that beginning in FY 14 -15 a more conservative projection factor be used to generate forced budgetary savings: (NOTE: Each 1% equates to approximately $2 million) FY 12 -13: 100% of recurring revenue projected; FY 13 -14: 100% of recurring revenue projected; FY 14 -15: 99% of recurring revenue projected; Such factors shall be used to generate General Fund savings until such time that a 7 % -8% unassigned General Fund reserve has been achieved. Any generated General Fund savings achieved after reaching between a 7 % -8% undesignated General Fund reserve shall be applied in the following order: Up to a max of 25 %- Unassigned General Fund Reserve Up to a max of 25 %- Economic Uncertainty Reserve Up to a max of 50% -Can be applied to term specific programs, projects, personnel as well as deferred capital maintenance. Page 3 Budget & Financial Polices 65C -9 Internal Service Funds Background Internal Service Funds are established to administer and account for various activities whose purpose is to provide for goods and services to support other departments for their ongoing operational and programming needs. The delivery of these services is recovered on a cost recovery basis. Purpose It is the Intent of the Internal Service Fund Reserve Policy to establish general guidelines as to the establishment of a proper recovery rate structure and define an appropriate level of reserves for each Internal Service Fund. It will also establish criteria for the use of reserves and establish a process by which to replenish reserves if utilized. Although this policy only addresses the Risk Management Funds (i.e. Liability and Property Insurance and Workers Compensation Fund), it Is the intent to build upon and include all internal service funds within this policy. Risk Management The Risk Management programs are established to protect the City's assets through the administration of a properly funded liability claim and insurance program and by minimizing the cost and effect of work - related injuries. Rates for these programs are established on a biennial actuarial basis. Reserves Reserves for these accounts will be funded at not less than 80% as defined in the actuarial study. In addition, three months of operational reserves will be included to address any variations related to revenues and expenditures. Any surplus amounts defined in these accounts from general agencies shall be available for transfer to the General Fund until such time that the General Fund reserve meets the minimum requirement of 15% or to establish the reserve for Economic Uncertainty. Transfers shall be submitted to Council for approval, There after any surplus can be used to fund any deficits identified in other Internal Service Fund reserves, as well as other unfunded capital and deferred related maintenance. Page 4 Budget &Financial Polices 65C -10 EXHIBIT 3 Government Finance Officers Association n Ir • �. BACKGROUND: In the context of financial reporting, the term fund balance is used to describe the net position of governmental funds calculated in accordance with generally accepted accounting principles (GAAP). Budget professionals commonly use this same term to describe the net position of governmental funds calculated on a government's budgetary basis,' While In both cases fund balance is intended to serve as a measure of the financial resources available in a governmental fund; It Is essential that differences between GAAP fund balance and budgetary fund balance be fully appreciated. 1. GAAP financial statements report up to five separate categories of fund balance based on the type and source of constraints placed on how resources can be spent (presented in descending order from most constraining to least constraining): nonspendable fund balance, restricted fund balance, committed fund balance, assigned fund balance, and unassigned fund balance.' The total of the amounts in these last three categories (where the only constraint on spending, if any, is imposed by the government Itself) is termed unrestricted fund balance. In contrast, budgetary fund balance, while it is subject to the same constraints on spending as GAAP fund balance, typically represents simply the total amount accumulatad from prior years at a point in time. 2. The calculation of GAAP fund balance and budgetary fund balance sometimes is complicated by the use of sub -funds within the general fund. In such cases, GAAP fund balance includes amounts from all of the subfunds, whereas budgetary fund balance typically does not. 3. Often the timing of the recognition of revenues and expenditures is different for purposes of GAAP financial reporting and budgeting. For example, encumbrances arising from purchase orders often are recognized as expenditures for budgetary purposes, but never for the preparation of GAAP financial statements. The effect of these and other differences on the amounts reported as GAAP fund balance and budgetary fund balance In the general fund should be clarified, understood, and documented. It is essential that governments maintain adequate levels of fund balance to mitigate current and future risks (e.g., revenue shortfalls and unanticipated expenditures) and to ensure stable tax rates. In most cases, discussions of fund balance will properly focus on a government's general fund. Nonetheless, financial resources available in other funds should also be considered in assessing the adequacy of unrestricted fund balance in the general fund. RECOPIIMENOATION: GFOA recommends that governments establish a formal policy on the level of unrestricted fund balance that should be maintained in the general fund for GAAP and budgetary purposes.' Such a 65C -11 guideline should be set by the appropriate policy body and articulate a framework and process for how the government would increase or decrease the level of unrestricted fund balance over a specific time period." In particular, governments should provide broad guidance in the policy for how resources will be directed to replenish fund balance should the balance fall below the level prescribed. Appropriate Level. The adequacy of unrestricted fund balance in the general fund should take into account each government's own unique circumstances. For example, governments that may be vulnerable to natural disasters, more dependent on a volatile revenue source, or potentially subject to cuts in state aid and /or federal grants may need to maintain a higher level In the unrestricted fund balance. Articulating these risks in a fund balance policy makes it easier to explain to stakeholders the rationale for a seemingly higher than normal level of fund balance that protects taxpayers and employees from unexpected changes in financial condition. Nevertheless. GFOA recommends, at a minimum, that general -purpose governments, regardless of size, maintain unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.5 The choice of revenues or expenditures as a basis of comparison may be dictated by what Is more predictable in a government's particular oircumstances a Furthermore, a government's particular situation often may require a level of unrestricted fund balance in the general fund significantly in excess of this recommended minimum level. In any case, 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 unrestricted fund balance in the general fund at any one time. In establishing a policy governing the level of unrestricted fund balance in the general fund, a government should consider a variety of factors, Including: 1. The predictability of its revenues and the volatility of its expenditures (Le., higher levels of unrestricted fund balance may be needed if significant revenue sources are subject to unpredictable fluctuations or if operating expenditures are highly volatile); 2. Its perceived exposure to significant one -time outlays (e.g., disasters, immediate capital needs, state budget cuts); 3. The potential drain upon general fund resources from other funds, as well as, the availability of resources in other funds; 4. The potential impact on the entity's bond ratings and the corresponding Increased cost of borrowed funds; 5. Commitments and assignments (i.e., governments may wish to maintain higher levels of unrestricted fund balance to compensate for any portion of unrestricted fund balance already committed or assigned by the government for a specific purpose). Governments may deem it appropriate to exclude from consideration resources that have been committed or assigned to some other purpose and focus on unassigned fund balance, rather than on unrestricted fund balance. Use and Replenishment. The fund balance policy should define conditions warranting its use, and if a fund balance falls below the government's policy level, a solid plan to replenish it. In that context, the fund balance policy should: 1. Define the time period within which and contingencies for which fund balances will be used; 2. Describe how the government's expenditure and /or revenue levels will be adjusted to match any new economic realities that are behind the use of fund balance as a financing bridge; 3. Describe the time period over which the components of fund balance will be replenished and the means by which they will be replenished. Generally, governments should seek to replenish their fund balances within one to three years of use. Specifically, factors influencing the replenishment time horizon Include 65C -12 1. The budgetary reasons behind the fund balance targets; 2. Recovering from an extreme event, 3. Political continuity; 4. Financial planning time horizons; 6. Long -term forecasts and economic conditions; 6. External financing expectations. Revenue sources that would typically be looked to for replenishment of a fund balance include nonrecurring revenues, budget surpluses, and excess resources In other funds (if legally permissible and there Is a defensible rationale). Year -end surpluses are an appropriate source for replenishing fund balance. Unrestricted Fund Balance Above Formal Policy Requirement. In some cases, governments can find themselves in a position with an amount of unrestricted fund balance in the general fund over their formal policy reserve requirement even after taking Into account potential financial risks In the foreseeable future, Amounts over the formal policy may reflect a structural trend, in which case governments should consider a policy as to how this would be addressed. Additionally, an education or communication strategy, or at a minimum, explanation of large changes in fund balance is encouraged. In all cases, use of those funds should be prohibited as a funding source for ongoing recurring expenditures. Notes: 1. For the sake of clarity, this recommended practice uses the terms GAAP fund balance and budgetary fund balance to distinguish these two different uses of the same term. 2. These categories are set forth in Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund 7ype Definitions. 3. Sometimes restricted fund balance includes resources available to finance items that typically would require the use of unrestricted fund balance (e.g., a contingency reserve). In that case, such amounts should be included as part of unrestricted fund balance for purposes of analysis. 4. See Recommended Practice 4.1 of the National Advisory Council on State and Local Budgeting governments on the need to "maintain a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of temporary revenue shortfalls or unpredicted one -time expenditures" (Recommended Practice 4.1). 5, In practice, a level of unrestricted fund balance significantly lower than the recommended minimum may be appropriate for states and America's largest governments (e.g , cities, counties, and school districts) because they often are in a better position to predict contingencies (for the same reason that an insurance company can more readily predict the number of accidents for a pool of 500,000 drivers than for a pool of fifty), and because their revenues and expenditures often are more diversified and thus potentially less subject to volatility. 6. In either case, unusual items that would distort trends (e.g., one -time revenues and expenditures) should be excluded, whereas recurring transfers should be included. Once the decision has boon made to compare unrestricted fund balance to either revenues and/or expenditures, that decision should be followed consistently from period to period. 203 N. LaSalle Street - Suite 27001 Chicago, IL 60601 -12101 Phone: (312) 977 -9700 - Fax: (312) 977 -4806 65C -13 65C -14