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HomeMy WebLinkAbout2011-06-27 11-228 ORDERCOUNCIL ACTION Item No. Date: June 27 2011 Item/Subject: Order, Adopting Fund Balance Policy Responsible Department: Firrarrce Commentary: Since the mid 90's Ne City of Bangor has had an extensive and detailed "Designated and Undesignated"fundbalancepolicy. Recent changes In Governmental Accounting Standards require the Cityto adopt a new fund balancepolicy. Under the new standards fund balances will no longer be classified as reserved for, designated and undesignated, but now must be classified for financial statement purposes as nonspendable, riaAdcted, committed, assigned and unassigned. The attached policy classifies fond balances in accordance with the recent accounting standards and maintains the Council's prior decisions related to fund balances. The only provision of the attached policy that is proposed! W change is the target level of unassigned (previously referred to as undesignated) fund balance. By Charter this fund balance shall be no more than 10% of me operating, excluding debt service for the General Fund and no less than 5%. By prior policy, the Council had astaNished a target of Z5%. The attached fund balance policy proposes a new lama of 8.33%, or one month's expenditures. The attached policy has been reviewed by the Finance Committee is unanimously recommend for approval. 00, n Department head Manager's Comments: O �t l OOIk, 4�1 City .1tyManager dnager Associated Information: Fund Balance Policy Legal Approval: c' Solicitor DrUoduced for X Passage _ First Reading Page Referral 2:1 228 Jove 27, 2011 Assigned to councilor _ giovaov CITY OF BANGOR (TITLE.) Order, Adopting Fund Balance Policy 9y ote City Council of the G'ty of arvion ORDERED, THAT the attached Fund Balance Policy is hereby adopted and shall supersede Council Orders 96-247, 9&126, 00-243, 02-159, 02-310, 07-314, 084121, 08-080 in their edirety. IM CTTf CO cm June 27. 2011 HDtpn Made a Secun for Pasaage paproed L� 1633 CITY OF BANGOR MAINE FUND BALANCE POLICY 1.0 Purpose The purpose of this policy Is to provide guidance related to the City's various fund balances as part of the City Council's and Management's fiduciary responsibility to ensure the long-term sound financial management of the City. The policy provides definitions, background information, limitations on use or balances (if any), target levels, funding mechanisms, and Identify the responsible City official by fund balance. This policy applies to the fund balances of the City's governmental funds only. 2.0 General Definitions Fund Ralance is a term used to describe the net assets, which Is the difference between the assets and Ilabllides In a governmental fund. Governmental fund balance is reported in five classifications that comprise a hierarchy based primarily on the extent to which the City is bound to honor constraints on the specific purposes for which amounts in those funds can be spent. The five classifications of governmental funds fund balance are defined as follows. • Non -spendable- resources which cannot be spent because they are either a) not in spendable form (i.e. inventories or prepaM items) or; b) legally or contractually required to be maintained intact (i.e. corpus of a trust). • Restdcted - resources with constraints placed on their use which are either a) externally imposed by creditors (i.e. debt covenants), grantors, contributors, or laws or regulations of other governments; or b) imposed by law through constitutional provisions or enabling legislation. • Committed - resources which are subject to limitations the government imposes upon itself as its highest level of decision making authority (i.e. City Council), and that remain binding unless removed in the same manner. • Assigned - resources nether restricted nor committed for which a government has a stated intended use as established by the City Council, or a body or official to which the City Council has delegated authority to assign amounts for specific purposes. Unassigned — resources which cannot be properly classified in one of the other four categories. The General Fund should be the only fund that reports a positive unassigned fund balance amount. The committed, assigned and unassigned classifications are often referred to, in the aggregate, as the unrearkmid fund balance. GAAPmeans generally accepted accounting principles. 3.0 Evaluation of Fund Balance Fund balance is essential to mitigate current and future risks and to ensure stable tax rates and service levels. Fund balance is intended to serve as a measure of financial resources in a government. It also is a crucial consideration in long-term financial planning. The City's management, credit rating services, and others monitor the levels of fund balance in the General Fund as an important indicator of the City's overall economic condition. In establishing an appropriate level of General Fund fund balance, the City of Bangor has considered the following factors: Properly tax base —The property tax base is the General Fund's largest revenue source. The Cilys tax base is well diversified between commercial and residential properties. In addition, there is no one taxpayer or market segment that comprises a significant portion of the overall base. Market values of property have demonstrated stable long term growth. Adequate infresbuclure and undeveloped parcels exist to allow for future growth. Non property tax mwnues — The largest portion of non -property tax revenues are intergovernmental revenues, most of which are appropriations from the State of Maine. Charges for municipal/educational services generate the next highest level of non - property tax revenues, followed by fees for services, which continue to grow and are reviewed regularly to ensure appropriate recovery of cost as well as identify opportunities to charge users based on services consumed. While revenues from the State of Maine have been curtailed from their formulaic levels, overall total non -property tax revenues have not changed significantly. All other non -property tax revenues remain stable wfth average annual growth. Exposure to A?niNcant outlays - The City has reviewed its potential exposure to significant one-time outlays. Due to its geographic location, the potential impact of natural disasters is low. Building and equipment needs are reviewed annually, and there are no known immediate capital needs pending. State budget cuts represent the most likely exposure for the City. Frequently State wrtailments are known in advance and the Gty has adequate notice to develop alternative plans to address the shortfall, either via hiring/spending freezes and/or the reallocation of funding within the approved budget by the appropriate local governing body (i.e. School Committee, City Council). Annually, the City reevaluates Its Insurance coverage, including specialty coverage for Its Airport, to ensure that adequate limits, covered events, values and deductibles are established. The City continues to review the possibility of other events. Debt prof/e, - The City is well within Its' Statutory debt limits as established by State Statute. General Fund debt per capita, debt as percentage of assessed value and debt as a percentage of overall budget remains low. The City has proactively refinanced Its debt in positive ate environments without extending the final maturity. When debt is Issued it is done on the open market as a competitive bid to ensure the lowest overall cost of funds. At least annually, the City reviews its overall debt position, repayment schedule, and its capital needs in order to determine when and for what debt will be issued. Uqu/dity-Adequate level of fund balance is necessary to ensure sufficient liquidity. The City reviews its fixed and variable outlays annually in order to maximize liquidity. In addition, the City monitors current and near term revenues to ensure Inflows are sufficient to match the City's liquidity needs and the City's annual collection ate for property taxes remains strong. While the City includes a number of other funds, the majority of them actually enhance the City's overall liquidity position. Budget Management - Budget variances are an indicator of the ability to manage the City's financial affairs. Historically, the City has realized a consistent pattern of positive budgetary variances, on an operating budget with moderate growth, even with the fiscal constraints experienced the last few years. Economic Factors - The City serves as the major trade, distributor, service, employment and commercial center for the central, eastern, and northern portion of the State. The City's unemployment rates at below the State level annually. At 3% of the state population, properties within the City generate in excess of 9% of Statewide retail sales. 4.0 Unassigned Fund Balances 4.1 General Fund Unassigned Fund Balance As the General Fund, is the only governmental fund to report positive unassigned fund balance, the following applies only to the General Fund unassigned fund balance. Article Vlll, Section 16 of the City Charter states: "The City Council shall target an undesignated fund balance of no more than 10% of the operating budget, excluding debt service for the General Fund. The minimum target balance shall be established at 5% of the last year's expenditures less debt service." R is the City's policy to maintain a General Fund unassigned fund balance of approximately 8.33% (or one month's expenditures) of the operating budget, excluding debt service for the General Fund. In the event, the City's General Fund unassigned fund balance drops below this level, the City will develop a plan, implemented through the annual budget process, to restore the balance to the target level over a period of no more than three (3) years. Amounts in excess of the target shall be used first to increase other assigned or committed fund balances and next to fund significant onetime capital improvements. In general, unassigned fund balance should not be used to fund any portion of the on-going and routine operating expenditures of the Co. It should be used primarily to provide overall financial stability and to respond to unforeseen emergencies, similar to those defined as Emergency Appropriations in Article VIII, Section 11 of the City Charter. 5.0 Assigned Fund Balances 5.1 General Fund Assigned Fund Balances Unless otherwise noted, all General Fund Assigned Balances are subject to authorization and approval by the City Council. The following General Fund Assigned Fund Balances are set forth. • The Improvement Reserve provides potential funding for the purchase of capital assets; maintenance of City assets such as buildings, roads, and other General Fund infrastructure; projects designed to reduce tuNre year expenditures; or capital projects which otherwise might require the issuance of debt. In general, only individual purchases or project with a cost in excess of $5,000 and a minimum useful life of three (3) years will be funded from this reserve. The Gry and School Workers Compensab'on Reserves provide funding for the long-term portion of self-insured workers' compensation liabilities arising from existing or anticipated workers compensation dalms. On an annual basis, the Finance Director, in consultation with the City Manager, may place any excess funds generated by the Workers Compensation Division in this fund balance. This fund balance should generally be maintained at a level suFdent to fund the long term liability of the City and School workers' compensation liability in accordance with the annual actuarial analysis. The Self Insuranre Reserve provides funding to protect the City against uninsured losses and to cover the cost of insurance deductibles. in accordance with Chapter 9, Article I, §9-8, C of the City Code, the Finance Committee may authorize self-insured claims against the City not exceeding $10,000, larger claims must be approved by the City Council. On an annual basis, the Finance Director, in consultation with the City Manager, shall determine the appropriate funding level based on the existing deductible amounts in the cWs various insurance policies and recent and expected history of uninsured losses. The Pooled Equipment Reserve provides funding for the purchase of vehicles and equipment owned and maintained by Me City's centralized Fleet Maintenance Division. Proceeds from the sale of surplus Fleet Maintenance owned vehicles and equipment shall be placed in this fund balance. On an annual basis, the Finance Director, in consultation with the City Manager, may place any excess funds generated by the Fleet Maintenance operation in this fund balance. This fund balance should not exceed 10% of the estimated current value replacement cost of the vehicles and equipment owned and maintained by the Fleet Maintenance Division. The Fire Equipment Reserve provides funding for the replacement or major repair of fire vehicles and equipment. Proceeds from the sale of surplus fire equipment shall be placed in this fund balance. This fund balance should not exceed the current value replacement cost of the most expensive piece of equipment owned and maintained by the Fine Department. The Bus Equipment Reserve provides funding for the replacement of buses, major repairs or rehabilitation of buses, or for other capital assets 11 228 required for the operation of the City's bus system. Proceeds from the sale of surplus buses or capital assets of the bus system shall be placed in this fund balance. This fund balance should not exceed 20% of the replacement value of the Bangor portion of the bus fleet • The Demolition Reserve provides funding for the demolition and/or removal of public hazards on property acquired by tax lien or Code Enforcement proceedings. The proceeds from the sale of property acquired through tax lien or Code Enforcement proceedings shall be placed in this fund balance. • The Benefit Reserve provides financial flexibility to the City for the potentially unpredictable costs associated with employee benefits. On an annual basis, the Finance Director, in consultation with the City Manager, may place any savings realized if benefits are budgeted at a higher amount than actually required into this fund balance. • The Parks & Recreation Reserve provides funding for capital improvements to the City's park system and recreational facilities to include replacement or upgrade of existing facilities ore equipment and the construction or new or expanded facilities. On an annual basis, the Finance Director, in consultation with the City Manager, may place one- half (1/2) of the net cash flow into this fund balance. • The Cameron Sodium Reserve provides funding for major maintenance, repairs, renovations and Improvements to the Garland Street Feld/Cameron Stadium athletic complex. This fund balance is subject to prior authorization and approval of the Bangor School Committee. Unless classified as nonspendable, restricted or committed, the Finance Director, in consultation with the City Manager, in accordance with GMP, shall establish the following fund balances as assigned. • ExamMmrces, which are amounts encumbered at year-end by purchase order or another means. • Balances Carried, which are amounts appropriated in the annual budget resolve, or in any supplemental budget resolves, for expenditures In an ensuing fiscal year. • Other, which are amounts the City Manager and Finance Director determine, in their professional judgment, to represent the City's intended use of fund balance. I Yz8 5.2 Capital Projects fund Assigned Balance The Finance Director, in consultation with the City Manager, shall establish assigned fund balances within the Capital Projects Fund. The source of funding will be any excess, non -committed or non -restricted funding, available upon completion of a project. These assigned fund balances may be used to provide additional funding to projects, which are minimally over budget upon completion. 6.0 Committed Fund Balances The Finance Director, in accordance with GAAP, shall determine and report all committed fund balances and related disclosure as required. 6.1 Arena Fund Committed Fund Balance The City Council authorized creation of the Arena Fund Special Revenue Fund. That action specially identifies the allowable uses of the fund revenues and fund balance. Any use of these funds must be authorized by a Council Order referencing its compliance with Council Order 05-333, as amended. 7.0 Restricted Fund Balances The Finance Director, in accordance with GAAP, shall determine and report all restricted fund balances and related disclosure as required. 7.1 General Fund Restricted Fund Balances The City Council in accordance with State Statute has established the following restricted fund balance. The Credit Reserve is defined by State Statute 'title 30-A, §5801, 3, and referenced within Article VIII, Section 17 of the City's Charter, as a means to assist the City in continuing its normal operations without increasing the tax rate. By Stable the annual appropriation to this fund balance is limited to 5% of the current tax commitment. Any use of these funds must comply with State Statute as may be amended from time to time. As part of the annual budget process, the City Council will consider appropriating 5% of the taxes assessed to new development, as defined by LD1, net of any value increases with a tax increment financing district to this fund balance. 8.0 Nonspendable Fund Balances The Finance Director, in accordance with GAAP, shall determine and report all restricted fund balances and related disclosure as required. i :,28 9.0 Policy Administration Annually, the Finance Director, in consultation with the City Manager, shall review this policy and the considerations used in establishing the various fund balance provisions. The France Director will report whether changes or additions to existing provisions or considerations have been identified that would change any provision(s) of the current policy.