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CC Resolution 2018-023 General Fund Balance & Reserve PolicyRESOLUTION NO.2018 - 023 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LA QUINTA, CALIFORNIA, APPROVING AND ADOPTING THE GENERAL FUND BALANCE AND RESERVES POLICY WHEREAS, the general purpose of the General Fund Balance and Reserve Policy is to provide the objectives and guidelines for the administration of the General Fund balance of the City of La Quinta (City); and WHEREAS, the Government Finance Officers Association (GFOA), a leading financial organization which provides best practice guidance to governmental organizations in the United States and Canada, recommends a reserve policy be in place; and WHEREAS, a comprehensive study as outlined by GFOA was undertaken by City staff and members of the Financial Advisory Commission to analyze risks and financial drivers to establish reserve level targets; and WHEREAS, the reserve policy provides multiple benefits to the City, including but not limited to planning for contingencies, ensuring cash availability, and maintaining good standing with credit agencies; and WHEREAS, the reserve policy establishes reserve categories, target amounts and conditions for utilization of reserves; and WHEREAS, a reserve policy reflects fiscal responsibility and the prudent values of the City. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of La Quinta to adopt the General Fund Balance and Reserves Policy "Exhibit A". Resolution No. 2018-023 General Fund Balance and Reserves Policy Adopted: May 15, 2018 Page 2 of 2 PASSED, APPROVED and ADOPTED at a regular meeting of the La Quinta City Council, held on this 15th day of May, 2018 by the following vote: AYES: Council Members Fitzpatrick, Pena, Radi, Sanchez, Mayor Evans NOES: None ABSENT: None ABSTAIN: None ATTEST: 11..II1]®r �1 MONIKA RAD�VA, AOiog City Clerk City of La Quinta, Calw ornia (CITY SEAL) APPROVED AS TO FORM: WILLIA H. IHRKE, City Attorney City of La Quinta, California LINDA EVANS, Mayor City of La Quinta, California EXHIBIT A RESOLUTION NO.2018-023 ta QaNa — GEM if,r DESERT - City of La Quinta General Fund Balance and Reserves Policy I. Purpose. This is the General Fund Balance and Reserves Policy (Policy) of the City of La Quinta (City); it defines the City's fund balance and reserve categories, identifies the need for reserves, and outlines the importance of maintaining the integrity of uses and funding amounts. The Policy also guides the City Council and staff when planning for contingencies, supports the City's credit rating, and ensures cash availability. This Policy aligns with the organization's values - fiscal responsibility, maintaining a safe community, fostering a thriving economy, continuous transparency and accountability, and enhancing our Citizen's quality of life. It also aligns with the City's budgetary guiding principles - one-time revenues should not be utilized for on -going expenditures; instead, they should be deposited into reserves or appropriated for one- time expenditures. Additionally, allocations for capital improvements, equipment replacement, and infrastructure investment should be part of the annual budget process through appropriations to Internal Service Funds. II. Scope. This Policy was created after comprehensive research and analysis. The City's 10-year financial projection model was employed to identify annual funding levels, and the Government Finance Officer Association's (GFOA) structured assessment model was used to analyze the degree to which the City is vulnerable to specific risk factors such as extreme events, revenue and expenditure volatility, leverage, liquidity, and growth. These financial forecasting tools will continue to be utilized to monitor reserve levels and assess future reserve adjustment recommendations. III. Definitions. The Government Accounting Standards Board (GASB) Statement No. 54 defines fund balance as follows: Nonspendable Fund Balance. The nonspendable fund balance classification includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. The criterion includes items that are not expected to be converted to cash, for 1 of 4 example, inventories and prepaid amounts. It also includes the long-term amount of loans and notes receivable, as well as property acquired for resale. Restricted Fund Balance: Amounts that are restricted to specific purposes should be reported as restricted fund balance. Fund balance should be reported as restricted when constraints placed on the use of resources are either externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments; or imposed by law through constitutional provisions or enabling legislation. Committed Fund Balance: Amounts that can only be used for specific purposes pursuant to constraints imposed by formal action of the government's highest level of decision -making authority should be reported as committed fund balance. Those committed amounts cannot be used for any other purpose unless the government removes or changes the specified use by taking the same type of action (for example, legislation, resolution, ordinance) it employed to previously commit those amounts. Committed fund balance also should incorporate contractual obligations to the extent that existing resources in the fund have been specifically committed for use in satisfying those contractual requirements. Assigned Fund Balance: Amounts that are constrained by the government's intent to be used for specific purposes, but are neither restricted nor committed, should be reported as assigned fund balance. Intent should be expressed by (a) the governing body itself or (b) a body or official to which the governing body has delegated the authority to assign amounts to be used for specific purposes. The nature of the actions necessary to remove or modify an assignment is not as prescriptive as it is with regard to the committed fund balance classification. Constraints imposed on the use of assigned amounts are more easily removed or modified than those imposed on amounts that are classified as committed. Unassigned Fund Balance: Unassigned fund balance is the residual classification for the General Fund. This classification represents fund balance that has not been assigned to other funds and that has not been restricted, committed, or assigned to specific purposes within the General Fund. The General Fund should be the only fund that reports a positive unassigned fund balance amount. IV. City's Reserve Categories and Targets Committed, assigned, and unassigned fund balance categories combined make up the "unrestricted" fund balance, which is the 2 of 4 total amount that is either unconstrained or the constraints are self-imposed and can be modified by Council. As such, the following reserve categories would be classified as committed or assigned (with the exception of the pension reserves, which once placed in trust would be reported as a Fiduciary Fund), and the remaining unassigned fund balance would be available for appropriation. Targets have been established for each category and will be periodically reviewed to ensure adequate levels. Natural Disaster Emergency Reserves. May be utilized for the preparation, recovery, and restoration of services before, during and/or after a natural disaster (such as flood, earthquake, etc.) as defined by City Code §2.20.020. The target is $10,000,000 and will be reviewed every five (5) years by conducting a risk analysis of all City assets, insurance levels, and potential federal/state contributions towards disaster recovery efforts. Economic Downturn Reserves: May be used in such instances as a declared national, state, or regional recession; loss of a major (top 10) revenue - generating business; or a natural disaster resulting in a significant decline in revenues. These reserves may also be used if overall revenues decrease or expenses increase by more than 10% of the previous year's actual revenues or expenditures. The target is $11,000,000, based on a 10-year analysis of the revenue and expenditure flows (which included the financial impacts of the Great Recession). The target will be evaluated again in the event of another significant economic downturn. Cash Flow Reserves: This reserve category is maintained to have adequate cash on hand to account for the uneven receipt of revenue. For example, property tax accounts for a large percentage of annual revenue, the bulk of which is not remitted until December and May of each year. The target is $5,000,000 and will be determined annually by analyzing the prior fiscal year by month and calculating the largest cumulative deficit between revenues and expenditures, with a minimum expectation of approximately 10% of operating expenditures reserved. Capital Improvement Reserves: This category will fund capital assets and infrastructure rehabilitation, improvement, and replacement. The target is $10,000,000 and is based on annual depreciation of assets. 3of4 Unfunded Pension Liability. This reserve will be maintained in an irrevocable trust and may be used to fund future pension obligations such as annual pension fund payments, unfunded pension liability payments, and/or any additional contributions to pay down the unfunded liability. The target is $10,000,000 and will be reviewed annually as CalPERS updates their actuarial reports, which outline the City's unfunded pension liability and annual contributions. V. Unassigned Fund Balance. The City will maintain a minimum of $8,000,000 in unassigned fund balance which could fund one-time expenditures or capital expenses at the City Council's discretion. VI. Authority Over Reserves. At Council direction, reserves may be utilized for their intended purpose as defined herein. The Policy may be amended by Council resolution and requires a 4/5th approval ("supermajority"). VII. Building to Target and Replenishments. City Council adoption of this Policy will establish these reserve categories and the funding targets. Going forward, the City Council shall annually review each reserve category and funding level during the mid- year budget process, once the annual financial statements are published and final fund balances are known. Funds will generally come from excess revenues over expenditures, one-time revenues, or specific departmental savings over budgeted expenditures, and may be allocated to each reserve category as directed by Council until the target level is reached. Once all targets are reached, funds would remain in the unassigned fund balance. Likewise, upon use of any reserves, the categories will be replenished back to target in a similar manner. 4of4