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CC Resolution 2023-005 General Fund Balance & Reserves PolicyRESOLUTION NO. 2023 — 005 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LA QUINTA APPROVING AND ADOPTING THE GENERAL FUND BALANCE AND RESERVES POLICY WHEREAS, the general purpose of the General Fund Balance and Reserves 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 Reserves 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 Reserves Policy Analysis Report and subsequent Reserves Policy was formally recognized by the GFOA and awarded the Exceptionally Well - Implemented GFOA Best Practice recognition; and WHEREAS, the Reserves 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 Reserves policy establishes reserve categories, target amounts and conditions for utilization of reserves; and WHEREAS, a Reserves 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 enclosed as "Exhibit A," and incorporated herewith by this reference. PASSED, APPROVED and ADOPTED at a regular meeting of the La Quinta City Council, held on this 21St day of February, 2023 by the following vote: AYES: Councilmembers Fitzpatrick, McGarrey, Pena, Sanchez, and Mayor Evans NOES: None ABSENT: None ABSTAIN: None Resolution No. 2023 — 005 General Fund Balance and Reserves Policy Adopted: February 21, 2023 Page 2 of 6 r LINDA EVANS, Mayor City of La Quinta, California ATTEST: —* MONIKA RADEVA, City Clei City of La Quinta, California APPROVED AS TO FORM: WILLIAM H. IHRKE, City Attorney City of La Quinta, California Resolution No. 2023 — 005 General Fund Balance and Reserves Policy Adopted: February 21, 2023 Page 3 of 6 EXHIBIT A 4 (Pea CALIFORNIA 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. II. Scope. This Policy applies to the City's General Fund; all Committed, Assigned, and Unassigned funds available as reported annually on the balance sheet in the City's Annual Comprehensive Financial Report (ACFR). III. General Policy. The Policy of the City is to maintain Reserves at an adequate level to address the community's needs through all contingencies. This Policy aligns with the organization's values of fiscal responsibility, maintaining a safe community, fostering a thriving economy, continuous transparency and accountability, and enhancing our Citizen's quality of life. The City's budgetary guiding principles state that 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. IV. Definitions. The Government Accounting Standards Board (GASB) Statement No. 54 defines fund balance as follows: A. 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 example, inventories and prepaid amounts. It also includes the long-term amount of loans and notes receivable, as well as property acquired for resale. Resolution No. 2023 — 005 General Fund Balance and Reserves Policy Adopted: February 21, 2023 Page 4 of 6 B. 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. C. 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 or 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. D. 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. E. Unassigned Fund Balance: Unassigned fund balance is the residual classification for the General Fund. This classification represents the 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. V. City's Reserve Categories and Targets Committed, assigned, and unassigned fund balance categories combined make up the "unrestricted" fund balance, which is the 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 Restricted Reserves), 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. Resolution No. 2023 — 005 General Fund Balance and Reserves Policy Adopted: February 21, 2023 Page 5 of 6 A. 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 La Quinta Municipal Code §2.20.020. The target of $15,000,000 was determined by conducting a risk analysis of all City assets, insurance levels, and potential federal/state contributions towards disaster recovery efforts. B. 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 of $13,000,000 was based on a long-term analysis of the revenue and expenditure flows (which included the financial impacts of the Great Recession, the loss of Redevelopment Agencies, and the COVID 19 pandemic) as well as the application of the Consumer Price Index (CPI) increases to the original base target. C. 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 for the Cash Flow Reserves is 10% of each year's revenue budget, or a minimum of $5,000,000. D. Capital Improvement Reserves: This category will fund capital assets and infrastructure rehabilitation, improvement, and replacement. The target of $12,000,000 is based on annual depreciation of assets as well as a CPI increase as described above. E. 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 the amount of the unfunded liability on the most recent CaIPERS actuarial reports, or a minimum of $5,000,000, and was determined through a review of the City's unfunded pension liability and annual contributions. Resolution No. 2023 — 005 General Fund Balance and Reserves Policy Adopted: February 21, 2023 Page 6 of 6 VI. Unassigned Fund Balance. The City may retain the equivalent of two months of general fund budgeted operating expenditures, or 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. VII. Measure G Reserves. The City has a local district transactions tax of 1% known as Measure G. The City monitors Measure G activity and excess revenues over expenditures are recorded as Reserves on the City's Balance Sheet. These funds can also be used for one-time expenditures or capital expenses at the City Council's discretion and are subject to annual reporting and oversight by the Financial Advisory Commission (FAC). VIII. Authority Over Reserves. At Council's 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"). IX. Building to Target and Replenishments. City Council adoption of this Policy will establish 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 ACFR is 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 remain in the unassigned fund balance. Likewise, upon use of any reserves, the categories will be replenished back to target in a similar manner. X. Policy Review. This policy shall be reviewed every five (5) years to assess the City's then current financial condition, risks, and the adequacy of current target levels.