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RESOLUTION NO. 2025-R ___
RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
CULVER CITY AMENDING CITY COUNCIL POLICY
STATEMENT 5002 (FINANCIAL POLICIES) TO ESTABLISH
COMMITTED RESERVE FOR LOAN TO COMMUNITY CORP
OF SANTA MONICA (CCSM) TOWARD CONSTRUCTION OF
AFFORDABLE HOUSING UNITS IN THE JUBILO VILLAGE
PROJECT LOCATED AT 4464 SEPULVEDA BOULEVARD,
CULVER CITY.
WHEREAS, Section VIII of City Council Policy 5002 , Financial Policies, sets forth a Financial Reserves Policy; and
WHEREAS, the Financial Reserves Policy establishes a Committed Fund Balance that includes amounts that can only be used for specific purposes pursuant to constraints imposed by formal action of the City Council; and WHEREAS, on March 10, 2025, the City Council directed the City Manager to include in the City’s Fiscal Year 2025-2026 budget funding for a $16 million residual receipts loan to Community Corporation of Santa Monica (CCSM) toward the cost of construction of the affordable housing portion of the Jubilo Village Project located at 4464 Sepulveda Boulevard, Culver City.
NOW, THEREFORE, the City Council of the City of Culver City, California, DOES HEREBY RESOLVE, as follows:
1. The City Council hereby authorizes the establishment of a committed reserve fund titled “Jubilo Village Reserve”, for the purpose of funding the CCSM loan.
2. The City Council hereby adopts an amended City Council Policy Statement 5002, Financial Policies, establishing the Jubilo Village Reserve, which Policy is attached hereto as Exhibit “A” to this Resolution and will replace the existing Council Policy
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Statement 5002. The amended Policy, as set forth in Exhibit A, shall supersede all other previously adopted policies regarding the subject matter therein.
2. The City Manager is hereby authorized to format the attached City Council Policy in a format consistent with other City Council adopted policies and shall include the final version of this adopted Policy with other adopted policies.
3. The City Manager shall distribute the attached City Council Policy to interested parties, which include, but are not limited to, the City’s Chief Financial Officer.
APPROVED AND ADOPTED on the _____day of __________, 2025.
____________________________
DAN O’BRIEN, Mayor
City of Culver City, California
ATTEST: APPROVED AS TO FORM:
_______________________________ ____________________________ JEREMY BOCCHINO, City Clerk HEATHER BAKER, City Attorney
CITY OF CULVER CITY
COUNCIL POLICY STATEMENT Policy Number: 5002
General Subject: Finance and Budget Date Issued: 06/09/2025
Specific Subject: Financial Policies Effective Date: 06/09/2025
Resolution No: 2025-R___
______________________________________________________________________
I. PURPOSE:
To establish a comprehensive set of financial policies for the City that will serve as a guideline for operational and strategic decision making related to financial matters.
II. STATEMENT OF POLICY:
The following financial policies are intended to establish a comprehensive set of guidelines for use by the City Council and City staff on decision -making that has a fiscal impact. The goal is to maintain the City’s financial stability in order to be able to continually adapt to local and regional economic changes. Such policies will allow the City to maintain and enhance a sound fiscal condition. This policy should be implemented in conjunction with associated subsidiary policies, i.e. Budget Development and Administration (5001), Purchasing Policy, Investment Policy, etc.
These financial policies will be reviewed annually to ensure that they remain current. The policy will be included as part of the City’s annual Adopted Budget. The City’s comprehensive financial policies shall be in conformance with all state and federal laws, generally accepted accounting principles (GAAP) and standards of the Governmental Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA).
Long-term Financial Planning
Auditing, Financial Reporting and Disclosure
Revenue Collection
Cash Management
Capital Improvement Projects
Financial Reserves
Grant Administration
Debt Management
III. LONG-TERM FINANCIAL PLANNING:
1. The City shall create a General Fund Financial Forecast that looks forward at least five fiscal years into the future. The City shall consider immediate proactive measures when deficits between anticipated revenues and expenditures exist, even in outer years. The Forecast shall be updated as part of the Mid -Year Budget Report and as part of the annual Proposed budget.
2. The City Council, City Manager and Executive Management will consider the effects of proposals for new or enhanced services, employee negotiations, tax/fee changes, or similar items, on the General Fund Financial Forecast. The City should be able to fund any such enhancements or changes in both the short-term and long-term.
3. The City shall develop and implement a financial plan to address its funding needs for issues like deferred maintenance and unfunded liabilities, which will be included in the General Fund Financial Forecast.
4. The City shall seek a balance in the overall revenue structure between more stable revenue sources (e.g. Property Tax and Utility Taxes) and economically sensitive revenue sources (e.g. Sales Tax and Transient Occupancy Tax).
5. The City will proactively seek to protect and expand its tax base by encouraging a healthy underlying economy.
6. The City will work to enhance and protect the property values of all Culver City residents and property owners.
7. The City shall encourage the economic development of the community as a whole in order to provide stable and increasing revenue streams. It should be the City’s goal to not only attract new businesses but also to retain successful businesses in the City. Objectives of the revenue strategy should also include: avoiding an over reliance on revenue from any one particular industry; recruitment and retention efforts to ensure a balance of revenue sources; ensuring compatible uses; encouraging business synergi es; and promoting the growth of amenities and ancillary services to support business districts and established industries.
8. The City shall develop and maintain methods for the evaluation of future development and related fiscal impacts on the City budget.
9. Every reasonable effort will be made to establish revenue measures which will cause the transients and recreation visitors to Culver City to carry a fair portion of the expenses incurred by the City as a result of their use of public facilities.
10. The City will establish appropriate cost -recovery targets for its fee structure and will annually adjust its Master Fee Schedule to ensure that the fees continue to meet cost recovery targets. The Finance Department may study, internally or using an outside consultant, the costs of providing such services and recommend fees to each department.
11. Special services, which can be identified with the recipients, will be self - supported from service fees to the maximum extent possible. Service fees shall be established in the Master Fee Schedule in compliance with applicable State law, and shall be periodically reviewed for compliance with applicable State law.
12. The City will oppose efforts of the State and County governments to divert revenues from the City or to increase unfunded service mandate of City taxpayers.
13. The City will seek additional intergovernmental funding and grants, with a priority on funding one-time capital projects. Grant-funded projects that require multi-year
support will be reviewed by City Council.
14. The City will not rely on one -time revenue sources to fund operations. One - time revenues sources, whenever possible, will be used to fund one -time projects, augment reserve balances or fund unfunded liabilities.
IV. AUDITING, FINANCIAL REPORTING AND DISCLOSURE POLICIES:
Accounting standards boards and regulatory agencies set the minimum standards and disclosure requirements for annual financial reports and continuing disclosure requirements associated with municipal securities. The City places a high value on transparency and full disclosure in all matters concerning the City’s financial position and results of operations. To this end, the City endeavors to make superior disclosure in the City’s Comprehensive Annual Financial Report and Continuing Disclosure filings by going above and beyond the minimum reporting requirements including certificate of achievement programs and voluntary event disclosure filings.
The City prepares its financial statements in conformance with Generally Accepted Accounting Principles (GAAP). Responsibility for the accuracy and completeness of the financial statements rests with the City. However, the City retains the services of an external accounting firm to audit the financial statements on an annual basis. The primary point of contact for the auditor is the Chief Financial Officer, but the auditors will have direct access to the City Manager, City Attorney, Financial Planning an d Budget Subcommittee or City Council on any matters they deem appropriate.
The financial statement audit and compliance audits will be conducted in accordance with the United States Generally Accepted Auditing Standards (GAAS), standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller of the United States, and standards set by regulatory agencies if applicable.
After soliciting and receiving written proposals from qualified independent accounting firms, the Chief Financial Officer shall submit a recommendation to the Financial Planning and Budget Subcommittee and City Council. Under the premise that multi- year audit agreements are more cost efficient, allow for greater continuity and reduce audit disruption, the City may engage auditors in multi -year contracts, but the term of each contract shall not exceed five years. Generally, the City will request propos als for audit services every five years. It is the City’s policy to require mandatory audit firm rotation after ten years of consecutive service.
After audit results have been communicated to the City, the Finance Department is then responsible for responding to all findings within six months to the City Manager and Financial Planning and Budget Subcommittee and appropriate regulatory agenci es, if applicable.
V. REVENUE COLLECTION POLICY:
1. The City will pursue revenue collection and auditing to ensure that monies due the City are accurately received in a timely manner.
2. The City will seek reimbursement from the appropriate agency for State and
Federal mandated costs whenever possible and cost-effective.
3. The City should centralize accounts receivable/collection activities wherever possible so that all receivables are handled consistently.
4. Accounts receivable management and diligent oversight of collections from all revenue sources are imperative. Sound financial management principles include the establishment of an allowance for doubtful accounts. Efforts will be made to pursu e the timely collection of delinquent accounts. When such accounts are deemed uncollectible, they should be written -off from the financial statements.
a. The Chief Financial Officer, with the approval of the City Manager, is authorized to write off uncollectible individual accounts less than or equal to $1,000.00. In such cases, the Chief Financial Officer must prepare a memorandum for City Manager review and approval documenting the accounts to be written off, the age of the debt, reasons for writing off each account and evidence of collection attempts taken on the account.
b. Past due accounts of $1,000.00 or greater may be written off with approval by the City Council. To write off accounts exceeding $1,000, the Chief Financial Officer must prepare an Agenda Report for City council review and approval documenting th e accounts to be written off, the age of the debt, reasons for writing off each account and evidence of collection attempts taken on the account.
VI. CASH MANAGEMENT POLICY:
1. Cash and investment programs will be maintained in accordance with California Government Code Section 53600 et seq. and the City’s adopted Investment Policy and will ensure that proper controls and safeguards are maintained. Pursuant to State law, the City , at least annually, revises, and the City Council affirms, a detailed Investment Policy.
2. Reports on the City’s investment portfolio and cash position will be developed and presented to the City Council on at least a quarterly basis, in conformity with the California Government Code.
3. City funds will be managed in a prudent and diligent manner with emphasis on safety, liquidity, and yield, in that order.
VII. CAPITAL IMPROVEMENT PROJECTS POLICY:
1. A five-year Capital Improvement Plan shall be developed and updated annually, including anticipated funding sources. Capital improvement projects are defined as infrastructure or equipment purchases or construction which result in a capitalized asset and have a useful (depreciable) life of two years or more.
2. The capital improvement plan will identify, where applicable, current operating
maintenance costs and funding streams available to repair and/or replace deteriorating infrastructure and to avoid significant unfunded liabilities.
3. The City should develop and implement a post -implementation evaluation of its infrastructures condition on a specified periodic basis, estimating the remaining useful life, and projecting replacement costs.
4. The City shall actively pursue outside funding sources for all Capital Improvement Projects. Outside funding sources, such as grants, shall be used to finance only those Capital Improvement Projects that are consistent with the five - year Capital Improvement Project and local governmental priorities, and whose operating and maintenance costs have been included in future operating budget forecasts.
5. Capital improvement lifecycle costs will be coordinated with the development of the Operating Budget. Future operating, maintenance and replacement costs associated with new capital improvements will be forecasted, matched to available revenue sources, and included in the Operating Budget. Capital project contract awards will include a fiscal impact statement disclosing the expected operating impact of the project and when such cost is expected to occur.
6. Financing of capital improvement projects shall be considered pursuant to the Debt Management Policy section.
VIII. FINANCIAL RESERVES POLICY:
Prudent financial management dictates that some portion of the funds available to the City be reserved for future use.
As a general budget principle concerning the use of reserves, the City Council decides whether to appropriate funds from Reserve accounts. Even though a project or other expenditure qualifies as a proper use of Reserves, the Council may decide that it is more beneficial to use current year operating revenues or bond proceeds instead, thereby retaining the Reserve funds for future use. Reserve funds will not be spent for any function other than the specific purpose of the Reserve account from which they are drawn without specific direction in the annual budget; or by a separate City Council action. Information regarding Annual Budget Adoption and Administration is contained in City Council Policy 5001.
Governmental Funds and Fund Balance Defined
Governmental Funds including the General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds and Permanent Funds have a short -term or current flow of financial resources, measurement focus and basis of accounting and therefore, exclude long-term assets and long -term liabilities. The term Fund Balance, used to describe the resources that accumulate in these funds, is the difference between the fund assets and fund liabilities of these funds. Fund Balance is similar to the measure of net working capital that is used in private sector accounting. By definition, both Fund Balance and Net Working Capital exclude long -term assets and long -term liabilities.
Proprietary Funds and Net Working Capital Defined
Proprietary Funds including Enterprise Funds and Internal Service Funds have a long - term or economic resources measurement focus and basis of accounting and therefore, include long-term assets and liabilities. This basis of accounting is very similar to t hat used in private sector. However, instead of Retained Earnings, the term Net Position is used to describe the difference between fund assets and fund liabilities. Since Net Position includes both long -term assets and liabilities, the most co mparable measure of proprietary fund financial resources to governmental Fund Balance is Net Working Capital, which is the difference between current assets and current liabilities. Net Working Capital, like Fund Balance, excludes long-term assets and long-term liabilities.
Governmental Fund Reserves (Fund Balance)
For Governmental Funds, the Governmental Accounting Standards Board (“GASB”) Statement No. 54 defines five specific classifications of fund balance. The five classifications are intended to identify whether the specific components of fund bal ance are available for appropriation and are therefore “Spendable.” The classifications also are intended to identify the extent to which fund balance is constrained by special restrictions, if any. Applicable only to governmental funds, the five classifications of fund balance are as follows:
CLASSIFICATIONS NATURE OF RESTRICTION
Non-spendable Cannot be readily converted to cash Restricted Externally imposed restrictions Committed City Council imposed commitment Assigned City Manager/CFO assigned purpose/intent
Unassigned Residual balance not otherwise restricted
A. Non-spendable fund balance: That portion of fund balance that includes amounts that are either (a) not in a spendable form, or (b) legally or contractually required to be maintained intact. Examples of Non-spendable fund balance include:
1. Reserve for Inventories: The value of inventories purchased by the City but not yet issued to the operating Departments is reflected in this account.
2. Reserve for Long Term Receivables and Advances: This Reserve is used to identify and segregate that portion of the City’s financial assets which are not due to be received for an extended period, so are not available for appropriation during the budget year.
3. Reserve for Prepaid Assets: This reserve represents resources that have been paid to another entity in advance of the accounting period in which the resource is deducted from fund balance. A common example is an insurance premium, which is typically payable in advance of the coverage period. Although prepaid assets have yet to be deducted from fund balance, they are no longer available for appropriation.
B. Restricted fund balance: The portion of fund balance that reflects constraints placed on the use of resources (other than non-spendable items) that are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments; or (b) imposed by law through constitutional provisions or enabling legislation. The City operates approximately twenty special revenue funds that account for items such as gas tax revenues distributed by the State, local return portions of County-wide sales tax overrides dedicated to transportation, grants from federal or Sta te agencies with specific spending restrictions, Section 8 and CDBG funds from the federal government with very specific spending limitations, and a number of others. Since these funds are established because of the specific spending limitation s on them, any year -end balances are still restricted for these purposes. Some specific examples of restricted fund balance are:
1. Reserve for Debt Service: Funds are placed in this Reserve at the time debt is issued. The provisions governing the Reserve, if established, are in the Bond Indenture and the Reserve itself is typically controlled by the Trustee.
2. Park In Lieu: Per CCMC 15.06.305 and California Government Code Section 664777 (The 1975 “Quimby Act”), a dedication of land or payment of fees for park or recreational purposes in conjunction with residential development is required. The fees collected can o nly be used for specific park or recreation purposes as outlined in CCMC 15.06.305 through 15.06.330.
C. Committed fund balance: That portion of a fund balance that includes amounts that can only be used for specific purposes pursuant to constraints imposed by formal action by the government’s highest level of decision making authority, and remain binding unless remo ved in the same manner. The City considers a resolution to constitute a formal action for the purposes of establishing committed fund balance. The action to constrain resources must occur within the fiscal reporting period; however, the amount can be determined subsequently. City Council imposed Commitments are as follows:
1. Contingency Reserve: The Contingency Reserve shall have a target balance of thirty percent (30%) of General Fund “Operating Budget” as originally adopted.
Operating Budget for this purpose shall include current expenditure appropriations and shall exclude Capital Improvement Projects and Transfers Out. Appropriation and/or access to these funds are reserved for emergency situations only. The parameters by which the Contingency Reserve could be accessed would include the following circumstances:
a. A catastrophic loss of critical infrastructure requiring an expenditure of greater than or equal to five percent (5%) of the General Fund, Operating Budget, as defined above.
b. A State or Federally declared state of emergency where the City response or related City loss is greater than or equal to five percent (5%) of the General Fund, Operating Budget.
c. Any settlement arising from a claim or judgment where the loss exceeds the City’s insured policy coverage by an amount greater than or equal to five percent (5%) of the General Fund, Operating Budget.
d. Deviation from budgeted revenue projections in the top three General Fund revenue categories, namely, Sales Taxes, Utility Users’ Taxes and Business Taxes in a cumulative amount greater than or equal to five percent (5%) of the General Fund, Operating Budget.
e. Any action by another government that eliminates or shifts revenues from the City amounting to greater than or equal to five percent (5%) of the General Fund, Operating Budget.
f. Inability of the City to meet its debt service obligations in any given year.
g. Any combination of factors 1) a. -f. amounting to greater than or equal to five percent (5%) of the General Fund, Operating Budget in any one fiscal year.
Use of the Contingency Reserve must be approved by the City Council. Should the Contingency Reserve commitment be used, the City Manager shall present a plan to City Council to replenish the reserve within five years.
2. Facilities Planning Reserve : The Facilities Planning Reserve has been established to offset the cost of replacement or major refurbishment to critical City facilities such as, but not limited to, the City Hall building and Police Department buildings, Fire Stations, and other Facility Improvement Projects. Use of this Reserve must be approved by City Council. This Reserve shall be funded by allocations of General Fund surplus revenues, as defined later in this policy, or by specific City Council allocations. The eligible uses of this reserve include the cash funding of public facility improvements or the servicing of related debt.
3. Recreational Facilities: City Council Policy 5003 requires ten percent (10%) of gross annual revenues derived from specified recreational classes and rentals to be set aside for the refurbishment of certain recreational facilities, fee- based activity programs and equipment used in connection with fee -based recreation classes.
4. Public Safety Equipment Replacement Reserve : The Public Safety Equipment Replacement Reserve has been established to secure funding for critical safety related equipment such as: personal protective equipment for police and fire, emergency medical equipment, fire suppression equipment, hazardous materials equipment, extrication equipment, body-worn cameras, in-car cameras/arbitrator system, unmanned aerial vehic le, equipment to secure perimeters, other non - lethal equipment, and litter baskets. Use of this Reserve must be approved by City Council. This Reserve shall be funded by allocations of General Fund surplus revenues, as defined later in this Policy, or by specific City Council allocations.
5. Jubilo Village Reserve : The Jubilo Village Reserve has been established to secure funding in the amount of $12 million for a portion of a $16 million residual receipts loan commitment to Community Corporation of Santa Monica (CCSM) toward the costs of construction of the affordable housing units within the Jubilo Village Project, located at 4464 Sepulveda Boulevard, Culver City.
D. Assigned fund balance: That portion of a fund balance that includes amounts that are constrained by the City’s intent to be used for specific purposes but that are not restricted or committed. This policy hereby delegates the authority to the City Manager or Chief Financial Officer to modify or create new assignments of fund balance. Constraints imposed on the use of assigned amounts may be changed by the City Manager or Chief Financial Officer. Appropriations of balances are subject to Council Policy 5001 concerning budget adoption and administration. Examples of assigned fund balance may include but are not limited to:
1. Reserves for Encumbrances: Purchase Orders and contracts executed by the City express an intent to purchase goods or services. Generally , such documents include a cancellation clause, where the City would then only be responsible to pay for goods received or services provided. The City recognizes the obligation to pay for these goods and services as a reservation of fund balance, but because the City can ultimately free itself of this obligation if necessary, it does not meet the requirements of the more restrictive fund balance categorizations.
2. Change in Fair Market Value of Investments : As dictated by GASB 31, the City is required to record investments at their fair value (market value). This accounting practice is necessary to ensure that the City’s investment assets are shown at their true value as of the balance sheet. However, in a fluctuating interest rate environment, this practice records market value gains or losses which may never be actually realized. The City Manager or Chief Financial Officer may elect to reserve a portion of fund balance associated with an unrealized market value gain. However, it is impractical to assign a portion of fund balance associated with an unrealized market value loss.
When the City Manager or Chief Financial Officer authorizes a change in General Fund, Assigned Fund Balance, City Council shall be notified quarterly.
E. Unassigned fund balance: The residual portion of available fund balance that is not otherwise restricted, committed or assigned.
IX. GENERAL FUND SURPLUS:
At the end of each fiscal year, the difference between General Fund revenues and expenditures results in either a surplus (adding to fund balance) or deficit (subtracting from fund balance). In the case of a surplus, the policy for allocation shall follow these priorities:
1. Full funding of the Contingency Reserve.
2. If the Contingency Reserve is fully funded, 10% of the remaining surplus amount, but no more than $1,000,000, shall be placed in the Public Safety Equipment Replacement Reserve, 40% of the remaining surplus amount shall be placed in the Facilities Planning Reserve, and the remainder shall revert to Unassigned fund balance.
The City Manager may recommend a different allocation for approval by the City Council.
X. PROPRIETARY FUND RESERVES (NET WORKING CAPITAL):
In the case of Proprietary Funds (Enterprise and Internal Service Funds), Generally Accepted Accounting Principles (“GAAP”) does not permit the reporting of reserves on the face of City financial statements. However, this does not preclude the C ity from setting policies to accumulate financial resources for prudent financial management of its proprietary fund operations. Since proprietary funds may include both long-term capital assets and long-term liabilities, the most comparable mea sure of liquid financial resources that is similar to fund balance in proprietary funds is net working capital which is the difference between current assets and current liabilities. For all further references to reserves in Proprietary Funds, Net Working Capital is the intended meaning.
A. Refuse Disposal Fund
1. Stabilization and Contingency Reserve: This Reserve is used to provide sufficient funds to support seasonal variations in cash flows and in more extreme conditions, to maintain operations for a reasonable period of time so the City may reorganize in an orderly manner or effe ctuate a rate increase to offset sustained cost increases. The intent of the Reserve is to provide funds to offset cost increases that are projected to be short-lived, thereby partially eliminating the volatility in annual rate adjustments. It is not intended to offset ongoing, long- term pricing structure changes. The target level of this reserve is twenty - five percent (25%) of the annual operating budget. This reserve level is intended to provide a reorganization period of 3 months with zero income or 12 months at a twenty-five percent (25%) loss rate. The City Council must approve the use of these funds, based on City Manager recommendation. Funds collected in excess of the Stabilization reserve target would be available to offset future rate adjustments, while extended reserve shortfalls would be recovered from future rate increases. Should catastrophic losses to the fleet or transfer station occur, the Stab ilization and Contingency Reserve may be called upon to avoid disruption to refuse disposal.
B. Municipal Bus Lines Fund
1. Stabilization and Contingency Reserve: This Reserve is used to provide sufficient funds to support seasonal variations in cash flows and in more extreme conditions, to maintain operations for a reasonable period of time so the City may reorganize in an orderly manner or effe ctuate a fare increase to offset sustained cost increases. The intent of the Reserve is to provide funds to offset cost increases that are projected to be short -lived, thereby partially eliminating the volatility in fare adjustments. It is not intended to offset ongoing, long - term cost of operations changes. The target level of this reserve is twenty- five percent (25%) of the annual operating budget. This reserve level is intended to provide a reorganization period of 3 months with zero income or 12 months at a twenty-five percent (25%) loss rate. The City Council must approve the use of these funds, based on City Manager recommendation. Funds collected in excess of the Stabilization reserve target would be available to offset future fare adjustments, while extended reserve shortfalls would be recovered from future fare increases. Should catastrophic losses to the
fleet or transportation building occur, the Stabilization and Contingency Reserve may be called upon to avoid disruption to public transportation.
C. Sewer Enterprise Fund
1. Stabilization and Contingency Reserve: This Reserve is used to provide sufficient funds to support seasonal variations in cash flows and in more extreme conditions, to maintain operations for a reasonable period of time so the City may reorganize in an orderly manner or effe ctuate a rate increase to offset sustained cost increases. The intent of the Reserve is to provide funds to offset cost increases that are projected to be short -lived, thereby partially eliminating the volatility in annual rate adjustments. It is not intended to offset ongoing, long-term pricing structure changes. The target level of this reserve is fifty percent (50%) of the annual operating budget. This reserve level is intended to provide a reorganization period of 6 months with zero income or 24 months at a twenty-five percent (25%) loss rate. The City Council must approve use of these funds, based on City Manager recommendation. Funds collected in excess of the Stabilization reserve target would be available to offset future rate adjustments, while extended reserve shortfalls would be recovered from future rate increases. Should catastrophic losses to the infrastructure system occur, the Stabilization and C ontingency Reserve may be called upon to avoid disruption to sewer service.
2. Infrastructure Replacement Funding Policy: This funding policy is intended to be a temporary repository for cash flows associated with the funding of infrastructure replacement projects provided by the Sewer Master Plan. The contribution rate is intended to level-amortize the cost of infrastructure replacement projects over a long period of time. The annual funding rate of the Sewer Master Plan is targeted at an amount that, when combined with prior or future year contributions, is sufficient to provide for the eventual replacement of assets as scheduled in the plan. This contribution policy should be updated periodically based on the most current Wastewater Master Plan. There are no minimum or maximum balances contemplated by this funding policy. However, the contributions level should be reviewed periodically or as major updates to the Wastewater Master Plan occur. Annual funding is contingent on many factors and may ultimately involve a combined strategy of cash funding and debt issuance with the intent to normalize the burden on Sewer customer rates.
D. Internal Service Funds
Background.
Internal Service Funds are used to centrally manage and account for specific program activity in a centralized cost center. Their revenue generally comes from internal charges to departmental operating budgets rather than direct appropriations. They have several functions.
They work well in normalizing departmental budgeting for programs that have life-cycles greater than one year; thereby facilitating level budgeting for expenditures that will, by their nature, be erratic from year to year. This also facilitates easier identification of long term trends.
They act as a strategic savings plan for long-term assets and liabilities.
From an analytical standpoint, they enable appropriate distribution of city- wide costs to individual departments, thereby more readily establishing true costs of various operations.
Since departmental charges to the internal service fund duplicate the ultimate expenditure from the internal service fund, they are eliminated when consolidating entity-wide totals.
The measurement criteria, cash flow patterns, funding horizon and acceptable funding levels are unique to each program being funded. Policy regarding target balance and/or contribution policy, gain/loss amortization assumption, source data, and governance for each of the City’s Internal Service Funds is set forth as follows:
1. For all Internal Service Funds: The Chief Financial Officer may transfer part or all of any unencumbered fund balance between the Internal Service Funds provided that the withdrawal of funds from the transferred fund would not cause insufficient reserve levels or insufficient resources to carry out its intended purpose. This action is appropriate when the decline in cash balance in any fund is precipitated by an off-trend non-recurring event. The Chief Financial Officer will make such recommendations as part of the annual budget adoption or through separate Council action.
2. Equipment Maintenance Fund and Equipment Replacement Fund : The Equipment Maintenance and Replacement Funds receive operating money from the Departments to provide equipment maintenance and to fund the regular replacement of major pieces of equipment (mostly vehicles) at their economic obsolescence.
a. Equipment Maintenance Fund: The Equipment Maintenance Fund acts solely as a cost allocation center (vs. a pre -funding center) and is funded on a pay - as-you-go basis by departmental maintenance charges by vehicle type and usage requirement. Because of this limited functi on, the target year - end balance is zero.
Contribution rates (departmental charges) are set to include the direct costs associated with maintaining the City vehicle fleet, including fleet maintenance employee salary and benefits, operating expenses, administrative overhead and m aintenance related capital outlay.
Maintenance facility improvements and replacement costs are to be provided outside of this cost unit.
Because of the limited purpose of this fund, a gain/loss assumption is not needed.
Source data is ongoing city fleet inventory and maintenance cost information.
Governance is achieved through annual management adjustment of contribution rates on the basis of maintenance cost by vehicle and distribution of costs based on fleet use by department/division.
b. Equipment Replacement Fund : Operating Departments are charged annual amounts sufficient to accumulate funds for the replacement of vehicles, communications equipment, technology equipment and other equipment replacement determined appropriate by the Chief Financial Officer. The City Manager recommends annual rate adjustments as part of the budget preparation process. These adjustments are based on pricing, future replacement schedules and other variables.
The age and needs of the equipment inventory vary from year to year.
Therefore, the year-end fund balance will fluctuate in direct correlation to accumulated depreciation. In general, it will increase in the years preceding the scheduled replacement of relatively large percentage of the equipment, on a dollar value basis. However, rising equipment costs, dissimilar future needs, replacing equipment faster than their expected life or maintaining equipment longer than their expected life all contribute to variation from the projected schedule.
In light of the above, the target funding level is not established in terms of a flat dollar figure or even a percentage of the overall value of the equipment inventory. It is established at fifty percent (50%) of the current accumulated depreciation value of the equipment inventory, calculated on a replacement value basis. This will be reconciled annually as part of the year-end close out process by the Finance Department. If departmental replacement charges for equipment prove to be excessive or insufficient with regard to this target funding level, new rates established during the next budget cycle will be adjusted with a view toward bringing the balance back to the target level over a three-year period.
3. Self-Insurance Fund
Background
The Self -insurance fund pays for insurance premiums, benefit and settlement payments, and administrative and operating expenses. It is supported by charges to other City funds for the services it provides. These annual charges for service shall reflect the five -year historical experience and shall be set to equal the annual expenses of the fund.
Policy & Practice
Self-insurance reserves (Liability and Workers’ compensation) will be maintained at a level which, together with purchased insurance policies, adequately indemnify the City’s property, liability, and health benefit risk from one -time fluctuations. A qualified actuarial firm shall be retained on an annual basis in order to recommend appropriate funding levels, which will be approved by Council. The City shall maintain minimum reserves equal to 60% of the five-year average of total Self-Insurance Fund costs, with a maximum of 100%.
To lessen the impact of short -term annual rate change fluctuation, City management may implement one-time fund transfers (rather than department rate
increases) when funding shortfalls appear to be due to unusually sharp and non- recurring factors. Excess reserves in other areas may be transferred to the internal service fund in these instances but such transfers should not exceed the funding necessary to reach the one hundred percent (100%) reserve level defined above.
4. Compensated Absences
Fund Background
The primary purpose of flex leave, vacation leave and sick leave is to provide compensated time off as appropriate and approved. However, under certain circumstances, typically at separation from service, some employees have the option of receiving cash -out payments for some accumulated leave balances. The Compensated Absences Fund is utilized primarily as a budget smoothing technique for any such leave bank liquidations. The primary purpose of the Compensated Absences Fund is to maintain a balance sufficient to facilitate this smoothing.
Policy and Practice
The contribution rate will be set to cover estimated annual cash flows based on a three-year trailing average.
The minimum cash reserve should not fall below that three -year average. The maximum cash reserve should not exceed fifty percent (50%) of the long term liability. The target cash reserve shall be the median difference between the minimum and maximum figures.
Each department will make contributions to the Compensated Absences Fund through its operating budget as a specified percentage of salary. The Chief Financial Officer will review and recommend adjustments to the percentage of salary required during the annual budget development process. This percentage will be set so as to maintain the reserve within the parameters established above.
5. Post Retirement Funding Policies
a. Pension Funding:
i) California Public Employees Retirement System (CalPERS): The City’s principal Defined Benefit Pension program is provided through contract with CalPERS. The City’s contributions to the plan include a fixed employer paid member contributio n and an actuarially determined employer contribution that fluctuates each year based on an annual actuarial plan valuation. This variable rate employer contribution includes the normal cost of providing the contracted benefits plus or minus an amortization of plan changes and net actuarial gains and losses since the last valuation period.
It is the City’s policy to make contributions to the plan equaling at least
one hundred percent (100%) of the actuarially required contribution (annual pension cost). Because the City pays the entire actuarially required contribution each year, by definition, its net pension obligation at the end of each year is $0. Any unfunded actuarial liability (UAL) is amortized and paid in accordance with the actuary’s funding recommendations. The City will strive to maintain its UAL within a range that is considered acceptable to actuarial standards. The City Council shall consider increasing the annual CalPERS contribution should the UAL status fall below acceptable actuarial standards.
b. Other Post-Employment Benefits (OPEB Funding):
Background.
The City’s OPEB funding obligations consists of two retiree medical plans.
New Plan. Effective July 1, 2011, the City and its employee associations agreed to major changes to the Post Employment Healthcare Plan. New employees participate in a program that requires certain defined employee and employer contributions while the employee is in active service. However, once the contributions have been made to the employee’s account, the City has transferred a substantial portion of the funding risk to the employee.
Old Plan. Eligible employees who retired prior to the “New Plan” and active employees were eligible to continue to receive post-retirement medical benefits (a defined benefit plan). The cost was divided among the City, current employees and certain retirees. In the past, this program was largely funded on a pay-as-you-go basis, so there was a significant unfunded liability. Recognizing this problem, the City began contributing to this obligation in
2010. In 2012, these assets were placed in a pre-funding trust. The City’s intention is to amortize the remaining unfunded liability within 25 years.
Policy & Practice.
New Plan. Consistent with agreements between the City and employee associations, the new defined contribution plan will be one hundred percent (100%) funded, on an ongoing basis, as part of the annual budget process. Funds to cover this expenditure will be contained within the salary section of each department’s annual operating budget.
Old Plan. The City’s policy is to prefund the explicit (cash subsidy) portion of the Actuarial Accrued Liability (AAL) of the remnants of the old plan over a 25- year amortization period, or less. This amount will be based on the Annual Required Contribution (ARC) determined by a biennial actuarial review; subject to review and analysis by the City. The City will strive to maintain a funded status that will be within a range that is considered acceptable to actuarial standards. The City Council shall consider increasing the annual OPEB contribution should the funded status fall below acceptable actuarial standards. The City Council shall also
consider increasing the annual OPEB contribution when possible to reduce the amortization period.
XI. GRANT ADMINISTRATION POLICY
A. Grant Application and Responsibility
Individual departments are encouraged to investigate sources of funding relevant to their respective departmental activities.
The individual department applying for a grant or receiving a restricted donation shall generally be considered the Program Administrator of the grant. The Budget and Accounting Divisions in the Finance Department may assist in the financial administration and reporting of the grant but the Program Administrator is ultimately responsible for meeting all terms and conditions of the grant, insuring that only allowable costs are charged to the grant program and is responsible for adhering to City budgeting and fiscal procedures. Individual Departments and Program Administrators are not authorized to execute grant contracts. Grant contracts should be reviewed by the City Attorney’s office and executed by the City Manager and/or City Council.
B. Grant Acceptance & Appropriation by City Council
Even though the funding source for an activity may be provided by a grantor/donor, only City Council can appropriate funds for official City activities except as authorized by Council Policy 5001 (Budget Adoption and Administration).
Therefore, prior to the acceptance of a grant, the City Manager and City Council shall:
1. Approve the terms and conditions of the proposed grant including the specific City obligations that may be created by the grant contract in terms of required City matching expenditures or staff activities, even if the expenditures were previously appropriated through the budget adoption process.
2. Approve budget appropriations for the grant expenditures and City matching expenditures unless previously appropriated through the budget adoption process.
3. Approve and execute the Grant Contract(s).
Note: The City Council review and approval of items 1 and 3 are not required if the grant is under $30,000, pursuant to Council Policy 5001.
Any budget amendments requested by the Program Administrator or operating department shall be reviewed by the Budget Division of the Finance Department and submitted as a staff report to the Council for their review and approval. The Budget Division of the Finance Department along with the Program Administrator shall determine the proper amount of the appropriation request during the current and future fiscal year(s).
C. Timely Reimbursement
The Program Administrator is responsible and should pursue and/or request grant reimbursements or draw-downs on a timely basis. If requested, the Accounting Division of the Finance Department will assist with grant reimbursements or draw- downs. All checks shall be made payable to the City of Culver City and remitted to the Program Administrator.
Grant checks should be deposited immediately with the Revenue Division of the Finance Department along with supporting documentation received by the Program Administrator. Copies should also be forwarded to the Accounting Division of the Finance Department.
The Program Administrator will keep the Budget and Accounting Divisions of the Finance Department apprised of the annual estimated grant revenues and expenditures and a tentative schedule of cash-flows for the grant program.
D. Financial and Grant Reporting
Grant reporting requirements vary widely by grant and sometimes include monthly, quarterly, and or annual reporting. Subsequent to the approval of a grant application, and during the project period, any required reports shall be the responsibility of the Program Administr ator, or if requested by the Program Administrator, in conjunction with the Accounting Division of the Finance Department. Program Administrators submitting their own reports shall forward a copy of each report to the Accounting Division of the Finance Department.
E. Grants Containing Direct Federal Assistance of Federal “Pass-Through” Funds
Program Administrators acknowledge that Federal Funds or Federal Funds that “pass-through” state and local programs are required to be reported on the City’s Schedule of Federal Financial Assistance and included in the City’s annual Single Audit (compliance audit of all Federal Funds). Program Administrators will identify and keep the Accounting Division apprised of those grant programs that contain direct Federal Funding or Federal pass -through funds, identifying the Catalog of Federal Domestic Assistance (CFDA) number when at all possible.
F. Record Keeping & Retention Requirements
For the purpose of Grantor inquiries and grant specific compliance audits, Program Administrators are responsible for maintaining adequate records to evidence that program activities and expenditures met the terms and conditions of the grant and that all g rant reporting requirements were met timely . Record retention requirements vary by grant, but it is recommended that grant records should be maintained for a minimum of the life-of-the-grant plus three years, unless otherwise specified by the grant contract.
G. Documents to be forwarded to Accounting
Information received from a granting or donor agency that is pertinent to the terms, conditions, approval, extension, denial, revocation, and administration of a grant
shall be forwarded to the OMB of the Finance Department including but not limited to:
Grant Award Notification
Expenditure Authorization Date (if applicable) Grant Contracts Grant Extension Letters
Grant Termination Letter
Program and or Financial Reports
Notices of Questioned Costs or instances of non-compliance Any Document setting or modifying terms and conditions of the grant
XII. DEBT MANAGEMENT POLICIES:
The City is committed to fiscal sustainability by employing long -term financial planning efforts, maintaining appropriate reserves levels and employing prudent practices in governance, management, budget administration and financial reporting.
Debt levels and their related annual costs are important long -term obligations that must be managed within available resources. A disciplined thoughtful approach to debt management includes policies that provide guidelines for the City to manage its debt program in-line with those resources. Therefore, the objective of this policy is to provide written guidelines and restrictions concerning the amount and type of debt issued by the City and the ongoing management of the debt portfolio.
This debt management policy is intended to improve the quality of decisions, provide justification for the structure of debt issuance, identify policy goals and demonstrate a commitment to long-term financial planning, including a multi-year capital plan. Adherence to a debt management policy signals to rating agencies and the capital markets that a government is well managed and should meet its obligations in a timely manner.
A. Conditions and Purposes of Debt Issuance
1. Acceptable Conditions of the Use of Debt
a. It meets the City’s goal of distributing the payments for the asset over its useful life so that benefits more closely match costs for both current and future residents.
b. It is the most cost-effective funding means available to the City, taking into account cash flow needs and other funding alternatives.
c. It is fiscally prudent and meets the guidelines of this Policy. Any consideration of debt financing shall consider financial alternatives, including pay-as-you-go funding, proceeds derived from development or redevelopment of existing land and capital assets owned by the City, and use of existing or future cash reserves, or combinations thereof.
2. Acceptable Uses of Debt
The City will consider financing for the acquisition, substantial refurbishment, replacement or expansion of physical assets, including land improvements.
The primary purpose of debt is to finance one of the following:
a. Acquisition and or improvement of land, right -of-way or long - term easements.
b. Acquisition of a capital asset with a useful life of 3 or more years.
c. Construction or reconstruction of a facility.
d. Refunding, refinancing, or restructuring debt, subject to refunding objectives and parameters discussed in Section E.
e. Although not the primary purpose of the financing effort, project reimbursables that include project planning design, engineering and other preconstruction efforts; project -associated furniture fixtures and equipment; capitalized interest, origi nal issuer’s discount, underwriter’s discount and other costs of issuance.
f. Interim or cash flow financing, such as anticipation notes.
3. Prohibited Uses of Debt
Prohibited uses of debt include the following:
a. Financing of operating costs except for anticipation notes with a term of less than one year.
b. Debt issuance used to address budgetary deficits.
c. Debt issued for periods exceeding the useful life of the asset or projects to be financed.
B. Use of Alternative Debt Instruments
The City recognizes that there are numerous types of financing structures and funding sources available, each with specific benefits, risks, and costs. All potential funding sources are reviewed by management within the context of the Debt Policy and the overall portfolio to ensure that any financial product or structure is consistent with the City’s objectives. Regardless of what financing structure(s) is utilized, due-diligence review must be performed for each transaction, including the quantification of potential risks and benefits, and analysis of the impact on City creditworthiness and debt affordability and capacity.
1. Variable Rate Debt
Variable rate debt affords the City the potential to achieve a lower cost debt depending on market conditions. However, the City will seek to limit the use of
variable-rate debt due to the potential risks of such instruments.
a. Purpose
The City shall consider the use of variable rate debt for the purposes of:
i) Reducing the costs of debt issues.
ii) Increasing flexibility for accelerating principal repayment and amortization.
iii) Enhancing the management of assets and liabilities (matching short-term “priced debt” with the City’s short-term investments). iv) Diversifying interest rate exposure.
b. Considerations and Limitations on Variable-Rate Debt
The City may consider the use of all alternative structures and modes of variable rate debt to the extent permissible under State law and will make determinations among different types of modes of variable-rate debt based on cost, benefit, and risk factors. The Chief Financial Officer shall consider the following factors in considering whether to utilize variable rate debt:
i) Any variable rate debt should not exceed 20% of total City General Fund supported debt.
ii) Any variable rate debt should be fully hedged by expected future Facility Financing Plan reserves or unrestricted General Fund reserve levels.
iii) Whether interest cost and market conditions (including the shape of the yield curves and relative value considerations) are unfavorable for issuing fixed rate debt.
iv) The likelihood of projected debt service savings when comparing the cost of fixed rate bonds.
v) Costs, implementation and administration are quantified and considered.
vi) Cost and availability of liquidity facilities (lines of credit necessary for variable rate debt obligations and commercial paper in the event that the bonds are not successfully remarketed) are quantified and considered.
vii) Ability to convert debt to another mode (daily, monthly, fixed) or redeem at par at any time is permitted.
viii) The findings of a thorough risk management assessment.
c. Risk Management
Any issuance of variable rate debt shall require a rigorous risk assessment, including, but not limited to factors discussed in this section.
Variable rate debt subjects the City to additional financial risks (relative to fixed rate bonds), including interest rate risk, tax risk, and certain risks related to providing liquidity for certain types of variable rate debt.
The City will properly manage the risks as follows:
i) Interest Rate Risk and Tax Risk – The risk that market interest rates increase on variable -rate debt because of market conditions, changes in taxation of municipal bond interest, or reductions in tax rates. Mitigation – Limit total variable rate exposure per the defined limits and match the variable rate liabilities with short term assets.
ii) Liquidity/Remarketing Risk – The risk that holders of variable rate bonds exercise their “put” option, tender their bonds, and the bonds cannot be remarketed requiring the bond liquidity facility provider to repurchase the bonds. This will result in the City paying a higher rate of interest to the facility provider and the potential rapid amortization of the repurchased bonds. Mitigation – Limit total direct variable - rate exposure. Seek liquidity facilities which allow for longer (5 -10 years) amortization of any draws on the facility. Secure credit support facilities that result in bond ratings of the highest short -term ratings and long-term ratings not less than AA. If the City’s bonds are downgraded below these levels as a result of the facility provider’s ratings, a replacement provider shall be sought.
iii) Liquidity/Rollover Risk – The risk that arises due to the shorter term of most liquidity provider agreements (1 -5 years) relative to the longer-term amortization schedule of the City’s variable -rate bonds.
In particular, (1) the City may incur higher renewal fees when renewal agreements are negotiated and (2) the liquidity bank market constricts such that it is difficult to secure third party liquidity at any interest rate. Mitigation – Negotiate longer terms on provider contracts to minimize the number of rollovers.
2. Derivatives
The use of certain derivative products to hedge variable rate debt, such as interest rate swaps, may be considered to the extent the City has such debt outstanding or under consideration. The City will exercise extreme caution in the use of derivative instruments for hedging purposes, and will consider their utilization o nly when sufficient understanding of the products and sufficient expertise for their appropriate use has been developed. A comprehensive derivative policy will be adopted by the City prior to any utilization of such instruments.
C. Refunding Guidelines
The Chief Financial Officer shall monitor at least annually all outstanding City debt obligations for potential refinancing opportunities. The City will consider refinancing of outstanding debt to achieve annual savings. Absent a compelling economic reason or financial benefit to the City, any refinancing should not result in any increase to the weighted average life of the refinanced debt.
The City will generally seek to achieve debt service savings which, on a net present value basis, are at least 3% of the debt being refinanced. The net
present value assessment shall factor in all costs, including issuance, escrow, and foregone interest earnings of any contributed funds on hand. Any potential refinancing shall additionally consider whether an alternative refinancing opportunity with higher savings is reasonably expected in the future.
Any potential refinancing executed more than 90 days in advance of the outstanding debt optional call date shall require a higher savings threshold.
Consideration of this method of refinancing shall place greater emphasis on determining whether an alternative refinancing opportunity with higher savings is reasonably expected in the future.
D. Market Communication, Administration, and Reporting
1. Rating Agency Relations and Annual or Ongoing Surveillance . The Chief Financial Officer shall be responsible for maintaining the City's relationships with Standard & Poor's Ratings Services, Fitch Ratings and Moody’s Investor’s Service. The City is committed to maintaining its existing rating levels. In addition to general communication, the Chief Financial Officer shall:
a. Ensure the rating agencies are provided updated financial information of the City as it becomes publicly available.
b. Communicate with credit analysts at each agency at least once each year, or as may be requested by the agencies.
c. Prior to each proposed new debt issuance, schedule meetings or conference calls with agency analysts and provide a thorough update on the City’s financial position, including the impacts of the proposed debt issuance.
2. Council and Financial Planning and Budget Subcommittee Communication. The Chief Financial Officer should report feedback from rating agencies, when and if available, regarding the City's financial strengths and weaknesses and recommendations for addressing any weaknesses as they pertain to maintaining the City’s existing credit ratings.
3. Continuing Disclosure Compliance. The City shall remain in compliance with Security and Exchange Commission Rule 15c2-12 by filing its annual financial statements and other financial and operating data for the benefit of its bondholders within 270 days of the close of the fiscal year, or as required in any such agreement for any debt issue. The City shall maintain a log or file evidencing that all continuing disclosure filings have been made promptly.
4. Debt Issue Record-Keeping. A copy of all debt-related records shall be retained at the City’s offices. At minimum, these records shall include all official statements, bond legal documents/transcripts, resolutions, trustee statements, leases, and title reports for each City financing (to the extent available).
5. Arbitrage Rebate. The use of bond proceeds and their investments must be monitored to ensure compliance with all Internal Revenue Code Arbitrage Rebate Requirements. The Chief Financial Officer shall ensure that all bond
proceeds and investments are tracked in a manner which facilitates accurate calculation; and, if a rebate payment is due, such payment is made in a timely manner.
E. Credit Ratings.
The City will consider published ratings agency guidelines regarding best financial practices and guidelines for structuring its capital funding and debt strategies to maintain the highest possible credit ratings consistent with its current operating and capital needs.
F. Legal Debt Limit.
Culver City Charter section 1603 indicates that the City shall not incur bonded indebtedness which shall in the aggregate exceed the sum of fifteen percent (15%) of the total assessed valuation, for purposes of City taxation, of all the real and personal property within the City. While this limit defines the absolute maximum legal debt limit for the City, it is not an effective indicator of the City’s affordable debt capacity.
G. Affordability.
Prior to the issuance of debt to finance a project, the City will carefully consider the overall long-term affordability of the proposed debt issuance. The City shall not assume more debt without conducting an objective analysis of the City’s ability to assume and support additional debt service payments. The City will consider its long- term revenue and expenditure trends, the impact on operational flexibility and the overall debt burden on the taxpayers. The evaluation process shall include a review of generally accepted measures of affordability and will strive to achieve and or maintain debt levels consistent with its current operating and capital needs.
The Chief Financial Officer shall review benchmarking results of other California cities of comparable size with the City’s Financial Planning and Budget Subcommittee prior to any significant project financing.
1. General Fund -Supported Debt . General Fund Supported Debt generally includes Certificates of Participation (COPs) and Lease Revenue Bonds (LRBs) which are lease obligations that are secured by an installment sale or by a lease- back arrangement between the City and another public entity. The general operating revenues of the City are pledged to pay the lease payments, which are, in turn, used to pay debt service on the bonds or Certificates of Participation.
These obligations do not constitute indebtedness under the state constitutional debt limitation and, therefore, are not subject to voter approval.
Payments to be made under valid leases are payable only in the year in which use and occupancy of the leased property is available, and lease payments may not be accelerated. Lease financing requires the fair market rental value of the leased property to be equal to or greater than the required debt service or lease payment schedule. The lessee (City) is obligated to place in its Annual Budget the rental payments that are due and
payable during each fiscal year the lessee has use of the leased property.
The City should strive to maintain its net General Fund-backed debt service at or less than 8% of available annually budgeted revenue. This ratio is defined as the City’s annual debt service requirements on Certificates of Participation and Lease Revenue Bonds compared to total General Fund Revenues net of interfund transfers. This ratio, which pertains to only general fund backed debt, is often referred to as “lease burden.”
2. Revenue Bonds. Long-term obligations payable solely from specific pledged sources, in general, are not subject to a debt limitation. Examples of such long- term obligations include those which achieve the financing or refinancing of projects provided by the issuance of debt instruments that are payable from restricted revenues or user fees (Enterprise Revenues) and revenues generated from a project.
In determining the affordability of proposed revenue bonds, the City will perform an analysis comparing projected annual net revenues (exclusive of depreciation which is a non -cash related expense) to estimated annual debt service. The City should stri ve to maintain a coverage ratio of 125% using historical and/or projected net revenues to cover annual debt service for bonds. The City may require a rate increase to cover both operations and debt service costs, and create debt service reserve fun ds to maintain the required coverage ratios.
3. Special Districts Financing. The City’s Special Districts primarily consist of 1913/1915 Act Assessment Districts (Assessment Districts). The City will consider requests for Special District formation and debt issuance when such requests address a public need or pr ovide a public benefit. Each application will be considered on a case by case basis, and the Finance Department may not recommend a financing if it is determined that the financing could be detrimental to the debt position or the best interests of the City.
4. Conduit Debt. Conduit financing provides for the issuance of securities by a government agency to finance a project of a third party, such as a non -profit organization or other private entity. The City may sponsor conduit financings for those activities th at have a general public purpose and are consistent with the City’s overall service and policy objectives. Unless a compelling public policy rationale exists, such conduit financings will not in any way pledge the City’s faith and credit.
H. Structure of Debt
1. Term of Debt – Debt will be structured with the goal of distributing the payments for the asset over its useful life so that benefits more closely match costs for both current and future residents. Borrowings by the City should be of a duration t hat does not exceed the useful life of the improvement that it finances. The standard term of long -term borrowing is typically 15-30 years.
2. Rapidity of Debt Payment – Accelerated repayment schedules reduce debt burden faster and reduce total borrowing costs. The Finance Department will amortize debt through the most financially advantageous debt structure and to the extent possible, matc h the City’s projected cash flow to the anticipated debt service payments. “Backloading” of debt service will be considered only when one or more of the following occur:
a. Natural disasters or extraordinary or unanticipated external factors make payments on the debt in early years prohibitive.
b. The benefits derived from the debt issuance can clearly be demonstrated to be greater in the future than in the present.
c. Such structuring is beneficial to the City’s aggregate overall debt payment schedule or achieves measurable interest savings.
d. Such structuring will allow debt service to more closely match project revenues during the early years of the project’s operation.
3. Level Payment – To the extent practical, bonds will be amortized on a level repayment basis, and revenue bonds will be amortized on a level repayment basis considering the forecasted available pledged revenues to achieve the lowest rates possible. Bond repayments should not increase on an annual basis in excess of 2% without a dedicated and supporting revenue funding stream.
4. Serial Bonds, Term Bonds, and Capital Appreciation Bonds – For each issuance, the City will select serial bonds or term bonds, or both. On the occasions where circumstances warrant, Capital Appreciation Bonds (CABs) may be used. The decision to use term, serial, or CAB bonds is driven based on market conditions.
5. Reserve Funds – The City shall strive to maintain fund balance in the Facilities Planning Reserve at a level equal to or greater than the maximum annual debt service of existing obligations.
*This Policy supersedes Policy No. 5002 issued on January 23, 1995 by Resolution No. 95-R00, revised on July 16, 2007 by Resolution No. 2007-R043, revised on June 22, 2009 by Resolution No. 2009-R051, revised on June 23, 2014 by Resolution No. 2014-R056 and revised on June 12, 2023 by Resolution No. 2023-R044.