City Council Policy and Procedure
Number: 2019-01 Reviewed: Annually/As-Needed
Effective Date: 8/20/2019 Revised Date(s):
City Council Policy 2019-01 Effective Date: 08/20/2019 Page 1 of 4 Fund Balance and Reserves Policy
1. Purpose
1.1 The purpose of this policy is to establish prudent reserve policies to ensure the long-term fiscal health and stability of the City. The practice and discipline to maintain adequate reserve funds is necessary to ensure that adequate funding is available for planned and unplanned replacements of capital assets and equipment, infrastructure repairs and replacements, long-term obligations, as well as, economic uncertainties, local emergencies and natural disasters.
2. Definitions
2.1 A fund’s equity – commonly referred to as “fund balance” – is generally the difference between its assets and its liabilities. In accordance with Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Government Fund Type Definitions, fund balance will be displayed in the following classifications depicting the relative strength of the spending constraints placed on the purposes for which resources can be used:
2.1.1 Non-spendable Fund Balance – The portion of a fund balance that includes amounts that cannot be spent because they are either (a) not in a spendable form, such as prepaid items, inventories of supplies, or loans receivable; or (b) legally or contractually required to be maintained intact, such as the principal portion of an endowment.
2.1.2 Restricted Fund Balance – The portion of fund balance that can be used only for those purposes that are specified by their providers, such as granters, bondholders, or higher levels of government. It is important to note that these resources are constrained by external parties.
2.1.3 Committed Fund Balance – The portion of a fund balance that includes 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, and remains binding unless removed in the same manner.
2.1.4 Assigned Fund Balance – The portion of a fund balance that includes amounts that are constrained by the government’s intent to City Council Policy 2019-01 Effective Date: 08/20/2019 Page 2 of 4 be used for specific purposes, but that are neither restricted nor committed. Such intent needs to be established at either the highest level of decision-making, or by an official designated for that purpose.
2.1.5 Unassigned Fund Balance – The portion of a fund balance that includes amounts that do not fall into one of the above aforementioned categories. The General Fund is the only fund that should report this category of fund balance.
3. Policy
3.1 The fund balance policies are relevant to the unrestricted fund balances, which include committed, assigned, and unassigned fund balances. Since there are practical and/or legal limitations on the use of non-spendable or restricted fund balances, they are not subject to the fund balance policies.
3.2 This policy shall be reviewed and approved annually, with any revisions, by the City Council during the review and adoption of the annual City Budget and Capital Improvement Program.
3.3 The City Council may assign fund balance to a specific purpose in relation to this fund balance policy. By resolution, the Council has also authorized the City Manager and/or the Finance Director to assign fund balance.
Assignments of fund balance by the City Manager and/or the Finance Director do not require formal action by the City Council; however, each assignment must be approved by either of the authorized officials before the item can be presented in the financial statements.
3.4 When multiple categories of fund balance are available for expenditure (for example, a construction project is being funded partly by a grant, funds set aside by the City Council, and unassigned fund balance), the City will start with the most restricted category – spending those funds first – before moving down to the next category with available funds.
3.5 All uses of reserve funds shall be approved by the City Council.
3.6 The City Council may designate portions of the Unassigned General Fund balance for future capital projects, continuing or carry-over appropriations from prior fiscal years, or any other municipal purpose that the City Council deems prudent or necessary. Best practices dictate that fund balance reserves should not be used for ongoing operating expenditures; however, the City Council’s retains discretion as to when to utilize the reserves in this manner.
City Council Policy 2019-01 Effective Date: 08/20/2019 Page 3 of 4
3.7 Reserve levels shall be adjusted in accordance with this Policy annually at the end of each fiscal year in conjunction with the preparation of the City’s annual budget.
3.8 All classifications of General Fund balance will appear in the annual Comprehensive Annual Financial Report (CAFR).
4. Reserve Fund Annual Contributions
4.1 Contingency Reserve Fund - To adequately provide for economic uncertainties, local emergencies or disasters, and other financial hardships or downturns in the local or national economy, including contingencies for unforeseen operating or capital needs and cash flow requirements, the City will maintain a Contingency Reserve Fund equal to no less than 25% of the General Fund expenditures, including operating transfers, in the adopted annual budget. The Contingency Reserve Fund reserve balance is classified as a committed fund balance.
4.2 Other Post Employment Benefit (OPEB) Reserve Fund/Trust Fund – The City will maintain the Other Post Employment Benefit (OPEB) Reserve Fund and/or OPEB Trust Fund to cover the projected costs of future retiree benefits. The combined amount of the Reserve Fund and the Trust Fund shall equal no less than 80% of the total OPEB Liability based on the most recent independent actuarial valuation. The Other Post Employment Benefit (OPEB) Reserve Fund reserve balance is classified as assigned fund balance. The Other Post Employment Benefit (OPEB) Trust Fund is classified as restricted fund balance.
4.3 Building Facility and Maintenance Fund – The City will maintain a Building Facility and Maintenance Fund to provide for the future replacement of improvements, systems and equipment at City Hall, Diamond Bar Center and other City buildings and facilities. The annual contribution to this fund shall be no less than $100,000. The Building Facility and Maintenance Fund reserve balance is classified as assigned fund balance.
4.4 Vehicle Maintenance and Replacement Fund - The City will maintain a Vehicle Maintenance and Replacement Fund to provide funding for the timely replacement of vehicles and related equipment with an individual replacement cost of $10,000 or more. The annual contribution to this fund will generally be based on the estimated operating expenses plus depreciation. Any interest earnings, sale proceeds of surplus equipment and related damage and insurance recoveries will be credited to this Fund.
The Vehicle Maintenance and Replacement Fund reserve balance is classified as assigned fund balance.
4.5 Technology Reserve Fund - The City will maintain a Technology Reserve Fund to provide for the future replacement of essential technology systems, City Council Policy 2019-01 Effective Date: 08/20/2019 Page 4 of 4 including network, security, communication, computer hardware and software platforms, e-government and other technology solutions that are utilized as part of City operations. The annual contribution to this fund shall be no less than $100,000. The Technology Reserve Fund reserve balance is classified as assigned fund balance.
5. Allocation of Available Fund Balance to Reserve Funds
5.1 It is a long-term goal of the City to build unrestricted reserve funds to provide flexibility, respond to emergencies, fund new projects and maintain necessary reserves for the eventual replacement of City capital facilities, equipment, and assets at the end of their design life. After the minimum funding levels and annual contributions to the Funds identified in Section 4 above are satisfied, any remaining fund balance available at the end of the fiscal year shall be apportioned to the following funds:
5.1.1 Park and Facility Development Fund – The Park and Facility Development Fund provides for the development and
enhancements of the City’s parks and facilities. The Park and Facility Development Fund reserve balance is classified as assigned fund balance. Allocation: 40%
5.1.2 Building Facility and Maintenance Fund – The Building Facility & Maintenance Fund provides for the future replacement of improvements, systems and equipment at City Hall, Diamond Bar Center and other City buildings and facilities. The Building Facility and Maintenance Fund reserve balance is classified as assigned fund balance. Allocation: 40%.
5.1.3 Unrestricted General Fund Balance – Allocation: 20%
6. Further Information
6.1 For further information or questions related to this policy, contact the Finance Director.
7. References
7.1 Resolution 2019-36
7.2 Resolution 2011-26