Fiscal
Policy
INTR
ODUCTION
Objecti
ve
This Fiscal Policy (or “Policy”) establishes policy parameters to guide the City’s long term fiscal stability, including parameters for establishing and implementing the City Budget. This Policy is intended to provide direction for the management of the City’s finances to provide for the delivery of quality services; maintain an enhanced service delivery; ensure a balanced budget; and establish reserves necessary to meet known and unknown future obligations.
Policy Areas
This Policy addresses the following areas:
1. Fiscal Policy Overview
2. Definitions
3. Budget Creation
4. Budget Priorities
5. Budget Adjustments
6. Accounting, Auditing and Financial Reporting
7. Capital Improvement Projects and Infrastructure
8. Debt
9. General Revenue Policies
10. Enterprise Fund Revenue
11. Investment
12. General Reserve Policies
13. Use of Fund Balance
14. General Fund Reserves
15. Capital Improvement Project (CIP) Fund Reserves
16. Trusts
17. Internal Service Fund Reserves
18. Enterprise Fund Reserves
19. Internal Service Replacement Funds
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R2023-__
Fiscal Policy
Fisc
al Po
licy
1. Overview of
Purpose and Scope of this Policy
a. The general financial goal is to maintain and enhance the sound fiscal condition of the City.
b. Appli
cability. This Policy applies to all funds for the City of Napa, as well as fund
s managed by the City of Napa on behalf of other entities such as the H
ousing Authority of the City of Napa, the Napa Enhanced Infrastructure Fi
nancing District, and Napa County.
2. Definiti
ons. The definitions set forth below shall apply to this Policy. Unless otherwise de
fined in this Policy, the definitions and interpretations set forth in the Budget shall apply to this Policy.
a. "Balanced Budget": In each fund, budgeted revenues plus fund balance ar e grea
ter than budgeted expenditures.
b. "Budget”: An annual plan approved by the City Council of financial activity including an
ticipated expenditures and the estimated means to finance those expenditures.
Budget appropriations are authorized by formal City Council action with any budget adjustments approved in accordance with the provisions of this Fiscal Policy. c. “Capital Improvement Program (CIP) Project Budget”: The Budget includes a listing of all planned capital improvement projects by category. d. “Deficit”: The excess of fund expenses over fund revenues at the close of a fiscal year.
e. “Department Director”: the chief executive appointive officer (as defined by C ity C
harter Section 75 and Napa Municipal Code Title 2) of each Department identified in the Budget, or the authorized designee of the Department Director or City Manager.
f. "Fund": An independent fiscal and accounting entity with a self-balancing set of accounts recording cash and/or other resources together with all related liabilities, obligations, reserves, and equities.
g. "Fund Balance": The difference between assets and liabilities reported in a
go
vernmental fund.
h. "Fund Balance Categories" per current governmental accounting stand ards (G
ASB 54):
i. “Non-Spendable”: Cannot be readily converted to cash or cannot legally be spent
ii. “Restricted”: External imposed (by granting agencies, governmental entities, etc.) restrictions on spending
iii. “Committed”: City Council formally-imposed (by resolution or other action) restrictions on spending
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Fiscal Policy
iv
.
“Assigned”: Funds reserved by Council direction or City Manager for designated purposes
v. “Unassigned”: Residual balance not classified in any of the above categories
i. "General Fund Operating Budget": total General Fund expenditure budget less transfers to other funds and reserves.
j. "Non-Recurring": Revenues or expenditures not expected to recur on a regular basis; not to be included in the regular operating budget. k. "Object Code”: Object codes are used in the City’s financial system to differentiate between different types of revenues, expenditures, and balance sheet accounts.
3. Budget Creation
a. The City
Council will adopt a balanced two-year budget by June 30 of every other year. As a part of the biennial budget process, prior to the end of the first year of the two-year budget cycle, the City Council will adopt a budget for the second year (in compliance with City Charter Sections 87 – 91) which will incorporate any amendments for the second year of the two-year budget cycle. When considering each budget, or any amendments to a budget recommended by the City Manager, the City Council will consider the following policy goals:
i. A bi
ennial base operating budget will be developed by verifying or conservatively projecting revenues and expenditures for the forthcoming two fiscal years.
ii. The C
ity will maintain a level of expenditures which will provide for the public well-being and safety of the residents, property owners, businesses, and visitors of the community.
iii. Projected
revenues will be sufficient to support projected operating expenditures. The City will estimate its annual revenues by an objective, an
alytical process utilizing trend, judgmental, and statistical analysis as appropriate. Revenue estimates adopted by the City Council must be con
servative.
iv. The C
ity shall contract with outside consultants or utilize limited term City staff positions for peaks in workload, when a project is limited in term and/or scope, or when specialized expertise is necessary and it is more cost- effective to hire a consultant than add a full-time staff position. Any appointment to a limited-term employment position shall be made in accordance with Council Policy (R1999-247, as may be amended ).
C
onversely, for longer-term needs (at least 3 to 5 years), or when the City Manager determines it is more cost-effective, the City Council may consider adding full-time staff.
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v. The
City will project its equipment replacement and maintenance needs for the next ten years and will update this projection each year. From this projection a maintenance and replacement schedule will be developed and followed.
vi. The
Non-Recurring General Fund will be used to budget for non-recurring items.
b. Each
Department Director may request additional funds for new positions, equipment, or programs during the budget creation process. Requests are submitted as Budget Packages and include a description of what the requested funding will be used for and the estimated financial impact. c. Compe
nsated Absence annual appropriations are budgeted in the General Fund for payment of various accrued leave balances (non-Enterprise Fund only). The three appropriations are for payment of accrued leave for separating employees, leave payouts for continuing employees, and annual cashouts of management leave. The appropriation amounts shall be based on historical trends, salary growth, and anticipated usage of leave cashout policies.
4. Budget Priorities
When considering each budget, or any amendments to a budget recommended by the City Manager, the City Council will consider the following policy goals:
a. Mainten
ance and replacement funding will be prioritized each year to ensure that capital facilities and equipment are sufficiently maintained to avoid service disruptions.
b. Proje
cts or programs to improve City business processes and/or increase efficiency will be prioritized over the addition of new full-time staff. c. If fund
ing is not available for operations and maintenance costs of proposed new facilities, the City will delay construction of these facilities.
5. Bud
get Adjustments
a. The City Manager is authorized to establish administrative regulations to document the procedures for Department Directors to submit requests for budget adjustments using the City’s financial system.
b. Any proposed amendment to the Budget requires approval by the City Council, except that the City Manager is authorized to approve an amendment to the Budget upon making a written determination in accordance with any of the following circumstances:
i. When
the increased expenditure is completely offset by new matching revenue under either of the following circumstances:
1. To the extent the City receives donations (including grants) for a specified purpose, the City Manager is authorized to increase
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Fiscal Policy
ap
propriati
ons for that department and that fiscal year in an
amount not to exceed the amount of the donation. Adjustments shall be reported to the City Council as part of the next regular financial report.
2. To the extent that a department projects revenues above that fiscal year’s budgeted revenues, the City Manager is authorized to increase appropriations for that department and that fiscal year in an amount not to exceed 15% of the department’s total revenue budget for that fund and object code. Adjustments shall be reported to the City Council as part of the next regular financial report. ii. Any budget transfer within the same fund involving: (a) salaries and benefits budgets, or (b) transfers between departments, or (c) accounts within a department as necessary to meet department objectives. c. The City Council hereby authorizes the City Manager, for all funds except the General Fund, to carry forward a revenue or an expenditure appropriation from a prior fiscal year to the next fiscal year, based on departmental request and in an amount not to exceed not yet expended appropriations from that fund for the prior fiscal year. For the General Fund, the City Manager is authorized to carry forward an
expenditure appropriation from a prior fiscal year to the next fiscal year , provi
ded the amount is for an encumbrance that will carry forward to the next fiscal year and does not exceed not yet expended appropriations from the fund for the prior fiscal year.
i. The amount
of the increased appropriations for the next fiscal year, due to unexpended encumbrances, department requests, and available appropriations from the prior fiscal year, will be reported to the City Council as a part of the annual financial audit for the prior fiscal year.
6. Accou
nting, Auditing and Financial Reporting
a. The C
ity’s accounting and financial reporting systems will be maintained in conformance with generally accepted accounting principles and standards of the Government Accounting Standards Board.
b. Financi
al reports will be submitted to the City Council and will be made available to the public at least twice each fiscal year.
c. Full
and continuing disclosure will be provided in the general financial statements and bond representations.
d. The City w
ill maintain a good credit rating in the financial community. e. The City w
ill maintain a liquidity ratio of at least 1:1.
f. An an
nual audit will be performed by an independent public accounting firm w ith the
subsequent issue of an official Annual Comprehensive Financial Report (ACFR), including an audit opinion.
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Policy
g. In acc
ordance with City Charter section 58, the Finance Director will, at least once a month, provide a written report to the City Council of the cash in the Treasury. h. In acc
ordance with Napa Municipal Code section 2.32.050, the Finance Director shall deliver to the City Manager and to the City Council at a regularly scheduled Council meeting, a budget report showing the budget status at the end of the preceding month.
i. The
Long-Term Financial Forecast shall be prepared annually projecting revenues and expenditures for the General Fund. This forecast shall be used as a planning tool in developing the following year’s operating budget.
7. Cap
ital Improvement Projects and Infrastructure
When considering each Budget, or any amendments to a Budget recommended by the City Manager, the City Council will consider the following policy goals:
a. The
City will plan for the design, construction, implementation, operation, and maintenance of capital improvements in accordance with an adopted Capital Improvement Program.
b. The
City will develop an annual plan for capital improvements, including project design, construction, implementation, and operating and maintenance costs (“CIP Project Budget”).
d. The
City will use intergovernmental assistance to finance only those capital improvements that are consistent with the Capital Improvement Program and City priorities and for which operating and maintenance costs have been included in the Budget.
e. To
cover the costs of CIP projects planned for the Water Enterprise Fund and the Solid Waste and Recycling Enterprise Fund, the City will seek non-General Fund sources of revenue (including grants from other agencies), and the City will otherwise cover the costs through the establishment and regular updating of fees and charges that are equitably imposed on users of the services.
8. Deb
t
a. The
City Council may authorize the use of short-term debt to cover temporary or emergency cash flow shortages of less than one fiscal year. b. The
City Council may issue inter-fund loans rather than outside debt instruments to meet short-term cash flow needs. Inter-fund loans must be repaid consistent with terms approved by a Council resolution.
c. The
City will confine long-term borrowing to fund capital improvements that cannot be funded from current revenues.
d. The
City will use special assessment revenue, inter-fund loans or other self- supporting bonds instead of general obligation bonds when feasible.
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Fiscal
Policy
9. Genera
l Revenue Policies
a. The C
ity will strive to maintain a diversified and stable revenue base to shelter it from short-term fluctuations in any one revenue source. b. The ob
jective of the revenue policies is to ensure that funding is derived from a fair, equitable, and adequate resource base. When establishing new or amended sources of revenue: (i) the City Council will use General Fund revenue sources generated from a broad base (such as property taxes, transient occupancy taxes, sales taxes, and business license taxes) to pay for City services that provide a citywide benefit; and (ii) services that provide a particular benefit to a customer or user shall primarily be financed with user fees, charges, or assessments based on the level of service provided (in accordance with State law, including California Constitution Articles XIII C and XIII D, known as “Prop 26” and “Prop 218”). The City’s goal is to recover from the recipient of City services the full cost of services provided, subject to the limitations of law, unless the City Council determines that public policy or market factors warrant a lesser fee amount. c. Sub
ject to approval by the City Council, and in accordance with limitations of State law, fees for City services will be adjusted on a recurring schedule to address changed circumstances, including cost of living adjustments. d. Non
-recurring revenues will be used for non-recurring expenditures only. This includes all non-recurring funds, including capital and reserves. i. Non
-recurring general revenues will be deposited into the Non-Recurring General Fund.
10. Enterp
rise Fund Revenue
a. The
City will set fees and user charges for each utility fund at a level that fully supports the total direct and indirect cost of the activity and that supports capital investment in the system including the costs of annual depreciation of the system assets. Indirect costs include the cost of annual debt service used for capital assets and overhead charges.
11. Invest
ment
a. The
City Treasurer will annually submit an investment policy to the City Council for review and adoption.
b. The
City Treasurer will invest the City’s monies in accordance with applicable laws and adopted investment policies and direct the investment of bond or note monies on deposit with a trustee or fiscal agent in accordance with the applicable indenture or issuance document.
12. Genera
l Reserve Policies
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Fiscal
Policy
a. It is t
he intent of the City to establish and maintain reserve funds to ensure the continued delivery of City services to address emergencies, address a temporary revenue shortfall or provide stability during economic cycles. Sufficient reserve funds will be managed to provide adequate cash flow, stabilize the City's interest rates and provide continuity in service delivery. The City shall maintain adequate cash reserves in each fund to maintain a positive cash position at any time during a fiscal year and at year-end.
b. If fiscal ch
anges require staff to recommend funding reserves that differ from the amounts identified in this Policy, staff will bring this recommendation to Council as a specific action for approval.
13. Use
of Fund Balance
a. The
City shall reduce committed or assigned fund balance first only if the expenditures incurred are for the purpose for which the funds were originally committed or assigned. Otherwise, unassigned fund balance shall be reduced first, followed by assigned, and then committed.
b. Fund
Balance amounts that are constrained by the government’s intent to be used for specific purposes, but are neither restricted nor committed, are to be reported as Assigned Fund Balance. The Finance Director is authorized to designate fund balances that are “assigned” to be used for specific purposes. Those amounts are to be reported in the financial statements as “Assigned Fund Balance” in compliance with GASB Statement 54.
c. After
the end of each fiscal year, and upon completion of the annual financial audit, the City Council shall take action to transfer any available unassigned fund balance in the General Fund to the CIP Facilities Reserve or appropriate for other priority expenditures.
14. Genera
l Fund Reserves
a. The
City Council hereby authorizes the City Manager to maintain a General Fund Emergency Reserve in accordance with this Policy. Each fiscal year, the City will include in the Budget a transfer to the General Fund Emergency Reserve to bring the reserve balance to at least 14 percent of that year’s General Fund Operating Budget. However, this transfer may be excluded from the Budget to the extent necessary to avoid a budgeted deficit.
i. The
primary purpose of this General Fund Emergency Reserve is to protect the City’s essential service programs and funding requirements during significant events such as (but not limited to) economic downturns/recessions that impact City revenues, natural disasters, declared emergencies (as defined by Napa Municipal Code Chapter 2.89),
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Fiscal
Policy
state
government reductions or takeaways of City revenues, or other situations that could not be reasonably foreseen during preparation of the budget.
1. In the
event the City Manager declares that action is needed to be taken to resolve an emergency, in accordance with Napa Municipal Code Section 2.91.040, the City Manager is authorized to encumber and spend the General Fund Emergency Reserve to pay the costs of the action to resolve the emergency. These actions shall be reported to the City Council at their next meeting after the declaration of the emergency, and during the duration of the declared emergency in accordance with Napa Municipal Code Section 2.91.040.
ii.
In the
case of natural disasters, the General Fund Emergency Reserve should be used to pay for FEMA-approved projects. The project total amount shall be transferred from the Emergency Reserve and deposited into the appropriate project fund.
1. The
City Manager is authorized to deposit any reimbursement funds received from FEMA and CalOES, into the Emergency Reserve to replenish the fund.
2. The
City Manager is authorized to initially fund the City’s portion of FEMA projects from the General Fund Emergency Reserve. The proposed timing of repayment will be included in the City’s Long- Term Financial Forecast.
iii. The
use of the General Fund Emergency Reserve must be approved by the City Council. As an exception, in the situations described in 14.a.i and
14.a.ii above, the City Manager is authorized to use the General Fund Emergency Reserve and then report to the City Council. All other situations require advance approval from the City Council.
iv. App
roved use of General Fund Emergency Reserve funds may cause the balance of the reserve to drop below the required 14 percent level. The City will begin to restore reserves used under this Policy within 24 months after their first use. The proposed timing of repayment of reserves will be subject to approval by the City Council and will be included in the City’s Long-Term Financial Forecast.
b. The
City Council hereby authorizes the City Manager to maintain a General Fund Operating Reserve in accordance with this Policy. Each fiscal year, the City will include in the Budget a transfer to the General Fund Operating Reserve to bring the reserve balance to at least 5 percent of that year’s General Fund Operating Budget. However, this transfer may be excluded from the Budget to the extent necessary to avoid a budgeted deficit. The primary purpose of this General Fund
EXHIBIT A
Fiscal
Policy
Operating
Reserve is to make up for temporarily decreased revenues or to provide temporary resources in the event of an economic downturn while expenditure reductions are implemented.
i. The use
of the General Fund Operating Reserve must be approved by the City Council.
ii.
App
roved use of General Fund Operating Reserve funds may cause the balance of the reserve to drop below the required 5 percent level.
The City will begin to restore reserves used under this Policy within 24 months after their first use. The proposed timing of repayment of reserves will be subject to approval by the City Council and will be included in the City’s Long-Term Financial Forecast.
c. The
City Council hereby authorizes the City Manager to maintain a General Fund Contingency Reserve in accordance with this Policy. Each fiscal year, the City will include in the Budget a transfer to the General Fund Contingency Reserve to bring the reserve balance to at least 1 percent of that year’s General Fund Operating Budget. However, this transfer may be excluded from the Budget to the extent necessary to avoid a budgeted deficit. The primary purpose of this General Fund Contingency Reserve is to provide funding for non-recurring unanticipated expenditures or to set aside funds to cover known contingencies with unknown costs.
i. The
use of the General Fund Contingency Reserve must be approved by the City Council.
ii.
Approved
use of Contingency Reserve funds may cause the balance
of the reserve to drop below the required 1 percent level. The City will begin to restore reserves used under this Policy within 24 months after their first use. The proposed timing of repayment of reserves will be subject to approval by the City Council and will be included in the City’s Long-Term Financial Forecast.
d. In the
event that budgeted revenue is not enough to fully fund all reserves, they shall receive funding in the following priority order:
i. First
, repay any reserves as outlined in the City’s Long-Term Financial Forecast. If multiple reserves require replenishment, they should receive funds in the following order: first the Emergency Reserve, then the Operating Reserve, then the Contingency Reserve.
ii.
Next,
bring the reserve funds up to their prescribed percentage amounts in the following order: first the Emergency Reserve, then the Operating Reserve, then the Contingency Reserve.
iii. If the
City experiences two consecutive years where the reserves could not be fully funded, the next Long-Term financial forecast shall identify a plan
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Policy
to brin
g the reserves up to the correct balances and maintain annual contributions at the required level.
15. Cap
ital Improvement Program (CIP) Fund Reserves
a. The
City Council hereby authorizes the City Manager to maintain a CIP Facilities Reserve in accordance with this Policy. Each fiscal year, the City will include in the Budget a transfer from the General Fund to the CIP Facilities Reserve, in an amount ranging from 0.5 percent to 3.0 percent of that year’s General Fund Operating Budget.
i. The
primary purpose of this CIP Facilities Reserve is to provide funding for the expansion or maintenance of existing City facilities or the creation/renovation/acquisition of new facilities that meet the workforce needs of City services.
ii.
The
use of the CIP Facilities Reserve must be approved by City Council, generally through the CIP Budget adoption.
b. The
City Council hereby authorizes the City Manager to maintain a CIP General Reserve in accordance with this Policy. Each fiscal year, the City will include in the Budget a transfer from the General Fund to the CIP General Reserve, in an amount of ranging from 0.5 percent to 3.0 percent of the year’s General Fund Operating Budget.
i. The
primary purpose of this CIP General Reserve is to provide funding for ongoing and future Capital Improvement Projects.
ii.
The
use of the CIP General Reserve must be approved by the City Council, generally through the CIP Budget adoption.
iii. The
CIP Budget shall not program out the use of more than 90 percent of the expected CIP General Reserve or CIP Facilities Reserve balance in the Capital Improvement Program (CIP) Project Budget.
c. The
City Council hereby authorizes the City Manager to maintain a General Plan Update Reserve in the CIP Fund to accumulate funds necessary to update the General Plan every 20 years. The General Fund adopted budget shall include a transfer to the General Plan Update Reserve of $100,000 per year. i. The
use of the General Plan Update Reserve must be approved by the City Council, generally through the CIP Budget adoption.
16. Trus
ts
a. The City has established an irrevocable trust to fund future retiree medical costs.
The Trust will be funded through bi-weekly charges to departments equal to the Annual Required Contribution (ARC) as a percentage of payroll based on the most recent Other Postemployment Benefits (OPEB) Actuarial Report.
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b. The C
ity has established an irrevocable Section 115 trust to help mitigate increases in future pension costs. Deposits to the Trust shall be authorized by the City Council as funds are available.
17. Internal S
ervice Fund Reserves
a. Fleet
Fund
i. The C
ity Council hereby authorizes the City Manager to maintain a Fleet Operating Reserve within the Fleet Fund. The target minimum reserve balance is $100,000.
1. The pri
mary purpose of this reserve is to provide temporary
resources in the event of higher than anticipated Fleet Operating costs.
2. The use
of the Fleet Operating Reserve must be approved by the
City Council.
3. Approved
use of Fleet Operating Reserve funds may cause the
balance of the reserve to drop below the $100,000 minimum. The City will begin to restore reserves used under this Policy within 24 months after their first use by collecting additional revenue through Fleet operations and maintenance rates. The proposed timing of repayment of reserves will be subject to approval by the City Council and will be included in the City’s Long-Term Financial Forecast.
b. Risk Manag
ement Fund
i. Self
-insurance reserves will be maintained at a level which, together w ith pu
rchased insurance policies, adequately protects the City. The rese rve fund
ing level goal for each program is no less than the target 80% confidence level appropriately discounted for investment income.
1. The use of the Risk Management Fund Reserve must be approved by the City Council.
2. Approved use of the Risk Management Reserve may cause the balance of the reserve to drop below the target 80% confidence level. Replenishment of the Risk Management Reserve will be subject to approval by the City Council.
18. Enterpr
ise Fund Reserves
a. Water Fund
and Recycling Fund
i. The C
ity will maintain a prudent level of reserve funds in the Water Enterprise Fund and the Solid Waste and Recycling Fund as determined during the periodic rate-setting process.
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19. Internal S
ervice Replacement Funds
a. “Fleet
Replacement Reserve” and “Fleet Equipment Replacement and Upgrade R
eserve”
i. The C
ity Council hereby authorizes the City Manager to maintain a Fleet Replacement Reserve for costs associated with the replacement of vehicles and other rolling stock (such as trailers, compressors or other equipment on wheels) as they become unserviceable, obsolete or reach a predetermined service life. The reserve will be maintained at a level adequate to replace all stock, per the pre-determined replacement schedule. The reserve will track contributions and replacements based on the contributing fund (General Fund, Water Enterprise Fund, etc). ii. The C
ity Council hereby authorizes the City Manager to maintain a Fleet Equipment Replacement and Upgrade Reserve within the Fleet Fund. The primary purpose of this reserve is to cover costs associated with the replacement of specialized tools, Fleet facility/vehicle equipment, as well as Electric Vehicle (EV) charging stations supporting City EV’s/equipment.
This funding can be used to add new equipment and charging stations, as well as replace existing items throughout the life cycle of the equipment.
The reserve will be maintained at a level adequate to replace equipment, per the pre-determined replacement schedule.
iii. The use of the Fl
eet Replacement and Fleet Equipment Replacement and
Upgrade Reserve Funds must be approved by the City Council. iv. Reple
nishment of the Fleet Replacement and Fleet Equipment
Replacement and Upgrade Reserves will be subject to approval by the City C
ouncil.
b. Fire A
pparatus Replacement Fund
i. The C
ity Council hereby authorizes the City Manager City to maintain a Fire Apparatus Replacement Fund for costs associated with the replacement of Fire Apparatus vehicles as they become unserviceable, obsolete or reach a predetermined service life. The fund will be maintained at a level adequate to replace all stock, per the pre-determined replacement schedule.
1. The use of the Fire Apparatus Replacement Fund Reserve must be approved by the City Council.
2. Replenishment of the Fire Apparatus Replacement Reserve will be subject to approval by the City Council.
c. Equip
ment Replacement Fund
i. The C
ity Council hereby authorizes the City Manager to maintain a n E
quipment Replacement Fund for capital equipment as it becomes
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Fiscal Policy
un
servicea
ble, obsolete or reaches a predetermined service life. The fund will be maintained at a level adequate to replace all capital equipment per the pre-determined replacement schedule.
1. The use of the Equipment Replacement Fund Reserve must be approved by the City Council.
2. Replenishment of the Risk Management Reserve will be subject to approval by the City Council.
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