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ITY OF SANTA MARIA
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PURPOSE
Establish a General Fund Reserve Policy.
POLICY SCOPE
This Po licy sets fo rth the parameters and funding met hods t he City may utilize to establish and maintain an adequate G eneral Fund R eserve and Appropriation fo r Contingencies.
BACKGROUND
The City of Santa Maria (herein referred to as the “ City”) should maintain a prudent level of financial resources to protect against reducing service levels or incurring debt due to revenue shortfalls or unpredicated one- time expenditures. This policy establishes how and when the City builds up stabilization funds, and identifies the purposes for which they may be used. The Government Finance Officers Association (GFOA) provides guidance and recommendations for the development of these funds.
The
maintenance of a G eneral Fund R eserve is a sound business practice to prot ect the fiscal solvency of the City. A prudent General Fund Reserve level is a critical measure of a government’s ability to m anage risk. Risk com es in m any form s, often unfor eseen – a reserve f und is a k ey t ool in meeting t he fi nancial challeng es of such unfor eseen occurrences.
The City has current policies on establishing and maintain Reserve funds, and additional support for Reserves are a best practice r ecommendation fr om the GFOA and various credit rating agencies.
The GFOA recommends, at a minimum , that general-purposes governments, regardless of size, maintain unr estricted fund balance in t heir General Fund of no less than two mont hs (or 16.7%) o f general fund operating expenditures. A s table, reasonable level of reserved and unreserved fund balance denotes financial stability and strong fiscal management, both important factors considered by rating a gencies i n evaluating t he cr edit worthiness of t he City. The General Fund Reserve Policy and General Fund A ppropriation for Contingencies establishes guidelines to ensure the City maintains an unrestricted fund ba lance in line with GFOA recommendations.
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A General Fund Reserve Policy is important in order to ensure that the City is effectively able to:
A. Respond strategically and responsibly to the challenges of a changing fiscal environment;
B. Mitigate operational impacts during difficult economic times;
C. Provide flexibility to the City Council for thoughtful reaction to State fiscal or legislative actions that reduce City revenues or increase City costs;
D. Maintain adequate cash balances;
E. Manage unanticipated costs occurring on a one-time basis, such as natural disasters; and
F. Demonstrate fiscal soundness and continued creditworthiness to bond rating agencies and the financial community.
DEFINITIONS
Appropriation for Contingencies – An amount appropriated for unanticipated expenditure requirements. Appropriation for Contingencies is adopted as part of the Budget with a majority vote of the City Council and can be used during the course of a fiscal year transferring the appropriation to elsewhere in the budget. The Appropriation for Contingencies expires June 30th of each fiscal year to be reestablished the following year.
Emergency / Catastrophic Reserve – The portion of the General Fund balance assigned by the City Council as the Disaster Reserve. This funding is set aside to respond to disasters or major unforeseen events.
Excess Fund Balance Available – The amount, if any, of actual General Fund balance that is available, after the close of fiscal year accounting, exceeding the estimated General Fund Balance Available used in the Budget. This difference, if any, is considered when finalizing the annual Adopted Budget.
Fund Balances – Fund balances represent the net assets of each fund. Net assets generally represent a fund’s assets (cash, receivables, etc.) less its liabilities. Portions of a fund’s balance may be non-spendable, restricted, ass igned or committed for future expenditure as a result of City policy, terms and conditions of agreements with outside parties, governmental regulations, laws, or ot her restrictions, which the City cannot unilaterally alter.
Fund Balance Available – The amount of General Fund balance that is available for financing expenditures and other funding requirements after deducting non-spendable, restricted, committed and assigned fund balance. Also referred to as the unobligated or unassigned fund balance.
General Fund – The main operating fund providing general City-wide services.
General Fund Reserve (Operating Reserve) – The portion of the General Fund balance assigned by the City Council as the General F und Reserve. It is not available for
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appropriation during the fiscal year except in cases of a legally declared emergency, as the funds are held for future years in anticipation of limited duration budget shortfalls and to ensure sufficient working capital for cash flow. The General Fund Reserve is not a budgetary appropriation and so does not expire at year end. It can be added to or reduced with each year’s budget.
Local Economic Augmentation Fund ( Emergency Reserve) – The portion of the General Fund balance assigned by the City Council as the Budget Stabilization Reserve. Stabilization funds are called by many names, including rainy day funds, contingency funds, and are there to buffer against economic downturns, recessions, or major volatility.
Measure U Fund: A locally approved transactions and use tax (sales tax) fund that provides discretionary revenue to support the City of Santa Maria’s general municipal services, including public safety, infrastructure, and community programs. The fund is used to maintain service levels, address community priorities, and enhance long-term fiscal stability.
Unrestricted Fund Balance – The portion of the General Fund balance made up of the committed, assigned and available (unassigned) fund balance. The unrestricted fund balance is not restricted by law for a specific purpose.
POLICY
A. General Fund Reserve (GFOA Core Operating Reserve) – It is the goal of the City Council to build a General Fund Reserve of 16.7 percent of the prior year’s budgeted General Fund operating expenditures. The purpose is to maintain liquidity and cover normal revenue fluctuations and unexpected expenditures.
B. Local Economic Augmentation Fund – When adopting the annual bud get for the General Fund, the City Council to put aside 10% to 15% of General Fund expenditures to buffer against economic downturns, recessions, or major volatility.
C. Emergency / Catastrophic Reserve – When adopting the annual bud get for the General Fund, t he City Council shall put aside 5 % to 10% of General Fund expenditures to respond to disasters or major unforeseen events.
D. Appropriation for Contingencies – An amount up to five (5.0) percent of the General Fund operating expenditures and should not be less than one (1.0) percent of the approved General Fund operating expenditures in any given year. An amount appropriated for unanticipated expenditure requirements that are adopted as part of the Budget with a majority vote of the City Council and can be used during the course of a fiscal year transferring the appropriation to elsewhere in the budget. The Appropriation for Contingencies expires June 30th of each fiscal year to be reestablished the following year.
1. During the public hearing on the Recommended Budget or at any properly noticed public meeting the City Council may consider reducing the amount set aside in the General Fund Appropriation for Contingencies.
E. Excess Fund Balance Available – When adopting the annual budget for the General Fund, the City Council will provide direction to the Director of Finance to reconcile the difference between the General Fund’s estimated and actual Fund Balance Available at the beginning of the budget per iod. In those instances when the ac tual Fund
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Balance Available is less than estimated, the City Director of Finance may be directed to reduce the General Fund Appropriation for Contingencies and/or General Fund Reserves. In those instances when the actual Fund Balance Available is greater than estimated, the Director of Finance may be given specific direction, generally within the following parameters:
1. The first priority for Excess General Fund Balance Available at the beginning of each fiscal year, if any, is to increase the General Fund Reserve and/or General Fund Appropriation for Contingencies to ensure it is maintained within the recommended 16.7 percent of the prior year’s General Fund operating expenditures.
2. The second priority for Excess General Fund Balance Available at the beginning of each fiscal year, if any, is to increase the Local Economic Augmentation Fund (Stabilization Reserve) to put aside 10% to 15%.
3. The third priority for Excess General Fund Balance Available at the beginning of each fiscal year, if any, is to increase the Emergency/Catastrophic Reserve to put aside 5% to 10%.
3. The fourth priority for Excess General Fund Balance Available at the beginning of each fiscal year, if any, is to dedicate excess fund balance for known and quantified unfunded liabilities or one-time unmet needs, including but not limited to the following:
a. Employee pension plan contributions and pension obligation bond debt service
b. Other post-employment benefits (retiree health)
c. Unmet building or maintenance needs
d. Accrued employee leave
e. Litigation settlements
F. Unreserved Fund Balance – The City will maintain sufficient fund balances in the General Fund to provide adequate working capital and to accommodate required adjustments to other reserve accounts, including advances to other funds.
Appropriations or use of funds from Unreserved Fund Balances will require approval by the City Council.
G. Other Assignments or Commitments of the General Fund – Establishment of these policies do not preclude the City Council from setting aside additional funds for a specific project, program or capital item.
H. Specifying the Appropriate Circumstances for Drawing Down Reserves – It is to be expected that the reserve or budgetary cushion will temporarily diminish when unforeseen pressures affect the General Fund. Therefore, it is important to have a policy for drawing down reserves. The GFOA suggests those circumstances in which invasion of the general reserve may be warranted:
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• Emergency
• Non-recurring expenses
• One-time capital cost
There is no “one-size-fits-all” definition of what constitutes an “emergency” for purposes of administering a reserve policy. Ultimately, an “emergency” is what the City Council determines it to be. It will always reflect a carful balancing of the City Council’s desire to maintain an adequate reserve, with its desire to maintain essential services – and, in some cases, its obligation to maintain statutorily required serve levels.
Until the City reaches its general reserve goal, the budget process permits appropriations for one-time projects/expenses and capital projects. In the event that the City realizes reserves above the minimum levels defined, the first use of such funds should be a designation for capital projects and other one-time uses, up to and amount equal to a certain percent of General Fund revenues.
I. Directing the Replenishment of the Reserve – If and when reserves are diminished, the City Council should adopt a plan to replenish reserves to minimum levels within a specific timeframe.
J. The General Fund Reserve shall be the last resort in balancing the City budget.
K. A majority vote of the City Council shall be required to authorize General Fund Reserve expenditures.
L. No expenditures shall be made directly from the General Fund Reserve. Funds for expenditures shall be transferred to a cost center.
RESPONSIBILITIES
The City Manager and the City Director of Finance are hereby authorized and directed to implement the Policy hereby established when preparing the annual budget for each fiscal year. Additionally, the Finance Director will initiate a review of the policy within seven years of adoption. The review of the policy will include a review of best practices as well as a financial risk assessment.