Resolution Number 16-06-21-08RESOLUTION NO. 16-06-21-08
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF SAN JUAN CAPISTRANO TO SET FORTH RESERVE
TARGETS WITH RESPECT TO THE GENERAL FUND OF
THE CITY
WHEREAS, it has been the practice of the City of San Juan Capistrano to
consider during its budget adoption process the amount that should be appropriated to
be set aside in a contingency reserve, and,
WHEREAS, the City has prudently accumulated over a number of years a
contingency reserve balance at approximately 50% of the annual budget of the General
Fund of the City, and,
WHEREAS, from time to time, appropriations of reserve balances are needed to
funds special needs or circumstances facing the City , and ,
WHEREAS, it is considered best practice to identify specific reserves for specific
purposes so that the reserve needs of a city are more clearly defined and the full
impacts of using accumulated reserves for the payment of expenditures are clearly
understood, and,
WHEREAS, reserve targets represent long-term financial goals that are fully
expected to be realized over a number of years, and,
WHEREAS, such targets and the proper balance to be held in such reserves
should be re-examined at each budget cycle because every city has limited resources
and reserve management is one of many public policy priorities that must be managed
in the context of these limited resources .
NOW, THEREFORE, BE IT RESOLVED, that the City Council of the City of San
Juan Capistrano does hereby resolve as follows .
SECTION 1. -Purpose of Reserves for Specific Purposes : Reserves require
an assessment of the financial risks that face different cities in varying degrees. Specific
reserves also result in more thoughtful decisions when amounts previously established
for reserves later become appropriated to support expenditures . Specific reserves
require recognition that there is a cost to funding new or increased expenditures from
existing reserves. Detailed reserves require a careful weighting of these considerations
when reserves are established as well as when they are later accessed to pay for
expenditures.
Section 2 -Competing Priorities for Limited Resources -Cities operate in an
environment of competing priorities for the use of limited resources. Reserves are not
established in isolation of the consideration of other valid uses to which the limited
1 6/21/2016
resources of a city can be used. As a result, the amounts that are desired for specific
reserves must take into account other purposes for which City resources can be
engaged.
Section 3 -Reserve Targets -The targets identified in this policy represent
long-term goals that have been established to guide City Council in the establishment
and allocation of reserve balances. These determinations are a part of the City's
biennial budget process. Reserve targets do not represent minimum requirements .
Because reserve targets are intended to be met over a long-term , a reserve balance
that is less than the amount targeted does not represent a deficiency or violation of this
policy. The reserve targets established pursuant to this policy supersede any previously
established guidelines for General Fund contingency reserves.
Section 4 -Annual Assignment and Reallocation -The amounts established
for targets and the amounts actually established for each reserve are an integral part of
the resource allocation process that is addressed in the establishment of a budget. As a
part of the City's biennial budget process and at any time during the two-year budget
policy, the targets previously established for General Fund reserves may be re-
evaluated and changed to reflect changes in conditions or the judgment of City Council.
For example, amounts previously allocated to specific reserves may be reallocated to
other reserves.
The attached schedule sets forth the reserve targets and funding assignments for Fiscal
Year 2016-17 and 2017-18, as currently approved by City Council. An amendment of
this resolution is not required for City Council to reallocate reserve balances or to
appropriate reserve balances for the payment of operating expenses. Such changes
may be made at any time by a majority vote of the City Council.
Section 5 -Reserve Guidelines -In consideration of the foregoing, the
following reserves are identified for consideration by City Council:
Cash Flow Reserve -Because property taxes are a significant revenue source
for the general funds of cities and since 50% of a city's property taxes are not
received until six months after the beginning of the fiscal year, cities generally
need a Cash Flow Reserve to provide for payment of monthly operating
expenses until the first installment of property taxes has been received. Based on
historical trends, the Finance Department has determined this amount to be $5
million. The amounts held in the Cash Flow Reserve are unavailable for other
purposes and should be fully funded as of the beginning of every fiscal year to
prevent the cash of the General Fund of the City from reaching a negative
position. Negative cash positions represent a de facto borrowing from other funds
of the City which may be subject to their own seasonal fluctuation issues as well
as the need to retain funds for project requirements. Funding the Cash Flow
Reserve at less than $5 million would require an annual assessment of the
availability of cash in other funds to finance the temporary borrowing of the
2 6/21/2016
General Fund for the six month period of each fiscal year during which cash
outflows exceed cash inflows.
Economic Uncertainty-In recognition that the economy is cyclical with periods
of economic expansion followed by periods of economic decline and that these
fluctuations in economic conditions have an effect on the revenues of a City, it is
considered best practice for cities to have an economic uncertainty reserve.
During the recessionary period of 2008 through 2011, revenues of the City of
San Juan Capistrano declined on average of 9% per year over a five year period.
This amounted to a loss of revenues of $10 million over that five year period. An
economic uncertainty reserve allows cities to continue to provide essential
services during recessionary periods. Considerable discretion must be exercised
in determining the proper target for the City and the amount that is annually
committed toward reaching that target. Because of competing demands for City
resources, a full funding of this reserve to minimize the risk associated with
cyclical economic variation is not always possible. In view of this and in
recognition that the next economic downturn may not be as deep or last as long
as the most recent recession, the City may from time to time adjust this reserve
target to reflect the limited resources of the City and the other demands for these
resources against which the funding of this reserve must be balanced.
Pension Contributions -A city's annual pension contribution requirement is
one of the most significant expenses that a city faces. One of the financial risks
to which cities are exposed is the risk that annual increases in the amount of
required pension contributions will exceed the rate of revenue growth required to
fund increasing pension costs. As a result, some cities have established a
pension reserve to accumulate funds that can be accessed in later budget
periods to offset higher annual pension costs in those future periods. In addition,
some cities have chosen to accumulate money in their pension reserve to be
applied toward a reduction of its pension obligation. Before any funds
accumulated for a supplemental contribution to the pension trust are remitted to
the trust, the City should carefully evaluate its long-term cash needs since such
supplemental contributions are irrevocable.
Other Contingencies -In addition to its reserve for economic uncertainty, the
City has established a general contingencies reserve to reflect the fact that the
City is also exposed to the risk that other uncertain and unexpected requirements
for funds can occur. These unexpected future costs can take the form of new
litigation, natural disaster, unexpected project requirements, new critical
initiatives of City Council, etc. The use of a reserve of this nature reflects the
reality that no budget can anticipate all of the circumstances that can trigger the
immediate need for additional funds.
Capital Replacement-The City has a number of funds that hold resources that
are restricted for capital replacement. These include funds holding development
fee revenue, intergovernmental revenue, and bond proceeds. In addition, the City
3 6/21/2016
has accumulated capital replacement reserves in its Facilities Operations Fund.
In the past, funding to the Facilities Operations Fund has typically been made
based on the original cost of city-owned buildings, vehicles, and equipment. In
recognition that the amount required to replace existing assets often exceeds the
costs originally incurred to obtain those assets, the City may elect during its
budget development process to set aside additional reserves in the General
Fund to cover the additional cost of asset replacement. Amounts contributed to
this reserve may also reflect an accumulation of funds for new or additional
capital assets expected to be needed in the future that are not currently
addressed by existing funding policies. Finally, a capital replacement reserve in
the General Fund serves an important role in replacing a diminishing funding
source for existing capital projects: development-related revenues that are
derived from private development activity in the community that are expected to
decline as the City approaches build out.
PASSED , APPROVED , AND ADOPT this 21 51 day of June 2016 .
ATTEST:
MARctiSQbQ w
STATE OF CALIFORNIA )
COUNTY OF ORANGE ) ss .
CITY OF SAN JUAN CAPISTRANO )
I, MARIA MORRIS, appointed City Clerk of the City of San Juan Capistrano, do hereby
certify that the foregoing Resolution No. 16-06-21-08 was duly adopted . by the
City Council of the City of San Juan Capi st ra no at the Regular meeting thereof, held the
21 51 day of June 2016, by the followi ng vo te :
Reeve, Perry, Allevato, Ferguson and Mayor Patterson
None
None
4 6/21/2016
Schedule of Reserve Funding
For Fiscal Years 2016-17 and 2017-18
Long-term Reserve Reserve Reserve
Reserve Balance As of Balance As of Balance As of
Reserve Target J une 3 0 , 20 16 June 30 , 2017 Ju ne 30, 20 18
Cash Flow (20% of budqet) $5,000 ,000 5 ,000,000 5 000 ,000 5,000 000
Economic Uncertainty (40%) 10 000 ,000 7,500 ,000 7,500,000 7,500 ,000
Other Continqencies (1 0%) 2 ,500 ,000 1,000,000 1,000,000 1,000 ,000
Pension Contributions (10%) 2,500,000
Capital Replacement (10%) 2,500 ,000
Total $22 ,500,000 13 ,500,000 13 ,500 ,000 13,500,000
5 6/21/2016
EXHIBIT A TO ATIACHMENT 8-
Prior Resolution Containin_g Reserve Guidelines
RESOLUTION NO. 11-06-30-04
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN JUAN
CAPISTRANO, CALIFORNIA, ADOPTING THE CITY'S FUND BALANCE
POLICY
WHEREAS, the Governmental Accounting Standards Board (GASB) has issued
Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions
(GASB 54) with the intent of improving financial reporting by providing fund balance
classifications that will be more easily understood; and,
WHEREAS, GASB 54 defines the various fund balance components of
governmental fund-types for financial reporting purposes; and
WHEREAS, the classification and reporting of fund balance components as required
by GASB 54 will be effective starting with the fiscal year 2010-2011 reporting and therefor
need to be adopted by June 30, 2011; and
WHEREAS, the Chief Financial Officer is delegated the authority to assign fund
balance for specific purposes for inclusion in the annual financial reports
WHEREAS, City Council has established guidelines for contingency reserves that
should be reflected by the authority of City policy
NOW, THEREFORE, BE IT RESOLVED, that the City Council of the City of San
Juan Capistrano does hereby approve and adopt the Fund Balance Policy (EXHIBIT "A").
PASSED, APPROVED, AND ADOPTED this 30th day of June, 2011
1
SM~
6/30/2011
EXHIBIT A-Page 1 of 8
STATE OF CALIFORNIA )
COUNTY OF ORANGE ) ss.
CITY OF SAN JUAN CAPISTRANO )
I, MARIA MORRIS, appointed City Clerk of the City of San Juan Capistrano, do hereby
certify that the foregoing Resolution No. 11-06-30-04 was duly adopted by the City
Council of the City of San Juan Capi stra no at a Adjourned Regular meeting thereof, held
the 30 11' day of June 2011, by the foll owi ng vote:
COUNCIL MEMBERS: Freese, Reeve, Taylor, Kramer and Mayor Allevato
OUNCIL MEMBER: None
OUNCIL MEMBER: None
2 6/30/2011
EXHIBIT A-Page 2 of 8
I. PURPOSE
CITY OF SAN JUAN CAPISTRANO
FUND BALANCE POLICY
FIRST ADOPTED:
The purpose of this policy is to establish parameters, provide guidance, and
set forth authoritative governance for the classification of fund balance as
reported by the City of San Juan Capistrano and the Community
Redevelopment Agency. In February 2009, the Governmental Accounting
Standards Board (GASB) issued Statement No. 54, Fund Balance Reporting
and Governmental Fund Type Definitions (GASB 54). GASB 54 changes the
reporting presentation of fund balance components for governmental fund-
types. While there is no prescribed change to the total amount of a given fund
balance, the categorization and terminology used to describe fund balance
components are substantially altered. The new approach focuses on the
extent to which the City is bound to honor constraints on the specific
purposes for which amounts in the fund can be spent, not on financial
resources available for appropriation within a fund; see ATIACHMENT A
In addition to the GASB 54 compliance of governmental fund-types, this
policy also defines the components of budget reserves for the enterprise
funds; see ATTACHMENT B.
II. POLICY STATEMENT
This policy shall define the components of fund balance, authorize the Chief
Financial Officer to prepare financial reports which accurately categorize fund
balance in compliance with GASB 54, and establish contingency limits.
The term fund balance is used to describe the difference between assets
(what is owned) and liabilities (what is owed) reported within a fund. Prior to
GASB 54, fund balances were classified into three separate components:
Reserved, Designated and Undesignated. Frequently, important limitations
are placed on the purpose for which all or a portion of a fund's resources can
be used. The authoritative level of these limitations can vary significantly,
depending on their source . .The five components of fund balance under the
GASB 54 reporting standard are designed to indicate the extent to which the
City is bound by limitations which may be placed upon resources.
This policy shall also define the budget reserve components of the City's
enterprise funds.
CITY OF SAN JUAN CAPISTRANO
FUND BALANCE POLICY
FIRST ADOPTED:
Ill. FUND BALANCE GOVERNING POLICIES
The City shall report governmental fund-type fund balances in compliance
with GASB 54 and shall categorize budget reserves in the enterprise funds
according to the following five components:
Non -spendable Fund Balance: The portion of 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, non-current assets, or in
certain instances, loans receivable; or (b) legally or contractually required to
be maintained intact, such as the principal portion of an endowment. This
category was reported as a "reserved" fund balance prior to GASB 54.
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 (such as through debt covenants),
grantors, contributors, or laws or regulations of other governments; or (b)
imposed by law through constitutional provisions or enabling legislation. This
category was reported as a "reserved" fund balance prior to GASB 54.
UNRESTRICTED :
Committed Fund Balance: The portion of fund balance that includes amounts
which can only be used for specific purposes pursuant to constraints imposed
by formal action of the highest level of decision making authority, City
Council. Such constraints shall remain binding unless removed in the same
manner. For example, City Council may enact an ordinance or adopt a
resolution which identifies spending certain amounts of fund balance for
specific purposes. Committed amounts cannot be used for any other purpose
unless the City Council removes or changes the specified use through the
same type of formal action taken to establish the commitment. Action taken to
commit fund balance shall occur within the fiscal reporting period; however,
the amount may be subsequently determined . This category was reported as
"designated" fund balance prior to GASB 54.
Assigned Fund Balance : The portion of fund balance that includes amounts
constrained by the City 's intent to be used for specific purposes, but cannot
be categorized as either restricted or committed. Such intent shall be
established by non-formal action of City Council, the highest level of decision
making, or by an official designated for that purpose. This policy hereby
delegates the authority to assign amounts to be used for specific purposes to
P ag e 12
EXHIBIT A-Page 4 of 8
CITY OF SAN JUAN CAPISTRANO
FUND BALANCE POLICY
FIRST ADOPTED:
the Chief Financial Officer for the purpose of reporting these amounts in the
annual financial statements. An example of assigned fund balance is an
amount of existing fund balance that is planned to be used to eliminate a
projected deficit in the subsequent year's budget. Assigned fund balance shall
not exceed total fund balance less the sum of the non~spendable, restricted,
and committed fund balance components. This category was reported as
"designated" fund balance prior to GASB 54.
Unassigned Fund Ba lance : The portion of fund balance that includes amounts
that do not fall into one of the above four categories. The general fund shall
include this classification for residual positive net resources in excess of
amounts properly classified as one of the other four components. In funds
other than the general fund, this classification shall be used only to report a
deficit balance resulting from residual net resources which are less than total
fund balance less the sum of the non-spendable, restricted , and committed,
and assigned fund balance components. This category was reported as
"undesignated" fund balance prior to GASB 54.
IV. FUND BALANCE CLASSIFICATION AND RESERVES
The accounting policies of the City consider restricted fund balance to have
been spent first when an expenditure is incurred for purposes for which both
restricted and unrestricted fund balance is available. Similarly, when an
expenditure is incurred for purposes for which amounts iri any of the
unrestricted classifications of fund balance could be used, the City considers
committed amounts to be reduced first, followed by assigned amounts and
then unassigned amounts.
In order to maintain a stable revenue structure and provide reliable services
to the community, the City reserves fund balance for contingencies. City
Council guidelines for contingency reserves are:
Governmental fund-types including the General Fund ~ target of 50% of
current operating expenditures, excluding capital improvement projects
transfers, with a minimum reserve of 25%
Water and Sewer Enterprise Funds, approximately 25% to 100% of
current operating expenditures
CITY OF SAN JUAN CAPISTRANO
FUND BALANCE POLICY
FIRST ADOPTED:
Water and sewer Replacement Funds, approximately one year's average
capital costs.
This policy is in place to provide a measure of protection for the City against
unforeseen circumstances and to comply with GASB 54. No other policy or
procedure supersedes the authority and provisions of this policy.
P ag e 14
EXHI BIT A -Page 6 of 8
AlTACHMENT A
VARIOUS COMPONENTS OF FUND BALANCE IN THE GENERAL FUND AS
DEFINED BY GOVERNMENTAL ACCOUNTING STANDARDS BOARD STATEMENT
NO. 54
Non ~spendable Fund Balance
Long term receivables: The portion of fund balance that represents the asset amount of
notes receivable held by a given fund.
Prepaid expenditures: The portion of fund balance that represents the asset amount .of
prepaid expenditures held by a given fund.
Advances to other funds: The portion of fund balance that represents the asset amount
of advances to other funds held by a given fund.
Committed Fund Balance
Capital Projects: The portion of fund balance that has been appropriated for specific
capital projects and remains unspent.
Contingency. The portion of fund balance placed in reserve for spending in the event of
an emergency or economic uncertainty. Contingency reserves can be spent down when
the City's operations are impacted by factors outside the City's control . Examples of
such circumstances would include unforeseen changes in anticipated costs in the case
of local disasters or catastrophic events such as storm damage, landslides, energy
costs, water main line breaks or well production shortages; financial hardships or
downturns in the local or national economy, state budget implications, imposition of
state or federal mandates or other unforeseen legal requirements, unexpected
interruptions in cash flows.
Assigned Fund Balance
City Half Replacement: The portion of fund balance that has been set aside to fund new
City Hall facilities.
Encumbrances: The portion of fund balance attributable to appropriations carried over
from a prior year into the year under operation.
Unassigned Fund Balance
Fund Balance -Unassigned: Any portion of General Fund fund balance that does not
comply with any other fund balance component category.
EXHIBIT A-Page 7 of 8
ATTACHMENT 8
VARIOUS COMPONENTS OF BUDGETED RESERVES FOR ENTERPRISE FUNDS
Committed Fund Balance
Contingency: The portion of fund balance budgeted to reserves for spending in the
event of an emergency or negative economic condition.
Bond Reserve: The portion of fund balance budgeted to reserves for meeting required
debt service obligations of bonds .
Assigned Fund Balance
Capital Projects: Budgeted fund balance of Enterprise Capital Improvement Projects
Funds that has been appropriated for specific capital projects and remains unspent.
Capital Replacement: The portion of fund balance budgeted for the replacement of
existing capital assets .
Unassigned Fund Balance
Fund Balance -Unassigned: Any portion of budgeted fund balance that does not
comply with any other fund balance component category.
EXHIBIT A-Page 8 of 8