To: Honorable Mayor and Members of Town Council
From: Trish Muller, Finance Director
Title
Resolution Approving the Amended and Restated Fund Balance Reserve Policy
Body
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Executive Summary
In April of 2015 Council approved a proposed approach to a revised and updated Fund Balance Reserve Policy. This proposed approach updates a policy which was previously adopted in 2005. This updated approach was initially presented at the November 18, 2014 Council meeting, then refined and discussed again at the April 28, 2015 meeting. Council was provided with information regarding Fund Balance Reserve Considerations on an individual fund basis. Staff was directed, at that time, to develop a policy to present to Council which would incorporate the proposed revisions as presented. Staff deferred the adoption of the policy so that Town Manager, Dave Corliss, who began with the Town in June of 2015, could take time to ensure understanding and approval of the proposed approach as well.
Since this proposed approach was positively accepted by Council at previous presentations, staff has proceeded with incorporating the categorization of fund balance reserves in the 2016 Budget process. Attachment D demonstrates the use of these categories with the 2016 Amended Budget in a Townwide summary format to represent all categories of reserves as proposed.
Discussion
It is important to re-examine policies on an ongoing basis to ensure they still apply or make reasonable sense to continue. An amended and restated fund balance reserve policy is submitted for review as previously introduced and subsequently refined according to Council direction. As part of this process, all Town funds have been examined and considered carefully as to the nature and intent of the funds. Staff also partnered with Department Directors to ensure a thorough and conservative approach. The Government Finance Officers’ Association (GFOA) is an organization represents public finance officials and provides best practice guidance and resources to government finance officials. The GFOA provides guidance regard the Appropriate Level of Fund Balance which the Town not only meets, but exceeds. The GFOA identifies that it is advisable to reserve no less than two months of General Fund operating revenues; this would equate to about $6.8 million, however the Town’s General Fund reserves are $8.4 million for 2016.
Recommendation. GFOA recommends that governments establish a formal policy on the level of unrestricted fund balance that should be maintained in the general fund for GAAP and budgetary purposes. Such a guideline should be set by the appropriate policy body and articulate a framework and process for how the government would increase or decrease the level of unrestricted fund balance over a specific time period. In particular, governments should provide broad guidance in the policy for how resources will be directed to replenish fund balance should the balance fall below the level prescribed.
Appropriate Level. The adequacy of unrestricted fund balance in the general fund should take into account each government’s own unique circumstances. For example, governments that may be vulnerable to natural disasters, more dependent on a volatile revenue source, or potentially subject to cuts in state aid and/or federal grants may need to maintain a higher level in the unrestricted fund balance.
Nevertheless, GFOA recommends, at a minimum, that general-purpose governments, regardless of size, maintain unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.
The Town has taken an approach which incorporates aspects unique to each of the Town’s 24 funds within the recommended categories of reserves.
The following categories of reserves were presented as a recommended approach and are the basis upon which a proposed policy has been developed for Council consideration:
1. Contractual Reserve is intended to accommodate the set aside of funds for specific contracts, without creating multi-year obligations;
2. Operational Capacity Reserve is meant to allow for growth of operational funds necessary for a known future item for project, such as a future fire station;
3. Revenue Stabilization Reserve is identified to provide necessary funds, in the event of an unplanned loss of regular occurring revenue, which is depended upon for operational purposes;
4. Catastrophic Events Reserve would be utilized in the event of some unknown disaster, natural or other, and could assist in ensuring that public safety is adequately addressed, or immediate costs are accommodated at such a time;
5. Capital Reserve is intended to allow for the set aside of funds to accumulate for future known capital purposes, included in the existing five-year capital improvement program and beyond;
6. Opportunity / Economic Development Reserve is meant to allow for the possibility of economically beneficial, or other identified area of opportunity that may arise;
7. Taxpayers Bill Of Rights Reserve is required for emergencies, as defined in the statute, and must be replenished within the same fiscal year, if utilized;
8. Operating Designations are recommended and follow recommended industry standards;
9. Debt Service and Variable Interest Rate Reserves follow guidelines provided according to the Town’s requirements for debt;
10. Claims and Healthcare Cost Reserves would assist in the event that medical claim costs or general health insurance increases in the Employee Benefits Fund exceed available budgets in a given year and follows recommended guidelines for such reserves;
11. Committed for Fund Purpose Reserves are meant to assign a general identifier for funds that are specific in intent. Examples include: Philip S. Miller Trust Fund, Capital Funds, Police Forfeiture Fund, etc. whereby funds are legally or otherwise restricted in used relative to the fund.
Budget Impact
It is important to note that specific amounts or calculations are not included in the above categories or within the recommended policy update. It is recommended that the specifics regarding amounts of reservations for the above categories be evaluated each year and determined as part of the annual budget process to revisit and reaffirm this approach to ensure Council consideration and overall agreement. Broad guidance is also provided with regard to replenishing reserve amounts that may be utilized for the identified purpose within the reserve category. In such cases, it is recommended that plans be identified within the budget amendment which appropriates the use of reserve funds as to the plan for replenishment.
Motion
“I move to approve the Resolution as introduced by title.”
Attachments
Attachment A: Agenda Memo presented to Town Council April 28, 2015
Attachment B: Resolution
Exhibit 1: Proposed Town of Castle Rock Reserves Policy, Amended and Restated
Attachment C: Townwide Summary of 2016 Amended Budget with Reserves