HomeMy WebLinkAbout07-10-07 FPAC Agenda
~
~HILLS
FINANCIAL PLANNING & ANALYSIS COMMITTEE
TUESDAY, July 10, 2007
6:00 P.M.
Upstairs Conference Room, Arden Hills City Hall
I. CALL MEETING TO ORDER AND ROLL CALL
II. APROVAL OF AGENDA
III. APPROVAL OF JUNE 20,2007 MINUTES
IV. CITY COUNCIL UPDATE - Councilmember Grant
V. INVESTMENT POLICY DISCUSSION
A. Review suggested revisions and comments from the City Attorney
B. Refine Policy and Discussion
C. Adopt recommended policy for presentation to City Council
VI. 2006 Financial Statement review
VII. NEXT MEETING AGENDA - August 14, 2007
A. Fund Balance Policy
VIII. JOINT MEETING WITH PTRC, EDC AND PLANNING COMMISSION
- July 17, 2007
Cummings Park Pavilion
6:00 p.m. Dinner - meeting to follow
IX. ADJOURN
A quorum of the City Council may be present at this meeting.
City of Arden Hills
1245 West Highway 96. Arden Hills Minnesota 55112
Phone 651.634.5120 . Fax 651.634.513 7
www.ci.arden-hills.mn.us
Minutes
DI�EN HILLS
•
FINANCIAL PLANNING &ANALYSIS COMMITTEE
WEDNESDAY, June 20,2007
6:00 P.M.
Upstairs Conference Room,Arden Hills City Hall
I. CALL MEETING TO ORDER AND ROLL CALL
The meeting was called to order by committee chair, Scott Bronson at 6:05pm
MEMEBERS PRESENT: Scott Bronson, Jeff Johnson,Jim Ostlund,Maurice Gieske
OTHERS PRESENT: Stan Harpstead, Mayor; Sue Iverson, Finance Director; Joe Rueb, Accounting
Analyst
MEMEBERS NOT PRESENT: Al Hilgers;David Grant,C -. Council Liaison
II. APROVAL OF AGENDA
III. APPROVAL OF MAY 23,2007 MINUTES
Motioned: Jeff Johnson1010-3,„
• Approved: Jim Ostlund . .
IV. CITY COUNCIL UPDATE— Harpstead
The City is currently working on a •,,ap .Improvement Plan(CIP); taking one step at a time. The
CIP includes; looking at a new 4,- station _ years out), new fire truck (current), and new roads. The
t ,
EDC is reviewing options for the : ix/Grey Fox area. Wellington Management is working on
making changes to current buildings, adding two new buildings, and adding a Walgreens. Changes to the
Holiday Inn are coming soon. Mayor Harpstead mentioned that the city doesn't want to use city money
or residential money for new business development. The Chesapeake properties are looking to do some
development. Approximately 400,000 sq ft of commercial buildings valued at approximately $180 per sq
ft. Development is encouraged sooner than later as this property is part of the 1990 TIF District that may
only have 4 years left. Additional information not directly associated with Arden Hills right now:
Additional entrance to the TCAAP property is being reviewed; one entrance would be off of 35W and the
other off of Hwy 10. The cost associated with these entrances, $20 million for the 35W entrance and$35
million for the Hwy 10 redevelopment. The Armory is looking to add two new buildings, a community
41/ City of Arden Hills
1245 West Highway 96•Arden Hills Minnesota 55112
Phone 651.634.5120•Fax 651.634.5137
www.ci.arden-hills.mn.us
-AIJEN HILLS
center, some temporary housing units, and redo the existing garage/workshop area. Mayor Harpstead also
invited the members of the committee to attend any of the Master Development Agreement (MDA)
Council work sessions. These concern TCAAP and the next meeting is June 25,2007 at 6 p.m.before the
regular City Council meeting.
Jeff Johnson has requested a list of all on-going projects for the city. The current CIP will be included in
the next packet for all members.
V. INVESTMENT POLICY DISCUSSION
The current policy is very similar to White Bear Township's policy and a number of other Cities's which
were provided for the committee as reference material in their ackets. A concern was had over making
decisions when they did not have any performance or finan information. Some committee members
wanted more time to research and have more input to the iitilic visions. Mayor Harpstead stated that
policies can be modified at anytime with City Counc pproval an that we are in need of an updated
policy so our staff can work on the investment port . °is recommendation was to approve a policy
tonight and if later the committee decides that t mould changes or we find that we have problems
we can amend it at that time. Current policy wa p ` 1996 and is now out of date; statutes have
changed. Our investment and cash portfol'.a_ .=‘ent ,totals approximately $11.4 million. Certificates of
Deposits (CDs)cannot be more than$9 Z 0 00 ® 'tzt . We need to make sure all investors have records
of who we are invested in as we ca•••t « multiple investments in one company or we will not be
covered by the FDIC insurance. .,a "ayor •stad mentioned that the policy needs to be restrictive and
conservative.No junk bonds can • ha• •; must have an"A"rating or better. There was a discussion
on "Timing Risks" and was decided t ; `held to maturity" would stay in place after Finance Director
Iverson explained how cities handle investments and report them. The City does not do active trading.
Long term investments are usually invested for duration of three to five years. Maurice Gieske stated that
safety is a primary key and suggests reviewing how other cities invest. Finance Director Iverson stated
that the City current practice is much like other cities of similar size. The 4M Fund used by the city was
set-up by the League of Minnesota Cities. Administration fees are charged back to the fund. The
committee decided to benchmark the City's portfolio return against the 4M Plus Fund; the 4M Fund is a
sweep account where as the 4M Plus Fund is a 30 day account. The City Council approves all investment
brokers. Various changes were incorporated in the draft policy. The City will not purchase derivatives.
Cash flow was discussed and Finance Director Iverson stated that she projects cash flow based on two
years of expenditure history as recommended by the GFOA and any construction and capital expenditures
per on-going construction contracts. The consensus of the committee was to put concentration risk at no
more than 5% of the overall portfolio may be invested in the securities of a single issuer except for the
City of Arden Hills
-WEN HILLS
securities of the U.S.Government or an external investment pool. The committee also wanted a"Counter
Signature" policy for individual protection. Counter Signature must be one of the following: City
Administrator,Asst.City Administration,Mayor,FPAC Chair, or Council Liaison.
The draft policy will be emailed to all committee members with the discussed changes for approval and
then presented to the City Council at the July 91h meeting for Council approval.
VI. NEXT MEETING AGENDA
The committee decided to change its meeting date from the third Wednesday of each month to the second
Tuesday of each month. This will enable items to be brought forward to the City Council for approval or
presentation at their second meeting of the month instead of ding to wait until the next month. The next
meeting will be July 10`h if this is acceptable to all mem• S. nce Director Iverson will check with
the missing members and if acceptable will change the e o the Ci 's calendars.
The next policy will be Fund Balance policies his wi elude reviewing the CIP, the assessment
policy, and assessing what we can and cannot affo l •. �`o: is will be based on cash flows; some of this
will be done in the future when we work rat:-= ;and other long-range policies. Currently our City
works on the basis of pay as you go.
Jeff Johnson requested reports with t ast years of critical funds balances within the CIP.
VII. JOINT MEETING WI TRC DC AND PLANNING COMMISSION
The committee is invited to a joint mee with the Parks,Trails, and Recreation Commission; Economic
Development Commission, and the Planning Commission on July 17, 2007, at the Cummings Park
Pavilion,at 6:00 p.m. A BBQ will be held first and meeting to follow
VIII. ADJOURN
Meeting adjourned at 8:20pm.
Motioned: Jim Ostlund
Approved: Jeff Johnson
A quorum of the City Council may be present at this meeting.
• Scott Bronson,FPAC Chair Susan K.Iverson,Finance Director
City of Arden Hills
•
-ARZEN
MEMORANDUM
HILLS
MEMORANDUM
DATE: July 6, 2007
TO: Financial Planning and Analysis Committee
FROM: Sue Iverson, Finance Director
SUBJECT: Investment Policy Discussions
BACKGROUND:
At our last meeting, we worked out a draft investment policy to be presented to the City
Council for approval. I had not forwarded it back to all of you, as the city Attorney was
reviewing it.
DISCUSSION:
I have received input from the City Attorney and he has recommended some changes to the draft
policy. I have included the policy as we have drafted it and will bring the City Attorney's
changes with to the meeting as I have not received them in writing yet. I will email them to you
as soon as I received them.
RECOMMENDED ACTION:
Adoption of an investment policy for recommendation to the City Council.
•
CITY OF ARDEN HILLS
INVESTMENT POLICY
1. Purpose
to investpublic funds:l a::.ma e#"t ypaximizes return and
It is the policy of the City .;;.; <.;.;;:
provides maximum security in preserving and protecting f rids while meeting.the daily cash flow
demands and conforming to all applicable federal, st#0.1.00/or.lOc#IStatii*C:gOOrrunelitithc
investment of public funds.
2. Standards of Care
A. Prudence—The standard of prudence to be used shall be.,h; `prudent person"
st
andard and shall be applied in the.1.0 01 . 0)-41.1pf managing o' 'all portfolio.
Individuals acting in accordance with written procedures and this investment
policy and exercising due dingLnce:shall` r lle ed of personal responsibility for
` . provided deviations
an individual security's credits or matl� t`p� uges,
from expectations are reported in a timely fashion tl1e liquidity and the sale of
securities are carried our:;in accordance:w th the for s`of this policy.
1111 ...„..............
...........
The "prudent person''standard states that,4`h2u st ents shall be made with
judgment and care. zn e ..circumstancesthen revailing,which persons of
prudence, discretion and0telligence exercise in the management of their own
affairs,not for speclto but.for investment, considering the probable safety of
then cpttal as,well as the:pbahe income to be derived."
B. Ethics andV:OnfigtOKInterestifitiployees involved in the investment process
shall refrain from papal business activity that could conflict with the proper
execution and management of the investment program, or that could impair their
ability to make impartial decisions. Employees shall disclose any material
interests in financial institthtions with which they conduct business. They shall
<fi l er;disclose ant parson financial/investment positions that could be related to
''':441-00611.pance OfitiOiiivestment portfolio. Employees shall refrain from
unde0.4(.40g0004iiiinvestment transactions with the same individual with whom
businesssou€tted on behalf of the City.
C. Delegation of Authority—Authority to manage the investment portfolio is granted
to the City's Finance Director/Treasurer,who shall act in accordance with
established procedures and internal controls for the operation of the investment
portfolio consistent with this investment policy. No person may engage in an
investment transaction except as provided under the terms of this policy. The
• Finance Director shall be responsible for all transactions undertaken and shall
1
establish a system of control. Each transaction will be approved by one of the
following officials within 48 hours:
1) City Administrator
2) Mayor
3) Chair of the Financial Planning and Analysis Committee
4) Council Liaison of the Financial Planning and Analysis Committee
3. Investment Objectives
The City will invest idle fun
ds based on the follow*obje tie ,.
t —The primaryob•ectiv the.pr r �tioi o c t an # e
A. Safety J
safeguarding of public funds by i litigating credit and in erest ta010k.
a. Credit Risk—The City wil tins, e' r'edit risk,which is the risk
of loss due to the failure oIthe security issuer or backer.
•
b. Interest Rate Risk- ' t. ;will minimize t rest rate risk,
4"
which is the risk,R at:•i•Ottetualue of sec ities in the portfolio
will fall due to;c ;ges inJgi0*kif1itinterest rates.
B. Term—Investments v4titiO,schaitted to<eo er all expenditures.
Investments will<not be*ngefiiiiiin one year for cash flow and all excess
funds may be i es ted for lone than:o year.
C.•
in
• to meet all op
erating
i uidit :� `<'�+artfolio shall rs '�Iquid p g
requireniefogiNpOgy be reasonably anticipated. This is accomplished by
structuring th : o folto so that securities mature concurrent with cash
needs;to meet antic pata demands. Furthermore, since all possible cash
ands cannot be anti vat . the portfolio should consist of securities
with:actlyg secondary or T.0 a markets. Alternatively, a portion of the
portfolio mar be placed in money market mutual funds or government
investment pools :Which offer same-day liquidity for short-term funds.
: : , Yield—The in*estinent portfolio shall be designed with the objective of
ttaimng a maet rate of return throughout budgetary and economic
cycles, taking into account the investment risk constraints and liquidity
'''Wffeekliil'iiiMiObenchmark to be used will be the 4M Plus Fund annual rate of
r t ::R turn on investment is of secondary importance compared to the
safetad liquidity objectives. The core of investments are limited to
relatively low risk securities in anticipation of earning a fair return relative
to the risk being assumed. Securities shall generally be held until
maturity.
4. Pooling of Funds
2
11111) The City will consolidate (pool) cash and reserves balances from all funds, except for
those legally restricted by statutes,to maximize investment earnings and to increase efficiencies
with regard to investment pricing, safekeeping and administration.
5. Authorized Investments
The City of Arden Hills will invest only in securities authorized by Minnesota Statute 475.66.
1. Governmental bonds,notes,bills, mortgages anckOlbgr securities,which are direct
obligations or are guaranteed or insured issues nAlth.090t,States, its agencies,
its instrumentalities, or organizations created Py arrgot:§fpongress, excluding
mortgage-backed securities defined as•bigkrisk".:(0011,fino!':.119.19w) or in
certificates of deposit secured by letters of WiE040#111127*4.pan
Banks.
High risk mortgage-backed securities are.:i4V!If4110-$0;1111mi,::,„:..
A) interest—only or principal-. only rfiOrtgag00) ,securities,
B) any mortgage derivative security that:
a) has an expept§014*§tage life greater than ten years,
b) has an expected i0000ilife that:
i) 74.til•rttencli',01ixogomp four years as the result of
on.::40-iniectigoAaigiiiiiiiaparallel shift in the
curve of pluaNi:baSis points: or
• ii)•i .h shcirten by mcroili#ian six years as the result of
• .
an irriniOiate...anctgti§tained parallel shift in the
lip yield ciirOpfniirins.300 basis points: or
c)11111'011 have an estiiiiitMthange in price of more than 17
pg.rgprit as the result of an immediate and sustained parallel
a0$iiiithe yield curve of plus or minus 300 basis points.
2. „:11:,1.0)14400#01i:of tiwkInited Statt$.ibiitkagencies under a repurchase agreement if
AIIII:g**Inargiff'gg#00004nder the tOpArchase agreement is 101 percent and with any
of the following institutions:
.,,iggnifY. A) a bank qualified as depository of public funds,
01111nomighB) any national or state bank in the United States which is a member of the
Federal Rese.MiSystem and whose combined capital and surplus equals or
..."'qingig:14gxceeds $1.04Vii000,
ggrjrnarytopOfing dealer in the United States government securities to
FiViONdifgritiSerye Bank of New York,
D) having its principal executive office in
licensed pursuant to Chapter 80A, or an affiliate of it,
regulated by the Securities and Exchange Commission and maintaining a
combined capital and surplus of$40,000,000 or more, exclusive of
subordinated debt.
3. State and local government obligation as follows:
• A) an obligation of the State of Minnesota or any of its municipalities:
3
a) that have taxing power, and .
b) are rated"A" or better by a national bond rating service.
B) obligation of other state and local governments:
a) that have,t,a.Ax,, power, and .
b) are rated. or better by a national. bondrating service.
C) general obligations ligations of the Minnesota Housing Finance. Agency that are
rated"A" or better by a national bond rating service.
D) general obligations of housing finance agencies of other states,provided:
a) they include a moral obligation of the state. and
b) they are rated"A" or betidi'bY::.4
E) general revenue obligation of State 10f
•
Minnesota other than those foup0iiiipliplllip::1?fikove fttousin,g Finance
Agency)that are rated"AA" or 15.6.0ritg*Rational bondtagrilliprvice.
4. Certificates of deposit at state and and savings and loan
belimited to the
.associations. All investments made upOr..this subsection
amount of Federal Die8p000s5it.Insurance corporation or forth in of
f74i°pno should he in the form a
Minnesota statute 1 The
::. .itni'l4iritii.:.tifiklogkresx1ceed the insurance coverage
discounted security maturing :ether with any accrued
or in the amount so that at anytime the
interest does not exceed the insurancc co erage
5. Banker's Acceptances of United States or their Canadian subsidiaries
that are rated Investors Service P1 by Standard and
Poor's CorporatioH. m...,atures in 270..daYs.:or less. Banker's Acceptances can
only be purchaseitith!yio0 is greater than the United States Treasury
obligations...or Federal:
6. •omniercial Paper:issued 140H:.:111*...#"tates corporations or their Canadian
subsidiaries th '.t :ire rated "Al"*15.i.Moody's Investors7o days or less.Service and/or"Pl"by
Standard and PoorIllorporation matures in 2
Money Market Funds consisting of United States Treasury Obligations and/or
Federal Agency
8. The..7.91y7:' ill norpitireLlitiaLse securities that are considered highly sensitive. A
highly sensitive
lient is a debt instrument with contract terms that make the
investineiliiipidirv_iue highly sensitive to interestrate changes. Examples
include range notes and index amortizing notes, step-up notes and bonds,
variable-rate investments with coupon multipliers, and coupons that vary
inversely with a benchmark index.
9. The City will not purchase securities that could expose the City to foreign
currency risk.
•
4
10. The City will not purchase derivatives.
•
6. Safekeeping and Custody
Investments may be held in safekeeping with:
1. Any Federal Reserve Bank,
authorized under the laws of the Unite::> tatrany state to exercise
2. Any bank a < � :: :.:
corporate trust powers, including but notlimited tax ; s;:;from which the
�
investment
es tme nt is
purchased,ch as ed
,
3. A primary reporting dealer in the Umt�� # 'tges, vmefiVserCurWeMs to Its
Federal Reserve Bank of New York, ai!. ..
havingits rincipal a ve.office in Minnesota,
4. A securities broker-dealer p ,, IJ ;,,;,;,,;,,;;,,;;;;;,.,;.;;.;:.;;;;
Licensed pursuant to Chapter 80A, or an'affiliateOfittippgnlated by the securities
and exchange commission and maintaining a combinedcombing40apiKnnd surplus of
$40,000,000 or more, exclusive of subo inated debt.
The City's ownership of all securities in hich the fund is invested should be evidenced
by written acknowledgments identifying the securities bAQF
y:
A. The names of issuers,
•
B. The maturity
C. The interest rates,
D. Any serialnumber's or other distinguishing marks.
The City shall not invest in'secur`ities that are both uninsured and not registered in the
name of the City and a ':h ld by either:
Theeounte party or
B. The coup gr 's trust department or agent, but not in the name of the
City.
-17.1101iFigkkp,Director shall establish a system of internal controls,which shall be
reviewed with` h ndependent auditor<vf the City. The controls shall be designed to prevent the
loss of public ds a s 1a from ra d employee error, and misrepresentation by third parties,
g
unanticipated change ii ..ancial riarkets, or imprudent actions by employees and officers of
the City.
7. Concentration of Credit Risk
No more than 5% of the overall portfolio may be invested in the securities of a single
issuer, except for the securities of the U.S. Government or an external investment pool.
• 8. Investment Depositories and Authorized Dealers
5
• Annually, the City Council will designate by resolution depositories, security dealers and
financial institutions authorized to provide banking and investment services to the City. Prior to
completing an initial transaction each year with a broker/dealer,the City shall provide to the
broker/dealer a copy of the City's Investment Policy and a copy of the Notification to Broker and
Certification by Broker as required by Minnesota Statute 118A.04. The broker/dealer must sign
and return the Notification to Broker and Certification by Brokg:.and agree to handle the City's
account in accordance with the City's Investment Policy and provide a copy.of their broker's
insurance coverage for their firm.
9. Investment Earnings
Interest earnings will be credited to the source of theinyested funds at the,0410bach
the average dailycash balances during 00,0*A ket value adjustments
month based on g ..... :;;::. :.::::.::
and interest accruals will be allocated at the end of the fis`i 'yea f n the average cash
balances during the fiscal year.
10. Reporting and Review
A listing of the City's investment portfolio shatt:tlo, c
fin
ancial
cia Ire rt t 0 the
City Council at the end of each fiscal quarter 'T` e list<should include;date of purchase and
maturity, type of investment, firm invested at y eld, test rate,and comparison to the
benchmark set forth in this policy.
11. Exemption
Any investment currently he141104114oes not meet the guidelines of this policy shall be
exempted from the requirement of this policy Upon maturity, if funds are re-invested the new
securities must confor f : i'.this policy.
12. wow/and Approval
The investment policy shall be formally approved and adopted by resolution the City
Council anctany`future changes to tihei1policy must be approved by the City Council.
•
6
•
-` R ENHILLS
MEMORANDUM
DATE: July 6, 2007
TO: Financial Planning and Analysis Committee
FROM: Sue Iverson, Finance Director
SUBJECT: 2006 Financial Report and Fund Balance Policy Information
BACKGROUND:
The 2006 Financial Statements were presented to the City Council on June 25, 2007.
41) DISCUSSION:
I have included a copy of the 2006 Financial Statement, Management Report, and Special Report
for your information. We can discuss any questions you may have and what information we
need to discuss the next policy on Fund Balance based on this information. I have not included
the CIP in this packet, as you have a copy of last year's CIP in your 2007 budget books and we
are currently working on the updated CIP for 2008. I will give you a copy of this once we have
completed this. I have been gathering reference materials for use in our next discussions,but due
to the timing of changing our meeting date—I have not received all the materials yet.
RECOMMENDED ACTION:
None.
•
• CITY OF ARDEN HILLS
INVESTMENT POLICY
1. Purpose
It is the policy of the City to invest public funds in a manner which maximizes return and
provides maximum security in preserving and protecting funds while meeting the daily cash flow
demands and conforming to all applicable federal, state and/or local statutes government the
investment of public funds.
2. Standards of Care
A. Prudence—The standard of prudence to be used shall be the "prudent person"
standard and shall be applied in the context of managing an overall portfolio.
Individuals acting in accordance with written procedures and this investment
policy and exercising due diligence shall be relieved of personal responsibility for
an individual security's credit risk or market price changes,provided deviations
from expectations are reported in a timely fashion and the liquidity and the sale of
securities are carried our in accordance with the terms of this policy.
• The "prudent person" standard states that, "Investments shall be made with
judgment and care, under circumstances then prevailing,which persons of
prudence, discretion and intelligence exercise in the management of their own
affairs, not for speculation,but for investment, considering the probable safety of
their capital as well as the probable income to be derived."
B. Ethics and Conflicts of Interest—Employees involved in the investment process
shall refrain from personal business activity that could conflict with the proper
execution and management of the investment program, or that could impair their
ability to make impartial decisions. Employees shall disclose any material
interests in financial institutions with which they conduct business. They shall
further disclose any person financial/investment positions that could be related to
the performance of the investment portfolio. Employees shall refrain from
undertaking personal investment transactions with the same individual with whom
business is conducted on behalf of the City.
C. Delegation of Authority—Authority to manage the investment portfolio is granted
to the City's Finance Director/Treasurer, who shall act in accordance with
established procedures and internal controls for the operation of the investment
portfolio consistent with this investment policy. No person may engage in an
investment transaction except as provided under the terms of this policy. The
• Finance Director shall be responsible for all transactions undertaken and shall
1
establish a system of control. Each transaction will be approved acknowledged
iby one of the following officials within 48 hours:
1) City Administrator
2) Mayor
3) Ch ' 1 Dl „Dgn A nd „aly./ s Comam ttee
f t1, F
4) Council Liaison of the Financial Planning and Analysis Committee
3. Investment Objectives
The City will invest idle funds based on the following objectives:
A. Safety—The primary objective is the preservation of capital and the
safeguarding of public funds by mitigating credit and interest rate risk.
a. Credit Risk—The City will minimize credit risk, which is the risk
of loss due to the failure of the security issuer or backer.
b. Interest Rate Risk—The City will minimize interest rate risk,
which is the risk that the market value of securities in the portfolio
will fall due to changes in the market interest rates.
B. Term—Investments will be scheduled to cover all expenditures.
Investments will not be longer than one year for cash flow and all excess
• funds may be invested for longer than one year.
C. Liquidity—The portfolio shall remain liquid to meet all operating
requirements that may be reasonably anticipated. This is accomplished by
structuring the portfolio so that securities mature concurrent with cash
needs to meet anticipated demands. Furthermore, since all possible cash
demands cannot be anticipated,the portfolio should consist of securities
with active secondary or resale markets. Alternatively, a portion of the
portfolio may be placed in money market mutual funds or government
investment pools which offer same-day liquidity for short-term funds.
D. Yield—The investment portfolio shall be designed with the objective of
attaining a market rate of return throughout budgetary and economic
cycles,taking into account the investment risk constraints and liquidity
needs. The benchmark to be used will be the 4M Plus Fund annual rate of
return. Return on investment is of secondary importance compared to the
safety and liquidity objectives. The core of investments are limited to
relatively low risk securities in anticipation of earning a fair return relative
to the risk being assumed. Securities shall generally be held until
maturity.
4. Pooling of Funds
11
2
The City will consolidate (pool) cash and reserves balances from all funds, except for
ithose legally restricted by statutes, to maximize investment earnings and to increase efficiencies
with regard to investment pricing, safekeeping and administration.
5. Authorized Investments
The City of Arden Hills will invest only in securities authorized by Minnesota Statute §118A.04
and §118A.05.
1. Governmental bonds, notes,bills,mortgages and other securities,which are direct
obligations or are guaranteed or insured issues of the United States, its agencies,
its instrumentalities, or organizations created by an act of Congress, excluding
mortgage-backed securities defined as "high risk" (as defined below) or in
certificates of deposit secured by letters of credit issued by Federal Home Loan
Banks.
High risk mortgage-backed securities are as follows:
A) interest—only or principal—only mortgage-backed securities,
B) any mortgage derivative security that:
a) has an expected average life greater than ten years,
b) has an expected average life that:
i) will extend by more than four years as the result of
an immediate and sustained parallel shift in the
yield curve of plus 300 basis points: or
• ii) will shorten by more than six years as the result of
an immediate and sustained parallel shift in the
yield curve of minus 300 basis points: or
c) will have an estimated change in price of more than 17
percent as the result of an immediate and sustained parallel
shift in the yield curve of plus or minus 300 basis points.
2. Obligations of the United States or its agencies under a repurchase agreement if
the margin agreement under the repurchase agreement is 101 percent and with any
of the following institutions:
A) a bank qualified as depository of public funds,
B) any national or state bank in the United States which is a member of the
Federal Reserve System and whose combined capital and surplus equals or
exceeds $10,000,000,
C) a primary reporting dealer in the United States government securities to
the Federal Reserve Bank of New York,
D) a securities broker/dealer having its principal executive office in
Minnesota, licensed pursuant to Minnesota Statues Chapter 80A, or an
affiliate of it, regulated by the Securities and Exchange Commission and
maintaining a combined capital and surplus of$40,000,000 or more,
exclusive of subordinated debt.
• 3. State and local government obligation as follows:
3
A) an obligation of the State of Minnesota or any of its municipalities:
a) that have taxing power, and
b) are rated"A" or better by a national bond rating service.
B) obligation of other state and local governments:
a) that have taxing power, and
b) are rated"A" or better by a national bond rating service.
C) general obligations of the Minnesota Housing Finance Agency that are
rated"A" or better by a national bond rating service.
D) general obligations of housing finance agencies of other states,provided:
a) they include a moral obligation of the state, and
b) they are rated "A"or better by a national bond rating service,
E) general revenue obligation of any agency or authority of the State of
Minnesota other than those found in C or D above (Housing Finance
Agency)that are rated"AA" or better by a national bond rating service.
4. Certificates of deposit at state and federally chartered banks and savings and loan
associations. All investments made under this subsection shall be limited to the
amount of Federal Deposit Insurance Corporation or the manner set forth in
Minnesota statute §118A.05. The certificate of deposit should be in the form of a
discounted security maturing in the amount not to exceed the insurance coverage
or in the amount so that at any time the face amount together with any accrued
interest does not exceed the insurance coverage.
5. Banker's Acceptances of United States Corporation or their Canadian subsidiaries
that are rated"Al" by Moody's Investors Service and/or P1 by Standard and
Poor's Corporation and matures in 270 days or less. Banker's Acceptances can
only be purchased if the yield is greater than the United States Treasury
obligations or Federal Agency issues.
6. Commercial Paper issued by United States corporations or their Canadian
subsidiaries that are rated"Al"by Moody's Investors Service and/or"P1"by
Standard and Poor's Corporation and matures in 270 days or less.
7. Money Market Funds consisting of United States Treasury Obligations and/or
Federal Agency Issues.
8. The City will not purchase securities that are considered highly sensitive. A
highly sensitive investment is a debt instrument with contract terms that make the
investment's fair value highly sensitive to interest rate changes. Examples
include range notes and index amortizing notes, step-up notes and bonds,
variable-rate investments with coupon multipliers, and coupons that vary
inversely with a benchmark index.
9. The City will not purchase securities that could expose the City to foreign
currency risk.
4
10. The City will not purchase derivatives.
6. Safekeeping and Custody
Investments may be held in safekeeping with:
1. Any Federal Reserve Bank,
2. Any bank authorized under the laws of the United States or any state to exercise
corporate trust powers, including but not limited to the bank from which the
investment is purchased,
3. A primary reporting dealer in the United States government securities to the
Federal Reserve Bank of New York, or
4. A securities broker-dealer having its principal executive office in Minnesota,
Licensed pursuant to Minnesota Statutes Chapter 80A, or an affiliate of it,
regulated by the securities and exchange commission and maintaining a combined
capital and surplus of$40,000,000 or more, exclusive of subordinated debt.
The City's ownership of all securities in which the fund is invested should be evidenced
by written acknowledgments identifying the securities by:
A. The names of issuers,
B. The maturity dates,
C. The interest rates,
D. Any serial numbers or other distinguishing marks.
The City shall not invest in securities that are both uninsured and not registered in the
name of the City and are held by either:
A. The counterparty or
B. The counterparty's trust department or agent, but not in the name of the
City.
The Finance Director shall establish a system of internal controls,which shall be
reviewed with the independent auditor of the City. The controls shall be designed to prevent the
loss of public funds arising from fraud, employee error, and misrepresentation by third parties,
unanticipated changes in financial markets, or imprudent actions by employees and officers of
the City.
7. Concentration of Credit Risk
No more than 5% of the overall portfolio may be invested in the securities of a single
issuer, except for the securities of the U.S. Government or an external investment pool.
5
8. Investment Depositories and Authorized Dealers
Annually, the City Council will designate by resolution depositories, security dealers and
financial institutions authorized to provide banking and investment services to the City. Prior to
completing an initial transaction each year with a broker/dealer,the City shall provide to the
broker/dealer a copy of the City's Investment Policy and a copy of the Notification to Broker and
Certification by Broker as required by Minnesota Statutes Chapter 80A. The broker/dealer must
sign and return the Notification to Broker and Certification by Broker and agree to handle the
City's account in accordance with the City's Investment Policy and provide a copy of their
broker's insurance coverage for their firm.
9. Investment Earnings
Interest earnings will be credited to the source of the invested funds at the end of each
month based on the average daily cash balances during the month. Market value adjustments
and interest accruals will be allocated at the end of the fiscal year based on the average cash
balances during the fiscal year.
10. Reporting and Review
A listing of the City's investment portfolio shall be included in the financial report to the
City Council at the end of each fiscal quarter. The list should include date of purchase and
maturity, type of investment, firm invested at, yield, interest rate, and comparison to the
benchmark set forth in this policy.
11. Exemption
Any investment currently held that does not meet the guidelines of this policy shall be
exempted from the requirement of this policy. Upon maturity, if funds are re-invested the new
securities must conform to this policy.
12. Review and Approval
The investment policy shall be formally approved and adopted by resolution the City
Council and any future changes to the policy must be approved by the City Council.
•
6
• Appropriate Level of Unreserved Fund Balance in the General Fund (2002)
Background. Accountants employ the term fund balance to describe the net assets of
governmental funds calculated in accordance with generally accepted accounting
principles (GAAP).Budget professionals commonly use this same term to describe the
net assets of governmental funds calculated on a government's budgetary basis.' In both
cases, fund balance is intended to serve as a measure of the financial resources available
in a governmental fund.
Accountants distinguish reserved fund balance from unreserved fund balance.Typically,
only the latter is available for spending. Accountants also sometimes report a designated
portion of unreserved fund balance to indicate that the governing body or management
have tentative plans concerning the use of all or a portion of unreserved fund balance.
It is essential that governments maintain adequate levels of fund balance to mitigate
current and future risks (e.g.,revenue shortfalls and unanticipated expenditures) and to
ensure stable tax rates. Fund balance levels are a crucial consideration,too, in long-term
financial planning.
In most cases, discussions of fund balance will properly focus on a government's general
fund.Nonetheless, financial resources available in other funds should also be considered
in assessing the adequacy of unreserved fund balance in the general fund.
Credit rating agencies carefully monitor levels of fund balance and unreserved fund
balance in a government's general fund to evaluate a government's continued
creditworthiness. Likewise, laws and regulations often govern appropriate levels of fund
balance and unreserved fund balance for state and local governments.
Those interested primarily in a government's creditworthiness or economic condition
(e.g.,rating agencies) are likely to favor increased levels of fund balance. Opposing
pressures often come from unions,taxpayers and citizens' groups,which may view high
levels of fund balance as "excessive."
Recommendation. GFOA recommends that governments establish a formal policy on
the level of unreserved fund balance that should be maintained in the general fund.2
GFOA also encourages the adoption of similar policies for other types of governmental
funds. Such a guideline should be set by the appropriate policy body and should provide
both a temporal framework and specific plans for increasing or decreasing the level of
unreserved fund balance, if it is inconsistent with that policy.3
The adequacy of unreserved fund balance in the general fund should be assessed based
upon a government's own specific circumstances.Nevertheless, GFOA recommends, at a
minimum,that general-purpose governments, regardless of size, maintain unreserved
fund balance in their general fund of no less than five to 15 percent of regular general
fund operating revenues, or of no less than one to two months of regular general fund
operating expenditures.4 A government's particular situation may require levels of
•
unreserved fund balance in the general fund significantly in excess of these recommended
minimum levels.' Furthermore, such measures should be applied within the context of
long-term forecasting,thereby avoiding the risk of placing too much emphasis upon the
level of unreserved fund balance in the general fund at any one time.
In establishing a policy governing the level of unreserved fund balance in the general
fund, a government should consider a variety of factors, including:
• The predictability of it revenues and the volatility of its expenditures(i.e., higher
levels of unreserved fund balance may be needed if significant revenue sources
are subject to unpredictable fluctuations or if operating expenditures are highly
volatile).
• The availability of resources in other funds as well as the potential drain upon
general fund resources from other funds (i.e.,the availability of resources in other
funds may reduce the amount of unreserved fund balance needed in the general
fund,just as deficits in other funds may require that a higher level of unreserved
fund balance be maintained in the general fund).
• Liquidity(i.e., a disparity between when financial resources actually become
available to make payments and the average maturity of related liabilities may
require that a higher level of resources be maintained).
• Designations (i.e., governments may wish to maintain higher levels of unreserved
fund balance to compensate for any portion of unreserved fund balance already
designated for a specific purpose).
• Naturally, any policy addressing desirable levels of unreserved fund balance in the
general fund should be in conformity with all applicable legal and regulatory constraints.
In this case in particular, it is essential that differences between GAAP fund balance and
budgetary fund balance be fully appreciated by all interested parties.
' For the sake of clarity,this recommended practice uses the terms GAAP fund balance
and budgetary fund balance to distinguish these two different uses of the same term.
2 Sometimes reserved fund balance includes resources available to finance items that
typically would require the use of unreserved fund balance(e.g., a contingency reserve).
In that case, such amounts should be included as part of unreserved fund balance for
purposes of analysis.
See Recommended Practice 4.1 of the National Advisory Council on State and Local
Budgeting governments on the need to "maintain a prudent level of financial resources to
protect against reducing service levels or raising taxes and fees because of temporary
revenue shortfalls or unpredicted one-time expenditures" (Recommended Practice 4.1).
4The choice of revenues or expenditures as a basis of comparison may be dictated by
what is more predictable in a government's particular circumstances. In either case,
unusual items that would distort trends(e.g., one-time revenues and expenditures) should
be excluded,whereas recurring transfers should be included. Once the decision has been
made to compare unreserved fund balance to either revenues or expenditures,that
decision should be followed consistently from period to period.
In practice, levels of fund balance, (expressed as a percentage of revenues/expenditures
or as a multiple of monthly expenditures),typically are less for larger governments than
for smaller governments because of the magnitude of the amounts involved and because
the diversification of their revenues and expenditures often results in lower degrees of
volatility.
Approved by the Committee on Accounting, Auditing and Financial Reporting and the
Committee on Governmental Budgeting and Management, January 30, 2002
Approved by the Executive Board, February 15, 2002.
•
40 Appropriate Level of Unreserved Fund Balance in the General Fund(2002)
Background. Accountants employ the term fund balance to describe the net assets of governmental funds calculated in
accordance with generally accepted accounting principles(GAAP). Budget professionals commonly use this same term
to describe the net assets of governmental funds calculated on a government's budgetary basis.' In both cases,fund
balance is intended to serve as a measure of the financial resources available in a governmental fund.
Accountants distinguish reserved fund balance from unreserved fund balance. Typically,only the latter is available for
spending. Accountants also sometimes report a designated portion of unreserved fund balance to indicate that the
governing body or management have tentative plans concerning the use of all or a portion of unreserved fund balance.
It is essential that governments maintain adequate levels of fund balance to mitigate current and future risks(e.g.,
revenue shortfalls and unanticipated expenditures)and to ensure stable tax rates. Fund balance levels are a crucial
consideration,too,in long-term financial planning.
In most cases,discussions of fund balance will properly focus on a government's general fund. Nonetheless,financial
resources available in other funds should also be considered in assessing the adequacy of unreserved fund balance in the
general fund.
Credit rating agencies carefully monitor levels of fund balance and unreserved fund balance in a government's general
fund to evaluate a government's continued creditworthiness. Likewise,laws and regulations often govern appropriate
levels of fund balance and unreserved fund balance for state and local governments.
Those interested primarily in a government's creditworthiness or economic condition(e.g.,rating agencies)are likely to
favor increased levels of fund balance. Opposing pressures often come from unions,taxpayers and citizens'groups,
which may view high levels of fund balance as"excessive."
Recommendation. GFOA recommends that governments establish a formal policy on the level of unreserved fund
balance that should be maintained in the general fund.' GFOA also encourages the adoption of similar policies for other
types of governmental funds. Such a guideline should be set by the appropriate policy body and should provide both a
temporal framework and specific plans for increasing or decreasing the level of unreserved fund balance,if it is
inconsistent with that policy.'
The adequacy of unreserved fund balance in the general fund should be assessed based upon a government's own
specific circumstances. Nevertheless,GFOA recommends,at a minimum,that general-purpose governments,regardless
of size,maintain unreserved fund balance in their general fund of no less than five to 15 percent of regular general fund
operating revenues,or of no less than one to two months of regular general fund operating expenditures.4 A
government's particular situation may require levels of unreserved fund balance in the general fund significantly in
excess of these recommended minimum levels.' Furthermore,such measures should be applied within the context of
For the sake of clarity,this recommended practice uses the terms GAAP fund balance and budgetary fund balance to distinguish
these two different uses of the same term.
2 Sometimes reserved fund balance includes resources available to finance items that typically would require the use of unreserved
fund balance(e.g.,a contingency reserve). In that case,such amounts should be included as part of unreserved fund balance for
purposes of analysis.
See Recommended Practice 4.1 of the National Advisory Council on State and Local Budgeting governments on the need to
"maintain a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of
temporary revenue shortfalls or unpredicted one-time expenditures" (Recommended Practice 4.1).
4The choice of revenues or expenditures as a basis of comparison may be dictated by what is more predictable in a government's
particular circumstances. In either case,unusual items that would distort trends(e.g.,one-time revenues and expenditures)should be
excluded,whereas recurring transfers should be included.Once the decision has been made to compare unreserved fund balance to
either revenues or expenditures,that decision should be followed consistently from period to period.
5 In practice,levels of fund balance,(expressed as a percentage of revenues/expenditures or as a multiple of monthly expenditures),
typically are less for larger governments than for smaller governments because of the magnitude of the amounts involved and because
the diversification of their revenues and expenditures often results in lower degrees of volatility.
4110
long-term forecasting,thereby avoiding the risk of placing too much emphasis upon the level of unreserved fund balance
in the general fund at any one time.
In establishing a policy governing the level of unreserved fund balance in the general fund,a government should
consider a variety of factors,including:
• The predictability of it revenues and the volatility of its expenditures(i.e.,higher levels of unreserved fund balance
may be needed if significant revenue sources are subject to unpredictable fluctuations or if operating expenditures
are highly volatile).
• The availability of resources in other funds as well as the potential drain upon general fund resources from other
funds(i.e.,the availability of resources in other funds may reduce the amount of unreserved fund balance needed in
the general fund,just as deficits in other funds may require that a higher level of unreserved fund balance be
maintained in the general fund).
• Liquidity(i.e.,a disparity between when financial resources actually become available to make payments and the
average maturity of related liabilities may require that a higher level of resources be maintained).
• Designations(i.e.,governments may wish to maintain higher levels of unreserved fund balance to compensate for
any portion of unreserved fund balance already designated for a specific purpose).
Naturally,any policy addressing desirable levels of unreserved fund balance in the general fund should be in conformity
with all applicable legal and regulatory constraints. In this case in particular,it is essential that differences between
GAAP fund balance and budgetary fund balance be fully appreciated by all interested parties.
11111 Approved by the Committee on Accounting,Auditing and Financial Reporting and the Committee on
Governmental Budgeting and Management,January 30, 2002
Approved by the Executive Board,February 15,2002.
•
RECOMMENDED PRACTICE
Multi-Year Capital Planning(2006) (CEDCP)
Background. Buildings,infrastructure,technology,and major equipment are the physical foundation for
providing services to constituents. The procurement,construction,and maintenance of capital assets are a critical
activity of state and local governments, school districts,and other government agencies,and therefore require
careful planning.
Capital planning is critical to water,sewer,transportation,sanitation,and other essential public services. It is also
an important component of a community's economic development program and strategic plan. Capital facilities
and infrastructure are important legacies that serve current and future generations. It is extremely difficult for
governments to address the current and long-term needs of their constituents without a sound multi-year capital
plan that clearly identifies capital and major equipment needs,maintenance requirements,funding options,and
operating budget impacts.
A properly prepared capital plan is essential to the future financial health of an organization and continued
delivery of services to citizens and businesses.
Recommendation. The Government Finance Officers Association(GFOA)recommends that state and local
• governments prepare and adopt comprehensive multi-year capital plans to ensure effective management of capital
assets. A prudent multi-year capital plan identifies and prioritizes expected needs based on a community's
strategic plan,establishes project scope and cost,details estimated amounts of funding from various sources,and
projects future operating and maintenance costs. A capital plan should cover a period of at least three years,
preferably five or more.
Identify needs. The first step in capital planning is identifying needs. Using information,including development
projections, strategic plans,comprehensive plans, facility master plans,regional plans,and citizen input
processes,governments should identify present and future service needs that require capital infrastructure or
equipment. In this process,attention should be given to:
• Capital assets that require repair,maintenance, or replacement that,if not addressed,will result in higher costs
in future years
• Infrastructure improvements needed to support new development or redevelopment
• Projects with revenue-generating potential
• Improvements that support economic development
• Changes in policy or community needs
Determine costs. The full extent of project costs should be determined when developing the multi-year capital
plan. Cost issues to consider include the following:
• The scope and timing of a planned project should be well defined in the early stages of the planning process
• Agencies should identify and use the most appropriate approaches,including outside assistance,when
estimating project costs and potential revenues
• For projects programmed beyond the first year of the plan,governments should adjust cost projections based
• on anticipated inflation
• The ongoing operating costs associated with each project should be quantified,and the sources of funding for
410 those costs should be identified
• A clear estimate of all major components required to implement a project should be outlined,including land
acquisition needs,design, construction,contingency and post-construction costs
• Recognize the non-financial impacts of the project(e.g.,environmental)on the community
Prioritize capital requests. Governments are continually faced with extensive capital needs and limited financial
resources. Therefore,prioritizing capital project requests is a critical step in the capital plan preparation process.
When evaluating project submittals, governments should:
• Reflect the relationship of project submittals to financial and governing policies,plans,and studies
• Allow submitting agencies to provide an initial prioritization
• Incorporate input and participation from major stakeholders and the general public
• Adhere to legal requirements and/or mandates
• Anticipate the operating budget impacts resulting from capital projects
• Apply analytical techniques,as appropriate, for evaluating potential projects(e.g.,net present value,pay back
period,cost-benefit analysis,life cycle costing, cash flow modeling)
• Re-evaluate capital projects approved in previous multi-year capital plans
• Use a rating system to facilitate decision-making
Develop financing strategies. GFOA recognizes the importance of establishing a viable financing approach for
supporting the multi-year capital plan. Financing strategies should align with expected project requirements while
sustaining the financial health of the organization. Governments undertaking a capital financing plan should:
• Anticipate expected revenue and expenditure trends,including their relationship to multi-year financial plans
• Prepare cash flow projections of the amount and timing of the capital financing
• Continue compliance with all established financial policies
• Recognize appropriate legal constraints
• Consider and estimate funding amounts from all appropriate funding alternatives
• Ensure reliability and stability of identified funding sources
• Evaluate the affordability of the financing strategy,including the impact on debt ratios,taxpayers,ratepayers,
and others
References
• A. John Vogt, Capital Budgeting and Finance:A Guide for Local Governments,(Washington,D.C.:
International City/County Management Association,2004)
• National Advisory Council on State and Local Budgeting,Recommended Budget Practices:A Framework for
Improved State and Local Government Budgeting(Chicago: GFOA, 1998)
• Patricia Tigue, Capital Improvement Programming:A Guide for Smaller Governments(Chicago: GFOA,
1996).
• Nicole Westerman"Managing the Capital Planning Cycle: Best Practice Examples of Effective Capital
Program Management," Government Finance Review 20,no. 3 (June 2004).
• GFOA Recommended Practice:Establishing Appropriate Capitalization Thresholds for Tangible Capital
Assets(2001)
• GFOA Recommended Practice:Establishing the Useful Life of Capital Assets(2002)
• GFOA Recommended Practice:Establishment of Strategic Plans(2005)
Approved by the GFOA's Executive Board,February 24,2006.
•
O
Government Finance Officers Association
Recommended Practice
Capital Project Budget(2007) (CEDCP and BUDGET)
Background. Once a government entity has adopted a multi-year capital plan(see GFOA
Recommended Practice,Multi-Year Capital Planning),the next step in the capital process is to develop
and implement a capital improvement projects budget(capital budget). A properly prepared and
adopted capital budget is essential to ensure proper planning,funding and implementation of major
projects. Most capital budgets are formally adopted as part of the annual or bi-annual budget process,
officially incorporating the appropriate year(s) of the multi-year capital plan into the budget.
Capital projects are different from programs adopted in the operating budget, often representing very
large financial obligations that may span two or more fiscal years. Therefore,it is important that they be
properly planned,budgeted, and tracked. Because of the unique nature of capital projects,the processes
for preparing,prioritizing and presenting them to the governing body may be different from the
operating budget. Capital project budgets may also require additional information such as geographic
location,multi-year funding sources,and impact on the operating budget. After the capital budget is
411 adopted, it is important that an adequate system is in place to initiate and manage each authorized
project through completion.
Recommendation.The Government Finance Officers Association(GFOA)recommends that
governments prepare and adopt a formal capital budget as part of their annual or bi-annual budget
process. The capital budget should be directly linked to, and flow from,the multi-year capital
improvement plan. In many jurisdictions,the first year(or first two years in a bi-annual budget) of the
multi-year capital plan would be adopted by the governing body. It may be necessary to modify projects
approved in the capital plan before adopting them in a capital budget. Modifications may be necessary
based on changes in project scope, funding requirements,or other issues. If these modifications are
material,jurisdictions should consider the impacts these may have on their multi-year capital and
financial plans.
Organizations should establish specific criteria early in the process to help prioritize capital submittals.
The capital budget should be adopted by formal action of the legislative body, either as a component of
the operating budget or as a separate capital budget. It should comply with all state and local legal
requirements:
Preparing and Adopting the Capital Budget. The capital budget should include the following
information:
• A definition of capital expenditure for that entity.
• Summary information of capital projects by fund, category, etc.
•
• A schedule for completion of the project,including specific phases of a project, estimated
• funding requirements for the upcoming year(s), and planned timing for acquisition,design, and
construction activities.
• Descriptions of the general scope of the project,including expected service and financial benefits
to the jurisdiction.
• A description of any impact the project will have on the current or future operating budget.
• Estimated costs of the project,based on recent and accurate sources of information.
• Identified funding sources for all aspects of the project, specifically referencing any financing
requirements for the upcoming fiscal year.
• Funding authority based either on total estimated project cost,or estimated project costs for the
upcoming fiscal year. Consideration should be given to carry-forward funding for projects
previously authorized.
• Any analytical information deemed helpful for setting capital priorities(this can include any
cost/benefit comparisons, and related capital projects).
Jurisdictions should provide a greater level of detail and information for non-routine capital projects
than for routine projects. For example, a major new wastewater treatment plant or civic center will have
greater service and cost implications than an ongoing project to resurface roads or maintain water lines.
For non-routine projects,the capital budget should thoroughly describe the impact on the operating
budget,number of additional positions required,tax or fee implications, and other financial or service
impacts.
When developing the capital budget, entities should consider measures to mitigate risk related to
410 undertaking major non-routine projects. Based on the size of the capital budget and the complexity of
the capital projects,it may be appropriate for entities to budget additional reserves for project overruns
or insurance coverage such as performance bonds or general liability coverage.
Reporting on the Capital Budget. GFOA recognizes the importance of timely and accurate reporting on
projects adopted in the capital budget. Executive leadership,legislators, and citizens should all have the
ability to review the status and expected completion of approved capital projects. Periodic reports should
be issued routinely on all ongoing capital projects. The reports should compare actual expenditures to
the original budget,identify level of completion of the project, and enumerate any changes in the scope
of the project, and alert management to any concerns with completion of the project on time or on
schedule.
References
• Distinguished Budget Presentation Awards Program,Awards Criteria and Explanations of the
Criteria, GFOA.
• John Vogt, Capital Budgeting and Finance:A Guide for Local Governments,ICMA,2004.
• Nicole Westerman,Managing the Capital Planning Cycle:Best Practice Examples of Effective
Capital Program Management, Government Finance Review, 2004.
• National Advisory Council on State and Local Budgeting,Recommended Budget Practices:A
Framework for Improved State and Local Government Budgeting, 1998.
• Patricia Tigue, Capital Improvement Programming:A Guide for Smaller Governments, 1996
• John Fishbein,Preparing High Quality Budget Documents,GFOA, 2006.
111111 Approved by the GFOA's Executive Board on March 2, 2007.
•
Government Finance Officers Association
Recommended Practice
Documentation of Accounting Policies and Procedures(2002 and 2007) (CAAFR)
Background. Communication is an essential component of a comprehensive framework of internal
controls. One method of communication that is particularly effective for controls over accounting and
financial reporting is the formal documentation of accounting policies and procedures. A well-designed
and properly maintained system of documenting accounting policies and procedures enhances both
accountability and consistency. The resulting documentation can also serve as a useful training tool for
staff.
Recommendation.Every government should document its accounting policies and procedures.
Traditionally, such documentation has taken the form of an accounting policies and procedures manual.
Thanks to advances in technology,even more effective methods are now also available for this purpose.
An appropriate level of management to emphasize their importance and authority should promulgate
accounting policies and procedures. The documentation of accounting policies and procedures should be
evaluated annually and updated periodically,no less than once every three years, according to a
predetermined schedule. Changes in policies and procedures that occur between these periodic reviews
should be updated in the documentation promptly as they occur. A specific employee should be assigned
the duty of overseeing this process. Management is responsible for ensuring that this duty is performed
consistently.
The documentation of accounting policies and procedures should be readily available to all employees
who need it. It should delineate the authority and responsibility of all employees, especially the authority
to authorize transactions and the responsibility for the safekeeping of assets and records. Likewise,the
documentation of accounting policies and procedures should indicate which employees are to perform
which procedures. Procedures should be described as they are actually intended to be performed rather
than in some idealized form. Also,the documentation of accounting policies and procedures should
explain the design and purpose of control-related procedures to increase employee understanding of and
support for controls.
Approved by the GFOA's Executive Board, March 2,2007.
CITY OF MISSION VIEJO
• MANAGEMENT AND BUDGET POLICIES
(AS AMENDED JULY 6, 1999)
RESERVES
General Fund Reserves
A. A Contingency Reserve account will be budgeted every two years, and
appropriated annually to provide for unanticipated expenditures of a nonrecurring nature
and/or to meet unexpected increases in costs.
B. An Economic Uncertainty Reserve account will be budgeted every two years,
and appropriated annually to avoid the need for service level reductions in the event an
economic downturn causes revenues to come in lower than budget.
C. An Exposures Reserve will be maintained for the purpose of setting aside
resources for costs not covered by the City's insurance programs, such as claim costs within
the City's deductibles, self-insured retentions and/or major costs associated with disasters
and other events, which will not be reimbursable from insurance or from the Federal or State
government. The amount of this reserve will be analyzed every two years to determine the
appropriate funding level.
D. A Reserve for Infrastructure, which will receive residual fund balance not
apportioned to the Reserves listed under Sections A through C and Sections H and I, will be
maintained to fund future infrastructure and other one-time expenditures, such as for capital
projects that were not anticipated in the biennial budget process or could not be entirely
financed from current revenues.
E. Reserves for Encumbrances and Continuing Appropriations are established at
the end of every fiscal year to reserve fund balance in the amount equal to the City's unpaid
obligations and unfinished projects at year-end.
F. Other reserves, such as for cash flow, in the event that current cash flow needs
exceed combined fund balances, or anticipated costs for service enhancements, will be
established each fiscal year as needed.
G. Combined unappropriated fund balance and appropriated reserves in the
General Fund will not be allowed to fall below 15% of the current year General Fund
operating budget. Funding levels of all General Fund reserves will be reviewed during
periods of economic stagnation to avoid reductions in operating service levels.
Other Reserve Funds
H. A Computer, Equipment, Furnishings, and Vehicle (CEFV) Replacement Fund
will be maintained, at a rate of 100% accumulated depreciation, and as a separate fund, to
fund the replacement costs of existing equipment, vehicles, computers and office furnishings
• when they reach the end of their useful lives.
CITY OF MISSION VIEJO
• MANAGEMENT AND BUDGET POLICIES
(AS AMENDED JULY 6, 1999)
A Facility Rehabilitation/Replacement Fund will be maintained, at a rate of 60%
of accumulated depreciation, as a separate fund, to fund the rehabilitation or replacement
costs of existing City buildings, recreational facilities, and parks/sport fields fixtures when they
reach the end of their useful lives.
J. A minimum fund balance of 30% of estimated Gas Tax revenues, excluding
those revenues resulting from the Orange County Transportation Authority (OCTA) Fund
exchange agreement, for the current year will be set aside as a reserve for street repair
emergencies and other unanticipated traffic safety projects.
•
O
• General Fund Reserves Use Policy Resolution #34722
Adopt a General Reserve Use Policy. (Resolution)
WHEREAS, over the past three years,and continuing with the approved FY 1990-91 budget the City Council has
endeavored to rebuild General Fund reserves; and
WHEREAS,as a result of annual transfers and one-time unexpected revenues Council was able to achieve a five
percent General Reserve in just three years;and
WHEREAS,the Auditor's Annual Financial Condition Report has recommended establishment to reserve levels equal
to 10 to 15 percent of annual General Fund operating revenues,and a written financial management policy that includes
policies on reserve requirement; and
WHEREAS,an increase in the City's reserves decreases the City's need for short-term borrowing which is an
indication of the City's financial health; and
WHEREAS,actions taken in the FY 1990-91 Approved Budget transfer$2 million toward a second five percent
reserve;and
WHEREAS, it is important for Council to adopt a policy governing Council's use of the General Fund Reserve Fund.
NOW THEREFORE,BE IT RESOLVED by the Council of the City of Portland,Oregon that the attached General
Fund Reserve Fund Use Policy(summarized below)be adopted:
1. The first five percent reserve is defined as an emergency reserve available to fund one-time,emergency,
unanticipated expenditure requirements or offset unanticipated revenue fluctuations occurring within a fiscal year.
2. The emergency reserve will only be accessed when the result of emergency expenditures or an unexpected
revenue reduction would likely result in a negative ending balance for the General Fund.
3. Emergency Reserve resources must begin to be restored in the fiscal year following their use.Restoration will be
consistent with the Council's past practice of budgeting transfers totaling a minimum of$1 million dollars a year to
the General Reserve Fund.
4. The second five percent reserve is defined as counter cyclical reserve available to either maintain General Fund
current service level programs or transition expenditure growth to match slower revenue growth during the first 18
to 24 months of a recession.
5. The counter cyclical reserve may be used when basic revenue growth(where"basic revenue"is defined as the
sum of General Fund property tax,business license,utility license/franchise fees,cigarette and liquor taxes,
transient lodging taxes,and interest income)falls to below 5.5 percent for two consecutive quarters or the Financial
Forecast estimates basic revenue growth will be below 5.5 percent for the next fiscal year,and one or more of the
following conditions occurs in conjunction with slower revenue growth:
• The Portland Metropolitan Area unemployment rate is reported above 6.5 percent for two consecutive quarters
or the Financial Forecast estimates unemployment will average in excess of 6.5 percent for the next fiscal year.
.• The property tax delinquency rate exceeds 8 percent.
• Actual business license year-to-year revenue growth falls below 5.5 percent for two consecutive quarters of the
Financial Forecast estimates Business License revenue growth at less than 5.5 percent for the next fiscal year.
6. The Council should begin to restore counter cyclical reserves within 24 months of their first use.
7. Revenue shortfalls associated with bureau service reimbursement income, contract income,or cost recovery
income may not be offset by a transfer of resources from the General Reserve Fund.
•
City of Portland,Oregon—FY 1999-00 Adopted Budget 293
General Fund Reserves Use Policy Resolution#34722
• Adopted by Council,May 03, 1990
Mayor J.E. Bud Clark Barbara Clark
April 26, 1990 Auditor of the City of Portland
SCB:TG:RR
General Reserve Fund Use Policy
INTRODUCTION
Over the past three years and continuing with the proposed FY 1990-91 budget the Council,through past actions,
established the General Reserve Fund to house and clearly identify the discretionary reserve within the budget. As a
result of annual transfers and one-time unexpected revenues Council was able to achieve a five percent General Reserve
in just three years.A general fund reserve is needed for two reasons:
• To insulate General Fund programs and current service levels from large and unanticipated one-time
expenditure requirements,a revenue reduction due to a change in state or federal legislation,resulting from
adverse litigation, or similar unforeseen action.
• To temporarily insulate General Fund programs and current service levels from slower revenue growth that
typically occurs during an economic recession.
This reserve is not intended to be used because General Fund expenditure growth exceeds normal revenue growth.
The level of the reserve fund is measured as a percentage of the budgeted General Fund revenues net of short-term
borrowing receipts. Analysis attached as Appendix A of the December 1989 Financial Forecast shows that a 10
percent reserve level is required.
The following paragraphs set out policy guidelines that could govern Council's use of reserve funds.
EMERGENCY RESERVE
The Council reserves the first five percent,or one half of the overall reserve as an Emergency Reserve. The emergency
reserve is available to fund one-time emergency,unanticipated expenditure requirements or offset unanticipated
revenue fluctuations occurring within a fiscal year. The reserve avoids the need to make budget adjustments outside of
the normal budget hearing process.The Council can withdraw funds from the emergency reserve after the General
Fund's budgeted contingency is exhausted. The emergency reserve will only be accessed when the result of emergency
expenditures or an unexpected revenue reduction would be that the General Fund would likely end the fiscal year with
a negative ending fund balance.
Revenue shortfalls associated with bureau service reimbursement income,contract income,or cost recovery revenues
may not be offset by a transfer of resources from the General Reserve Fund.
Restoration of the Emergency Reserves will begin the fiscal year following their use.Restoration will be consistent
with the Council's past practice of budgeting transfers totaling a minimum of$1 million dollars a year to the General
Reserve Fund.
USE OF THE COUNTER CYCLICAL RESERVE
The second 5 percent of the reserve is designated as a counter cyclical.The Council will use this half of the reserve to
either maintain General Fund current service level programs or transition expenditure growth to match slower revenue
growth during the first 18-to 24 months of a recession. The counter cyclical reserve is designated for use as"bridge
financing"necessary to offset slower revenue growth during a recession.
For purposes of this policy, slower or recessionary revenue growth triggers Council's assessment of use of the reserve
when:
•
294 City of Portland, Oregon-FY 1999-00 Adopted Budget
General Fund Reserves Use Policy Resolution#34722
III . Basic revenue growth falls to below 5.5 percent for two(2)consecutive quarters or the Financial Forecast
estimates basic revenue growth will be below 5.5 percent for the next fiscal year.Basic Revenue is defined as
the sum of General Fund property tax,business license,utility license/franchise fees,cigarette and liquor taxes,
transient lodging taxes, and interest income.
In addition,one or more of the following conditions must occur in conjunction with slower basic revenue growth:
s The Portland Metropolitan Area(PMSA)unemployment rate is reported above 6.5 percent for two(2)
consecutive quarters or the Financial Forecast estimates PMSA unemployment will average in excess of 6.5
percent for the next fiscal year.
+ The property tax delinquency rate exceeds 8 percent.
Business license year-to-year revenue growth falls below 5.5 percent for two(2)consecutive quarters or the
Financial Forecast estimates Business License revenue growth at less than 5.5 percent for the next fiscal year.
Exhibit A summarizes these indicators on an annual fiscal year basis for the period FY 1969-70 through FY 1998-99.
Exhibit A shows that basic revenue growth below 5.5 percent occurred three times in the past two decades. Exhibit A
should not be construed to suggest that use of reserves would avoid the need to reduce expenditure growth or possibly
the absolute level of expenditures over a multi-year period.
Declines in Bureau specific cost recovery revenues, contract income,or service reimbursement income may not be
offset by transfer of counter cyclical reserve resources.
The Council should begin to restore Counter cyclical Reserves used under the guidelines with 24 months after their first
use.
Table 2: Counter Cyclical Reserve Use Indicators
• City of Portland-History of Counter Cyclical Reserve Use Indicators
PMSA Unemployment Property Tax Delinquency
Basic Revenues Rate Rate Business License Revenue
Fiscal Growth Growth
Year (%) Below 5.5% Rate(%) Over 6.5% Rate(%) Over 8.0% (%) Below 5.0%
1971 4.9% Below 5.5% 7.6% Over 6.5% 8.2% Over 8.0% 0.6% Below 5.0%
1972 9.1% NA 6.9% Over 6.5% 7.1% NA 5.4% Below 5.0%
1973 9.3% NA 5.6% NA 6.8% NA 14.9% NA
1974 7.0% NA 5.8% NA 12.2% Over 8.0% 33.4% NA
1975 4.9% Below 5.5% 7.8% Over 6.5% 10.7% Over 8.0% -11.9% Below 5.0%
1976 13.6% NA 9.6% Over 6.5% 9.7% Over 8.0% 24.8% NA
1977 8.5% NA 7.7% Over 6.5% 8.6% Over 8.0% 42.9% NA
1978 7.1% NA 5.7% NA 8.9% Over 8.0% 10.9% NA
1979 10.6% NA 5.3% NA 7.9% NA 19.4% NA
1980 7.1% NA 5.7% NA 11.7% Over 8.0% 5.3% Below 5.0%
1981 10.6% NA 7.1% Over 6.5% 5.9% NA 4.8% Below 5.0%
1982 2.3% Below 5.5% 9.1% Over 6.5% 6.7% Over 8.0% -10.9% Below 5.0%
1983 -0.1% Below 5.5% 10.4% Over 6.5% 8.6% Over 8.0% -0.8% Below 5.0%
•
City of Portland,Oregon-FY 1999-00 Adopted Budget 295
General Fund Reserves Use Policy Resolution#34722
• Table 2: Counter Cyclical Reserve Use Indicators
1984 8.9% NA 8.7% Over 6.5% 8.3% NA 5.4% Below 5.0%
1985 12.1% NA 7.6% Over 6.5% 7.6% NA 24.4% NA
1986 8.5% NA 7.4% Over 6.5% 8.4% NA 1.7% Below 5.0%
1987 14.3% NA 6.2% NA 7.5% NA 16.7% NA
1988 9.2% NA 5.0% NA 7.1% NA 19.3% NA
1989 7.9% NA 4.4% NA 6.5% NA 11.4% NA
Note:"Basic Revenues"include General Fund property taxes,business licenses,utility licenses,transient lodging taxes,cigarette
and liquor taxes,and interest income revenues.
NA:Not Applicable
Table 2 - Counter Cyclical Reserve Use Indicators
BASIC Revenue Growth
(FY1970-71 through FY1988-89)
20.0%
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Fiscal Year Ends June 30th
12 Reeenue Growth(%) - 5.5%Line
Figure 1 -Basic Revenue Growth vs. 5.5%
•
296 City of Portland, Oregon-FY 1999-00 Adopted Budget
General Fund Reserves Use Policy Resolution#34722
• APPENDIX A
A DISCUSSION OF REQUIRED GENERAL FUND RESERVE LEVEL
General
The Council,at present,is operating with a goal of funding the General Reserve Fund at 5 percent of the General Fund
revenues net of short-term borrowing proceeds. As noted in the Financial Forecast,the General Reserve Fund will
probably end FY 1989-90 at or very close to the desired 5 percent goal.Table 3 shows that estimated year-end balance
in the General Reserve
Table 3: General Reserve Fund Status
City of Portland
General Fund Reserve Fund
Audit Actual Adopted Budget Estimated Year-End
Item FY 1997-88 FY 1988-89 FY 1989-90 FY 1989-90
GENERAL RESERVE FUND DETAIL
Beginning Fund Balance $0 $1,000,000 $2,433,894 $2,434,967
Transfers-IN $4,950,000 $1,340,283 $1,000,000 $9,667,952
Transfers-OUT ($3,950,000) $0 $0 ($4,000,000)
Interest Income $0 $94,684 $103,017 $472,481
Ending Fund Balance $1,000,000 $2,434,967 $3,536,911 $8,575,400
• Ending Fund Balance As Percent of Net Reve-
nues 0.623% 1.409% 2.034% 4.926%
Net Revenues $160,591,017 $172,784,494 $173,926,367 $174,087,688
5%Reserve Level(5.000%) $8,029,551 $8,639,225 $8,696,318 $8,704,384
Over(Under) ($7,029,551) ($6,204,258) ($5,159,407) ($128,984)
(*)Total General Fund revenues less short-term borrowing proceeds
Table 3 -General Reserve Fund Status
Fund will be somewhere around 4.9 percent.The forecast for the fund currently assumes that$3 million will be needed
to fund Police and Fire retirements expected to result from recent vote approval of Fire and Police,Disability and
Retirement pension reform. Another$1 million of possible expenditures,requiring a transfer from the reserve to the
General Fund,were outlined in the FY 1988-89 Fourth Quarter Report.
There are two principal reasons for building a reserve;
• First,large unexpected one-time expenditures are more easily funded from a reserve.Temporary or permanent
reductions in programs are avoided. For example,the current reserve allows funding of Fire and Police
retirement related personal services expenses without disruption of General Fund programs.
Second,a"counter-cyclical"reserve is required to ameliorate the effects of an economic downturn on General
Fund revenue growth. A slower regional economy will slow revenue growth relative to expenses. The result is
a resource gap that, in the absence of a reserve,can probably only be eliminated by expenditure reductions. In
addition it should be noted that actions by the State Legislature or the Public Utilities Commission(PUC) can
also adversely affect revenue growth.
IP
City of Portland,Oregon—FY 1999-00 Adopted Budget 297
General Fund Reserves Use Policy Resolution#34722
• The General Reserve Fund is now at a level that allows the Council to use reserves to counteract one-time fluctuations
in revenues and expenditures or meet large unexpected one-time expenditures. The 5 percent level is not adequate to
offset the combination of slower revenue growth and fund large unexpected expenditures. That is it would not provide
any insulation against the effects of an economic downturn. The following paragraphs develop alternative estimates of
General Reserve Fund levels that would provide a reserve capable of funding extraordinary one-time expenditure
requirements and ameliorate the effects of an economic downturn,adverse legislation,or adverse PUC decisions.
Revenue History FY 1974-75 To FY 1988-89
Table 4 summarizes historical General Fund discretionary revenue growth characteristics. In Table 4 revenue is
summarized for the"Big Four"revenues and"All Other"discretionary revenues.Two discretionary revenue streams are
shown in Table 4. The top line of Table 4 represents"unadjusted"discretionary revenues, i.e.,total revenues less short-
term borrowing,contracts, service reimbursements,and grants and donations. The"adjusted"line,at the bottom of
Table 4 nets out Federal Revenue Sharing transfers to the General Fund, other irregular or one-time transfers,and
construction permit revenues.
Table 4: General Fund Revenue Growth
City of Portland
General Fund Revenue Growth
Characteristics,FY 1974-75 to FY 1988-89
Growth Rates(%)
Com-
pound
Item Annual Maximum Minimum
IIIGeneral Fund Discretionary 5.5% 12.2% 0.6%
Big Four Revenue 9.2% 14.4% 2.1%
811-
Property Taxes 814 7.7% 13.2% 2.4%
Transient Lodgings 821 12.0% 31.4% -9.2%
Business Licenses 831 11.7% 42.9% -10.9%
Utility License 832 13.3% 22.1% 2.9%
All Other Discretionary(**) -2.8% 16.9% -7.4%
Adjusted Discretionary(*) 8.5% 14.5% 0 0%
(*) Net of Federal Revenue Sharing,one-time or irregular transfers and
construction permits.
(**)Average of 6 negative changes
Table 4-General Fund Revenue Growth
This line more accurately reflects the General Fund's current organizational make-up and revenue mix.
III
298 City of Portland, Oregon—FY 1999-00 Adopted Budget
General Fund Reserves Use Policy Resolution#34722
0 Table 4 shows that overall,General Fund discretionary revenues have at worst gone flat or grown only marginally
during the periods of slower regional growth. The compound annual growth rate over the past 15 years has been about
5.5 percent.The worst year of growth for the"unadjusted"discretionary revenue stream was apparently FY 1976-77 at
the tail end of a recession.The"adjusted"discretionary revenue stream showed no growth during FY 1982-83.A larger
Federal Revenue Sharing transfer(up$1.4 million)and other one-time transfers(up about$3.4 million)totaling an
estimated$4.8 million, allowed the City to temporarily support higher expenditure levels.
The Big Four revenues have never failed to grow and the lowest overall year-to-year growth appears to be about 2.1
percent. It is interesting to note the difference in growth characteristics.Property Taxes and Utility Franchise/License
Fees appear to have a growth floor in the 2 to 2.5 percent range. Transient Lodging and Business License Taxes both
declined during the last recession. Transient Lodging taxes declined by about 9 percent between FY 1979-80 and FY
1980-81 (at$10.03 million)and did not reach a new high until FY 1984-85 (at$11.5 million).All Other discretionary
revenues appears to be more volatile but the long run trend appears to be downward.This probably reflects the fact that
miscellaneous fees and charges are not indexed to a price index and are not regularly reviewed to reflect rising costs.
Alternative Reserve Level Calculations
Table 4 seems to show that during an economic downturn revenue growth will at best slow considerably.How much
depends on the nature,severity,timing,and length of the downturn.Tables 3 and 4 use the information above and other
Financial Forecast information to develop three cases or alternative reserve level calculations.
CASE 1
Case 1 uses the Lower Bound revenue forecast shown in Figures 4 and 5 of the Financial Forecast.
The onset of an economic downturn during late FY 1989-90 creates an estimated gap,during FY 1990-91 of about$2.8
million between expenditures and revenues. During the second year(FY 1991-92)the estimated gap widens to$5.6
million. Creation of a reserve large enough to get through the first year translates into a General Reserve Fund totaling
• about$11.5 million. This would be composed of a 5 percent element for unexpected expenses plus a$2.8 million
counter-cyclical element. This works out to a total reserve level that is 6.6 percent of Net Revenues as defined above.
Adding the insurance of a second year raises the required reserve level to about$17.1 million. This works out to a total
reserve level of just under 10 percent. A conservative approach argues for the 10 percent level The reason for this is
timing.A recession is likely to result in slower revenue growth during or within a fiscal year.This requires some initial
use of the counter cyclical reserve element to get through a part of a year.Adding the second year,really the first full
year,would give Council the opportunity to make revenue and expenditure adjustments with the implementation of a
new budget. Thus,under the two-year column in Table 3,the$8.35 million counter cyclical reserve would be used to
adjust to slower revenue growth over an 18 to 24 month period.The other reserve elements,the"unexpected expenses"
reserve would still be available for the extraordinary one-time expenditure requirements.
The"Case 1" calculations are attractive because they"fall out"of the annual Financial Forecast.This calculation can
be replicated from year to year.The major drawback associated with the approach is that it depends on a specific(DRI)
recession forecast. The specifics and details of the recession forecast that produces the lower bound revenue forecast
are different every forecast cycle. Calculations from year-to-year may result in variations in the required reserve level.
•
City of Portland,Oregon—FY 1999-00 Adopted Budget 299
General Fund Reserves Use Policy Resolution#34722
• Table 5: Case 1 Reserve Calculation
CASE 1
Cyclical Reserve Calculations
Use Lower Bound Revenue Forecast
FY 1990-91 General
Fund Net Revenues $174,087,688
Item Required Reserve
Unexpected
Expense.(5.00%) $8,704,384
Counter cyclical
Reserve $9,912,685
Required Reserve
Fund Level $18,617,070
Reserve Level Percent-
age 10.7%
Table 5 -Case 1 Reserve Calculation
CASE 2
Case 2 uses the lowest overall historical year-to-year growth rate of 0.6 percent to compute a counter cyclical reserve
element.Under this alternative the difference between the"Most Likely"forecast and lower 0.6 percent discretionary
revenue growth translates into about$7.7 million gap between revenues and expenditures.As shown at the top of Table
6,the required reserve level amounts to about$16.4 million or about 9.4 percent of revenues. The counter cyclical
reserve element would total about$7.7 million. Comparison with Case 1,suggests that this would be large enough to
get through a 12 to 18 month period of slow revenue growth.
CASE 4
Case 3 uses the lowest growth rate for each major category shown in Table 4 and estimated year-end FY 1989-90
revenues to compute an overall lower bound revenue estimate for FY 1990-91. For example,Transient Lodging Taxes
are forecast to increase by about 7 percent during FY 1990-91.Table 4 shows a worst case growth of-9.2 percent. The
difference between the forecast and negative growth results in a revenue gap. Doing this for other major categories
yields an estimated shortfall of about$9.9 million. The required reserve level for this case is$18.6 million. This
equates to about 10.7 percent of forecast FY 1990-91 General Fund revenues net of short-term borrowing.A counter-
cyclical reserve totaling$9.9 million would,judging from Case 1,probably be sufficient to offset slower revenue
growth over an 18 to 24 month period.
•
300 City of Portland, Oregon—FY 1999-00 Adopted Budget
General Fund Reserves Use Policy Resolution#34722
• Table 6: Cases 2 and 3 Reserve Levels
CASE 2
Cyclical Reserve Calculation
Use Lowest Year-to-Year Overall Growth
Item Required Reserve
Unexpected Expense.(5.00%) $8,704,384
Counter cyclical Reserve $7,699,782
Required Reserve Fund Level $16,404,167
Reserve Level Percentage 9.4%
CASE 3
Cyclical Reserve Calculations
Use Lowest Year-to-Year Overall Growth
Item Required Reserve
Unexpected Expense.(5.00%) $8,704,384
Counter cyclical Reserve $9,912,685
Required Reserve Fund Level $18,617,070
Reserve Level Percentage 10.7%
• Table 6-Cases 2 and 3 Reserve Levels
Conclusion
The three different reserve level calculations shown above suggest that the desired General Reserve Fund level is about
10 percent of total annual General Fund Revenues net of short-term borrowing receipts. About 5 percentage points
constitutes a reserve for large unexpected one-time expenditures. An additional 5 percentage points would provide a
counter-cyclical reserve. A 10 percent General Reserve Fund level would give the Council flexibility to contend with
the combination of large one-time unexpected expenditures and slower revenue growth due to an economic downturn.
The analysis above suggests that the 5 percent counter-cyclical reserve element would provide about 12 to 24 months of
leeway in adjusting to the effects of slower revenue growth due to an economic slowdown.
•
City of Portland,Oregon—FY 1999-00 Adopted Budget 301
•
RECOMMENDED PRACTICE
Adoption of Financial Policies (2001)
Background. The National Advisory Council on State and Local Budgeting(NACSLB)
has developed a comprehensive set of recommended budget practices. The
recommendations have been endorsed by a number of key governmental associations,by
academia and by labor groups associated with state and local governments. These
practices and the associated framework outline a budget process that encompasses the
broad scope of governmental planning and decision-making with regard to the use of
resources. This work is recognized as one of the most important advances in
governmental finance in decades. The Government Finance Officers Association(GFOA)
has adopted a recommended practice endorsing the NACSLB practices and the associated
framework. However,the policies included in this Recommended Practice are those
considered fundamental to the budget process and relevant to the broadest number of
jurisdictions.
• The work of the NACSLB provides a framework for describing the overall budget
process. The framework is organized around the four principles of the budget process:
• Establish Broad Goals to Guide Government Decision Making
• Develop Approaches to Achieve Goals
• Develop a Budget Consistent with Approaches to Achieve Goals
• Evaluate Performance and Make Adjustments
Each of these principles has additional elements that provide guidance for an effective
budget process. Element#4, of Principle 2, Adopt Financial Policies, addresses the need
for jurisdictions to establish policies to help frame resource allocation decisions.
Recommendation.
The Government Finance Officers Association(GFOA) recommends that, at a minimum,
financial policies in the following areas be developed by professional staff and formally
adopted by the jurisdiction's governing board as well as the governing boards of those
component units; state,provincial and municipal corporations and organizations; and
other bodies under their jurisdiction.
• Financial Planning Policies
• Revenue Policies
• • Expenditure Policies
The jurisdiction's adopted financial policies should be used to frame major policy
• initiatives and be summarized in the budget document.
It is further recommended that these policies, along with any others that may be adopted,
be reviewed during the budget process. Professional staff should review the policies to
ensure continued relevance and to identify any gaps that should be addressed with new
policies. The results of the review should be shared with the governing board during the
review of the proposed budget.
Policy categories that should be considered for development, adoption and regular
review are as follows: Financial Planning Policies
These policies address both the need for a long-term view and the fundamental principle
of a balanced budget. At a minimum,jurisdictions should have policies that support:
1. Balanced Budget-A jurisdiction should adopt a policy(s)that defines a balanced
operating budget, encourages commitment to a balanced budget under normal
circumstances, and provides for disclosure when a deviation from a balanced operating
budget is planned or when it occurs. (NACSLB Practice 4.5)
2. Long-Range Planning-A jurisdiction should adopt a policy(s)that supports a
financial planning process that assesses the long-term financial implications of current
and proposed operating and capital budgets,budget policies, cash management and
• investment policies,programs and assumptions. (NACSLB Element 9, GFOA
Recommended Practice)1
3. Asset Inventory-A jurisdiction should adopt a policy(s)to inventory and assess the
condition of all major capital assets. This information should be used to plan for the
ongoing financial commitments required to maximize the public's benefit. (NACSLB
Practice 2.2)2
Revenue Policies
Understanding the revenue stream is essential to prudent planning. Most of these policies
seek stability to avoid potential service disruptions caused by revenue shortfalls. At a
minimum jurisdictions should have policies that address:
1. Revenue Diversification -A jurisdiction should adopt a policy(s)that encourages a
diversity of revenue sources in order to improve the ability to handle fluctuations in
individual sources. (NACSLB Practice 4.6)
2. Fees and Charges - A jurisdiction should adopt policy(s) that identify the manner in
which fees and charges are set and the extent to which they cover the cost of the service
provided. (NACSLB Practice 4.2)
• I See also GFOA's recommended practice on Establishment of Strategic Plans(2005).
2 See also GFOA's recommended practice on Sustainabilitv(2002).
•
• 3. Use of One-time Revenues -A jurisdiction should adopt a policy(s) discouraging the
use of one-time revenues for ongoing expenditures. (NACSLB Practice 4.4)
4. Use of Unpredictable Revenues -A jurisdiction should adopt a policy(s) on the
collection and use of major revenue sources it considers unpredictable. (NACSLB
Practice 4.4a)
Expenditure Policies
The expenditures of jurisdictions define the ongoing public service commitment. Prudent
expenditure planning and accountability will ensure fiscal stability. At a minimum
jurisdictions should have policies that address:
1. Debt Capacity,Issuance, and Management-A jurisdiction should adopt a
policy(s)that specifies appropriate uses for debt and identifies the maximum amount of
debt and debt service that should be outstanding at any time. (NACSLB Practice 4.3,
4.3a, GFOA Recommend Practices pp.90-92)
2. Reserve or Stabilization Accounts-A jurisdiction should adopt a policy(s) to
maintain a prudent level of financial resources to protect against the need to reduce
service levels or raise taxes and fees due to temporary revenue shortfalls or unpredicted
one-time expenditures. (NACSLB Practice 4.1)34
• 3. Operating/Capital Expenditure Accountability-A jurisdiction should adopt a
policy(s)to compare actual expenditures to budget periodically(e.g., quarterly) and
decide on actions to bring the budget into balance, if necessary. (NACSLB Practice 7.2)
References.
• National Advisory Council on State and Local Budgeting. Recommended
BudgetPractices:A Framework for Improved State and Local Government
Budgeting. GFOA1998.
• A Guide for Preparing a Debt Policy, Patricia Tigue, GFOA, 1998.
• GFOA Recommended Practice. "Setting of Government Charges and Fees" (1996).
• "Elements of a Comprehensive Local Debt Policy," Government Finance Review,
October 1994.
• "Developing Formal Debt Policies," Government Finance Review, August 1991.
3 See also GFOA's recommended practice on Business Preparedness and Continuity Guidelines(2005).
• 4 See also GFOA's recommended practice on Appropriate Level of Unreserved Fund Balance in the
General Fund(2002).
•
(651)290-6907
jfilla®pfb-pa.com
July 9, 2007
MICHELLE WOLFE VIA EMAIL AND U.S. MAIL
CITY ADMINISTRATOR
CITY OF ARDEN HILLS
1245 WEST HIGHWAY 96
ARDEN HILLS, MN 55112-5743
RE: INVESTMENT POLICY
Our File No.: 10450-92-1
Michelle:
I have reviewed the proposed Investment Policy for the City of Arden Hills and
offer the following comments:
1 . The City Council may only exercise the authority granted to cities
• by the State Legislature. The City Council has full authority over
the financial affairs of the City (M.S. 412.241) and may delegate
these to the City's treasurer or chief financial officer the
authority to invest City funds (M.S. 118A.02). The provisions of
Section 2C of the proposed Policy which grant investment decision
authority to individuals other than the City's treasurer or chief
financial officer appear to exceed the authority granted to cities.
2. The reference to Minnesota Statute 475.66 in Section 5 of the
proposed Policy is incorrect. Reference should be to Minnesota
Statutes §118A.04 and §118A.05.
3. The reference in Section 5(2)D of the proposed Policy to Chapter
A should be to Minnesota Statues Chapter 80A.
4. The reference in Section 5(4) of the proposed Policy to Minnesota
Statutes 118.005 should be to Minnesota Statutes §118A.05.
5. The reference in Section 6(4) of the proposed Policy to Chapter
80A should be to Minnesota Statutes Chapter 80A.
6. The reference in Section 8 of the proposed Policy to Minnesota
• Statutes 118A.04 should be to Minnesota Statutes Chapter 80A.
July 9, 2007
Page 2
If you have any questions please feel free to contact me.
• Very truly yours,
Jerome P. Filla
JPF/plc
Cc: Sue Iverson - via email
•
•
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