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HomeMy WebLinkAbout14-042 Finance & Budget Policy Guidelines Resolution 14-042 Page 1 of 2 RESOLUTION NO. 14-042 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PORT TOWNSEND, WASHINGTON ESTABLISHING FINANCE AND BUDGET POLICY GUIDELINES WHEREAS, the City Council adopted a set of Financial Policies and Budget guidelines relating to Revenues, Expenditures, Reserves and general Budget goals and guidelines in Resolution 99-051; and WHEREAS, the City Council has reviewed and approved a series of Utility Cost of Service and Rates studies: as in Ordinance 2953 (FCS October, 2007 Study); FCS Water and Wastewater Cost of Service Rate Study, March 2008; FCS Study update October 2010; and Ordinance 3071 FCS Cost of Service, March, 2012; and WHEREAS,the City Council adopted Resolution 14-035 approving a Cost Allocation Plan on June 16, 2014; and WHEREAS, the City Council adopted a three-year community investment strategy as a part of its overall financial management and budget strategies, Resolution 08-041 in November 2008; and WHEREAS, the City Council approved a 24-point fiscal plan in Resolution 11-043 in December 2011; and WHEREAS, as a part of its Annual Audit the State Auditor's Office raised questions as to the adequacy of the City's Financial Policies, and whereas the City wishes to consolidate and update its Finance and Budget Policy Guidelines NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Port Townsend, Washington, as follows: SECTION 1. Resolution 99-051 is repealed and replaced by the attached Finance and Budget Policy Guidelines (attachment "A" to this Resolution); SECTION 2. The prior Rate Studies, Resolutions and Ordinances are hereby confirmed and continued; SECTION 3. The Annual Budget Ordinance and Supplemental Ordinances shall be considered as a part of and implementing document for the City's Finance and Budget Policy Guidelines. Resolution 14-042 Page 2 of 2 ADOPTED by the City Council of Port Townsend, WA at a regular meeting thereof, held this 21"day of July, 2014. e David King, Mayor Attest: Joanna Sanders, CMC John P. Watts City Clerk City Attorney Resolution 14-042 Exhibit A Page 1 of 20 CITY OF PORT TOWNSEND,WASHINGTON FINANCIAL AND BUDGET POLICY GUIDELINES OVERVIEW OF FINANCIAL AND BUDGET POLICY GUIDELINES The Government Finance Officers Association (GFOA) "Best Practices" and Financial Policies handbook helped guide the development of the City of Port Townsend's revised Financial and Budget Policy Guidelines. These Guidelines are not intended to restrict the City Council or City Management in financial decision-making, but to offer"check points" and a means to test short-term financial or budget decisions against long-term financial stability and sustainability. "Financial policies are a key element of sound fiscal administration, policies provide the guidance or`rules of the game' that shape the decisions of elected officials and public managers. When policies are effective, they can preserve or enhance the fiscal health of..."* the government, and increase citizen confidence in their government. "Financial policies are a basis for equal treatment of all constituents and advancing the greater good of the community...." Financial policies also help resist interest group pressure. Financial policies: • Set good financial management practices; • Set strategic intent and define boundaries; • Promote long-term strategic thinking; • Manage financial risk and promote good bond ratings; • Increase citizen awareness of City finances. While Financial and Budget Policy Guidelines are intended to be flexible, temporary major variations from these Policy Guidelines should be specifically acknowledged in the Annual Budget Ordinance or Budget Document. Any longer-term variations from Policy should be part of periodic Policy review and update. The GFOA Best Practices recommends that, at a minimum, Financial Policies should address: Financial Planning Policies, Revenue Policies and Expenditure Policies. These policies should then be summarized in the Budget Document. The Municipal Research and Services Center(MRSC) of Washington State suggests"fiscal policies address: Operating Budget Policies, Revenue and Expenditure Policies, Reserve and Fund Balance Policies, and Service Level considerations."** The State Auditor's Office Local Government Performance Center sets guidelines for Overhead Indirect Cost Allocation plans for cost recovery and Federal grant compliance. The City's Budget is how the City balances its overall Financial Policy objectives with potentially competing or even conflicting annual goals and resource limitations in the Budget. The Budget is the annual implementation of the City's Financial and Budget Policy Guidelines. The Budget itself becomes a part of the City's overall Policy and Financial Plan Forecast. * GFOA Financial Policies, 2012 **MRSC Finance Advisor Reprioritizing on the Rebound 9/30/12 Resolution 14-042 Exhibit A Page 2 of 20 GENERAL FINANCIAL POLICIES The City of Port Townsend provides municipal services for its citizens, including protection of life and property, public health and welfare, and improved quality of life. The Port Townsend City Council deems it a high priority to deliver municipal services in the manner consistent for all citizens, and with maximum efficiency and financial prudence. The City Council, as the legislative and governing body, sets the City's Financial and Budget Policy Guidelines, and through its Financial and Budget Committee, monitors and reviews the City's overall financial performance. The City Manager, as the City's Chief Executive Officer and Chief Budget Officer, is responsible to the City Council for managing City operations and program services, and preparation of the City's Annual Budget consistent with established Financial and Budget Policy Guidelines. The Director of Finance and Administrative Services, as the City's Chief Financial Officer and Chief Auditing Officer, is responsible to the City Manager for the preparation of accurate and timely financial and budget reporting, along with accounting and utility billing operations, policy advice to the City Manager and City Council. The Department Heads are responsible to the City Manager for Department Operations and Capital Project management, purchasing and grants administration. Department Heads shall monitor related revenue performance and expenditure control with the assistance of the Finance Department. The City must prioritize its services and, should revenues become constrained, the following services are considered priorities in the following general order: • Public Life, Health and Safety: • police, fire, emergency medical services; building inspections; and traffic control; • water, sewer, and storm drainage service and streets infrastructure maintenance. • Legal Mandates: Accounting/auditing/financial reporting; land-use planning. • City Facilities and Property: maintenance of park land, buildings, public rights of way, and City equipment; information technology; • Council and Community goals, both annual and long-range. Resolution 14-042 Exhibit A Page 3 of 20 FUND BALANCES, RESERVES AND CONTINGENCY GENERAL FUND (010) --This is the primary operating fund or current expense fund of the City. To maintain the City's credit rating and meet seasonal cash flow, the budget shall provide for an anticipated undesignated fund balance between 5% and 8% of estimated annual revenues for general government fund types. The fund balance shall be exclusive of all reserves not anticipated to be readily available for use in emergencies and contingencies. Should the fund balance fall below 5% of revenues, a plan for expenditure reductions and/or revenue increases shall be submitted by the City Manager to the City Council. If, at the end of a fiscal year, the fund balance falls below 5%, then the City shall rebuild the balance within a period not to exceed three fiscal years. COUNCIL RESERVE—In addition to the Fund balance and the Contingency, the budget for the General Fund shall provide for a "Council Reserve"equivalent to 1% of estimated operating revenues. Only the General Fund shall maintain a"Council Reserve". The Council Reserve is established to provide for non- recurring community requests or unanticipated needs deemed necessary by Council. The Council Reserve shall be suspended during times of significant economic downturn, especially during years when the General Fund fund balance falls below 5%. The Council Reserve is a budgeted appropriation expected to be specifically allocated at the Council's discretion. SPECIAL REVENUE FUNDS (101-199) --These funds account for revenues derived from special taxes, grants or other restricted sources designed to finance particular activities. Apart from any unrestricted General Fund contributions to a Special Revenue Fund, the unexpended ending fund balances carry over year to year and should retain enough revenue to cover operating cash flow and anticipated major project or program obligations of the fund. Of these funds, the Street, Library, Public Works Administration, and Community Services funds are of an operations nature and should retain the same 5-8% ending balance throughout the fiscal year as in the General Fund. Other Special Revenue Funds are more cyclical or project related and only need retained ending fund balances or transfers in to cover anticipated obligations: Drug Enforcement, Lodging Tax, Fire/EMS, Affordable Housing, CDBG Grants and Systems Development. CONTINGENCY(102)—While classified as a Special Revenue Fund, the City's Contingency Fund is more of a strategic reserve to meet emergency conditions or to help maintain essential services during periods of economic downturn. Each fund should retain enough in its own Ending Fund Balance Reserves to offset minor non-recurring or unanticipated expenses during the budget year. The City's Contingency Fund is intended for major events and should be maintained at 2% of the General Fund annual operating revenues. If the contingency falls below 2% of operating revenue, the City shall make a gradual correction of the problem over a three year period. DEBT SERVICES FUND (200)—These funds are used to pay general government debt. The City shall retain or transfer in funds sufficient to cover the annual fund obligations, and retain such "coverage" amounts to comply with bond covenants or other loan restrictions, Long-term debt includes Bonds, Federal or State loans (e.g. PWTF, FHA), or private placement financing. The City of Port Townsend shall only use long-term debt for capital projects that cannot be financed out of current revenues. Annual debt payments should not exceed 15% of the annual General Government expenditures of the City (Operating Budget less Water/Sewer/Storm Utility Operations, less Interfund Transfers and Loans, less Debt Service Payments ="General Government Net Operating Budget for Debt Ratio Purposes). Debt financing shall generally be limited to one-time capital improvement projects and only under the following circumstances: • When the project's useful life will exceed the term of the financing; • When project revenue or specific resources as identified will be sufficient to service the debt; • When projects cannot be cash funded. Debt financing shall not be considered appropriate for: Resolution 14-042 Exhibit A Page 4 of 20 • Current operating and maintenance expenses (except for issuing short-term instruments such as revenue anticipation notes or tax anticipation notes); and any recurring purpose(except as indicated above). Tax anticipation debt will be retired annually, and bond anticipation notes will be retired within six months of the completion of the project. Short-term debt outstanding at the end of the year will not exceed 5% of net operating revenue (including tax anticipation notes but excluding bond anticipation notes.) The City's Limited (non-voted) General Obligation (LTGO) Debt Capacity per State Law is 1.5% of total assessed value. The City should seek to retain 5-10% of its LTGO Debt Capacity for unforeseeable catastrophic emergencies. Options for Interim or"Bridge" financing may include: • Bond Anticipation Notes (BANS) • Tax Anticipation Notes (TANS) • Lines of Credit with major financial institutions • Interfund Loans CAPITAL PROJECTS FUNDS (300)—These funds are established for the acquisition or construction of general government(non-utility) capital improvements. Ending Fund Balance Reserves should be maintained at levels sufficient to cover anticipated annual expenditures with transfers in from supporting funds (General, REET, etc.) to cover project needs. ENTERPRISE FUNDS (400)—These funds are the"business-like" funds for operations providing services to the general public supported primarily through user's fees (Water, Sewer, Stormwater, and Utility Revenue Bond). The Ending Fund Balances of these funds should be in the 5-8% range for operating fund cash flow, and any additional amounts needed to build towards future project cash or debt payment needs. INTERNAL SERVICE FUNDS (500)—These funds are also "business-like) funds for operations providing services to other City departments or funds on a direct cost-reimbursement basis (e.g. Equipment Rental including Information Technology services and equipment, and internal Engineering Services). Fund balances should break even, after set aside of funds for future capital equipment replacements. FIDUCIARY FUNDS (600)—These funds account for assets held by the City as a trustee or as an agent on behalf of others. Ending Fund Balances and any transfers in should be maintained consistent with fund restrictions. Resolution 14-042 Exhibit A Page 5 of 20 ENDING FUND BALANCE, RESERVES, CONTINGENCY SUMMARY The following is a summary of the foregoing reserves guidelines, intended to be reviewed annually as a part of the Budget process: • General Fund .......................................................5-8% of operating revenue (Exclusive of the Council Reserve budgeted within the General Fund) • Library...................................................................5-8% of property tax • Street....................................................................2-3% of expenditures • P.W. Administration..............................................2-3% of expenditures • Community Services ............................................2-3% of expenditures • System Development Charges Fund ...................100% of restricted funds • Other Special Revenue Funds...... ............ .........Sufficient to meet obligations • Contingency .........................................................2-3% of operating revenue • Debt Service............. .......................... ..........Sufficient to meet obligations • General Capital ....................................................Sufficient to meet obligations • Enterprise Funds..................................................5-8% of operating revenue plus accumulated long-term needs • Internal Service ....................................................Sufficient to meet obligations • Fiduciary Funds....................................................Sufficient to meet obligations The undesignated General Fund Balance (the balance not tied to a known project) will be maintained at a level to provide the City with sufficient working capital and a comfortable margin of safety to address emergencies and unexpected declines in revenue without borrowing. The City should not use the undesignated General Fund Balance to finance recurring operating expenditures. This means annual General Fund revenues should be equal to or greater than annual regular operating expenditures. General Fund revenues will be used for general government, street and parks programs only. General Fund revenues will not be used to subsidize utility or enterprise operations, which will be self- supporting through user rates. Resolution 14-042 Exhibit A Page 6 of 20 REVENUE POLICIES SOURCES OF REVENUE—The City will strive to maintain a diversified and stable revenue system to shelter the government from short-run fluctuations in any one revenue source and ensure its ability to provide ongoing service. Restricted revenue shall only be used for the purposes legally permissible and in a fiscally responsible manner. Programs and services funded by restricted revenue will be clearly designated as such. One-time revenues shall support one-time expenditures. Intergovernmental assistance shall be used to finance only those capital improvements that are consistent with the capital improvement plan and local government priorities, and whose operation and maintenance costs have been included in operating budget forecasts. ENTERPRISE FUNDS (WATER/WASTEWATER/STORMWATER)—Enterprise funds will be operated in a manner that maintains a minimum ending fund balance that is not less than 5-8% of total operating expenditure appropriations. Utilities will be self-supporting through user rates and charges. Utility user charges for each of the City utilities will be cost of service basis (i.e., set to full support the total direct, indirect, and capital costs) and established so that the operating revenues of each utility are at least equal to its operating expenditures and annual debt service obligations. The user rates of a utility shall be designated so that a portion covers replacement of the utility's facilities. Fund balances may be used to temporarily offset rate increases, after sufficient funds have been accumulated for identified capital improvement needs or alternative finding secured. FEES AND CHARGES (Non-Utility)—All fees for licenses, permit, fines, and other miscellaneous charges shall be set to recover the City's expense in providing the attendant service. Average cost or actual cost methodology may be used. These fees shall be reviewed annually and shared with the Council. The City Council will establish cost recovery policies for all fees and charges. Such cost recovery policies shall consider the relative public/private benefits from the services being provided and/or the desirability of providing access to services for specialized populations. These policies will specify the percentage of full costs (direct and indirect overhead cost recovery)to be recovered through the fees or charges Council may utilize professional consulting services to periodically update or review the allocation model. . The level of cost recovery may be adjusted periodically by the City Council to ensure that fees and charges are current, equitable, competitive, etc. and cover the percentage of the costs deemed appropriate. Staff shall provide for a periodic evaluation of the City's fees and charges to keep the fees and charges in line with Council-established cost recovery policies. Where the City has authority to set or adjust fees and charges, the fee adjustment will be benchmarked against the change in the Seattle-Tacoma Urban Wage Earners Consumer Price Index for the twelve month period ending June 30, or other applicable index or measure as determined by the City Council. Where direct beneficiaries of a city program or services can be identified, fees will be established to recover the costs of that service or program. Fees are also to protect tax payers from subsidizing special service users. A fee shall be charged for any service that benefits limited interests within the community, except for human needs type services to persons with limited ability to pay. When hazardous materials are spilled and the Fire District's assistance is required to deal with the situation, the City shall require reimbursement for expenses incurred. Some services provide some benefit to the greater community. When a greater community benefit is identified, the City may choose to subsidize, either whole or in part, such service. Resolution 14-042 Exhibit A Page 7 of 20 Rental fees will be established to be comparable to commercial rates, while at the same time recovering full costs of use of the property or facility. PARKS AND POOL FEES—As a multi-year goal, the Pool division will strive to recover 50% of Pool costs by generating revenues through special programs, fees, charges, donations and/or designated use of City-operated facilities. Through an aggressive volunteer recruitment program, the Parks shall seek to minimize the subsidy required for partial and minimum fee support programs. Solicitation of funds through donations, fund raising events, non-traditional sources, and various other modes shall be encouraged by the Parks, Recreation and Tree Advisory Board and other advisory committees. Funds collected for any special purpose shall be earmarked for that purpose. TRANSFERS (ADVANCES)AND INTERFUND LOANS—To the maximum extent feasible and appropriate, General Fund transfers to other funds shall be defined as payments intended for the support of specific programs or services. Amounts not needed to support such specific program or service expenses shall revert to the General Fund's fund balance, unless Council direction establishing the transfer for other items is enacted. General Fund transfers/advances to supported funds shall be managed to meet cash flow needs on a "just in time" basis to protect the General Fund's cash flow and interest earnings. These tranfers or advances are intended to be used for temporary funding purposes which will occur for no longer than a twelve month period. Otherwise, transfers should generally occur on the basis of 1/12 of the budgeted amount at the beginning of each month, with a reconciliation of actual expenditures against transferred amounts in the year-end closing process. Where it is necessary to make a one-time advance of General Funds to another operating fund, this action shall occur under the following conditions: • The advance is reviewed by the Finance and Budget Committee and approved by the City Council prior to the transfer of funds: All excess cash balances in the fund shall be invested for the benefit of the General Fund, if not contrary to applicable Federal and State law and regulation, as long as the advance is outstanding; • Should the fund accumulate an unexpected unencumbered balance, this excess shall be used first to repay the advance; and • At the time of closing out the fund, all assets of the fund revert to the General Fund, if not contrary to any other applicable Federal, State or local law. The requirements for making and accounting for interfund loans are as follows: • The City Council must approve by resolution all interfund loans. The resolution will include a planned schedule of repayment of the loan principal as well as setting a reasonable rate of interest to be paid to the lending fund. The following guidelines should be used in establishing the rate of interest: • Not lower than the"opportunity cost" if the funds were otherwise invested, such as the LGIP (local Government Investment Pool) rate or a bank CD rate for a similar term. • Treasury yields or short-term bond yields for a similar term. • Not higher than the external rate available to the municipality. • Interest is not required in the following circumstances: • The borrowing fund has no independent source of revenue other than the lending fund; or • The borrowing fund is normally funded by the lending fund. (For example, General Fund is used to fund Streets and capital projects.) • The lending fund is the General Fund, which, being unrestricted, can loan interest-free, except to a proprietary fund (i.e. enterprise funds such as Water and Sewer). • The borrowing fund must anticipate sufficient revenues to be in a position over the period of the loan to make the specified principal and interest payments as required in the authorizing resolution. Resolution 14-042 Exhibit A Page 8 of 20 The term of the loan may continue over a period of more than one year, but must be"temporary" in the sense that no permanent diversion of the lending fund results from the failure to repay by the borrowing fund. A loan that continues longer than three years will be scrutinized for a"permanent diversion"of moneys. (Note: These restrictions and limitations do not apply to those funds which are legally permitted to support one another through appropriations, transfers, advances, etc.) For short-term cash deficits in non-General Fund operating funds during the course of the year, short- term interfund loans are preferred to advances, except in cases where the receiving fund is legally precluded from paying interest on loans, or where loan transactions would be too numerous and costly to be cost effective. City interfund loans are preferable to outside short-term or private sector lines of credit. OVERHEAD COST RECOVERY—As provided in the State auditor's Office guidelines, "Cost allocation is a method to determine and assign the cost of central services to the internal-government users of those services. Cost allocation thereby enables local governments to more accurately account for the complete cost of the services it provides to the public—and to better assess the fees it should charge them." Included in cost allocation are direct costs (not otherwise charged to budget units) and indirect costs: • Direct Costs: specifically identified with a particular service or unit if not already charged directly (e.g. facilities,janitorial, etc.) • Indirect Costs: incurred for common or joint purposes, benefiting more than one unit, not readily assignable to a specific unit(e.g. legal, personnel, clerk, IT, etc.). The term "allocation" implies that there is no overly precise method available for direct charging a cost to a unit, so the City is using the most appropriate method available for doing so. However, a cost allocation plan should be designed and used to provide a reasonable, consistent and equitable means to allocate costs. Inequitable charges result in questionable charges to grant, utilities and restricted funds. For grant purposes, costs that benefit the public at large cannot be included and should follow the OMB A-87 guidelines, and may require two cost allocation methodologies. OVERHEAD INDIRECT COST RECOVERY— Beyond the direct cost-allocations for operating Departments/Funds from Internal Service Funds (Equipment Rental and Replacement, Information Technology and Engineering Services), the City shall also apply charges to Departments/Funds for City- wide overhead indirect cost recovery where allowed (Council, City Manager, City Clerk, City Attorney and Finance), unless determined otherwise by an Overhead Cost Allocation Plan and rate. The City may determine to apply this rate City-wide, or may waive the overhead cost-recovery in all or part if Council determines a general benefit to the taxpayer or utility rate payer. The Overhead Indirect Cost Recovery assumptions and allocations shall be reviewed internally every two years, and an independent review and update, including Federal A-87 assumptions, every five years. Resolution 14-042 Exhibit A Page 9 of 20 GENERAL EXPENDITURE AND BUDGET POLICIES OPERATING BUDGET"ZERO-BASED" OR"PAY-AS-YOU-GO"—The City shall attempt to conduct its operations on a zero-based or pay-as-you-go basis from existing or foreseeable revenue sources. The control of costs will be emphasized. Achieving pay-as-you-go requires the following practices: current operations, maintenance and depreciation costs to be funded with current revenues; direct and indirect costs of services must be fully identified; and sound revenue and expenditure forecasts must be prepared. The City budget shall balance operation expenditures with operating revenues. The General Fund shall not be balanced with the use of the General Fund balance if to do so would drop the fund balance below 5% of operating revenue. All equipment replacement and maintenance needs for the next five years will be projected and the projection will be updated each year. A maintenance and replacement schedule based on this projection will be developed and followed. Replacement of capital outlay items shall be timed at fairly stable intervals so as not to spend excessively in one year and restricted in the next. The budget should provide sufficient funds for the regular repair and maintenance of all City of Port Townsend capital assets. The budget should not be balanced by deferring these expenditures. Future maintenance needs for all new capital facilities will be fully costed out. Personnel: This is the City's most significant operating expense. • Total Compensation: The City shall take a"total compensation" approach looking at salary and benefit costs when making external market comparisons and in benchmarking internal comparables, evaluating salary compression vertically and lateral comparators horizontally. • Competitive Compensation: Salaries and benefits should be comparable to cities and private sector employers that are within the same labor market and with other cities or private sector employers that offer comparable quality services in order to attract and retain high quality staff. • Union Contract Negotiations: If a collective bargaining agreement is, or will be, under negotiations, then a specific amount will not be included in the budget for potential wage adjustments resulting from the negotiation, other than continuing the basis for a COLA adjustment, except a negative COLA will not be budgeted. This is to protect the City from any claims of not"bargaining in good faith". Funding for unknown contract terms must be considered in balancing ongoing revenues with ongoing expenses. • Fluctuation in Staffing Requirements: Additional personnel resources needed for large projects or responding to a"housing" cycle boom may be retained on a temporary, term (non-permanent employee) or contract basis. Training and Travel—City employees or others on official City business or training may be required to travel outside the City to conduct their business or training for the City. City employees and officials will be reimbursed for reasonable and customary expenses incurred in the conduct of their business for the City, including food, lodging and travel expenses while away, excluding any expenses for personal entertainment or alcoholic beverages, as provided in the City's Personnel Rules for business or training travel. Such training or travel shall be as provided either specifically or generally in the annual budget. • Training shall be seen as an investment in maintaining the certifications and skills of the City's employees. At least 1% of the department's budgeted salary expense will be allocated for certifications and skills training. An additional 1% shall be budgeted City-wide for organizational development and process improvement. • Travel expenses for travel outside the City shall be pre-approved with a Travel Authorization Request form itemizing the estimated total cost of the business or related training costs (registration, meals or per diem, lodging, travel expenses, etc.) and then reconciled upon 10 days of return on the Travel Expense Voucher form, or equivalent forms as revised by the City. Resolution 14-042 Exhibit A Page 10 of 20 Technology Investments that Forestall Adding Permanent Staff: Recognizing that personnel related expenditures represent the largest portion of the City's budget, methods to increase efficiency and effectiveness of the delivery of City services through technology improvements should receive priority funding if it can forestall the addition of permanent staff. SPECIAL REVENUE FUNDS OR SPECIAL PURPOSE TAX USES—As Special Revenue Funds or Special Purpose Taxes are established, expenditure expectations and guidelines should also be established consistent with long-term budget and service level sustainability. Library Special Revenue Fund—As Special Revenue Funds with direct property or other dedicated tax allocations are established, expenditure expectations and guidelines should also be established to foster long-term budget and service level sustainability. Public Safety Sales Tax Special Purpose Tax—Pursuant to the authorizing R.C.W. and consistent with the voter approved ballot measure, half of the forecasted annual revenue should be for Police Services (NOT LESS THAN 1/3 per R.C.W.) and half for Youth and Community Services programs or related debt services for such program support. Resolution 14-042 Exhibit A Page 11 of 20 GRANTS MANAGEMENT POLICY Leveraging City and community resource with external financial assistance can enhance the quality and level of public services, facilities and infrastructure. City Policy is to seek and accept grants and other financial assistance consistent with the City's vision and goals. External assistance also carries with it the goals and restrictions of the grantor. Grant relationships are partnerships where the goals of both the City and grantor must be in alignment. The benefits, costs and long-term implications of the partnership must be considered prior to formal application. The City's Grants Management Policy involves six steps: 1. SEARCH—City departments staff and officials are encouraged to actively search out and identify potential grants which may further the City's vision and goals, within the City's financial limitations. 2. PRE-APPLICATION—Department Managers and staff shall pursue grants within their purchasing authority within City Purchasing Policies. The City Manager shall be advised of all grant considerations over a $10,000 total, and a formal Pre-Application Questionnaire may be required for consideration of any grants over$60,000. 3. FORMAL APPLICATION— Formal applications directly by the City, or indirectly by other agencies involving the City, must fall within Departmental Purchasing levels. All grants will seek reimbursement of direct cost departmental and City wide indirect or administrative costs to the maximum extent allowable by the grantor. Grants by other agencies involving the City or by the City involving other grantees must have City Manager or Council approval beyond the$60,000 Purchasing levels. 4. AWARD AND CONTRACT— Upon formal Notice of Grant Award (NOGA) or informal notification, a written contract must be approved prior to any City commitment, formal or otherwise. All grant contracts must be within the City's Purchasing levels. Any needed budget amendments for grant match not otherwise within general budget authority shall be adopted prior to formal grant acceptance and contract signing. 5. ACCOUNTING AND REPORTING—City departments shall coordinate with Finance to assure that grants comply with Federal, State and local requirements for timely reimbursements, monitoring of vendors and sub recipients, as well as City Purchasing Policies. 6. CLOSE-OUT—Multi-year grants shall have periodic accounting reviews not less than at the close of each fiscal year. Upon conclusion of each grant, the Department grant manager shall prepare a grant close-out report in coordination with the City's Finance Department. A complete grants management file record shall be maintained per City policy, either in the Department, Finance or Clerks Office. Resolution 14-042 Exhibit A Page 12 of 20 CAPITAL IMPROVEMENT POLICY CAPITAL IMPROVEMENT PLAN (CIP)—A five-year Capital Improvement Plan shall be developed and presented annually by staff in accordance with the City's Comp Plan, and approved by City Council. This plan shall contain all capital improvements from all funds and departments of the City. A high priority shall be placed on replacement of capital improvements when such improvements have deteriorated to the point of becoming hazardous, incur high maintenance costs, are negatively affecting property values, and/or no longer functionally serving their intended purposes. CAPITAL MAINTENANCE—Standards of maintenance to adequately protect the City's capital investments shall be developed and periodically updated. The annual budget will be prepared to meet established maintenance schedules. Future maintenance needs for all new capital facilities will be fully costed. CIP FINANCE—Capital Improvement financing should represent 5-10% of the annual budgeted expenditures of the City. Within the limitation of existing law, various funding sources may be utilized for capital improvements. Interest earnings from capital improvement financing sources shall be separately accounted for and attributed to each active capital improvement project on a monthly basis. Upon completion of capital projects, the Finance Director shall certify any unspent funds from the project, to the City Manager. Unspent capital project funds shall be reported to the City Council through the Quarterly Performance Report. The City Manager shall include in the annual budget and capital improvement program recommendations to dispose of unspent capital project funds. In no case shall projects incur a funding deficit without the express approval of the City Council. CIP POLICY—The Capital Improvement Planning Policy is to present the City's approach to managing development of its Capital Improvement Plan (CIP). Adherence to this policy will ensure that the City preserves, maintains, and improves building, parks, roads, sewers, equipment and other capital investments. This policy will also help the City avoid emergency and unexpected major costs in the future. This policy shall apply to capital projects that meet all of the following criteria: 1. Projects that exceed $50,000 in total cost. 2. Projects that involve the purchase of land, buildings, building improvement or building components. 3. Projects where the City is responsible for the purchase and/or development. 4. Projects that are included in the City's Comprehensive Plan or related capital plans. Resolution 14-042 Exhibit A Page 13 of 20 DEBT MANAGEMENT STATUTORY LIMITATIONS—All City debt management policies and practices shall comply with Washington State law. The general obligation debt of the City shall not exceed an aggregated total 7.5% of the assessed value of taxable property within the City. RCW 39.36.020 The following individual percentages shall not be exceeded in any specific debt category: • General Debt—2.5% of assessed valuation • Non-Voted 1.5% Limited Tax General Obligation (LTGO) Bonds • Voted 1.0% Unlimited Tax General Obligation (UTGO) Bonds • Utility Debt—2.5% of assessed valuation • Open Space and Park Facilities—2.5% of assessed valuation REVENUE BONDS—Revenue bonds are used to finance construction or improvements to facilities of enterprise systems operated by the City and are generally payable from the enterprise. Revenue bonds are not subject to the City's statutory debt limitation and voter approval is not required. SHORT TERM OBLIGATIONS—Short term obligations are warrants, notes, capital leases or other evidences of indebtedness expected to be repaid in three years or less. The City may use short term obligations to: • Meet the immediate financing needs of a capital project for which long-term financing has been secured but not yet received. • Cover temporary cash flow shortages, which may be caused by a delay in receipting tax revenues. The City may make short term loans between City funds (interfund loans) as an alternative to using short term obligations. • Interfund loans will be permitted only if an analysis of the affected fund indicates excess funds are available and the use of these funds will not impact the fund's current operations. • All interfund loans shall bear interest based on prevailing rates and have terms consistent with state guidelines. • All interfund loans shall be made in conformance with the City's Interfund Loan Policy. INTERMEDIATE TERM DEBT—Intermediate term debt is debt that is used to finance a specific asset or set of assets with a useful life of more than three but less than seven years. The City will only issue intermediate term debt for capital assets when the cost of borrowing or other factors make it in the City's best interest. The term of any intermediate term debt will not exceed a conservative estimate of the useful life of the asset(s) to be financed. LONG TERM DEBT—Long term debt is that debt which is seven years or more to term. The City will only issue long term debt for capital improvements that are included in the City's Capital Improvement Plan. The term of any long term debt will not exceed a conservative estimate of the useful life of the asset to be financed. The City will include a comprehensive debt repayment plan with any proposed use of long term debt. Resolution 14-042 Exhibit A Page 14 of 20 The City will explore alternative financing mechanisms such as local improvement districts, Washington State Public Works Trust Fund Loans and the Local Option Capital Asset Lending (LOCAL) Program when planning to incur debt. In any proposal to use debt the City shall identify the future operating and maintenance costs associated with the capital improvement to be financed and how those operating and maintenance costs will be paid. REFUNDING BONDS— Refunding bonds are issued to refinance existing bonds to take advantage of lower interest rates. The City will use refunding bonds, where appropriate, when restructuring its current outstanding debt. A debt refunding is a refinance of debt typically done to take advantage of lower interest rates. Unless otherwise justified, such as a desire to remove or change a bond covenant, a debt refunding will not be pursued without a sufficient net present value benefit after expenses. Resolution 14-042 Exhibit A Page 15 of 20 LONG-RANGE FINANCIAL PLAN AND FORECAST FINANCIAL FORECAST—The City will develop a 5-year Financial Plan and Forecast Model(s) based on these Financial Policies and a best estimate of likely revenues and expenditures. The model is to test the policies against likely surrounding economic conditions. The model is to be used for long-range financial planning, along with Budget adjustment, and is not a replacement for budgeting. The purpose of the Financial Planning Policy is to present the city's approach to assessing the future financial impacts of changes in economic conditions, City policies and the funding and operation of City services. Adherence to this policy will ensure that the City manages its finances in a prudent and thoughtful manner that maintains the City's long-term financial health, and considers: Time Horizon: The City's financial planning will look at least six years into the future(current+5). The City may elect to extend its planning horizon further if conditions warrant. Long Range Financial Plan Content and Assumptions: The Long Range Financial Plan (LRFP) should include the following elements. Other elements may be included as needed: 1. Economic Condition. The LRFP should include a discussion of the recent trends in national, state and local economic indicators such as employment totals, unemployment rate and taxable retail sales. 2. City Service Delivery Context. The LRFP should include a presentation of any important legislative or statutory changes, City annexations, service level or service changes and any new or revised agreements for regional service delivery. 3. Revenue. The revenue section of the LRFP should include a presentation of the trends, key assumptions and projections for the City's major revenues of the following areas: • Property Taxes • Sales Taxes • Trend in City sales tax revenue by industry sector. • Trends and projections for new commercial development and related impacts. • Utility Taxes o Projected utility charges by utility type. • Licenses and Permits • Intergovernmental Revenues • Charges for Goods and Services • Fines and Forfeits • Other Revenue Options. EXPENDITURES—The expenditure section of the LRFP should include a presentation of the trends, key assumptions and projections for the City's expenditures. The areas covered by the LRFP's expenditure section should include historical data and projections for the following areas: • Staffing levels and organizational changes. • Personnel cost changes to include: • Wages: cost of living adjustments, step increases, promotions and market adjustments • Wage related benefits including insurance and pensions • Growth and inflationary assumptions. • Impacts of any proposed changes to interlocal service agreements and other major contracts. • Proposed capital investments including impact of the City's proposed Capital Improvement Plan and Equipment Acquisition and Replacement Plan. • Other significant expenses. • Fund Balance. The Fund Balance section of the LRFP should include a presentation of the historical trends and projections in total revenues, total expenses, net revenues and ending fund balance as compared to the Fund Balance and Reserve Level policy targets. • Scenarios. The LRFP should include the results from scenarios that use different assumptions to identify the impact on revenues, expenses, net revenues and ending fund balance. Resolution 14-042 Exhibit A Page 16 of 20 DEBT—The LRFP should include any projected debt service payments and the relationship of debt service to overall expenses and revenues KEY INDICATORS—The LRFP should present trends and projections in key financial indicators, such as: • Revenues and expenses per capita including nominal and inflation adjusted data. • Staffing levels per 1,000 population: total and by major department. • Projected annual growth rates of revenues and expenses including personnel costs. COMPARISIONS—The LRFP may include comparisons to other cities and benchmarks, recognizing that the data for comparable cities may reflect differences in service deliver, financial structure and financial policies. Comparative information may include: Comparative revenues and expenses by major type to include: • Total revenues and expenses per capita. • Taxes per capita by tax source. Resolution 14-042 Exhibit A Page 17 of 20 FINANCE AND BUDGET POLICY GUIDELINES APPENDIX QUICK REFERENCE SUMMARY This section of the Finance and Budget Policy Guidelines is intended as a quick reference for use by City managers in following City financial guidelines and developing City budgets. This section is to serve as an easy to use quick reference, but is not intended to replace or override the policies themselves. PROGRAM AND BUDGET PRIORITIES (Page 2) The City must prioritize its services and, should revenues become constrained, the following services are considered priorities in the following general order: • Public Life, Health and Safety: • police, fire, emergency medical services; building inspections; and traffic control; • water, sewer, and storm drainage service and streets infrastructure maintenance. • Legal Mandates: Accounting/auditing/financial reporting; land-use planning. • City Facilities and Property: maintenance of park land, buildings, public rights of way, and City equipment; information technology; • Council and Community goals, both annual and long-range. ENDING FUND BALANCE, RESERVES, CONTINGENCY SUMMARY (Page 5) The following is a summary of the foregoing reserves guidelines, intended to be reviewed annually as a part of the Budget process: • General Fund .......................................................5-8% of operating revenue (Exclusive of 1% budgeted within Council Contingency) • Library...................................................................5-8% of property tax • Street....................................................................2-3% of expenditures • P.W. Administration..............................................2-3% of expenditures • Community Services ............................................2-3%of expenditures • System Development Charges Fund...................100% of restricted funds Other Special: • Revenue Funds....................................................Sufficient to meet obligations • Contingency .........................................................to 2-3% of operating revenue • Debt Service.........................................................Sufficient to meet obligations • General Capital ....................................................Sufficient to meet obligations • Enterprise Funds..................................................5-8% of operating revenue plus accumulated long-term needs • Internal Service ....................................................2-3% of operating expenditures plus capital replacement needs • Fiduciary Funds....................................................Sufficient to meet obligations The undesignated General Fund Balance (the balance not tied to a known project) will be maintained at a level to provide the City with sufficient working capital and a comfortable margin of safety to address emergencies and unexpected declines in revenue without borrowing. The City should not use the undesignated General Fund Balance to finance recurring operating expenditures. This means annual General Fund revenues should be equal to or greater than annual regular operating expenditures. General Fund revenues will be used for general government, street and parks programs only. General Fund revenues will not be used to subsidize utility or enterprise operations, which will be self- supporting through user rates. REVENUE POLICIES (Page 6) Resolution 14-042 Exhibit A Page 18 of 20 SOURCES OF REVENUE—The City will strive to maintain a diversified and stable revenue system to shelter the government from short-run fluctuations in any one revenue source and ensure its ability to provide ongoing service. Restricted revenue shall only be used for the purposes legally permissible and in a fiscally responsible manner. Programs and services funded by restricted revenue will be clearly designated as such. One-time revenues shall support one-time expenditures. Intergovernmental assistance shall be used to finance only those capital improvements that are consistent with the capital improvement plan and local government priorities, and whose operation and maintenance costs have been included in operating budget forecasts. ENTERPRISE FUNDS (WATER/WASTEWATER/STORMWATER)—Enterprise funds will be operated in a manner that maintains a minimum ending fund balance that is not less than 5-8% of total operating expenditure appropriations. Utilities will be self-supporting through user rates and charges. Utility user charges for each of the City utilities will be cost of service basis (i.e., set to full support the total direct, indirect, and capital costs) and established so that the operating revenues of each utility are at least equal to its operating expenditures and annual debt service obligations. The user rates of a utility shall be designated so that a portion covers replacement of the utility's facilities. Fund balances may be used to temporarily offset rate increases, after sufficient funds have been accumulated for identified capital improvement needs or alternative finding secured. FEES AND CHARGES (Non-Utility)—All fees for licenses, permit, fines, and other miscellaneous charges shall be set to recover the City's expense in providing the attendant service. Average cost methodology may be used. These fees shall be reviewed annually and shared with the Council. The City Council will establish cost recovery policies for all fees and charges. Such cost recovery policies shall consider the relative public/private benefits from the services being provided and/or the desirability of providing access to services for specialized populations. These policies will specify the percentage of full costs (direct and indirect overhead cost recover) to be recovered through the fees or charges. The level of cost recovery may be adjusted periodically by the City Council to ensure that fees and charges are current, equitable, competitive, etc. and cover the percentage of the costs deemed appropriate. Staff shall provide for a periodic evaluation of the City's fees and charges to keep the fees and charges in line with Council-established cost recovery policies. Where the City has authority to set fees and charges, all such fees and charges shall be adjusted annually for inflation based on the change in the Seattle-Tacoma Urban Wage Earners Consumer Price Index for the twelve month period ending June 30, or other applicable index or measure as determined by the City Council. Where direct beneficiaries of a city program or services can be identified, fees will be established to recover the costs of that service or program. Fees are also to protect tax payers from subsidizing special service users. A fee shall be charged for any service that benefits limited interests within the community, except for human needs type services to persons with limited ability to pay. When hazardous materials are spilled and the Fire District's assistance is required to deal with the situation, the City shall require reimbursement for expenses incurred. Some services provide some benefit to the greater community. When a greater community benefit is identified, the City may choose to subsidize, either whole or in part, such service. Resolution 14-042 Exhibit A Page 19 of 20 Rental fees will be established to be comparable to commercial rates, while at the same time recovering full costs of use of the property or facility. PARKS AND POOL FEES (Page 7) As a multi-year goal, the Pool division will strive to recover 50% of Pool costs by generating revenues through special programs, fees, charges, donations and/or designated use of City-operated facilities. Through an aggressive volunteer recruitment program, the Parks shall seek to minimize the subsidy required for partial and minimum fee support programs. Solicitation of funds through donations, fund raising events, non-traditional sources, and various other modes shall be encouraged by the Parks, Recreation and Tree Advisory Board and other advisory committees. Funds collected for any special purpose shall be earmarked for that purpose. OVERHEAD INDIRECT COST RECOVERY(Page 8) Beyond the direct cost-allocations for operating Departments/Funds from Internal Service Funds (Equipment Rental and Replacement, Information Technology and Engineering Services), the City shall also apply charges to Departments/Funds for City-wide overhead indirect cost recovery where allowed (Council, City Manager, City Clerk, City Attorney and Finance), unless determined otherwise by an Overhead Cost Allocation Plan and rate. The City may determine to apply this rate City-wide, or may waive the overhead cost-recovery in all or part if Council determines a general benefit to the taxpayer or utility rate payer. GENERAL EXPENDITURE AND BUDGET POLICIES (Page 9) Operating Budget"Pay-As-You-Go"–The City shall attempt to conduct its operations on a pay-as-you-go basis from existing or foreseeable revenue sources. The control of costs will be emphasized. Achieving pay-as-you-go requires the following practices: current operations, maintenance and depreciation costs to be funded with current revenues; direct and indirect costs of services must be fully identified; and sound revenue and expenditure forecasts must be prepared. The City budget shall balance operation expenditures with operating revenues. The General Fund shall not be balanced with the use of the General Fund balance if to do so would drop the fund balance below 5% of operating revenue. All equipment replacement and maintenance needs for the next five years will be projected and the projection will be updated each year. A maintenance and replacement schedule based on this projection will be developed and followed. Replacement of capital outlay items shall be timed at fairly stable intervals so as not to spend excessively in one year and restricted in the next. The budget should provide sufficient funds for the regular repair and maintenance of all City of Port Townsend capital assets. The budget should not be balanced by deferring these expenditures. Future maintenance needs for all new capital facilities will be fully costed out. SPECIAL REVENUE FUNDS OR SPECIAL PURPOSE TAX USES (Page 10) As Special Revenue Funds or Special Purpose Taxes are established, expenditure expectations and guidelines should also be established consistent with long-term budget and service level sustainability. Library Special Revenue Fund—As Special Revenue Funds with direct property or other dedicated tax allocations are established, expenditure expectations and guidelines should also be established to foster long-term budget and service level sustainability. Resolution 14-042 Exhibit A Page 20 of 20 Public Safety Sales Tax Special Purpose Tax—Pursuant to the authorizing R.C.W. and consistent with the voter approved ballot measure, half of the forecasted annual revenue should be for Police Services (NOT LESS THAN 1/3 per R.C.W.) and half for Youth and Community Services programs or related debt services for such program support. GRANTS MANAGEMENT POLICY(Page 12) City Policy is to seek and accept grants and other financial assistance consistent with the City's vision and goals. Grant relationships are partnerships where the goals of both the City and grantor must be in alignment. The benefits, costs and long-term implications of the partnership must be considered prior to formal application. The City's Grants Management Policy involves six steps: 1. SEARCH –City departments staff and officials are encouraged to actively search out and identify potential grants which may further the City's vision and goals, within the City's financial limitations. 2. PRE-APPLICATION–Department Managers and staff shall pursue grants within their purchasing authority within City Purchasing Policies. The City Manager shall be advised of all grant considerations over a $10,000 total, and a formal Pre-Application Questionnaire may be required for consideration of any grants over$60,000. 3. FORMAL APPLICATION– Formal applications directly by the City, or indirectly by other agencies involving the City, must fall within Departmental Purchasing levels. All grants will seek reimbursement of direct cost departmental and City wide indirect or administrative costs to the maximum extent allowable by the grantor. Grants by other agencies involving the City or by the City involving other grantees must have City Manager, or Council approval beyond the$60,000 Purchasing levels. 4. AWARD AND CONTRACT–Upon formal Notice of Grand Award (NOGA)or informal notification, a written contract must be approved prior to any City commitment, formal or otherwise. All grant contracts must be within the City's Purchasing levels. Any needed budget amendments for grant match not otherwise within general budget authority shall be adopted prior to formal grant acceptance and contract signing. 5. ACCOUNTING AND REPORTING–City departments shall coordinate with Finance to assure that grants comply with Federal, State and local requirements for timely reimbursements, monitoring of vendors and subrecipients, as well as City Purchasing Policies. 6. CLOSE-OUT–Multi-year grants shall have periodic accounting reviews not less than at the close of each fiscal year. Upon conclusion of each grant, the Department grant manager shall prepare a grant close-out report in coordination with the City's Finance Department. A complete grants management file record shall be maintained per City policy, either in the Department, Finance or Clerks Office.