AGENDA MEMORANDUM

 

 

Meeting Date:           July 23, 2007

 

From:                          Bill Pfeilsticker, Finance Director

 

Subject:                      Ordinance amending Sections 2-229, 2-230, 2-231 & 2-232 of the Code of Ordinances substantially changing the Fund Balance Policy

 

 

Staff Recommendation: 

 

Interim City Manager, Finance staff, the Financial Advisor, and all Utility Department Directors recommend adoption of the proposed Ordinance changing the Fund Balance Policy.

 

Analysis:

It is essential that the City maintain adequate cash reserves in its various Governmental and Enterprise Funds to continue to maintain the capacity to: (1) provide sufficient cash flow for daily financial needs, (2) secure and maintain investment grade bond ratings, (3) offset significant economic downturns or revenue shortfalls, and (4) provide funds for unforeseen expenditures related to emergencies.

 

Following input from the Interim City Manager, Finance staff, Utility Department Directors, the Financial Advisor, and Consulting Engineers, the existing Fund Balance Policy was substantially changed to clearly define terminology used in the policy, and to tailor to the particular needs of the City and each respective Utility Enterprise. 

 

To delete ambiguous terminology and best describe the purpose of the policy in layman’s terms, the title was changed from Fund Balance Policy to Cash Reserve Policy.

 

As currently required, all calculations of minimum cash reserves will continue to be calculated using the current fiscal year budget adopted by ordinance.

 

The Governmental (General) Fund required minimum cash reserve remains unchanged at 20% of the adopted current budget.

 

The Sanitation, Communications, Water and Wastewater Utility Funds each require minimum cash reserves equaling 25% of the adopted current budget.

 

For the Electric Utility Enterprise, the minimum cash balance level will be determined by the following formula: Total Revenues - (Cost of purchased power + Operating Transfers to the General Fund + Cost of Surcharge Transfers) / 365 days X 120 days. 

 

For the Gas Utility Enterprise, the minimum cash balance level will be determined by Total Revenues - (Cost of purchased gas + Operating Transfers to the General Fund + Cost of Surcharge Transfers) / 365 days X 90 days. 

 

For the Electric and Gas Utilities, the reserve shall be in addition to all other Enterprise Fund Cash Reserves, including but not limited to amounts reserved for debt service and/or amounts reserved for Renewal and Replacement of long lived assets, and shall not include any impact fees or capital contributions from developers.

 

This draft policy was reviewed by Moody’s, Fitch Ratings, and Standard and Poor’s, prior to their release of ratings.  Each rating agency cited this revised fund balance/cash reserve policy as a significant  reason for their improved outlook on Leesburg’s finances.

 

Options:

1.  Adopt the Ordinance as proposed; or,

2.  Such alternative action as the Commission may deem appropriate

 

Fiscal Impact:  There will be no expenses incurred as a result of adoption of this policy.    Required minimum unrestricted Cash Reserves will be required for all funds, adding to the financial health of the City.  Definition of Cash Reserves is specific so the calculation of minimum levels cannot be manipulated.  The policy requires continued analysis of cash reserves in all funds and prompt action when funds fall below minimum levels.

 

Submission Date and Time:    8/8/2007 4:38 PM7/19/2007 10:48 AM____

 

Department: ______________________

Prepared by:  ______________________                     

Attachments:         Yes____   No ______

Advertised:   ____Not Required ______                     

Dates:   __________________________                     

Attorney Review :       Yes___  No ____

                                                

_________________________________           

Revised 6/10/04

 

Reviewed by: Dept. Head ________

 

Finance  Dept. __________________                                     

                              

Deputy C.M. ___________________                                                                         

Submitted by:

City Manager ___________________

 

Account No. _________________

 

Project No. ___________________

 

WF No. ______________________

 

Budget  ______________________

 

Available _____________________

 

 

 


 

ORDINANCE NUMBER ______

                                                                                              

 

AN ORDINANCE OF THE CITY COMMISSION OF THE CITY OF LEESBURG, FLORIDA; AMENDING SECTIONS 2-229, 2-230, 2-231, AND 2-232 OF THE CODE OF ORDINANCES OF THE CITY OF LEESBURG, FLORIDA HEREINAFTER REFERRED TO AS THE CASH RESERVE POLICY; REPEALING CONFLICTING ORDINANCES INCLUDING ORDINANCE 00-34; PROVIDING A SAVINGS CLAUSE; AND PROVIDING AN EFFECTIVE DATE

 

 

                 WHEREAS, the City Commission, in and for the City of Leesburg, Florida, hereinafter referred to as Commission, endorses sound financial policies and practices; and

 

                 WHEREAS, the Commission has determined that an amended fund balance/retained earnings reserve policy, hereafter referred to as the Cash Reserve Policy, following input from its Staff, Financial Advisor, and Consulting Engineers, tailored to the particular needs of the City and each respective Utility Enterprise, is the most responsible way to provide resources for unanticipated events which could adversely affect the financial condition of the City and jeopardize the continuation of necessary public services; and,

           

                 WHEREAS, it is essential that the Commission maintain adequate cash reserves in its various Governmental and Enterprise Funds to continue to maintain the capacity to: (1) provide sufficient cash flow for daily financial needs, (2) secure and maintain investment grade bond ratings, (3) offset significant economic downturns or revenue shortfalls, and (4) provide funds for unforeseen expenditures related to emergencies; and,

 

                 WHEREAS, the Commission has heretofore had a formally adopted fund balance/retained earnings reserve policy, and desires by the means of this ordinance to replace its existing Ordinance 00-34;

 

                 NOW THEREFORE, BE IT ENACTED BY THE PEOPLE OF THE CITY OF LEESBURG, FLORIDA:

 

SECTION I

 

Sections 2-229, 2-230, 2-231and 2-232 are hereby amended to the Code of Ordinances of the City of Leesburg, Florida, to read as set forth below:

 


 Section 2-229.  Creation of a Cash Reserve Policy.

 

 Cash Reserve Policy

 

Purpose:

 

For increased financial stability, the City of Leesburg desires to manage its financial resources by establishing  cash balance ranges for selected funds.   This will ensure the City maintains a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of temporary revenue shortfalls or unexpected one-time expenditures.

 

Definitions:

 

Cash Reserve:  The minimum acceptable level of unrestricted operating cash specifically set aside and classified in a separate cash reserve account as defined under section 2-229 Creation of Cash Reserves.

 

Cash Balance Range:  Cash Balance Range is the range of amounts this policy has set within which the City means to maintain minimum Cash Reserves.  The floor of the range is equal to the minimum acceptable level of unrestricted operating cash with the ceiling of the upper range equal to 115% of the minimum acceptable level  as defined under section 2-229.

 

Surplus:  Surplus is the amount of cash that exceeds 115% of the minimum acceptable level of Cash Reserve.

 

Shortfall:  Shortfall is the amount by which the lower limit of the Cash Balance Range falls below the minimum Cash Reserve.

 

Renewal and Replacement:   Expenditures, usually capital in nature and not related to capital expansion, required for ongoing repair and replacement of equipment for operations.

 

Expenditures:  Expenditures are all uses of financial resources, budgeted for any purpose, and include operating and capital expenses, debt service, and transfers to other funds.

 

Operating Expenditures:  Operating expenditures are uses of financial resources for personnel, supplies, services and materials, and exclude capital expenses, debt service, and transfers to other funds.

 

Section 2-229. Creation of Cash Reserves.

 

There is hereby created, in each of the various governmental funds (general fund, special revenue funds, debt service funds, and capital projects funds) and proprietary funds (enterprise funds and internal service funds) of the City, a Cash Reserve equal to the following:

 

A.                 General Fund – In the general fund, there shall be created a Cash Reserve equal to 20% of the current fiscal year budget for that fund.  For the purposes of this calculation, the current fiscal year budget shall be the budget as originally adopted by ordinance.  This reserve shall be in addition to all other reserves as may be required to account for special revenue activity or other activity that may require a restriction of cash.  In any fiscal year when the City is unable to create the Cash Reserve  as required by this section, the City shall (a) not budget any amount of fund balance for the purpose of balancing the budget and (b) have its City Manager identify in a written plan to the Commission how to reach this minimum fund balance level within 24 months.

 

B.                 Special Revenue Funds – By definition, special revenue funds are created to account for the proceeds of specific revenue sources (other than expendable trusts or for major capital projects) that are legally restricted to expenditure for specified purposes.  As such, no specific reservation of cash is created by virtue of enactment of this ordinance; rather the amount of any reservation of cash shall be governed by the legal authority underlying the creation of the individual fund.

 

C.                 Debt Service Fund – Debt service funds are typically subjected to the creation of very specific reserve amounts as a part of the ordinance or resolution which authorizes the issuance of the bonds which are being repaid.  Therefore, this policy does not create any specific reservation of cash within the debt service fund; rather, reserve requirements for any outstanding City bond issues will be as derived from the ordinance or resolution authorizing the issuance of the bonds.

 

D.                Capital Projects Fund – The capital projects fund was created to account for resources designated to construct or acquire general fixed assets and major improvements.  Occasionally, these projects may extend beyond a single fiscal year.  Therefore, although no specific reserve requirement is established for the capital projects fund, at a minimum, the fiscal year end Cash Balances, coupled with estimated revenues for the subsequent fiscal year and any City Commission authorized financing, must be sufficient to fund all outstanding Capital Project fund obligations.

 

E.                 Enterprise Funds – The City has created a total of 6 (six) enterprise funds to account for the following utility services:  electric, natural gas, sanitation services, communication services, water and wastewater treatment.  In each of the enterprise funds now or hereafter created by the Commission, with the exception of the Electric Utility Fund and Gas Utility Fund, there shall be created a reservation of cash equal to 25% of the current fiscal year budget for that fund.  For the Electric Utility Enterprise, the minimum cash balance level will be determined by the following formula; Total Revenues - (Cost of purchased power + Operating Transfers to the General Fund + Cost of Surcharge Transfers) / 365 days X 120 days.  For the Gas Utility Enterprise, the minimum cash balance level will be determined by Total Revenues - (Cost of purchased gas + Operating Transfers to the General Fund + Cost of Surcharge Transfers) / 365 days X 90 days.  For the purposes of this calculation, the current fiscal year budget shall be the total budget as originally adopted by ordinance. This budget shall be prepared on the modified accrual basis of accounting and therefore includes such items as capital outlay and operating transfers out. This reserve shall be in addition to all other Enterprise Fund Cash Reserves, including but not limited to amounts reserved for debt service and/or amounts reserved for Renewal and Replacement of long lived assets, and shall not include any impact fees or capital contributions from developers.

 

F.                  Internal Service Funds – The City has created two internal service funds to account for employee health benefits coverage, and workers’ compensation coverage.  There is hereby created within each of the internal service funds, a reservation of cash in an amount necessary to ensure that cash in the fund as of the end of each fiscal year is greater than or equal to zero. This reserve shall be in addition to all other reservations of cash, including but not limited to amounts reserved for claims incurred but not paid in the Health Care Coverage Fund and the Workers’ Compensation Fund.  By definition, internal service funds are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the City, or to other governmental units, on a cost-reimbursement basis.  Consequently, these funds are generally intended to operate on a break even basis. Therefore, in any fiscal year when it is projected that the actual amount of cash will be less than or equal to zero at year end, it will be necessary to either increase the rates charged or reduce expenses or both. 

           

Section 2-230.  Utilization of Surplus Cash.              If it is determined that there is a surplus (surplus is defined as the amount of cash that exceeds 115% of the minimum acceptable level of Cash Reserve) the surplus funds can be designated or appropriated at the next quarterly budget amendment as presented by the City Manager and approved by the City Commission, for the following purposes:

 

1.      Eliminate shortfalls in related funds.  Any General Fund surplus may be transferred to cover shortfalls within any other fund initiated by the City to provide City services.  Any Utilities Enterprise Operating Fund surplus may be transferred to the respective R & R Fund to cover shortfalls or be presented by the City Manager to the City Commission for any additional proposed Capital Expenditures on a pay-as-you-go basis.

 

2.      Reduction or avoidance of debt.  If there is short-term debt within the fund, the surplus may be applied to reduce or eliminate the debt if financial analysis by  the City Manager proves this to be advantageous for the City.  If a borrowing is scheduled, the surplus may be used to reduce the principal amount the City needs to obtain if financial analysis by the City Manager proves this to be advantageous for the City.

 

3.      Applied to a renewal and replacement program.  Surplus funds may be used to supplement or enhance a capital replacement program such as vehicle, personal computer, or heavy equipment replacement, or any other capital replacement program initiated by the City Manager and approved by the City Commission.

 

4.      One-time capital needs.  Since a surplus may not represent a recurring source of revenue, it should not be used to fund a recurring expense; however, if a one-time capital expenditure requirement has been identified by the appropriate City Director and City Manager has agreed, but not already funded through an appropriation, the surplus may be appropriated for this use as approved by the City Commission.

 


5.      Tax, fee, or rate stabilization.  Surplus funds may be designated for deposit to a utilities rate stabilization fund or another respective fund account in order to avoid raising taxes, fees, or rates related to the fund in subsequent years.

 

The amount of cash that falls within the cash balance range, the minimum level of unrestricted operating cash up to 115% of the minimum level, will be maintained within the fund to cover any unexpected annual requirements that may be needed as determined by the City Manager and notified to the City Commission in writing.

 

Section 2-231.  Replenishment of Cash Reserve Deficits. If it is determined there is a shortfall at any fiscal quarter end, (an amount below the minimum level of the fund balance range for any fund), the fund balance or reserve deficit is to be rebuilt through the following mechanisms in order of priority:

 

1.      Distribution of surplus from other related funds within the General Fund, or respective Utility Enterprise Fund, as delineated under “Surplus” category, if available.

 

2.   An appropriation during the next available budget amendment time period or the annual budget process until the required fund balance limit has been reached.  If this is financially infeasible, a written plan shall be forwarded to the City Commission within 90 days following the identification of the reserve fund deficit by the City Manager, for City Commission approval in order to restore the fund balance to an amount within the range within a maximum 24 month time frame.  This plan may require a reduction of services, reduction in administrative or general fund transfers, an increase in taxes, fees, rates, or some combination thereof.

 

Section 2-232.  Annual Review Compliance with the provisions of this ordinance shall be reviewed as a part of the annual budget adoption process, and then on a quarterly basis following receipt of a fiscal quarter un-audited financial statement.  The City’s Finance Director, Budget Director and City Manager will prepare a written report to the Commission identifying each fund’s required fund balance, actual fund balance as of the prior fiscal year end and quarter end, and projected fund balance at the end of the submitted budget’s fiscal year end.

 

SECTION II

 

If any portion of this ordinance is declared invalid or unenforceable, then to the extent it is possible to do so without destroying the overall intent and effect of this ordinance, the portion deemed invalid or unenforceable shall be severed herefrom and the remainder of this ordinance shall continue in full force and effect as if it were enacted without including the portion found to be invalid or unenforceable.

 

SECTION III

 

All ordinances or parts of ordinances which are in conflict with this ordinance are hereby repealed, to the extent necessary to alleviate the conflict, but shall continue in effect insofar as they are not in conflict herewith, unless repeal of the conflicting portion destroys the overall intent and effect of any of the conflicting ordinances, in which case those ordinances so affected shall be hereby repealed in their entirety.

 


SECTION IV.

 

This ordinance shall take effect on October 1, 2007.

 

 

            PASSED AND ADOPTED at the regular meeting of the Leesburg City Commission as held on the __23rd____ day of July, 2007.

 

 

 

 

 

 

 

 

 

 

THE CITY OF LEESBURG

 

 

By:

 

 

Sanna Henderson

Mayor

 

Attest:

 

 

 

 

 

 

 

Betty Richardson

City Clerk