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HomeMy WebLinkAbout(0016) Proprietary Fund Reserve Policy Eff 10-1-20 Final.PDFFORT WORTH. Proprietary Fund Reserve Policy I. Authority: The Fort Worth City Council is responsible for legislation, policy formulation, and overall direction setting of the government. This includes the approval of financial policies that establish and direct the operations of the City of Fort Worth. The City Manager and Assistant City Managers are responsible for carrying out the policy directives of the City Council and managing the day-to-day operations of the executive departments, including the Department of Financial Management Services. This policy shall be administered on behalf of the City Manager and Assistant City Managers by the Chief Financial Officer/Director of Finance. II. Purpose: The City desires to maintain a prudent level of financial resources to guard its stakeholders against service disruption in the event of unexpected temporary revenue shortfalls or unpredicted one-time expenses. In addition, this policy is intended to document the appropriate Reserve level to protect the City's creditworthiness and provide adequate cash flow based upon the traditional operating cycle. The Government Finance Officers Association's (GFOA) best practice for reserves recommend, at a minimum, regardless of size, maintain an unrestricted net position of no less than two months of regular operating revenues or operating expenses. Reserves are accumulated and maintained to provide stability and flexibility to respond to unexpected adversity and/or opportunities and to minimize the costs associated with short-term cash borrowing. This policy establishes the amounts the City will strive to maintain in its Proprietary Fund Reserves, how the Reserve will be funded, and the conditions under which the Reserves may be used. This policy is intended to supplement, but not supersede, provisions of ordinances of the City governing the issuance or incurrence of bonds or other obligations secured in whole or in part by revenues or credited to a Proprietary Fund. III. Applicability and Scope: This policy shall apply to all Proprietary Funds under the budgetary and fiscal control of the City Manager and the City Council. IV. Related Documents and References: A. Operating and Capital Budget Policy B. Long -Term Financial Planning Policy IIPage Proprietary Fund FORTWORTHe �r Reserve Policy C. Capital Asset Investment and Management Policy 21Page FORT WORTH. Proprietary Fund Reserve Policy V. Policy: Enterprise Funds Reserve Levels - The City will maintain the following goal reserve levels in each Enterprise Fund, consistent with State law and the terms of ordinances pursuant to which obligations have been issued or incurred that are secured in whole or in part by revenues held in or credited to an Enterprise Fund: 1. A goal of Working Capital in Enterprise Funds equivalent to three months (25%) of the next fiscal year budgeted operating expenses, excluding intrafund transfers out to funds within the same reporting group (e.g. transfer out from Water and Sewer Operating Fund to its Capital Fund). This calculation sh, operating fund only. Projects Fund or Debt Service 11 be performed against the 2. A Reserve of 100 Days cash on hand with a goal of 150 Days Cash on Hand. This calculation shall be performed against the operating fund only on Generally Accepted Accounting Principles (GAAP - Full Accrual) basis. 3. The City's goal is that no Enterprise Fund shall have a negative Unrestricted Net Position. This calculation shall be performed by using all of the funds for the respective reporting group. 4. In addition, the City acknowledges that initially, not all funds will meet the minimum requirement for Working Capital and/or Days Cash on Hand outlined in this policy. A fund will be considered compliant with this policy as long as the financial position shows continuous improvement each fiscal year. 31Page FORT WORTH. Proprietary Fund Reserve Policy Internal Service Funds Reserve Levels for Internal Service Insurance Funds - The City will maintain the following minimum reserve levels in all Internal Service Insurance Funds: 1. A goal of Working Capital in Insurance Funds three months (25%) of the next fiscal year budgeted operating expenses, excluding intrafund transfers out to funds within the same reporting group (e.g. transfer out from Water and Sewer Operating Fund to its Capital Projects Fund or Debt Service Fund). This calculation shall be performed using the operating fund only. 2. No Insurance Fund shall have a negative Unrestricted Net Position. This calculation shall be performed by using all of the funds of the respective reporting group of the specific insurance related internal service fund. 3. In addition, the City acknowledges that initially, not all funds will meet the minimum requirement for Working Capital outlined in this policy. A fund will be considered compliant with this policy as long as the financial position shows continuous improvement each fiscal year. Reserve Levels for Non -Insurance Internal Service Funds - The City will maintain the following minimum reserve levels in all Internal Service Insurance Funds: 1. A goal of Working Capital in Non -Insurance Internal Service Funds equivalent to ten percent (10%) of the next fiscal year budgeted operating expenses, excluding intrafund transfers out to funds within the same reporting group (e.g. transfer out from Water and Sewer Operating Fund to its Capital Projects Fund or Debt Service Fund). This calculation shall be performed using the operating fund only. 2. No Internal Service Fund shall have a negative Unrestricted Net Position. This calculation shall be performed by using all of 41Page FORT WORTH, Proprietary Fund Reserve Policy the funds for the respective reporting group funds of the specific non -insurance related internal service fund. 3. In addition, the City acknowledges that initially, not all funds will meet the minimum requirement for Working Capital outlined in this policy. A fund will be considered compliant with this policy as long as the financial position shows continuous improvement each fiscal year. VI. Monitoring Performance: A. For purposes of this calculation, Working Capital will include long-term investments that can be liquidated within five business days. The City will measure its compliance with this policy on an annual basis as of September 30t" each year or as soon as practical after final fiscal year-end financial information becomes available. During the fiscal year, the Financial Management Services and Planning & Data Analytics departments shall closely monitor the City's revenues and expenses to ensure Reserves are not used beyond any planned usage. S. If, based on staff's analysis and forecasting, the target level of Reserves is not met at fiscal year-end or is not likely to be met at any point within a five-year time horizon, then during the annual budget process a plan to replenish the Reserve levels will be developed by collaboration among affected departments and the Financial Management Services and Planning & Data Analytics departments based on the requirements outlined in this policy. C. Funding the Reserve - Funding of Reserve targets will generally come from excess revenues over expenditures or one-time revenues, non -recurring revenues, and budget surplus. Year-end surpluses are an appropriate source for replenishing fund balance. D. Periodic Review of the Targets - At a minimum, during the annual financial planning/budget process staff shall review the current and five-year projected Reserves to ensure that they are appropriate given the economic and financial risk factors the City is subject to. VII. Conditions for Use of Reserves: The City intends to limit use of Proprietary Reserves to address unanticipated, non- recurring needs. Reserves shall not be applied to recurring annual operating expenses. Reserves may, however, be used to allow time for the City to restructure 51Page FORT WORTH, Proprietary Fund Reserve Policy its operations deliberately (as might be required in an economic downturn), but such use will only take place in the context of an adopted long-term plan. VIII. Excess of Reserves: In the event Reserves exceed the minimum balance requirements, at the end of each fiscal year, any excess Reserves may be used in the following ways: 1. Fund accrued liabilities, including but not limited to debt service, pension, and other post -employment benefits as directed and approved within the long-term financial plan and the annual budget ordinance. Priority will be given to those items that relieve budget or financial operating pressure in future periods; 2. Appropriated to lower the amount of bonds or increase the pay-as-you-go contributions needed to fund capital projects in the City's Capital Improvement Plan; 3. One-time expenses that do not increase recurring operating costs that cannot be funded through current revenues. Emphasis will be placed on one-time uses that reduce future operating costs; or 4. Start-up expenses for new programs, provided that such action is approved by the City Council and is considered in the context of multi -year projections of revenue and expenses as prepared by the Department of Finance. IX. Authority over Reserves: The City Council may authorize the use of Reserves. The Financial Management 61Page FORT WORTH, Proprietary Fund Reserve Policy Services and Planning & Data Analytics departments will regularly report both current and projected Reserve levels to the City Manager and City Council. X. Quality Control and Quality Assurance: It is the responsibility of the Chief Financial Officer/Director of Finance to ensure the presence of procedures that provide sufficient guidance to affected City personnel to fulfill the intent of this policy. This policy will be reviewed at least annually and updated on an as-neededbasis. XI. Basis: Generally Accepted Accounting Principles (GAAP - Full Accrual) basis is use for calculating the reserve level for Proprietary Funds Reserve. 7 1 P a g e 51Page