City of Rock Hill Financial Policies 2016 What are Financial - - PDF document

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2016

City of Rock Hill Financial Policies

What are Financial Policies?

Financial Policies are a method of institutionalizing good financial management practices in the organization. They clarify and crystallize the strategic intent for financial management These policies are intended to help manage risks to financial condition and are a key component of ensuring a government does not incur excessive risk in the pursuit

• f public goals

Financial policies are used by a governing board and executive management to set the baseline standards for how the organization will be managed financially Financial policies are central to a strategic, long-term approach to financial management. The strategic intent articulated by many financial policies necessarily demands a long-term perspective from the organization

Why Adopt Financial Policies?

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The City of Rock Hill has developed a comprehensive set

• f financial policies that are consistent with the City’s

goals and objectives. Financial policies are an integral part of the development of service, capital, and financial plans and the budget. They provide the basis for decision-making and continue Rock Hill’s tradition of financial stability.

Why Adopt Financial Policies?

The following steps should be considered in the development of effective policies. 1.

Define the problem the policy will address. 2. Draft the policy. Be aware of legal requirements and consider public comments. Look at the experience of peer governments. 3. Review and present the policy to government officials. 4. Formally consider and adopt policy. 5. Implement policy making sure that staff and government

• fficials are aware of policies

Development of Policies

Effective polices have a number of design features in common.

1. Policies must exist in written form 2. Policies should be expressed in a manner that is understandable to the intended audiences. 3. Policies should be made available to all stakeholders, and be published in more than one medium with multiple means of access. 4. Policies should address all relevant issues and risks for that specific policy in a concise fashion.

Design of Policies

3 Financial Policies

Current Assets - Current Liabilities = Fund Balance It’s the government’s working capital A measure of resources immediately available to finance ongoing operations

What is Fund Balance? Why maintain a Fund Balance?

 To smooth Cash Flow resulting from revenue cycles  As an alternative to Tax Anticipation Notes and associated expenses  To maintain a stronger Credit Rating.  To weather Revenue Shortages (i.e. natural disasters

• r economic downturns)

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 To limit Exposure to Risk  To provide Flexibility  Unanticipated Economic Downturns  One-time Opportunities

Why maintain a Fund Balance? Factors affecting Fund Balance

 Ratio of Personnel Expenses to total budget  Vulnerability To Natural Disasters and resulting cost  Desired Creditworthiness

How much is the Right Amount?

There is no “One Size Fits All” level of fund balance that is appropriate for all cities Many factors affect how much a city should maintain in its General Fund Analyze the Weaknesses, Risks, and Financial Goals of your city or town GFOA recommends that cities no matter the size maintain an Unassigned Fund Balance (General Fund) of at least 2-Months operating revenue or expenditures

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Assuming an even proration of revenues and expenditures throughout the year, a minimum fund balance of 17% (2/12th) would be necessary to meet the GFOA’s recommendation An average city with diverse revenues needs 18-20%

• f budget in available cash to bridge cash flow gaps

from July-November

How much is the Right Amount? A Fund Balance Policy Should…

 Establish the minimum funding on factors such as:

• cash flow
• disaster potential
• revenue diversity
• economic factors

 Tie minimum balance to % of budget so it grows without additional authorization

Things to consider

 Historically how revenues are received and expenditures paid  The impact of revenue and expenditure patterns on cash flow  Peak cash flow needs in recent years  On top of that, how much cash do you need for emergencies during peak cash flow needs?

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Things to consider

 Assess the risks that could occur during the period of time when your city’s need for cash on hand is at its greatest  Fund Balance level impacts your city’s credit rating  The interest cost of borrowing money to maintain positive cash flow in the absence of adequate funds  Potential impact on operations if expenditures must be delayed until the inflow of revenue is sufficient

Things to consider

 Objective consideration of these factors should enable Council to determine an adequate level of fund balance  Once that is done, the key is establishing a policy to ensure that the necessary level of fund balance is achieved and maintained

The City will maintain stabilization funds at levels sufficient to protect the City’s credit as well as its financial position from emergencies.

It is the goal of the City of Rock Hill to maintain a General Fund Balance equal to at least 15% of the total audited General Fund expenditures from the previous fiscal year and to maintain Enterprise Fund Unrestricted Net Assets equal to at least 20% of total Enterprise Fund operating expenses for the previous fiscal year.

FP 1: Fund Balance

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The City will design, maintain and administer a revenue system that will assure a reliable, equitable, diversified and sufficient revenue stream to support desired City services

The City uses the following goals to accomplish this policy:

• establish all user charges at a level related to the full costs of

providing the service

• identify all costs even if the City chooses not to recover all costs –

reasons for not recovering full costs should be identified and explained

• consider market rates and charges levied by other business and

municipalities for like services in establishing rates, fees, and charges

FP 2: Revenue

The City will design, maintain and administer a revenue system that will assure a reliable, equitable, diversified and sufficient revenue stream to support desired City services

The City uses the following goals to accomplish this policy:

• one-time or special revenues shall not be used to finance ongoing

City operations

• maintain an aggressive policy of seeking the collection of

delinquent utility and license fee accounts

• solicit citizen input for decisions relating to revenues
• be conservative in determining revenue projections

FP 2: Revenue

The City will annually review its revenue source to maintain a diversified revenue base.

The City will identify approaches that will be used to improve revenue diversification including:

• analyze the sensitivity of revenues to changes in rates
• analyze the fairness of the tax or fee
• analyze administrative aspects of the revenue source
• other relevant issues

FP 3: Diversified Revenue Base

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The City will limit the use of one-time revenues to pay for ongoing expenditures of the government.

One-time revenues include but are not limited to:

• Infrequent sales of government assets
• Bond refunding savings
• Infrequent revenues from development
• grants

Any use of revenue that adds to the ongoing expenditure base will be carefully reviewed and minimized (capital funds that increase operating expenses)

FP 4: Use of One Time Revenue

The City will annually evaluate all revenues, determine those that are considered to be unpredictable, and determine the best use of those revenues.

FP 5: Revenue Classification

For each major unpredictable revenue source, the City will:

• identify those aspects of the revenue source that make the revenue

unpredictable

• identify the expected or normal degree of volatility of the revenue source
• decide, in advance, on a set of tentative actions to be taken if these revenue

sources generate revenues substantially higher or lower than projected The plans should be publicly discussed and used in budget decision-making.

Enterprise Fund Transfers

A fund is a separate fiscal and accounting entity with its own self-balancing set of accounts; its own assets, liabilities, and equity; and its own revenues and expenditures. An interfund transfer is a budgeted movement of money from one fund to another with the money shown as revenue in the receiving fund and as an expenditure in the fund from which the revenue is transferred

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It is common for municipalities that own and

• perate public utilities to transfer resources from

their utility enterprise fund to their general fund. In South Carolina, the courts have in the past stated that a municipal utility is a business enterprise that may lawfully be used by the municipality to reduce tax burdens on its residents.

Enterprise Fund Transfers Enterprise Fund Transfers Enterprise Fund Transfers

It is common for cities with public utilities to assess a fee in lieu of franchise on their utility and to charge the utility for administrative services provided by the general fund These assessments do not appear improper at present. However, that could change depending on the final outcome of the Azar case. Consult your attorney and make sure that these, or similar, arrangements are adopted by council as a financial policy of the city and that objective formulas and actual expenses are used to calculate amounts transferred.

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The City will quantify operating transfers from the utility system to cover general fund expenses.

City Council has determined that the City needs to maintain the competitiveness of the utility system and to reduce the General Fund’s need for Utility Fund transfers. In quantifying these transfers, the City uses a formula that presupposes what utility services would have been provided by a privately‐owned utility instead of the City’s publicly owned utility. Transfers should be established at a level supportable by current utility business practices.

FP 6: Operating Transfers

The City will quantify operating transfers from the utility system to cover general fund expenses.

FP 6: Operating Transfers

Policy guidelines regarding franchise fees, payments in lieu of taxes, rate of return and operating transfers from the utility system:

• Franchise Fees - The City shall budget annually a franchise fee from the

Utility Fund that equals the franchise fee that would have been paid had electric, water and sewer services been provided by an investor‐owned utility.

• Payment in Lieu of Taxes - The City shall budget annually a payment in

lieu of taxes from the electric, water, and sewer systems to the General Fund that approximates the amount of ad valorem taxes that would have been paid had utility services been provided by an investor‐owned utility.

The City will quantify operating transfers from the utility system to cover general fund expenses.

FP 6: Operating Transfers

Policy guidelines regarding franchise fees, payments in lieu of taxes, rate of return and operating transfers from the utility system:

• Rate of Return - The City may budget annually a rate of return
• n the gross operational revenues of the electric, water and sewer systems.
• Exceptions - The amount to be paid from the electric, water and sewer

systems under this resolution may be increased or reduced upon approval

• f the City Council.

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City staff will provide to the City Council a report on the operating results of The City.

All excess revenue collected that exceeds the projected budget revenue figure from a specific revenue category for each fiscal reporting period must be reported to City Council on a monthly basis. All expenditures that exceed the projected budget expense figures in excess of $5,000 on a departmental level must be reported to City Council.

FP 7: Operating Transfers

The City will annually adopt a Balanced Operating Budget.

• The City of Rock Hill annual budget appropriation will cover the

twelve-month period Beginning July 1 and ending June 30.

• Any required public hearing will be scheduled to receive input; special public

hearings are required to consider the issue of tax increase.

• Budgets are prepared at the department level.
• The budget will be developed in conjunction with a stated program of

performance objectives and measures.

FP 8: Adoption of a Balanced Budget

• Current appropriations in all funds are limited to the sum of available,

unencumbered cash balances and revenues estimated to be received in the current budget period.

The City will annually adopt a Balanced Operating Budget.

FP 8: Adoption of a Balanced Budget

• General Fund expenditures and subsidy appropriations for mandated

and priority programs are to be made against current revenue sources, and not dependent upon uncertain reserves or fluctuating prior period cash balances.

• Special Revenue Funds are supported by special levies and fees,

grants or intergovernmental revenues. Expenditures in these funds are:

• strictly limited to the mandates of the funding source
• not to be used to subsidize other funds, except as required
• r permitted by program regulations

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The City will annually adopt a Balanced Operating Budget.

FP 8: Adoption of a Balanced Budget

• All operations of the Enterprise Fund will be self‐supporting entities.
• Multi‐year operating cost projections shall be prepared and updated

each year to identify the impact on resources.

• A ten‐year Capital Improvements Program shall be prepared and

updated each year.

• For purposes of this policy, the cash basis of accounting are used in defining

revenues and expenditures.

• It will be the duty of the City Manager to take action to bring the budget

into balance if adjustments are needed in the course of a fiscal period.

The City will identify priority services, establish appropriate service levels, and administer the expenditure of available resources to assure fiscal stability and the effective and efficient delivery of services.

• The City will operate on a current funding basis.
• Immediate corrective actions will be taken if at any time during the fiscal

year expenditure and revenue re-estimates are such that an operating deficit is projected at year‐end.

• The Finance Director is charged with performing periodic staff and

third‐party reviews of City programs for both efficiency and effectiveness.

• Every effort will be made to maximize any discounts offered by creditors and

vendors.

FP 9: Delivery of Services

The City will adhere to a debt policy that ensures that debt is issued and managed prudently in

• rder to maintain a sound fiscal position and

protect credit quality.

Debt policy sets forth the parameters for issuing debt and managing

• utstanding debt and provides guidance to decision makers regarding the

timing and purposes for which debt may be issued, types and amounts of permissible debt, method of sale that may be used and structural features that may be incorporated. Adherence helps to ensure that the City maintains a sound debt position and that credit quality is protected.

FP 10: Debt Policy

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Components of a good Debt Policy:

• Capital Planning
• Financing Planning
• Term of Debt Repayment
• Call Provisions
• Interest Rate
• Method of Sale

FP 10: Debt Policy

• Competitive Sales
• The market is familiar with the issuer.
• The issuer is a stable and regular borrower in the public

market.

• There is an active secondary market with a broad investor

base for the City’s bonds.

• The issue has a non‐enhanced credit rating of A or above
• r can obtain a credit enhancement prior to the competitive

sale. Conditions favoring the use of a competitive sale:

FP 10: Debt Policy

Components of a good Debt Policy:

• The debt structure is backed by the issuer’s full faith and

credit or a strong, known or historically performing revenue stream.

• The issue is neither too large to be easily absorbed by

the market nor too small to attract investors without a concerted sale effort.

• The issue does not include complex or innovative features or

require explanation as to the bonds’ security. Conditions favoring the use of a competitive sale (cont.):

FP 10: Debt Policy

Components of a good Debt Policy:

• Interest rates are stable, market demand is strong, and

the market is able to absorb a reasonable amount of buying or selling at reasonable price changes.

• The issue can be sold and closed on a schedule that

does not need to be accelerated or shortened for market or policy reasons.

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• Negotiated Sales

Conditions favoring the use of a negotiated sale:

• Ensure fairness by using a competitive underwriter selection

process through a request for proposals where multiple proposals are considered.

• Remain actively involved in each step of the negotiation and

sale processes to uphold the public trust.

• Insure that either an employee of the issuer, or an outside

professional other than the issue underwriter, who is familiar with and abreast of the condition of the municipal market, is available to assist in structuring the issue, pricing, and monitoring sales activities.

FP 10: Debt Policy

Components of a good Debt Policy:

• Require that the financial advisor used for a particular bond

issue not act as underwriter of the same bond issue.

• Negotiated Sales

Conditions favoring the use of a negotiated sale:

FP 10: Debt Policy

Components of a good Debt Policy:

• Require that financial professionals disclose the name or names of any

person or firm, including attorneys, lobbyists and public relations professionals compensated in connection with a specific bond issue.

• Review the “Agreement among Underwriters” and insure that it is

filed with the issuer and that it governs all transactions during the underwriting period.

• Request all financial professionals submitting joint proposals or intending

to enter into joint accounts or any fee‐splitting arrangements in connection with a bond issue to fully disclose to the issuer any plan or arrangements to share tasks, responsibilities and fees earned, and disclose the financial professionals with whom the sharing is proposed, the method used to calculate the fees to be earned, and any changes thereto. Conditions for Refinancing

• Debt Service Savings
• Defeasance
• Conduit Financings

FP 10: Debt Policy

Components of a good Debt Policy:

• Rating Agency Relationships
• Quality of Ratings
• Rebate Reporting/Covenant Compliance/Reporting Practices

Credit Ratings

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Checklist of Debt Policy Considerations

• 1. How long is the capital planning period?
• 2. Have all non-debt sources of funds been considered?
• 3. How are borrowing plans reviewed internally?
• 4. What level of debt is manageable in order to maintain or improve

the government’s credit quality?

• 5. How much “pay-as-you-go” financing should be included in the

capital loan?

• 6. How much short-term borrowing will be undertaken, including both
• perating and capital borrowings?

FP 10: Debt Policy

Checklist of Debt Policy Considerations

7. How much debt will be issued in the form of variable-rate securities? 8. How does the redemption schedule for each proposed issue affect the

• verall debt service requirements of the government?

9. What types of affordability guidelines will be established to help monitor and preserve credit quality?

• 10. What provisions have been made to periodically review the capital plan

and borrowing practices?

• 11. What is the overlapping debt burden on the taxpayer?
• 12. How will the formal debt policies be integrated into capital planning

and funding process?

FP 11: Debt Policy

The City will establish thresholds for the maximum amount of debt and debt service that should be outstanding at any one time.

General Obligation Debt Affordability Measures:

• Total general obligation debt as measured against the population on a

per-capita basis cannot exceed $225

• Total annual general obligation debt as measured as a percent of

current expenditures cannot exceed 12%

• Utility enterprise debt affordability measures – 1.2 times coverage
• Tax increment debt affordability measures – not exceed revenues

FP 11: Debt Limit

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The City will develop practices to guide the financial actions it will take in the event of emergencies, natural disasters, or other unexpected events.

Phase Classifications and the Corresponding Action:

• A. Alert

An anticipated net reduction in available reserves or reduction in major revenue resource(s) from 1% up to 9% Action Delaying expenditures while maintaining the “same level” of service

FP 12: Contingency Planning

The City will develop practices to guide the financial actions it will take in the event of emergencies, natural disasters, or other unexpected events.

FP 12: Contingency Planning

Phase Classifications and the Corresponding Action (cont.):

• B. Minor

A reduction in reserves in excess of 9%, but less than 23% Action

• 1. Implement the previously determined “same level” budget
• 2. Intensify the review process for large items
• 3. Closely scrutinize the hiring process

The City will develop practices to guide the financial actions it will take in the event of emergencies, natural disasters, or other unexpected events.

FP 12: Contingency Planning

Phase Classifications and the Corresponding Action (cont.):

• C. Moderate

A reduction in reserves in excess of 23%, but less than 50% (initiating cuts of service levels): Action

• 1. Require greater justification for large expenditures
• 2. Defer capital expenditures
• 3. Reduce CIP appropriations from the affected fund
• 4. Hire to fill vacant positions only with special justifications and

authorization

• 5. Closely monitor and reduce expenditures

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The City will develop practices to guide the financial actions it will take in the event of emergencies, natural disasters, or other unexpected events.

FP 12: Contingency Planning

Phase Classifications and the Corresponding Action (cont.):

• D. Major

A reduction in reserves of 50% to 100% (implementation of major service cuts) Action

• 1. Institute a hiring freeze
• 2. Reduce the temporary workforce
• 3. Defer merit wage increases
• 4. Further reduce capital expenditures
• 5. Prepare a strategy for reduction in force

The City will develop practices to guide the financial actions it will take in the event of emergencies, natural disasters, or other unexpected events.

FP 12: Contingency Planning

Phase Classifications and the Corresponding Action (cont.):

• E. Crisis

Reserves have been 100% depleted and potential for having a deficit is present Action

• 1. Implement a reduction in force or other personnel cost-reduction

strategies

• 2. Eliminate programs
• 3. Eliminate capital improvements

The City of Rock Hill will perform accounting functions that shall conform to the Generally accepted accounting principles as applicable to governments.

It will be the policy of the City to:

• prepare and present regular reports that analyze, evaluate, and forecast the City’s

financial performance and economic conditions

• seek out and employ the assistance of qualified financial advisors and consultants
• Have an independent audit performed annually
• Issue annual financial reports

FP 13: Accounting Functions

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The City of Rock Hill will perform accounting functions that shall conform to the Generally accepted accounting principles as applicable to governments.

FP 13: Accounting Functions

Accounting records for the City of Rock Hill governmental funds are maintained

• n a modified accrual basis.

Accounting records for proprietary funds are maintained on the accrual basis. The City of Rock Hill’s accounting system is organized and operated on a “fund” basis.

• Governmental funds
• Special revenue
• Debt service
• Capital projects
• Proprietary funds
• Fiduciary funds

The City of Rock Hill will provide economic incentives with the goals of targeting economic and geographic sectors; promoting business retention and recruitment; encouraging job creation; increasing property tax revenue; and improving blight, economically distressed areas, and environmental conditions.

The City will maintain a fund, replenish the fund, and provide financial incentives programs in accordance with the strategic goals of the city.

• Financial incentives programs
• Guidelines for limits to incentives
• Fund establishment and replenishment
• Performance monitoring

FP 14: Econ Development Incentives

Post-issuance tax compliance begins with the debt issuance process and provides for a continuing focus on investments

• f bond proceeds and use of bond property and requiring

the identification of existing policies, responsible people, applicable procedures and affected population.

• Procedures
• Issuance
• Recordkeeping
• Arbitrage
• Private use of bonds-funded facilities
• Reissuance

FP 15: Procedures for Debt Issuance