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

City of Rock Hill Financial Policies 2016 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 of public goals Why Adopt Financial Policies? 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 1

Why Adopt Financial Policies? The City of Rock Hill has developed a comprehensive set of 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. Development of 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 officials are aware of policies Design 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. 2

Financial Policies What is Fund Balance? Current Assets - Current Liabilities = Fund Balance It’s the government’s working capital A measure of resources immediately available to finance ongoing operations 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 or economic downturns) 3

Why maintain a Fund Balance?  To limit Exposure to Risk  To provide Flexibility  Unanticipated Economic Downturns  One-time Opportunities 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 4

How much is the Right Amount? 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% of budget in available cash to bridge cash flow gaps from July-November A Fund Balance Policy Should…  Establish the minimum funding on factors such as: o cash flow o disaster potential o revenue diversity o 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? 5

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 FP 1: Fund Balance 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. 6

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: - 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 3: Diversified Revenue Base 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 7

FP 4: Use of One Time Revenue 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 5: Revenue Classification The City will annually evaluate all revenues, determine those that are considered to be unpredictable, and determine the best use of those revenues. 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 8

Enterprise Fund Transfers It is common for municipalities that own and operate 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 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. 9