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RESOLUTION NUMBER 7194 A RESOLUTION OF THE MISSOULA CITY COUNCIL CREATING A FINANCIAL MANAGEMENT POLICY OF THE CITY OF MISSOULA FOR BUDGET PRACTICES, FUND BALANCE RESERVES AND FINANCIAL REPORTING WHEREAS a financial management policy is helpful for developing sound budget practices that sustain current service levels, maintain financial stability and provide for accurate financial reporting; WHEREAS, Title 7, Chapter 6 of the Montana Code Annotated is entitled “Financial Administration and Taxation" for local government; and WHEREAS, prudent financial management encourages the Missoula City Council to establish this additional Financial Management Policy to serve as a guideline for the City of Missoula during its budget process and for its financial reporting; and WHEREAS the Missoula City Council considered and adopted the attached financial management policy for the City of Missoula at its January 8, 2007 meeting; and NOW, THEREFORE, BE IT RESOLVED, that the attached Policy of the City of Missoula be established as the official financial management policy for budget practices, fund balance reserves and financial reporting. FURTHER BE IT RESOLVED THAT this document shall also be included in the Missoula Administrative Rules and Procedures as Policy No. 34, on file in the Missoula City Clerks’ office. PASSED AND ADOPTED this 8th day of January, 2007. ATTEST: APPROVED: Martha L. Rehbein John Engen Martha L. Rehbein John Engen City Clerk Mayor (SEAL) ---PAGE BREAK--- OVERVIEW The City of Missoula has an important responsibility to its citizens to carefully account for public funds, manage city finances wisely, manage growth, and plan for the adequate funding of services desired by the public, including the provision and maintenance of public facilities. As Missoula continues to grow, its government needs to insure that it is capable of adequately funding and providing those local government services the citizens require. The following fiscal and budgetary policies are designed to meet these goals. The overall goal of the city's fiscal policy is to establish and maintain effective management of the city's financial resources. Formal policy statements and major objectives provide the foundation for achieving this goal. Accordingly, this section outlines the policies used in guiding the preparation and management of the city's overall budget and the major objectives to be accomplished. Financial policies are guidelines for operational and strategic decision making related to financial matters. Financial policies identify acceptable and unacceptable courses of action, establish parameters in which the government can operate, and provide a standard against which the government's fiscal performance can be judged. The following City financial policies, endorsed by the City Council, establish the framework for the City of Missoula’s overall fiscal planning and management. The City of Missoula’s financial policies show the credit rating industry and prospective investors (bond buyers) the City’s commitment to sound financial management and fiscal integrity. The financial policies also improve the City’s fiscal stability by helping City officials plan fiscal strategy with a consistent approach. Adherence to adopted financial policies promotes sound financial management, which can lead to improvement in City bond ratings and lower cost of capital. OPERATING BUDGET POLICIES Links to Financial Plans. 1) Five-Year Plan. The City of Missoula’s annual budget will be developed in accordance with the policies and priorities set forth in the five year strategic financial plan, Council goals, the needs of the city, and state and federal laws. Program/project priorities and service delivery levels will be established by the aforementioned plans and will be updated during annually during the budget process. Scope. 1) Comprehensive Budget. A comprehensive annual budget will be prepared for all funds expended by the city. State law (7-6-4005), states that “Local government officials may not make a disbursement or expenditure or incur an obligation in excess of the total appropriations for a fund.” Inclusion of all funds in the budget enables the council, the administration, and the public to consider all financial aspects of city government when preparing, modifying, and monitoring the budget. 2) Budgetary Emphasis. Budgetary emphasis will focus on providing those basic government services which provide the maximum level of services, to the most citizens, in the most cost effective manner, with due consideration being given to all costs--economic, fiscal, and social. Adherence to this basic philosophy provides the citizens of the City of Missoula assurance that its government and elected officials are responsive to the basic needs of the citizens and that its government is operated in an economical and efficient manner. 3) Competing Requests. The budget process is intended to weigh all competing requests for City resources, within expected fiscal constraints. Requests for new, ongoing programs made outside the budget process will not be allowed unless they are deemed an emergency. ---PAGE BREAK--- 4) Understandable. The budget will be prepared in such a manner as to facilitate its understanding by citizens and elected officials. One of the stated purposes of the budget is to present a picture of the city government operations and intentions for the year to the citizens of the City of Missoula. Presenting a budget document that is understandable to the citizens furthers the goal of effectively communicating local government finance issues to both elected officials and the public. Budgeting Control System. 1) Budgetary Control. The City will exercise budgetary control (maximum spending authority) through City Council approval of appropriation authority for each program. The budgetary control system enables the Council to monitor current year operations and acts as an early warning mechanism when departments deviate in any substantive way from the original budget. 2) Budget to Actual Reports. Reports comparing actual revenues and expenditures to budgeted amounts will be prepared and posted to the City's web-site. reports comparing actual revenues and expenditures to budget amounts provide the mechanism for the Council and the administration to regularly monitor compliance with the adopted budget. Quarterly reports will also be prepared that summarize the detailed reports. Balanced Budget Definition and Requirement. 1) Balanced Budget. The city will maintain a balanced budget. This means that: ¾ Operating revenues must fully cover operating expenditures, including debt service. Under this policy, it is allowable for total expenditures to exceed revenues in a given year as long as the projected ending fund balance meets minimum policy levels. ¾ Ending fund balance (or working capital in proprietary funds) must meet minimum policy levels. Performance Measurement Integration. 1) Program Objectives. The annual budget will establish measurable program objectives and allow reasonable time to accomplish those objectives. REVENUE POLICIES. General Policies. 1) Diversification and Stabilization. The city will seek to maintain a diversified and stable revenue base to protect it from short-term fluctuations in any one revenue source. 2) Aggressive Collection. The city will pursue an aggressive policy of collecting revenues. An aggressive policy of collecting revenues will help to insure the city's revenue estimates are met, all taxpayers are treated fairly and consistently, and delinquencies are kept to a minimum. 3) Grant Opportunities. The city will aggressively pursue opportunities for Federal or State grant funding. An aggressive policy of pursuing opportunities for Federal or State grant funding provides citizens assurance that the city is striving to obtain all state and federal funds to which it is entitled-- thereby reducing dependence upon local taxpayers for the support of local public services. 4) Current Revenues for Current Uses. The city will match all current expenditures with current revenues. 5) Enterprise Funds. The city will set fees and rates at levels which fully recover the total direct and indirect costs—including operations, depreciation of capital assets, and fund and comply with any debt service covenants. ---PAGE BREAK--- 6) Earmarking. The City recognizes that generally accepted accounting principles for state and local governments discourage the "earmarking" of General Fund revenues, and accordingly, the practice of designating General Fund revenues for specific programs should be minimized in the City's management of its fiscal affairs. 7) Realistic and Conservative. The city will estimate revenues in a realistic and conservative manner. Aggressive revenue estimates significantly increase the chances of budgetary shortfalls occurring during the year--resulting in either deficit spending or required spending reductions. Realistic and conservative revenue estimates, on the other hand, will serve to minimize the adverse impact of revenue shortfalls and will also reduce the need for mid-year spending reductions. 8) Multi-year Revenue and Expenditure Forecasting: The City will perform multi-year revenue and expenditure forecasting, as denoted in its 5-year financial plan. 9) One-Time Revenues. The city will give highest priority in the use of one-time revenues to the funding of capital assets or other non-recurring expenditures. Utilizing one-time revenues to fund on- going expenditures results in incurring annual expenditure obligations which may be unfunded in future years. Using one-time revenues to fund capital assets or other non-recurring expenditures better enables future administrations and council’s to cope with the financial problems when these revenue sources are discontinued, since these types of expenditures can more easily be eliminated. User Fees. 1) Cost-Effective. User fees will be enacted/ charged only if the city finds it cost-effective and administratively feasible to do so. User fees are often costly to administer. Prior to establishing user fees, the costs to establish and administer the fees will be considered in order to provide assurance that the city's collection mechanisms are being operated in an efficient manner. 2) Beneficiary Populations. User fees and charges will be used, as opposed to general taxes, when distinct beneficiary populations or interest groups can be identified. User fees and charges are preferable to general taxes because user charges can provide clear demand signals which assist in determining what services to offer, their quantity, and their quality. User charges are also more equitable, since only those who use and benefit from the service must pay--thereby eliminating the subsidy provided by nonusers to users, which is inherent in general tax financing. 3) Community-Wide versus Special Benefit. The level of user fee cost recovery should consider the community-wide versus special service nature of the program or activity. The use of general-purpose revenues is appropriate for community-wide services, while other user fees are appropriate for services that are of special benefit to identified individuals or groups. 4) General. The following general concepts will be used in developing and implementing service charges and user fees: a. Revenues should not exceed the reasonable cost of providing the service. b. Cost recovery goals should be based on the total cost of delivering the service, including direct costs, departmental administration costs and organization-wide support costs such as accounting, personnel, information technology, legal services, fleet maintenance, and insurance. c. The method of assessing and collecting fees should be as simple as possible in order to reduce the administrative cost of collection. d. Rate structures should be sensitive to the “market” for similar services as well as to smaller, infrequent users of the service. e. A unified approach should be used in determining cost recovery levels for various programs based on the factors discussed above. ---PAGE BREAK--- EXPENDITURE POLICIES Maintenance of Capital Assets. Capital Assets. The budget will provide for adequate maintenance of capital, plant, and equipment and for their orderly replacement. All governments experience prosperous times as well as periods of economic decline. In periods of economic decline, proper maintenance and replacement of capital, plant, and equipment is generally postponed or eliminated as a first means of balancing the budget. Recognition of the need for adequate maintenance and replacement of capital, plant, and equipment, regardless of the economic conditions, will assist in maintaining the government's equipment and infrastructure in good operating condition. RESERVE POLICIES Unreserved Fund Balance. 1) General Fund. An undesignated general fund reserve will be maintained by the city. The undesignated reserve will be used for: cash flow purposes, equipment acquisition and replacement, and to enable the city to meet unexpected expenditure demands or revenue shortfalls. The City will focus on attaining and maintaining a fund balance equal to 7% of the General Fund's budget. 2) Enterprise Funds. Enterprise Fund Reserves will be maintained to meet four objectives: ensure adequate funding for operations; to ensure infrastructure repair and replacement; to provide working capital to provide level rate change for customers; and, to maintain the legally required coverage and other covenants for outstanding revenue bond debt. 3) Insurance Funds. Self-Insurance Reserves will be maintained at a level, which, together with purchased insurance policies, will adequately indemnify the City’s property, liability, and health benefit risk. The City will focus on attaining and maintaining a fund balance equal to three months of claims experience for the City's health plan insurance budget. 4) Required Reserves. Reserves will be established for funds which are not available for expenditure or are legally segregated for a specific use, in accordance with Governmental Accounting and Financial Reporting Standards (GAFR). The City’s policy is to manage and account for its financial activity in accordance with Generally Accepted Accounting Principles (GAAP), as set forth by the Governmental Accounting Standards Board (GASB). This policy is consistent with GASB requirements. Utilizing Unreserved Fund Balances. 1) Spending Reserves. On-going expenditures will be limited to levels which can be supported by current revenues. Utilization of reserves to fund on-going expenditures will produce a balanced budget, however, this practice will eventually cause severe financial problems. Once reserve levels are depleted, the city would face elimination of on-going costs in order to balance the budget. Therefore, the funding of on-going expenditures will be limited to current revenues. CAPITAL IMPROVEMENT POLICIES CIP Formulation. 1) CIP Purpose. The purpose of the CIP is to systematically plan, schedule, and finance capital projects to ensure cost-effectiveness as well as conformance with established policies. The ClP is a five-year plan organized into the same functional groupings used for the operating programs. The ClP will reflect a balance between capital replacement projects that repair, replace or enhance existing ---PAGE BREAK--- facilities, equipment or infrastructure; and capital facility projects that significantly expand or add to the City’s existing fixed assets. 2) CIP Criteria. Construction projects and capital purchases of $5,000 or more will be included in the Capital Improvement Plan (CIP) as long as the useful life of the asset exceeds five years; minor capital outlays of less than $5,000 will be included in the regular operating budget. Vehicles intended for use on streets and highways, costing less than $35,000, are not included in the CIP. The Capital Improvement Plan (CIP) differentiates the financing of high cost long-lived physical improvements from low cost "consumable" equipment items contained in the operating budget. CIP items may be funded through debt financing or current revenues while operating budget items are annual or routine in nature and should only be financed from current revenues. 3) Deteriorating Infrastructure. The capital improvement plan will include, in addition to an estimate of current operating maintenance expenditures, adequate funding to support repair and replacement of deteriorating infrastructure. Project Financing. 1) Minor Capital Projects. Minor capital projects or recurring capital projects, which primarily benefit current residents, will be financed from current revenues. Minor capital projects or recurring capital projects represent relatively small costs of an on-going nature, and therefore, should be financed with current revenues rather than utilizing debt financing. This policy also reflects the view that those who benefit from a capital project should pay for the project. 2) Major Capital Projects. Major capital projects, which benefit future residents, will be financed with other financing sources (e.g. debt financing). Major capital projects represent large expenditures of a non-recurring nature which primarily benefit future residents. Debt financing provides a means of generating sufficient funds to pay for the costs of major projects. Debt financing also enables the costs of the project to be supported by those who benefit from the project, since debt service payments will be funded through charges to future residents. 3) Pay As You Go Financing (PAYG) for Projects. The City shall seek to appropriately use PAYG financing, when feasible, based on the following criteria: a. The project can be adequately funded from available current revenues and fund balances; b. The project can be completed within an acceptable timeframe when funded from current revenues. c. Additional debt levels could adversely impact credit ratings or capacities to repay existing obligations; d. Market conditions are such that PAYG presents a favorable option; or e. The asset's useful life itself is not conducive to long term debt financing ACCOUNTING, AUDITING AND FINANCIAL REPORTING POLICIES GAAP. The City will manage and account for its financial activity in accordance with Generally Accepted Accounting Principles (GAAP), as set forth by the Governmental Accounting Standards Board (GASB). GASB is recognized as the authority with respect to governmental accounting. Managing the city's finances in accordance with GAAP and in accordance with the rules set forth by GASB, provides the citizens of the City of Missoula assurance that their public funds are being accounted for in a proper manner. ---PAGE BREAK--- Basis of Accounting. The city will maintain its accounting records for general governmental operations on a modified accrual basis, with revenues recorded when available and measurable, and expenditures recorded when services or goods are received and liabilities incurred. Accounting records for proprietary fund types and similar trust funds will be maintained on an accrual basis, with all revenues recorded when earned and expenses recorded at the time liabilities are incurred, without regard to receipt or payment of cash. Adherence to this policy will enable the city to prepare its financial statements in accordance with Generally Accepted Accounting Principles as set forth by the Governmental Accounting Standards Board. The basis of accounting is the same for both the budget and the financial statements. Financial Report. The City of Missoula will prepare an Annual Financial Report (AFR) in conformity with Generally Accepted Accounting Principles (GAAP). The report will be made available to the general public. Audits. An annual audit will be performed by an independent public accounting firm, with an audit opinion to be included with the City’s published Annual Financial Report (AFR). Audits of the city’s financial records provide the public assurance that its funds are being expended in accordance with Local, State, and Federal law and in accordance with Generally Accepted Accounting Principles. Audits also provide management and the Council with suggestions for improvement in its financial operations from independent experts in the accounting field.