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RES 2013-017CITY OF SOUTH LAKE TAHOE RESOLUTION NO. 2013 -17 RESOLUTION AMENDING THE FINANCIAL POLICIES OF THE CITY OF SOUTH LAKE TAHOE REGARDING CAPITAL ASSETS, BUDGET MANAGEMENT, BUDGET PREPARATION, DEBT MANAGEMENT, FINANCIAL REPORTING, STRENGTHENING FINANCIAL POSITION, CASH, AND GRANT FUNDING AND COMPLIANCE WHEREAS, it is prudent to adopt Financial Policies to provide operating and planning guidelines that support the City's financial operations and ensure its fiscal health; and WHEREAS, the Financial Policies guide City staff in evaluating the financial implications of program and policy recommendations to the City Council; and WHEREAS, the Financial Policies also serve as parameters for City Council action to ensure a long -term, stable economic base for the City; and WHEREAS, the Financial Policies require amendments from time to time to ensure compliance with the requirements set forth in State law, the South Lake Tahoe City Code, Generally Accepted Accounting Principles (GAAP) and best practices in municipal financial management, and in the case of any conflict, the provisions of such laws, ordinances or GAAP will control; and WHEREAS, the updated Financial Policies of the City of South Lake Tahoe have been presented to the City Council for review, comment and direction to staff, NOW THEREFORE, BE IT RESOLVED, that the City Council of the City of South Lake Tahoe does hereby adopts the amendments to the Financial Policies of the City of South Lake Tahoe regarding Capital Assets, Budget Management, Budget Preparation, Debt Management, Financial Reporting, Strengthening Financial Position, Cash, and Grant Funding and Compliance. PASSED AND ADOPTED by the City Council of the City of South Lake Tahoe at a meeting on February 19, 2013 by the following vote: AYES: NOES: ABSTAIN CABSENT: ATTFRT? Councilmembers DAMS, COLE, CONNER, LAINE & SWANSON Councilmembers Councilmembers Councilmembers Susan Alessi, City Clerk om Davis, Mayor Financial Policies - Budget Preparation The City Manager shall submit a proposed Annual Budget to the City Council for approval in accordance with City Code Section 2-24, H. The Annual Budget shall meet the following criteria: A. Structural Balance The City shall maintain a balanced budget. The total of proposed expenditures shall not exceed the total of estimated revenues plus carried forward fund balance, exclusive of reserves, for any fund. The Annual Budget shall clearly identify anticipated revenue for all funds for the upcoming fiscal year. Current revenue shall be sufficient to support current expenditures (defined as "structural balance"). Estimates of current revenue shall not include beginning fund balances (whether General Fund, Revenue Funds, or other Specially Designated Funds). If projected revenue is insufficient to support projected funding requirements, the City Manager and Finance Director may recommend allocation of all or a portion of an unreserved fund balance if it appears that: 1. The expenditure requiring the appropriation of additional revenues is not likely to be recurring, or 2. The revenue source leading to the development of the available revenues is likely to remain stable in future years, 3. The City Manager and Finance Director can otherwise establish an appropriate match of revenue/expenditures that will not lead to structural imbalance in future years. B. Appropriations Limit Appropriations in the Annual Budget shall comply with the annual determination of the City's appropriations limit, calculated in accordance with Article XIIIB of the Constitution of the State of California and Government Code section 7900. C. Operating Carryover Operating program appropriations not spent during the fiscal year will not automatically carry-over into the next fiscal year, and shall lapse at year-end. These un-spent appropriations shall be subject to re- City of SL T Financial Policies - Budget Preparation Rev, February 2013 appropriation into the subsequent fiscal year, except for long-term projects in progress that are carried forward to the following year and reserved for encumbrances. This policy shall not preclude the adoption by the City Council of an expenditure control program that may be designed as an incentive to encourage departments to achieve annual cost savings to fund large capital expenditures. D. One-Time Revenues One-time revenues shall only be used for one-time expenditures. Prior to allocating anyone-time revenues, the Finance Director shall determine that such revenues are not being used to subsidize an imbalance between operating revenues and expenditures. If the Finance Director determines that one-time revenues are needed to correct a structural imbalance, the Finance Director shall present the City Manager and City Council with a financial forecast demonstrating that the operating deficit will not continue. E. Internal Service Funds The City may establish and operate Internal Service Funds to report any services that are provided to other City departments for which the Cost Allocation Plan does not recoup that cost. Internal Service Funds should not be created unless it is clearly established that no other fund type is applicable. At the same time that it adopts the budget resolution, the City Council must approve a balanced financial plan for each Internal Service Fund, where estimated expenditures do not exceed estimated revenue. F. Maintenance Equipment and buildings shall be maintained at reasonable levels to avoid service disruptions, and to achieve maximum useful life, and to ensure safety of employees and the public. Maintenance and replacement funding shall be allocated each year consistent with this policy. G. Level of Contingency Appropriations A General Fund Contingency of 1 % of total budgeted departmental expenditures shall no longer be budgeted. City of SL T Financial Policies - Budget Preparation 2 Rev, February 2013 Financial Policies - Budget Management A. Internal Controls A comprehensive system of financial internal controls shall be maintained to protect the City's assets and sustain the integrity of the City's financial systems. Managers at all levels shall be responsible for implementing City Financial Policies and sound controls, and for regularly monitoring and measuring their effectiveness. B, Revenue Forecast Revenue estimates shall be monitored on a monthly basis to identify any potential trends that would significantly impact revenue sources. The Finance Director shall consult with stakeholders to review current local economic trends that may impact City revenues sources. C. Fiscal Impact Statement Effective management dictates that the City Council and citizens be presented with the direct and indirect costs of all items as part of the decision making process. Items presented to the City Council for approval shall include a Statement of Projected Fiscal Impact. Proposals that were not included in the annual budget work plan shall be identified, and funding shall be based on the identification of savings or additional revenue necessary to fund the unanticipated needs. The Finance Director shall also review state and federal legislative items that might result in a fiscal or policy impact on the City and shall promptly report on such items to the City Manager and City Council. D. Financial and Management Report The Finance Director shall submit a periodic financial report to the City Council. The report shall analyze budgeted versus actual revenues and appropriations, expenditures, and encumbrances. E. Mid-Year Budget Review The Finance Director shall prepare and submit a mid-year budget analysis for the City Council's review. The report shall review the City's fiscal condition, and make recommendations to amend appropriations if necessary. Budget amendments may be presented to the City Council at mid-year, but are not intended to provide additional avenues for departments to request funding for items not approved in the annual City of SL T Financial Policies - Budget Management Rev, February 2013 budget. All departmental requests for mid-year budget adjustments must be submitted to the Finance Director and City Manager for review. F. Appropriations During Fiscal Year 1, Supplemental Appropriations Prior to the City Council making any supplemental appropriation, the Finance Director shall certify that monies in excess of those estimated in the budget are available for appropriation. Any such supplemental appropriation may be made for the fiscal year by resolution up to the amount of any available excess funds. 2. Emergency Appropriations The City Council may appropriate City funds during an emergency as defined in South Lake Tahoe City Code Section 9-4 to ensure the safety, health and welfare of the community. 3. Reductions in Appropriations Appropriations may be reduced any time during the fiscal year by the City Councilor City Manager if it appears probable that either the revenues or fund balances available will be insufficient to finance the expenditures for which appropriations have been authorized. The Finance Director shall report any appropriation reductions to the City Council. 4. Budgetary Categories The City's annual budget is approved with the following categories: · Salaries · Benefits · Operations and Maintenance · Capital Outlay · Debt Service · Capital Improvement Program 5. Budget Transfers a, Transfers within a Departmental Category - Department Heads may transfer budget within a departmental category as defined above, if the transfer does not exceed the category's total budget. City of SL T Financial Policies - Budget Management 2 Rev. February 2013 b. Transfers between Categories and Departments - transfers between categories, not to exceed total budget, and transfers between departments require the approval of the City Manager and the Finance Director. c. Transfers between Funds - Only the City Council, by resolution, may transfer monies between funds and from unappropriated balances or fund balances to any fund or appropriation account. G. Inter-fund Borrowing From time to time it may become necessary for the City to loan funds from one fund to another. If this need arises a written request shall be made to the Finance Director. The Finance Director shall make a written recommendation to the City Manager regarding the request and the appropriate repayment schedule and interest rate. If approved by the City Manager the Finance Department and the requesting department(s) shall prepare an agenda item seeking City Council approvals. Any intrafund borrowing contemplated shall be consistent with documents establishing the fund. City of SL T Financial Policies - Budget Management 3 Rev, February 2013 Financial Policies: Preserving Capital Investments - Fixed Assets Capitalization and Inventory Control Policy The City invests in capital assets such as property, plant, equipment, facilities and infrastructure. Preservation of such investments through regular maintenance and a long-term renovation plan is necessary to preserve the value of such capital investments. The City must also plan for the replacement of capital investments (particularly vehicles and equipment). The following policy requirements are intended to ensure the proper accounting and preservation of capital investments; and to provide a sound economic base for their replacement. 1. The budget should provide sufficient funding for adequate maintenance, renovation and the orderly replacement of capital assets such as equipment, fleet, facilities, streets and parks. 2. All capital assets should be maintained at a level that protects capital investment and minimizes future maintenance and replacement costs. 3. A five-year schedule of equipment replacement and maintenance needs, as well as facilities, streets and parks renovation and maintenance needs should be prepared on an annual basis. Expenditures consistent with such plans shall be included in annual budget appropriations. A. Capital Assets Definition, Classes, and Capitalization Thresholds The City defines capital assets as any assets used in operations with an estimated useful life in excess of three years that have a value equal to or greater than the capitalization threshold for their respective asset class. The Asset Classes and Capitalization Thresholds have been established as follows: Asset Class Threshold $50,000 $50,000/$7,000 $7,000 ment $7,000 $100,000 $200,000 $50,000 Use threshold for the a ro riate asset class The threshold will generally not be applied to components of fixed assets. City of SL T Financial Policies - Preserving Capital Investments Rev, February 2013 1. Cost of Capital Assets Capital Assets are recorded at historical cost or estimated historical cost if purchased or constructed. The cost should include ancillary charges necessary to place the asset into its intended location and condition for use. Items to include in the cost of capital asset are as follows: · Original contract or invoice price · Freight and transportation charges · Handling and storage charges · In-transit insurance charges · Sales, use, and other taxes imposed on the acquisition · Installation charges · Charges for testing and preparation for use · Site preparation costs · Professional fees · Capitalized interest should be included in the cost of a proprietary fund asset when it meets the criteria of Financial Accounting Standards Board No. 34. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Donated capital assets are valued at their fair value on the date of donation. 2. Depreciating Capital Assets Property, plant and equipment, depreciable infrastructure and intangible assets of the City shall be depreciated using the straight-line method and applying the half-year convention method over the following useful lives. Asset Class Years Infrastructure 1 0-40 3-10 3-20 As limited by contractual or legal revisions. 1 0-40 It is the City's policy that capital assets have no residual value at the end of their lives. Land, Construction-in-Progress and certain intangible assets are not depreciated. If the asset is disposed of before the end of its useful life, a half-year of depreciation is allowable for the year of disposition. City of SL T Financial Policies - Preserving Capital Investments 2 Rev, February 2013 3. Capital Assets Classes Land The surface of the earth, which can be used to support structures and roadways. Land is characterized as having an unlimited life (inexhaustible). Includes the cost of land itself and the cost of preparing land for its intended uses. Examples of items that might be capitalized as part of the cost of land include basic site improvements (e.g., excavation, fill, and grading), as well as the cost of removing, relocating, or reconstructing the property of others (e.g., power lines). Buildinas and Buildina Improvements A structure that is permanently attached to the land, has a roof, is partially or completely enclosed by walls, and is not intended to be transportable or moveable. Improvements to existing buildings that materially extend the useful life of a building, increase the value of a building, or both should be capitalized. The improvement must meet one of the following criteria: · The improvement adds square footage to the existing building. · The improvement is a major renovation that prepares an existing building for a new use. · The improvement expenditure increases the life or value of the building by 25 percent of the original life or cost. The cost of an improvement (or betterment) normally is added to the cost of the related structure, rather than treated as a separate asset. Examples of expenditures to be capitalized as building improvements are as follows: · Replacement of an old shingle roof with a new fireproof tile roof · Upgrade of heating and cooling systems · Structures attached to the building such as covered patios, sunrooms, garages, carports, enclosed stairwells, etc. · Structural changes such as reinforcement of floors or walls, installation or replacement of beams, joists, steel grids, or other interior framing. The following are examples of expenditures not to capitalize as improvements to buildings. Instead, these items should be recorded as maintenance expense: · Adding, removing and/or moving of walls relating to renovation projects that are not considered major rehabilitation projects and do not increase the value or life of the building City of SL T Financial Policies - Preserving Capital Investments 3 Rev, February 2013 · Plumbing or electrical repairs · Cleaning, pest extermination, or other periodic maintenance · Interior decoration, such as draperies, blinds, curtain rods, wallpaper · Maintenance-type interior renovation, such as repainting, touch-up, plastering, replacement of carpet, tile, or panel sections; sink and fixture refinishing, etc. · Maintenance-type exterior renovation such as repainting, replacement of deteriorated siding, roof, or masonry sections · Replacement of a part or component of a building with a new part of the same type and performance capabilities, such as replacement of an old boiler with a new one of the same type and performance capabilities Improvements Other Than Buildinas This major asset class is used for permanent (i.e., non-moveable) improvements, other than buildings, that add value to land, but do not have an indefinite useful life. Examples include fences, retaining walls, parking lots, and most landscaping. Moveable items (e.g., picnic table in a park) should be classified as furnishings and equipment. Vehicles, Machinery, Specialty and Office Eauipment Fixed or movable tangible assets to be used for operations, the benefits of which extend beyond one year from date of acquisition and rendered into service. Examples of expenditures to be capitalized in this class include but are not limited to: Vehicles Computers and servers Machinery Furniture and fixtures Intanaible Assets Intangible assets are characterized as lacking physical form (e.g., computer software, water rights, easements, and patents). Certain intangibles provide benefits indefinitely. In that case, no amortization expense would be recognized. Intangibles with the length of their life limited by contractual or legal provisions should be amortized over the period stated in the provisions. Easements are interest in land owned by another that entitles its holder to a specific limited use. The estimated value of easements is immaterial and therefore will not be capitalized. City of SL T Financial Policies - Preserving Capital Investments 4 Rev, February 2013 A right-of-way is a type of easement in which title remains with the property owner and therefore is not capitalized. Infrastructure Long-lived capital assets that normally are stationary in nature and are of value only to the City. Include, but are not limited to: roads and streets, curbs, gutters, bridges, streetlights, sidewalks, streetscape, bike paths, storm-water drainage improvements, roadway resurfacing, basin and stream environment zone construction, ramps, airfields and runways in Airport Enterprise fund. For the purpose of reporting this major class is separated into subclasses, such as Streets, Bike Paths, Streetscape, Basin and SEZ Construction, and Runways. Construction in Prooress This major class is used for costs incurred to construct or develop a tangible or intangible capital asset before it is substantially ready to be placed into service. The costs should remain in this category until all retention money has been paid (at which time the asset would be reclassified into the appropriate major class). B. Capital Assets Accountability and Control When capital assets are acquired or deeded to the City, copies of related documents shall be routed to the Finance Department in a timely manner to ensure these assets are recorded in the City's financial records. Department heads are ultimately responsible for safeguarding its fixed assets from theft or loss. However, the Finance Department does recognize and acknowledge its responsibility to establish and maintain systems and procedures that enable department heads and program managers to properly safeguard their assets. In general, inventory control is applied only to movable fixed assets (generally these falling into the "Vehicles, Machinery and Equipment" category), and not to land, buildings, or other immovable fixed assets. Fixed assets subject to inventory control will be accounted for and controlled through the same systems and procedures used to account and control fixed assets subject to capitalization. Fixed assets will be subject to inventory control if they meet at least one (1) of the following criteria: a. The original cost of the fixed asset is equal to or greater than $5,000 if classified as equipment, $50,000 if classified as buildings or land, or $200,000 if classified as infrastructure. b. Any asset less than the capitalization threshold, as recommended by the Finance Director. This may include certain machinery and equipment that, due to portability, value outside of the office, or character, are susceptible to theft and/or loss. It may include computer equipment and electronic City of SL T Financial Policies - Preserving Capital Investments 5 Rev, February 2013 devices such as laptops and iphones, guns, weapons, and other movable items. Also included may be any asset requested by a department to be controlled in order to satisfy an internal (operational) or external requirement. For example, the Finance Department (may wish to) tracks all computer hardware in order to establish replacement and upgrade requirements for both hardware and system software. c. Any asset required to be controlled and separately reported pursuant to grant conditions or any other externally imposed reporting requirement. Procedure: The goal is to tag all fixed assets that fall within the above categories without affecting the functionality or value of the product. Tags should be placed on the back of the equipment, somewhere where they can be found, but not necessarily stand out. The fixed asset addition form (Exhibit I) should be filled out as much as possible. A complete description of the asset should be obtained showing manufacturer, model, serial #, color and any other identifying criteria. The date purchased and cost should be entered when known. If not known, please estimate and mark (est) after the data. It is understood that logistically some items can not be tagged. These items still need to be inventoried and the information maintained in a department file. Surplus property shall be identified by the department, officially declared to the City Council, and after approval, sold at auction and eliminated from the fixed asset accountability list. Proceeds from sale of surplus property will be allocated to the City's General fund unless the property was originally purchased with monies from a specific fund, in which case, the proceeds will be returned to that fund. Accounting for Leases: Leases that do not transfer substantially all the benefits and risks of ownership are operating leases. Capitalize a lease that transfers substantially all of the benefits and risks of property ownership, provided the lease is non-cancelable (only non-cancelable leases may be capitalized). One or more of four criteria must be met: 1. Transfers ownership to the lessee. 2. Contains a bargain purchase option. 3. Lease term is equal to or greater than 75 percent of the estimated economic life of the leased property. 4. The present value of the minimum lease payments (excluding executor costs) equals or exceeds 90 percent of the fair value of the lease property. Account Coding: The account coding to be used for the purchase of capital outlay will be as follows: For items costing $5,000 or more (these are considered Fixed Assets) use: Object code # 46010 - Land Object code # 46020 - Buildings and Building Improvements City of SL T Financial Policies - Preserving Capital Investments 6 Rev, February 2013 Object code # 46030- Improvements Other Than Buildings Object code # 46110 - Machinery & Equipment ($5,000) Object code # 46122 - Software Object code # 46130 - Vehicles Object code # 46140 - Furniture and Fixtures For items costing less than $5,000 per unit (these are NOT considered Fixed Assets) use: Object code # 46120 - Tools, Parts and Leases less than $5,000 City of SL T Financial Policies - Preserving Capital Investments 7 Rev, February 2013 Attachments: Exhibit I - Sample of Fixed Asset Addition Form City of SL T Financial Policies - Preserving Capital Investments 8 Rev, February 2013