HomeMy WebLinkAboutFinancial Management PolicyCOMPREHENSIVE FINANCIAL MANAGEMENT POLICY
Adopted April 18, 2011
Revised December 19, 2011
ORIGIN
The City’s 2030 Vision and Strategic Plan ca lls for the establishment of a C omprehensive Fina ncial
Management Policy in its V ision , as one of ten Vision Elements and as a G oal .
The Vision
“ STRONG FINANCIAL MANAGEMENT - The people of Prior Lake have a powerful vision and great hopes
for the community’s future. For the 2030 Vision to become a reality, the City must ensure that there is
financial confidence in the City and that financial resources are available, in the amou nt and within
appropriate time frames, to fund the operating and capital costs associated with implementing the
Strategic Plan regardless of the pace of development. Financial strength includes always assuring that
financial resources are used to achieve m aximum value for the lowest reasonable expenditure needed
to achieve the 2030 Vision” – 2030 Vision and Strategic Plan, adopted November 9, 2009
Vision Element
“Strong Financial Management,” one of the ten vision elements of the 2030 Vision and Strategic Plan
(2030 VSP), represents an area of strategic importance that must be addressed to make the 2030 VSP a
reality.
Goal
“Establish a comprehensive financial management policy which addresses the City’s approach to fund
balances, revenues, expenditures and debt.”
PURPOSE
The Comprehensive Financial Management P olicy serves three main purposes:
1. T o draw together in a single document the City’ s major financial policies;
2. T o establish principles to guide both staff and Council members to make consistent and
informed financial decisions.
3. To inform the citizenry that the City is a prudent steward of their resources.
POLICY AREAS
The Comprehensive Financial Management P olicy establishes City policy in the following areas:
I. Reserves
II. Revenues (to be added in the future)
III. Expenditures (to be added in the future)
IV. Debt (to be added in the future)
V. Financial Planning & Reporting (to be added in the future)
OBJECTIVES OF THIS POLICY
1. To provide both short - term and long - term financial stability to city government by ensuring
adequate funding for providing services and protecting infrastructure needed by the community
today and for years to come;
2. To protect the City Council’s policy - making ability by ensuring that important policy decisions
are not con s tr ained by financial problems or local, state, regional or national emergencies;
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3. To provide sound financial principles to guide the decisions of the City Council and City
managem ent;
4. To create a document that City management and City Council members can refer to when
engaged in financial planning, day to day decision making, budget preparation and other
financial management endeavors .
I. RESERVES
The goal of the City Council in establishing a Reserve Policy is to ensure the long - term economic stability
of the organization by providing sufficient funds for cash flow purposes, to accumulate savings for
projects (one - time and grant - matching opportunities), and to have reserves for u nexpected revenue
shortfalls or emergencies, while providing a specific plan for increasing or decreasing the level of fund
balance as appropriate. In creating this policy, the City Council expressly acknowledges that a key
element in sound financial mana gement is having a reserve at all times. This policy seeks to establish
parameters for the reserves so it is neither larger than needed nor less than desirable and based upon
financial and management analysis and principles. This policy also establishes the specific guidelines
that will be used to classify fund balances into categories based primarily on the extent to which the City
is bound to honor constraints on the specific purposes for which amounts in these funds can be spent.
A. CLASSIFICATION OF FUN D BALANCE / PROCEDURES
1. Non - spendable
This category includes fund balance that cannot be spent because it is either (i) not in spendable
form or (ii) is legally or contractually required to be maintained intact. Examples include
inventories and prepaid amounts.
2. Restricted
Fund balance should be reported as restricted when constraints placed on those resources are
either (i) externally imposed by creditors, grantors, contributors, or laws or regulations of other
governments or (ii) imposed by law through constitutional provisions or enabling legislation.
3. Committed
Fund balance that can only be used for specific purposes pursuant to constraints imposed by
formal action of the government’s highest level of decision - making authority. The committed
amounts ca nnot be used for any other purpose unless the government removes or changes the
specified use by taking the same type of action it employed to commit those amounts. The
City’s highest level of decision making authority (City Council) will annually, or as deemed
necessary, commit specific revenue sources for specified purposes by resolution. This formal
action must occur prior to the end of the reporting period; however, the amount to be subject
to the constraint may be determined in the subsequent period. To remove the constraint on
specified use of committed resources the City Council shall pass a resolution.
4. Assigned
Amounts that are constrained by the government’s intent to use for specified purposes, but are
neither restricted nor committed. Assigned fund balance in the General Fund includes amounts
that are intended to be used for specific purposes. The City Council has delegated the authority
to assign and remove assignments of fund balance amounts for specified purposes to the
F inance Director.
5. Unassigned
Unassigned fund balance represents the residual classification for the General Fund. It includes
amounts that have not been assigned to other funds and that have not been restricted,
committed, or assigned to specific purposes within the General Fund. The General Fund should
be the only fund that reports a positive unassigned fund balance amount. This classification is
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also used to account for deficit fund balances in other governmental funds. When both
restricted and unrestricted resour ces are available for use, it is the City’s policy to first use
restricted resources and then use unrestricted resources as they are needed. When committed,
assigned or unassigned resources are available for use, it is the City’s policy to use resources in
the following order: 1) committed, 2) assigned and 3) unassigned.
B. GENERAL FUND
The City will maintain a General Fund reserve balance at a level which takes into consideration the
following:
1. Cash Flow
a. S ix month s of projected operating expenditures recognizing that an increasingly
larger share of the General Fund is dependent upon property taxes and that this
trend is likely to continue;
b. Debt service for market referenda debt obligations;
2. Contingency
a. P otentially volatile revenue sources recognizing that the City is dependent upon
others in large funding categories of state aid, township fire agreements and SMSC
contributions;
b. U nforeseen natural or man - made disasters and emergencies which will require
advance payment by the City without a ny guarantee of repayment by the federal
government or an insurer;
3. Savings
a. Planned one - time expenditures and grant matching opportunities which become
available but require immediate liquidity to take advantage of;
b. Initial establishment of a plan for long - term obligations ;
4. Other Factors
a. I mpact on City’s bond rating ;
b. S tatus of public retirement systems and understanding that as an employer the City has
a statutory obligation to fund unforeseen deficits.
Reserve Amount
Based on the above criteria, the goal would be to maintain a General Fund unrestricted fund balance
(which includes Committed, Assigned and Unassigned classifications) of 45 % of projected
expenditures for the subsequent year ; however, this need could fluctuate with each year’s budget
objectives and appropriations such as large capital expenditures, and variations in the collections of
revenues. This amount meets the financial needs of the City and is also consistent with th e
expertise and official opinion of the Minnesota State Auditor.
Reserve Expenditure Criteria
The City Council may consider the judicious use of reserve balances in the following situations:
1. to fund an expenditure of significant long - term benefit or legacy to the community
2. to fund a one - time (non - recurring) expenditure or grant matching opportunity
3. to fund a one - time unplanned revenue shortfall
4. to fund an unplanned expenditure due to an emergency or disaster
5. to moderate property tax es
6. to retire existing debt
7. to fund policy shifts by other governmental entities having a negative impact on the City
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8. to provide catch - up funding for long - term obligations not previously recognized
Reserve minimum: In no case will the re serve be allowed to fall below 40 %.
The City Council recognizes that any such funds may be appropriated for non - recurring expenditures
as they represent prior year surpluses that may or may not materialize in subsequent fiscal years.
This should only be considered after reviewing the long - term financial plan to ensure that short -
term decisions are not compromising the long - term viability of the Fund.
The City Council also recognizes that the use of reserves to moderate property tax es is a temp orary
situation such that a future funding source will be needed to replace it; therefore, the City Council
should evaluate the use of reserves for this purpose during the budget process and in conjunction
with the long - term financial plan.
Replenishment of Reserve
In the event that the yearend reserve balance is projected to be less than the target level due to the
use of reserve balances for purposes identified above , a plan must be presented at the time the
reserve funds are appropriated that will reestablish the target level within 24 months .
Should the Fund Balance Reserve amount fall below the 45 % targeted level, the City Council must
approve and adopt a plan to restore this balance to the target level within 24 months. If restoration
of the re serve cannot be accomplished within such period without severe hardship to the City, then
the City Council will establish a different time period.
A negative residual amount may not be reported for restricted, committed or assigned fund
balances in the General Fund.
C. ENTERPRISE FUNDS
The City will maintain reserves in Enterprise Funds at levels sufficient to provide adequate working
capital for current expenditure needs, for the replacemen t of capital assets within the F und over
their estimated useful life and to pay for future capital projects. Future capital projects must be
identified and quantified in a written finance plan for the fund which shall be included in the City’s
annual Capital Improvement Program.
The City will maintain a reserve balanc e at a level which that takes into consideration the following:
1. Cash Flow
a. Three months of projected operating expenditures
b. Debt service obligations
2. Contingency
a. Potentially volatile revenue sources
b. Unforeseen natural or man - made disasters and emergencies
3. Savings
a. Planned one - time expenditures and grant matching opportunities
b. Impact of large capital projects identified in a long - term plan
4. Other Factors
a. Impact on City’s bond rating;
b. Requirements by external funding source
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D. ECONOMIC DEVELOPMENT AUTHORITY FUND
The City will strive to maintain a fun d balance within the EDA Fund, a Special Revenue Fund, in order
to meet both anticipated and unanticipated future economic development needs.
The City will maintain a reserve balance at a level which that takes into consideration the following:
1. professional services ;
2. significant funding which may be required for acquisition of land for development
opportunities ;
3. potential relocation costs or legal costs attributable to economic development actions;
4. anticipated or un anticipated environmental concerns or impacts.
E. OTHER SPECIAL REVENUE FUNDS
The City will maintain reserves in the Special Revenue Funds at level s sufficient to provide working
capital for current expenditure needs plus an amount that is estimated to be needed to meet legal
restrictions , requirements by external funding sources and /or pay for future capital projects. Future
capital projects must be identified and quantified in a written finance plan for the Fund , which shall
be included in the City’s annual Capital Improvement Pro gram .
F. DEBT SERVICE FUNDS
The City will maintain reserves in the Debt Service Funds at levels sufficient to provide worki ng
capital for current expenditure needs plus an amount that is estimated to be needed to meet legal
restrictions and requirements by external funding sources .
G. CAPITAL PROJECT FUNDS
The City will maintain reserves in the Capital Project Funds at levels sufficient to provide working
capital for current expenditure needs plus an amount that is estimated to be needed to meet legal
restrictions, requirements by external funding sources an d/or pay for future capital projects. Future
capital projects must be identified and quantified in a written finance plan for the F und, which shall
be included in the City’s annual Capital Improvement Program.
H. MONITORING AND REPORTING
The City Manager and Finance Director shall annually prepare a report documenting the status of
the fund balance s with this policy and present it to the City Council in conjunction with the
development of the annual budget and/or other long - term financial planning documen ts . Should
the report disclose that there are unassigned funds available , a recommendation for use of said
funds shall be presented to the City Council.
The City will annually review the adequacy of the reserve balance s .
The City will periodically review updates to Rating Agency methodologies and medians to make sure
that the reserve policy is consistent to ensure maintaining its existing rating or that it positions itself
for an upgrade.
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