Cash Reserves Policy Being Considered

What’s in your bank account?

How many of us are fortunate enough to have a bank account with savings to pay our rent or mortgage, buy groceries and keep the utilities on for a few months in the event we lose our job or have some unexpected emergency? For the City, that’s considered an operating or contingency reserve. Are you saving money to buy a house or a new car? Once you spend that money for its intended purpose, it’s gone. But, the money in an operating reserve needs to be there “just in case” and, if it is spent, it needs to be replenished over time.

City council is currently considering a “cash reserves balance and replenishment” policy. Drafts were included in work session packets on June 2 and June 15. On July 7, council continued any action on the resolution to adopt the policy. They will discuss it again at the August 4 work session.

The City uses an accounting structure consisting of five funds for different aspects of its operations, each with varying needs and risks that influence the amount of cash needed for responsible fiscal management. The purpose of the proposed policy is to define the level of cash to be held in each fund. It is essential that governments have a level of savings sufficient for operating cash flow, to provide a backup for revenue shortfalls, to mitigate against uncontrollable costs and a variety of other current and future risks, and to help ensure stable rates for taxpayers and ratepayers. Fund balance levels are a crucial consideration in long-term financial planning. The policy also recognizes that, while reserves provide the City Council with the ability to respond to and safeguard from uncertainty and risk, excessive reserves could be used for additional services or even result in the reduction of taxes or fees. The types of holdings, uses allowed for reserves, and the replenishment strategy are addressed in the policy, as well.

This policy recently became a higher priority because of the discussions about spending down unrestricted reserves as a result of the operating deficit that arose after voters approved a new streets ordinance. When “2A funds” were originally approved by voters, use for “construction, operation, maintenance, and repair of roads and other public infrastructure of the City” was allowed. The ordinance approved in the special election applies greater restrictions on the use of the sales tax. It should be noted, however, that on July 7 the council agreed to revise the 1990 ordinance that restricts use of the 2% sales tax and, as the governing body, they would address this issue before adoption of the 2016 budget.

It is also important that we clearly establish when it is appropriate to use reserves. The City was criticized for planning to spend reserves in the 2015 budget for certain capital projects that are a high priority for the council. This can be an acceptable use of reserves. The budget is “in balance” if current revenue plus available reserves are sufficient to pay all planned expenditures. For budget purposes, this is not considered a deficit.

It also may be acceptable from time to time to spend reserves on operations. However, this is a different situation than spending reserves for a one-time capital project. Operating costs are ongoing, not one-time like a capital purchase. An organization cannot spend more than the amount of their income year after year. This policy states that the operating budget should always be in balance based on current income sources, unless something unexpected happens. Council would generally have until the next budget cycle to make changes to re-balance the operating budget.

This new policy continues the effort begun several years ago to establish a system of internal controls appropriate for the City of Salida. Many policies and procedures have been developed, documented and implemented over the past years starting with those deemed the highest priority based on the City’s operating needs and various risk factors. Internal control is broadly defined as the process established and implemented to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) Effectiveness and efficiency of operations; (2) Reliability of financial reporting; (3) Compliance with applicable laws. Links to a few of the City’s policies and procedures establishing components of the city’s overall control framework can be found in the Financial Documents section of the City website.