During the next regular council meeting on July 7th, the City Council will consider approving a Cash Reserves Balance and Replenishment Policy. A draft version of this policy was included in the council work session packets on June 2nd and on June 15th, although it was discussed only at the second meeting due to time constraints at the first work session.
The purpose of the 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. It also addresses allowable types of holdings and uses for reserves and the replenishment strategy should reserves drop below the minimum balances.
The Cash Reserves Balance and Replenishment Policy is being presented to the council as a continuation of an effort begun several years ago to establish a system of internal controls (see note below) 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.
A policy for reserves recently became a higher priority because of the discussions about spending down unrestricted reserves as a result of the operating deficit caused by the new streets ordinance. On March 24, 2015 voters approved Ordinance 2014-28 in a special election. It applies greater restrictions on the use of the sales tax originally approved by voters and implemented as Ordinance No. 2008-34. This 1% sales tax is referred to as the “2A funds.” The additional amount of 2A revenue now restricted for capital spending reduces the amount previously available annually for the operation, maintenance and improvement of streets and other infrastructure, which included part of the funding to pay operating costs of streets and public infrastructure. Since the total operating budget each year generally equals the amount of available revenue, the city council now must find additional operating revenue sources, implement operating budget cuts or spend unrestricted reserves.
Another reason why this policy is deemed important is that we want to 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. It is perfectly acceptable to use reserves for a capital project. 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. This may be compared to an individual saving money for a few years to buy a car for cash or to make a down payment on a house. That individual would have a surplus in the budget during the years of saving up; then, in the year the purchase is made, the individual would show a deficit. One would need to look at a longer time period than one single year to understand that particular transaction.
It may also 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 individual or 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. The City would generally have until the next budget cycle to make changes to re-balance the operating budget.
Note: 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.