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Home My WebLink About050812 Finance Committee Agenda In compliance with the Americans Disabilities Act, if you need special assistance to participate in this meeting, please contact the City Clerk's Department at 951-694-6444. Notification 48 hours prior to a meeting will enable the City to make reasonable arrangements to ensure accessibility to that meeting[28 CFR 35.102.35.104 ADA Title II] MEETING NOTICE/AGENDA FINANCE COMMITTEE CANYON'S CONFERENCE ROOM 41000 MAIN STREET TEMECULA, CALIFORNIA TUESDAY, MAY, 8, 2012 3:00 PM CALL TO ORDER: ROLL CALL: Mayor Chuck Washington, Mayor Pro Tem Mike Naggar PUBLIC COMMENTS A total of 15 minutes is provided so members of the public may address the Committee on items that are not listed on the agenda. Speakers are limited to three (3) minutes each. If you desire to speak to the Committee on an item not listed on the agenda, a "Request to Speak" form should be filled out and filed with the staff liaison. When you are called to speak, please come forward and state your name for the record. For all Public Hearing/Committee Business matters on the agenda, a"Request to Speak" form must be filed with the staff liaison prior to the Committee addressing that item. There is a five-minute (5) time limit for individual speakers. COMMITTEE BUSINESS 1. Local Vendor Preferences � 2. Fiscal Policies ADJOURNMENT �`�zjlZ (,J Date Susan . Jon , MMC Cit CI rk NOTICE TO THE PUBLIC The Agenda will be available for viewing, prior to the meeting, at the Main Reception at City Hall — 41000 Main Street, Temecula, 8:00 — 5:00 PM as well as on the City's website — www.citvoftemecula.orq. Any staff report/written material pertaining to this meeting will be available, prior to the meeting, for public review at the Main Reception and at the respective meeting. Any Supplemental Material distributed to a majority of the Committee Members regarding any item on the Agenda, after the posting of the Agenda, will be available for public review at the Main Reception. In addition, such material will be made available for review at the respective meeting. If you have any questions regarding any item of business on the Agenda for this meeting, please contact City Hall — 951-694-6444. ' C][TY O�' T7ElV�C�,A FINANCE DEPARTMENT � MEMORANDUM TO: Mike Naggar, Finance Committee Member Chuck Washington, Finance Committee Member FROM: Genie Wilson, Director of Finance Roberto Cardenas, Fiscal Services Manager DATE: May 8, 2012 SUBJECT: Local Vendor Preference Program Annually, the City of Temecula spends a considerable amount purchasing supplies, equipment, materials, maintenance services, public projects, and professional services. A substantial portion of the funds used to make these purchases come from taxes and fees derived from local businesses. Whenever feasible, funds generated from the local community should be funneled back into the local economy, thus slowing the economic export to other municipalities and increasing the financial productivity of every taxpayer dollar. Given the nation's current economic condition, cities are increasingly being asked by local businesses to establish preferences for local businesses as a means to encourage, promote, stimulate, preserve, and grow the local economy. Local Vendor Preference - Materials, Supplies, Equipment Preferences typically provide Local Vendors' a percentage preference for purchases .that require competitive bidding. More specifically, if a Local Vendor submits a bid within a certain percentage (typically 1% to 3%) of the lowest bid, said local Vendor is awarded the bid. Local Vendor Preference — Public Projects Since "Public Projects" (i.e. construction) must be awarded to the lowest responsive, responsible bidder per the California Public Contract Code, municipalities typically do not include Local Vendor preferences for P,ublic Project solicitations. However, since the City of Temecula has adopted the Uniform Public Construction Cost Accounting Act ("The AcY'), Public Projects up to $45,000 may be included in a Local Vendor Preference program. Local Vendor Preference — Services For solicitations that are based on evaluation criteria other than lowest price (i.e. Professional Services), a percentage (typically 3% to 5%) is added to the final scores, thereby giving the Local Vendor a 3% to 5% advantage in the selection. Pros and Cons Opponents argue that if the Local Vendor Preference program is not properly implemented, it will limit competition from outside competitors. In addition, opponents argue that the quality of services from Local Vendors accustomed to relying on said preference is diminished. Proponents, on the other hand, argue that said concerns can be mitigated with a solid implementation and oversight program. � 1"Local Vendor° means a vendor, contractor, or consultant who has a valid physical business address located within the boundaries of the City of Temecula, at least six months prior to bid or proposal opening date, from which the vendor, contractor, or consultant operates or performs business on a day-to-day basis, and holds a valid business license issued by the City of Temecula and designates, for sales tax purposes, the City of Temecula as the point of sale for retail transactions within the Ciry. Post office boxes are not verifiable and shall not be used for the purpose of establishing such physical address. R:IFinance Committee Meetingsl4 - May 8, 20121Finance Committee Memo - Local Vendor Preference.docx Local Municipalities A survey of local municipalities reveals active Local Vendor Preferences, as follows: � �� ,�<� �P`refer�ence � :� °. �� =__ ��`��` � T , Criter�a�� . � � " �" z� Cit of Lake Elsinore 3% For urchases� sub'ect to sales tax Cit of Murrieta 3% Excludes Public Pro'ects Cit of Wildomar 1% For urchases sub'ect to sales tax Count of Riverside 5% A lied to the total rice durin evaluation of the res onses Count of San Die o 1% Excludes Public Pro'ects Staff Recommendation Given the economic climate and the City's desire to collaborate with local businesses, staff recommends that the City create a Local Vendor Preference program to support responsive and responsible Local Vendors under the following purchasing guidelines: � �-��- � Pu �� _�� ,,��;`, _,_.�� .'.Purchase�Lim�ts� ,`,,.,. ,, .�'�_� �� Prefe'rence;,,. Materials,��Su lies, and E ui �ment � Purchases over $ 5,000 3% Public Pro'ects Purchases u to $45,000 3% Services Professional and Maintenance Purchases over $30,000 5% Staff recommends that the City award the bid to the local Vendor only if said entity is willing to reduce its bid to the lowest bid amount. R:IFinance Committee Meetingsl4 - May 8, 20121Finance Committee Memo - Local Vendor Preference.docx � City of Temecula Local Vendor Preference Examples 1. Local Vendor Preference - Materials, Supplies, Equipment Preferences typically provide Local Vendors' a percentage preference for purchases that require competitive bidding. More specifically, if a Local Vendor submits a bid within a certain percentage (typically 1% to 3%) of the lowest bid, said local Vendor is awarded the bid, as illustrated in Exhibit A: Exhibit A— Materials, Su lies, E ui ment � $Uen`�dor P�eference,__� '��:Vendo� ��Vendor5tatus_��'�_B�,d�Amount ��Bid�Award�r Vendor A Non-Local Vendor $100,000 3% Vendor B Local Vendor $102,500 X Vendor C Local Vendor $107,000 Typically, municipalities award the bid to the local Vendor for the amount quoted based on the notion that it offsets the revenue generated from the sales tax (assuming it is subject to tax). Using Exhibit A as an example, the City would pay "Vendor B" $102,500 as stipulated in Vendor B's bid. However, other municipalities choose to award the bid � to the Local Vendor only if the Vendor is willing to reduce its bid. to the lowest bid amount. Using Exhibit A as an example, "Vendor B" would be required to reduce its bid to $100,000. 2. Local Vendor Preference — Public Projects Since "Public Projects" (i.e. construction) must be awarded to the lowest responsive, responsible bidder per the California Public Contract Code, municipalities typically do not include Local Vendor preferences for Public Project solicitations. However, since the City of Temecula has adopted the Uniform Public Construction Cost Accounting Act ("The Act"), Public Projects up to $45,000 may be included in a Local Vendor Preference program. 3. Local Vendor Preference — Services For solicitations that are based on evaluation criteria other than lowest price (i.e. Professional Services), a percentage (typically 3% to 5%) is added to the final scores to be evaluated, as illustrated here: Exhibit B - Services � � � � � � � � � � � � � � �� . �� Evaluat�on�Cnteria� �� Venclor A�� -� �Uendor B Uendor C� � � � � � : �s. � '�`�� s �. r�-,�e '�.+� x.�'� :: :: a � �'� x�� ,- i �� .:. .t��i � �= ' °"' � ;. N'o;n LocalmUendor ��E��. � _Local'Uendor,<�, � v„ Local Ueador ,.. �"�_ __> ., ... .. � ,�,�. Price 20% 15% 16% Ex erience 23% 22% 23% Qualit 23% 25% 21 % Schedule 25% 25% 21 % E�aluation��Percenta �Points „ 91;% ' ��° 87% : N �� 81% "� `� , , �.... �� . � _ _. _ _ � ��. �� ; ___��.. . , �. �� ,�. . .,, __. . Local Vendor Preference (5°/o) N/A 5% 5% , �" °`� � � ri ..: �«��Grand Total�� 91%0�� k,92% ��"' ��.�� 86% � E � : ��,..... r�.. . �. _ ��.,s .,.. � ,..... �� . ._.., In this scenario, the Local Vendor (Vendor B) would be awarded the contract as a result of the 5% Local Vendor Preference applied to the total allotted evaluation percentage. 1"Local Vendor" means a vendor, contractor, or consultant who has a valid physical business address located within the boundaries of the City of Temecula, at least six months prior to bid or proposal opening date, from which the vendor, contractor, or consultant operates or performs business on a day-to-day basis, and holds a valid business license issued by the City of Temecula and designates, for sales tax purposes, the Ciry of Temecula as the point of sale for retail transactions within the City. Post office boxes are not verifiable and shall not be used for the purpose of establishing such physical address. R:\Finance Committee Meetings\4 - May 8, 2012\Examples - Local Vendor Preference.docx ` City of Temecula Local Vendor Preference Examples Pros and Cons Concerns over the implementation of a Local Vendor Preference program are minimal. Opponents argue that if the Local Vendor Preference program is not properly implemented, it will limit competition from outside competitors. In addition, opponents argue that the quality of services from Local Vendors accustomed to relying on said preference is diminished. Proponents, on the other hand, argue that said concerns can be mitigated with a solid implementation and oversight program. RC:jmm R:\Finance Committee Meetings\4 - May 8, 2012\Examples - Local Vendor Preference.docx C][TY O� T]EIVIEC�,A FINANCE DEPARTMENT MEMORANDUM TO: Mike Naggar, Finance Committee Member Chuck Washington, Finance Committee Member FROM: Genie Wilson, Director of Finance Roberto Cardenas, Fiscal Services Manager DATE: May 8, 2012 SUBJECT: City of Temecula Budget and Fiscal Policies In recent years, the importance of establishing sound fiscal policies has increased due to economic fluctuations. Fiscal policies provide guidance for responsible long term planning and assist in the budget development process. The Government Finance Officers Association (GFOA) recommends local governments follow a financial planning process based upon established financial policies and strategies. More importantly, fiscal policies provide a structure within which fiscal decisions should be made. The purpose of the attached City of Temecula Budget and Fiscal Policies is to ensure the City's finances are managed in a manner that will guide the planning, development, and ' implementation of the city's budget, provide for the cost effective delivery of quality services, and optimize all available resources toward the accomplishment of the City's Core Values as defined in the Quality of Life Master Plan. The fiscal policies are designed to be continually reviewed - new policies may be adopted (as needed) to foster responsible fiscal management. The Budget and Fiscal Policy document is organized in the following order: I. Financial Strategic Plan Purpose and Organization tl. Financial Reporting III. Fund Balance and Reserves IV. Staffing Policy V. Asset Management and Replacement Policy VI. Investments VII. Capitai Financing and Debt Management VIII. Interfund Transfers and Loans Policy IX. 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Annual Operating Budget (AOB) and Strategic Business Plan ............................3 B. Balanced Budget .....................................................................................................4 C. Five Year Financial Forecast ..................................................................................4 D. Capital Improvement Program (CIP) ......................................................................5 ---- - I1. FINANCIAL REPORTING ....................:.......................:::............:.... :.:.................:..8 - - A. Annual Reporting ......................................................................................:.............8 B. Interim Reporting ....................................................................................................8 C. Budget Amendments ..............................................................................................8 D. Extended Annual Reporting ...................................................................................8 III. FUND BALANCE AND RESERVES .....................................................................9 A. Fund Balance and Reserve Purpose ......................................................................9 B. Minimum Fund and Working Capital Balances .....................................................9 C. Future Capital Project Designations ......................................................................9 D. Other Designations and Reserves .........................................................................9 E. Fund Balance Policy ...............................................................................................9 F. Fund Balance Components :� ........................:........................................................10 G. Hierarchy of Spending Fund Balance ..................................................................10 IV. STAFFING POLICY .............................................................................................11 A. Regular Staffing .....................................................................................................11 � B. Project Staffing ......................................................................................................11 C. Temporary Staffing ...............................................................................................12 D . Work Hours ............................................................................................................12 E. Overtime Management .....................................................:....................................12 F. Independent Contractors ......................................................................................13 G. Productivity ...........................................................................................................13 H. Contracting for Services — Private Sector ...........................................................14 I. Contracting for Services — Government Service Contracts ...............................15 J. Contracting for Services — Regional Approach ...................................................15 V. ASSET MANAGEMENT AND REPLACEMENT (AMAR) POLICY ........................16 A. AMAR Definition ....................................................................................................16 B. AMAR Process .......................................................................................................16 C. AMAR Policy ..........................................................................................................17 D. AMAR Funding Strategy ................................................:......................................17 1 CITY OF TEMECULA BUDGET AND FISCAL POLICIES VI. INVESTMENTS ...................................................................................................18 A. Introduction ...........................................................................................................18 B. Objectives ..............................................................................................................18 C. Scope ..:..................................................................................................................19 D. Investment Authority .............................................................................................19 E. Safekeeping of Securities .....................................................................................20 F. Reporting ...............................................................................................................20 G. Qualified Dealers ......................................:............................................................20 _... - - H. Authorized Investments ..........:.:. .:: ...-- .�: _--- ::--- - ----..........: - ..21 ...... .......... ........... ............. .........:.:. I. Ineligible Investments ............:..............................................................................23 J. Swapping of Securities .........................................................................................23 K. Portfolio Adjustments ...........................................................................................23 L. Policy Review ........................................................................................................23 M. Ethics and Conflict of Interest ..............................................................................23 VII. CAPITAL FINANCING AND DEBT MANAGEMENT ..........................................25 A. Capital Financing ..................................................................................................25 B. Debt Management ........................................................................:........................26 C. Debt Capacity ........................................................................................................26 D. Independent Disclosure Counsel .........................................................................27 E. Land-Based Financings ............................:...........................................................27 F. Conduit Financings .................................................................................:.............29 G. Refinancings ..........................................................................................................30 VIII. INTERFUND TRANSFERS AND LOANS POLICY .............................................31 A. Establishment of Various Funds ..........................................................................31 B. Transfer between Funds .......................................................................................31 C. Interfund Loans .....................................................................................................31 IX. APPROPRIATIONS LIMITATION � 32 ' ....................................................................... A. Adopting a Resolution .................................................:........................................32 B. Supporting Documentation Available for Review ...............................................32 C. Calculating Appropriations ...................................................................................32 D. Review of User Fees and Charges ...:...................................................................32 E. Support of Legislation or Initiatives .....................................................................32 F. Voter Approval to Amend Appropriation Limit ....................................................32 _ � � 2 CITY OF TEMECULA BUDGET AND FISCAL POLICIES I. FINANCIAL STRATEGIC PLAN PURPOSE AND ORGANIZATION A. Annual Operating Budget (AOB) and Strategic Business Plan Through its Financial Strategic Plan, the City will link resources with results by: __ 1. Identifying community needs for essential services that improve quality of life through strategic planning that: a. Organize the programs required to provide these essential services; b. Establish program policies and goals, which define the nature and level of program services required; c. Identify activities performed in delivering program services. 2. Proposing goals for improving the delivery of program services that: a. Identify and appropriate the resources required to perform program activities and accomplish program goals. b. Set objectives to measure Performance (progress) pertaining to: . Long term goals based on Council priorities; • Output of program activities; . Accomplishment of program objectives; . Expenditure of program appropriations. 3. The AOB process encompasses the development, implementation, and evaluation of a plan for the provision of services for the upcoming fiscal year. The process includes political, managerial, planning, communication, and financial dimensions. The budget incorporates a long-term perspective, establishes linkages to broad organizational goals, and focuses budget decisions on desired results and outcomes. The AOB is formalized via the following process: a. A budget workshop is held with the City Council to receive Council direction and public comment, prior to budget preparation; b. Budget team updates policies and procedures for budget preparation, creates the budget process calendar, and prepares the current budget schedules for each department to use in preparing the new budget; c. A budget kickoff workshop is held with the City Manager, Department Directors, and Department Analysts to discuss the status_ of the current fiscal year budget, discuss the Five Year Financial Forecast, review the upcoming budget process calendar, discuss the impacts of �the current economic conditions at the State and Federal levels, and discuss the essential principles and elements of the budget process; CITY OF TEMECULA BUDGET AND FISCAL POLICIES d. Individual meetings are held with the budget team and each department to assist in the budget development process; e. The City Manager, in collaboration with the budget team, holds meetings with each department director (and analysts) to discuss their department budget req uest; f. A budget workshop is held with the City Council to receive public comment and to review the components of the proposed budget, prior to formal consideration for adoption; g. City Manager submits the proposed AOB and salary plan to the City Council at :- a public meeting for approval. B. Balanced Budget The City will maintain a balanced budget over the period of the Financial Strategic Plan. This means that: 1. Operating revenues must fully cover operating expenditures; 2. Ending fund balance must meet minimum policy levels. For the general fund, this level has been established at 20% of operating expenditures for economic uncertainties. C. Five Year Financial Forecast The City will prepare a five-year financial forecast bi-annually to assist in long range planning and policy development. The five-year forecast provides a tool to evaluate the ability of the City to fund proposed programs, operating and maintenance costs, capital expenditures, as well as operating costs related to future capital improvement projects: 1. Revenues are projected using a conservative approach, and are based on historical trends, stable residential development projections, internal analysis, and commercial growth that incorporates known development projects. Separate sets of assumptions are developed for major revenue types such as sales tax, property tax, community development fees, transient occupancy taxes, and investment income; 2. Departmental expenditure projections are developed using anticipated cost of living increases for general and administrative operating costs. Additional assumptions are incorporated for major expenditure categories such as public safety to ensure that commercial and residential growth projections are addressed to maintain current service levels. The five-year capital improvement program is reviewed with the annual operating and maintenance costs of each proposed project are identified and included in the forecast; 3. The five-year forecast indicates whether projected revenue growth will support anticipated expenditures for current levels of service. However, as the City � continues to grow, it is important to ensure that it can meet increasing demands, and be in a position to respond to possible changes in economic conditions. The five-year forecast is a dynamic tool that requires bi-annual update and review of its underlying assumptions to keep the City in a position of strong fiscal condition. � _ 4 �._�_..... _ _ CITY OF TEMECU�A BUDGET AND FISCAL POLICIES D. Capital Improvement Program (CIP) 1. CIP Purqose - The purpose of the Capital Improvement Program (CIP) budget document is to serve as a planning tool, which coordinates the level ranking, financing, and scheduling of major projects undertaken by the City. All projects presented in the five-year CIP budget are carefully programmed to ensure the community's capital improvement needs are met both now and in the future. In addition, the projects provide additional opportunities and access to the City and improve the overall quality of life as identified in the Quality of Life Master Plan (QLMP). This document is dynamic and, consequently, must be revised annually to address - changing needs, level rankings, and financial conditions. The City's goal in providing a CIP Budget is to develop a multi-year plan for capital improvement, update it annually, and follow through with all capital improvements in accordance with the plan. It also allows staff to budget operating and maintenance costs into the five year projection in order to determine the total cost of each project before it is undertaken. 2. CIP Development - This CIP budget document is developed by incorporating input from City Council and key management team �members, based on community comments and feedback received throughout the year. This team then, through several workshops, identifies and evaluates community needs in the areas of roads/streets, bridges, public buildings, parks and recreation facilities, and redevelopment projects. Each proposed project is reviewed and discussed to ensure funding, timing, and necessity. A CIP City Council workshop is held to provide the City Council with an opportunity to review each project in detail, and to receive public comments concerning the five-year program. 3. CIP Proiects: $30,000 or More - The capital improvements presented in the budget are the City's major projects, which exceed $30,000 in cost, have long-term life spans, and are generally non-recurring. These projects include land and right-of-way acquisition, design, construction or rehabilitation of public buildings or facilities, public infrastructure design and construction, park design and construction, and redevelopment projects. 4. Prolect Manaqer - Every CIP project will have a project manager who will prepare the project proposal, ensure that required phases are completed on schedule, authorize all project expenditures, ensure that all regulations and laws are observed, and periodically report project status. 5. Proiect Benefit - Projects must identify a benefit and reference a Core Value (QLMP) goal. 6. CIP Review Committee - In determining the relative merit of a proposed project, key management team members evaluate projects for feasibility, community enhancement, infrastructure and historic preservation, and safety. 7. CIP Level Rankinq - Projects in the CIP are scheduled in each of five fiscal years based on community needs, as determined by the City Council and availability of . funding. Level rankings in each major category (Circulation, Infrastructure/Other, Parks and Recreation, and Redevelopment Agency/Housing) are assigned in accordance with the following guidelines: _ 5 CITY OF TEMECULA BUDGET AND FISCAL POLICIES a. LEVEL I: The project is urgent and must be completed as soon as feasible. Failure to address the project may impact the health, safety, or welfare of the community or have a potential significant impact on the financial well being of the City. The project must be initiated or financial opportunity losses may result. � b. LEVEL II: The project is important and addressing it is necessary. The project impacts safety, law enforcement, health, welfare, economic base, quality of life, and has been identified as a priority in the Quality of Life Master Plan. c. LEVEL III: The project will enhance quality of life and will provide a benefit to - - - the community. Completion of the project will improve the community by providing cultural, recreational, and/or aesthetic value, or is deemed as a necessary improvement to a public facility. d. Future Years Projects: The project will be an improvement to the community, but does not necessarily need to be completed within a five-year capital improvement program time frame. 8. CIP Administrative Costs - The administrative costs associated with managing CIP projects are estimated (generally as five to ten percent of estimated construction costs), and included in each project budget. 9. CIP Oqerations and Maintenance (O & M� - Future operations and maintenance costs that result from CIP projects are estimated and identified in the CIP project sheets. These � incremental future operating costs are incorporated into the five-year forecast. 10. CIP Phases - The CIP will emphasize project planning, with projects progressing through at least two and up to ten of the following phases: a. Designate. Appropriates funds based on projects designated for funding by the Council through adoption of the Financial Strategic Plan. b. Study. Concept design, site selection, feasibility analysis, schematic design, environmental determination, property appraisals, scheduling, grant application, grant approval, specification preparation for equipment purchases. c. Environmental Review. Compliance with CEQA and other environmental studies, if necessary. d. Rea/ Property Acquisitions. Property acquisition for projects, if necessary. e. Site Preparation. Demolition, hazardous materials abatements, other � pre-construction work. f. Design. Final design, plan and specification preparation and construction cost estimation. � g. Construction. Construction contracts. � h. Construction Management. Contract project management and inspection, soils and material tests, other support services during construction. i. Equipment Acquisitions. Vehicles, heavy machinery, computers, office furnishings, other equipment items acquired and installed independently from construction contracts. 6 ___... CITY OF TEMECULA BUDGET AND FISCAL POLICIES 11. CIP Appropriation - The City's annual CIP appropriation for study, design, acquisition and/or construction is based on the projects designated by the Council through adoption of the Financial Strategic Plan. Adoption of the Financial Strategic Plan CIP appropriation does not automatically authorize funding for specific project phases. This authorization generally occurs only after the preceding project phase has been completed and approved by the Council and costs for the succeeding phases have been fully developed. If project costs at the time of bid award are less than the budgeted amount, the balance will be unappropriated and returned to fund balance or allocated to another project. If project costs at the time of bid award are greater than budget amounts, five basic options are available: - - -- - _ - -- - - -_ -- - a. Eliminate the project; . b. Defer the project for consideration to the next Financial Strategic Plan period; c. Rescope or change the phasing of the project to meet the existing budget; d. Transfer funding from another specified, lower level ranking project. e. Appropriate additional resources as necessary from fund balance. 12. CIP Budqet Carryover - Project accounts, which have been appropriated, will not lapse until completion of the project phase. 13. Proqram Obiectives - Project phases will be listed as objectives in the program narratives of the programs, which manage the projects. 14. General Plan Consistency Review - All projects are evaluated by the City's Planning Commission to ensure consistency with the provisions of the City of Temecula General Plan, while considering the City's long-term vision as developed by the City Council. The proposed Circulation, Infrastructure, and Parks and Recreation projects are reviewed and approved by the Planning Commission, Public/Traffic Safety Commission, and the Parks and Recreation Commission. 7 _ CITY OF TEMECULA BUDGET AND FISCAL POLICIES II. FINANCIAL REPORTING A. Annual Reporting The City will prepare annual financial statements as follows: 1. The City will contract for an annual audit by a qualified independent certified public accountant. The City will strive for an unqualified auditors' opinion. 2. The City will use generally accepted accounting principles in preparing its annual financial statements, and will strive to meet the requirements of the GFOA's Award for Excellence in Financial Reporting program. 3. The City will issue audited financial statements within 180 days after year-end. B. Interim Reporting The City will prepare and issue timely interim reports on the City's fiscal status to the Council and staff. This includes: on-line access to the City's financial management system by City staff; monthly reports to program managers; formal quarterly reports to the Council and Department Directors; mid-year budget reviews; and interim annual reports. C. Budget Amendments The Council may amend or supplement the budget at any time after its adoption by majority vote of the Council members. The City Manager has the authority to make administrative adjustments to the budget as long as those changes will not have a significant policy impact nor affect budgeted year-end fund balances. D. Extended Annual Reporting The City will prepare extended annual reports as required by federal and state requirements including, but not limited to: 1. State Controller Report 2. Street Reports _..... . _ g CITY OF TEMECULA BUDGET AND FISCAL POLICIES III. FUND BALANCE AND RESERVES A. Fund Balance and Reserve Purpose • This section summarizes the Fund Balance priorities and policies. B. Minimum Fund and Working Capital Balances The City will maintain a minimum fund balance of at least 20% of operating expenditures in the General Fund. This is considered the minimum level necessary to maintain the City's credit worthiness and to adequately provide for: --- 1. Economic uncertainties, local disasters, and other financial hardships or downturns in the local or national economy; 2. Contingencies for unseen operating or capital needs; 3. Cash flow requirements. C. Future Capital Project Designations , The Council may designate specific fund balance levels for future development of capital projects that it has determined to be in the best long-term interests of the City. D. Other Designations and Reserves In addition to the designations noted above, fund balance levels will be sufficient to meet funding requirements for projects approved in prior years which are carried forward into the new year; debt service reserve requirements; reserves for encumbrances; and other reserves or designations required by contractual obligations, state law, or generally accepted accounting principles. E. Fund Balance Policy � Fund balance is the accumulated excess of actual revenues and other financing sources over actual expenditures and other uses at year-end. In general terms, it represents the City's accumulated "savings" from year to year, as any fund balance realized at year-end is added to (or deducted from if expenditures exceeded revenues for that particular year) the previous year's fund balance. Fund balance is often referred to as "reserves". This policy establishes the procedures for reporting unrestricted fund balance in the . General Fund financial statements, as well as a fund balance expenditures hierarchy. Fund Balance commitments and assignments ensure that there will be adequate financial resources to protect the City against circumstances such as revenue shortfalls and unanticipated expenditures. The Policy also authorizes and directs the Director of Finance to prepare financial reports and categorize fund balance per Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. ,,,, - __._ _ ,,, _ .___� _ _ 9 CITY OF TEMECULA BUDGET AND FISCAL POLICIES F. Fund Balance Components There are five separate components of fund balance which identify the specific purposes for which amounts can be spent: (1) Nonexpendable Fund Balance — inherently nonexpendable; (2) Restricted Fund Balance — externally enforceable limitations on use; (3) Committed Fund Balance — self-imposed limitations on use; (4) Assigned Fund Balance — limitation resulting from intended use; (5) Unassigned Fund Balance — residual net resources. 1. Nonexpendable Fund Balance - Amounts that cannot be spent because they are either (a) not in spendable form, such as prepaid items or inventories; or (b) legally _.. ___ required to be maintained intact, such as the principal portion.of an endowment. . __ _ ___._ 2. Restricted Fund Balance - Amounts for a specific purpose that are either (a) externally imposed by creditors (such as through debt covenants), grantors, contributors, other governments' regulations; or (b) imposed by law through constitutional provisions or enabling legislation. , 3. Committed Fund Balance - Amounts authorized for specific purposes by a government's highest level of decision making authority (City Council). These committed amounts cannot be used for any other purpose unless the City Council removes or changes the specified use through the same formal action taken to establish the commitment. City Council action to commit fund balance needs to occur within the fiscal reporting period however, the amount can be determined subsequently. The City's committed fund balance includes a reserve for economic uncertainty. It is City policy to maintain a reserve of 20% of Annual General Fund appropriations. Amounts are committed to finance any significant unanticipated revenue shortfalls, negative State budget impacts or impacts from natural disasters or other catastrophic events. 4. Assigned Fund Balance - Amounts that are constrained for specific purposes, but are neither restricted or committed. For all governmental funds other than the General Fund, any remaining amounts not classified as nonexpendable, restricted, or committed are considered assigned. For the General Fund, this policy delegates the authority to assign amounts to be used for specific purposes to the Finance Director in consultation with the City Manager for the purpose of reporting these amounts in annual financial statements. 5. Unassigned Fund Balance - Residual net resources of the General Fund in excess of what can be classified in one of the other four categories. G. Hierarchy of Spending Fund Balance Restricted fund balance should be spent first when an expenditure is incurred for which both restricted and unrestricted fund balance is available. When an expenditure is incurred for purposes where amounts in any of the unrestricted classifications of fund balance could be used, committed amounts are to be spent first, followed by assigned amounts and then unassigned amounts. _ ____ __ ___ 10 CITY OF TEMECULA BUDGET AND FISCAL POLICIES IV. STAFFING POLICY A. Regular Staffing 1. The budget will fully appropriate the resources needed for authorized regular staffing. 2. Regular full-time benefitted employees will represent the core work force and the preferred means of staffing ongoing, year-round program activities and services. The City will strive to provide competitive compensation and benefit schedules for its authorized-regular work force. - Each regular employee will: a. Fill an authorized regular position; b. Receive salary and benefits consistent with labor agreements or other City Council approved compensation plans. 3. To manage the growth of the regular work force and overall staffing costs, the City will follow these procedures: a. The Council will authorize all regular positions. b. The Human Resources Department will coordinate and approve the hiring of all regular employees. c. Supplement core staff with a balanced workforce consisting of part-time, contract, and independent contractors. d. All requests for additional regular positions will include evaluations of: • The necessity, term and expected results of the proposed activity; • Staffing and material costs including salary, benefits, equipment, uniforms, clerical support and facilities; • The ability of private industry to provide the proposed service; • Additional revenues or cost savings, which may be realized. � e. Periodically, and before any request for additional regular positions, existing programs will be re-evaluated to determine if services can be provided with existing regular employees. � f. The City will make every effort to conduct an internal recruitment to fill regular positions. The City will evaluate the advantages and disadvantages of conducting an internal recruitment versus and external recruitment on a case-by-case basis. B. Project Staffing 1. The hiring of project employees will not be used as an incremental method for � expanding the City's regular work force. 2. Project employees include all employees other than regular employees, temporary staffing, elected officials and volunteers. Project employees will generally augment regular City staffing as extra-help employees, seasonal employees, contract employees, interns and work-study assistants. _ 11 CITY OF TEMECULA BUDGET AND FISCAL POLICIES 3. The City Manager and Department Directors will encourage the use of project employees to meet peak workload requirements, fill interim vacancies, and accomplish tasks where less than full-time, year-round staffing is required. Under this guideline, project employees will be hired for up to one year at a time in � conjunction with the annual operating budget on an at-will basis. Moreover, project employee hours will generally not exceed 50% of a regular, full-time position (1,000 hours annually). There may be limited circumstances where the use of project employees on an ongoing basis in excess of this target may be appropriate due to unique programming or staffing requirements. However, any such exceptions must be approved by the City Manager based on the review and recommendation of the ___ _ _ _ ._. Human Resources Department. __ C. Temporary Staffing 1. Temporary Staffing agencies can be contacted only in the case of a short-term assignment such as sick leave, disability leave, maternity leave, etc. 2. The City will pay the Temporary Staffing Agency a. fair base rate for the employee with a negotiated markup while the temporary employee is providing work for the City. D. Work Hours 1. Regular employee, project employee, and temporary employee work hours will be based on the needs of the City and the position. 2. Employee work hours may be flexed in an effort to minimize overtime. E. Overtime Management 1. Overtime should be used only when necessary and when other alternatives are not feasible or cost effective. 2. All overtime must be pre-authorized by a department director or delegated in accordance with existing policy. 3. Departmental operating budgets should reflect anticipated annual overtime costs and departments will regularly monitor overtime use and expenditures. 4. When considering the addition of regular, project, or temporary staffing, the use of overtime as an alternative will be considered. The department will take into account: a. The duration that additional staff resources may be needed; b. The cost of overtime versus the cost of additional staff; c. The skills and abilities of current staff; d. Training costs associated with hiring additional staff; e. The impact of overtime on existing staff; f. The impact on quality of services. , . �. __ . 12 CITY OF TEMECULA BUDGET AND FISCAL POLICIES F. Independent Contractors Independent contractors are not City employees. They may be used in two situations: 1. Short-term, peak workload assignments to be accomplished using personnel contracted through an outside employment agency (OEA). In this situation, it is anticipated that City staff will closely monitor the work of OEA employees and minimal training will be required. However, they will always be considered the employees of the OEA and not the City. All placements through an OEA will be coordinated through the Human Resources Department and subject to the approval of the-Human-Resour-ces-Department. - - - - 2. Construction of public works projects and delivery of operating, maintenance or specialized professional services not routinely performed by City employees. Such services will be provided without close supervision by City staff, and the required methods, skills and equipment will generally be determined and provided by the contractor. Contract awards will be guided by the City's purchasing policies and procedures. G. Productivity The City will repeatedly monitor and review the City's methods of operation to ensure that services continue to be delivered in the most cost-effective manner possible. This review process encompasses a wide range of productivity issues, including: 1. Analyzing systems and procedures to identify and remove unnecessary review requirements. 2. Evaluating the ability of new technologies and related capital investments to improve productivity. 3. Developing the skills and abilities of all City employees. 4. Developing and implementing appropriate methods of recognizing and rewarding exceptional employee performance. 5. Evaluating the ability of the private sector to perform the same level of service at a lower cost. 6. Periodic formal reviews of operations on a systematic, ongoing basis. 7. Maintaining a decentralized approach in managing the . City's support service functions. Although some level of centralization is necessary for review and control purposes, decentralization supports productivity by: a. Encouraging accountability by delegating responsibility to the lowest possible � level; b. Stimulating creativity, innovation and individual initiative; c. Reducing the administrative costs of operation by eliminating unnecessary� review procedures; - _._� : _. 13 �� CITY OF TEMECULA BUDGET AND FISCAL POLICIES d. Improving the ability of the organization to respond to changing needs, and identify and implement cost-saving programs; e. Assigning responsibility for effective operations and citizen responsiveness to the department. H. Contracting for Services — Private Sector 1. General Policy Guidelines: a. Contracting with the private sector for the delivery of services may provide the City with a significant opportunity for cost containment and productivity -- enhancements: As such, the City is committed to using private sector resources in delivering municipal services as a key element in our continuing efforts to provide cost-effective programs. b. Private sector contracting approaches under this policy include construction projects, professional services, outside employment agencies and ongoing operating and maintenance services. c. In evaluating the costs of private sector contracts compared with in-house performance of the service, indirect, direct, and contract administration costs of the City will be identified and considered. d. Whenever private sector providers are available and can meet established service levels, they will be seriously considered as viable service delivery alternatives using the evaluation criteria outlined below: e. For programs and activities currently provided by City employees, conversions to contract services will generally be made through attrition, reassignment or absorption by the contractor. 2. Evaluation Criteria - Within the general policy guidelines stated above, the cost-effectiveness of contract services in meeting established service levels will be determined on a case-by-case basis using the following criteria: a. Is a sufficient private sector market available to competitively deliver this service and assure a reasonable range of alternative service providers? b. Can the contract be effectively and efficiently administered? c. What are the consequences if the contractor fails.to perform, and can the contract reasonably be written to compensate the City for any such damages? d. Can a private sector contractor better respond to expansions, contractions or special requirements of the service? � e. Can the work scope be sufficiently defined to ensure that competing proposals can be fairly and fully evaluated, as well as the contractor's performance after bid award? f. Does the use of contract services provide us with an opportunity to redefine service levels? g. Will the contract limit our ability to deliver emergency or other high priority services? h. Overall, can the City successfully delegate the performance of the service but still retain accountability and responsibility for its delivery? 14 CITY OF TEMECULA BUDGET AND FISCAL POLICIES I. Contracting for Services - Government Service Contracts 1,. General Policy Guidelines: a. Contracting with other government entities for the delivery of services such as police and fire provides the City with significant opportunities for cost containment and productivity enhancements. The City utilizes government service confracts to deliver municipal `services as a key element in the City's continuing efforts to provide cost-effective programs. b. Police Contract Services — The City contracts with Riverside County Sherriff's Department for police services. Under this contract the City maintains a ratio of one (1) uniformed police officer for every one thousand (1000) residents. Contracting with the County facilitates an efficient, effective and affordable model of policing for the community. The police contract allows the city to partner with the County to leverage resources to reduce costs for supervision, administration, training, clerical support, vehicles and equipment. , c. Fire Contract Services - The City contracts with the Riverside County Fire Department for all fire services. Contracting with the County facilitates an efficient, effective and affordable model of fire protection, disaster preparedness, fire prevention, and emergency operation services for the community. The fire contract allows the City to partner with the County to leverage resources to reduce costs for supervision, administration, training, clerical support, vehicles and equipment. J. Contracting for Services — Regional Approach 1. A regional approach to public services leverages economies of scale to improve outcomes and services to the citizens. Therefore, prior to entering into private or government service contracts, the City will require the completion of a systematic assessment to determine whether a regional approach to providing services is necessary. a. Animal Control Services - The City contracts with Animal Friends of the Valleys for animal control services and the County of Riverside (via the Southwest Community Financing Authority) for animal sheltering services. Contracting with multi-agencies for these services demonstrates a regional approach of leveraging resources to provide efficient services (at a reduced cost). . �CITY OF TEMECULA BUDGET AND FISCAL-POLICIES V. ASSET MANAGEMENT AND REPLACEMENT (AMAR) POLICY A. AMAR Definition Asset Management and Replacement is the practice of strategically managing the life cycle of the City's capital infrastructure to achieve the greatest return on every tax dollar invested. The capital infrastructure's life-cycle includes how the asset is planned, designed, constructed, operated, maintained, replaced, and disposed. Capital infrastructure includes streets, roads, public facilities, parks and trails, and drainage facilities, as follows: 1. Streets and Roads------Assets -related- to the provision of transportation (e.g. -- pedestrian, bicycles, commercial vehicles, private vehicles, and public vehicles. 2. Public Facilities — Building and land assets used for, a diverse range of services including community services, recreation, accommodation, and municipal administration. 3. Parks and Trails - Assets which provide opportunities for organized and informal recreation activities (e.g. sports, exercise), provide aesthetic and cultural value to the community, and provide public spaces for social interaction. 4. Drainage Facilities — Assets which provide a measure of flooding protection to the community from storm water runoff and those assets which improve the water quality of storm water runoff going into main drains and waterways. B. AMAR Process As assets age, their performance (service provided) will deteriorate. Therefore, a process must be applied to determine when ability of an asset to meet service standards deteriorates to an unacceptable level. This means considering all management options , and strategies as part of the asset lifecycle, from planning to disposal. The objective of managing the assets in this manner is to look at long-term cost impacts when making asset management decisions. An effective process will be based on the following sequence: �� yAMI� fAMAR � � AMAR ��,�:, ,� � � Opera6onal ' �� £�� Plan �� .� �,��..�Plans� � � � � The AMAR Policy provides general direction and guidance for the AMAR Plan. The AMAR Plan provides more detailed direction and guidance for all major asset classes (Streets and Roads, Public Facilities, Parks and Trails, and Drainage Facilities). The AMAR Operational Plans cater for the delivery of specific asset management. The AMAR Plan is based on applicable management studies, best practices, and analysis and should be updated every five years. The actual replacement of assets via the AMAR Operational Plans is dependent on staff analysis and recommendation after a review of any intervening variables such as variations in service delivery demands, force majeure, and programming. The AMAR Operational Plans are updated annually as part of the , operating budget process. _. Y ___ _ 16 CITY OF TEMECULA BUDGET AND FISCAL POLICIES C. AMAR Policy The purpose of the Asset Management and Replacement Policy (AMAR Policy) is to demonstrate the City's commitment to the responsible management of the City's capital infrastructure. The AMAR Policy ensures adequate provisions are made for the long-term replacement of the City's capital infrastructure by: �, 1. Incorporating appropriate asset management best practices to ensure that the City delivers the highest appropriate level of service through its assets to: a. Ensure service delivery-needs-form the basis of asset management; b. Incorporate a life-cycle approach to asset management. 2. Applying transparent and responsible financial management of City assets that: a. Integrate asset management with budgetary planning; b. Provide for present needs while protecting resources for future generations. 3. Meeting or surpassing legislative requirements for asset management. 4. Ensuring resources and operational capabilities are identified and responsibility for asset management is allocated. D. AMAR Funding Strategy 1. AMAR Fund Policy: a. The funding strategy shall be based on the following: • An evaluation of available funds in the General Fund, Special Reserve Funds, and the Internal Service Funds; • A comparison of available funds against the requirements of AMAR Plan (based on applicable management studies, best practices, and analysis); • Establishment of a separate AMAR Fund and Policy (e.g. designation, reservation) that best meets the needs of the City. b. When established, the drafting of the _actual AMAR Fund Policy will be dependent on Council guidance and direction, and based on the analysis of the completed management studies. 2. The purpose of the Asset Management Fund is to: a. Accumulate earnings to provide a long-term funding source for replacement/rehabilitation of City infrastructure while preserving the principle balance of the Fund; b. Provide financial reserves to respond to natural disasters and other emergencies; c. Provide a source for internal loans and liquidity; d. Serve as collateral for City debt issues; e. Asset Management Fund assets may not be used for any purpose without approval of the City Council. i� CITY OF TEMECULA BUDGET AND FISCAL POLICIES VI. INVESTMENTS A. Introduction The intent of this Investment Policy is to establish the limits within which the City's Investment Program shall be conducted. Investment goals and objectives are defined. Authorized investments and reporting requirements are identified. The monies entrusted to the City Treasurer will be referred to as the "Fund" throughout the remainder of this document. B. Objectives The investment policies and practices of the City of Temecula are based upon State law and prudent money management. The primary goals of these policies include: 1. To protect the principal monies entrusted to this office. Safety of principal is the foremost objective of the City of Temecula. Each investment transaction shall seek to ensure that capital losses are avoided, whether from securities default, broker-dealer default, or erosion of market value. �The City shall seek to preserve principal by mitigating the two types of risk (credit risk and market risk). a. Credit Risk - Defined as the risk of loss due to failure of the issuer of a security, shall be mitigated by investing only with issuers whose financial strength and . reputation can be verified to be the highest as rated by nationally known rating agencies, and by diversifying the investment portfolio so that the failure of any one issuer would not unduly harm the City's cash flow. b. Market Risk - The risk of market value fluctuations due to overall changes in the general level of interest rates, shall be mitigated by (a) structuring the portfolio so that securities mature earlier than or concurrent with the timing of major cash outflows, thus eliminating the need to sell securities prior to their maturity; (b) prohibiting the use of leverage and margin accounts; and (c) prohibiting the taking of short positions - that is, selling securities which the City does not own. It is explicitly recognized herein, however, that in a diversified portfolio, occasional measured losses are inevitable, and must be considered within the context of the overall investment return. 2. To provide sufficient liquiditv to meet normal operatinq and unexpected expenditures. The portfolio will be structured with sufficient liquidity to allow the , City to meet expected cash requirements. This will be accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands. Since all possible cash demands cannot be anticipated, the � portfolio will maintain a liquidity buffer and invest primarily in securities with active secondary and resale markets. 3. To assure compliance with all Federal, State, and Local laws governinq the investment of monies under the control of the Citv Treasurer. The legal basis for the City's investment activities is the City of Temecula Municipal Code, Chapter 3.04, Revenue and Finance, Fiscal Provisions Generally and Government Code Sections 5922, 16429.1, 53600 to 53609, and 53630 to 53686, which include parameters for authorized investments, report of investments and investment authority. ' ___.__..._ _ 18 CITY OF TEMECULA BUDGET AND FISCAL POLICIES 4. To qenerate a maximum amount of investment income within the parameters of prudent risk manaqement and consistent with the above policies. The City's investment portfolio shall be designed to attain a market-average rate of return through economic cycles. The market-average rate of return is defined as the average return on three-month U.S. Treasury bills. Whenever possible, and consistent with risk limitations and prudent investment principles, the Treasurer shall seek to augment returns above the market average rate of return. The policy will also address risk management because it is such an integral part of the investment policy. To concentrate only on maximizing return , would be --. dangerous. Therefore, -policy issues-will-be- directed to: 1) limiting the Fund's � exposure to each issue and issuer of debt, arid 2) determining a minimum credit requirement that firms must have in order to hold City money. C. Scope - This investment policy applies to all funds under the control of the City Treasurer, including but not limited to the general fund, special revenue funds, debt service funds, capital improvement funds, trust funds and proceeds of bonds sale in the custody of the Treasurer and any other funds under his control. California Government Code Section 53601(I) permits money from bond proceeds, obligations under a lease, installment sales or other agreements to be invested in any security that meets the statutory provisions governing the issuance of the bond or other agreements made by the issuing agency. Furthermore, California Government Code Section 5922(d) provides that notwithstanding any other provision of law, proceeds of bonds and any moneys set aside and pledged to secure payment of the bonds or certain other contracts specified in Section 5922, may be invested in securities or obligations described in the ordinance, resolution, indenture, agreement, or other instrument providing for the issuance of the bonds or the contract. D. Investment Authority The City of Temecula Municipal Code delegates to the City Treasurer the authority to invest and reinvest moneys of the city, to sell or exchange securities, and to deposit them and provide for their safekeeping. The City Treasurer is responsible for daily management of the investment program, including: 1. Establishing procedures for operation consistent with the investment policy; 2. Approving daily investment transactions; � 3. Developing projections of the City's cash requirements for operating needs; 4. Reviewing the liquidity position of the investment portfolio; 5. Ensuring that the City's cash position is consistent with operating requirzments; 6. Preparing appropriate investment reports; 7. Developing, implementing and monitoring controls over investments; 8. Developing record keeping for investment transactions. _ 19 CITY OF TEMECULA BUDGET AND FISCAL POLICIES The City Treasurer may delegate investment authority to qualified and competent officials and City employees such as the Finance Director, Assistant Finance Director, or Revenue - Manager. All persons authorized to make investment decisions on behalf of the City are trustees of the public funds and therefore fiduciaries subject to the tollowing prudent investor standard as defined in Califorriia Government Code Section 53600.3: When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like ---- --- -- ---...— -- ----__. _ _ _ - -- capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law. E. Safekeeping of Securities To protect against potential losses by collapse of individual securities. dealers, all securities owned by the City, including collateral on repurchase agreements, shall be held in safekeeping by a third party bank trust department, acting as agent for the City under the terms of a custody agreement executed by the bank and by the City. All securities will be received and delivered using standard delivery versus payment procedures (i.e., the City's safekeeping agent will only release payment for a security after the security has , been properly delivered). This section is intended to comply with Government Code Sections 53601 and 53608. . F. Reporting The City Treasurer shall render a monthly report to the City Manager and City Council showing the type of investment, issuing institution, selling institution, date of maturity, par and dollar amount of deposit, current market value for all securities, return on the City's investment portfolio expressed as an annual percentage rate, yield to maturity, cash flow information demonstrating that the City can meet its upcoming financial obligations, and such data as may be required by the City Council. The report shall also state its relationship to this statement of investment policy, as directed under the Code. The Treasurer shall at least annually submit a recommended updated Investment Policy to be reviewed and approved by the City Council. The City's investment reporting policy meets or exceeds the requirements of Section 53646 of the California Government Code. G. Qualified Dealers The City shall transact investments only with banks, savings and loans, state-licensed investment security broker-dealers, the State of California Local Agency Investment Fund, or brokerage firms designated as primary government dealers by, and regularly reporting to, the New York Federal Reserve Bank. Investment staff shall investigate dealers who wish to do business with the City in order to determine if they are adequately capitalized, market securities appropriate to the City's needs, and are recommended by managers of , portfolios similar to the City's. The City's Broker/Dealer Questionnaire will be used in this investigation. _:_- - 20 , CITY OF TEMECULA BUDGET AND FISCAL POLICIES The City shall at least annually send a copy of the current investment policy to all dealers approved to do business with the City. Confirmation of receipt of this policy shall be considered as evidence that the dealer understands the City's investment policies, and intends to show the City only appropriate investments. H. Authorized Investments Investments shall be made in the context of the "prudent investor" rule, which states: Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, butJfor investment, considering the probable safety of their capital as well as the probable income to be derived. The City is further governed by the California Government Code, Sections 5922, 16429.1, and 53600 et seq. Within the context of these limitations, the following investments are authorized, as further limited herein: 1. United States Treasurv Bills, Bonds, and Notes, or those for which the full faith and credit of the United States are pledqed for payment of principal and interest. There is no limitation as to the percentage of the portfolio that can be invested in this category. Maturity is not to exceed the projected dates of the City's cash needs or five years, whichever is less. 2. Obliqations issued by the Federal Farm Credit Bank Svstem (FFCB), the Federal Home Loan Bank Board (FHLB), the Federal Home Loan Mortqaqe Corporation � (FHLMC), the Federal National Mortqaqe Association (FNMA), and other United States aqency obliqations with maturities of five vears or less. Although there is no percentage limitation on the dollar amount that can be invested in these issues, the "prudent investor" rule shall apply for a single agency name. Maturity is not to � exceed the projected dates of the City's cash needs or five years, whichever is less. 3. Bills of exchanqe or time drafts drawn on and accepted bv a commercial bank, otherwise known as banker's acceptances. Banker's acceptances purchased may not exceed 180 days to maturity or 40% of the market value of the portfolio. No more than 10% of the market value of the portfolio may be invested in banker's acceptances issued by any one bank. 4. Commercial paper rankinq of the hiqhest letter and number ratinq by a nationally recoqnized statistical ratinq orqanization (NRSRO), and issued by a domestic corporation havinq assets in excess of $500,000,000 and havinq an "A-1" or better ratinq on its lonq-term debentures as provided by a NRSRO. Purchases of eligible commercial paper may not exceed 15% of the market value of tlie portfolio. No more than 10% of the market value of the portfolio may be invested in commercial paper issued by any one corporation. The City may invest in no more than 10% of a single corporation. The City may invest in no more than 10% of a single corporation's commercial paper. Maturity is not to exceed 180 days. �� . ,___. 21 CITY OF TEMECULA BUDGET AND FISCAL POLICIES ' 5. Neqotiable certificates of deposit issued bv nationallv or state-chartered banks or state or federal savinqs and loan associations. Negotiable certificates of deposit (NCDs) differ from other certificates of deposit by their deposit liquidity. They are issued against funds deposited for specified periods of time and earn specified or variable rates of interest. NCDs are traded actively in secondary markets. When feasible, an independent trading service will be used as part of the evaluation process. Issuers must be rated "B" or better by Thomson Bank Watch or equivalent rating service, or rated A-1 for deposits by Standard & Poors, or P-1 for deposits by Moodys or comparably rated by a national rating agency. Transactions in NCDs shall not collectively exceed 30% of the total portfolio in effect immediately after any such investment is made. __ ._.. .__._ _ ._ .__ ___ __ . . _ 6. Repurchase Aqreements. The City may invest in repurchase agreements with banks and dealers with which the City has entered into a master repurchase agreement which specifies terms and conditions of repurchase agreements. Transactions shall be limited to the primary dealers and the top banking institutions according to the rating agency based on liquidity, profitability, and financial strength. The maturity of repurchase agreements shall not exceed thirty days. The market value of securities used as collateral for repurchase agreements shall be monitored daily by the investment staff and will not be allowed to fall below 102% of the value of the repurchase agreement plus the value of collateral in excess of the value of the repurchase agreement. In order to conform with provisions of the Federal Bankruptcy Code which provide for the liquidation of securities held as collateral for repurchase agreements, the only securities acceptable as collateral shall be certificates of deposit, eligible bankers' acceptances, or securities that are direct obligations of, or that are fully guaranteed as to principal and interest by, the United States or any agency of the United States. No more than 50% of the portfolio may be invested in repurchase agreements, and a"perfected security interesY' shall always be maintained in the securities subject to a repurchase agreement. 7. Local Aqencv Investment Fund. The City may invest in the Local Agency Investment Fund (LAIF) established by the State Treasurer for the benefit of local agencies up to the maximum permitted by State law. 8. Time Deposits. As to the deposits of non-surplus funds, the City may invest in non-negotiable time deposits collateralized in accordance with the California Government Code (including, but not limited to, entering into a contract with the depository institution pursuant to California Government Code Section 53649) in those banks and savings and loan associations that meet the requirements for � investment in negotiable certificates of deposit. Since time deposits are not liquid, no more than 15% of the portfolio may be invested in this category. The depository institution should have been in existence for at least five years. The City may waive the first $100,000 of collateral security for such deposits if the institution is insured pursuant to federal law. In order to secure the uninsured portions of such deposits, an institution shall maintain at least 10% in excess of the total amount deposited. Real estate mortgages may not be accepted as collateral. The maximum term for deposits shall be one year. In general, the depository institution must have a minimum 6% net worth to assets ratio or the minimum ratio established by the Comptroller of the Currency. The depository institution's operation must have been , profitable during their last reporting period. ____ ��_________ 22 CITY OF TEMECULA BUDGET AND FISCAL POLICIES 9. Monev Market Funds. The City may invest in money market funds that invest solely in U.S. Treasuries, obligations of the U.S. Treasury, and repurchase agreements relating to such treasury obligations. To be eligible, the money market fund must have attained the highest ranking available as evaluated by.a nationally recognized rating service and retained an investment advisor with not less than five years experience and that is registered with the SEC, and which advisor has assets under management in excess of $500 million. Except as otherwise noted, this list of authorized investments is intended to apply to the investment of all operating and surplus funds. The investment of bond proceeds shall be governed by the permitted investments as specified in the official statement for each bond issue. � -�- - I. Ineligible Investments Investments not described herein, including, but not limited to, reverse repurchase agreements, mutual funds (other than money market funds), zero coupon bonds, inverse floaters, mortgage-derived securities, common stocks and corporate notes and bonds are prohibited from use in the City's investment portfolio. J. Swapping of Securities A swap is the movement from one security to another and may be done for a variety of reasons, such as to increase yield, lengthen or shorten maturities, to take a profit, or to increase investment quality. The purchase transaction and the sale transaction must each be recorded separately and any losses or gains on the sale must be recorded. K. Portfolio Adjustments Should an investment percentage-of-portfolio limitation be exceeded due to an incident such as fluctuation in portfolio size, the affected securities may be held to maturity to avoid losses. When no loss is indicated, the Treasurer shall consider reconstructing the portfolio basing his or her decision, in part, on the expected length of time the portfolio will be unbalanced. L. Policy Review This investment policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity, and return, and its relevance to � current law and financial and economic trends. The City Council shall be responsible for maintaining guidance over this investment policy to ensure that the City can adapt readily to changing market conditions, and shall approve any modification to the investment policy prior to implementation. M. Ethics and Conflict of Interest Officers and employees involved in the investment process shall refrain from personal � business. activity that conflicts with the proper execution of the investment program or impairs their ability to make impartial investment decisions. _.___. 23 CITY OF TEMECULA BUDGET AND FISCAL POLICIES In addition, no funds shall be invested in negotiable certificates of deposit issued by, or non-negotiable time deposits under contract with a State or Federal credit union if a member of the City Council or any person with investment decision making authority in the administrative office, manager's office, budget office, auditor-controller's office, or treasurer's office of the City also serves on the board of directors, or any committee appointed by the board of directors, or the credit committee or the supervisory committee of the State or Federal credit union issuing the negotiable certificates of deposit or in which the non-negotiable time deposit is proposed to be deposited. Additionally, officers and staff involved in the investment of public funds are required to annually file a Fair Political Practices Commission Statement of Economic Interest form. __�__..�� __.___ _ ._ 24 CITY OF TEMECULA BUDGET AND FISCAL POLICIES VII. CAPITAL FINANCING AND DEBT MANAGEMENT A. Capital Financing 1. The City will consider the use of debt financing only for one=time capital improvement projects and only under the following circumstances: a. When the project's useful life will exceed the term of the financing; b. When project revenues or specific resources will be sufficient to service the long-term debt. 2. Debt financing will not be considered appropriate for any recurring purpose such as current operating and maintenance expenditures. The issuance of short-term instruments such as revenue, tax or bond anticipation notes is excluded from this limitation. (See Investment Policy) 3. Capital improvements will be financed primarily through user fees, service charges, assessments, special taxes or developer agreements when benefits can be specifically attributed to users of the facility. Accordingly, development impact fees should be created and implemented at levels sufficient to ensure that new development pays its fair share of the cost of constructing necessary community facilities. � 4. Transportation related impact fees are a major funding source in financing transportation system improvements. However, revenues from these fees are subject to significant fluctuation based on the rate of new development. Accordingly, the following guidelines will be followed in designing and building projects funded with transportation impact fees: a. The availability of transportation impact fees in funding a specific project will be analyzed on a case-by-case basis as plans and specification or contract awards are submitted for City Manager or Council approval. b. If adequate funds are not available at that time, the Council will make one of two determinations: • Defer the project until funds are available; • Based on the high-priority of the project, advance funds from the General Fund, which will be reimbursed as soon as funds become available. Repayment of General Fund advances will be the first use of transportation impact fee funds when they become available. 5. The City will use the following criteria to evaluate pay-as-you-go versus long-term financing in funding capital improvements: a. Factors Favoring Pay-As-You-Go Financing: • Current revenues and adequate fund balances are available or project phasing can be accomplished; • Existing debt levels adversely affect the City's credit rating; •� Market conditions are unstable or present difficulties in marketing. 2s CITY OF TEMECULA BUDGET AND FISCAL POLICIES b. Factors Favoring Long Term Financing: • Revenues available for debt service are deemed sufficient and reliable so that long-term financings can be marketed with investment grade credit ratings; • The project securing the financing is of the type, which will support an investment grade credit rating; • Market conditions present favorable interest rates and demand for City financings; • A project is mandated by state or federal requirements, and resources are insufficient or unavailable; - - - ------ - • The project is immediately required to meet or relieve capacity needs and current resources are insufficient or unavailable. B. Debt Management 1. The City will not obligate the General Fund to secure long-term financings except when marketability can be significantly enhanced. 2. An internal feasibility analysis will be prepared for each long-term financing which analyzes the impact on current and future budgets for debt service and operations. This analysis will also address the reliability of revenues to support debt service. 3. The City will generally conduct financings on a competitive basis. However, negotiated financings may be used due to market volatility or the use of an unusual or complex financing or security structure. 4. The City will seek an investment grade rating (Baa/BBB or greater) on any direct debt and will seek credit enhancements such as letters of credit or insurance when necessary for marketing purposes, availability and cost-effectiveness. 5. The City will monitor all forms of debt annually coincident with the City's Financial Strategic Plan preparation and review process and report concerns and remedies, if needed, to the Council. 6. The City will diligently monitor its compliance with bond covenants and ensure its adherence to federal arbitrage regulations. 7. The City will maintain good, ongoing communications with bond rating agencies about its financial, condition. The City will follow a policy of full disclosure on every financial report and bond prospectus (Official Statement). C. Debt Capacity 1. General Purpose Debt Capacitv. The City will carefully monitor its levels of . general-purpose debt. Because our general purpose debt capacity is limited, it is important that we only use general purpose debt financing for high-priority projects where we cannot reasonably use other financing methods for two key reasons: _.. . _ _ 26 CITY OF TEMECULA BUDGET AND FISCAL POLICIES a. Funds borrowed for a project today are not available to fund other projects tomorrow; b. Funds committed for debt repayment today are not available to fund operations in the future. In evaluating debt capacity, general-purpose annual debt service payments should generally not exceed 10% of General Fund revenues; and in no case should they exceed 15%. Further� direct debt will -- --- - - -- . - not exceed 2% of assessed valuation; and no more than 60% of capital improvement outlays will be funded from long-term financings. D. Independent Disclosure Counsel The following criteria will be used on a case-by-case basis in determining whether the City should retain the services of an independent disclosure counsel in conjunction with specific project financings: 1. The City will generally not retain the services of an independent disclosure counsel when all of the following circumstances are present: a. The revenue source for repayment is under the management or control of the City, such as general obligation bonds, revenue bonds, lease-revenue bonds or certificates of participation; b. The bonds will be rated or insured. 2. The City will consider retaining the services of an independent disclosure counsel when one or more of following circumstances are present: a. The financing will be negotiated, and the underwriter has not separately engaged an underwriter's counsel for disclosure purposes; b. The revenue source for repayment is not under the management or control of the City, such as land-based assessment districts, tax allocation bonds or - conduit financings; c. The bonds will not be rated or insured; d. The City's financial advisor, bond counsel or underwriter recommends that the City retain an independent disclosure counsel based on the circumstances of the financing. E. Land Financings 1. Public Purpose. There will be a clearly articulated public purpose in forming an assessment or special tax district in financing public infrastructure improvements. This should include a finding by the Council as to why this form of financing is preferred over other funding options such as impact fees, reimbursement agreements or direct developer responsibility for the improvements. 2. Eliqible Improvements. Except as otherwise determined by the Council when proceedings for district formation are commenced, preference in financing public improvements through a special tax district shall be given for those public improvements that help achieve clearly identified community facility and infrastructure goals in accordance with adopted facility and infrastructure plans as set forth in key policy documents such as the General Plan, Specific Plan, Facility or Infrasfructure Master Plans, or Capital Improvement Plan. Such improvements include study, design, construction and/or acquisition of: CITY OF TEMECULA BUDGET AND FISCAL POLICIES a. Public safety facilities; b. Major transportation system improvements, such as freeway interchanges; bridges; intersection improvements; construction of new or widened arterial or collector streets (including related landscaping and lighting); sidewalks and other pedestrian paths; transit facilities; and bike paths; c. Storm drainage, creek protection and flood protection improvements; d. Parks, trails, community centers and other recreational facilities; e. Open space; f. Cultural and social service facilities; g. Other governmental facilities and improvements such as offices, information --- technology systems and telecommunication systems. -- 3. Active Role. Even though land-based financings may be a limited obligation of the City, we will play an active role in managing the district. This means that the City will select and retain the financing team, including the financial advisor, bond � counsel, trustee, appraiser, disclosure counsel, assessment engineer and underwriter. Any costs incurred by the City in retaining these services will generally be the responsibility of the property owners or developer, and will be advanced via a deposit when an application is filed; or will be paid on a contingency fee basis from the proceeds from the bonds. 4. Credit Qualitv. When a developer requests a district, the City will carefully evaluate the applicant's financial plan and ability to carry the project, including the payment of assessments and special taxes during build-out. This may include detailed background, credit and lender checks, and the preparation of independent appraisal reports and market absorption studies. For districts where one property owner accounts for more than 25% of the annual debt service obligation, a letter of credit further securing the financing may be required. 5. Reserve Fund A reserve fund should be established in the lesser amount of: the maximum annual debt service; 125% of the annual average debt service; or 10% of the bond proceeds. 6. Value-to-Debt Ratios. The minimum value- to-date ratio should generally be 4:1. This means the value of the property in the district, with the public improvements, should be at least four times the amount of the assessment or special tax debt. In special circumstances, after conferring and receiving the concurrence of the City's financial advisor and bond counsel that a lower value-to-debt ratio is financially prudent under the circumstances, the City may consider allowing a value-to-debt ratio of 3:1. The Council should make special findings in this case. 7. A�praisal Methodology. Determination of value of property in the district shall be based upon the full cash value as shown on the ad valorem assessment roll or upon an appraisal by an independent Member Appraisal Institute (MAI). The definitions, standards and assumptions to be used for appraisals shall be determined by the City on a case-by-case basis, with input from City consultants and district applicants, and by reference to relevant materials and information promulgated by the State of California, including the Appraisal Standards for Land-Secured Financings prepared by the California Debt and Investment Advisory Commission. 8. Capitalized Interest Durinq Construction. Decisions to capitalize interest will be made on case-by-case basis, with the intent that if allowed, it should improve the _ ___ . �.._.�.._... ___ 28 CITY OF TEMECULA BUDGET AND FISCAL POLICIES credit quality of the bonds and reduce borrowing costs, benefiting both current and future property owners. 9. Maximum Burden. Annual assessments (or special taxes in the case of Mello-Roos or similar districts) should generally not exceed 1% of the sales price of the property; and total property taxes, special assessments and special taxes payments collected on the tax roll should generally not exceed 2%. 10. Benefit Apportionment. Assessments and special taxes will be apportioned according to a formula that is clear, understandable, equitable and reasonably related to the benefit received by, or burden attributed to, each parcel with respect to its financed improvement. Any annual escalation factor should generally not _- -- - -- - - _ . . , exceed 2%. -- - . .. _ _. _ . _... 11. Special Tax District Administration. In the case of Mello-Roos or similar special tax districts, the total maximum annual tax should not exceed 110% of annual debt service. The rate and method of apportionment should include a back-up tax in the event of significant changes from the initial development plan, and should include procedures for prepayments. 12. Foreclosure Covenants. In managing administrative costs, the City will establish minimum delinquency amounts per owner, and for the district as a whole, on a case-by-case basis before initiating foreclosure proceedings. 13. Disclosure to Bondholders. In general, each property owner who accounts for more than 10% of the annual debt service or bonded indebtedness must provide ongoing disclosure information annually as described under SEC Rule 15(c)-12. 14. Disclosure to Prospective Purchasers. Full disclosure about outstanding balances . and annual payments should be made by the seller to prospective buyers at the time that the buyer bids on the property. It should not be deferred to after the buyer has made the decision to purchase. When appropriate, applicants or property owners may be required to provide the City with a disclosure plan. F. Conduit Financings 1. The City will consider requests for conduit financing on a case-by-case basis using the following criteria: a. The City's bond counsel will review the terms of the financing, and render an opinion that there will be no liability to the City in issuing the bonds on behalf of the applicant; b. There is a clearly articulated public purpose in providing the conduit financing; c. The applicant is capable of achieving this public purpose. � 2. This means that the review of requests for conduit financing will generally be a two-step process: a. First asking the Council if they are interested in considering the request, and establishing the ground rules for evaluating it; b. And then returning with the results of this evaluation, and recommending approval of appropriate financing documents if warranted. This two-step approach ensures that the issues are clear for both the City and applicant, and that key policy questions are answered. 29 ---__---.........—::::.... CITY OF TEMECULA BUDGET AND FISCAL POLICIES 3. The work scope necessary to address these issues will vary from request to request, and will have to be determined on a case-by-case basis. Additionally, the City should generally be fully reimbursed for our costs in evaluating the request; however, this should also be determined on a case-by-case basis. G. Refinancings 1. General Guidelines. Periodic reviews of all outstanding debt will be undertaken to determine refinancing opportunities. Refinancings will be considered (within federal tax law constraints) under the following conditions: a. There is a net economic benefit; -- b. It is needed to modernize covenants that are adversely-affecting the City's ° financial position or operations � c. The City wants to reduce the principal outstanding in order to achieve future debt service savings, and it has available working capital to do so from other sources. 2. Standards for Economic Savinqs. In general, refinancings for economic savings will be undertaken whenever net present value savings of at least five percent (5%) of the refunded debt can be achieved. a. Refinancings that produce net present value savings of less than five percent will be considered on a� case-by-case basis, provided that the present value savings are at least three percent (3%) of the refunded debfi. b. Refinancings with savings of less than three percent (3%), or with negative savings, will not be considered unless there is a compelling public policy objective. " 30 .�_.._.�,___ ___ CITY OF TEMECULA BUDGET AND FISCAL POLICIES - VIII. INTERFUND TRANSFERS AND LOANS POLICY A. ' Establishment of Various Funds The City has established various funds to account for revenues whose use should be restricted to certain activities. Accordingly, each fund exists as a separate financing entity from other funds, with its own revenue sources, expenditures and fund equity. - B. Transfer between Funds Any transfers between funds for operating purposes are set forth in the budget. These operating -transfers, under which financial resources are transferred from one fund to --- - - another, are distinctly different from interFund borrowings, which are usually made°for temporary cash flow reasons, and are not intended to result in a transfer of financiat resources. In summary, interfund transfers result in a change in fund equity; interFund borrowings do not, as the intent is to repay the loan in the near term. C. Interfund Loans Interfund loans may be appropriate whenever the loan is expected to be repaid within the immediate future. The most common use of interfund loans is for grant programs, where costs are incurred before drawdowns are initiated and received. Receipt of funds is typically received shortly after the request for funds has been made. _ , ... 3 I __.. _ CITY OF TEMECULA BUDGET AND FISCAL POLICIES IX. APPROPRIATIONS LIMITATION A. Adopting a Resolution The Council will annually adopt a resolution establishing the City's appropriations limit calculated in accordance with Article XIII-B of the Constitution of the State of California, Section 7900 of the State of California Government Code, and any other voter approved amendments or state legislation that affect the City's appropriations limit. B. Supporting Documentation Available for Review -- --- - The supporting documentation used in calculating the Gifiy's appropriations limit and - projected appropriations subject to the limit will be available for public and Council review at least ten days before Council consideration of a resolution to adopt an appropriations limit. The Council will generally consider this resolution in connection with final approval of the budget. C. Calculating Appropriations The City will strive to develop revenue sources, both new and existing, which are considered non-tax proceeds, in calculating its appropriations subject to limitation. D. Review of User Fees and Charges The City will annually review user fees and charges and report to the Council the amount of program subsidy, if any, that is being provided by the General Fund. E. Support of Legislation or Initiatives The City will actively support legislation or initiatives sponsored or approved by League of California Cities which would modify Article XIII-B of the Constitution in a manner which would allow the City to retain projected tax revenues resulting from growth in the local economy for use as determined by the Council. F. Voter Approval to Amend Appropriation Limit The City will seek voter approval to amend its appropriation limit at such time that tax proceeds are in excess of allowable limits. : , _. �",I�ul�= I��ul�loCln �i'ta�mt�il��li�Wui�I��Ii� ��S��I� i n��l �� _... . _... 32