Financial Policies

Budget

Balanced Budget

The budget proposed by the City Administrator shall not propose expenditures in excess of estimated opening balances and anticipated income. This applies to all funds. The City is not to use fund balance as a long-term approach to balance the budget. Planned uses of fund balances should be limited. It is only appropriate to use fund balances below the City’s prescribed Fund Balance policy (see Fund Balance Policy section for more detail) when there is a severe economic downturn or a one-time special project that City Council wishes to use the funds for. This provides the City time to make the necessary structural changes to bring the budget into alignment on a long-term basis.

It is appropriate to use fund balance due to higher than anticipated revenues or unspent appropriation from the previous fiscal year. In this circumstance, the use of fund balance should be used for one-time expenditures, not ongoing operating costs. In all situations it is important to retain sufficient undesignated fund balance for unforeseen economic conditions.

The Finance Director is responsible for ensuring the current year budget is in balance and will, along with the City Administrator, advise the Finance Committee, Mayor and Council on year-to-date expenditures, revenues, and any necessary corrective actions.

Budget Monitoring and Control

Department and division Directors have primary responsibility for the control of budgeted expenditures, the collection of budgeted revenues, and the delivery of service in accordance with the adopted annual budget.

Department Directors are responsible for identifying significant changes in spending or revenue variances. Departments must notify the Finance Director of all significant changes to the budget. A department must identify the cause and recommend solutions to minimize unanticipated costs to the City as part of this notification.

The budget is adopted at the fund level. Changes within each fund can be accomplished with a budget transfer without formal approval as long as the fund’s budget in total remains intact. Departmental budgets within a fund are managed to the bottom line and Department Directors can overspend one line item as long as other line items are underspent by at least an equal amount. However, Department Directors cannot create a new ongoing expense such as a new employee with one-time savings in their budget. As necessary, the Finance Department will coordinate a legal amendment to the budget, as conditions dictate.

The Finance Department is responsible for monitoring the implementation of the City's adopted annual budget and will prepare monthly actual expenditure and revenue reports compared to the budgeted amounts for Finance Committee review. The formal monthly monitoring of revenues and expenses against budget goals with the Finance Committee will begin in April each year as the first 3 months of the year are generally not sufficient to identify trends. Internal monitoring occurs constantly and any significant issues that arise will be brought to the attention of the Mayor and Finance Committee and any concerns are addressed immediately in the most appropriate, agreed upon fashion.

As a statutory City, the State of Colorado collects sales taxes on behalf of the City of Salida and distributes funds to the City in one payment per month. That payment occurs more than one month after the collection period in which the taxes are earned (i.e., the City receives taxes earned during January in early March, generally by the 10th of the month). The City needs to wait an additional five days to receive its allocation of a share of Chaffee County sales tax dollars resulting from a long-term intergovernmental agreement.

Since sales tax is such an important indicator of financial health for the City, the City is quick to recognize the tax payments and analyze the amounts received against prior year collections for the same period and with budget goals. A sales tax report is distributed to the Mayor, Finance Committee, City Council and posted on the City website monthly, and budget plans are altered if this important indicator so dictates. Retail, accommodations and food service are the principal sources of sales tax revenues, accounting for more than 80% of the total. As such, trends in these sectors bear close watching.

The Finance Department will also monitor department progress in completing their projects which have been appropriated within the annual budget through regular communication with departments. Additionally, the Finance Office will work with departments to develop corrective action plans, as necessary.

Long-Range Planning

The City needs to anticipate future challenges with revenue and expense imbalances so corrective action can be taken to maintain financial stability. The Finance Director shall annually develop a three-year General Fund revenue and expenditure forecast using reasonable and historically-based assumptions to provide City officials with pertinent data to make decisions for multi-year policy direction. This forecast will identify changes in revenue and expenditures with consideration of projected new development in the City, program changes, costs associated with personnel such as health insurance and wage increases, asset replacement schedules, and capital projects coming online. Periodically, (at least every 5 years) strong consideration will be given to hiring an outside consultant with expertise in developing long-range plans for municipalities to put together a complete Financial Management Plan that will be used to reset, as necessary, the financial targets for the City.

All City divisions are required to assess and report annually on necessary capital improvement projects for the subsequent five years.

During the budgeting process all capital improvement projects are analyzed to determine if they reduce, maintain, or increase operating and maintenance costs. When budgeting for new capital equipment or projects, total life cycle cost, financing and sourcing options from acquisition, through end of life/disposition should be considered.

REVENUE POLICIES

Revenue Diversification

The City values a diversified mix of revenue sources to mitigate the risk of volatility. The major source of revenue for the General Fund is sales tax. Since sales tax is a direct function of business cycles and inflation, it is important to evaluate opportunities to improve the diversity of the City’s revenue sources.

Fees and Charges

The City annually reviews its fees and fines to ensure they are consistent with the costs they are set to recover.

The general policy of the City of Salida regarding fees and charges is based upon the following considerations:

• Tax dollars should support essential City services that benefit and are available to everyone in the community (such as parks, police and fire protection).
• For services that largely or solely benefit individuals, the City should recover full or partial costs of service delivery through user fees.
• A fee should not be imposed on services where the cost to collect the fee exceeds the cost of the service and user fees must not exceed the full cost of providing the service.
• Fee increases, as well as new fees, must be approved and implemented prior to including associated revenue increases in the proposed budget.
• User fee pricing policies should take into consideration:
  • Whether the service benefits the general community or only the individual or group receiving the service.
  • Whether the service is only provided by the public sector or also by the private sector.
  • Whether imposing the full fee cost would pose a hardship on specific service users.
  • Whether imposing the full fee cost would place the City at an economic disadvantage.
  • Whether not imposing a full cost fee would create an unrealistic demand on the service.
• The full costs of providing a service can include the following:
  • Direct costs associated with providing the service, including:
    • The cost of the time all employees spend on the service, including fringe benefits.
    • Other direct costs, such as materials and supplies, contractual services, or legal fees associated with the service.
  • Building and equipment depreciation.
  • Supervision, clerical support, etc.
  • Departmental indirect costs such as an allocation of accounting and utility costs.

Use of One-time Revenues

One-time revenues should be used only for one-time expenditures and not for ongoing expenditures. By definition, one-time revenues cannot be relied upon in future budget years. Examples of one-time revenues are sales of City assets, and one-time payments to the City.

Investing in projects that will result in long-term operating or capital cost savings is the best use of one-time revenues. For example, these may include early debt retirement, capital expenditures that will reduce operating costs or address deferred capital needs, information technology projects that will improve efficiency, and special projects that will not incur ongoing operating costs.

Use of Unpredictable Revenues

Sales tax revenue is a direct function of the business cycle and therefore a volatile source of revenue. During periods of strong growth, sales tax revenue has seen double digit increases from the previous year. During periods of recession, sales tax revenue has been lower than the previous year. It is not prudent to allocate sales tax revenue that exceeds the normal growth rate (defined as the 10 year average historical annual growth rate) to ongoing programs. Therefore, sales tax revenues exceeding the normal growth rate should be used for one-time expenditures or to increase reserves for the next inevitable economic downturn. When sales tax revenue growth is less than the normal growth rate, it may be necessary to use reserves until appropriate expenditure reductions or other measures can be implemented.

Use of Capital Improvement Project (CIP) Fund Revenues

Capital improvement funds are used for the acquisition, repair, or rehabilitation of assets that last for 15 years or more and which support the governmental purposes of the City. A project can be considered a capital improvement project if it is for nonrecurring expenses in excess of $25,000.

The Proprietary Funds (Water and Wastewater) are supported by fees generated within those funds; thereforeprojects supporting those funds should not be charged to the Capital Improvement Fund. The Streets Fund receives its own allocation of sales tax revenues and, generally, street projects should be charged to the Streets Fund.

The primary financial resources dedicated to the Capital Improvements Fund include an allocation of 8% of the sales tax collections. For large new projects, Council may apply any accumulated funds within the General Fund if the new project is deemed important to the mission of the City and fits into the strategic plan.

Expenditures from the Capital Improvement Fund emphasize repair, rehabilitation, and upgrades to existing City infrastructure.

Capital funds are dedicated to capital uses as defined above, as well as capital planning studies. Capital planning studies include asset condition evaluations, infrastructure inventories, concept planning, master plans, and design.

Fund Balance Policy

Fund balance is defined as accumulated revenues over expenditures that may be appropriated for use by City Council. In total, fund balance represents everything owned by the City (assets) less everything owed (liabilities). Not all fund balance is available for appropriation.

The following categories are deemed as “not available” for appropriation:

Non-spendable – includes fund balance amounts such as inventories or prepaid assets which are non-spendable by nature.

Restricted – includes fund balance amounts that are constrained by an outside agency for specific purposes such as statutory restrictions (i.e., TABOR emergency reserves) and funds collected for a specific purpose (i.e., the unspent portion of grants paid in advance). These amounts are only available for appropriation tied to the restricted purpose.

The following categories generally are “available” for appropriation and are the fund balance amounts disclosed in the budget documents:

Committed – includes fund balance amounts that are constrained for specific purposes that are internally imposed by the government through formal action by Council. Council can choose to free the commitment as plans change.

Assigned – includes spendable fund balance amounts that are intended to be used for specific purposes that are neither considered restricted or committed. Fund balance may be assigned by the City Council or the City Administrator. These amounts are available for appropriation.

Unassigned – includes positive fund balance within the General Fund, which has not been classified within the other above-mentioned categories. Unassigned fund balance may also include negative balances for any governmental fund if expenditures exceed amounts restricted, committed or assigned for those specific purposes. Positive unassigned fund balance is available for appropriation.

The City’s fund balance policy defines the level of available reserves to be held in each fund. It is essential that governments have a level of savings sufficient for operating cash flow, to provide a backup for revenue shortfalls, to mitigate against uncontrollable costs and a variety of other current and future risks, and to help ensure stable rates for taxpayers and ratepayers. Fund balance levels are a crucial consideration in long-term financial planning.

This policy also recognizes that, while reserves provide the City Council with the ability to respond to and safeguard from uncertainty and risk, excessive reserves might better be used for additional services or even result in the reduction of taxes or fees. The following fund balance levels are established for the unique needs and differing situations of each of the various funds.

The fund balance policy allows for flexibility in the event of:

• Unexpected revenue shortfall,
• One-time expenditures outside the scope of normal ongoing operations,
• Unusual operating cash flow needs, such as pending collection of a large grant receivable (i.e. timing difference between use of funds and collection of revenue).