FINANCIAL POLICIES
The West Covina City Council has established the following general financial guidelines to ensure the economic integrity of the City and to ensure that current needs do not unfairly tax future generations.
Reserves: Based upon the economic strength of the City and the susceptibility of the tax base to swings in the local economy, the following general guidelines have been established for reserves.
- Maintain uncommitted General Fund reserves at a minimum of $10 million. This base reserve level should not be used to fund operations or capital improvements. This reserve level is available for emergencies only.
- Maintain Self-insurance Fund Reserves adequate to keep the Self-insurance Fund actuarially sound. Thus, reserves must be adequate to pay all valid claims, including those incurred but not reported.
General Budgeting: The following parameters have been established to ensure the ongoing integrity of the City's financial assets:
- All budgets, operating and capital, should be in harmony with the City's long-term financial goals. Recurring expenditures will be funded with recurring revenues. Similarly, one-time expenditures may be funded with one-time revenues or reserve balances.
- Budgets are prepared on the same basis used for financial accounting and reporting. Thus, governmental fund types are prepared on the modified accrual basis of accounting and proprietary funds are budgeted on the accrual basis of accounting.
Operating Budgets: The following guidelines have been established specifically for operating budgets:
- All governmental funds will have balanced budgets. Defined as ongoing revenues equal to or greater than ongoing expenditures.
- Recurring expenditures will be funded with recurring revenues. Similarly, one-time expenditures may be funded with one-time revenues.
- All proprietary funds will be self-supporting over the long term. Thus, revenues for services shall be set at rates adequate to fully recover the cost of providing the services.
Capital Improvement Program Budget: The following guidelines have been established specifically for capital projects budgets:
- Projects with multiple funding sources available will be funded from the most restrictive funding source available.
- Major capital items may be funded by long-term financing methods, if appropriate.
Debt Service Budgets: The following guidelines have been established specifically for debt service budgets:
- All debt must be for purposes which further the City's service goals.
- The terms of the debt service agreements should be consistent with the City's Long-Term Financial Plan.
- The structure of debt financing should not expose the City to interest rate risk.
- Debt service should be accounted for in a separate fund for management control purposes.
- Anticipated recurring revenues must be adequate to fund scheduled debt service payments.
As a general law city, West Covina cannot incur general obligation indebtedness, which exceeds 3.5% of the total assessed valuation of all real and personal property within the City. On June 30, 2004, the City's debt limit was more than $212,900 million. In keeping with the City Council's policy to meet ongoing needs with current revenues and to maintain a low tax rate within the City, there were no outstanding general obligation bonds on that date. The City has no plans for issuing general obligation bonds during the fiscal year ending June 30, 2006. The existing debt service obligations do not impose a current burden on the City or Redevelopment Agency.
ASSET AND LIABILITY MANAGEMENT
Within the finance department, the City manages the City's portfolio. The City has taken an active approach to cash management to maximize interest earnings, maintain adequate liquidity and comply with state and federal regulations and the City's investment policy. The policy is updated and approved annually by the City Council. It states that the primary objectives, in priority order, of the City of West Covina's investment activities shall be:
- Safeguard principal: Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to insure the preservation of capital in the overall portfolio.
- Meet liquidity needs: The City's investment portfolio will remain sufficiently liquid to enable the City to meet all operating expenditure needs which might be reasonably anticipated for the following six months.
- Achieve a return on funds: The City's investment portfolio shall be designed with the objective of maximizing yield consistent with (A) and (B) above.
The City invests in a variety of investment vehicles, including:
Private, state and county investment pools, government-backed securities; and medium term corporate notes.
USE OF FUNDS
The City's accounting system is organized and operated on a "fund basis" under which each fund is a distinct self-balancing accounting entity. A fund is "an independent fiscal and accounting entity used to record all financial transactions related to the specific purpose for which the fund was created." Funds are established for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, legal restrictions or limitations. The fund balance is the amount that remains in a fund at the end of the fiscal year after revenues have been received and expenditures have been paid. In the case of restricted special funds, it is not unusual for large one-time capital expenditures to exceed one-year revenues. This is because some of these funds take a number of years to build up a balance adequate to pay for large projects.
Differences in fund reporting found in the budget versus financial statements: The budget distinguishes between several different general fund types designated at various times by the City Council. In the financial statements, these are consolidated into a single fund. The internal services funds are also combined. The financial statements also include trust funds, which are not found in the budget document. These are monies held in trust for an outside party such as developer deposits and are not a part of the budgeting process.
FINANCIAL GOALS
A discussion of short and long-term financial goals can be found in the budget message.
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