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129865277.00001\40089220.1 FINANCIAL POLICIES 05/23/2022 1 CITY OF ROLLING HILLS ADMINISTRATIVE POLICY/PROCEDURES FINANCIAL, BUDGET AND DEBT POLICIES Original Version Effective: 09/24/2007 See end of document for complete policy history Current Version Effective: 05/23/2022 Policy Framework: The purpose of the Financial, Budget and Debt Policies is to guide the City Council and other City officials in developing sustainable, balanced budgets and managing the City’s finances in a prudent manner consistent with best practices. The City’s commitment to adopting and operating within a balanced budget is a core financial value and policy of the City. The City of Rolling Hills Financial Policies represents the City’s framework for planning and management of the City’s fiscal resources. Adherence to the Financial Policies promote sound financial management which can lead to unqualified annual audits, provide assurance to the taxpayers that tax dollars are being collected and spent per City Council direction and provide a minimum of unexpected impacts upon taxpayers and users of public services. The City Council Finance / Budget Committee shall serve as the City’s audit committee for the purpose of recommending the selection of an auditor to the City Council, meeting with the City Auditor, reviewing the annual audit and necessary financial statements, responding to conflicts between management and the auditor and responding to fraudulent activities. The City Council will conduct a competitive process for the selection of the independent external auditor every 6 years to be in conformance with California Government Code Section 12410.6(b). Any non- audit work performed by the independent external auditor, if allowed, will be done under a separate contract approved by the City Council. The City Manager shall be responsible for developing and, as appropriate, implementing and managing these policies as well as subsidiary policies that execute the City’s Financial Policies. The City’s Financial Policies shall be in conformance with all state and federal laws, generally accepted accounting principles (GAAP) and standards of the Governmental Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA). 65277.00001\40089220.1 FINANCIAL POLICIES 05/23/2022 2 1. Financial Reporting Entity: The City of Rolling Hills was incorporated in 1957 under the general laws of the State of California. The City operates under the Council-Manager form of government. The City Council consists of five members elected at large for overlapping four-year terms. The Mayor and Mayor Pro-Tem are selected from the City Council members and serve a one- year term. The City Council appoints a City Manager, City Attorney and City Treasurer. In addition, the City Council appoints the members of advisory Commissions and Committees. The City, directly or by contract, provides municipal services as authorized by statute. Services provided include: • Public safety through the Los Angeles County Sheriff and Fire Department • Refuse collection by contract with a private hauler • Water through California Water Service Company • Sewer through Los Angeles County Sanitation Districts • Recreation • Public improvements • Planning and zoning • General administrative and support services 2. Financial Reporting Policies: The City’s accounting and financial reporting systems will be maintained in conformance with all state and federal laws, generally accepted accounting principles (GAAP) and standards of the Governmental Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA). Further, the City will make every attempt to implement all changes to governmental accounting practices at the earliest practical time. • The financial report should be in conformity with GAAP, demonstrate compliance with finance related legal and contractual provisions, disclose thoroughly with detail sufficient to minimize ambiguity and potential for misleading interferences. • An annual audit will be performed by an independent public accounting firm with an audit opinion to be included with the City’s published Comprehensive Annual Financial Report. • The City’s budget should satisfy criteria as a financial and programmatic policy document, as a comprehensive financial plan, as an operations guide for all organizational units and as a communications device for all significant budgetary issues, trends, and resource choices. • The City shall evaluate the fiscal impact of proposed changes in employee benefits to be provided. Prior to assuming liability for expanded benefits, 65277.00001\40089220.1 FINANCIAL POLICIES 05/23/2022 3 a viable funding plan with estimates of long term impacts shall be incorporated into the analysis. • The City shall endeavor to avoid committing to new spending for operating or capital improvement purposes until an analysis of all current and future cost implications is completed. • The City shall endeavor to maintain cash reserves sufficient to fully fund the next present value of accruing liabilities, obligations to employees for vested payroll and benefits and similar obligations as they are incurred. • The City shall prepare and present to the City Council monthly interim revenue and expenditure reports and a Mid-Year Review to allow evaluation of potential discrepancies from budget assumptions. 3. Internal Control Accounting Policies: To provide a reasonable basis for making management’s required representations concerning the finances of the City. • Accounting Records – Maintain accounting records in accordance with Generally Accepted Accounting Principles (GAAP). • Monthly Posting – Post a monthly record, which maintains each month’s activities separate and distinct from another month’s work. This provides visibility in locating errors and fixing corrections. Accounting ledgers will be reviewed and reconciled on a monthly basis to supporting documentation – Cash Receipts, Accounts Payable, Payroll and Monthly Journal Entries. • Sequential Number – Sequentially numbered instruments will be used for checks and cash receipts. Pre-numbered receipts are controlled and accounted for by an individual with no accounting handling responsibilities. The City’s pre-numbered checks and pre-numbered cash receipts should be safeguarded in the Vault. All copies of voided receipt forms are retained, accounted for, and documented. • Audit Trail – The City’s accounting records and systems shall provide an audit trail (e.g. paper document) that allows for the tracing of each transaction from its original document to completion. 4. Operating Management Policies: The budget process is intended to weigh all competing requests for City resources within expected fiscal constraints. Requests for new, on-going programs made outside the budget process will be discouraged. 65277.00001\40089220.1 FINANCIAL POLICIES 05/23/2022 4 • Budget development will consider multi-year implications of current decisions and allocations and use conservative revenue forecasts. • Revenues will not be dedicated for specific purposes, unless required by law or Generally Accepted Accounting Practices (GAAP). All non- restricted revenues will be deposited in the General Fund (or other designated fund as approved by the City Manager) and appropriated by the City Council. • Current revenues will fund current expenditures. City revenues will be managed to protect programs from short-term fluctuations that impact expenditures. • The City will endeavor to identify entrepreneurial solutions to cover or recover costs of operating program. • The City shall strive to avoid returning to the City Council for new or expanded appropriations during the fiscal year. Exceptions may include emergencies, unforeseen impacts, mid-year adjustments or new opportunities. • Additional personnel will be requested after service needs have been thoroughly examined and is substantiated for new program initiatives or policy directives. • All non-Enterprise user fees and charges will be evaluated at least every three years to determine the direct and indirect cost recovery rate. The analysis will be presented to the City Council. • The City shall endeavor to maintain adequate cash reserves to fund 100% replacement of capital equipment. Replacement costs will be based upon equipment lifecycle financial analysis developed by the Finance Director and approved by the City Manager. • Balanced revenue and expenditure forecasts will be prepared to examine the City’s ability to absorb operating costs due to changes in the economy, service demands, and capital improvements. The forecast will be updated annually and include a four-year outlook. • Cash and investment programs will be maintained in accordance with the Government Code and the adopted investment policy will ensure that proper controls and safeguards are maintained. City funds will be managed in a prudent and diligent manner with an emphasis on safety of principal, liquidity, and financial return on principal, in that order. Pursuant to State law, the City, at least annually, revises and the City Council affirms a detailed investment policy. 65277.00001\40089220.1 FINANCIAL POLICIES 05/23/2022 5 5. Capital Management Policies: • Capital improvement projects are defined as infrastructure or equipment purchases or construction which results in a capitalized asset and having a useful (depreciable) life of at least one year with a cost of $5,000 or more per the City’s resolution Number 953. • The Finance Department shall utilize the straight-line method of calculating depreciation over the estimated useful life for all classes of assets. • The capital improvement plan will attempt to include, in addition to current operating maintenance expenditures, adequate funding to support, repair and replace deteriorating infrastructure and avoid a significant unfunded liability. • Capital improvement lifecycle costs will be coordinated with the development of the City’s operating budget. Future operating, maintenance, and replacement costs associated with new capital improvements will be forecast, matched to available revenue sources and be included in the operating budget. Capital project contract awards or purchases will include a fiscal impact statement disclosing the expected operating impact of the project or acquisition and when such cost is expected to occur. 6. Reserve Policies: It is the goal of the City to obtain and maintain a General Fund operating reserve (Rainy day fund) in the form of cash, of at least 40% of prior year audited annual General Fund revenues to cover normal seasonal cash flow variations, as well as unforeseen emergency or catastrophic impacts upon the City. • One-time revenue windfalls should be designated as a reserve or used for one- time expenditures. The funds should not be used for on-going operations. For purposes of this policy, one-time revenue windfalls shall include: CalPERS rebates Tax revenue growth in excess of 10% in a single year Unexpected revenues (e.g., litigation settlement) Any other revenues the City Council may elect to designate as extraordinary • All unexpended General Funds from the prior fiscal year will be deposited in the General Fund Reserve Fund (Rainy Day Fund.) • The City will strive to maintain the Municipal Self-Insurance Fund with a July 1 balance of $250,000. • The City will strive to transfer $250,000 annually into the Utilities Fund for the purpose of building up the necessary balance for underground projects. • Enterprise Fund (e.g., for refuse collection) user fees and charges will be examined annually to ensure that they recover all direct and indirect costs of the service, 65277.00001\40089220.1 FINANCIAL POLICIES 05/23/2022 6 provide for capital improvements and maintenance and maintain adequate reserves. Moreover, maintenance of cash reserves will provide a de facto rate stabilization plan. Rate increases shall be approved by the City Council following formal noticing and public hearing. Rate adjustments for enterprise operations will be based on five-year financial plans unless a conscious decision is made to the contrary. The current cash reserves shall be adjusted annually and will be equal to the proposed annual General Fund subsidy to the Refuse Fund and will be budgeted as a Transfer into the Refuse Fund. • The City has established a PARS Pension Rate Stabilization Program Section 115 Trust. The Trust was created to fund the City’s unfunded PERS Pension Liability and as funds are available they would be deposited into the Trust in order to maintain adequate reserves. 7. Budget Policies: The function of the City of Rolling Hills is primarily administrative. A. Categories of Funds • The City’s annual budget contains fifteen different funds managed in conformance with the City’s Fund Balance Policy: General Fund Community Facility Fund Self-Insurance Fund Refuse Fund Traffic Fund Transit Fund - Proposition A Transit Fund - Proposition C Transit Fund – Measure R Transit Fund – Measure M LA County Measure W Capital Projects Fund Citizens Options for Public Safety Fund (COPS) Fund California Law Enforcement Equipment Program (CLEEP) Fund. Utility Fund OPEB (Post-Employment Benefits Other Than Pensions) Fund • Each fund is considered to be a separate accounting entity for budgeting and financial reporting purposes. • The operations of each fund are accounted for by providing a separate set of self- balancing accounts which are comprised of each fund’s assets, liabilities, equity, revenues and expenditures, as appropriate. • The City resources are allocated to and for individual funds based upon the purpose of the spending activities. • All funds and reserves will be evaluated annually for long-term adequacy and use requirements in conjunction with development of the City’s long-term budget assumptions. 65277.00001\40089220.1 FINANCIAL POLICIES 05/23/2022 7 • For approved capital projects unexpended budget appropriations would be reviewed annually by the Finance/Budget/Audit Committee for recommendation for carryover to the following fiscal year. B. Operating Budget Guidelines • The Budget is detailed - Expenditures are authorized line by line, item by item. Line items are used to limit precisely the amount and narrowly define what can be spent. • The Budget is annual - The annual budget period is from July 1 to June 30. The time span of the authority to spend is restricted to one year. Each year the regular cycle of budgeting is repeated. • The budget is comprehensive – The budget is prepared for all funds expended by the City. • The City adopts a budget by June 30 of each year. • Comparative Data - Comparative data from the prior year is presented in the annual budget in order to provide an understanding of changes in the City’s financial position and operation. • Public Hearing - The City Council reviews a tentative budget and adopts the final budget. A public hearing is conducted to receive comments prior to adoption. C. Financial Review Throughout the fiscal year, monthly financial reports comparing actual amounts with budgeted amounts are prepared by the Finance Director and submitted to the City Manager and members of the City Council. As these reports are reviewed, attention is drawn to variances between budgeted amounts and actual amounts. D. Budgeted Revenues & Expenditures The City reviews fees and charges to keep pace with the cost of providing the service. 8. Debt Management Policies: The City will seek to avoid incurring debt. While the City is disposed to funding capital improvements and expenditures on a cash basis, the City will consider, and when necessary, enter into debt financing for citywide public improvement projects such as sewers and utility undergrounding. • Lease Equipment - Office Equipment has been leased on a monthly basis with the expense incurred at the time of payment. Policy Administrative History: 65277.00001\40089220.1 FINANCIAL POLICIES 05/23/2022 8 Adopted September 24, 2007 Revised and Adopted March 24, 2008 Revised and Adopted February 23, 2009 Revised and Adopted March 8, 2010 Reviewed and Adopted February 28, 2011 Revised and Adopted May 23, 2011 Reviewed and Adopted May 14, 2012 Reviewed and Adopted April 22, 2013 Revised and Adopted September 9, 2013 Reviewed and Adopted March 24, 2014 Reviewed and Adopted April 27, 2015 Reviewed and Revised April 25, 2016 Reviewed and Adopted April 24, 2017 Reviewed and Adopted April 22, 2019 Reviewed and Adopted May 11, 2020 Reviewed and Adopted May 23, 2022