TO: Honorable Mayor and Members of the City Council
THRU: Tom Kisela, City Manager
FROM: Trang Nguyen, Finance Director
1. Subject
title
Review of the proposed Financial Management Policies.
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2. Summary
Proposed Financial Management Policies to provide a framework for the annual budget and planning process.
3. Recommended Action
recommendation
Provide input and direction regarding the proposed Financial Management Policies.
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4. Fiscal Impact
None.
5. Strategic Plan Goals
Goal 2: Enhance Economic Development and Achieve Fiscal Sustainability
Objective 2.9: Create a fiscal sustainability plan
6. Discussion and Background
On November 26, 2024, the City Council adopted a Strategic Plan, outlining the Council’s goals and objectives for the next five years, which included a goal to create a fiscal sustainability plan. As part of this plan, as well as in response to the Fiscal Year 2024-25 (FY 25) operating budget deficit, staff have drafted a set of Financial Management Policies.
While the City has generally practiced many of the guidelines specified in the policies, it had not been formally outlined through a comprehensive document. In an effort to ensure transparency, consistency, and sustainability of the City’s finances moving forward, staff have compiled the draft Financial Management Policies (FMPs). These policies provide a framework for the annual budget and planning process, which include guardrails to ensure the financial decisions being proposed will support and maintain fiscal responsibility, accountability, and sustainability into the future. The purpose of the controls outlined in the policy areis to establish consistent and sound financial decision-making that will carry forward year to year. These policies will also provide the public a comprehensive document that will serve as the roadmap for the annual budgetary process and a guideline for meeting fund balance reserves. The FMPs cover key elements of the City’s finances including the following:
• Budget Development
o General Fund Budget
o Capital Projects Fund Budget
• Fund Balance
• Reserves
• Budgetary Controls and Accounting Methodology
• Pension, Investment and Debt
Also included in the FMP’s are important definitions, principles, and changes that include:
• Structurally balanced budget
o Recurring expenditure should not be more than recurring revenue
o One-time revenue is not used for recurring expenditure
• Definition of reserves, components of fund balance, and reporting of fund balance
o Non-spendable - amounts that are not in a spendable form such as inventory.
o Restricted - amounts constrained to specific purposes by their providers such as grantors and higher levels of government.
o Assigned - amounts identified by the City Council for a specific purpose.
o Committed - amounts that have been spent for specific purposes determined by the government’s highest level of decision-making authority.
o Unassigned - amounts that are not classified as non-spendable, restricted, assigned, and committed.
• Changes to the reserve policy
o General Fund - going from 16.6% back to 25% of the General Fund expenditure, excluding transfers.
o Internal Service Funds - various levels depending on the fund. ( sSee attachment A for more details).
o Capital Projects Fund - going from 5-year annual average CIP or 50% of the single highest year to an equivalent of 1-year pavement management.
• Separating the reserve policy from pension policy
Following the meeting, input and direction from the City Council will be included in the FMPs; and the final document will be finalized and shared with the Audit and Investment Committees. Once reviewed, the FMPs will be brought back to the City Council for adoption at a future meeting. The FMPs will be reviewed annually during budget adoption.
7. ATTACHMENTS
• City of Orange Financial Management Policies