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Exh 8GAGENDA ITEM 8G FEBRUARY 11, 2002 CITY OF ATLANTIC BEACH CITY COMMISSION MEETING STAFF REPORT AGENDA ITEM: Financial Policies for Rate Increases SUBMITTED BY: Nelson Van Liere, Finance Director ~. DATE: February 4,2002 BACKGROUND: .The City Commission, in its 2001 Strategic Planning Session, directed staffto develop financial policies for rate increases and a rate plan for fees. The attached policy document incorporates the necessary guidelines for both. All of the criteria explained in the policy will be the basis for determining the appropriate charges and fees for all City services. This policy establishes the methods to follow and is to be used in conjunction with the development of the Long Term Financial Plan, as well as the Annual Operating Budgets on an on-going basis. The Policy document states that all charges and fees will be analyzed and described according to the guidelines established. This analysis will take considerable time to accomplish and document. Staff will begin to document the justifications for the charges and fees imposed and recommend changes as deemed necessary. The rates for the large utility funds are to be addressed each year early in the budget process, and rates with little or no fiscal impact will be a secondary priority. Once the charges and fees have been evaluated, the annual adjustments to the calculations should not be as time consuming. As charges are determined to be unsuitable, the City Manager will make appropriate recommendations to the City Commission for adjustments. No increases in rates will be assumed in the development of the proposed budgets, unless the basis for those changes are discussed in either the strategic planning sessions or budget workshops. The adoption of these financial policies or guidelines will help ensure that the long-term financial health of the City is preserved, and that over time, the City has the resources to weather financial crisis and grow with the economy. BUDGET: No budget impact RECOMMENDATION: To adopt the Financial Policies or Rate Increases REVIEWED BY CITY MANAGER rvzt ~ AGENDA ITEM 8G FEBRUARY 11, 2002 City of Atlantic Beach Financial Policies for Rate Increases I. Purpose: Revenues provide the resources by which local governments carry out their missions. Ultirnately, revenue policies should strive to improve the equity and efficiency of the local revenue structure. The guidelines presented below should help ensure thaf the long-term financial goals of the City aze achieved. The efforts expended to achieve these goals will be primarily directed at the Annual Operating Budget and the Long Term Financial Planning development and adoption processes. II. Goals: 1. To recover the costs ofproviding a service level comparable or exceeding those provided by other local governments in our azea. 2. To be responsible for the charges and fees imposed on our citizens and to be accountable for the justifications. 3. To protect the City from financial hardship through continual monitoring of costs and the revenue it takes to recover those costs in both the short and long terms for each program service. 4. To assure the governing body through the budget process that all fees ar chazges imposed aze appropriate and in-line with neighboring jurisdictions. 5. To work towazds a full cost base for all chazges and fees. III. Objectives: 1. To implement a revenue generation review process whereby each revenue source is analyzed every yeaz during the budget process. 2. To ensure that all revenue generating fees or charges aze documented with. a policy statement describing the source, purpose and justification for the amount imposed. 3. To implement a policy that establishes the methodology bg which changes to all. rates are made. AGENDA ITEM 8G FEBRUARY 11, 2002 IV. Policy Criteria: Periodic Review All chazges and fees will be periodically reviewed as part of the budget process. The review process will include an analysis of revenue sufficiency, market compazison and regulatory necessity at a m;n;mum. A summary review document will be provided with the proposed budget document annually. Approval Process Chanties to chazges and fees will eg nerally take the form of their original adontion. Such form may include ordinance, resolution or adnunistrative policy. All changes will be done with approval of the City Commission upon recommendation by the City Manager. All changes to chazges and fees will become effective at the beginning of the next fiscal yeaz unless a severe budget shortfall or regulatory requiremenrmandates an eazlier adoption. Criteria for Establishing or Changing Charges and Fees If the review of the charges and fees reveals that the cost of providing the service is not adequately covered, or that the desired revenue is not being generated, the City Mana eg r may recommend to the Citescommission adjustments to those charges and fees as needed. It is the City's intent to adjust rates as needed when the. basis for those rates change as a result of the above-mentioned periodic reviews. This will be done in order to prevent loss of income due to inflation, competition or other rising costs ofproviding services. Ever effort will be made to control the cost associated with providing the services. Due to the much higher level of accountability local governments are subject to today, the justifications for the charges and fees must be defensible to those paying them. To ensure that the City can adequately justify the charges and fees that it imposes, we will require a policy document for each. The City must have adequate justifications for each charge or fee imposed and also make that information available to the public. Each change or fee shall be reviewed periodically for its appropriateness and sufficiency. All charges and fees are classified into one of three categories as follows: a.) Cost recovery b.) Profit Generating c.) Program Subsidized AGENDA ITEM 8G FEBRUARY 11, 2002 For purposes of this policy, cost means full cost. Full cost is the sum of all costs associated with providing the service. It includes both direct cost and indirect costs. The department head responsible for administering the program for which the charge or fee is imposed will agree upon all cost calculations. A cost summary sheet will be maintained for all charges and fees where practical Full Cost Recovery of Goods and Services Where the City intends to provide a service, but onlyproviding that service is cost neutral. The charge or fee will be established and mahrtained at an amount intending to recover the full cost of providing the service. When adjusting chazges and fees, the City will work towazds full cost recovery. Profit Generating Charges and Fees Where the City intends to generate revenues in excess of cost to provide the service or og ods. The City must provide the justification for the profit. Possible reasons for chazging more than cost are: To regulate demand, discourage the program, to fund or promote other programs or to build reserves. Subsidizing Charges and Fees Where the City_provides Qoods or services at a price less than cost. The City must justify the reasons for continuing the programs that do not recover their own costs. Examples of reasons to continue the program would be regulatory, subsidy of a valued community service or to assist the underprivileged. AGENDA ITEM 8G FEBRUARY 11, 2002 V. The Process: Setting the Level of Service service over time. In the absence of fiscal crisis, the City's top priority is the maintenance of the existing level of service. No increase or decrease in service levels will be carried out, with the exception of the items approved during the Strategic Planning Process. This process includes the input from the City Commission each year prior to the adoption ofthe Annual Operating Budget. Throughout this process, the City Manager makes recommendations on the level of service to be provided to the community. From this, Department Heads develop operating budgets that establish an estimate of the resources necessary to provide that level of service. Revenues generated by chazges and fees should be based on the cost of delivery of those services being provided, but they also reflect the City Commission's preferences or tolerances for certain types of chazges and fees. Annual Budgeting and the Long Range Financial Plan It is critical to the financial stability of the City to continue to develop and maintain the Long Range Financial Plan in addition to adopting a balanced Annual Operating Budget each year. Using the Long Range Financial Plan as a basis for determining the revenue requirements on an annual basis will helg ensure that the City will continue to recover the necessary costs ofproviding services. Described below aze the components of the budgets. Maintaining Cash Balance Reserve All budget projections aze calculated on a cash basis beginning with the prior yeaz's ending finazicial statement balance. The City has established a designated a cash reserve of 25% of operating budget to be on hand in all-major funds. This reserve is calculated each year as 25% of the proposed operating budget without capital outlay. This policy reserve is in addition to other legal restrictions such as debt service reserves. The City will maintain sufficient chazges and fees to be sure that the 25% reserve balance is preserved yeaz to year. In the event that an unforeseen shortfall causes the City to appropriate funds below the 25% reserve, the City shall subsequently budget and adjust rates to build that reserve back to the required levels in as short a time period as feasible. Revenue and Operating Expense Trends The revenue and expense estimates included in the Long Range Financial Plan take into consideration some historical trends, cash balance reserves, known revenue and expense issues and the ten-yeaz projection of capital expenditures. These projections will factor in the cost of living increases in operating expenses and assume a conservative estimate of revenue growth. The trends are based on AGENDA ITEM 8G FEBRUARY 11, 2002 at least four years of data, adjusted for items that are not expected to impact future results of operations. Major Capital Outlay The Long Range Financial Plan also incorporates the Water. Sewer and Storm Water Master Plans as well as the Pavement Management System cost estimates for street improvements as a basis for a ten yeaz major capital. outlay estimate. Equipment and vehicle replacements are scheduled with the assistance of our contracted fleet maintenance service provider. All future capital outlay will be funded from current year revenues and surplus cash reserves. Every attempt will be made in the budget process to smooth capital spending so that cash flow can be managed more efficiently. Debt Service Long-term borrowing will not be used to fund current operations. Each yeaz the City will perform an analysis of net income to verify that revenues are sufficient to meet debt service requirements including coverage ratios. The Long Range Financial Plan assumes the City will continue to fund current operations with current revenues and will not incur any additional debt in the foreseeable future. The capital improvement plan fanding is based on a "pay as we go" policy. Transfers to Other Funds In addition to recovery of all of the above costs associated with service delivery, the chazges and fees must in certain circumstances also recover transfers to other funds. Transfers commonly include return on investment from utility services, grant matching and cost subsidy of other programs. Each of these transfers should be justified during the budget process. Charge or Fee Analysis After determining the revenue amount needed to support the services provided, it is necessary to determine the make-up or structure of the charges and fees necessary to recover the costs to deliver them. In many cases it is a combination of fees and chazges that support a number of programs. In these cases, the total of all related fees and chazges must be analyzed in conjunction with the sum total of the cost ofproviding all ofthe related services or programs. Annually, the City will evaluate the mix of revenues sources to determine if they aze appropriate for the funded programs. For those services being funded by more than one revenue source, the chazge or fee will usually be based on local market rates. As mentioned above, this practice is common, however, the decision to provide a service at a chazge or fee above or below cost should be an explicit policy decision. The cost information for each service provided should be accumulated as a beginning basis for the determination of all chazges and fees. Through the budget process, the Citv will determine which combination of revenues will support those AGENDA ITEM 8G FEBRUARY 11, 2002 services. Each revenue source will be reviewed for adequacy, stability and .appropriateness as well as its position in the market. All rates should be based on cost. It will then be a policy decision to either charge more or less than that cost depending on other factors. Those other factors should be justifiable and be available to the public upon request. Cost Recovery Analysis Attached is an outline to be used to calculate the revenues necessary to recover costs of a program or service. The worksheet shows a breakdown of the associated cost components for a service or program and outlines most of the criteria to be used to evaluate the appropriate charge or fee. An analysis such as is described below should be done for each charge or fee_ The information used to determine costs will be based on historical trends and long term financial planning projections as well as knowledge of current issues. AGENDA ITEM 8G FEBRUARY 11, 2002 Outline of Charge or Fee Analysis Charge or Fee Description: General Ledger Account Number Amount of Current Charge Public Purpose of Chage Cost Recovery Calculation Labor: Avg. wage rate of employee performing task Multiply times number of hours typically takes to perform task; Total salary Add: 25% for benefits Total Salary and Benefits Materials and Equipment: Supplies Vehicle use chazge Equipment use chazge Other Overhead Estimate: Average Annual Capital Outlay Annual Debt Service Transfers to be funded .Total Cost to Provide services Total units served Total estimated cost per unit Mazket Rate Analysis: Explanation: of why cost is •above or below cost recovery 'Recommended Rate: Atitachments: