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HomeMy WebLinkAbout2020-0921C Resolution Adopting Cash Reserve PolicyResolution No. 2020-0921C Cash Reserve Policy TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 RESOLUTION NO. 2020-0921C ADOPTING CASH RESERVE POLICY THE STATE OF TEXAS COUNTIES OF DENTON AND TARRANT § WHEREAS, Trophy Club Municipal Utility District No. 1 (the "District") is duly created and existing municipal utility district created and operating under Chapters 49 and 54 of the Texas Water Code, as amended; WHEREAS, the Governmental Accounting Standards Board ("GASB") released Statement No. 54- "Fund Balance Reporting and Governmental Fund Type Definitions" on March 11, 2009. The objective of GASB Statement No. 54 is to enhance the usefulness of fund balance information by providing clearer fund balance classifications and by clarifying governmental fund type definitions; WHEREAS, the Board of Directors of the District desires to implement GASB Statement No. 54, and in connection therewith, desires to adopt certain policies for the establishment, funding and management of the District's reserve funds including specifying the target balances for each reserve fund; and WHEREAS, the objective of the Policy is to enhance the District's financial position, provide clear policies regarding the funding of reserve funds, and to establish and maintain adequate reserve funds to secure the District's financial position; NOW, THEREFORE, BE IT ORDERED BY THE BOARD OF DIRECTORS OF TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1, THAT: Section 1. The matters and facts recited in the preamble to this Order are found to be true and correct and the same are incorporated herein as a part of this Order. Section 2. The Board has reviewed the Reserve Policy and finds and declares that the Reserve Policy in the form attached hereto is hereby approved and adopted, and such Policy shall replace and supersede in its entirety the Policy adopted pursuant to Resolution No. 2019-0722 and any prior Cash Reserve Policy of the District. 1 of 9 Resolution No. 2020-0921C Cash Reserve Policy Section 3. The General Manager is authorized to do all things necessary and proper to evidence the Board's adoption of this Order and to carry out the intent hereof. Upon execution, a permanent copy of this Order shall be filed in the permanent records of the District. Section 4. That the Finance Manager is hereby authorized to perform the functions required by the attached Reserve Policy. ADOPTED, PASSED AND APPROVED this 21' day of September 2020. ATTEST: (1 ( Kelly Castonguay, Secretary Board of Directors 2 of 9 Steve Flynn, Preside Board of Directors Resolution No. 2020-0921C Cash Reserve Policy TROPHY CLUB MUNICIPAL UTILITY DISTRICT NO. 1 RESERVE POLICY ARTICLE I BACKGROUND Section 1.01. Background. One of the key attributes of a financially stable organization is the establishment and maintenance of appropriate financial reserves. Adequate reserves position an organization to weather significant economic downturns more effectively, manage the consequences of outside agency actions that may result in increased costs, and address unexpected emergencies, such as natural disasters, catastrophic events caused by human activity, or excessive liabilities or legal judgments against the organization. In concert with Trophy Club Municipal Utility District No. 1's (the "District") other financial policies, this Reserve Policy establishes fund balance policies to enhance the District's financial stability. ARTICLE II POLICY STATEMENTS Section 2.01. General. Reserve funds will be accumulated and maintained in a manner that allows the funding of costs and capital investments consistent with the District's capital and financial plans while avoiding significant rate fluctuations due to changes in cash flow requirements. The classification of reserve fund balances shall be in conformance with Government Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Definitions. Section 2.02. Definitions. In accordance with GASB 54, the Board of Directors adopts the following classifications of fund balance depicting the relative strength of the spending constraints placed on the purposes for which resources can be used: A. Non -spendable fund balance—Amounts either not in spendable form, or legally or contractually required to be maintained intact. This would include inventory, prepaids, and non-current receivables. B. Restricted fund balance— Amounts constrained either externally by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments; or imposed by law through constitutional provisions or enabling 3 of 9 Resolution No. 2020-0921C Cash Reserve Policy legislation. This would generally include amounts in bonded capital projects funds, debt service funds, and program funds funded with federal program dollars. C. Committed fund balance—Amounts that are committed for specific purposes by formal action of the Board of Directors. Amounts classified as "committed" are not subject to legal enforceability like restricted fund balance; however, those amounts cannot be used for any other purpose unless the Board removes or changes the limitation by taking the same form of action it employed to previously impose the limitation. D. Assigned fund balance—Amounts intended to be used by the District for a specific purpose. Intent can be expressed by the Board of Directors or by an official or body to which the Board of Directors delegates the authority. The Finance Manager is authorized by the Board of Directors to assign fund balance to a specific purpose as approved by this fund balance policy. Assigned fund balance includes: 1. For the General Fund; the amounts assigned by the Finance Director intended to be used for specific purposes. The amounts reported as assigned should not result in a deficit in unassigned fund balance. 2. For all governmental funds other than the General Fund; these are all remaining positive amounts (except for negative balances) that are not classified as non - spendable and are neither restricted nor committed. However, if there is a negative balance after classifying amounts as non -spendable, restricted or committed, the fund would report a negative amount as Unassigned and zero to be reported as Assigned. E. Unassigned fund balance—Amounts remaining after applying the above definitions. Amounts are available for any purpose; these amounts are reported only in the general fund. Planned spending in the subsequent year's budget would be included here unless formally committed or assigned. Section 2.03. Reserve Targets. The Reserve Policy is based on either percentage targets or days of operation; all associated dollar figures represent estimated/projected targets based on either the percentage target or days of operation target set by the Reserve Policy. Reserve Targets shall be adopted as part of the annual budget. Section 2.04. Monitoring and Reporting Use of Reserve Funds 4 of 9 Resolution No. 2020-0921C Cash Reserve Policy The General Manager shall perform a review and analysis of each designated reserve fund for presentation to the Board of Directors at a public meeting during consideration of the annual budget by the Board of Directors. Upon determination that a fund balance is less than the established target fund level, the General Manager shall inform the Board of Directors. Any requests to the Board of Directors for the use of reserves will be accompanied by a current status report of the affected reserve fund and impacts on the future reserve levels. Section 2.05. Reserve Expenditures Unless specified otherwise in the Reserve Policy, expenditures from any reserve requires District Board action to appropriate the funds. The General Manager may recommend reserve expenditures through the budget process or at District Board meetings for the Board of Directors consideration and approval. Section 2.06. Replenishment of Reserves Should a reserve fall below the targeted reserve level set forth in this Reserve Policy, the General Manager will develop a plan to replenish the reserve in a reasonable time -frame. The proposed plan will be presented to the Board of Directors as part of the subsequent fiscal year budget. Section 2.07. Deviations from the Reserve Policy No deviations from the Reserve Policy will be allowed except as approved by the Board of Directors. Proposed exceptions to the Reserve Policy will be reviewed by the General Manager and District Finance Manager. After their timely review and recommendation, the proposed exception will be presented to the Board of Directors for action. Section 2.08. Reserve Policy Review and Update The District's General manager will present this Reserve Policy to the Board of Directors at least biennially to determine if changes are necessary to ensure the Policy is effective and remains current with general accounting and financial best practice standards, and to address any regulatory changes that may become applicable after adoption of this Policy. Any changes, additions, or deletions to this Reserve Policy will be by formal action of the Board of Directors. Section 2.09. Fund Balance Spending Order Unless legally prohibited, the District will spend the most restricted funds before less restricted funds in the following order: 1. Non -spendable — if the funds become spendable 2. Restricted 3. Committed 4. Assigned 5. Unassigned 5 of 9 Resolution No. 2020-0921 C Cash Reserve Policy ARTICLE III RESERVE FUNDS Section 3.01. Reserve Funds The Board of Directors hereby establishes and designates the following reserve funds: Operating Reserves; Rehabilitation and Replacement Reserves; Equipment Replacement Reserves; Emergency Reserves; Debt Service Reserves; and, Rate Stabilization Reserves. Section 3.02. Operating Reserves A. The purpose of Operating Reserves is to accumulate sufficient reserve funds necessary to satisfy the general cash flow demands and requirements of the District. There can be a significant length of time between when a system provides a service and when a customer may pay for that service. In addition to timing, the volume of cash flow can be affected by weather and seasonal demand patterns. This reserve fund will preserve credit worthiness, ensure adequate financial resources are available for timely payment of District obligations, and provide liquidity throughout the fiscal year. This funds GASB 54 classification is assigned fund balance. B. The District should maintain Operating Reserves equivalent to at least 45 days budgeted operating requirements to mitigate potential cash flow problems. Operating Reserves will not normally exceed the equivalent of 90 days budgeted operating requirements. C. The General Manager is authorized to approve the expenditure of Operating Reserves in response to day-to-day cash flow requirements that are in accordance with the Board of Directors approved policy and budget authorizations. Section 3.03. Capital Reserves A. Rehabilitation and Replacement Reserves 1. The purpose of Rehabilitation and Replacement Reserves is to fund unplanned or accelerated infrastructure rehabilitation or replacement needs when assets wear out before their expected useful life ends or when a utility desires to accrue for its future rehabilitation and replacement needs on a pay-as-you-go basis. These reserves may also be used as a source of funds for cash funding for the utility's Capital Improvement Program (CIP), or to set aside funds for intermediate to long-term future replacement of major assets not included in the CIP. Rehabilitation and Replacement Reserves may be used to provide a cushion to absorb capital cost 6 of 9 Resolution No. 2020-0921C Cash Reserve Policy overruns that might otherwise require debt issuance and/or rate increases. This funds GASB 54 classification is assigned fund balance. 2. Each adopted budget of the District should contain a transfer from the general fund to the Rehabilitation and Replacement Reserves in an amount approved by the Board of Directors. The desired minimum balance for this reserve is 1.5 percent of the cost of the District's system assets. 3. The General Manager is authorized to approve the expenditure of Rehabilitation and Replacement Reserves, without prior approval of the Board of Directors, in accordance with approved policy and budget authorizations. B. Equipment Replacement Reserves 1. The purpose of Equipment Replacement Reserves is to accumulate the probable replacement cost of equipment each year over the life of the asset, so it can be replaced readily when it becomes obsolete, is totally depreciated or is scheduled for replacement. Assets defined as equipment include vehicles, pumps, computer equipment, office equipment, mechanical equipment, laboratory equipment, and other similar equipment with an expected life typically in the range of as few as three to as many as twenty years. Annual depreciation is calculated as a function of the depreciation schedule maintained within the District's financial management software. This funds GASB 54 classification is assigned fund balance. 2. The source of funding for this reserve shall be in the form of an annual operating expense (transfer) to the Equipment Replacement Reserves. 3. The General Manager is authorized to approve the expenditure of Equipment Replacement Reserves, without prior approval of the Board of Directors, in accordance with approved policy and budget authorizations. C. Emergency Capital Reserves 1. Emergency Capital Reserves are essentially "insurance" against unanticipated emergencies, failure of the utility's most vulnerable system components, and liability from District activities that are not insured through other mechanisms. This reserve provides funding to insure timely emergency repairs or replacements, and continued operation of the District's essential services during periods of natural disasters and/or other emergencies that potentially threaten the health, safety or welfare of District customers, residents, or employees and for which immediate 7 of 9 Resolution No. 2020-0921C Cash Reserve Policy corrective action is necessary. Emergency Capital Reserves may be used when capital improvement funds have otherwise been purposefully spent down to a preset limit on planned projects. They will not be used to meet operating shortfalls or to fund new programs or personnel. This funds GASB 54 classification is committed fund balance. 2. The Emergency Capital Reserves funding level is based on the historical records and the experience of the utility in dealing with such emergencies and disasters. Determining the emergency reserve funding level is also a function of management objectives and overall system reliability. 3. The General Manager is authorized to approve the expenditure of Emergency Capital Reserves, without prior approval of the Board of Directors, in accordance with District policy. Upon expenditure of any Emergency Capital Reserves, the General Manager shall notify the Board of Directors at the earliest possible opportunity. 4. Expenditures from Emergency Capital Reserves which are subsequently recovered, either partially or fully, from FEMA, insurance and/or any other sources, shall be utilized solely for refunding Emergency Capital Reserves. Section 3.04. Debt Service Reserves A. Debt Service Reserves are those funds that relate to the management of the District's outstanding bonded indebtedness. Establishment of a debt service reserve is typically legally required by the covenants and indentures of the District's revenue bonds and may be required by some general obligation bonds. The establishment of a debt reserve provides security to the bondholders that adequate funds will be available to pay the debt service obligations, even under a distressed situation. This funds GASB 54 classification is restricted reserve fund balance. B. Debt Service Reserves will be funded, maintained and expended only in accordance with the terms of the orders or resolutions adopted by the Board of Directors authorizing the issuance of the District's revenue obligations. Authorization to expend the Debt Service Reserves is restricted to the Board of Directors. Section 3.05. Rate Stabilization Reserves A. The purpose of Rate Stabilization Reserves is to establish a means to provide cash reserves that can be used to meet revenue requirements while gradually increasing 8 of 9 Resolution No. 2020-0921C Cash Reserve Policy rates over time to the level necessary for the utility to be financially sustainable. This fund buffers the impacts of unanticipated fluctuations or revenue shortfalls and should be capable of defraying the need for an immediate rate increase to cover the cost of an unanticipated rise in expenses. Unexpected fluctuations can include, but are not limited to an economic downturn, unanticipated increases in other utility expenses, and/or other extraordinary circumstances. This funds GASB 54 classification is committed fund balance. B. The District should maintain Rate Stabilization Reserves equivalent to 30% of the annual net water revenue. Each adopted budget of the District should contain a transfer from the general fund to the Rate Stabilization Reserves in an amount approved by the Board of Directors. C. Transfer of funds from Rate Stabilization Reserves requires the Board of Directors approval. After transfer, the General Manager is authorized to approve the expenditure of those funds, in accordance with District policy and budget authorizations. 9 of 9