Internal service funds account for operating expenses on the accrual basis of accounting

Financial Policies

Financial Policies

Guidelines

The budget process and format shall be outcome-based and focused on goals, objectives, and performance indicators. The budget will provide adequate funding for maintenance and replacement of infrastructure and equipment.

Basis of Budgeting

The budgets for general government type funds (General Fund, Special Revenue Funds and Capital Funds) are prepared on a modified accrual basis for accounting and budgeting purposes. Under this method, revenues are recognized only when they become measurable and available to finance expenditures of the fiscal period. Available means collectible within the current period, or soon enough thereafter, to pay current liabilities.

Expenditures are recognized when the fund liability is incurred except for un-matured interest on general long-term debt which is recognized when due, and the noncurrent portion of accrued vacation and sick leave which is recorded in a general long-term debt group. At year-end, open encumbrance balances lapse. However, encumbrances related to Capital Projects are generally re-appropriated as part of the following year’s budget.

The Enterprise Funds (Utility, Utility Impact Fee, Sanitation, Stormwater and Cemetery Funds) on the other hand, are budgeted on a full accrual basis. Not only are expenditures recognized when a commitment is made (such as through a purchase order), but revenues are also recognized when they are obligated to the City (for example, water user fees are recognized as revenue when bills are produced, or service is provided).

The City also utilizes Internal Service Funds (Workers’ Compensation, General Liability Self-Insurance, and Fleet Services Funds), which are budgeted on a full accrual basis.

The differences between the budget basis and the full accrual basis of accounting include: (1) budgeting the full amount of capital expenditures as expense rather than depreciating the expenditure, (2) not budgeting interest earnings on restricted funds and impact fees, and (3) presenting debt service expense net of restricted investment proceeds.

Basis of Accounting

Basis of accounting refers to the time when revenues and expenditures or expenses are recognized in the accounts, and relates to the timing of the measurements made, regardless of the measurement focus applied. All governmental funds are accounted for by using the modified accrual basis of accounting. Their revenues are recognized in the period in which the revenue becomes susceptible to accrual, i.e., when the revenue becomes both measurable and available as expendable financial resources to pay liabilities of the current period. Ad valorem taxes and charges for services are susceptible to accrual when collected in the current year, or within 60 days after year-end, provided the amounts received pertain to liabilities through the end of the fiscal year.

Intergovernmental revenues, franchise fees and utility service taxes are recorded in accordance with their legal or contractual requirements as earned. Interest is recorded when earned. Licenses and permits, charges for services, fines and forfeitures, and other revenues applicable to the current period are recorded as revenue when received in cash because they are generally not measurable until received. License and permit revenue collected in advance for periods of which they relate are recorded as deferred revenue.

Expenditures are generally recognized under the accrual basis of accounting when the related fund liability is incurred. Exceptions to this general rule include principal and interest on general long-term debt, which are recognized when due where funds are not specifically reserved for such purpose.

The reporting practices for the Proprietary Fund Types closely parallel comparable commercial financial reporting. Both recognize revenue when earned and expenses when incurred (the accrual basis) including depreciation on its exhaustible fixed assets. Earned, but unbilled service receivables are accrued as revenue in the Enterprise Fund.

The Comprehensive Annual Financial Report shows the status of the City's finances based on "Generally Accepted Accounting Principles" (GAAP). In most cases, this conforms to the way the City prepares its budget. There are two exceptions: the treatment of depreciation expense and compensated absences. Depreciation expense is not budgeted but instead the budget reflects the full purchase cost of capital improvements. The Annual Financial Report shows depreciation expense for Enterprise Funds as required by GAAP.

Compensated absences are included in salary projections in the budget whereas the Annual Financial Report reflects both sick and vacation as accrued liabilities as required by GAAP. The Annual Financial Report shows fund expenditures and revenues on both a GAAP basis and budget basis for comparison purposes.

The hierarchy for reporting and budgetary control is as follows:

1. Fund

2. Department

3. Division

4. Function

5. Object Code

Governmental Fund Types

• The General Fund (001) is the City’s primary operating fund. It accounts for all financial resources of the City, except those required to be accounted for in another fund. Resources are derived primarily from taxes, franchise and utility taxes, charges for services, and intergovernmental revenues. Expenditures are incurred to provide general government, public safety, public works, and community services.

• Special Revenue Funds account for revenue sources that are legally restricted to expenditures of specific purposes (excluding expendable trusts and major capital projects). Included in the budget are the following special revenue funds:

o Police Training Fund (103)

o Police/Fire Outside Services Fund (104)

o Police Equitable Sharing Fund (110)

o Three Islands Safe Neighborhood District Fund (120)

o Golden Isles Safe Neighborhood District Fund (121)

o Grant Fund (150)

o Transportation Fund (160)

o Law Enforcement Trust Fund (165)

o Permits and Inspections Fund (170)

• Debt Service Funds are used to account for the accumulation of resources to pay debt, and the actual payment of long-term debt principal and interest and related costs. Included in the budget are the following funds:

o Debt Service GO Bonds Fund (202)

o Debt Service Capital Fund (248)

• Capital Improvement Funds are used to account for the acquisition and construction of major capital facilities other than those financed by proprietary funds and trust funds. Included in the budget are the following funds:

o Parks General Obligation Bond Capital Fund (302)

o Capital Projects Fund (348)

o Surtax Fund (350)

Business Fund Types - Proprietary Funds

• The Enterprise Fund is used to account for operations that are financed and operated in a manner similar to a commercial enterprise, where the intent of the governing body is that the costs of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges, or where the governing body has decided that periodic determination of the revenue earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes. Included in the budget are the following funds:

o Sanitation Fund (410)

o Cemetery Fund (420)

o Stormwater Drainage Fund (440)

o Utility Fund (490)

o Utility Impact Fee Fund (491)

• The Internal Service Funds are used to account for the financing of goods and services provided by one department or agency to other departments or agencies of the government and to other government units, on a cost reimbursement basis. Included in the budget are the following funds:

o Fleet Services Fund (530)

o General Liability Self-Insurance Fund (570)

o Workers’ Compensation Fund (575)

Accounting and Budgetary Control

In developing and evaluating the City’s accounting system, consideration is given to the adequacy of internal accounting controls. Internal accounting controls are designed to provide reasonable but not absolute assurance regarding: (1) safeguarding of assets against loss from unauthorized use or disposition and (2) reliability of financial records for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance recognizes: (1) the cost of control should not exceed the benefits likely to be derived and (2) the valuation of costs and benefits requires estimates and judgments by management. All internal control evaluations occur within the above framework.

Annual budgets are adopted on a basis consistent with accounting principles generally accepted in the United States. The City maintains budgetary controls to ensure compliance with legal provisions embodied in the annual appropriated budget approved by the City Commission. Activities of the General Fund, certain Special Revenue Funds, Enterprise Funds and Capital Improvement Funds are included in the annual appropriated budget. The City also maintains a five-year Capital Improvement Program that is updated annually. Proposed projects are prioritized, and available funds are allocated accordingly. The level of budgetary control, i.e., the level at which expenditures cannot legally exceed the appropriated amount, is established at the category level within a fund. Encumbrance accounting (under which purchase orders, contracts, and other commitments for the expenditure of funds are recorded as a reservation of budget) is used to further enhance budgetary control. Unencumbered appropriations lapse at year-end. However, encumbrances related to Capital Projects are generally re-appropriated as part of the following year’s budget. Budget-to-actual comparisons demonstrate how the actual expenses/expenditures compare to both the original and final revised budgets.

Balanced Operating Budget

The City Commission encourages commitment to a balanced budget based on reasonable expectations of revenue and expenditure variances. Adopted budgets can only be altered to the degree that the City Manager’s authority is granted by the City Commission. In any fund in which expenditures/expenses shall exceed revenues, operating reserves shall be used to meet the shortfalls. The FY 21/22 budget is balanced primarily by conservative expenditure forecasts and reasonably expected revenues. Budget transfers are as follows: up to $5,000 needs Department Director and Budget Director approval; $5,001 to $15,000 needs Department Director, Budget Director, and Deputy/Assistant City Manager approvals; and $15,001 to $50,000 needs Department Director, Budget Director, Deputy/Assistant City Manager and City Manager approval. The City Commission must be notified in writing of any budget transfers more than the City Manager’s limits.

Fund Balance Policies

During the FY 17/18 Budget Hearings, the City Commission set a minimum target on reserves by adding a provision in the Budget Ordinance for the major funds as follows:

General Fund – During the FY 2019-20 Budget Process, an ordinance was approved by the City Commission to update the Reserves Policy for the General Fund.

The minimum level of unassigned fund balance for the General Fund shall be sixteen percent (16%) of the current audited General Fund operating expenditures (excluding transfers). This is equivalent to the total amount needed to cover two (2) months of regular General Fund operating expenditures. The minimum unassigned fund balance shall be determined based upon the most recently audited Comprehensive Annual Financial Report. In the event, after the annual audit, that the unassigned fund balance falls below 16% of the General Fund operating expenditures, the City Manager will prepare and submit a plan for replenishment (e.g., committed, and/or assigned fund balance reduction, expenditure reductions and/or revenue increases) to the City Commission. The City shall act when necessary, to restore the unassigned fund balance to acceptable levels within three (3) fiscal years. This target is not inclusive of any non-spendable, restricted, committed, or assigned amounts.

Special Revenue Funds – By definition, Special Revenue Funds are created to account for the proceeds of specific revenue sources (other than expendable trusts or for major capital projects) that are legally restricted to expenditures for specified purposes. As such, no specific reservation of fund balance is created by virtue of enactment of this ordinance; rather the amount of any reservation of fund balance shall be governed by the legal authority underlying the creation of the individual fund. Except for the funds listed on the table above.

Enterprise Funds – The City has created five Enterprise Funds to account for the following services: Cemetery, Sanitation, Utility, Utility Impact Fee and Stormwater Management. In the Enterprise Funds, there will be a reservation of retained earnings of no less than one to two months of regular operating expenditures for each fund if that specific fund is not mentioned on the table above.

For the purposes of this calculation, the current fiscal year budget shall be the total budget as originally adopted by ordinance in September. This budget shall be prepared on the modified accrual basis of accounting, and therefore includes such items as capital outlay and operating transfers out. This reserve shall be in addition to all other reservations of retained earnings, including but not limited to amounts reserved for debt service and/or amounts reserved for renewal and replacement of long-lived assets.

Internal Service Funds – The City has created three Internal Service Funds to account for costs of ensuring the City in the areas of General and Auto Liability, costs of providing Workers’ Compensation insurance coverage to employees of the City and Fleet Services. In the Internal Service Funds, a reservation of retained earnings is guaranteed in an amount necessary to ensure that unreserved retained earnings in the fund as of the end of each fiscal year is greater than or equal to zero. A provision in the budget ordinance has set a floor for each of the Internal Service Funds as listed on the table above.

Revenue Policies

The City endeavors to maintain a diversified and stable revenue system to shelter from unforeseeable short-run fluctuations in any single revenue source.

The City estimates its annual revenues by an objective, analytical process. The City will project revenues for the next year and will update this projection annually. Each existing and potential revenue source will be re-examined annually.

Each year, the City will recalculate the full costs of activities supported by user fees to identify the impact of inflation and other cost increases.

The City Commission provides authority for the use of unpredictable or one-time revenues, such that these revenues are not relied upon for ongoing expenditures. The City conservatively projects difficult to predict revenues such as building permits for new construction based on high probability of receipt.

The City Commission identifies the way fees and charges are set and the extent to which they cover the cost of the service provided. This is accomplished in revenue meetings held with the City Manager and Department Directors, in which all fees are reviewed and the level of cost recovery plus a reasonable cushion is determined and submitted to the City Commission for approval. Costs which are not recovered are documented and fully disclosed to the City Commission in the budget workshop sessions held with public participation. In simple language, if the reserves are necessary to balance a segment of the budget, this will be disclosed.

Debt Management Policies

The City’s primary objective in debt management is to keep the level of indebtedness within available resources and debt limitations established by state law. In this regard, the City continues to act very conservatively and tries not to obligate current resources. In November of 2014, the citizens voted for a $57.5 million General Obligation Bond to improve and construct additional parks around the City. Implementing this program is now well underway.

The City has a general obligation legal debt limitation not to exceed 10% of total assessed valuation of the taxable property within the City boundaries. The current calculated general obligation debt limit is $602,360,979 and the balance of the GO debt as of September 30, 2021 will be $52,115,000.

For the time first time in the City’s history, in FY 16 the City has obtained a financial credit rating. The City issued two (2) bonds in FY 16, the GO Bonds, and the Capital Improvement Revenue Bonds. The issuance of the GO Bonds in June provided the capital resources to complete the Parks Master Plan, which was approved through a referendum held in November 2014. Fitch Ratings and S&P Global Ratings have assigned the GO Bonds a rating of AA+ and AA, respectively. The Capital Improvement Bonds were issued for the refunding of the 2007 Series A Revenue Bonds to take advantage of lower interest rates and to provide funding to build the Main Fire Station. The assigned rating to the Capital Improvement Bonds from Fitch Ratings and S&P Global Ratings were AA and AA-, respectively

The City issued General Obligation (GO) Bonds, Series 2016 on June 21, 2016 in the amount of $57,500,000. The GO Bonds were issued for the purpose of funding the costs of construction, expansion, renovation and improvements of City-wide parks and recreation facilities in accordance with the City’s Parks Master Plan. The bonds bear interest at rates ranging from 3.00-5.00% and are to be repaid from ad valorem revenue. Interest is to be paid semi-annually on January 1 and July 1 of each year; and the first principal payment was due on July 1, 2017 and each July 1 thereafter until the maturity date of July 1, 2046.

The Revenue Bonds, Series 2007A were issued for the purpose of financing the acquisition of park land. The bonds were refunded in FY 15/16 and are now known as “Capital Improvement Refunding Revenue Bonds, Series 2016” with an issuance date of June 29, 2016. The bonds are not a General Obligation Bond. The interest rates are ranging from 4.00-5.00% and are to be repaid solely from non-ad valorem revenue. Principal is payable annually on October 1 with the first payment due October 1, 2018 and interest is to be paid semi-annually on April 1 and October 1 of each year. The bonds mature on October 1, 2027.

In addition to the refunding of the Revenue Bonds, Series 2007A, an additional $8,270,000 for the construction of the Main Fire Station was added to this issue. The bonds are not General Obligation Bonds; bear interest at rates ranging from 2.00-5.00% and are to be repaid solely from non-ad valorem revenue. Principal is payable annually on October 1 with the first payment due October 1, 2017 and interest is to be paid semi-annually on April 1 and October 1 of each year. The bonds mature on October 1, 2035.

A summary of annual debt service requirements as of September 30, 2021 will be as follows:

Does internal service fund use accrual accounting?

Which funds are accounted for using the accrual basis of accounting?

What is internal service fund in accounting?

Where are internal service funds reported?