Financial Policies: Policy Development Reserve Policies Capital Asset Management Policies

October 3, 2013

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Financial Policies . . .

1. Are guidelines for operational and strategic decision making related to financial matters

2. Should be adopted by the governing body3. Are VERY IMPORTANT to credit rating

agencies4. Clarify and crystallize the strategic

intent for financial management

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Financial Policies . . .

5. Define limits on the actions staff can take6. Promote long-term and strategic thinking7. Manage risks to financial condition8. Should comply with established public

management best practices9. Are needed by all sizes of governments

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Policies vs. Procedures

1. Policies are (overarching) guidelines or principles of financial management decisions; procedures are detailed steps.

2. Policies are written down in an authoritative document and are approved by the governing body; procedures may or may not be written down and are not adopted by the governing body.

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Policies vs. Procedures

3. Policies should be concise; procedures can be lengthy.

4. Policies are written toward a broad audience; procedures are staff-level directives.

5. Policies are developed through a process; procedures are often practices that have evolved over time.

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Control vs. Flexibility

•Generally, the more control, the lesser flexibility

•Should have more control▫To maintain fairness▫To remove discretion▫Ensure integrity▫For areas often associated with areas of

risk of mismanagement or fraud, such as debt, procurement, and investments

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Control vs. Flexibility

•Should have more flexibilityoTo meet performance goalsoWhen the public is involvedoTo determine details on a case-by-case

basis

•User Fees

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Steps to Developing Financial Policies

1. Establish a vision and values for financial condition

2. Define the problem the policy will address

3. Draft the policy4. Executive team should review the draft

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Steps to Developing Financial Policies

5. Present to elected officials informally6. Have a public comment period?7. Formally consider and adopt the policy8. Put the policy into practice9. Monitor and maintain the policy

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Effective Policies Are . . .Explicit, in writing, easy to understand,

and are formally adoptedCurrent and relevantLiteral – mean what they say and are

written in plain languageEasily accessible – on website, in budget

document, known to staffConcise yet comprehensive

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Where do I Start?

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Essential PoliciesFund balance and reservesOperating budgetCapital budgeting and planningDebt managementLong-range financial planningInvestment

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Highly Advisable Policies

•Accounting and financial reporting•Revenues•Internal controls•Expenditures•Purchasing•Risk management•Economic development

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Financial Management That Affects Credit Quality

1. Revenue and expenditure assumptions2. Budget amendments and updates3. Long-term financial planning4. Long-term capital planning5. Investment management policies6. Reserve and liquidity policies

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General Fund Reserve Policies

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Reasons to Adopt a Reserve Policy

1. Plan for contingencies2. Maintain good standing with rating

agencies3. Ensure cash availability 4. Avoid interest expense5. Generate investment income6. Create a better working relationship

between the governing body and staff

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Level of Constraints on Reserves

•Committed – at highest level of decision making (i.e. resolution or ordinance)

•Assigned – earmarked for intended use•Unassigned

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Step 1: Set the Target

A. How to define the target▫As a percentage of regular operating

revenues▫As a percentage of regular operating

expenditures▫Number of month’s worth of revenues or

expenditures▫Fixed amount

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Step 1: Set the Target

GFOA recommends no less than 2 months of regular general fund operating revenues (or expenditures, whichever is less volatile) as

unrestricted fund balance

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Step 1: Set the Target

Standard and Poor’s View on ReservesRatingRange of Available Fund

Balance

Low Below 0%

Adequate 1% - 4%

Good 4% - 8%

Strong 8% - 15%

Very strong Above 15%

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Step 1: Set the Target

B. Consider Risks▫Vulnerability to extreme events (natural

disasters) and public safety concerns▫Revenue source stability▫Expenditure volatility▫Leverage▫Liquidity▫Other funds’ dependency▫Growth ▫Capital projects

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Step 1: Set the Target

C. Identify the Drivers▫Commitments or assignments▫Budget practices▫Government size▫Borrowing capacity▫Outsider perceptions▫Political support

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Step 2: Draft the PolicyPolicy element Essential Importan

tDiscretionar

y

Definition and purpose of reserves X

Reserve target levels X

Funding the target amount X

Conditions for use of reserves X

Authority over reserves X

Replenishment of reserves X

Excess reserves X

Periodic review of targets X

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Capital Asset Management Policies

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Areas of Capital Asset Management

1. Capital improvement planning (CIP)2. Capital budgeting3. Capital project management4. Capital asset maintenance

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Capital Improvement PlanningPolicy element Essentia

lImportant Discretionary

Scope X

Project identification X

Participants X

Selecting projects X

Balanced CIP X

Funding strategies X

Operating budget impacts X

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Criteria for Selecting ProjectsResults of formal needs

assessmentAlignment with goalsExpected useful lifeImplications of project

deferralFeasibility of

implementation

Operating budget impactRegional benefits/linkagesEnhancements to quality

of lifeEconomic impactEnvironmental impact

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Funding Strategies

•Debt financing•Capital reserves•One-time resources•Earmarking portions of regular revenue

streams•Establishing entirely dedicated revenue

streams

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Capital Budgeting

•Allocating funds•Budget period – current fiscal year or life

of the project?•Budget to actual comparisons are

generally since the start of the project, and not by fiscal year

•What happens if bids are over budget?•What happens to excess if project comes

in under budget?

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Capital Project Management

•Role of a project manager▫Prepare the project proposal▫Ensure required phases are completed (on

schedule)▫Authorize all project expenditures▫Ensure compliance with all laws and

regulations▫Periodically report project status

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Capital Asset MaintenancePolicy element Essential Important

Inventory and physical condition X

Establish standards by asset class X

Evaluate infrastructure and set priorities X

Develop maintenance funding policies X

Monitor and communicate progress X

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Contact Information

Diane B. Allison, CPA, CGMA, CGFODirector of Business Services

Ascension Parish School Boarddiane.allison@apsb.orgOffice: (225) 391-7073

Donaldsonville, LA