Awards for Excellence: City of La Quinta, CA

Fund Balance Guidelines for the General Fund

About City of La Quinta, CA

The City of La Quinta is a resort city in Riverside County, California, specifically in the Coachella Valley between Indian Wells and Indio. The population was 37,467 at the 2010 census. La Quinta embarked on a nine-month journey to study its financial situation and create policy recommendations for its reserve levels. After several months of research and soliciting input from stakeholders, city staff created a long-range outlook of the city’s financial stability. La Quinta relies heavily on discretionary income spending at its hotels, restaurants, and shops. The city is also near a large fault line, and the threat of a major earthquake is always a worry. Rapidly rising pension costs are another concern. The new reserves policy addresses all of these factors, improving the city’s ability to face the future. To create its general fund balance and reserves policy, La Quinta benchmarked its policies against those of other cities and performed a historical analysis of its current reserve amounts. The city also worked with the risk management office, which conducted a full analysis of city assets and insurance coverage to determine natural disaster needs. City staff also used resources including GFOA publications and best practices.

Implementation of Best Practice

The processes for implementing GFOA's best practice on the General Fund and Reserves policy was broken into three steps.


1) Elected official guidance. La Quinta staff was directed by City Council to undertake a study of reserves and utilize the Financial Advisory Commission to assist in the study.

    • Without the support of the council, La Quinta staff would not have been able to implement the new reserves policy.
    • Local government governing boards need to have buy-in regarding the importance of resesrves in regards to the future fiscal health of the City.

2) The staff and Financial Advisory Commission created a sub-committee to study reserves, and conduct several months of research on history.

  • Research tools included:
    • GFOA Best Practice "Fund Balance Guidelines for the General Fund"
    • GFOA publications "Financing the Future" and "Financial Policies" by Shane Kavanagh
    • Other cities policies
    • Zane H. Johnson's article "Fiscal Issues Related to the General Fund Reserve"
    • Every category for the new reserve policy was individually analyzed to determine the appropriate funding levels.
    • For example: cash flow reserves were determined by analyzing revenue and expenditure patterns and calculating the largest cumulative deficit between them. Natural disaster reserves were calculated by assessing the City's risk exposure based on probability of an event, insurance coverage, and the likelihood of FEMA reimbursement.

3) Collaboration. La Quinta used the expertise of the Commissioners, the staff, and the Council to determine collectively what the findings from their study meant for their reserve levels.

  • Staff and the subcommittee collaberated on the new reserves policy
  • Presented findings to council and full commission regularly by holding "study sessions" to gather feedback from a multitude of stakeholders.

 

Benefits

  • A better understanding of the factors that determine the long-range outlook for La Quinta's financial stability. Factors considered include:
    • La Quinta relies heavily on discretionary income spending at hotels, restaurants, and shops.
    • La Quinta is also located very close to a large fault line, so there is always a possibility for an earthquake.
    • Like many other cities, La Quinta is struggling with the rapidly rising pension costs.
  • Understanding these factors has positioned La Quinta's to adjust their reserve policy to better address the threats of the factors that could influence the cities long-term financial stability.

Tools and Resources

GFOA Best Practice: Fund Balance Guidelines for the General Fund

GFOA recommends that governments establish a formal policy for the level of unrestricted fund balance that should be maintained in the general fund for generally accepted accounting practice and budgetary purposes. The guideline should articulate a framework and process for how the government would increase or decrease the level of unrestricted fund balance over a specific time period. In particular, governments should provide broad guidance in the policy for how resources will be directed to replenish the fund balance if it falls below the prescribed level.

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