Legal Requirements and Budget Process

LEGAL REQUIREMENTS AND BUDGET PROCESS

2021-2022 Proposed Revised Biennial Operating and Capital Budget

The City of Arvada is a political subdivision of the State of Colorado, located in Jefferson and Adams Counties in the Northwest quadrant of the greater Denver, Colorado, metropolitan area . The City Charter establishes a Council-Manager form of government . The City’s governing body consists of an elected Mayor and six -member Council . The Mayor and Council appoint a City Manager . The City of Arvada is a “home rule” City, governed by its City Charter, the Colorado State Constitution, and City ordinances as adopted by the City Council .

The City Charter requires the adoption of budgets for the general fund, special revenue funds, debt service funds, capital projects funds, and proprietary funds. Budgets are not required for fiduciary funds. A fiduciary fund is custodial in nature and is used to account for assets that the government holds for others in an agent or trustee capacity .

City Council annually appropriates all budgeted funds with the exception of the capital projects funds . Project-length budgets are adopted for these funds . The City adopts budgets for all funds using the modified accrual basis of accounting, the same basis used in the entity’s financial statements, consistent with generally accepted accounting principles (GAAP) .

The City Manager submits a proposed budget to the City Council for each of two budget years (January 1 to December 31) . The budget includes an explanatory message and is submitted in early September . The proposed budget contains a complete and detailed financial plan for all City funds. The proposed budget is open for public inspection and review . By October 15th, City Council conducts at least one public hearing on the proposed budget. Not less than sixty days prior to the first day of the next fiscal year, City Council adopts the City budget by resolution and the annual appropriation by ordinance . The City prepares a combination line-item and program budget, but the legal level of control is at the fund level which is the amount approved by ordinance .

2022 BUDGET PROCESS CALENDAR

JANUARY Council Strategic Retreat FEBRUARY Revenue assumption criteria completed MARCH Funding criteria developed for expenditures APRIL Departments present capital requests with associated operating costs MAY City Manager & departments develop CIP recommendations/ Update 10-year Model JUNE Departments develop Operating Budgets for 2021-2022 JULY Council begins review of Proposed CIP and 10-Year Plan SEPTEMBER Council reviews recommended 2021-2022 operating budget with 10-year revenue and expenditure plans OCTOBER Adoption of 2021-2022 Revised Operating Budget and CIP with 10-year considerations DECEMBER Publication of final Budget and CIP

FUND STRUCTURE

2021-2022 Proposed Revised Biennial Operating and Capital Budget

A brief description of the City of Arvada’s fund structure follows:

Governmental Funds (General, Special Revenue and Debt Service)

• General Fund - This fund accounts for all the financial resources of the City which are not required to be accounted for in another fund . • Streets Fund - This fund accounts for costs associated with street repair and replacement including concrete, crack sealing, chip sealing, seal coating, milling and overlay and reconstruction .

Revenues are derived from the City’s General Fund and the Highway Users Tax Fund which is the City’s share of state-collected tax revenue . This fund is budgeted separately, but included with the General Fund in the City of Arvada Comprehensive Annual Financial Report (CAFR) . • Arvada Housing Authority Fund – The Section 8 Housing Assistance Payments Program is administered by the Arvada Housing Authority . • Community Development Fund – This fund accounts for all entitlements, revenues and expenditures of the Community Development Block Grant (CDBG), the Home Rehabilitation and the

Essential Home Repairs programs . • Parks Fund – This fund accounts for costs associated with the acquisition, design, development, maintenance and beautification of parks, open space and trails within the City. • Police Seizure – Colorado State Statutes authorize local law enforcement agencies to seize cash and other assets belonging to persons convicted of public nuisance crimes . This fund was established to account for these resources as they are awarded and expended by the City’s law enforcement agency . • Police Tax Increment Funds – The purpose of the tax increment funds is to account for the voter-approved sales tax increment ( .21 and .25) to fund expanded police services . • Grants Fund – This fund accounts for receipt of lottery monies through the Conservation Trust

Fund . • COP Debt Service Fund – This fund accounts for the payment of principal and interest on the $11,820,000 Series 2015 Refunding Certificates of Participation and the $11,180,000 Series 2016 Certificates of Participation. • Debt Service Fund – This fund accounts for the payment of principal and interest on the $70,825,0000 Series 2019 Sales and Use Tax Bonds . • Capital Improvement Projects Fund – This fund accounts for the financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by the Enterprise or Internal Service Funds) . This fund also accounts for the proceeds from the $70,825,000 Series 2019 Sales and Use Tax Revenue Bonds .

The major Governmental Funds, as reported in the 2020 City of Arvada Comprehensive Annual Financial Report (CAFR), were the General Fund, Community Development Fund, Parks Fund, Construction Fund and the General Capital Improvement Projects Fund .

Internal Service Funds

• Insurance Service Fund – This fund accounts for the activities associated with the City’s worker’s compensation and property and liability insurance activities . • Print Shop Fund – This fund accounts for the activities associated with the print shop operations . • Computer Fund – This fund accounts for the accumulation of financial resources necessary for the timely and orderly replacement and maintenance of the City’s computers . • Vehicles Fund – This fund accounts for the accumulation of financial resources necessary for the timely and orderly replacement and maintenance of the City’s vehicles and equipment .

2021-2022 Proposed Revised Biennial Operating and Capital Budget

• Building Fund – This fund accounts for the accumulation of financial resources necessary for the maintenance of City buildings .

Enterprise Funds

• Water Fund – This fund accounts for administration, operations, capital outlay, maintenance, financing and related debt service and billing and collection for the water utility operations. • Wastewater Fund – This fund accounts for administration, operations, capital outlay, maintenance, billing and collection for the collection, transmission and disposal of sewage and wastewater . • Stormwater Fund –This fund accounts for all activities necessary to maintain a stormwater management plan . • Solid Waste Fund – This fund accounts for all activities necessary to maintain the solid waste and recycling program . This is a new fund in 2021 . • Golf Course Fund – This fund accounts for all revenues and expenses of the Lake Arbor and

West Woods Golf Courses .

The major Enterprise Funds, as reported in the 2020 City of Arvada CAFR, were the Water Fund, the Wastewater Fund, the Stormwater Fund and the Golf Course Fund .

2021-2022 Proposed Revised Biennial Operating and Capital Budget

The following table shows each City Work System and its associated fund(s):

Fund General Fund Grants Fund Street Maintenance Fund Community Development Arvada Housing Authority Parks Police Seizure Police Tax Increment Fund .21 Police Tax Increment Fund .25 COP Debt Service Debt Service Fund Capital Projects Fund Special Assessments Fund Water Fund Wastewater Fund Stormwater Fund Solid Waste Fund Golf Course Fund Insurance Fund Computer Fund Print Shop Vehicle Fund Building Fund Community and Economic Development Infrastructure Organizational and Service Effectiveness

Vibrant Community and Neighborhoods

Safe Community

X X X X X

X X

X X X

X X X X X X

X X X X

X X X X

X X X X

Basis of Budgeting

Annual budgets for governmental funds (General, Special Revenue and Debt Service funds) are prepared separately using the modified accrual basis of accounting, the same basis of accounting that is used in the entity’s financial statements. Under the modified accrual basis of accounting, revenues are recognized in the accounting period in which they become available and measurable, and expenditures are recognized in the accounting period when the liability is incurred, if measurable .

2021-2022 Proposed Revised Biennial Operating and Capital Budget

Annual budgets are also created for all Enterprise and Internal Service funds . This basis used to budget these funds is also a modified accrual basis of accounting which includes capital expenditures and current debt service principal and interest payments and excludes depreciation, amortization and adjustments for accrued compensation absences .

Budget Control and Budget Transfers

Control of expenditures is exercised at the fund level . Once the City Council adopts the budget, the City’s financial management system is used to monitor activity. Quarterly financial reports are prepared for City Council and compare actual expenditures and revenues against the budgeted and prior year amounts . Reviewing actual expenditures to budgeted amounts on a fund-by-fund basis ensures that expenditures are within the legal appropriated limits required by the City’s Charter .

Once the budget is adopted, transfers between line items for regular operating expenses, within funds and programs, can be accomplished with the approval of the department director . Transfers from any personnel accounts require the approval of the department director and the City Manager .

Budget Amendments and Supplemental Appropriation

The adopted budget can be amended during the year . This action requires City Council approval in the form of a resolution . At the end of the year City Council approves a supplemental appropriation by ordinance for the budget amendments approved throughout the year for any unforeseen changes arising after the adoption of the annual appropriation . A supplemental appropriation can be made as long as the total amount budgeted does not exceed the actual or anticipated revenues and the available fund balance .

Lapsed Appropriations

All appropriations not spent at the end of the year lapse into the fund balance applicable to the specific fund except for appropriations in the Capital Improvement Fund which do not lapse until the project is complete or abandoned .

Ten-Year Financial Models

In 2015, City Council adopted a budget and fiscal policy that utilizes long-range planning for each of the City’s major operating funds to maintain the fiscal health of the City. Specifically, the City prepares a twoyear budget based on a ten-year financial model. This method of budgeting is used to determine if future impacts of the current proposed budget are fiscally sound. Using this ten-year model, the City is able to test the effects of current financial decisions on future years’ financial conditions when approving funding requests throughout the organization .

There are many variables and factors that impact the ten-year model . These components include the following: beginning fund balance, projected revenues, projected expenditures (including capital expenditures), ending fund balance and required Council established fund balance goals . Revenue and expenditure projections are based on historical trends, various economic and inflation forecasts, and known changes in operations, legislation and capital outlay requirements .

The budget process begins with the estimated beginning fund balance for the current year . Projected revenues and expenditures are applied to the beginning balance to calculate the ending balance for the proposed budget year . This process is continued for the next ten years . The resulting calculation of the ending balance in year ten is compared to the calculation of the minimum required fund balance goal .

2021-2022 Proposed Revised Biennial Operating and Capital Budget

The bottom line is that each fund should work towards maintaining a fund balance that is equal to, or exceeds, the required fund balance goal in the tenth year . The “Ten-Year Models” section of this document includes summaries of ten-year financial models for the City’s major operating funds.

The comparison of ending balances to the required fund balance goal in the tenth year reveals whether or not adjustments in the current level of proposed expenditures are necessary in order to maintain long-term financial stability. If the ending balance is equal to or exceeds the fund balance goal, no adjustment in the current proposed budget is necessary . The fund may also contemplate additional expenditures based on the needs in the fund . However, if it is less than the ending fund balance and the fund balance goal, the City has ten years to either eliminate one-time capital expenditures, reduce on-going operating expenditures, or some combination of the above to work toward the fund balance goal .

Taking a long-term view of the City’s current operations insures that the City acts in a fiscally responsible manner . Budgeting in this manner also allows management time to react and respond to changes in the economy and minimizes the effect of budget fluctuations on service delivery.

The City defines a balanced budget when estimated expenditures do not exceed estimated revenues and available fund balance for each year of the two-year budget . For the 2022 budget, the City proposed a balanced budget .

Financial Planning Policies

• The City Manager is responsible for recommending a balanced budget to the City Council sixty days prior to the first day of the next fiscal year. • The City defines a balanced budget when estimated expenditures do not exceed estimated revenues and available fund balance . • The City’s budget is prepared on the modified accrual basis for all funds, and assumes that prior year ending fund balances may be utilized to balance the budget . • The City avoids the use of non-recurring and unpredictable revenues to fund ongoing expenditures . • The City will create and maintain a ten year financial forecast for each budgeted fund and work towards maintaining a fund balance that is equal to, or exceeds the fund balance goal in the tenth year . • The City will provide ongoing funding for required capital replacement through the Computer

Maintenance and Replacement Fund, Vehicle Maintenance and Replacement Fund and Building

Maintenance Fund . The City will create a ten-year Capital Improvement Plan that lists all capital improvements proposed for the ten year period including a project description, estimated project cost and timeline and alignment with any City Council Strategic Results .

Fund Balance Policy

A top priority of the City Council is to maintain the fiscal health of the City. Revenue projections are conservative and expenditures are monitored throughout the year . In stable economic times, the combination of these two strategies leads to revenue collections being higher than budgeted and expenditures being lower than budgeted . The combination of the two usually leads to additional monies in the fund balance which can be used for unanticipated increases in expenditures, unforeseen reductions in revenues, financing of one-time capital expenditures, adding to the fund balance or a combination of all the above. If these monies are used for expenditures, their use is not approved until the next year .

2021-2022 Proposed Revised Biennial Operating and Capital Budget

Included in the budget and fiscal policy adopted by City Council in 2015, is a required fund balance reserve that is established to mitigate current and future risks (e .g . revenue shortfalls or unanticipated expenditures) . The City maintains a fund balance in its General Fund equal to 17% of annual expenditures . Three percent is reserved for emergencies as required by Article X of the Colorado Constitution . The remaining 14% protects the City from cyclical fluctuations in revenues or unanticipated expenditures. The City also establishes an individualized fund balance requirement for various operating funds . Use of fund balance reserves must be recommended by the Finance Director, and approved by the City Manager and City Council .

Cash Management and Investment Policy

The Colorado statutes and the City of Arvada Investment Policy govern general provisions for the City’s investment strategies . The investment policy for the City shall apply to the investment of all general and special funds of the City of Arvada over which it exercises financial control.

The City’s objectives for cash management and investments are: • Preservation of capital through and protection of investment principal • Maintenance of sufficient liquidity to meet the City’s cash needs • Diversification to avoid incurring unreasonable market risks • Maximization of the rate of return for prevailing market conditions for eligible securities

The Investment Policy further restricts the investment of City funds to the following types of securities and transactions: • U .S . Treasury Obligations • Federal Agency and Instrumentality Securities • Repurchase Agreements • Commercial Paper • Corporate Debt • Municipal Bonds • Certificates of Deposit • Local Government Investment Pools • Money Market Mutual Funds • Securities of the City of Arvada

Debt Policies

• Short-term borrowing or lease-purchase contracts may be considered for financing major operating capital equipment when the Finance Director, with approval of the City Manager and City Council, determines that this is in the City’s best financial interest. • Long-term debt will not be used to finance current operating expenses. When long-term debt is warranted for a project, the payback period for bonds used for the project must not exceed the useful life of the project . • The City of Arvada will attempt to obtain a minimum AA bond rating, although is currently rated AAA, and maintain a favorable rating through prudent financial management and adherence to a policy of full disclosure on financial reports. • As required by State Statute, appropriate elections will be held to obtain voter approval for debt issuance . • The City will hire qualified bond counsel and financial advisors and market its debt on a competitive basis .

2021-2022 Proposed Revised Biennial Operating and Capital Budget

• Refunding or prepayment of outstanding debt may occur when the possibility of interest cost reduction exists, or the City wishes to restructure its debt service .

Taxpayers’ Bill of Rights (TABOR)

In 1992, voters approved an amendment to the Colorado Constitution (Article X, Section 20) that places limits on revenue and expenditures of the state and local governments . Even though the limit is placed on both revenue and expenditures, the constitutional amendment ultimately applies to a limit on revenue collections . Growth in revenue is limited to the increase in the Denver-Boulder Consumer Price Index plus local growth (new construction and annexation) . This percentage is added to the preceding year’s revenue base, giving the dollar limit allowed for revenue collection in the ensuing year . Any revenue collected over the limit must be refunded to the citizens . Federal grants or gifts to the City are excluded in the revenue limit .

In November 1996, the qualified electors of the City approved Resolution R96-127 which reads as follows:

Without creating any new tax or increasing any current taxes, shall the City of Arvada be permitted, in 1996 and each year thereafter, to retain and spend City revenues in excess of the spending, revenue raising, or other limits in Article X, Section 20 of the Colorado Constitution, utilizing such revenues for public safety, municipal services, transportation and other public improvements, parks and recreational facilities, and any other lawful public purpose?