Page 25 - 2020-21 Budget Summary

Contingency Reserve Account

In the event that there are unanticipated expenses or revenue shortfalls impacting programs approved in
the current year budget and the exhaustion of any funds in the Unappropriated Balance line item for mid-
year adjustments, the Contingency Reserve Account will be the source of any additional funding for those
programs. Funds must be appropriated by a vote of at least a majority of the Council with Mayoral
concurrence. Funds for new programs or positions added outside of the current year budget must come
from other non-Reserve Fund sources.

Budget Stabilization Fund

The Budget Stabilization Fund has been established to provide a method to prevent overspending during
prosperous years and provide resources to help maintain service levels during years of slow revenue
growth or declining revenue.

Unappropriated Balance Line Item for Mid-Year Adjustments

Each year, the City Council and Mayor shall appropriate funds to a line item in the Unappropriated
Balance intended for use as a reserve for mid-year adjustments. The purpose of this line item is to
address shortfalls that arise during the fiscal year that the City cannot otherwise address through service
adjustments or account transfers. The City shall use this line item to address these shortfalls prior to
using the Reserve Fund.

GENERAL FUND ENCUMBRANCE POLICY

An encumbrance is a reservation of funds to cover purchase orders, contracts, or other goods and
services that are chargeable to an appropriation. It records obligations before goods are received or
services are rendered. Encumbrances are often recorded based on estimates of the cost of goods or
services being purchased. An encumbrance system provides a warning as the authorized expenditure
level is approached and thus protects the entity from over-spending an appropriation.

As a rule, any encumbered funds that remain unspent for a period longer than one fiscal year shall be
reverted. An exception to this policy applies to encumbrances for commodities procurements, which
include supplies or equipment. These encumbered funds shall revert if they remain unspent for a period
longer than three years. Further exemptions apply to legal obligations, contingent liabilities such as
pending legal settlements, or an appropriation for a project that the authorized department cannot
complete within the allowable timeframe.

DEBT MANAGEMENT POLICY

The Debt Management Policy was developed to provide guidelines for the issuance of bonds and other
forms of indebtedness to finance capital improvements, equipment acquisition, and other items. This
policy incorporates the original Debt Management Policy approved by the Mayor and City Council in
1998, the Municipal Improvement Corporation of Los Angeles (“MICLA”) Departmental Operating Policies
approved by the Mayor and City Council in 2000, and the Variable Rate and Swap Policies approved by
the Mayor and Council in 2003. The Mello-Roos Policies and Procedures, adopted in 1994, remain as
separate policies based on the unique nature of this debt structure.

The Debt Management Policy describes the methods and circumstances with which certain types of
financing products can be used, the guidelines that will be imposed on them, and who in the City is
responsible for implementing these policies. While the issuance of debt is frequently an appropriate
method of financing capital projects and equipment acquisition, monitoring is required to preserve the
City's credit strength and budget flexibility. These guidelines will assist the City in determining the
appropriate uses for debt financing, structuring debt financings, and establishing certain debt
management goals.

The CAO Debt Management Group, as part of its ongoing responsibility to manage the City’s Debt
Program, will use these policies in determining the appropriate uses and parameters for fixed-rate, long-
term rate, variable rate debt, commercial paper, and interest rate risk reduction products. In evaluating a
particular transaction, the CAO will review the long-term implications, including costs of borrowing,
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