On November 12, 2002, staff conducted a study session on the topic of budget appropriation control. At the conclusion of the study session, Council directed staff to research alternatives available for budget appropriation and amendment policies. At a study session on March 18, 2003, staff presented the research results and requested Council direction on the options to pursue further.

Current City budget appropriation control policy requires Council approval for all changes between appropriation categories or funds. It allows a department to reallocate resources between programs without Council approval, as long as the overall department budget by fund does not exceed the annually appropriated amount. Council expressed an interest in considering a policy to establish some oversight for resource reallocation decisions within a department.

A viable alternative that Council may wish to consider is an appropriation control policy that would require departments to seek Council approval for reappropriation between programs that exceed $100,000 or 5% of the annual program budget, whichever is greater, up to a maximum threshold of $250,000. For programs with annual budgets less than $500,000, the maximum reappropriation threshold would be limited to $50,000. Any changes over the maximum threshold would require Council approval. Staff has worked closely with the City Attorney on the issue of budget appropriation and development of this policy.

In considering changes to the appropriation control policy, Council should be aware that staff will be providing Council an enhanced Program Outcome Measure Exception Report to Council three times a year, beginning FY 2003/2004. This trimester report will detail outcome measures that are not expected to meet their goals for the fiscal year. If the targets are not anticipated to be met and staff is proposing to move resources from the associated program above the maximum threshold set by Council, Council approval will be required before resources are transferred.

On November 12, 2002, staff conducted a study session on the topic of budget appropriation control. At the conclusion of the study session, Council directed staff to research alternatives available for budget appropriation and amendment policies. At a study session on March 18, 2003, staff presented several budget appropriation control policy options that are available to manage resource reallocation decisions within a department. Amendments within a department may occur from time-to-time, as the service level demands for different programs, service delivery plans or activities change. Based on the survey staff conducted in November 2002, the most prevalent policy options implemented by California city governments to manage resource reallocation decisions within a department are discussed below.

1. Appropriation Control at the Department Level by Fund

Budget appropriation control is at the department level by fund. Council approval is required for increases in, or reallocations between, appropriation categories or funds. The categories that funds are appropriated to may include debt service, capital projects, equipment, reserves, transfers, and department operating budgets.

Departments have the flexibility to reallocate resources between programs without special Council approval, as long as the overall department by fund budget does not exceed the annually appropriated amount.

As staff discussed in the November 2002 study session, the survey results indicated that most of the California cities surveyed, including Sunnyvale, appropriate at the department by fund level. In three of the surveyed cities, this flexibility is limited to a maximum dollar amount. Council approval is required if the amendment exceeds the specified dollar limit, which ranges from $25,000 to $75,000.

2. Appropriation Control with a Dollar Amount Limit

Council approval would be required for budget reallocations that exceed a dollar amount limit, which may be applied to a department and/or program. The dollar limit can vary by department or program. Reallocations that are less than this amount would not require Council approval, as long as approvals are obtained from the City Manager, Director of Finance and the Department Director. 

As noted previously, the survey results indicated three of the surveyed cities require Council approval for budget amendments in excess of a specified dollar limit, ranging from $25,000 to $75,000.

3. Appropriation Control with a Reallocation Threshold Percentage

A reallocation threshold percentage may be established for each department and/or program. The percentage may vary depending on the level of control desired for each specific department and/or program. Council approval would be required for budget reallocations that exceed the threshold percentage. For reallocations that are less than the threshold, approvals must be obtained from the City Manager, Director of Finance and the Department Director.

The threshold is calculated based on a percentage of the overall budget for the department, fund or program. For example, a threshold of 5% for a department, fund or program with an annual budget of $500,000 would mean that any reallocations above $25,000 require Council approval. A different threshold percentage may be set for those departments or programs that Council desires to monitor more closely.

4. Appropriation Control at the Program Level

Council approval would be required for budget reallocations between programs within a department regardless of amount. Reallocations between activities within the same program would not require Council approval, as long as approvals are obtained from the City Manager, Director of Finance and the Department Director.

There are advantages and disadvantages to each of the options. Please refer to Attachment A for a summary of the pros and cons of each option, when compared to the current City policy of appropriation control at the department by fund level.

The Fiscal Sub-Element to the City General Plan contains several goals, policies, and action statements that address maintaining sound financial practices. Examples of goals and policies include:

Goal 7.1B Financial Practices: Maintain sound financial practices which meet all applicable standards and direct the City’s financial resources toward meeting the City’s long term goals.

Policy 7.1B.1. Resource Allocation: Allocate resources in direct relation to general plan goals.

Policy 7.1B.5. Performance Budget System: Maintain and refine the Performance Budget System to assure its use for multi­year planning, full­cost accounting, and budget monitoring.

If Council wishes to have closer oversight of resource allocation decisions than it currently has, a viable alternative is an appropriation control policy that would require departments to seek Council approval for reappropriation between programs that exceed $100,000 or 5% of the annual program budget, whichever is greater, up to a maximum threshold of $250,000. For programs with annual budgets less than $500,000, the maximum reappropriation threshold would be limited to $50,000. Any changes over the maximum threshold would require Council approval.

The expenditure limits would be calculated based on the program budget within the same fund. An example of the expenditure limits for General Fund programs is included in Attachment B - Budget Appropriation & Control Limits. If the overall budget is expected to exceed the appropriated amount for a given fiscal year, the department would seek Council approval for service level changes and/or budget modifications at the earliest time possible.

Appropriation control would apply to all governmental funds, including General and Special Revenue Funds. In keeping with governmental accounting practices, it would not apply to Enterprise and Internal Service Funds, which are business-type activities that are controlled by available revenue and demand for service. Income statements that detail the net financial position (revenue vs. expenditures) for the Enterprise and Internal Service Funds are prepared and reviewed by the Finance Director for each accounting period. Significant performance issues with these funds are reported to Council in the accounting period financial report. In addition, Staff will request Council direction should the rate stabilization reserve for the Enterprise funds become insufficient to support the net financial position of the funds.

This proposed new policy is an amalgamation of the prevalent policy options implemented by California city governments as discussed earlier in this report. The expenditure limits allow the departments some flexibility in meeting day-to-day service level demands while providing Council with a tighter oversight of how resources are allocated within the department.

Staff has worked closely with the City Attorney on the issue of budget appropriation and development of this policy. 

While one mechanism for greater oversight in resource allocation decisions is a change in appropriation policy, Council will also be receiving a new report beginning FY 2003/2004 which will enhance Council oversight in a timely manner. On a trimester basis, staff will submit a Program Outcome Measure Exception Report to Council which highlights the outcome measures that are not anticipated to achieve their targets by year end. The report will detail the reasons for these exceptions. If the targets are not anticipated to be met and staff is proposing to move resources from the associated program above the maximum threshold set by Council, Council approval will be required before resources are transferred.

In addition to the new Program Outcome Measure Exception Report, staff will continue to provide the financial report for each accounting period and highlight the status of operating expenditures for the significant funds.

There is no fiscal impact to the City in implementing the budget appropriation control policy.

Public contact was made through posting of the Council agenda on the City's official notice bulletin board, posting of the agenda and report on the City's web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the report in the Library and the City Clerk's Office.

1. Appropriation Control Policy Options Summary
2. Budget Appropriation & Control Limit Examples

Appropriation Control with a Dollar Amount Limit

 ** For example, if the Police Services program is expected to have a year-end expenditure overage of $250,000 or less, the program manager will not need to submit a RTC and budget modification request if the following conditions are met:

• The program service level is currently being met.
• The City Manager, Director of Finance and Department Director has reviewed this excess along with the overall Public Safety Department budget, and has identified potential cost savings within the department such that the overall department expenditure level is not expected to exceed the annually appropriated amount.