Updated May 2, 2005

City of Foster City

Internal Service Funds

Recommended Principles

FY 2005-2006

The following principles shall guide the methodology used to budget for internal service fund (ISF) charges to operating budgets starting in FY 2005-2006

  1. Consistency – A consistent methodology will be used for all internal service funds.
  1. Replacement Charges
  2. Assets Subject to Replacement – Individual or mass / pooled assets that have a cost basis and an estimated replacement value over $1,000 and greater than 3 years in estimated useful life may be included for replacement in Internal Service Funds. Assets which have an individual cost basis of $5,000 should be included in replacement ISF’s. Discretion may be used as to whether or not all assets should be included for cost recovery (e.g., assets that were one-time purchases that are not intended to be replaced, assets funded through capital grants that are subject to future funding).
  3. Cost Basis – Replacement value shall be assigned based upon a reasonable estimate of the cost of replacement of the asset at the end of its useful life. Cost basis will ignore any potential resale value of the replaced asset. Proceeds from the sale of assets are shown as separate revenues that increase the fund balance. Inflationary effects: Inflationary effects on certain equipment will be included and estimated up front based upon past experience and estimated increases for future replacement purchases.
  4. Useful Life (Replacement Period) – The replacement period assigned to each asset should, to the fullest extent possible, match the estimated useful life for depreciating those assets for financial reporting purposes.
  5. Useful Life or Replacement Charge Adjustments – Useful life and estimated replacement value of each asset shall be reviewed annually prior to the start of the succeeding fiscal year. Any changes to the useful life (extension, more rapid expiration) or estimated replacement value shall be accounted for prospectively. (E.g., an asset of $10,000 is assigned a life of 10 years. At the end of the 5th year, the asset’s useful life is changed from 10 years to 15 years. At the end of the 5th year, replacement costs remaining to be recovered are $5,000. The remaining recovery period is now ten years [five plus an additional five]. The annual recovery amount shall be $500 [$5,000 divided by 10 remaining years.])
  6. Replacement Start Period – Replacement charges will start at the beginning of the fiscal year in which the asset is scheduled for purchase. If the asset is not purchased or is otherwise delayed to the very end of the fiscal year, the replacement charges accrued will be ‘trued up’ in the following fiscal year. Assets not replaced will remain at their recovered value until purchased.
  7. Allocation to Departments / Divisions – Allocation of replacement costs shall be allocated to departments / divisions based upon their relative use of those assets. Shared assets between two or more departments will be allocated based upon each department’s / division’s pro-rata use of the asset. Judgment will be used to determine the appropriate allocation based upon consultation with the user departments.
  8. Beginning Replacement Charges – Upon implementation of this new methodology, the opening replacement charge balance shall be calculated using the method described in section 2 above for all assets. This balance will be compared with the opening fund balance for the fund, and any overages (shortages) will be reviewed by the City Manager on how to handle.
  9. Initial Asset Funding – New assets to be placed on the replacement listing must be initially funded through operating department budgets in the year in which the asset is purchased.
  10. Emergency / Contingency Funds – Contingency funds may be established for ISF’s at a level authorized by the City Manager (which is recommended to be $100,000 for each internal service fund). Contingency funds are put in place to allow for purchases that were not specifically identified for replacement in the budget process but need to be replaced to maintain operations. Such purchases require prior approval of the City Manager. Replaced assets that are on the equipment replacement listing will be accounted for as a replacement at the beginning of the current fiscal year (#2e above); replacement charges will be revised for such asset in the following fiscal year on a prospective basis.
  11. Inadequate Recovery Charges – Departments are charged with the responsibility of reviewing replacement costs annually as indicated in #2d above. The City Manager may authorize use of the Contingency Funds in the applicable ISF fund to fund the increased costs.
  12. Asset Designation to Appropriate Internal Service Fund – Assets shall be assigned to the appropriate internal service fund to which the asset relates. All building-related costs (e.g., HVAC equipment, carpeting, security systems, etc.) should be included in the Building Maintenance Fund. All computer-related technologies (e.g., PC’s, printers, copiers, etc.) should be included in the Information Technology Fund. All vehicle-related assets (e.g., vehicles, add-on equipment that is not easily transferable to a non-vehicle related use) should be included in the Vehicle Replacement Fund.
  13. Asset Disposal and Non-Replacement – Replacement charges built up for assets on the replacement listing that are not replaced shall be transferred to the fund balance of that ISF, and shall not be transferred to cover for another asset.
  1. Operating Costs
  2. Full Recovery – Operating costs shall be recovered in full based upon the annual operating budget forecasted for the fiscal year.
  3. Allocation to Departments / Divisions – Allocation of operating costs shall be allocated to departments / divisions based upon a reasonable allocation methodology that considers such things as extent of personnel services provided to each department, or specifically identifiable costs to individual departments or assets. Operating costs maybe allocated differently based upon the nature of those costs (e.g., personnel may be allocated based upon level of service provided to operating departments, whereas supply costs pertaining to specific assets may be allocated based upon that asset’s departmental allocation.). Judgment will be used to determine the appropriate allocation based upon consultation with the user departments.
  4. Personnel Costs – Personnel costs shall include a direct allocation of personnel supporting the operations of the internal service fund. Policy and operational requirements shall dictate the level and extent of allocation of personnel costs allocated to the fund, but in every case shall include salaries plus benefits of all employees that have direct responsibilities for overseeing or handling the operating activities of the fund (e.g., department heads, managers, supervisors, staff). If an employee has less than 10% of their annual work hours devoted to supporting the operations of the fund, the employee’s time shall not be directly allocated to the fund.
  5. Maintenance Costs – All maintenance costs associated with assets included in Internal Service Funds will be included in those funds. Such costs may be allocated directly to the department(s) to whom the asset is attributed.
  1. Implementation Issues
  2. Calculation Tool – Initially, Microsoft Excel will be the tool used for calculation of existing assets under the new methodology. Spreadsheets will be created and provided using existing assets by the Administrative Services Director, and will include calculation formulae to assist in implementing the methods described herein. Internal service fund administrators will then be required to update and analyze those spreadsheets in accordance with the instructions provided herein.
  1. Department Responsibilities

The following represents a summary of operating department responsibilities:

  1. Verify the business need of each asset on the replacement listing.
  2. Verify the existence of the assets.
  3. Validate the replacement value.
  4. Validate the estimated remaining useful life.
  5. Provide the ISF administrator with the notice of intent to replace any existing asset on a timely basis for the next fiscal year.
  6. Provide the ISF administrator with the notice of intent to purchase new assets that are to be added to the ISF.