HomeMy WebLinkAbout03 15 10 City Council work session
CITY COUNCIL WORK SESSION REPORT
MEETING DATE: MARCH 15, 2010
PREPARED BY: JERILYN ERICKSON, FINANCE DIRECTOR
TOPIC: FUND BALANCE RESERVES
DISCUSSION: Introduction
The purpose of this workshop item is to discuss fund balance reserves including:
1) the classifications used with the different fund types; 2) minimum fund balance;
3) the emergency component of a reserve; and 4) impact of reserve balances on
bond rating.
History
The City of Prior Lake currently does not have a formal Fund Balance Reserve
policy for any of its funds. In 2007, the City Council adopted resolution 07-087
which approved the revised 2030 Vision and Strategic Plan. Contained within
this revised Plan was a goal which established the Finance Performance Gold
Standards. One of the objectives of this goal was to “Maintain a 45% General
Fund reserve balance – OSA (Office of State Auditor) and City Auditor
recommended reserve to provide adequate cash flow, offset revenue shortfalls
and insurance for unforeseen catastrophic events.”
The Office of the State Auditor (OSA) has recommended that each city establish
a formal policy on the level of unreserved fund balance that should be maintained
in the General Fund. The OSA also encourages the adoption of similar policies
for all other special revenue funds.
The State Auditor has taken a position on the level of unreserved fund balance
only in the general and special revenue funds, because the nature of other
governmental funds (capital projects and debt service) is such that the fund
balance is restricted for the purpose of the fund.
Current Circumstances
When drafting a Fund Balance Reserve Policy, there are a number of factors that
should be taken into account, specifically the city’s revenue streams. Funds,
such as the General Fund, that rely heavily on property taxes must maintain
sufficient financial resources to cover expenditures through the next tax revenue
collection cycle. Funds that rely on state appropriations and grants should also
consider the timing of those payments. Cities need to maintain a prudent level of
financial resources to protect against reducing service levels or raising taxes and
fees because of temporary revenue shortfalls or unpredicted one-time
expenditures.
Other considerations include the predictability of revenues and the volatility of
expenditures. Higher levels of unreserved fund balance may be needed if
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significant revenue sources are subject to unpredictable fluctuations or if
operating expenditures are highly volatile.
The adequacy of unreserved fund balance should be assessed based on an
individual city’s own circumstances. Nevertheless, the State Auditor has
recommended that cities maintain unreserved fund balances in the General Fund
and special revenue funds of approximately 35 to 50 percent of fund operating
revenues or no less than five months of operating expenditures. Such measures
should be applied within the context of long-term forecasting, thereby avoiding
the risk of placing too much emphasis on the level of unreserved fund balance at
any one time.
Revenues
The General Fund receives tax settlements in June and December. Property
taxes, $8.5 million, comprise 70% of the revenue sources for the General Fund.
The City receives approximately $520,000 annually from the State of Minnesota
as shown in the following table:
Municipal State Aid $ 230,000 Feb (50%), July (40%), Jan (10%)
Police Aid $ 155,000 October (100%)
Fire Aid $ 123,000 October (100%)
PERA Aid $ 11,905 July (50%), Dec (50%)
Total $ 519,905 5% of Revenues
Market Value Homestead Credit Aid (MVHC), a program that is supposed to be
funded by the State of MN, has been unallotted for 2010, 2009 and 50% in 2008.
In anticipation of an unallotment for 2010, the City’s 2010 budget included a
$227,000 contra revenue for the MVHC in property tax revenues. As market
values decline, MVHC will increase. Consequently, our exposure to a further
reduction in property tax revenues will also increase.
The City receives a significant contribution from the Shakopee Mdewakanton
Sioux Community. This contribution is currently $380,000 or 4% of General Fund
revenues. If the State approves legislation authorizing a racino, the City could
potentially lose some or all of this contribution from SMSC.
During the 2010 budget process, all General Fund revenue sources were
adjusted. Historically, there was a heavy reliance on revenues from a high level
of development activity (building permits and plan check fees). This is no longer
the case.
Fund Balance
Fund balance reporting and governmental fund type definitions are changing.
GASB statement 54 provides distinctions in how fund balances are reported to
identify amounts that are considered nonspendable. The Statement also
provides for additional classification as restricted, committed, assigned, and
unassigned based on the relative strength of the constraints that control how
specific amounts can be spent.
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Conclusion
The City Council should consider establishing fund balance reserve policies
which provide direction on the level of reserves for each the various funds. A
general one-size-fits-all policy is not appropriate when you consider the
substantial differences between each fund.
ISSUES: Staff has identified the following issues for discussion by the City Council:
1) What are the classifications for fund balance?
Currently, the City uses the following classifications for presenting fund
balance in the annual audit report:
Reserved (Governmental Funds)
?
Severance Compensation
?
Debt Service
Unreserved (Governmental Funds)
?
General Fund
?
Special Revenue Funds
Designated for development loans
o
Designated for capital outlay
o
Designated for improvements
o
?
Capital Project Funds
Designated for capital outlay
o
Designated for improvements
o
Net Assets (Enterprise Funds)
?
Invested in capital assets, net of related debt
?
Unrestricted
A revised Treasurer’s Report has been included with this agenda report to
reflect the current classifications for each of the City’s funds.
Staff Recommendation:
The fund balance classifications are changing with the implementation of
GASB 54. Later in 2010, staff and the city auditors will be presenting the
requirements and options associated with GASB 54.
2) What should the minimum fund balance be for the General Fund?
Based on the OSA’s five-month operating minimum plus emergency
funds, the following chart shows what the fund balance would be for 2007,
2008 and 2009.
2007 2008 2009
5 months operating $ 5,000,000 $4,800,000 $4,800,000
expenses (average)
Emergency $ 500,000 $ 500,000 $ 500,000
Total $ 5,500,000 $5,300,000 $5,300,000
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The “emergency” component is not based on any particular calculation.
A monthly cash flow for years 2007 through 2009 for the General Fund
has been included with this agenda report and supports the 5-month
operating amount shown above.
Staff Recommendation: Based on analysis of cash flow for the General
Fund, Staff recommends a minimum fund balance which follows the
OSA’s recommendation.
3) How should we define and quantify the “Emergency” component of
the minimum fund balance reserve?
A few definitions to consider include:
?
Natural disasters (flooding, tornados, straight-line winds, major
traffic accident, non-city utility emergencies)
?
Terrorism
?
Higher than normal expenditures (snow and ice control)
?
Significant uninsured litigation
4) How is the bond rating impacted by a lower reserve? Based on a
recent telephone call to Moody’s Rating Agency, they place a high priority
on the amount of liquidity a City has when determining its bond rating. It’s
one of a multitude of factors that is considered in the rating process. The
long-term benefit from having a higher bond rating is lower interest costs
for debt.
FINANCIAL The City’s treatment of its reserves has both financial and non-financial impacts.
IMPACT:
The most obvious impacts are in dealing with the financial vagaries of the
economy, changing policies of the state and federal governments and interest
rates paid by city taxpayers associated with the City’s annual borrowing. Less
obvious is the expanded menu of options the reserves make available to the City.
For example, without a healthy reserve, we could not have purchased the Pike
Lake property leveraging significant state dollars in the process of creating a
legacy for residents. Likewise, in the future, we may need funds to resolve
economic development or transportation issues in our community which might
not be available from other sources.
RECOMMENDED The City Council should discuss these issues so a draft fund balance policy can
ACTION:
be developed for City Council for additional review.
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City of Prior Lake
" SAMPLE REVISED REPORT"
Treasurers Report
February, 2010
Fund2/1/20102/28/2010
Fund Type & NameNo.BalanceReceiptsDisbursementsBalanceFund Balance ClassificationConstraints
Business-Type Funds
Water & Sewer Fund601$ 6,173,587.98$ 519,333.56 $ 371,248.38$ 6,321,673.16 UnrestrictedIdentified on utility bill for this purpose
Water Quality Fund602626,874.2967,448.1031,924.15662,398.24UnrestrictedIdentified on utility bill for this purpose
Transit Fund6031,706,587.4541,919.2965,502.771,683,003.97UnrestrictedFunds received for transit-related uses
Total Business-Type Funds$ 8,507,049.72$ 628,700.95 $ 468,675.30$ 8,667,075.37
Governmental-Type Funds
General Fund101$ 5,633,387.07$ 1,197,914.05 $ 1,518,286.75$ 5,313,014.37 UnreservedCashflow, emergencies, one-time opportunities
Special Revenue Funds
Cable Franchise Fund210$ 42,080.16 $ -$ -$ 42,080.16Unreserved; Designated for Capital OutlayStatutory obligation to use for PEG access
Capital Park Fund225144,821.690.001,636.00143,185.69Unreserved; Designated for ImprovementsContractually obligated; park dedication fees (see Country Joe)
Severance Compensation230404,243.150.000.00404,243.15Reserved for Severance CompensationReserved for Severance Compensation
EDA Special Revenue24099,191.710.000.0099,191.71Unreserved; Designated for ImprovementsEconomic Development
Econ Dev Federal Revolving Loan Fund250102,734.740.000.00102,734.74Unreserved; Designated for Development LoansEconomic Development
Econ Dev MN Revolving Loan Fund25579,778.870.000.0079,778.87Unreserved; Designated for Development LoansEconomic Development
Developer Agreement Fund260768,844.4415,000.0022,164.06761,680.38Unreserved; Designated for ImprovementsContractually obligated;
Total Special Revenue Funds$ 1,641,694.76$ 15,000.00$ 23,800.06$ 1,632,894.70
Capital Project Funds
Downtown Revolving Fund256$ 37,380.03 $ -$ -$ 37,380.03Unreserved; Designated for ImprovementsIdentified for downtown building façade improvements
Tax Increment402137,201.900.000.00137,201.90Unreserved; Designated for ImprovementsContractually obligated by tax increment agreements
TIF #1-341378,018.250.000.0078,018.25Unreserved; Designated for ImprovementsContractually obligated by tax increment agreements
TIF #3-141438,420.760.002,500.0035,920.76Unreserved; Designated for ImprovementsContractually obligated by tax increment agreements
TIF #4-14152,617.060.000.002,617.06Unreserved; Designated for ImprovementsContractually obligated by tax increment agreements
TIF #5-14161,157.490.000.001,157.49Unreserved; Designated for ImprovementsContractually obligated by tax increment agreements
TIF #6-141748,144.900.000.0048,144.90Unreserved; Designated for ImprovementsContractually obligated by tax increment agreements
Revolving Equipment Fund4101,169,721.800.000.001,169,721.80Unreserved; Designated for Capital OutlayIdentified for equipment replacement
Building Fund420284,807.870.008,859.00275,948.87Unreserved; Designated for Capital OutlayIdentified for funding Facilities Management Plan (future)
Revolving Park Equipment Fund430100,000.000.000.00100,000.00Unreserved; Designated for Capital OutlayIdentified for park equipment replacement
Construction Fund501679,380.040.00274,047.95405,332.09Unreserved;Construction projects in progress
Trunk Reserve Fund5021,065,585.7540,500.000.001,106,085.75Unreserved;Contractually obligated by developer agreements
Street Oversize Fund503513,603.430.000.00513,603.43Unreserved;Contractually obligated by developer agreements
Water Storage Fund505102,196.3927,000.000.00129,196.39Unreserved;Contractually obligated by developer agreements
Total Capital Project Funds$ 4,258,235.67$ 67,500.00$ 285,406.95$ 4,040,328.72
Debt Service Funds5xx$ 1,555,281.25$ 10,245.30$ -$ 1,565,526.55 Reserved for Debt ServiceReserved for contractually obligated debt service
Agency Fund801$ 149,100.00$ 9,000.00$ 500.00$ 157,600.00N/AEscrows to be reimbursed to depositors
Total Governmental Type Funds$ 13,237,698.75$ 1,299,659.35 $ 1,827,993.76$ 12,709,364.34
Total All Funds$ 21,744,748.47$ 1,928,360.30 $ 2,296,669.06$ 21,376,439.71
Investment Pool & Ratio$ 21,109,398.0198.75%
This report does not reflect financial obligations from contracts, agreements, purchases, services received, etc.
City of Prior Lake
General Fund
2009 General Fund Revenues/Expenses2009 General Fund Ending Cash
200920092009200944.0% of 2009
$7,000,000
RevenueExpenseNetEnding Cash Balance$ 12,476,934
$5,000,000
January 275,654.97 714,657.09 (439,002.12) 4,775,994.76 5,489,435.00
$6,000,000
$4,500,000
February 364,758.60 706,430.37 (341,671.77) 4,530,010.90 5,489,435.00
$4,000,000
$5,000,000
$3,500,000
March 141,848.60 736,661.64 (594,813.04) 3,931,891.87 5,489,435.00
$3,000,000
$4,000,000
April 401,112.31 734,607.34 (333,495.03) 3,599,535.79 5,489,435.00
$2,500,000
$3,000,000
May 262,445.94 927,794.30 (665,348.36) 2,952,579.86 5,489,435.00
$2,000,000
$1,500,000
June 4,576,268.13 1,142,119.14 3,434,148.99 6,381,202.59 5,489,435.00
$2,000,000
$1,000,000
July 446,919.42 1,064,674.09 (617,754.67) 5,770,170.42 5,489,435.00
$500,000
$1,000,000
August 202,676.16 909,012.65 (706,336.49) 5,071,735.42 5,489,435.00
$-
$-
September 318,752.30 741,265.80 (422,513.50) 4,659,003.41 5,489,435.00
October 573,319.16 867,942.58 (294,623.42) 4,355,670.24 5,489,435.00
November 91,193.52 1,405,594.08 (1,314,400.56) 3,036,780.86 5,489,435.00
December 4,433,733.52 1,600,659.69 2,833,073.83 6,045,408.58 5,489,435.00
RevenueExpense
Ending Cash Balance44.0% of 2009
12,088,682.63 11,551,418.77 537,263.86
44.0%
Average 1,007,390.22 962,618.23 44,771.99
12/31/08 FB / 2009 Budget
5 Mos Op 4,813,091.15
2008 General Fund Revenues/Expenses2008 General Fund Ending Cash
$6,000,000
200820082008200840.4% of 2008
$5,000,000
RevenueExpenseNetCash Balance$ 12,426,431
$4,500,000
$5,000,000
January 366,288.30 741,613.37 (375,325.07) 4,540,835.51 5,020,666.00
$4,000,000
$3,500,000
February 148,900.34 754,392.37 (605,492.03) 3,908,952.14 5,020,666.00
$4,000,000
$3,000,000
March 127,239.29 654,723.88 (527,484.59) 3,396,411.59 5,020,666.00
$2,500,000
$3,000,000
April 320,346.02 897,781.08 (577,435.06) 2,803,375.23 5,020,666.00
$2,000,000
May 113,438.21 1,253,675.04 (1,140,236.83) 1,668,573.05 5,020,666.00
$2,000,000
$1,500,000
June 4,291,814.68 796,589.81 3,495,224.87 5,175,843.15 5,020,666.00
$1,000,000
July 488,578.44 1,057,270.42 (568,691.98) 4,614,672.84 5,020,666.00
$1,000,000
$500,000
August 237,925.49 954,223.82 (716,298.33) 3,915,078.15 5,020,666.00
$-
$-
September 150,311.97 866,308.50 (715,996.53) 3,184,378.04 5,020,666.00
October 786,775.18 974,901.56 (188,126.38) 3,054,557.87 5,020,666.00
November 83,655.35 1,311,580.12 (1,227,924.77) 1,748,611.29 5,020,666.00
December 4,906,119.37 1,289,562.33 3,616,557.04 5,071,672.81 5,020,666.00
RevenueExpense
Ending Cash Balance44.0% of 2009
12,021,392.64 11,552,622.30 468,770.34
40.4%
Average 1,001,782.72 962,718.53 39,064.19
12/31/07 FB / 2008 Budget
5 Mos Op 4,813,592.63
2007 General Fund Revenues/Expenses2007 General Fund Ending Cash
$6,000,000
200720072007200745.2% of 2007
$5,000,000
RevenueExpenseNetCash Balance$ 11,685,807
$4,500,000
$5,000,000
January 247,016.49 577,697.06 (330,680.57) 5,123,822.18 5,276,400.00
$4,000,000
$3,500,000
February 313,774.89 654,394.90 (340,620.01) 4,733,549.50 5,276,400.00
$4,000,000
$3,000,000
March 171,163.78 677,559.20 (506,395.42) 4,072,089.28 5,276,400.00
$2,500,000
$3,000,000
April 342,807.43 807,036.25 (464,228.82) 3,620,645.84 5,276,400.00
$2,000,000
May 305,851.28 1,501,184.27 (1,195,332.99) 2,435,475.30 5,276,400.00
$2,000,000
$1,500,000
June 3,881,194.12 998,970.87 2,882,223.25 5,297,994.06 5,276,400.00
$1,000,000
July 491,024.58 1,032,401.67 (541,377.09) 4,746,367.13 5,276,400.00
$1,000,000
$500,000
August 296,769.37 785,262.54 (488,493.17) 4,295,084.56 5,276,400.00
$-
$-
September 413,957.59 857,742.51 (443,784.92) 3,858,080.63 5,276,400.00
October 401,228.67 1,129,102.88 (727,874.21) 3,078,490.49 5,276,400.00
November 102,840.35 1,702,815.74 (1,599,975.39) 1,477,483.88 5,276,400.00
December 4,781,327.81 1,280,275.21 3,501,052.60 5,370,302.97 5,276,400.00
RevenueExpense
Ending Cash Balance44.0% of 2009
11,748,956.36 12,004,443.10 (255,486.74)
45.2%
Average 979,079.70 1,000,370.26 (21,290.56)
12/31/06 FB / 2007 Budget
5 Mos Op 5,001,851.29
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