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HomeMy WebLinkAbout8C - Fund Balance Reserves ,~ AGENDA #: PREPARED BY: SUBJECT: DATE: INTRODUCTION: BACKGROUND: DISCUSSION: 8 (C) RALPH TESCHNER FINANCE DIRECTOR CONSIDER ESTABLISHMENT OF FUND BALANCE RESERVES FOR FUTURE EXPENDITURES MAY 16, 1994 The General Fund balance for the city increased by $385,728.00 during the past year as indicated in the 1993 Financial Report. This represents a fairly significant increase compared to past years which has prompted Staff to request that the City Council establish fund reserves for specifically designated expenditures. Typically in the past any excess revenue at year end would lapse automatically into the fund balance without any Council action with respect to reappropriation. The result has been a gradual buildup of our General Fund balance to an amount of nearly 1.75 million dollars. However, the Council has always had the discretionary authority to utilize the fund balance. On three specific instances, the Council has authorized such expenditures. On 7/15/91 the Council approved a $75,000 transfer to the Capital Park Fund for the completion of a park trail through Lakefront Park from CSAH 21. On 7/6/92 the Council approved an $85,000 transfer for the purpose of a concrete walk along Franklin Trail. Also approved in the 1992 Audit was the transfer of $200,000 to provide funding for the City's compensated absence liability (vacation and sick leave accrual). The General Fund balance serves two purposes. First and foremost it provides the City with necessary working capital to fmance expenditures prior to receipt of our tax settlements which occur in June and November. Secondly, it basically represents the City's savings account. The City's 1990 Audit was the first financial statement which included a working capital designation of one million dollars. This was in response to a recommendation by the League of Minnesota Cities because of increased attention by the State of Minnesota to cities' year-end cash positions and their erroneous interpretation that this is "free money" to possibly reduce state aids. Rather than a flat amount being set aside for working capital, an acceptable standard of 30% of the annual operating budget was recommended in Agenda Item 4(b) to set aside working capital on an yearly basis. Assuming the Council approves this recommendation, this would reserve $1,432,000 of our total fund balance of $1,731,775 as working capital and leave approximately $300,000 as undesignated. 4629 Dakota St. S.E., Prior Lake, Minnesota 55372-1714 / Ph. (612) 447-4230 / Fax (612) 447-4245 AN EQUAL OPPORTUNIlY EMPLOYER co.u_, ... '''-'r--~----..,....~----''-'-"''- We believe that it is best for the Council to designate a use or uses for these funds. There are a number of possibilities for the Council to consider: 1. Pro.perty Tax Write-Down The Council could use the excess revenue to reduce the city's operating budget tax levy. The problem with this is that unless you provide for this tax relief on an onging basis, the next year's budget is encumbered with an automatic price inflator to make up this difference before any other budget increases are factored in. The result is highly fluctuating property tax rates. Nor has anything of long term value been accomplished. 2. Increase Contingency Level Another option would be to increase the City's contingency account to allow for budget flexibility which would give the Council greater opportunity to respond to projects that periodically come up that are not allocated within the budget. For example, the Council could appropriate an additional $50,OOO/year to the Contingent Account from the carryover funds without increasing taxes. Here again, little of long term value is accomplished. 3. Fund Balance State statutes require that all unexpended budget appropriations lapse into the fund balance. The Council could continue this practice, thereby preserving our savings balance, in excess of the 30% threshold and access these monies only on a need-be basis as determined by Council action. Unfortunately the size of the balance would soon become apparent to State Auditor's Office. 4. Establish Fund Reserves This method actually provides the greatest flexibility to the Council with respect to future spending decisions. The underlining rational for establishing reserves is to offset the tax impact of specific expenditures by saving for them in advance of their occurrence. Such balances can buffer the severe fiscal increases we have experienced and provide available funds in case of emergency. ISSUES: There There are a number of fund reserve options available for the Council to consider. The following are three prominent needs for such fund reserves. Obviously there are many other needs which individual councilmembers may perceive. These were selected because they appear to be top priorities. Also accompanying each description are financing options to address each of these requirements if reserve funding is not supported. a.) Capital Park Fund The community has identified a trail system as an integral component of our overall development plans for Prior Lake. The City currently has a reserve established with a funding ...."';.,,~"'"".,~..... 'wq;>' .. mechanism to accumulate funds to improve neighborhood parks with trails and playground equipment. This source is derived from the $650.00 building permit park support fee which will generate nearly $100,000 annually towards this goal plus park dedication cash in lieu of land associated with new development. However, these dollars are inadequate to provide our park system connections to regional destinations. In addition, Sand Point and Lakefront Parks both lack improved accesses in the form of paved parking lots. Either the City adds these projects on to its capital improvement bonds as currently is the case or public referendum fmancing is probably the only realistic means to accomplish these internal park improvements outside the scope of building reserves to offset these improvement expenditures. Together these projects are expected to approach a cost of $270,000.00. b.) Equipment Fund The City's policy to finance equipment acquisition has been to issue equipment certificates and amortize this debt over a period of four years with no overlapping with the exception of the recent $500,000 fire equipment purchase. The last general certificates were issued for $375,000 in 1991. Because of the prohibitive cost of fire trucks, the Council will be reviewing requests exceeding $557,000 for 1995 which includes $190,000 for a new pumper. Transferring reserves to the equipment fund to maintain the present equipment debt level would eliminate an anticipated 4% tax increase associated with the equipment certificate increase. By establishing such a revolving equipment reserve on a more continual basis you mitigate the high impact of short term debt financing. c.) Government Buildini Fund The Space Needs Assessment that was reviewed by the Council recognizes that the following three functions will have to occur at sometime; Building Modification All city buildings ranging from city hall to the library will have to comply to ADA regulations that will require building access changes. The library appears to require the greatest expense to comply. Building Addition To accommodate inevitable staffing growth, an addition onto the present city hall will in all likelihood occur that will incorporate either some sort of freestanding or attached addition along with the elimination of the existing fire hall facility. ,. ..... ow . ALTERNATIVES: RECOMMENDATION: ACTION REQUIRED: REVIEWED BY: A941O. WRT Building New Construction It may be feasible that an entire new government center may be constructed with certain service elements such as police relocated to other sites. Ordinarily public referendum financing is not very successful in constructing these facilities. A more practical avenue would be to enter into a lease purchase arrangement which would not require public support. Yet these require substantial property tax levies to support. Therefore, if the City were able to contribute a significant equity portion by an accumulated reserve over time, tax impact could be correspondingly reduced. In evaluating these considerations Staff believes it is important that $300,000 be leveraged in such a manner as avoid anyone time utilization that may not have any long standing impact upon the taxes. Instead, these reserves should be used as possible seed money that can be refurbished on a continual basis. Recapping the options, the following alternatives are available to the City Council: 1. Consider a one-time property tax reduction. 2. Increase future budget contingency account by fund balance transfer. 3. Maintain fund balance above 30% working capital level. 4. Dedicate the entire amount of $300,000 to the Equipment Fund. 5. Approve a portion or all of the available $300,000 to specified expenditures or fund reserves as identified by the Council. Staff would recommend Alternative #4 and that, depending upon Council priority and consensus, a resolution be prepared that would incorporate Council direction regarding which fund reserve(s) should be established and the amount of the General Fund balance to be contributed. ity Council directing Staff to prepare resolution ed use of the City's General Fund balance. / 'L.-, V' ,_..- . ............ '"~,.. ..",.......--.... . I>^ .. wr ..