HomeMy WebLinkAboutItem 4
City of Lakeville
Finance Department
Memorandum
To: Mayor and Council
From: Jerilyn Erickson, Finance Director
Date: February 26, 2018
Subject: Utility Rate Study
The purpose of this agenda item is to update the Council on the results of the Utility Rate Study
(URS) that was completed by Northland Public Finance (part of Northland Securities). The
attached report details the study’s objectives, findings and recommendations, as well as results
of a literature search for best practices. Staff will provide some comments on the next steps
and possible future policy considerations.
Policy considerations
Financial Management Targets
The Northland report identifies several financial management targets that are currently used
in the model to evaluate whether forecasted revenues are sufficient to cover planned operating
and capital improvement expenses.
Staff recommends the continued use of the identified targets in the model going forward.
These targets maintain that the available cash on hand at the end of each year is an amount
sufficient to meet the following objectives:
Three months of operating cash
Following year debt service
Next year planned capital expenditures (not financed with bonds)
Three additional recommended targets:
Unassigned cash of $500,000 to account for unexpected costs
Unrestricted Net Assets not less than 50% of projected expenditures
Net revenues not less than 125% of annual debt service on existing and planned debt
Staff recommends amending the Fund Balance policy (Section 4.02) to incorporate the
objectives noted above for the Enterprise Funds. A proposed amended Fund Balance policy as
well as the current policy are included with this memo.
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Existing Debt
The Northland report references the financial reporting of debt associated with the utility
system.
Staff will review how debt is currently being reflected in the financial reports and determine if
any changes should be made.
New Debt
Since 2014, the City has issued debt each year for most of the costs incurred to replace and
repair watermain, recognizing that future customers will benefit from the improvements
implemented today.
Staff recommends using cash to finance infrastructure improvements rather than debt going
forward. This would result in a reduction in the cost of infrastructure maintenance as a whole
(due to no interest expense upon elimination of future debt). The current model assumes that
no additional debt will be issued for maintaining the current infrastructure after the year 2020,
even with low planned rate increases in the coming years. The projected cash balances in the
current model suggest that we may be able to avoid issuing debt in 2019 and/or 2020.
Staff is seeking direction from the Council about financing utility capital improvements on a
pay-as-you-go basis.
Water Trunk Fund
The Northland report recommends that the revenues and expenditures related to water
connection charges be included in the same fund as the Water Operating Fund revenues and
expenses.
Staff recommends keeping these revenues and expenses separate, as the revenues from
connection charges are committed toward the construction costs of new water supply lines,
wells, water storage facilities, and new sewer infrastructure. Maintaining the revenues and costs
in separate funds provides greater visibility to the use of the committed funds.
The City Water Plan is being updated in conjunction with the Comprehensive Plan update. It
is staff’s intent to incorporate in the Water Plan projected infrastructure costs based on growth
assumptions from the Comp Plan and to articulate that the funding source for these costs is
the water connection charge. The City Sanitary Sewer Plan will be similarly updated.
Growth Assumptions
The Northland report recommends discussion of whether the utility rate projections should use
the same customer growth assumptions as those used in preparation of the annual CIP
document.
Staff agrees that the same number of projected building permit estimates should be used for
both purposes, with a percentage reduction to add some conservatism to the utility revenue
projections.
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Conservation
As noted in the study results, research has shown that inclining rate structures are often
successful in reducing overall water demand, and elective water use (such as for landscaping
purposes) might decline with inclining rate structures. The City of Lakeville currently has a
tiered water rate structure that includes three tiers for residential customers and two tiers for
other customers.
Staff recommends that Council consider formalizing a conservation goal (i.e. gallons/day for
residential use) both for purposes of reducing our environmental impact as well as for
obtaining reductions in our future costs (delay building/expanding certain infrastructure,
digging new wells, building additional towers, etc). Staff also recommends that conservation
be considered during any discussion of rate structure changes, specifically with respect to the
number of billing tiers and the volume cut-off points of such tiers.
Monthly vs Quarterly Billing
The City currently issues utility bills on a quarterly basis. As noted in the study, research has
shown that monthly billing cycles can be helpful in promoting water conservation, as
customers are educated on their usage on a timelier basis. This change would have a direct
impact on costs to the City, as mailing costs and staff time spent on the billing and collections
process would increase. As more users move to electronic billing and payment, it would reduce
the cost impact of moving to monthly billing.
Staff recommends further discussion on the benefits of monthly billing to the customers
compared to the cost increases that would be anticipated from such a change.
Rate Structures
As noted in the study results, a rate structure should be designed to 1) provide a stable source
of revenue despite variances in water usage from year to year, 2) promote water conservation,
3) provide for affordable and fair structure for charging for services, and 4) balance the decision
to pay for capital infrastructure with cash versus debt.
Prior to any changes in rate structure, staff should complete the following:
Conduct an audit of all properties in the city to make sure we are billing them
appropriately;
Analyze water consumption and sewer discharge as compared to DNR and MCES
reports filed;
Analyze fixed and variable costs; determine how these relate to each different category
of user;
Staff recommends consideration of the following when considering rate structure changes:
Possible expansion of the current tiered model to include a fourth tier for residential
customers, and a third and possibly fourth tier for non-residential customers.
Review of the current tier volume cut-off points for any necessary changes to ensure
that an appropriate number of customers are falling into each tier.
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Promotion of economic development through any possible changes to the rate
structures.
Review of current senior discount to determine its purpose.
Staff is seeking direction from Council on any possible changes to the rate structures,
specifically with respect to balancing the objectives of 1) water conservation, 2) distribution of
costs between residential versus other customer types to promote the City’s overall economic
development goals, and 3) special discounts.
Proposed timeline
For the items discussed above where Staff is seeking Council direction, below is a possible
timeline for discussion of these items at work sessions.
Feb 26, 2018:
Financial Management Targets/Update Fund Balance Policy
Debt
Summer/Fall, 2018:
Debt Strategy (Policy)
General Water and Sewer Policy - Articulate goals such as:
o Conservation Goals
o Promoting economic development;
o Altering the impact on specific users such as senior discounts, etc.
Future:
Monthly vs Quarterly Billing
Rate structures
Attachments: 1) Northland Public Finance Utility Rate Study Report
2) Proposed Fund Balance Policy
3) Current Fund Balance Policy
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City of Lakeville
Utility Rate Study
For
Water and Sanitary
Sewer Funds
Final Report
February 2018
Northland Securities, Inc.
45 South 7th Street, Suite 2000
Minneapolis, MN 55402
(800) 851-2920
Member FINRA and SIPC | Registered with SEC and MSRB
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Contents
Introduction..................................................................1
Background ..................................................................2
Pro le of Utilities ..............................................................................2
Best Practices Evaluation.................................................................4
Utility Planning Model....................................................................6
Findings and Recommendations .............................8
Overview............................................................................................8
Future Growth...................................................................................8
Existing Debt.....................................................................................9
Financial Reporting..........................................................................9
Financial Management Targets ....................................................10
Methodology...................................................................................11
Water Utility Fund Projections.....................................................12
Sanitary Sewer Utility Fund Projections.....................................16
Next Steps..................................................................19
Appendix A - Water Utility Fund and Water Trunk
Fund ............................................................................20
Appendix B - Sanitary Sewer Utility Fund and
Sanitary Sewer Trunk Fund ....................................28
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Introduction
This report contains the results of work performed by Northland Public Fi-
nance on the 2017 Utility Rate Study (the “Study”). The Study is more than
an analysis of alternative user fees scenarios for the long-term nancial
management of the water and sanitary sewer utilities (the “Water Utility
Fund” and the “Sanitary Sewer Utility Fund” together “the Utilities”). A
core objective of the Study is to create a computer model that can be used
by City Staff to analyze the nancial implications of different scenarios.
Other study objectives included:
§Review existing plans and projections
§Collect and analyze customer usage from Local Government Informa-
tion Systems (LOGIS)
§Inform City on best practices
4 Water conservation rate structures
4 Billing frequency (quarterly or monthly)
4 Rates in comparable cities
§Prepare written report of ndings and recommendations
This report is organized into three sections with appendices:
§The Background Section provides a pro le of the Utilities, including
recent use trends, nancial structure, user charges, existing debt, and
planned capital improvements. The section includes an explanation
of the proposed nancial management policy targets used to evaluate
the nancial condition of the Utilities, a summary of literature on best
practices evaluation, and rate comparisons to other Minnesota cities.
Lastly, an overview of the Excel spreadsheet created for the City (the
“Model”) is provided.
§The Findings and Recommendations Section describes results of
the investigations and analysis conducted by Northland. This section
contains the results of the initial analysis of the projected nancial con-
dition of the Water Utility Fund and the Sanitary Sewer Utility Fund
(the “Base Scenario”). The Base Scenario re ects the City’s current
plans for future rate adjustments, capital spending, and debt issu-
ance. Related to the analysis are recommendations on key items that
shape nancial planning for the Utilities, including future estimates for
growth in customers, debt issuance, nancial accounting, and nancial
management targets. These recommendations are intended to provide
a foundation for future policy considerations for the City. The Study
was not intended to resolve all future policy considerations, but rather
to create the means to develop nance plan scenarios that facilitate
future planning and considerations.
§The Next Steps Section offers ideas for nearer and longer-term ac-
tions to continue the nancial planning process and the development
of nancial management policies.
§The Appendices provide supplemental information to the report.
The information includes the following reports for the Base Scenario
(prepared using the City’s plans for future rate adjustments, capital
spending, and debt issuance):
4 Pro forma nancial statements
4 Ending cash balance
4 Customers/usage/rates
4 Capital improvement plans
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Background
Northland collected and reviewed a wide range of information through
the Study process. Key elements of the background information are sum-
marized in this section. The information provides useful context for the
ndings and recommendations of the Study and for future nancial plan-
ning.
g Profi le of Utilities
u Water
The City operates a water utility system that currently serves approxi-
mately 20,000 customers. The water utility system consists of one water
treatment plant, six water storage towers, one ground storage reservoir, 18
water supply wells, and more than 300 miles of water main. The opera-
tion, maintenance, and expansion of the water utility system drives future
revenues and expenses. An examination of recent trends provides impor-
tant context for considering future rate changes. The information in this
section comes from water use and customer data used by the City to make
revenue projections for the Water Utility Fund.
Total water use has been relatively constant over the past three years, in a
range of 1.9 to 2.1 billion gallons. The charts in Figures 1 through 3 illus-
trate several important characteristics of water use in Lakeville:
§Residential customers consume the largest amount of water. For the
years 2012-2017, residential customers accounted for nearly 80% of
total water use.
§Correspondingly, residential customers make up 93% of all customers
served. Approximately 18,940 were estimated at 2017 year end.
Figure 1
Figure 2
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§Irrigation is the second largest water use, accounting for 10% of 2012-
2017 volume.
§Water use is highest in summer months when irrigation use rises. On
average, third quarter water use represents 39% of total annual use.
§Two-thirds of annual water use occurs in the second half of the year.
§For the years 2015-2017, residential water use averaged 86,000 gallons
per year per residential customer or 21,500 gallons per quarter.
§Industrial users average approximately 442,000 gallons annually per
customer.
These factors play a role in making nancial projections and setting user
rates to pay for the water utility system.
u Sanitary Sewer
The sanitary sewer utility system provides for the collection and treatment
of wastewater. The treatment of wastewater is provided by Metropolitan
Council Environmental Services (MCES). The City builds and maintains
the collection system that transports wastewater to the MCES Empire and
Seneca Wastewater Treatment Facilities.
Based on total sanitary sewer volume billed for the Sanitary Sewer Util-
ity Fund revenue projections prepared by the City, volume increased by
1.25% from 2016 to 2017 estimated. The total 2017 volume billed was pro-
jected by the City (as an input for the Study) to be 1.23 billion gallons.
MCES charges the City a fee for the regional collection and treatment
of wastewater. The City does not have any control over this operating
expense. Future charges payable to the MCES are projected based on total
estimated sanitary sewer volume reported to the MCES with an estimated
5.0% per year increase in the MCES fee charged per unit of volume.
MCES uses an allocation method based on previous ow to calculate each
municipality’s charges. For example, the method used 2015 calendar year
ow to allocate 2017 fees.
Figure 4
Figure 3
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g Best Practices Evaluation
u Literature Search for Best Practices
The City Staff requested a “best practices evaluation” to help inform future
decisions the City may implement regarding rate structure (i.e., changes
to tiers) and other utility fees and charges. Northland researched existing
literature related to the effectiveness of using rate structures to in uence
customer behavior and reduce consumption. The key ndings of North-
land’s research are summarized below.
Irrigation / Rate Structures
1. Research regarding the relationship between inclining rate structures
and demand for water is readily available. Research speci c to rates
versus irrigation demand is less prevalent, particularly for residential
customers as these customers often lack separate irrigation meters.
2. Research has shown that inclining rate structures are often successful
in reducing overall water demand, which would suggest that demand
for water used for irrigation purposes would also decline.
3.Most studies speci c to irrigation focus on the use of metering, con-
sumption control devices, and the use of other measures speci c to
landscaping (i.e., soil additives, drought tolerant turf, etc.).
4. Separate irrigation metering has proven to be a successful tool in
reducing demand for water as it identi es the speci c use of outdoor
watering and is separate from normal residential use.
5. Consumption control devices, such as weather sensitive irrigation
control switches (WSICS), have become powerful tools in reducing
irrigation demand, particularly for municipal clients (city parks, ball
elds, etc.) and institutional users (schools and universities). WSICS
are designed to override automated or timer-controlled irrigation sys-
tems to prevent over watering during rainy or wet weather.
6. WSICS have also proven to be valuable tools for residential custom-
ers with automated irrigation systems, particularly in suburban areas.
Studies have shown that suburban properties are more likely to have
in-ground irrigation systems. This, coupled with the fact that suburban
lot sizes are generally larger than those in more urban environments,
often leads to a greater demand for outdoor watering, particularly in
areas with higher property values. Additionally, research indicates
that property owners in these areas are more likely to be concerned
with the condition and appearance of landscaping and maintaining
lawn health.
7. High-demand residential water users are particularly sensitive to in-
creasing rate structures. Their outdoor water usage tends to be rather
discretionary and can be scaled back should the cost of water become
less palatable.
Water Conservation Elements and Rate Structures
1.National studies support the nding that the utility rate level itself
matters more than the rate structure. Rates that are kept too low do
not adequately cover the cost of operation, future replacement, and
infrastructure expansion. Rates kept too low in the short term provide
inaccurate information to customers on the long term cost of providing
service. The setting of rates and rate structure needs to take into ac-
count both the utility provider’s current and future needs for revenue.
The rates and structure need to balance what are sometimes competing
objectives. Those objectives may include:
4 Providing a stable source of revenue, recognizing water usage can
vary from year to year due to weather conditions and other factors,
to cover both the City’s variable and xed costs both in the short
term and long term
4 Promoting water conservation
4 Providing for affordable and fair structure for charging for services
4 Balancing the decision to pay for capital infrastructure with cash
versus debt recognizing that future customers will bene t from the
improvements funded today
2. Research suggests that utilizing a three-or-four tiered approach has
been most successful in reducing water usage and encouraging conser-
vation.
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3. Conservation measures include placing the lowest 10-20% users in the
rst tier, the more average users of 20-30% in the second tier, and the
highest 20-30% and 10-20% of users in the third and fourth tier, respec-
tively.
4. Tiered rates should increase respective to the desire for water conser-
vation. Some studies suggest that each tier should be increased by
10, 20, and 30%, while more aggressive rate structures have each tier
increasing by 20 to 50%.
Monthly versus Quarterly Billing
1. Research has shown that monthly billing cycles can be helpful in
promoting water conservation as quarterly billing tends to disconnect
users from monitoring usage.
2. Billing on a monthly basis can more easily help to identify issues with
water supply (i.e., plumbing that may be leaking) and allow customers
to easily see the impacts of increasing or decreasing usage which can
lead to behavior modi cation.
3. Monthly billing is often more budget friendly for the rate payer and
can be bene cial in reducing late payments.
4. For the water provider’s purposes, monthly billing has a direct impact
on costs associated with utility billing due to the need for increased
support from LOGIS and additional distribution expense. As more
providers, like Lakeville, utilize online-only billing, costs associated
with printing and mailing physical utility bills will decline.
5. To more accurately analyze the cost of monthly versus quarterly bill-
ing for Lakeville, more information would be needed regarding City
data collection (i.e., meter readings) and other information gathered by
the City and sent to LOGIS on a quarterly basis.
u Comparison to Other Cities
Northland was directed to compile and compare water and sewer rate
information for the following cities: Lakeville, Shakopee, Prior Lake, Apple
Valley, Eagan, Eden Prairie, Maple Grove, Plymouth, Burnsville, Chanhas-
sen, Savage, Woodbury, Blaine, and Inver Grove Heights. The comparable
cities were chosen based on similarities to Lakeville in one or more of the
following areas: population, market value, growth, median income, and
stage of development cycle. Figure 5 (page 7) compares residential quar-
terly water and sanitary sewer service bills for these comparable cities
(based on 2017 rates and 20,000 gallons of quarterly water usage). For the
comparison group, only four cities had lower water rates than Lakeville.
Lakeville had the fth lowest combined quarterly cost (out of 14 cities) ,
but only $0.36 per quarter higher than Eagan.
In addition to providing a comparison of rate information to other cities,
Northland also gathered information on rate structures used in the Minne-
sota Metropolitan Region. The Metropolitan Council’s Twin Cities Regional
Water Billing Analysis 2016 Report (the “MC Report”), includes the follow-
ing relevant ndings (for the approximate 273 cities included in the MC
Report) that are informative to the Study and City policy considerations:
§Customer Classes.Cities within the Metropolitan Region use numer-
ous combinations of customer classi cations. Of the 273 various rate
structures, 80% use different customer designations for rates charged
(i.e., residential, multi-family, commercial, irrigation, etc.)
§Billing Cycle.Approximately 57% of the cities within the Region bill on
a quarterly basis, 35% bill monthly, 4% bimonthly, and the remaining
4% is a mix (i.e., residential monthly and commercial quarterly).
§Uniform vs. Tiered Rate Structure.Tiered rate structures with in-
creasingly higher rates for higher tiers of water use are used in 69% of
the rate structures within the Region.
§Number of Tiers.Approximately 20% of the rate structures with tiers
have only two tiers, 44% of the tiered rate structures have three tiers,
and another 34% have either four or ve tiers. The remaining 2% con-
sist of rate structures that have six to ten tiers.
§Other Aspects.Only nine of the 273 municipal utilities included in the
MC Report offer special discounts for residential customers who are
senior citizens or have disabilities. The City of Lakeville offers a senior
discount.
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§Rankings.The MC Report show Lakeville as having one of the lowest
monthly residential water bills in the Metropolitan Region.
§Conservation Rates.The MC Report attempts to address the question
of whether or not a noticeable shift in water use occurs after a munici-
pality implements a conservation rate. The results were mixed and
inconclusive. The MC Report notes that many factors in uence overall
water demand, including improved water ef ciency among residen-
tial water-saving xtures. Other factors that affect water use include
demographic changes, change in the mix of residential and non-res-
idential customers, and water rates. This correlates with the national
literature search completed by Northland discussed in the previous
section.
§Average Residential Volume.The MC Report includes data that
compares water use versus average annual residential growth rate for
a city and concludes that there is no discernible pattern evident when
the average annual residential growth rates are compared to average
residential gallons per day (GPD) per connection. Data in the report
does not appear to point to any “normal” level for residential customer
water consumption.
g Utility Planning Model
The City is best served when nancial planning does not result in a static
report. Financial management of the water and sanitary sewer systems is
an ongoing process in a constantly changing environment. For that reason,
the primary focus of the Study was the preparation of the Base Scenario,
using the Model to create nancial projections for the Utilities that re ects
the City’s current plans for rate adjustments. Northland has provided City
Staff with a separate detailed report on the Model and instructions for
updating the Model.
The Model is based on existing nancial information, including the 2016
nancial report, 2017 estimates for nancial performance, and proposed
2018 budget. This information enabled Northland to verify the ow of
funds, compare to City Staff estimates, and create an accurate foundation
for projecting future nancial condition.
Northland worked with City Staff to obtain customer data from LOGIS.
Actual 2016 water and sewer volumes for all customers are built into the
Model. This data provides a useful check on the customer information
used by the City and provided to Northland for the Study. This detailed
information enables the City to explore changing volume, tiers, and the
implications of increased conservation.
The Model is designed to be used by City Staff on an ongoing basis and al-
lows for adjustment to a new scal year with limited inputs required.
An important aspect of the Model is the “dashboard” that facilitates
analyzing future scenarios. The dashboard shows the effects of changes in
rates or capital improvement funding on overall nancial condition and on
customer charges.
The “Impacts” table shows the quarterly and annual change in customer
cost from rate changes. This table is designed to quickly view a variety of
customer perspectives:
§Water and sewer volumes used in the table can be set to any amount.
§The comparison year can be set for any future year in the Model.
§The impact calculations can switch to any customer classi cation (e.g.,
residential versus commercial).
§The billing period can change from monthly to quarterly.
The Impacts table provides a thorough and ef cient tool for understanding
the impacts of policy decisions on water and sanitary sewer customers.
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Note to Figure 5:
For the purposes of calculating quarterly water and sanitary sewer charges, the example customer is a residential customer with average quarterly water
consumption of 20,000 gallons. The amounts shown for each city include city base and usage fees billed quarterly for water and sanitary sewer services.
The estimated quarterly charges for the cities included in Figure 5 was calculated by Northland for this report. Northland believes the amounts shown are
accurate, based on publicly available information on rates for these cities, but Northland has not veri ed the calculations with the listed cities.
Figure 5
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Findings and Recommendations
g Overview
Financial planning is guided by general objectives for a city to manage its
municipal utilities. These objectives include:
§Providing high quality service at an affordable price
§Making capital improvements needed to support growth and system
maintenance
§Allocating costs equitably between customer types and between cur-
rent and future users
§Maintaining a nancial condition of the municipal utilities that pro-
vides the capacity to deal with unplanned expenses and minimizes the
need for signi cant rates increases
Water and sanitary sewer user rates can be used to achieve other policy
objectives. To be effective, these objectives must be articulated and not as-
sumed. Examples of other objectives to consider in setting the utility rate
structure include:
§Encouraging water conservation
§Promoting economic development
§Altering the impact on speci c users
Collectively, these objectives create the framework for more speci c nan-
cial management targets. Financial management targets provide tools to
monitor nancial condition and to evaluate different scenarios for rates,
operation spending, capital improvements, and debt.
g Future Growth
Future growth is a critical factor in nancial planning for the Utilities.
Such growth includes the change in size and nature of the customer base,
the demand for water, the volume of wastewater, and the revenue col-
lected.
The Model contains two sets of growth projections for consideration (see
Figure 6). The rst set of growth projections comes from the projected
future customers used in the City’s Utility Fund Revenues spreadsheet,
maintained by the Finance Department. The Base Scenario used in the
Model is based on this set of growth projections.
Figure 6
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The second set of growth projections contained in the Model comes from
the projected building permits per year, the same estimates for growth the
City uses in its Capital Improvements Plan (CIP). The Model allows all or
only a portion of growth to be used in the projections. The Model is cur-
rently set to convert 75% of the residential growth projections included in
the CIP to new customers.
There are several issues related to future growth that should be discussed
further by the City as part of the on-going nancial planning for the Utili-
ties:
1. Should all planning (Utilities, CIP, Comprehensive Plan) use the same
growth projections?
2. If planning for the Utilities assumes customer growth based on pro-
jected building permits for new development, what percentage of this
growth should be used?’
3. If planning for the Utilities does not use building permits, what is the
metric for projecting future customer?
g Existing Debt
Existing debt is an important element of nancial planning. Operation of
the Utilities must generate enough net revenue to pay applicable principal
and interest on these obligations. Revenues of the Water Utility Fund are
currently pledged to ve bond issues:
1. G.O. Improvement Bonds, Series 2014A (2014A Bonds)
2. G.O. Bonds, Series 2015A (2015A Bonds)
3. G.O. Water Utility Revenue Bonds, Series 2016A (2016A Bonds)
4. G.O. Bonds, Series 2016B (2016B Bonds)
5. G.O. Bonds, Series 2017A (2017A Bonds)
Sanitary Sewer revenues are only pledged to the 2016B Bonds.
Only the 2016A Bonds were issued solely for improvements to the water
system. Water system obligations are only a portion of the other bond is-
sues. The obligations are de ned by speci c schedules for the payment of
principal and interest. The ow of funds to support debt is as follows:
§Debt service on the 2014A Bonds and the 2015A Bonds are paid from a
Debt Service Fund. Monies are transferred from the Water Utility Fund
to the Debt Service Fund for this purpose.
§Debt service on the 2016A Bonds is paid from the Debt Service Fund.
Monies are transferred from the Water Trunk Fund for this purpose.
The Water Trunk Fund, a Capital Projects Fund, receives all revenue
from the watermain connection charges paid with building permits.
No monies from the Water Utility Fund are used on this issue.
§Debt service on the 2016B Bonds and the 2017A Bonds are paid directly
from the Water Utility Fund. Only these issues are accounted for as
liabilities of the Water Utility Fund.
The City’s nancial planning and the structure of the Model follows this
ow of funds to ensure all debt is included in revenue projections.
The 2016A Bonds and the utility related portions of the 2016B Bonds and
the 2017A Bonds were issued pursuant to the authority of Minnesota Stat-
utes, Section 444.075. In using this statutory authority, the City pledged the
net revenues of the Utility Funds for the payment of principal and interest.
The debt issued under this statutory authority is an obligation of the Water
Utility Fund. Currently, the 2016A issue is not included as a liability of the
Water Utility Fund. This situation may understate obligations and over-
state the nancial position of the Water Utility Fund.
g Financial Reporting
The City maintains detailed spreadsheets and other nancial records
on the Utilities. These tools have assisted the City with its past nancial
management planning for the Utilities. Northland used the City’s nancial
reporting structure as the framework for the tables in the Model. Following
the nancial reporting structure used by the City allowed Northland to re-
view and compare the City’s prior projections against the results from the
Model. This included comparison of projections for future years’ ending
cash. Northland’s work in reviewing nancial records for the Utilities led
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to the following observations about the City’s nancial statements for the
Water Utility Fund, the Sanitary Sewer Utility Fund, and the Trunk Funds.
u Financial Statements for the Utilities
The City’s annual audited and published nancial statements roll up the
accounting for municipal utilities into a single Enterprise utility fund.
The fund is used to account for water, sanitary sewer, street lighting, and
environmental resources provided to City customers. This approach does
not provide bondholders, potential investors, and bond ratings agencies
with speci c information about the nancial condition of the individual
enterprise funds, including the Water Utility Fund and the Sanitary Sewer
Utility Fund.
u Connection Charges
The statutory authority to assess charges for connection to the water and
sanitary sewer systems at the time of building permit issuance comes from
Minnesota Statutes, Section 444.075. The purpose of the connection charges
is to collect revenues to pay for trunk and other core utility system im-
provements. As such, revenue collected from connection charges is a rev-
enue of the Water Utility Fund and the Sanitary Sewer Utility Fund. The
City does not account for revenue from connection charges in these funds.
g Financial Management Targets
The scope of services for the Study requested a focus on how to incorpo-
rate system infrastructure depreciation into the City’s rate structure. The
City asked for options for the City Council to evaluate and ultimately
select a rate structure for funding infrastructure depreciation. The funding
of depreciation and “the effect to reserves” was identi ed by the City as a
critical element of the Study.
The Study and the resulting Model address the request by focusing on the
City’s asset management practices to maintain and replace aging infra-
structure at future estimated costs, including the adoption of a long-range
capital improvements plan. Rather than focus on “funding depreciation”
it is better to gain a strong understanding of the expected future costs and,
maybe more importantly, their timing, and plan for replacement of infra-
structure and facilities. Using a planned schedule for capital improvements
and the incorporation of those plans into the Model does that. Capital im-
provement plans combined with nancial management targets are critical
element that allows for the setting of rates that meet City goals.
Financial management targets begin with criteria for evaluating over-
all nancial condition. Do projections show suf cient revenues to cover
planned operating and capital improvement expenses? The Utilities must
do better than break even, but by how much?
The Model helps to answer these question by allocating projected year-end
cash balance to the following purposes:
§3 months of operating cash
§Following year debt service
§Next year planned capital expenditure (not paid from bond proceeds)
These purposes assign cash to basic nancial management objectives. It is
also important for the Utilities to have monies that are not earmarked for a
particular purpose and available to manage unexpected changes in reve-
nues and expenditures. The Model uses two criteria to evaluate the amount
of available cash at year end:
§“Unassigned cash” is not less than $500,000. The amount of this target
is a policy decision for the City Council. Based on our experience in
working with other cities and in discussion with City Staff, we believe
that $500,000 is an appropriate minimum balance for Lakeville. In
evaluating the appropriateness of this amount, some factors to con-
sider include annual capital spending, exposure to costs in excess of
planning estimates, and frequency of emergency repairs.
§Unrestricted net assets not less than 50% of projected expenditures.
This target is meant to be an equivalent of the target for an unrestricted
fund balance for a city general fund. The City of Lakeville, for exam-
ple, has a stated policy to maintain an unrestricted fund balance in the
General Fund of an amount not less than 40% and not greater than 50%
of the next year’s budgeted expenditures of the General Fund. (Equity
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11
is reported as a fund balance in the General Fund and as a net assets
within the enterprise funds. Fund balance and net assets are the differ-
ence between fund assets and liabilities re ected on the balance sheet
or statement of net assets. The unrestricted net assets of the enterprise
funds can be considered a measure of available nancial resources.)
Taken together, these targets for unassigned cash and unrestricted net as-
sets determine if future nancial scenarios provide adequate amounts of
available nancial resources.
The third proposed nancial management target is net revenues not less
than 125% of annual debt service on existing and planned debt. A debt ser-
vice coverage ratio is essential when bonds are secured solely with utility
revenues. There is little formal use of this ratio in Minnesota because debt
is backed by the general obligation of the issuer. Nonetheless, debt service
coverage is a useful statistic to evaluate the nancial condition of the Utili-
ties. The 125% target is suggested as a nancial planning target based on
consideration of the rating agencies’ methodology for evaluating nancial
strength of utility revenue debt.
One point of clari cation is needed about the debt service coverage ratio
for the Utilities. The calculation applies solely to revenues attributed to the
speci c enterprise fund (debt paid directly from the Water Utility Fund
and/or the Sanitary Sewer Utility Fund, including revenue transferred
from one of these funds to a Debt Service Fund). This comment applies pri-
marily to the Water Utility Fund. Only certain bonds (2014A, 2015A, 2016B,
and 2017A Bonds) are paid either directly from the Water Utility Fund or
from a transfer from the Water Utility Fund to a Debt Service Fund, and
are included in this debt service coverage calculation. The 2016A Bonds
are paid directly from a transfer from the Water Trunk Fund to a Debt
Service Fund.
g Methodology
In considering the methodology for rate structure, the Study and result-
ing Model needed to address the City’s stated goal “to provide suf cient
revenue to each utility for current and future operations by modifying
the existing rates as needed to fairly distribute the costs of service among
different users”. Furthermore, the City’s scope of services for the Study
sought analysis of pricing strategies that reduce per capita demand, as well
as analysis of the likely impact on demand of various pricing schemes. A
range of alternative rate structures along with an analysis and rational for
each structure was requested. The funding of depreciation and the effect
to reserves was identi ed by the City as a critical element for study.
The Model addresses the City’s goal and requests by providing a tool to
analyze a range of pricing strategies and alternative rate structures based
on different policy direction. The nancial management targets within
the Model provide the rationale and ability to test whether a particular
structure is nancially sound and consistent with City’s goals. As noted
under the “Financial Management Targets” section on page 10, the funding
of deprecation is addressed in the Model by the identi cation of nancial
management targets that take into account the City’s adoption of a long-
range capital improvement plan to maintain and replace aging infrastruc-
ture based on future estimated costs.
The Model is based on the 2018 Budget and uses many of the same as-
sumptions that form the projections made by the City as part of its past -
nancial planning. Changes in assumptions and rate structure can be tested.
The Model incorporates changes in methodology for certain assumptions
that are noted below.
§Future water volume is calculated using projected growth in customers
and an average use per customer. This methodology allows projected
volume to change with growth assumptions and average use. This
methodology varies from the prior year quarterly averages methodol-
ogy the City has been using.
§The Model provides the ability to test different assumptions for how
water usage may respond to price changes. The Model allows for an
input of estimated price elasticity of demand for water to adjust water
usage for each one-percent increase in rate.
§Linking water volume to growth also affects the Sanitary Sewer Utility
Fund. The volume used to calculate Sanitary Sewer Utility Fund rev-
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enue is estimated to be 66% of total water volume (based on data from
LOGIS). These estimated volumes also drive the projected disposal
charges to be paid to Metropolitan Council Environmental Services
(MCES).
§The growth projections for increase in customers used in the analysis
presented in the Study are the same as current City projections. The
assumed annual growth in customers for nancial planning is below
the estimates used in the City’s CIP (based on building permits). As the
nancial planning for the Utilities continues, the City should consider
the merits of basing all planning on common growth projections.
§For future capital improvements estimated to be nanced with debt, the
Model includes estimated costs of issuance (calculated at 2.5% of par)
and creates an amortization schedule to calculate annual principal and
interest.
g Water Utility Fund Projections
Northland used the Model to prepare the Base Scenario for the Water
Utility Fund. The Base Scenario was prepared using the City’s nancial
planning assumptions for operating and non-operating expense, capital
improvement plans, debt, and planned rate adjustments. Table A (page 14)
provides a summary of key nancial information for the Water Utility Fund
for the Base Scenario.
The projected year-end cash balances for the Water Utility Fund for the
Base Scenario is shown in Figure 7. The scenario for the Water Utility
Fund assumes the following rate increases (percentage increase) to both
consumption and base fees: 5.0% for Year 2018; 4.0% for Years 2019 to 2025;
2.0% for Years 2026 to 2027. The Base Scenario for the Water Utility Fund
meets all of the nancial management targets:
§Minimum unassigned cash balance of $895,000 (estimated as of 2018)
§Minimum unrestricted net assets as % of projected expenditures of
232% (as of 2018)
§Debt service coverage of 186% (as of 2018)
§No new debt after 2020
These projections show that lower rate increases (for consumption and base
fee) may be possible for the Water Utility Fund depending on actual growth
in customers.
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1319
14
Table A
Water Fund
Summary of Key Financial Information
20
15
Table A (continued)
Water Utility Fund
Summary of Key Financial Information
21
16
g Sanitary Sewer Utility Fund Projections
As with the Water Utility Fund, Northland used the Model to prepare the
Base Scenario for the Sanitary Sewer Utility Fund. The Base Scenario was
prepared using the City’s nancial planning assumptions for operating
and non-operating expense, capital improvement plans, debt, and planned
rate adjustments. Table B (page 18) provides a summary of key nancial
information for the Sanitary Sewer Utility Fund for the Base Scenario.
The projected year-end cash balances for the Sanitary Sewer Utility Fund
for the Base Scenario is shown in the Figure 8. While overall cash balance
is projected to be positive, the Sanitary Sewer Utility Fund unassigned cash
balance is projected to be at a de cit for the nancial planning period, with
the exception of year 2027.
The Base Scenario for the Sanitary Sewer Utility Fund assumes the follow-
ing rate increases (percentage increase) for both consumption and base
fees: 6.0% for Years 2018 to 2021; 4.0% for Years 2022 to 2025; 2.0% for
Years 2026 to 2027. The Base Scenario for the Sanitary Sewer Utility Fund
does not meet the nancial management targets, with the exception of debt
service coverage and no debt issuance.
The nancial results are driven in part by projected increases in MCES dis-
posal costs for sanitary sewer ow. As with Water, an alternative scenario
was not developed as part of the Study, but will be considered by City
Staff pending input from the City Council on the policy considerations. As
with the Water Utility Fund, actual future growth in customers will impact
the cash projections.
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1723
18
Table B
Sanitary Sewer Utility Fund
Summary of Key Financial Information
24
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Next Steps
This Study lays the foundation for City Council to have in-depth discus-
sions about factors that shape the future nancial management and nance
plans for the Water and Sewer Utilities. The City Council and City Staff
will determine the issues to be considered as this nancial planning pro-
cess continues. Based on the work performed by Northland in Lakeville
and with other cities, we believe several issues merit further discussion by
the City.
u Growth Assumptions
We believe that the projected growth in Utility customers should be
grounded in the projections used in the CIP. The City’s past method of us-
ing 75% of projected annual growth (or some other factor) for its nancial
planning is appropriately conservative and builds in some cushion.
u Distribution of Costs
It would be useful to understand how the current rate structure distrib-
utes costs among the customer base. Do all users pay an equitable share
of xed costs or are some groups subsidized? This information will help
frame a discussion on alternative rate structures.
u Policy Considerations
The rate structure can be used to promote other policy objectives, such as
economic development or conservation.
u Trunk Funds
The City should continue to consider the nancial management of its
Trunk Funds in conjunction with the Utility Funds. The statutory author-
ity to collect trunk/connection charges, which is the authority the City
has used, comes from the operation of water and sanitary sewer utility
enterprises. In addition, the 2016A Bonds were issued under the authority
of Minnesota Statutes, Section 444.075. The use of this authority means the
2016A Bonds are backed by a pledge of net revenues from the Water Util-
ity Fund. Accounting for the debt of an enterprise funds in a Debt Service
Fund understates the real obligations of the Water Utility Fund.
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20
Appendix A - Water Utility Fund and Water
Trunk Fund
u Table A-1 Water Utility Fund Pro Forma Revenue and Expense and Change in Net Assets
u Table A-2 Water Utility Fund Pro Forma Assets and Liabilities
u Table A-3 Water Utility Fund Pro Forma Ending Cash
u Table A-4 Water Utility Fund Pro Forma Customers/Usage/Rates
u Table A-5 Water Utility Fund/Water Trunk Fund Capital Improvement Plans
u Table A-6 Water Trunk Fund Pro Forma Revenue and Expense and Fund Balance
26
21
Appendix A
Table A-1
Water Utility Fund
Pro Forma Revenue and Expense and Change in Net Assets
27
22
Appendix A
Table A-2
Water Utility Fund
Pro Forma Assets and Liabilities
28
23
Appendix A
Table A-3
Water Utility Fund
Pro Forma Ending Cash
29
24
Appendix A
Table A-4
Water Utility Fund
Pro Forma Customers/Usage/Rates
30
25
Appendix A
Table A-4 (Continued)
Water Utility Fund
Pro Forma Customers/Usage/Rates
31
26
Appendix A
Table A-5
Water Utility Fund and Water Trunk Fund
Capital Improvement Plan (CIP)
32
27
Appendix A
Table A-6
Water Trunk Fund
Pro Forma Revenue and Expense and Fund Balance
33
28
Appendix B - Sanitary Sewer Utility Fund and
Sanitary Sewer Trunk Fund
u Table B-1 Sanitary Sewer Utility Fund Pro Forma Revenue and Expense and Change in Net Assets
u Table B-2 Sanitary Sewer Utility Fund Pro Forma Assets and Liabilities
u Table B-3 Sanitary Sewer Utility Fund Pro Forma Ending Cash
u Table B-4 Sanitary Sewer Utility Fund Pro Forma Customers/Usage/Rates
u Table B-5 Sanitary Sewer Utility Fund/Sanitary Sewer Trunk Fund Capital Improvement Plans
u Table B-6 Sanitary Sewer Trunk Fund Pro Forma Revenue and Expense and Fund Balance
34
29
Appendix B
Table B-1
Sanitary Sewer Utility Fund
Pro Forma Revenue and Expense and Change in Net Assets
35
30
Appendix B
Table B-2
Sanitary Sewer Utility Fund
Pro Forma Assets and Liabilities
36
31
Appendix B
Table B-3
Sanitary Sewer Utility Fund
Pro Forma Ending Cash
37
32
Appendix B
Table B-4
Sanitary Sewer Utility Fund
Pro Forma Customers/Usage/Rates
38
33
Appendix B
Table B-5
Sanitary Sewer Utility Fund and Sanitary Sewer Trunk Fund
Capital Improvement Plan (CIP)
39
34
Appendix B
Table B-6
Sanitary Sewer Trunk Fund
Pro Forma Revenue and Expense and Fund Balance
40
Northland Securities, Inc.
45 South 7th Street, Suite 2000
Minneapolis, MN 55402
(800) 851-2920
Member FINRA and SIPC | Registered with SEC and MSRB
41
84
PROPOSED – 2018.02.26
FUND BALANCE
Policy 4.02
1) PURPOSE
a) To establish specific guidelines the City of Lakeville will use to classify fund balances
of the governmental funds into categories based primarily on the extent to which the
city is bound to honor constraints on the specific purposes for which amounts in these
funds can be spent.
b) The policy also establishes specific guidelines the city will use to maintain an
adequate level of fund balance to provide for cash flow requirements and contingency
needs.
c) The policy also establishes specific targets the city will use to maintain an adequate
level of net assets and cash on hand for the Enterprise Funds.
2) CLASSIFICATION OF FUND BALANCE
a) Nonspendable
1. This category includes fund balance that cannot be spent because it is either (i) not
in spendable form or (ii) is legally or contractually required to be maintained
intact. Examples include long‐term receivables, inventories and prepaid amounts.
b) Restricted
1. Fund balance should be reported as restricted when constraints placed on those
resources that are either (i) externally imposed by creditors, grantors, contributors,
or laws or regulations of other governments or (ii) imposed by law through
constitutional provisions or enabling legislation.
c) Committed
1. Fund balance that can only be used for specific purposes pursuant to constraints
imposed by formal action of the government’s highest level of decision‐making
authority. The committed amounts cannot be used for any other purpose unless the
government removes or changes the specified use by taking the same type of action
it employed to commit those amounts.
2. The City’s highest level of decision making authority (City Council) will annually or
as deemed necessary commit specific revenue sources for specified purposes by
resolution if they so choose. This formal action must occur prior to the end of the
reporting period, however, the amount to be subject to the constraint, may be
determined in the subsequent period.
3. City Council resolution is required to remove the constraint on the
specified use of committed resources.
d) Assigned
1. Amounts that are constrained by the government’s intent to use for specified
purposes, but are neither restricted nor committed. Assigned fund balance in the
General Fund includes amounts that are intended to be used for specific purposes.
2. The City Council has delegated the authority to assign and remove assignments
42
84
PROPOSED – 2018.02.26
of fund balance amounts for specified purposes to the City Administrator,
Finance Director or his/her designee.
e) Unassigned
1. Unassigned fund balance represents the residual classification for the General Fund.
This is fund balance that has not been reported in any other classification. The
General Fund is the only fund that can report a positive unassigned fund balance. A
negative residual amount may not be reported as restricted, committed, or assigned
fund balances. Other governmental funds would report deficit fund balances as
unassigned.
3) GOVERNMENTAL FUNDS
a) General Fund
1. The General Fund is established to account for all revenues and expenditures
which are not required to be accounted for in other funds. Revenue sources include
property taxes, license and permit fees, fines and forfeits, program revenues,
intergovernmental revenues, investment interest earnings, and transfers. The
General Fund’s resources finance a wide range of functions including the general
government administration, community and economic development, public safety,
public works, and parks and recreation.
2. The General Fund may have a portion of its fund balance classified as nonspendable
if there are long‐term receivables, inventories or prepaid items on the balance
sheet.
3. The City will endeavor to maintain an unrestricted (committed, assigned and
unassigned) fund balance in the General Fund of an amount not less than 40% and
not greater than 50% of the next year’s budgeted expenditures of the General Fund.
This will assist in maintaining an adequate level of fund balance to provide for cash
flow requirements and contingency needs.
b) Special Revenue Funds
1. Special Revenue Funds are used to account for and report the proceeds of specific
revenue sources that are restricted or committed to expenditures for specified
purposes other than debt service or capital projects. Governmental Accounting
Standards require that substantial inflows of revenues into a Special Revenue
Fund be either restricted or committed in order for the fund to be considered a
Special Revenue Fund. The city has the following Special Revenue Funds:
i) Communications Fund – the fund balance is considered committed. The cable
franchise fees are committed by City Council for operation and maintenance of a
government access channel, public communication budget, long‐term
replacement of equipment and other uses as authorized within budget.
ii) Economic Development Fund – the fund balance is both restricted and
committed by grant agreement and by the City Council. The grant award is
restricted by the Minnesota Department of Trade and Economic Development
grant agreement. The administrative fee revenues are committed by the City
43
84
PROPOSED – 2018.02.26
Council for future economic development endeavors.
iii) Downtown Special Service District Fund – the fund balance is considered
restricted pursuant to state statute.
c) Debt Service Funds
1. Debt Service Funds account for the accumulation of resources for the payment of
long‐term debt principal and interest maturing in current and future years. All of
the city’s Debt Service Fund balances are considered restricted pursuant to state
statutes and respective debt agreements.
d) Capital Project Funds
1. Capital Project Funds account for financial resources that are being accumulated for
current and future projects. The fund balances in the Capital Project Funds are
appropriated to and therefore considered restricted or committed for these
purposes: capital outlay expenditures, acquisition or construction of capital
facilities, and other capital assets. Bond proceeds are considered restricted. The
following addresses any other financial resources:
i) Municipal State‐Aid Fund – the fund balance is committed by City Council
for current street construction projects.
ii) Pavement Management Fund – the fund balance is committed by City
Council for current and future pavement management activities related to
crack sealing, patching, seal coating and overlays.
iii) Improvement Construction Fund – the fund balance is committed by City
Council for current and future construction of public improvements such as
streets, storm sewers, water and sanitary sewer trunk lines.
iv) Storm Sewer Fund – the fund balance is committed by City Council for
current and future construction of trunk storm sewer systems.
v) Water Fund – the fund balance is committed by City Council for current and
future construction of water supply lines, wells and water storage facilities, and
provides debt service to bonds issued to finance construction of the City’s water
treatment facility and other trunk infrastructure improvements.
vi) Sanitary Sewer Fund – the fund balance is committed by City Council for
current and future construction of sanitary sewer trunk systems.
vii) Park Dedication Fund – the fund balance is restricted pursuant to state statute.
viii) Trail Improvement Fund – the fund balance is committed by City Council for
current and future long‐term maintenance, repairs and replacement of the city
trails.
ix) Tax Increment Fund – the fund balance is restricted pursuant to enabling
legislation.
x) Building Fund – the fund balance is committed by City Council for current
and future construction and improvement of public buildings.
xi) Equipment Fund‐ the fund balance is committed by City Council for current
and future capital acquisitions related to replacing vehicles, heavy
machinery, and technology.
44
84
PROPOSED – 2018.02.26
4) ENTERPRISE FUNDS (UTILITY FUNDS ONLY)
a) Utility Funds are used to account for the financial activities associated with providing
services. When implementing any rate changes, the city intends to meet the following
financial management targets:
1. Available cash on hand to cover the following objectives:
i) Three months of operating cash
ii) Following year debt service payments
iii) Next year planned capital expenditures (not financed with bonds)
2. Unassigned cash of $500,000 to account for unexpected costs in Water and Sewer
Operating Funds. Unassigned cash of $100,000 to account for unexpected costs in
Environmental Resources and Streetlight Funds.
3. Unrestricted Net Assets not less than 50% of projected expenditures.
4. Net revenues not less than 125% of annual debt service on existing and planned
debt.
5) PROCEDURES FOR AVAILABLE RESOURCES
a) When both restricted and unrestricted resources are available for use, it is the city’s
policy to first use restricted resources, and then use unrestricted resources as they
are needed.
b) When unrestricted resources are available for use, it is the city’s policy to use
resources in the following order (i) committed, (ii) assigned, and (iii) unassigned.
6) STABILIZATION ARRANGEMENTS
a) Stabilization arrangements are defined as formally setting aside amounts for use in
emergency situations or when revenue shortages or budgetary imbalances arise.
b) The city will set aside amounts by resolution as deemed necessary that can only be
expended when certain specific circumstances exist. The resolution will identify and
describe the specific circumstances under which a need for stabilization arises. The
need for stabilization will only be utilized for situations that are not expected.
45
όχ
FUND BALANCE
Policy 4.02
1) PURPOSE
a) To establish specific guidelines the City of Lakeville will use to classify fund balances of the
governmental funds into categories based primarily on the extent to which the city is bound to
honor constraints on the specific purposes for which amounts in these funds can be spent.
b) The policy also establishes specific guidelines the city will use to maintain an adequate level of
fund balance to provide for cash flow requirements and contingency needs.
2) CLASSIFICATION OF FUND BALANCE
a) Nonspendable
i) This category includes fund balance that cannot be spent because it is either (i) not in
spendable form or (ii) is legally or contractually required to be maintained intact. Examples
include long-term receivables, inventories and prepaid amounts.
b) Restricted
i) Fund balance should be reported as restricted when constraints placed on those resources
that are eight (i) externally imposed by creditors, grantors, contributors, or laws or
regulations of other governments or (ii) imposed by law through constitutional provisions or
enabling legislation.
c) Committed
i) Fund balance that can only be used for specific purposes pursuant to constraints imposed by
formal action of the government’s highest level of decision-making authority. The
committed amounts cannot be used for any other purpose unless the government removes
or changes the specified use by taking the same type of action if employed to commit those
amounts.
ii) The City’s highest level of decision making authority (City Council) will annually or as
deemed necessary commit specific revenue sources for specified purposes by resolution if
they so choose. This formal action must occur prior to the end of the reporting period,
however, the amount to be subject to the constraint, may be determined in the subsequent
period.
iii) City Council resolution is required to remove the constraint on the specified use of
committed resources.
d) Assigned
i) Amounts that are constrained by the government’s intent to use for specified purposes, but
are neither restricted nor committed. Assigned fund balance in the General Fund includes
amounts that are intended to be used for specific purposes.
ii) The City Council has delegated the authority to assign and remove assignments of fund
balance amounts for specified purposes to the City Administrator, Finance Director or
his/her designee.
e) Unassigned
i) Unassigned fund balance represents the residual classification for the General Fund. This is
fund balance that has not been reported in any other classification. The General Fund is the
46
όψ
only fund that can report a positive unassigned fund balance. A negative residual amount
may not be reported as restricted, committed, or assigned fund balances. Other
governmental fund would report deficit fund balances as unassigned.
3) GOVERNMENTAL FUNDS
a) General Fund
i) The General Fund is established to account for all revenues and expenditures which are not
required to be accounted for in other funds. Revenue sources include property taxes,
license and permit fees, fines and forfeits, program revenues, intergovernmental revenues,
investment interest earnings, and transfers. The General Fund’s resources finance a wide
range of functions including the general government administration, community and
economic development, public safety, public works, and parks and recreation.
ii) The General Fund may have a portion of its fund balance classified as nonspendable if there
are long-term receivables, inventories or prepaid items on the balance sheet.
iii) The City will endeavor to maintain an unrestricted (committed, assigned and unassigned)
fund balance in the General Fund of an amount not less than 40% and not greater than 50%
of the next year’s budgeted expenditures of the General Fund. This will assist in maintaining
an adequate level of fund balance to provide for cash flow requirements and contingency
needs.
b) Special Revenue Funds
i) Special Revenue Funds are used to account for and report the proceeds of specific revenue
sources that are restricted or committed to expenditures for specified purposes other than
debt service or capital projects. Governmental Accounting Standards require that
substantial inflows of revenues into a Special Revenue Fund be either restricted or
committed in order for the fund to be considered a Special Revenue Fund. The city has the
following Special Revenue Funds:
(1)Communications Fund – the fund balance is considered committed. The cable franchise
fees are committed by City Council for operation and maintenance of a government
access channel, public communication budget, long-term replacement of equipment
and other uses as authorized within budget.
(2)Economic Development Fund – the fund balance is both restricted and committed by
grant agreement and by the City Council. The grant award is restricted by the
Minnesota Department of Trade and Economic Development grant agreement. The
administrative fee revenues are committed by the City Council for future economic
development endeavors.
(3)Downtown Special Service District Fund – the fund balance is considered restricted
pursuant to state statute.
c) Debt Service Funds
i) Debt Service Funds account for the accumulation of resources for the payment of long-term
debt principal and interest maturing in current and future years. All of the city’s Debt
Service Fund balances are considered restricted pursuant to state statutes and respective
debt agreements.
47
όω
d) Capital Project Funds
i) Capital Project Funds account for financial resources that are being accumulated for current
and future projects. The fund balances in the Capital Project Funds are appropriated to and
therefore considered restricted or committed for these purposes: capital outlay
expenditures, acquisition or construction of capital facilities, and other capital assets. Bond
proceeds are considered restricted. The following addresses any other financial resources:
(1)Municipal State-aid Fund – the fund balance is committed by City Council for current
street construction projects.
(2)Pavement Management Fund – the fund balance is committed by City Council for
current and future pavement management activities related to crack sealing, patching,
seal coating and overlays.
(3)Improvement Construction Fund – the fund balance is committed by City Council for
current and future construction of public improvements such as streets, storm sewers,
water and sanitary sewer trunk lines.
(4)Storm Sewer Fund – the fund balance is committed by City Council for current and
future construction of trunk storm sewer systems.
(5)Water Fund – the fund balance is committed by City Council for current and future
construction of water supply lines, wells and water storage facilities, and provides debt
service to bonds issued to finance construction of the City’s water treatment facility and
other trunk infrastructure improvements.
(6)Sanitary Sewer Fund – the fund balance is committed by City Council for current and
future construction of sanitary sewer trunk systems.
(7)Park Dedication Fund – the fund balance is restricted pursuant to state statute.
(8)Trail Improvement Fund – the fund balance is committed by City Council for current and
future long-term maintenance, repairs and replacement of the city trails.
(9)Tax Increment Fund – the fund balance is restricted pursuant to enabling legislation.
(10)Building Fund – the fund balance is committed by City Council for current and future
construction of improvement of public buildings.
(11)Equipment Fund – the fund balance is committed by City Council for current and future
capital acquisitions related to replacing vehicles, heavy machinery, and technology.
4) PROCEDURES FOR AVAILABLE RESOURCES
a) When both restricted and unrestricted resources are available for use, it is the city’s policy to
first use restricted resources, and then use unrestricted resources as they are needed.
b) When unrestricted resources are available for use, it is the city’s policy to use resources in the
following order (i) committed, (ii) assigned, and (iii) unassigned.
5) STABILIZATION ARRANGEMENTS
a) Stabilization arrangements are defined as formally setting aside amounts for use in emergency
situations or when revenue shortages or budgetary imbalances arise.
b) The city will set aside amounts by resolution as deemed necessary that can only be expended when
certain specific circumstances exist. The resolution will identify and describe the specific
48
όϊ
circumstances under which a need for stabilization arises. The need for stabilization will only be
utilized for situations that are not expected to occur routinely.
49