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HomeMy WebLinkAboutItem 06.dMarch 19, 2018 Item No. APPROVAL TO AMEND THE FUND BALANCE POLICY Proposed Action Staff recommends adoption of the following motion as part of the Consent Agenda: Move to approve an amendment of the Fund Balance Policy. Overview City Staff presented the amended Fund Balance Policy to the City Council at its February 26, 2018 work sessions as part of the Utility Rate Study item and answered the Council’s questions regarding the proposed changes. The purpose of the amendment is to establish specific targets the City will use to maintain an adequate level of net assets and cash on hand for the Enterprise Funds (specifically, the Utility Funds). The Finance Committee also reviewed the changes to the Fund Balance policy at their February 27, 2018 meeting. They stated that the goals of the proposed policy reflect responsible planning and adopted a motion stating that they support the changes. Primary Issues to Consider What are the key changes in the proposed policy? The Policy establishes the following financial management targets for the Enterprise Funds (Utility Funds only): 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. Supporting Information  A copy of the amended Fund Balance Policy with changes highlighted is attached. Financial Impact: $ Budgeted: Y☐ N☒ Source: Related Documents: (CIP, ERP, etc.): Envision Lakeville Community Values: Good Value for Public Services Report Completed by: Jerilyn Erickson, Finance Director 0- N/A 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 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 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. 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 to occur routinely.