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HomeMy WebLinkAbout6.d. Fund Balance Policy 4RcSEt VIOUNT EXECUTIVE VE SUMMARY CITY COUNCIL City Council Work Session: November 7, 2011 AGENDA ITEM: Fund Balance Policy AGENDA SECTION: PREPARED BY: Jeff May, Finance Director AGENDA NO. 3 N ATTACHMENTS: Draft Revised Fund Balance Policy, APPROVED BY Moody's Rating Analysis n� RECOMMENDED ACTION: Discussion only. ISSUE The issue before the. City Council is the discussion of modifications to the City's current Fund Balance Policy to reflect changes related to GASB #54. BACKGROUND This item is on the agenda to bring forth suggestions for modifications to the City's Fund Balance Policy. The last time the policy was updated was in 2004. In February 2009, the Governmental Accounting Standards Board (GASB) issued GASB #54 (Fund, Balance Reporting and Governmental Fund Type Definitions). The statement substantially changes how hind balances are categorized. also clarifies /modifies how some of the governmental funds are presented and classified. Most of the changes in the policy are to make the City compliant with GASB #54. The only time the City Council or the general public will see any difference is when viewing the Comprehensive Annual Financial Report (CAFR). How fund balance is categorized and titled will now be different in the CAFR. With assistance from our auditors at Baker Tilly we have structured the policy to make the changes procedurally as minimal as possible. The only real difference is how we will treat encumbrances. Encumbrances as the Council has known them in the past will not exist anymore. By the use`of "assignments" we will 'still be able to dedicate funds to purposes like we have done in the past. Assignments will be handled by the City Administrator or Finance Director. Anything that is "assigned / encumbered" like in the past with encumbrances will be discussed with the City Council as has been done in the past so the Council is aware of and o.k. with the assignments. The only difference will be that the Council's action will be to direct the City Administrator / Finance Director to make the assignments rather than passing a formal resolution to do so. Then staff will administratively follow up on those assignments. The other way to accomplish this would be to go through the "commitment" process. Based on input from our auditors, this is a much More cumbersome process and does not accomplish anything more or less than the assignments process does other than to require more steps and planning. We have tried to structure our policy to make sure that the Council still has the involvement necessary to provide them with the knowledge that they are providing the final direction in these "assignment / encumbrance" decision. The other area that is being addressed in our modified Fund Balance Policy is the Unassigned Fund Balance and the 55% maximum for the General Fund. "I have included the Moody's Rating Analysis from the November 1' bond sale that the City had in your packets. 6I have circled 5 different places in their analysis that mention the City's "ample reserves " -or "healthy reserves" for the General Fund. There has been concern among members of the Council since the policy was originally approved in 2003 that the 55% is too high a number to maintain for a reserve. There is no set in stone number — this number varies from community to community and how people classify their "reserve" also differs from community to community. The State Auditor's office recommends between 35 — 50% for a fund balance that is compared by looking at the year -end fund balance and comparing it to that year's beginning budget figures. This has never made sense to me because you should be looking at your year -end fund balance and comparing it to the following year's budget because that is the budget that you will have to be funding with your incoming revenues and your "fund balance" until you receive your tax payments in July and December of each year. Since we have implemented this policy we have never come close to "running out of cash" to pay our bills prior to July and December. Prior to 2003 when the policy was implemented our fund balance was low enough that there were times when we did come close to "being in the red" in the General Fund prior to our tax payments. Luckily they were in years of higher growth and permit revenues kept us from ever getting into a deficit. I believe, as I did in 2003, that the 55% number is a good number. At the time that the policy was adopted we got input from our financial advisors at Springsted and Ehlers and from Moody's. From their standpoint, especially Moody's; the higher that number the more "healthy" a community is. Unfortunately, I do not have'anything that says without question what the number truly should be though. I have tried in the modified policy to give the City Council a little more flexibility to have a range of 45 to 55% that would be acceptable before the City would have to come up with a plan to replenish the General Fund fund balance. That way if there was something that the Council really wanted to do with some of that reserve they would have the latitude to do so without straying from the wording of the policy. Based on input from Springsted and my own feelings after discussions with Moody's, I don't believe that these changes would affect our current Aa2 rating. I would not be as comfortable in making a statement like this if we were to lower the fund balance for the General Fund more than what is being proposed. I will prepared to answer as many questions.or address as many concerns as I can on Monday evening. This policy must be updated prior to December 31 so that we can make all of the necessary changes in our CAFR for the year ending 12/31/11. SUMMARY After discussion this evening, staff will be bringing a revised Fund Balance Policy for the City Council to approve at the November 15` meeting. 2 CITY OF ROSEMOUNT POLICY TITLE: FUND BALANCE POLICY EFFECTIVE DATE: November15, 2011 (Originally Adopted December 16, 2003) POLICY NUMBER: F -7 PROPOSED BY: FINANCE DATE APPROVED BY COUNCIL: November 15, 2011 (Last Amended February 17, 2004) PURPOSE The purpose of this policy is to provide a stable financial environment for the City's .operations that allows the City to provide quality services to its residents in a fiscally responsible manner designed to keep services and taxes as consistent as possible over time. This fund balance policy is meant to serve as the framework upon which consistent operations may be built and sustained. This policy will allow the City to provide a cushion against unexpected revenue shortfalls, to provide for working capital to ensure sufficient cash flow to meet the City's General Fund needs throughout the year, and to maintain and improve the City's credit rating. DEFINITIONS (Underlined) & POLICIES (Bolded) Fund Balance Fund Balance is the difference between assets and liabilities in governmental funds (i.e. General Fund, Special Revenue Funds, Capital Project Funds, Debt Service Funds and Permanent Funds). Previously, the City reported fund balances that were reserved, designated or unreserved. With theimplementation of GASB Statement No. 54, there are five new categories required for ending fund balances: Non - Spendable Fund Balance Describes the amount of a fund balance that cannot be spent because it is either not in spendable form or there is a legal or contractual requirement for the funds to remain intact. Policy At the end of each fiscal year, the City will report the portion of the fund "balance that is not in spendable form as Non-Spendable Fund Balance on the financial statements. For example, inventories, prepaid amounts, long -term receivables and amounts that must be maintained intact legally o'r contractually. Spendable Fund Balance (Overview) Describes the amount of fund balance that is available for appropriation based on the constraints that control how specific amounts can be spent. Typically, a significant portion of a government's spendable resources can be spent only for specified purposes. The following categories define the revenue source and the leverof force of the constraint on spending. Categories should be supported by actual plans approved by either the governing body, an appropriate officer, grant providers or enabling legislation. Restricted Fund Balance The restricted fund balance category includes the portion of the spendablefund balances that reflects constraints on spending because of legal restrictions stipulated by outside parties (e.g., encumbrances for goods or services with outside parties- creditors, grantors,outstanding at the end of the year). Also, funds will be restricted if there are any legal restrictions based on state statutes or grantrequirements placed on the use for specific purposes. Policy At the end of each fiscal year, the City will report "restricted" fund balance for amounts that have applicable legal restrictions per GASB1$54. In addition, encumbrances or funds restricted by enabling legislation will be reported as + "restricted ". Committed Fund Balance The committed fund balance classification includes the portion of the`spendable`fund balance that reflects constraints that the City has imposed upon itself by a formal action of the City Council (for example, an ordinance or resolution passed by a City Council). This constraint must be imposed prior to yearend but the amount can be determined at a later date in the subsequent period. Policy The City Council may, from time to time, commit additional amounts of fund balance to a'specific purpose. Such action shall be taken,inan open meeting and require the approval of a majority of the City Council. Commitments of fund balance, once made, can be modified only by a majority vote of the City Council. Assigned Fund Balance The assigned fund balance is the portion of the spendable "fund balance that reflects funds intended to be used by the government for specific purposes assigned by more informal operational plans (e.g. capital goods replacement — the constraint on use is not imposed by external parties or by formal council action). In governmental funds other than the General Fund (Special Revenue Funds, Capital Project Funds, Debt Service Funds and Permanent Funds), assigned fund balance represents the'amount that is not restricted or committed. The authority to "assign" fund balance is delegated to the City Administrator or the Finance Director. In the past, at year end, items from the General Fund, the Building CIP Fund, the Street CIP Fund and the Equipment CIP Fund have been approved for encumbering by the City Council so those funds would be "saved" to complete purchases of equipment or complete projects started but not finished during the year. Encumbrances like this will no longer exist but will be included with "assignments ". The reserve for compensated absences will also be included in the assigned fund balance category `on an annual basis. f i Policy For any items that are to be assigned as was done in the past with encumbrances (products or equipment that have not been purchased or for projects that have not been completed) the City Administrator and /or the Finance Director will continue to bring these items to the City Council for discussion before the assignments are made. Unassigned Fund Balance, This is the residual classification for the government's General Fund and includes all spendable amounts not contained in the other classifications and, therefore, not subject to,any constraints. Unassigned amounts available for any purpose. There are the current resources available for which there are no government self- imposed limitations or set spending plan. Although there is generally no set spending plan for the unassigned portion, there is a need to maintain a certain funding level. Unassigned fund balance is commonly used for emergency expenditures not previously considered. In addition, the resources classified as unassigned can be used to cover expenditures for revenues not yet received. .Policy a. The•City will attempt to maintain — 4Unassigned portions of the General Fund balance for cash flow at a maximum of 55% of the next year's General Fund operating budget. This 55% reserve will be considered the amount that allows the to meet its daily operating needs. In addition to cash flow needs this accommodates emergency contingency concerns. b. Any surplus exceeding 55 %, as of the completion of the previous year's audit, will be transferred to one of the`three Capital Improvement Program (CIP) funds (Building CIP, Street CIP or Equipment CIP) at the discretion of the City Council by formal action. If the Council feels the necessity to use these funds for another purpose, action will be taken accordingly at the same time that the normal transfer authorization would take place with a special reservation made for those funds in excess of the 55 %. c. Should the actual amount designated for cash flow fall significantly below the 55% (to less than 45%), the City, shall create a plan to restore the appropriate levels. If that amount remains in the 45% - 55% the balances will be monitored and reported to the City Council annually. d. To avoid interest expense charges that would reduce the amount of funds available for current operations the City shall not use tax anticipation borrowing to cover operating expenses. If it becomes apparent that the'City may need to do this, the policy shall be adjusted by Council action to raise the fund balance percentage to a larger figure to prevent this from happening in the future. Pp 9 e. The City will also review and update the schedule of all other fund balances, reserves, and working capital in all other operating funds of the City and determine adequacy of those money balances in conjunction with the budgets set annually. The City of Rosemount Fund Balance Policy established the order of use of unrestricted resources when any of these amounts are available for expenditures as committed amounts should be reduced first,`followed by the assigned amounts and then the unassigned amounts. i rt� I r t ' MooDY'S INVESTORS SERVICE A° . 4. New Issue: MOODY'S ASSIGNS Aa2 RATING TO THE CITY OF ROSEMOUNT'SiMN) $2.1 MILLION GENERAL OBLIGATION IMPROVEMENT BONDS, SERIES 2011A Global Credit Research - 25 Oct 2011 Aa2 RATING APPLIES TO $21.1 MILLION OF POST -SALE GOULT DEBT Municipality MV Moodys Rating ISSUE RASING General Obligation Improvement Bonds, Series 2011A Aa2 Sale Amount $2,080,000 Expected Sale Date 11/01/11 Rating Description General Obligation Unlimited Tax Opinion NEW YORK, Oct 25, 2011 -- Nbodys Investors Service has assigned a Aa2 rating to the City of Rosemount's (MN) $2.1 million General Obligation Improvement Bonds, Series 2011A Concurrently, Moody's has affirmed the Aa2 rating on the city's outstanding general obligation debt. Post -sale, the city will have $21.1 million of general obligation unlimited tax debt. SUMMARY RATING RATIONALE The bonds are secured by the city's general obligation unlimited tax pledge. Proceeds of the bonds will finance street and infrastruct - improvements in two lanned residential develQpriaViAssignment ancfaffirmation of the Aa2 rang reflects the citys large and slightly oncentrated tax 55Te located in the Twin Cities metropolitan area that has experienced recent declines in valuation, well - managed financial operations with ample reserves, and a manageable debt burden. STRENGTHS - History of operating surpluses has led to the presence of healthy General Fund reserves - Availability of land for future development CHALLENGES - Tax base exhibits moderate degree of taxpayer concentration - Tax base has experienced recent declines in valuation that may continue • DETAILED CREDIT DISCUSSION e - WELL- MANAGED FINANCIAL OPERATIONS WITH AMPLE RESERVES We expect the city's healthy finances to continue, supported by well- managed operations and ample reserves. Following several consecutive years of operating surpluses, the city's General Fund balance grew from $4.7 million in fiscal 2003 to $7.2 million in fiscal 2009. Before transfers to the city's capital and the Arena funds, fiscal 2010 revenues exceeded expenditures by $1.2 million. The transfers out, which included $854,000 to capital project funds, $115,000 to the Arena for operating expenditures (an amount which approximates previous annual trends) and $355,000 to Debt Service Funds to pay off existing debt, led to a modest use of reserves. The use of $84,000 in reserves slightly lowered the General Fund balance to $7.2 million, or a still very healthy 66.1 % of General Fund revenues, well above the median of 48.4% for Mnnesota cities. The city's formal General Fund balance policy calls for the maintenance of a General Fund unreserved balance at a maximum of 55% of the subsequent year's budgeted General Fund expenditures. This amount provides adequate working capital for general operations and cash flow needs. Amounts in excess are typically transferred to the city's various capital improvement projects funds. The city's Building, Equipment, and Street Capital Projects funds carried a total balance of $4.5 million at the close of fiscal 2010. For fiscal 2011, management reports revenues are tracking slightly above budget while expenditures are tracking under budget. The city expects a small operating surplus at the close of fiscal 2011 which will be transferred to the city's three capital projects funds. The city expects balanced operations for fiscal 2012 and the preliminary budget includes a reduction in the overall property tax levy due to a smaller than anticipated increase in health insurance premiums and the elimination of the Market Value Homestead Credit (MVHC). Property taxes are the city's primary operating revenue source, with property taxes representing 80.4% of General Fund revenues in fiscal 2010 followed by charges for services (8.8 %), and licenses and permits (4.2 %). Due to a slowdown in the housing market, building permit revenues declined somewhat in recent years. Favorably, the value of building permits issued in fiscal 2010 remained close to 2009 Ievels. In response to declining revenues, the city reduced expenditures including the delay of equipment purchases, elimination of some recreation programs, and by holding overall expenditures flat. Intergovernmental aid comprises a minimal 2.8% of General Fund revenues. The city does not receive Local Government Aid (LGA) from the State of Mnnesota and has not received MVHC since fiscal 2008. City officials do not budget for MVHC, which insulates th city from the i • - t of fluctuations in state aid that have occurred in rec -nt ears 'espi e some revenue pressures, Moodys expects the city's (financial operations wi remain so i • • ue to the history o strong management and healthy reserve levels. SLIGHTLY CONCENTRATED TM BASE FAVORABLY LOCATED IN TWIN CITIES METROPOLITAN AREA RECENT DECLINES IN FULL VALUATION Despite recent declines in full valuation, we expect that Rosemount's tax base will remain stable due to its favorable location in the Twin Cities area. Located in northern Dakota County (general obligation rated Aaa/negative outlook) in the southern suburbs of the Twin Cities metropolitan area, the City of Rosemount had previously experienced rapid growth over the past several decades, both in population and full value. The city's population has increased from 1,337 in 1970 to 21,874 in 2010 (49.6% growth since 2000). Full valuation growth was also rapid and the city's moderately sized tax base (currently $2.1 billion in full valuation) experienced annual double digit growth through 2007. Previous growth can be attributed to new residential and commercial development in prior years. However, growth has slowed in recent years due to the economic downturn. As a result, full valuation declined in each of the last three years (2.7% in 2008, 8.9% in 2009, and 5.4% in 2010) and the city's full valuation has declined at an average rate of 0.1 % over the last five years. Rosemount's tax base is somewhat concentrated, with an oil refinery owned by Flint Hills Resources (long -term rated A1/stable outlook) representing 11.5% of the city's assessed valuation in 2010. The ten largest taxpayers comprise 16.9% of city's total assessed valuation. We note the elevated credit risk associated with this degree of dependence on a single taxpayer, as well as the potential negative impact of the refinery on future development in the surrounding areas of the city. However, Rosemount has been home to the refinery since 1955, and its oil producing capacity has since grown tenfold. The plant is Minnesota's largest source of gasoline with 861 employees and continued expansions of the plant evidence Flint Hills' commitment to remaining in Rosemount. In addition to Flint Hills, the University of Minnesota (revenue rated Aa1 /stable outlook) also has a presence in Rosemount and holds a large land parcel of nearly 3,000 acres in the city devoted to agricultural research. The University has held the land since the late 1940s and is currently planning to gravel mine a portion of the site. At 6.5% in August 2011, Dakota County's unemployment rate was slightly lower than the state's rate (6.7 %) and well below the national rate (9.1%) for the same time period. Resident income levels exceed state and national medians with per capita and median family income at 99.6% and 121.2% of state medians, respectively. MANAGEABLE DEBT BURDEN WITH LIMITED FUTURE BORROWING PLANS We expect the city's debt burden will remain manageable given limited future borrowing needs. At 0.8% and 1.9% of full valuation, the city's direct and overall debt burdens are below state and national medians. Principal amortization is sound with 75.9% of all debt retired in ten years: The city may issue up to $2 million in additional debt to support two other development parcels in the next year. All of the city's debt is in fixed rate mode, and the city is not a party to any interest rate swap agreements. WHAT WOULD CHANGE THE RATING UP - Substantial growth and diversification of the city's tax base WHAT WOULD CHANGE THE RATING DOWN - Significant erosion of the city's tax base, - Material deterioration in General Fund reserves to a level inconsistent with similarly rated credits KEY STATISTICS 2010 Census population: 21,874 (49.6% increase from 2000) 2011 Full valuation: $2.1 billion Estimated Full value per capita: $97,802 2000 Per capita income: $23,116 (99.6% of state; 107.1% of US) 2000 Median family income: $68,929 (121.2% of state; 137.7% of US) Dakota County unemployment rate (August 2011): 6.5% (state at 6.7 %; US at 9.1 %) Fiscal 2010 General Fund balance: $7.2 million (66.1% of General Fund revenues) Direct debt burden: 0.8% Overall debt burden: 1.6% Principal amortization (10 years): 75.9% Post -sale general obligation debt outstanding: $21.1 million PRINCIPAL METHODOLOGY USED The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. 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