The URL can be used to link to this page

Home My WebLink About2.a. Fund Balance PolicyCITY OF ROSEMOUNT EXECUTIVE SUMMARY FOR DISCUSSION COMMITTEE OF THE WHOLE MEETING DATE: December 10, 2003 AGENDA ITEM: Fund Balance Policy AGENDA SECTION: Discussion PREPARED BY: Jeff May, Finance Director AGENDA NO. A ATTACHMENTS: Draft Fund Balance Policy; Projected APPROVED BY: 12/31/03 General Fund Fund Balance; Memos from Financial Consultants The draft Fund Balance Policy was discussed at the November 12 meeting for your initial review and comment. At that time, the policy was generally accepted with the exception of the compensated absences and how it relates to the overall fund balance percentage. Direction was given to staff to get input from our financial consultants on the handling of the compensated absences and how it could possibly affect our bond ratings. have attached memos from both of our financial consultants, Springsteds and Ehlers, which attempt to clarify this situation. In summary, both consultants feel, that any percentage that we use which exceeds 50% would be acceptable to the rating agencies. Both do feel strongly however that whatever number we use should include the compensated absences so that we do not give the appearance of saying one figure and manually backing out the compensated absences to come up with another number. Therefore, the compensated absences figure should be included in our final fund balance number, whether it is 55% or 60% (or any other figure). If Council reaches consensus on this final issue I would bring the policy to the December 16th Council meeting for approval. RECOMMENDED ACTION: Discussion only. COUNCIL ACTION: - Allenuue jas sla6pnq agl ql!m uo jounfuoo u! saoueleq Aeuow asogj jo Aoenbape ouiwaalap pue Aj!O aqj 10 spunl 6u!leaado aaglo Ile u! Ielideo bu!�aom pue `sanaasaa 'seoueleq punt aaglo Ile jo alnpagos aqj alepdn pue nnalnaa osle II!M A1!o aql 'p •a.anlnl aqj ui buluaddeg uaoal slgl luanaad of ambil aa6ael a of abelueoaad eoueleq punt eql aslea of uo!loe I!ounoO Aq pelsnfpe aq llegs Aollod aql `s!qj op of paau Aeua 40 agl legl luaiedde sawooeq }! ;I •sesuedxe bulleaad0 aanoo of buimoaaoq uo!jed!ollue xel asn lou llegs Al!O aqj suo!leaado luaaano aol: elgel!ene spunl jo lunowe aql aonpai pinom leq} se6aego esuadxe lsaaalui p!One of • %09 aqj 10 ssaoxa ul spunl asoyl aol apew uolleu6!sap le!oads e qpm ooeld aNel pinom uoilezlaoglne aalsueal lewaou ayl legl awl awes eqj le Albu!pa000e uaNel aq ll!nn uo!loe `asodand aagjoue aol spunl asegj asn of Al!sseoeu aq} sleal IlounoO aqj 11 , (ole `luawd!nba aig `saeo penbs `sl uo!lel!I!gegaa laaals `sjuawanoadw! buipl!nq) speau lel!deo of }!bads aol spunl paaaalsueal asegl emasaa pinogs 1!ounoO eql< `uo!loe s!ql to laed se 'alq!ssod Ile jell - uolloe lewaol Aq I!ounoo Al!O agllO u011aaos!p aql le (diO luawdlnb3 ao dIO laaaIS `d1O 6 u!pl!n8) spunl (dIO) Wea6Oad luawanoadwl lel!deo aa.aul aqj to auo of paaaalsueal aq II!M `llpne s,aeaA snolnaad aqj to uo!lalduwoo aq} jo se ` %09 bu!paeoxe snldans Auy •q •asodand oil!oads e aol paleu6!sap aae Aagl se %09 aqj to uollelnoleo aqj woal papnlaxe aq ll!m saouesge palesuadwoo aol pue saoueagwnoue aol panaasaa aae legj seoueleq punj •speou bu!leaado AI!ep sp laaw of Al!O aqj algeue II!M legl spunl agl aq llp pue ,Iel!deo bu!AaoAA aol paleu6!saa„ paaap!suoo aq II!m anaasaa %09 s!gl •Iebpnq bu!leaado s,aeeA lxeu a4l jo %09'lseel le to amasaa pun- ieaauaE) paleubisepun ue u!elulew of ldwepe Ilp Aj!O aqj A01 • 6u1lea Iipaao s,AJ!o eql anoadwi pue u!elu!ew of pue `aeeA agl lnogbnoagl speau s,A}!o eq} l aaw of mog gseo lumiuns einsue of Iel!deo 6uiN iom col ap!noad of `sllellaogs anuanaa pajoadxaun lsu!ebe uo!gsno a ep!noad of Aj!o eql molle II!m Ao!lod s!gl •spunl 6u!leaado aaglo lie `Allowipu! pue `pun j leaauaO aqj to saoueleq punt qpm bu!leap aol sempeowd pue saullep!nb do las of s! Aoilod s!gl to asodand agl, 3SOclod £o0Z `9L aagwooea :1IONfIOO ke GEIAO 1dc!V 31VG 3ONVNIA :A8 43SOdO�Id A3I 30NVIVS UNR=i :3 1111 AOI]Od 1Nf10W3S0:1 JO ADO GENERAL FUND (FUND 101) PROJECTED YEAR -END FUND BALANCE WORKSHEET 12/31/02 Balance - "Designated for Working Capital ": 5,059,304 Projected Revenues Thru 12/31 /03: 7,382,000 Less Projected Expenditures Thru 12/31/03: 7,438,000 Surplus(Deficit) for Year: (56,000) Projected "Designated for Working Capital" as of 12/31/03: 5,003,304 Proposed 2004 General Fund Operating Budget: 7,409,400 Percentage of Fund Balance to Next Year's Budget: 67.53% Compensated Absences Balance for Fund 101 as of 12/31/02: 438,425 (To Be Separately Reserved Based on Fund Balance Policy) ----------------------- Revised "Designated for Working Capital" as of 12/31/03: 4,564,879 Revised Percentage of Fund Balance to Next Year's Budget: 61.61% 85 E. SEVENTH PLACE, SUITE 1o0 SAINT PAUL, MN 55101 -288 651- 223 -3000 FAX: 651-223-3002 SPRINGS1111i Advisors to the Public .Sector E MEMORANDUM TO: Jeff May. City of Rosemount FROM: Al Erickson DATE: December 2, 2003 SUBJECT: Fund Balance Several weeks ago I verbally conveyed to you my comments concerning the written policy that had been developed concerning the City's fund balance. In a follow -up to that discussion we talked about adjusting the level of the fund balance and the possible reaction from Moody's as it relates to the bond rating of the City. This memo will confirm in writing my earlier comments concerning the fund balance level. The question you posed concerned whether a policy of 60% of the following years expenditures plus the amount of uncompensated absences would be viewed in a substantially different manner by the rating agencies than a policy of 60% of the following years expenditures including the amount for the uncompensated absences. From our discussion, I understand that the amount of uncompensated absences is equivalent to approximately 4% to 6% of the total. That would leave about 55% of the following year's expenditures for working capital and other unanticipated circumstances. You and I worked with Moody's for several years before successfully obtaining an upgrade to the City's credit rating last year. One of the strong rating factors mentioned by Moody's concerned the ample reserves held by the City. They mentioned this again in their June 26, 2003 report. Moody's was particularly pleased with the fund balance level in light of the cuts in local aid being made by the State of Minnesota. Based upon my discussions with Moody's concerning this topic, I do not believe that there will be a negative impact to the City's rating if the "net" fund balance available for working capital and other circumstances is 55% rather than 60 %. . Both values are ample and consistent with the fund balance amounts held by many Minnesota cities. I would comment that Moody's values consistency and that it would be in the best long term interests of the City to select a target percentage for the policy and then take action steps to ensure that you maintain, at minimum, that amount. One other option I would suggest is that a separate fund for uncompensated absences could be created. The amount held for those purposes could be transferred out of the general fund to the newly established fund and this would eliminate any potential confusion in the future. If the City CORPORATE OFF /CE: SAINT PAUL, MN • Visit our website at www.springsted.com IOWA KANSAS MINNESOTA VIRGINIA WASHINGTON, DC WISCONSIN ' Page 2 were to do this I would further recommend that a separate policy be established regarding the fund balance for that fund with the goal of continually funding 100% of the uncompensated balances. Hopefully this answers the questions that you posed. If you have any further questions or concerns related to this topic feel free to call me. EHLERS & ASSOCIATES INC To: Jeff May, City of Rosemount O From: Elizabeth Diaz & Jim Prosser, Ehlers & Associates, Inc. M W Date: December 1, 2003 Subject: Fund Balance policy You requested that we provide guidance concerning the City's proposed Fund Balance Policy, specifically relating to the treatment of compensated absences in the overall computation of a "Designation for Working Capital ". Ehlers did contact a municipal credit rating agency (without identifying your community) regarding this issue. In general, their position was that the primary concern regarding fund balance was the amount (as percentage of revenues). While a firm percent would not be considered by the rating agencies, the relative size of the designation for working capital would. It would be amore conservative practice to reduce ending fund balance by the compensated absences amount and then determine the percent to designate for working capital from that net amount. Treating compensated absences in this fashion in the General Fund would, most likely, also be consistent with its treatment in the City's proprietary funds. More specifically, if the City chose to reduce fund balance by some factor relating to the compensated absences the issue of concern to the rating agencies would be the resulting fund balance as a percentage of revenues. If the resulting amount dipped below 50% the rating agencies would likely take note. Depending on the circumstances, including reason for use of fund balance, forecasted revenues and expenditures, etc., the rating may not be impacted. Finally, if there is a desire to adjust fund balance on the basis of compensated absences, then Ehlers would recommend that this be factored into the actual level of targeted fund balance and not be used as a annual adjustment factor in a formal policy. We appreciate this opportunity to be of service to the City. LEADERS IN PUBLIC FINANCE 3060 Centre Pointe Drive Phone: 651 - 697 -8519 Fax: 651- 697 -0281 Roseville, MN 55113 -1105 ediazCehlers- inc.com