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HomeMy WebLinkAbout3.a. Sources and Uses of Funds f� • � �._ �'�� 4'!) RtIX �1�1 � � � i����.� f_) � � 7�t7 �q51N �t W � RC>SEM(�l�NT ti41�ttJt :;t)i� ','���f�l{ __ �.��`������'��)�;{�� r�;�� � ��,�t ,�,it� t �� � t � � June 16, 1989 T0: Council FROM: Don F. Darling, Finance Qirector Subjeet: Springsted Report (Fund Sources & Uses) Being presented by Springsted at the Regular Council Meeting on June 20th Item #3A, City of Rosemount, Minnesota, Statement of Policy, Sources and Uses of Funds. Hopefully, review and adoptifln of this Policy will provide additional controT for you the Council as well as the Administratvr and Department Heads in receipting and expending funds of the City. Those participating in the compilation of this report were the Fiscal Consultants, Auditar and Staff who will be in attendance to provide support at the presentation. I would be glad to provide or find answers to any questions you might have regarding this report prior to the meeting. '�'` SPRING�►TED � • �� �, PUBIIC FINANCE ADVfSORS 85 East Seventh Place,Suite 100 Sainl Paui,Minnesota 55101•2143 612•223•3Q00 I;ix:6I7�273•30�2 April 24, 1989 Honorable Mayor Members, City Council Stephan Jilk, Administrator Don Darling, Finance Director City Hall 2875 145th Street West Rosemount, MN 55068 RE: Sources and Uses of Funds We have been requested to provide the City with an overall policy of recognizing the sources and uses of funds. While this report will discuss all funds in general, the prime impetus is to provide direction to the staff and the Councii for those portions of the City's operation which do not fall within the usual budgetary items. Of prime importance is the request for temporary use of funds for various projects pending the receipt of definitive funding. This report is prepared as a guide and an augmentation to the management tools used in the City's operations. Over the years, the City has continued to grow and you are now in the stages of significant development. During tMe course of any growth, it is necessary to continuafly analyze the sources and uses of funds required to finance various operations. We agree it is appropriate at this time to re-examine the proper administration of funds as the demand on those funds will continue to increase. As with any report, the findings and procedures are not "cast in concrete" and must be periodically updated to reflec# current eonditians. We are pleased to again provide #t�e City with the continuing enhancement of its managernent policies and laok fiarward to discussing the contents herein with the Council and staff. We also wish to thank Mr. Allen Heinen of Boeckermann, Heinen & Mayer for his review of this policy for consistancy with the City's accounting procedures. Respectfully submitted, � .���r� �-�_____ Gerard B. Shanrion Vice President bb endosures _ �ndiana Office: Wisconsin E7(tice: � � 251 North Illkaois SUee�,Suite t540 500 Elnr Grove Road,Suile 1Q1 � � Indianapolis.Indiana 46204•1942 Elm Grove,Wisconsin 53122•0�37 317�23 7•3636 414•7Ei2•f3222 Fax:3t 7�237•3639 Fax:414�7R22�)Od . , • • CiTY f?F ROSEMQUNT, MINNESOTA STATEMENT OF POLICY SOURCES AND USES QF FUNDS tNTRODUCTION The funds of the City are grouped into five general categories: General, Special Revenue �ebt Service, Capital Projects and Enterprise. Each group of funds has a speciai purpose, source of revenue and accountability. This report wili serve as a generai policy statement as to the source and application of the assets of the fund groups and is intended to be used as a general guide in responding to departmental requests for funding requirements autside the budgeted process. We hasten to point out that for every rule there is at least one exception and, therefore, we have purposely addressed this policy in a broad sense. The report is not intended to be atl inclusive, but rather to be an effective management tool for aN department heads to utilize, The first step in establishing a source and use policy is to ensure a proper budgeting policy is in place. The budget establishes the financial control of spending. The authority far this confrol rests with the City Councif. Departments cannot exceed the limi#s estab(ished by the Council unless the Council approves an amendment authorizing such action. While formal budgets are not adopted for the speciat revenue, capital project, speciaf assessment and debt service funds, they are controlled by Council approva! of individual prQjects and expenditures. We concur with the City's budgetary process which incorporates nat only the financial goals of the City but also incorporates the devefopmental gaals of the community. ' a _�r���r'�"�- -1���`-�, ` � � ✓ • . � • GENERALFUND Purpose The general fund is the general operating fund of the City. It is used to recognize revenue and expenditures which are or cannot be attributabie to ano#her grouping of funds. Sources of Revenue There are two prime sources of revenue for this fund; taxes and intergovernmental revenues. Property taxes are received from the County at various times throughout year with major settlements received in July and December. Intergovemmentai revenues are those revenues received from state and federal sources, generally in fhe form of municipat aids and credits. It should be noted that the homestead credit, currently deducted from property tax bilis, is generally accounted for in this fund. Other prime sources of revenue would stem from investment eamings, fines, forfeitures, ar�d generai charges for service. Uses of Funds The general operation expenses of the City are paid f�om this fund. These expenditures are usually categorized by departmental organization. These departments wauld inc(ude, but not be limited #o: general government or administrative, public safety, public works, and parks and recreation. The expenditures from this fund must be irt line with the budget adopted by #he Council. Expenditures are approved by the Council and if the expenses are beyond the amount, or not contained, in the budget, the Councit must give specific approval for adjusting the budget and approve the expenditures. Included in this fund, as in most funds, should be a reserved and an unreserved fund balance. The fund balance is similar to a retained earnings balance of a corporate entity. It reflects the net asset position of the fund if all assets were cash and all tiabilities were satisfied. Only a portion of the fund balance is liquid in the form of cash and investrnents, Reserved fund balances are to be used for a specific purpose or proJect. They cannot be, used for any other purpose. Unreserved fund balances may be used at the discretion of the Council; however, each expendifure, as not�d previously, must be approved. Reserved fund balances, if not used during the year, become unreserved balances unless a continuing appropriation is made. . . • • SPECIAL REVENUE FUNDS Pur ose Special Ftevenue Funds are established to account for the proceeds af specific revenue sources that are legally restricted to expenditures for specific purposes. These funds are similar to enterprise funds as each project has a special pu►pose. This area should not include special assessment or trust type projects. Sources of Revenue These funds receive their revenue from either an allocation of taxes or more commonly from revenues generated for the purpose of the fund. The City's#ive-yea� CIP, MSA projects, HRA and Severance and Retirement Funds are reflected here. Expenditures Expenditures from these funds may only be used for the specific purpose of the fund. Expenditures tor the five-year CIP program must be used for only those projects iden#ified in the plan. This should be treated in the same light as tax inerement projects whereby no funds can be spent vnless they are eontained in the budget. Likewise, this fund inc{udes the MSA expenditures for state-aid streets. These expenditures may only be used for quali�ed projects and may not be used for general street constructian and repair. Requests for expenditure out of these funds should include a statement as to the purpose, amount to be expended, and potential reimbursement if available. Requests should a(sa reflect whether or not the expenditure has been planned as a general use of available funds. . . � . DEBT SERVICE FUNDS Purpose The debt serviee fund is used to repay principal, interest and associated paying agent/registrar fees on bonds, notes or other instruments of general government generai obligation long-term debt issued by the City. For every instrument of indebtedness, the awarding resofution estabiishes a debt service account which may become a part of an existing debt service account established for a like or similar issue. For each debt obligation issued by the City, a separate debt serviee account shou(d be established within this fund. Bond issues that are to be repaid from enterprise fund net revenues should be accounted for in the affected enterprise fund. Sourees of Revenue All sources of required revenue pledged to an instrumen# of indebtedness must be placed into this fund. These sources include, but are not limited to, general ad valorern #axes, special assessments, tax increment income, special charges, fess, lease and investment income. AII tax revenues or required net revenues fevied speci#ically for debt must be placed in this fund. Likewise, all special assessments or required net revenues pledged for the repayment of debt must 6e placed in this fund. Tax increment income and/or lease revenue pled�ed to the repayment of debt must also be placed in this fund. Each year prior to the certification of tax levies, an analysis af the debt serviee fund should be made to determine whether or not sufficient revenues will be available to pay the upcoming required debt service payments, If sufficient revenues will not be available and a gensral obllgation pledge of the City has been made, �special tax levy will be required. This also is an appropriate time to assure that net operating revenues of a utility or tax increment income will be sufficien#to pay debt. Expenditures Funds in the debt service aecount may be used only to pay principal, interest, registrar and/or paying agent fees and related maintenance expenditures for indeb#edness incurred by the City. The funds may be used for no other purpose. Other related expenditures may include audit fees or special research fees. Upon occasion, these funds may be augmented through the accumutation of prepayments, investment earnings or the eontinued receipt of 105% of debt service requirements. These surplus funds may be used to pre-pay or refund debt or to provide a defeasance of outstanding obligations. Each bond issued by the City has a debt service account. While the amounts in #he variaus accounts may be co-mingled for investment purposes, fhe balances may only be used to pay debt service on the bonds to which they are pledged. . . i • Only upan the discharge of an obligation either through payment of final maturity, prepayment of a!i obligations due or a defeasance of an obligation, may any surpius funds be used for any corporate purpose of the City. Funds in a debt service fund mav be used for no other purpose until the obiiqation is discharged. � � CONSTRUCTION/CAPITAL PROJECT FUNQ Purpose For each major construction project or specified group of eonstruction projects, other than those projects recorded in the CIP process, (see Special Revenue Funds) a speciat construction account should be established. If bonds are to be issued to fund a project, ths awarding resolutian will require the establishment of such a speciat fund. Aii items associated with a project shouid be reflected in this fund. As soon as a construction projec# wMich requires the use of funds has been identified, a fund should be established. Sources of Revenue Construction projec#s are usualiy funded from proceeds of bond issues. However, other sources of revenue are available. These other sources may be, but are not limited to, general fund or interfund transfers, or aliocations af funds, i.e. MSA funds, conneetion charges, pre-payments of assessments not piedged to a bond issue but attributable to the project. Expenditures Funds in a construction account should only be used to pay costs associated with the project(s) for which the account was created. These costs may include, but are not limited to, construetion, engineering, legal, administration, issuance, pubfication, land acquisition, and easements. If a fund has been created pursuant to a bond resolution, any surplus funds at the end of construction may be used to fund a like or similar project or they must be transfe�red to the debt service account of the issue. For example, surplus funds in an improvemen# prajeet financed pursuant to Chapter 429, Minnesota Statutes, may not be used to finance any additions to the City Hall. They may, however, be used to finance another project authorized pursu�nt to Chapter 429, Minnesota Statutes. Requests for Pro�ect Fundinq Since the construction funds are generally not included in#he budgetary process, a c�ener�l procedure should be established in order to request temporary funding pending receipt of permanent funds. For each project, a project manager should be designated. This individual will have the responsibility of not only requesting funds, but atso for thE administration of those funds. This individual need not be a department Mead, but should have full know�edge of the project and be directly involved from initiation to completion. ' • � For each project, a budge# should be established. The budget should include, but not be limited to: start date compietion date total projecfed costs temporary funds required - date needed - date#o be repaid - interest to be repaid permanent financing required - should inciude interest on temporary funds - expected date of financing; reasonable expectation - type of financing - term of repayment - source of repayment (assessments, tax levies, net utility revenues, connect'ron charges, MSA, etc.) Upon completion of this data, a projection of avaitable funds and designation of source should be obtained from fhe Finance Director. A signature from the finance department should be required indicating the availability of funds. If funds are not available within tMe time frame requested, an explanation should be furnished. A completed request form must be pr�sented to the City Administrator, or designee, far final approvaf or denial. Non-availability of funds or a request for temporary funding for a peripd exceeding 18-months shall be grounds for denial. The Council may grant the Administrator the authority to obligate a project if the temporary cost does not exceed $2,500. The Council shall have final authority for approval or deniaL The project manager must 'rnitial or approve all expenditures on a project, Expenditures must not exceed the amount approved. Any amendments to a budget which increases the . costs must be approved through the same process as an initia! request. Upon approval of a project, the finance department will create the necessary accounting records so that a proper allocation of funds is made to the construction account and that account is obligated to repay the aecount from which the temporary #unds were withdrawn. in any event, no transfer of funds will be permitted if such a transfer will create a negative balanee in that acco�nt. � . .� • i UTtLITIF FUNDS Purpose The utility funds are enterprise funds. Enterprise funds are used to account for aperations that are financed and oeprated in a rnanner similar to private business enterpri�es. The intent is that the costs, including depreciation, of providing the services to the general public are financed primarily through user charges. The utility funds are used to pay the costs of operating, maintaining, and improving the utility system in the City. We are examining here only the water and sewer utilities. As the Ci#y continues to grow, more trunk and lateral lines are required. In addition to the basic collection and distribution system, adequate storage and supply of water must be addressed. Sources of Revenue The City has five primary sources for generating funds far the utilities: 1. Service Charges 2. Connection Charges 3. SurcMarges 4. Assessments 5. Bonding Service Charqes Service charges should be sufficient to produce adequate revenues in an amount to pay for all operational expenses of the system. Each utility should be operated as a profit-making enterprise and, therefore, should be whofly self-supporting. Included as part of the operating expense should be a provision for interest expense and debt retirement. Generally, the principal amount of debt refired may be paid from the depreciation account. When an asset is acquired, it is depreciated over a useful life, Thus, a small portion is written off each year. If depreciation is transferred to a repair and/or replacement account, any debt service requirements of the utility must be paid from operating and/or non-opera#ing revenues. Service charges should be reviewed annually ta assure sufficient revenue will be available to cover all expenses. Whenever debt is outstanding which is payabie from the utility, the service charga, together with ail other sourcas af revenues, sMoutd produce net income in an amount to cover at least 1 Q5�'o of the annual debt service payment. Connection Charqes A fixed connection charge should be (and is} required for each new unit connected to the water and sewer system. The charge is adjusted annually based on the engineering construction index, and the revenue generated should be used to pay any debt service charges for core facility improvements. Should no deb# serviee charges be required, the revenues should be accumulated for future core facility construction. The City also collects a , . . � ! sewer access charge (SAC) which charge is generally established by the Metropolitan 1lVaste Control Commission. Whfle the City retains the connection cMarges, the SAC charge is collected on behalf of the MWCC and thus, is nat construed to be operating ineome Qr expense. Surcharg,es A surcharge is imposed for the sole purpose of providing revenue to pay debt service charges and should be used in conjunction with #he connectian charge. While the connection charge is a one-time fee, fhe surcharge is ongoing and should be a part of the routine billing for user charges. The revenues from tMis charge should be piaced in the debt service account and not be construed to be an operating revenue. These charges shouid be reviewed on an annual basis and discontinued if not required to pay debt service. Assessments Special assessments are used to pay for sueh routine facilities as laterals which connect to trunk lines. The laterals provide a direct benefit to the property and are thus eiigible for assessment. Assessment income should be assigned to the debt seniice account for bonds issued to finance construction projects. Bondinq Major capital improvements should be financed through the issuance of bonds. Pursuant to the pravisions of Chapter 444, Minnesota Statutes, these bonds may be sold as general obligations of the City, however, net revenues of the utility are pledged for the repayment of debt. Such bonds are n4t included in the net debt calcutations of the Gity pursuant to Chapter 475, Minnesota Statutes. In view of the fact the utility is expected to operate as a profitable enterprise and also the fact that the awarding resolutions for bond issues covenant that sufficient charges will be made to generate adequate net revenues, these bonds may be autharized by a majority vote of the City Council. No hearing or referendum is required. Each bond issue should cfearly indicate what projeets will be funded and identify the source ' of revenues to pay debt service. Thus, each issue must contain a projection of adequate income ta pay alt expenses of the utility. Accounting for Revenues The City already has a number of accounts established for the sewer and water utilities. We will address herein the source and ase of the major accounts. General Revenue Afl revenues from user fees should be placed in this account. In addition, a!I revenues generated from the sale of ineters and from service or repair charges should also be p4aced her�. . ! ! From this account, alt general operations expenditures should be paid including administrative and service repair expenses, supplies, routine capitai expenditures and depreciation. This fund should also account for investment earnings and expenses. Hook-up Fund This aecount should be used to account for the hook-up charges received from each new customer of the utility. From this account should be paid the costs of constructing core #acilities which are not paid from otMer sources such as special assessments. This fund should also be available to pay proportional debt service on any bonds issued to finance the construction of core facilities. Surcharqe Fund This fund should be used only if a surcharge is in effect and alt surcharge revenue shoufd be plaeed here. From this fund wili be paid debt service on bonds issued to finance the construction of core facilities. This fund shoufd be used for no other purpose except for tMe retirement of debt. Repair and Replacement fund This fund could be established from an annual allocation from depreciation expense. Generatly, depreciation expense is an accounting transaction and nat an ac#ual cash outlay. The accumulated depreciation becomes part of the retained earnings and shou{d be available for replacement of faeilities. If a portion of#he depreciation expense is transferred to this account, ongoing routine repairs and replacements can be affected with minimat impact on the general revenue stream of the utility. We nate further that depreciation expense could also be a cash item when it is used to retire outstanding debt. Depreciation This item on an income statement may be either an actual expenditure or an accumulafion of retained earnings. As nated above, depreciatian may be either an accounting transaction or an actual expense. Assets are depreciated over the useful life of the asset and sueh depreciation should be included in the general revenue stream of the u#ility and inc�uded as part of the rate structure. The amount of depreciation not used to fund a repair and replacement account may be used to retire debt and/or accumulate funds for unplanned expenditures. bb