HomeMy WebLinkAbout3.a. Sources and Uses of Funds f�
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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 � •
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�, 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,
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Gerard B. Shanrion
Vice President
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�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
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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.
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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.
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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.
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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.
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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.
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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.
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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. �
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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
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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�.
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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.
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