ITEM 7.3B Fund Transfer0
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MINNESOTA CDO
DEPARTMENT INFORMATION
Request for
City Council Action
ORIGINATING DEPARTMENT:
REQUESTOR:
MEETING DATE:
Administration
Adam Flaherty, Finance Director
June 13, 2016
PRESENTER(s):
REVIEWED BY:
ITEM #:
Adam Flaherty, Finance Director
City Administrator Johnson
7.3 (B)
AGENDA ITEM DETAILS
RECOMMENDATION:
It is recommended by staff that the City Council approve the transfer of funds from the General Fund in
accordance with the Citv's fund balance
ARE YOU SEEKING APPROVAL OF A CONTRACT? IS A PUBLIC HEARING REQUIRED?
No I No
BACKGROUND/JUSTIFICATION:
The City adopted a Fund Balance Policy in April 2011.
Within said policy, Section 03.03.07, Paragraph "C" establishes the minimum fund balance for the City's
General Fund as 45% of the subsequent year expenditure budget. The policy also outlines the
procedures when the actual fund balance exceeds the defined minimum. In the instance where fund
balance exceeds the 45% level, the excess will be transferred to the Revolving Capital Improvements
fund with the City Council reviewing the future use of said funds.
The City Council and staff reviewed this transfer as part of the 2017 budget discussion at the May 9,
2016 special meeting. The discussion revolved around transferring the excess funds for the 2015 year-
end to the Capital Equipment Revolving Fund. This was the result of information presented by the
Finance Director illustrating that the Capital Equipment Revolving fund is projecting future deficits.
The Finance Director has reviewed the cash flow projections for the Revolving Capital Improvements
fund. The determination is that the current cash balance exceeds identified expenditures within the
Capital Improvement Plan as well as a handful of other potential expenditures of which currently have
no identified funding source. A cash flow summary illustrating this review is attached.
With current funding levels and expenditures identified in the Capital Improvement Plan, the Equipment
Revolving Fund will experience a cash deficit by the end of 2017. At this time, there are no other viable
funding sources for the expenditures within this fund other than property taxes, which is the current
source. The transferred funds would provide the fund with sufficient cash flows (under current
projections) through 2018. This would allow the City Council more time to determine a longer -term
approach for the City's vehicle and equipment needs.
SUPPORTING DOCUMENTS: ATTACHED NONE
• Fund Balance Policy
• Calculation of Proposed Transfer
• Cash Flow Summary — Revolving Capital Improvements Fund
• Cash Flow Summary —Capital Equipment Revolving Fund (Current)
• Cash FlowSummary—Capital Equipment Revolving Fund (With Transfer)
pnGSIRI F MOTION
Please word motion as you would like it to appear in the minutes.
-Motion to approve the transfer of $460,212 from the General Fund to the Capital Equipment Revolving
Fund to be reported in the 2016 financial statements.
BUDGET INFORMATION
FUNDING: BUDGETED:
n/a n/a
POLICY 03.03
t r FUND BALANCE POLICY
Section
03.03.01
Purpose and Intent
03.03.02
Classification
03.03.03
Committing Fund Balance
03,03.04
Assigning Fund Balance
03.03.05
Unassigned Fund Balance
03.03.06
Order of Resource Use
03,03.07
Appropriate Fund Balance Levels
SECTION 03.03,01: PURPOSE AND INTENT:
A, The implementation of Governmental Accounting Standards Board (GASB) No.
54 is effective for local units of government for the financial reporting year ended
December 31, 2011. GASB Statement No. 54 is titled, "Fund Balance Reporting
and Governmental Fund Type Definitions" and creates new classifications for
reporting the components of fund balance.
B. Fund balance needs only to be classified in these categories for external financial
reporting purposes. However, in order to capture the information necessary for
these classifications, both the City Council and City staff will have significant
roles in the classification of the unrestricted fund balance components.
C. To affect the reporting of the various components of fund balance will also
require input from the City Council and City staff and in many ways will facilitate
and document the continuation of long range planning for the City.
SECTON 03.03.02: CLASSIFICATON:
A. With the 2011 implementation of GASB 54, the fund balance of the governmental
funds will be classified in the year end financial report as follows, expanding the
classification from three to five categories:
1, Nonspendable
2. Restricted
3. Unrestricted — committed
4. Unrestricted — assigned
5. Unrestricted — unassigned
B. Incorporated by reference with this policy is a table that includes each
classification, its definition and some examples to help explain the definition and
purpose of each classification.
C. Both the nonspendable and restricted fund balance categories result from
requirements or restraints that are placed on the City's assets by external factors,
whether it is the nature of the asset affecting the ability to expend the resource or
externally imposed restrictions of others. Examples of nonspendable fund
balance would include inventories, prepaid items, and permanent principal of an
endowment fund. Examples of restricted fund balance would include fund
balance restricted by statutes, unexpended bond proceeds, debt covenants,
taxes dedicated to a specific purpose, etc.
D. The unrestricted fund balance has three components and is reported as
committed, assigned or unassigned based on the actions of the City Council
and/or staff.
SECTON 03.03.03: COMMITTNG FUND BALANCE:
A. Council resolution, which is the highest level of decision -making authority in the
City, will be required to "commit" available fund balance to a specific purpose.
B. Once City Council action has been taken, the "committed" funds cannot be used
for any other purpose unless the commitment is rescinded by the same type of
council action.
C. Council resolution will be required prior to the year end but actual amounts
committed may be determined following the year end as the final balances are
determined.
SECTION 03.03.04: ASSIGNING FUND BALANCE: Authority to "assign"
available fund balance may be delegated to City staff after year end. Actual amounts
may also be determined after year-end. In governmental funds, other than the General
Fund, the assignment must follow the intent for the specific purpose of the individual
fund. As a result, all remaining fund balances of special revenue, debt service and
capital projects funds are classified as assigned.
SECTON 03.03.05: UNASSIGNED FUND BALANCE: The components of
unassigned fund balance will include all remaining fund balances not classified
elsewhere.
SECTION 03.03.06: ORDER OF RESOURCE USE: As expenditures are
incurred, the resources will be applied in the same order as the hierarchy above and the
following:
A. Restricted funds will be used to finance expenditures prior to the use of any
unrestricted funds.
B. The unrestricted monies will be applied in the same order as the hierarchy as
well with committed funds first applied to the expenditure, then any assigned
funds will be applied and lastly the unassigned fund balance will be used to
finance the balance of the expenditures.
SECTION 03.03.07: APPROPRIATE FUND BALANCE LEVELS:
A. The "fund" is the basic accounting entity of the City and the City may have
several "funds" depending upon the use for which each has been established.
The fund balance represents the available net assets, or assets less the liabilities
within each fund of the City. Fund balance requirements of a particular fund may
vary significantly based on the purpose of the fund and the resources financing
the activities accounted for within the fund.
B. The General Fund is the most important fund of the City and accounts for all
activities not required to be accounted for in a separate fund. The General Fund,
like all other governmental funds, must maintain a minimum fund balance to
provide adequate working capital/cash flow so all expenditures will be paid as
they come due. The reason the City maintains a fund balance in the General
Fund are as follows:
For Working Capital/Cash Flow: The expenditure activities of the General
Fund are financed primarily by general property taxes and state aids. The
general property tax revenues and state aids are received at specific
dates during the calendar year. Currently the general property tax
settlements, which accounted for 82% of the General Fund revenues in
2011, are received by the City in July and December each year. As the
general property taxes are the major revenue source of the General Fund,
the fund balance must be sufficient to finance the expenditures for a five to
six month period between the property tax settlements.
2. For a Revenue Shortfall: The fund balance in the General Fund should be
sufficient to absorb revenue reductions from state sources or other
sources as well. While the state aid received by the City is currently less
than 5% of the total budgeted expenditures, it is expected the impact of
revenue reductions from state sources will have a minimal impact on the
budget in any given year.
3. For Unexpected Expenditures: The fund balance of the, General Fund
should be sufficient to absorb any unexpected expenditures that would not
be financed by other revenue sources of the City. While the scope of
these examples would be difficult to quantify, the City must have sufficient
fund balance to absorb unanticipated expenditures within the scope of the
General Fund. The City also maintains general property and liability
insurance to replace losses of City property with only a minimal deductible
in the current policies which serves the purpose of reducing the City's
exposure to catastrophic events.
C. Minimum Fund Balance:
General Fund:
a. The minimum fund balance requirements of each fund of the City
will be evaluated on an individual basis taking into consideration the
working capital/cash flow requirements, the ability to absorb a
revenue shortfall or unexpected expenditures.
b. The General Fund minimum fund balance policy is established
based on the current flow of revenues. If or when such revenues
flows are changed or the percentage of General Fund revenues
derived from general property taxes changes, minimum fund
balance requirements may also change. As the level of activity
(expenditures) in the General Fund increases, it is expected the
minimum fund balance should increase also. The Office of the
State Auditor has established a written policy indicating the fund
balance should be approximately 35 to 50% of the budgeted
expenditures of the subsequent year or no less than five months of
the budgeted expenditures.
C. The City Council has established the minimum fund balance in the
General Fund as forty five (45%) percent of the subsequent years
expenditures. If year end fund balance levels exceed the forty five
(45%) percent level, the excess fund balance will be transferred to
the Revolving Capital Improvements Fund and reported as such in
the year end financial statements. The City Council will review the
future use of any amounts transferred to the Revolving Capital
Improvements Fund and may determine that the monies may be
used for any public purpose and may be committed, assigned or
remain as unassigned. If the fund balance is reduced below the
forty five (45%) level established, the council will determine if the
monies necessary to achieve the minimum fund balance will be
identified within other funds of the City or a future property tax levy
will be increased to finance the deficiency.
d. The minimum fund balance policy will be reviewed every year
during the annual budget process or more frequently if General
Fund financing would change.
2. Other City Funds: The City Council and City staff will review the fund
balance requirements of all funds at the conclusion of the annual audit,
Recommendations from the auditors and finance department will be
presented to the City Council for their -review and approval.
ADOPTED APRIL 11, 2011
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