6.0. SR 10-22-2001River
MEMORANDUM
Item
TO:
FROM:
DATE:
SUBJECT:
Hayor and Council
Lori Johnson, Finance Director
October 17, 200 I
Key Financial Strategies Worksession
Over the course of the last year, Rusty Fiefield has led the Council through discussions
on financial strategies and issues facing the city. One of the major components of the key
financial strategies project was to develop a financial management plan. The plan lays
out financial management policies in many areas including property tax, debt, budgeting,
reserve funds, and others. In order to provide the Council with adequate time to review
the plan, it is being distributed early.
The focus of Monday's work session is to discuss the policies included in the financial
management plan so the plan can be finalized. Once the plan is in final form, staff and
the Council can begin the implementation process. Although, as you review the plan you
will note that most of the items are already in place, therefore, no implementation is
necessary. However, there are other items, such as the capital improvement plan will
require implementation.
Staff will be prepared to answer questions and provide additional information at the
Council meeting. Please feel free to call with questions or comments before the meeting
as well.
Action Requested
The Council has asked to consider the draft financial management plan and recommend
changes as the Council deems appropriate. If council is comfortable with the plan as
proposed, it may be approved so that we move onto implementation.
River
FINANCIAL MANAGEMENT PLAN
DRAFT
October 16, 2001
Financial Management Policies
Financial management policies are essential elements of a strong financial future. The
policies serve as an on-going guide for decision-making. The policies describe actions to
be taken and the rationale for the actions. The creation of policies requires city officials
to consider implications of their actions. Policies promote continuity and stability. They
minimize the affects of changes in Council and management staff.
The following section describes the financial management policies of the City of Elk
River. These policies expand on existing City policies with new criteria developed in the
financial management planning process. All financial management policies should be
reviewed periodically to maintain relevance and effectiveness.
1. Revenues
]..].
1.2.
The flow of revenues is subject to fluctuation from growth, legislative
change and other factors. The City seeks to promote financial stability
through diversification of revenues, good financial planning and
maintenance of adequate reserves.
All non-tax revenues should be reviewed at least every three years. The
purpose of the review is to determine if adjustments are needed to produce
additional revenues, more equitably allocate costs, and/or achieve other
objectives determined by the City Council. All revenue forecasts shall be
conservative.
1.3.
]..4.
Due to the lack of local control and the uncertainty of future
commitments, limited reliance should be placed on revenues from
intergovernmental sources. All new intergovernmental revenues should
be carefully studied to determine stability and stipulations (if any)
regarding use.
To the extent feasible, one-time revenues will be applied toward one-time
expenditures; one-time revenues will not be used to finance ongoing
programs.
1.5.
The City will maximize utilization of user charges in lieu of property taxes
for services that can be individually identified and where the costs are
directly related to the level of service. User fees will be reviewed each
year to ensure that related costs are recovered.
]..6.
The growth and development of Elk River directly influences revenues
available from many sources. Financial planning must consider
anticipated community growth. All planning must recognize the
relationship between finance and community development. Much of the
General Fund fee revenue comes from development related charges, such
as building permit fees. As growth slows, revenue from these sources will
decline.
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Property Taxes
2.1
Property taxes are the most important source of revenue for both services
and capital investment. In managing property taxes, the City will seek a
balance between providing an appropriate level of services, maintaining
infrastructure, and affordability for residents.
2.2
Continued long range financial planning creates the opportunity for
managing property taxes and providing the greatest stability in tax rates.
Staff`will annually prepare-projections of property valuations, levies and
tax rates.
2.3
2.4
State control of the property tax system impairs the ability of the City to
undertake meaningful long-term planning. Legislative changes in the
class rates, State aid, levy limits and other elements of local government
finance cannot be predicted.
The City will seek a balanced tax base through support of a sound mix of
residential, commercial, and industrial development.
3. Utilities
3.1
3.2
3.3
3.4
3.5
The City Council sets fees and user charges for municipal sanitary sewer
service and garbage collection. The Utilities Commission sets fees and
charges for the water and electric utilities. The City will encourage the
Utilities Commission to adopt financial management policies similar to
the policies stated in this section.
The City will strive to set user fees for municipal utilities at a level that
creates financially sustaining enterprises.
The fee structure for municipal utilities should produce a net annual
surplus of revenues over expenditures after accounting for all operating
costs, depreciation of capital assets and payment of debt service.
All municipal utility funds will maintain adequate cash reserves. The
reserve needs vary for each municipal utility. The assessment of cash
reserves should take into account future capital investments, diversity and
stability of revenues and potential for unanticipated changes in revenues
and expenditures.
All utility rates should be reviewed every two years to minimize the
impacts of rate changes and to insure adequate long-term funding.
3.6 The Municipal Electric Utility will make an annual contribution to the
3.7
3.8
City. The cash contribution will be three percent of gross electric sales
within the corporate limits of the City. The City Council will determine
the allocation of the contribution between the General Fund and the
Capital Outlay Reserve.
The City Council will determine the chargeback to the Sewer Fund for
administration of the sanitary sewer system.
Any other transfer of equity from an utility fund to the General Fund
(other than stated in 3.6) should only be done on a one-time exception
basis, for example, to fund an unusual, unanticipated expense. In no event
shall such equity transfers be made in consecutive years. Equity transfers
must be approved by the City Council.
4. Investments
4.1
4.2
It is the policy of the City of Elk River to invest public funds in a manner
which will provide the highest investment return with the maximum
security while meeting the daily cash flow demands of the entity while
conforming to all state and local statutes governing the investment of
public funds.
The investment policy applies to all financial assets of the municipality.
These funds are accounted for in the City's Annual Financial Report and
include all City funds with the exception of the Water and Electric Funds
that fall under the investment policy adopted by the Elk River Utilities
Commission.
4.3
4.4
Investments shall be made with judgment and care under circumstances
then prevailing which persons of prudence, discretion, and intelligence
exercise in the management of their own affairs, not for speculation, but
for investment, considering the probable safety of their capital as well as
the probable income to be derived.
4.3.1
The standard of prudence to be used by investment officials shall
be the "prudent person" standard, as defined by Minnesota Statute
§356A.04, Subd. 2, and shall be applied in the context of managing
an overall portfolio. Investment officers acting in accordance with
written procedures and the investment policy and exercising due
diligence shall be relieved of personal responsibility for an
individual security's credit risk or market price changes, provided
deviations from expectations are reported in a timely fashion and
appropriate action is taken to control adverse developments.
All investments shall be limited to those permitted by Minnesota Statute
§ 11 SA. The primary objectives, in priority order, shall be:
4.4.1 Safety: Investments shall be undertaken in a manner that seeks to
ensure the preservation of capital in the overall portfolio. To attain
this objective, diversification is required in order that losses on
individual securities do not exceed the income generated from the
remainder of the portfolio.
4.4.2
Liquidity: The investment portfolio will remain sufficiently liquid
to enable the City to meet all operating requirements that might be
reasonably anticipated.
4.4.3
Return on Investment: The investment portfolio shall be designed
with the objective of attaining a market rate of return throughout
budgetary and economic cycles. The investment strategy will take
into account the constraints on risk and cash flow characteristics of
the investment portfolio.
4.4.4
Maintaining the Public's Trust: All officials and employees who
are part of the investment process shall seek to act responsibly as
custodians of the public trust. Investment officials shall avoid any
transaction that might impair public confidence in the
municipality's ability to govern effectively.
4.5
Authority to manage the investment program is derived from the
following: Minnesota Statutes § 118A. Management responsibility for the
investment program is hereby delegated to the Finance Director. No
person may engage in an investment transaction except as provided under
the terms of this policy and the procedures established by the Finance
Director. The Finance Director shall be responsible for all transactions
undertaken and shall establish a system of controls to regulate the
activities of subordinate officials.
4.6
Officers and employees involved in the investment process shall refrain
from personal business activity that could conflict with the investment
program, or which could reasonably cause others to question or doubt their
ability to make impartial investment decisions. Employees and investment
officials shall disclose to the Finance Director any material financial
interests in financial institutions that conduct business within this
jurisdiction, and they shall further disclose any large personal
financial/investment positions that could be related to the performance of
the portfolio.
4.7
The Finance Director will maintain a list of financial institutions
authorized to provide investment services. In addition, a list will be
maintained of approved security broker/dealers selected by credit
worthiness, who maintain an office in the State of Minnesota. These may
include "primary dealers" or regional dealers that qualify under Securities
& Exchange Commission Rule 15c3-1 (uniform net capital rule). All
brokers doing business with the City shall have a Broker Certification
form on file with the Finance Director in accordance with Minnesota
Statutes § 118A.04, Subd 9. All investments must be placed with brokers
whose office is in the State of Minnesota. No investments may be made
with out of state brokers.
4.8
Authorized and Suitable Investments: Investment instruments authorized
and permitted by this policy are as follows:
4.8.1 Repurchase Agreements consisting of collateral allowable in
Section 118A.04.
4.8.2
United States Securities: Governmental bonds, notes, bills,
mortgages (excluding high-risk mortgage-backed securities), and
other securities, which are direct obligations or are guaranteed or
insured issues of the United States, its agencies, its
instrumentalities, or organizations created by an act of Congress.
4.8.3
High risk mortgage-backed securities are as follows: (1) interest-
only or principal-only mortgage-backed securities; or, (2.) any
mortgage derivative security that: (a) has an expected average life
greater than ten years; (b) has an expected average life that: (i) will
extend by more than four years as the result of an immediate and
sustained parallel shift in the yield curve of plus 300 basis points;
or (ii) will shorten by more than six years as the result of an
immediate and sustained parallel shift in the yield curve of minus
300 basis points; or (c) will have an estimated change in price of
more than 17 percent as the result of an immediate and sustained
parallel shift in the yield curve of plus or minus 300 basis points.
4.8.4
Minnesota Joint Powers Investment Trust: Agreements or
Contracts for shares of a Minnesota joint powers investment trust
whose investments are restricted to securities authorized for
investment by the government entity and shares of an investment
company registered under the Federal Investment Company Act of
1940, whose shares are registered under the Federal Securities Act
of 1933, as long as the investment company's fund receives the
highest credit rating and is rated in one of the two highest risk
rating categories by at least one nationally recognized statistical
rating organization and is invested in financial instruments with a
final maturity of no longer than 13 months.
4.8.5
State and Local Securities: State and local government obligations
as follows: (1) any security which is a general obligation of any
state or local government with taxing powers which is rated "A" or
better by a national bond rating service; (2) any security which is a
revenue obligation of any state or local government with taxing
powers which is rated "AA" or better by a national bond rating
service; and, (3) a general obligation of the Minnesota Housing
Finance Agency which is a moral obligation of the State of
Minnesota and is rated "A" or better by a national bond rating
service.
4.8.6
Commercial paper issued by United States corporations or their
Canadian subsidiaries that are rated in the highest quality category
by at least two nationally recognized rating agencies.
4.8.7 Time deposits that are fully insured by the Federal Deposit
Insurance Corporation.
4.8.8 Bankers acceptances of United States banks.
5. Purchasing
5.1
The following procedures are to be followed for all normal purchasing
whether or not competitive bids are necessary.
5:1.1
Purchase orders are not needed for items costing less than $750.
Department head authorization is required prior to making the
purchase. Each department head is responsible for implementing
purchasing procedures for the department for purchases of items
costing less than $750 to ensure that employees do not make
purchases in excess of the budgeted amount.
5.1.2
Purchase orders shall be issued for all purchase of $750 or more
with the exception of: (1) consulting services, (2) contractual
agreements, (3) fixed ongoing amount previously approved by the
City Council, and (4) items purchased under a price agreement for
which an open purchase order already exists. A purchase order
shall not remain open for longer than one year.
5.1.2.1
The purchase order shall be completed and signed prior to
purchasing the requested item. The purchase order shall
include: (1) a description of the item(s) to be purchased, (2)
quantity, (3) cost (including tax and shipping, and (4)
budget code to be charged. The purchase order shall be
signed by the Department Head and the Finance Director or
the City Administrator.
5.1.2.2 A copy of the purchase order shall be given to the Finance
Department prior to the purchase.
5.1.2.3
The Department Head is responsible for ensuring that
adequate funds are available in the budget for the item(s)
requested as outlined in Minnesota Statutes, Section
412.721.
5.1.3
Purchasing policies are designed to facilitate the effective delivery
of municipal services while maintaining adequate financial
controls.
5.2
Department heads may make expenditures contained in the annual budget
in an amount not in excess of $2,000 without City Administrator approval.
5.3
5.4
5.5
The City Administrator may make expenditures contained in the annual
budget in an amount not in excess of $25,000 without City Council
approval.
The City will follow statutory requirements for competitive bidding.
No expenditure or other obligation shall be made unless authorized by the
budget and in compliance with 5.1 above. Any obligation incurred by any
person in the employ of the City for any purpose not authorized in the
budget resolution or for any amount in excess of the amount therein
authorized shall be a personal obligation upon the person incurring the
expenditure.
6. Budgeting
6.1
6.2
6.3
The City Administrator is responsible for the preparation and the
administration of the annual operating budget based on input from the
Department Heads.
A multi-year approach to budgeting should be evaluated when conditions
would support such practices. Given the frequent changes in State
policies, it is not currently practical for the operating budget to cover more
than one fiscal year.
The budget shall be adjusted as needed to recognize significant deviations
from original budget expectations. The Council shall consider budget
amendments each December. Budget amendments are intended to
recognize changes made by the Council during the year, to reflect major
revenue and expenditure deviations from budgeted amounts, and to
consider year-end budget requests. Budget amendments are not intended
to create a budget that matches budgeted revenues and expenditures to
actual revenues and expenditures.
6.3.1
Administrative budget amendments may be made throughout the
year by Department Heads to adjust line item budgets within their
department as long as the total departmental budget does not
change. These line item budget changes exclude personal service
and capital outlay categories. Changes must be requested in
writing and approved by the City Administrator and Finance
Director.
6.4
The City will not use short-term borrowing, internal or external, to balance
the budget for any fund.
6.5
The City will not sell assets or use one-time accounting principle changes
to balance the budget for any fund.
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6.6
6.7
The City will provide ample time and opportunity for public input into its
budget setting deliberations each year, including any required public
hearings.
Department heads will be responsible for administration of their
departmental operating budget. Requests for budget adjustments must be
submitted and approved before any program incurs cost overruns for the
annual budget period.
Accounting, Auditing and Financial Reporting
7.1
7.2
7.3
The City will establish and maintain the highest standard of accounting
practices, in conformity with Generally Accepted Accounting Principles
7.4
The City will arrange for an annual audit of all funds and account groups
by independent certified public accountants or by the State Auditor's
Office.
7.5
Staff is to bring these Financial Management Policies to the City Council
at least every two (2) years for review.
Regular monthly reports present a summary of financial activity by major
type of funds as compared to Budget. Department Heads will review
monthly reports comparing actual revenues and expenditures to the
budgeted amounts. Any negative variance in any revenue or spending
category (Personal Services, Supplies, Other Charges and Services,
Capital Outlay) for their department as a whole projected to exceed $5,000
by year-end will be reported in writing to the Finance Director and the
City Administrator.
The City will comply with the requirements of GASB 34 by the end of
fiscal year 2003.
Reserves
8.1
8.2
8.3
The City will establish and maintain reserves necessary to provide
adequate working capital, minimize indebtedness by accumulating monies
for capital investment, prevent the use of external short-term borrowing by
providing monies for contingencies and emergencies, and stability in
taxation and user fees.
Reserves in special revenue funds shall be accumulated and used solely
for the purposes served by the specific fund.
The capital improvements planning process will earmark reserves in
special revenue, capital project and enterprise funds to be used for capital
investment.
10.
8.4
Subject to relevant legal constraints, reserves may be used for short-term
internal borrowing.
General Fund Balance
9.1
The General Fund shall have an unreserved balance of not less than 45
percent of the next year's budgeted expenditures. This balance is needed
to provide adequate cash flow during the first six months of the year, to
fund unexpected, unbudgeted expenditures, to provide a temporary buffer
against legislative actions that may reduce state aid payments, to provide
revenue base stabilization, and to maintain or improve the City's bond
rating.
9.2
If the year end fund balance exceeds 45 percent of the next year's
budgeted expenditures, the surplus shall be allocated based on the
following criteria: (1) Investments that generate future savings will be
given priority; (2) The surplus will be allocated to more than one uses; (3)
The surplus will not be used on expenditures or programs that require an
ongoing financial commitment.
9.3
The following Reserve Fund needs will be given high priority when
allocating the surplus: (1) Government Building Reserve Fund - to
provide for future building expansion, replacement, and maintenance
needs of all City buildings except for enterprise fund buildings; (2) Capital
Outlay Reserve Fund - to purchase major capital equipment and to reduce
the need for debt to acquire equipment.
9.4
The Council shall annually approve a resolution designating the use of the
surplus prior to finalizing the Comprehensive Annual Financial Report
(CAFR) for the fiscal year just ended. The resolution shall include the
following: (1) The amount of the surplus and (2) The specific uses of the
surplus.
Capital Investment
10.1
10.2
The City will maintain buildings, infrastructure, utilities, parks, facilities,
and other assets in a manner that protects the investment and minimizes
future maintenance and replacement costs.
The City Administrator will annually prepare and submit to the City
Council a Capital Improvements Plan (CIP) for the next five fiscal years.
10.3
At a minimum, the CIP will include a description of the proposed
improvement, the estimated cost, timing and potential sources of funding.
If applicable, the CIP will identify implications for the operating budget
created by the proposed improvement.
10.4 In most cases, private developers will be responsible for the construction
of streets, sanitary sewer, watermain, and storm water collection systems
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10.5
10.6
10.7
10.8
10.9
needed to serve new development. The City may install infrastructure and
assess property owners when this approach provides the best alternative.
The City will finance street and utility oversizing and trunk utility
systems.
The City will maintain a system of capital charges for sanitary sewer and
water services. The charges will be collected when undeveloped land is
platted and when new users connect to the system. Revenues from the
capital charges will be accumulated and used to pay for the capital
investment related to the maintenance and expansion of the utility system.
The City will strive to maximize the revenues collected from capital
charges in order to protect existing utility users from bearing the costs
associated with growth. The City Council will work with the Utilities
Commission to set capital charges for the water system at appropriate
levels. In not less than three year intervals, the City Staff shall evaluate
the amount of all capital charges and recommend necessary changes to the
City Council and the Utilities Commission.
The City will maintain an equipment acquisition and replacement
program. The City will annually update the plan to provide funding for all
equipment purchases over $25,000 to be made in the next five fiscal years.
The City shall attempt to fund the program without the use of debt. It is
recognized that State imposed levy limits may create the need incur debt
for equipment acquisition.
The City will establish and maintain a program for the construction and
maintenance of the municipal storm water management system. By no
later than December 31, 2002, City Staffwill provide the City Council
with the estimated cost of storm water improvements over the next five
fiscal years and options for financing the improvements.
The City will establish and maintain a program for the maintenance of the
municipal street system.
10.9.1
The initial sealcoating in new subdivisions will be financed with
monies collected for this purpose at the time of original
development. Other sealcoating and other maintenance activities
will be financed through the General Fund.
10.9.2
The City will prepare an on-going plan for the reconstruction of
all city streets. The City will provide a sustainable source of
funding for the street reconstruction program. The street
reconstruction expenses will be assessed to adjacent or otherwise
benefiting properties to the maximum degree possible. The City
will establish a permanent improvement revolving fund under
Minnesota Statutes, Section 429.091 dedicated to the street
reconstruction program. The use of a permanent improvement
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11.
Debt
ll.1
11.2
11.3
11.4
11.5
11.6
11.7
11.8
11.9
revolving fund allows the accumulation and protection of
reserves, creates flexibility in the use of assessment revenues and
authorizes debt for this purpose. The City will annually prepare
cash flow projections for street reconstruction projects to ensure
adequate and ongoing funding.
It is not in the best interests of the City to finance capital investment on a
cash only basis. Saving the money needed to undertake large capital
projects may prevent the City from providing needed improvements in a
timely manner and/or create unacceptable demands on revenues. A cash-
only approach places the entire financial burden on residents that precede
the project. Persons that follow the improvement and receive its benefit
do not pay.
The City will maintain operating reserves at sufficient levels to prevent the
need for short-term borrowing in anticipation of the receipt of revenues,
grants, or other funds.
Temporary financing will be used only when, in the judgment of the City
Council, short-term debt serves the best interests of the City. Factors that
favor the use of temporary debt include potential for large variations in
project expenses, potential for future lower interest rates, ability to reduce
long-term debt, and the ability to better manage taxes and other revenues.
All bond issues and other obligations shall be repaid before the end of the
useful life of the financed asset.
The City will strive to repay all debt within the shortest practical period of
time. Debt should not be amortized over more than 20 years. At least 50
percent of all outstanding principal should be retired within the next 10-
year period.
The amount of outstanding debt is not limited to a specific amount or
ratio. In managing its debt, the City Council will balance need with the
ability to raise revenues to pay debt service.
The City will plan debt to avoid issuing more that $10,000,000 in tax-
exempt bonds during any calendar year and apply "bank qualified" status
to all issues.
The City will strive to avoid arbitrage rebate and reporting by (a) not
issuing more that $5,000,000 in tax-exempt bonds during any calendar
year or (b) expending bond proceeds within the time limitations for rebate
exemption imposed by federal regulations.
The City minimizes the amount of debt supported by property taxes by
making maximum use of special assessments, utility revenues and other
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11.10
11.11
11.12
11.13
non-tax sources to support debt.
Moody's Investors Service currently assigns an "A3" rating with a
positive outlook to the general obligation debt of Elk River. The City
shall strive to maintain or improve upon the current rating to achieve the
broadest market and lowest interest rates for City bonds. The City will
maintain open communications with bond rating agencies about its
financial condition.
The City will follow a policy of full disclosure in every financial report
and bond prospectus. The City will comply with Securities Exchange
Commission (SEC) reporting requirements and regulations on continuing
disclosure as they apply to each bond issue.
The City retains the services ofEhlers & Associates as an independent
financial advisor to assist City Staff with the issuance and management of
debt.
City Staff', with the assistance of the Ehlers & Associates, shall monitor
outstanding debt and advise the City Council on ways to reduce the debt
burden through refinancing at lower interest rates and the early retirement
of bonds. Bonds shall not be refunded for savings unless the present value
of the savings exceeds three percent of the refunded principal and 125
percent of costs of issuance plus underwriter's discount.
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