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6.2. SR 01-28-2002MEMORANDUM TO: FROM: Mayor and City Council e_~,\ Lori Johnson, Finance Director DATE: January 28, 2002 SUBJECT: Key Financial Strategies Worksession: Adopt Financial Management Plan Attached is the final draft of the City's Financial Management Plan. As you may recall, the Council originally reviewed and commented on the draft plan on October 17, 2001. The changes requested by Council at that meeting have been incorporated in the policy section of the final document. In addition three sections have been added: Keys, Actions, and Data. Each of these sections captures discussions and data presented at the Key Financial Strategies work sessions. The Keys section of the plan gives a general background of the major factors that influence the City's financial condition. The Action section lists the actions that are to be accomplished, and the Data section provides actual City data that was used as a basis for decision-making and analysis during this process. This data will continue to be updated on an ongoing basis so that staff and council members can react to and make decisions based on current trends and projections. Rusty Fifield will walk the Council through the final draft at the meeting. As I stated earlier, the only material changes to the Plan are the ones requested by the Council. Hopefully, since this is the final Key Financial Strategies meeting scheduled, the Financial Management Plan can be adopted so that we may begin working on some of the action steps included in the Plan. Of course, if you have any comments or would like to discuss the Plan in more detail prior to the Council meeting, please feel free to contact me at your convenience. Action Requested The City Council is asked to consider the attached Financial Management Plan for the City of Elk River. Key Financial Strategies For Elk River Final Draft January 17, 2002 CONTENTS 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. DATA INTRODUCTION 1 KEYS 3 Growth and Devdopment .............................................................................................. 3 Legislative Action ............................................................................................................. 3 Non-Tax Revenues .......................................................................................................... 4 Capital Investment .......................................................................................................... 4 General Fund .................................................................................................................... 5 ACTIONS 7 CIP .................................................................................................. : ..................................... 7 Facilities .............................................................................................................................. 7 Storm Sewer ...................................................................................................................... 8 Pavement Rehabilitation ................................................................................................ 9 GASB 34 ............................................................................................................................. 9 Bond Rating ....................................................................................................................... 9 Utilities ............................................................................................................................. l0 Property Taxes ................................................................................................................ 10 Landfill Surcharge ............................................................................................................ ll POLICIES 12 Revenues ................................................................................................................. 12 Property Taxes ...................................................................................................... 13 Utilities ................................................................................................................... 13 Investments ............................................................................................................ 14 Purchasing .............................................................................................................. 16 Budgeting ............................................................................................................... 17 Accounting, Auditing and Financial Reporting ............................................ 18 Reserves .................................................................................................................. 19 General Fund Balance .......................................................................................... 19 Capital Investment .............................................................................................. 20 Debt ......................................................................................................................... 21 23 Trends ............................................................................................................................... 23 Projections ....................................................................................................................... 40 Capital Improvements .................................................................................................. 42 (Draft January 2002) Key Financial Strategies For Elk River Page 59 (Draft January 2002) Key Financial Strategies For Elk River INTRODUCTION Financial management is the on-going effort to balance the competing forces of revenues and expenditures. The revenue side of the equation focuses on affordability. The expenditure side addresses community needs and desires. Financial management attempts to make the best use of available revenues to serve the community. Planning examines the current and future ability to meet this objective. Elk River has a long history of excellent financial management. The City's financial condition is sound. The City has managed its finances in an environment of community and legislative change. If current financial practices work, why plan? Comprehensive financial planning brings several benefits: Long term view Many aspects of financial management cover a limited time frame. Annual financial reports look back one year. Operating budgets plan for the upcoming year. Effective financial planning requires a broader view. Many important trends evolve over a number of years. Looking back at a single year often misses the context of changes. Looking into the future creates increases the ability to identify opportunities and obstacles that lie ahead. Build a better understanding Municipal finance is complicated and ever-changing. The planning process provides an opportunity to learn and to ask questions. A better understanding of finance leads to better decisions. Look at whole puzzle, not just pieces Many elements of municipal finance are interconnected. Capital improvements may affect operating costs. Use of reserves for one project may yield an unexpected gap for another. Financial ptanning creates a means for identifying these relationships and considering the ripple effects of financial decisions. Increase continuity Financial management often rehes on informal policies - an understanding between staff and City Council on financial practices. In the short~term, this approach can be very effective. It is difficult to maintain over the long run as staff and Council members change. Written plans and policies provide a common understanding and basis for continuity. During 2001, the City of Elk River has undertaken a financial management planning process. Through a series of interactive workshops, the City Council examined the key financial aspects of municipal government. The workshop topics were (1) Trends and Projections, (2) Operating Projections, (3) Capital Improvements, and (4) Policies. The results of this planning process are summarized in this report. The results fall into four key financial strategies: Page 1 (Draft January 2002) Key Financial Strategies For Elk River Identify the Keys that will shape the future financial condition of the City. Describe Policies that institutionalize a decision~makmg framework and provide continuity. List Actions to be taken to address financial management issues identified in the planning process. Compile Data to serve as a reference point for future planning and decisions. Page 2 (Draft January 2002) Key Financial Strategies For Elk River KEYS The financial management planning process in ELk River has been called "Key Financial Strategies". Through this process, several issues areas emerged as key factors for the financial future of ELk River. Growth and Development No single factor will influence the future of ELk River more than growth. · Growth creates property valuation. Growth adds homes, businesses and institutions that produce the demand for municipal services and facilities. · The City builds streets, sanitary sewer, water and electric systems needed to serve new development. · Development creates capital charges and user fees used to support debt and capital investment for utility systems. A key financial strategy for the City will be forecasting future growth and understanding the factors that may cause changes in these projections. State Law controls many elements of city finance. The results of the 200i Legislative Session showed how legislative actions affect city finances and impair long-term planning. The lack of legislative stability increases the importance of planning. Although it is impossible to predict future statutory constraints, planning forces the City to consider how State Law influences decision-making. It also provides an opportunity to create contingency plans as a buffer to adverse legislative change. Legislative Action Property Tax Changes. Given the slowing of the State economy and the extent of past class rate compression, it is difficult to imagine further reductions in tax capacity. In 2001, we were reminded of the speed, magnitude and unpredictability of changes in the property tax system. Forecasts of future property values should use conservativ, e assumptions. Levy Limits. The current law imposes levy limits for only the next two years. The on again/off again nature of levy limits shows the risk of planning for a future without some form of limitation on the City's ability to levy property taxes. New Limitations. The Legislature has periodically considered new limitations on the ability of cities to levy taxes or incur debt. The most common form of new limitation is a reverse referendum petition. Residents could petition a city to conduct a referendum on certain matters. Non-Tax Revenues. The impacts of Legislative change are not limited to property taxes. In 2001, the Legislature reduced HACA, but increased Local Government Aid allocations to Elk River. It is impossible to predict the future of State Aid. The City should anticipate discussions Page 3 (Draft January 2002) Key Financial Strategies For Elk River on legislation that affect other traditional local revenues. Caps on building permits fees, connection charges and other development fees could significantly impact ELk River's financial capacity. Non-Tax Revenues A financial strength of the City is the diversity of its revenue base. This diversity has allowed the City to keep pace with services and facilities without overburdening the taxpayer. Landfill revenues. Revenues collected from the landfill surcharge have been an essential part of capital improvement finance. The long-term status of this revenue is one of the most important financial planning issues facing the City. When this revenue goes away, the City may face the need to delay capital improvements and/or to increase use of other revenues. Development fees. ELk River derives a variety of revenues directly from new development. A slowdown in the pace of development reduces revenues and presents financial consequences. Some development revenues (i.e. - building permit fees) help to support the General Fund. Connection charges are used to pay capital improvements and debt. The City should continue to forecast future growth and to monitor growth capacity. Special assessments. The ability to assess the costs of public improvements to benefited properties reduces the demands on property taxes, utility revenues and other sources. Tax increment. The City has been able to use tax increment financing to encourage development and finance infrastructure. The 2001 changes in the property tax system will reduce the amount of tax increment revenue received by the City. The capacity of tax increment financing to support current obligations and new initiatives is a key financial strategy. Capital investment was a key topic of the financial planning process. The ability to provide capital improvements in a timdy and affordable manner is an essential function for the City. The planning process illustrated several key financial strategies for capital investment: Capital Investment Monies from the landfill surcharge are needed to finance planned expansions of the Library and City Hall. Surcharge revenues should be earmarked for this purpose. The Government Buildings Reserve does not contain enough money to support all potential facility needs. In addition to the Library and City Hall projects, other potential facility investments include one or more fire stations, community center, second liquor store and ice arena Page 4 (Draft January 2002) Key Financial Strategies For Elk River improvements. Funding plans for each of these projects is needed to make most effective use of revenues and reserves. The City has created a Pavement Management Program to provide for the reconstruction of the municipal street system. Currently, the Program draws funding from the landfill surcharge, assessments to benefiting properties and general property taxes. Careful planning will be needed to minimize the impacts on property taxes. It is anticipated that utility reserves and annual revenues will be used to pay for the related costs of street reconstruction projects. Planning for sewer, water and electric system improvements must be coordinated with the Utilities Commission. The City needs to create a long-term plan for funding construction and maintenance of the storm sewer system. Some money has been set aside in the Storm Sewer Project Fund. The current situation does not provide an ongoing source of revenue or a means of borrowing. If a storm water utility is not acceptable, then the City has three alternatives: (1) establish one or more storm sewer improvement districts; (2) assess 20% or more of the improvement costs to benefited properties; or (3) reallocate other revenues and undertake on a pay-as-you-go basis. The City needs a long-term plan for funding the acquisition and development of the municipal park system. Monies from park dedication fees and the NSP/RDF Fund are available for this purpose. The City can borrow for this purpose upon obtaining voter approval to issue bonds or proceeding under M.S. Chapter 429 to issue improvement bonds. Future facility and infrastructure projects increase the potential for capital improvements to compete with the General Fund for limited property tax revenues. Careful planning will help the City meet capital and service needs while managing the tax impacts. General Fund The General Fund is the heart of City financial operations. The General Fund finances most non-utility public services. The General Fund produces the largest demand on property taxes. Planning for the General Fund has led to the following key financial strategies: Personnel and related costs are the largest source of General Fund expense. The addition of staff will be a key to future expenditures. It is anticipated that the City will add a public works employee or police officer every other year to maintain adequate service levels. In the near term, the City has budgeted for additional staffing in cable TV, information management and finance. Planning for these additions and their expense helps to manage the financial implications. Page 5 (Draft January 2002) Key Financial Strategies For Elk River Contracts for service provide an alternative approach. The planning process identified custodial and engineering services as areas for further study. Revenues are the primary constraint to long-term planning. Services cannot be provided without adequate revenues. Making effective use of nomtax revenues will buffer the City from legislative change and enhance the ability to meet service needs. Growth, legislative change, inflation and other factors are beyond control of the City. These uncertainties increase the need to maintain strong reserves in the General Fund. Page 6 (Draft January 2002) Key Financial Strategies For Elk River ACTIONS Financial planning is a process, not an event. The preparation of a financial management plan and the adoption of policies lay the foundation. The City builds on this foundation by undertaking additional financial planning actions set forth in the plan. This section hsts the financial planning Actions to be undertaken by the City. Some actions will be undertaken in 2002. Other actions have longer time frames. Progress on the Actions should be reviewed annually as part of the budgeting process. Completed actions can be removed. Actions in progress can be updated. New actions can be added. CIP Recommended Action Update and adopt a ~e-year capital improvements plan. Proposed Timetable Prepare in conjunction with annual operating budget beginning in 2002. Comments The City collects much of the data required for a CIP, but has not prepared a comprehensive plan. The CIP is a document that will evolve over time. The initial CIP should be a simple and functional document. The initial collection of project data and the organization of the Plan can be a time consuming task. In subsequent years, data collection becomes more routine and additional details can be added. The following steps can be taken to initiate the CIP process in 2002: · Determine the types of capital improvements and' the minimum cost to be included in the Plan. · Determine the information required for each project. · Determine if projects will be prioritized and, if so, the method to be used. · Create a project worksheet. · Establish a calendar for preparation and submission of project worksheets by Department Heads. Facilities Recommended Actioa Update plans for facilities improvements and funding, specifically addressing the use of Government Buildings Reserve. Proposed Timetable Prepare in conjunction with Capital Improvements Plan. Page 7 (Draft January 2002) Key Financial Strategies For Elk River Comments R ecomraended Action Proposed Timetable Comments One key financial strategy is that financial decisions are often interrelated. This strategy is especially true for facilities. The financing of building projects often compete for the same, limited funding sources. The expansion of the City Hall Campus sends ripples into other parts of City finance. The use of reserves will reduce monies available for future projects. Debt incurred for the project creates obligations for property taxes or other revenues. Establish storm sewer improvement district to finance activities under the Surface Water Management Plan. Establish district(s) in 2002 and consider initial tax levy in 2002 for taxes payable 2003. Through the financial planning process, the use of a storm sewer improvement district was identified as the best option for financing the construction and maintain of the storm sewer system. The steps to be undertaken in 2002 include: Storm Sewer · Contact County (or State) to determine if levy for district without bonds is subject to levy limitations. If levy limits apply, consider corrective actions in Legislature. · Determine if one or more districts will be established. · Obtain the tax capacity value of property with the district(s). · Determine projects funding needs in years 2003 through 2007. · Estimate other public and private revenues available to finance improvements. · Undertake process to establish district(s), pursuant to Minnesota Statutes, Sections 444.17 through 444.21. · Include levy (if any) in steps for taxes payable 2003. Page 8 Recommended Action Proposed Timetable Comments R ecomraended Action Proposed Timetable Comments Recommended Action Proposed Timetable Comments Create and adopt a funding plan for Pavement Rehabilitation Program. Finalize funding plan prior to initial pubhc hearings, currently scheduled for September 2002. The Pavement Rehabilitation Report proposed improvements and assessments. This information needs to be expanded into an overall funding plan to include issues raised in the financial planning process: · What is the projected 12/31/01 balance in the Street Improvement Reserve Fund? Will monies in the Reserve be needed for any other purposes? How much of the Landfill Surcharge will be committed to this Program? · Will the City issue bonds to pay for annual improvements and does the $5,000/unit proposed assessment exceed the 20% threshold needed to issue G.O. Bonds? Will the City establish a permanent improvement revolving fund for pavement rehabilitation? · How will the City finance rehabilitation of sanitary sewer lines? · Is the Utilities Commission prepared to finance water and electric system improvements related to pavement rehabilitation projects? Initiate process for compliance with GASB 34. Complete compliance actions by 12/31/03. It is likdy that planning for compliance with these new financial reporting requirements will be influenced by the demands of other financial management projects. One way to stay on track is to list the steps required for compliance and track progress for each step. Develop strategies for obtaining a rating upgrade. Undertake in 2002 in conjunction with debt issuance. The City's current bond rating includes positive' (Draft January 2002) Key Financial Strategies For Elk River Pavement Rehabilitation GASB 34 Bond Rating Page 9 Recommended Actio~ Proposed Timetable ComlTlents Recommended Actio~ Proposed Timetable Comments outlook. The outlook signals the potential for rating changes in the foreseeable future. Two key steps in seeking a rating upgrade will be: · Scheduling a visit to Elk River by a Moody's analyst. · Evaluating options for mitigating the impacts of the overlapping debt of the Elk River School District. Review and coordinate key financial strategies with Utilities Commission. 2002 and ongoing. Several aspects of financial management have direct implications for the Municipal Utilities. · Ongoing review and adjustment of water system capital charges. · Ongoing review and adjustment of water system user fees. · Fund balance amounts and policies for water and electric funds. · Issuance of debt and bond rating. · Plans for funding water and electric system improvements in conjunction with pavement rehabilitation projects. Prepare updated projections of property valuation and tax rates. First half of 2002. The 2001 Legislature made significant changes to the property tax system. Final tax capacity values and tax rates will be known soon. This information is needed to make revised projections of future tax rates. The questions to be answered include: · Will levy limits in 2003 and potentially beyond impair the ability of the City to meet current and future staffing needs? · What are the tax rate implications of tax levies to support for capital improvements? · Is the projected total tax rate (operations plus debt) acceptable? (Draft January 2002) Key Financial Strategies For Elk River Utilities Property Taxes Page 10 (Draft January 2002) Key Financial Strategies For Elk River Recommended Action Proposed Timetable Corrlii1erlts Update projections of revenues from Landfill Surcharge. 2002 and ongoing. The Landfill Surcharge is second most important sources of revenue (behind property taxes) for the City of Elk River. The amount and duration of this revenue source has significant implications for capital improvements and tax planning. Landfill Surcharge Page 11 (Draft January 2002) Key Financial Strategies For Elk River POLICIES Financial management pohcies are essential elements of a strong financial future. The pohcies 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 pohcies requires city officials to consider imphcations of their actions. Pohcies 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 planmng process. All financial management policies should be reviewed periodically to maintain relevance and effectiveness. 1.1 1.2 1.3 1.4 1.5 1.6 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. 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 or placed into reserves. One-time revenues will not be used to finance ongoing programs. 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. 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. Revenues Page 12 2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 (Draft January 2002) Key Financial Strategies For Elk River 2. Property Taxes 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 maintaining overall financial condition, providing an appropriate level of services, maintaining infrastructure, and affordability for residents. 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. 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 The City Council sets fees and user charges for municipal sanitary sewer utility 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 users 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. Municipal Electric Utility will make an annual contribution to the City. The cash contribution will be based on 3% of gross electric sales within the corporate limits of the City. The City Council will determine the portion of this contribution to be allocated to the Capital Outlay Reserve. Page 13 3.7 3.8 4.1 4.2 4.3 4.3.1 4.4 (Draft January 2002) Key Financial Strategies For Elk River 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. e Investments 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. 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. 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 ¢118A. The primary objectives, in priority order, shall be: · 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. · Liquidity: The investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements that might be reasonably anticipated. · Return on Investment: The investment portfolio shall be designed with the objective of attaining a market rate of return throughout Page 14 4.5 4.6 4.7 4.8 (Draft January 2002) Key Financial Strategies For Elk River budgetary and economic cycles. The investment strategy will take into account the constraints on risk and cash flow characteristics of the investment portfolio. 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. Authority to manage the investment program is derived from Minnesota Statutes ~llSA. Management responsibility for the investment program is hereby ddegated 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. 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. 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. Authorized and Suitable Investments: Investment instruments authorized and permitted by this policy are as follows: Repurchase Agreements consisting of collateral allowable in Section 118A.04. 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. Page 15 5.1 5.2 5.2.1 (Draft January 2002) Key Financial Strategies For Elk River · 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 hfe that: (i) will extend by more than four years as the result of an immediate and sustained paralld 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 paralld 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 paralld shift in the yidd curve of plus or minus 300 basis points. · 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. · State and Local Securities: State and local government obhgations as follows: (1) any security which is a general obhgation 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 obhgation 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 obhgation of the Minnesota Housing Finance Agency which is a moral obhgation of the State of Minnesota and is rated "A' or better by a national bond rating service. · Commercial paper issued by United States corporations or their Canadian subsidiaries that are rated in the highest quahty category by at least two nationally recognized rating agencies. · Time deposits that are fully insured by the Federal Deposit Insurance Corporation. · Bankers acceptances of United States banks. The following procedures are to be followed for all normal purchasing whether or not competitive bids are necessary. Purchasing 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. Purchase orders shall be issued for all purchase of $750 or more with the exception of: (1) consulting services, (2) contractual agreements, (3) Page 16 5.2.2 5.2.3 5.3 5.4 5.5 5.6 5.7 5.8 6.1 6.2 (Draft January 2002) Key Financial Strate~es For Elk River 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. 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. A copy of the purchase order shall be given to the Finance Department prior to the purchase. 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. Purchasing pohcies are designed to facilitate the effective delivery of municipal services while maintaining adequate financial controls. Department heads may make expenditures contained in the annual budget in an amount not in excess of $2,000 without City Administrator approval. 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 through 5.4 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 The City Administrator is responsible for the preparation and the administration of the annual operating budget based on input from the Department Heads. The City will use financial forecasts as a tool for planning. Projecting key financial factors into the future allows the City to better understand the consequences of today's decisions, to identify opportunities and to plan for change. It is recognized that the complexities of local government finance make financial forecasts an indication of trends and not a specific prediction of the future. Page 17 6.3 6.3.1 6.4 6.5 6.6 6.7 7.1 7.2 7.3 7.4 (Draft January 2002) Key Financial Strategies For Elk River These Policies call for financial forecasts related to Property Taxes (2.2) and Capital Investment (10.2). City Council and Staff will determine other financial forecasts needed to support decision-making. 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. 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. Administrative budget amendments must be requested in writing and approved by the City Administrator and Finance Director. The City will not use short-term borrowing, internal or external, to balance the budget for any fund. The City will not sell assets or use one-time accounting principle changes to balance the budget for any fund. 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. 7. Accounting, Auditing and Financial Reporting The City will establish and maintain the highest standard of accounting practices, in conformity with Generally Accepted Accounting Principles (GAAP). 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. 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 Page 18 (Draft January 2002) Key Financial Strategies For Elk River 7.5 8.1 8.2 8.3 8.4 9.1 9.2 9.3 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 Admimstrator. The City will comply with the requirements of GASB 34 by the end of fiscal year 2003. 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 provide 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. Subject to relevant legal constraints, reserves may be used for short-term internal borrowing. The balance in the General Fund is an essential part of the overall financial management of the City. The General Fund balance indicates the City's overall financial condition Fund balance trends point to financial management practices. The Fund balance is essential in financing operations. 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. The General Fund shall have an unreserved balance of not less than 40 percent of the next year's budgeted expenditures. This calculation is made at the end of each fiscal year. If the year-end fund balance exceeds this threshold, the City Council will consider the need to retain the excess and increase the minimum fund balance before allocating the monies to other uses. The unreserved balance in excess of the minimum in 9.2 shall be allocated to other purposes at the discretion of the City Council. The Council shall annually approve a resolution designating the use of the 8. Reserves General Fund Balance Page 19 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 (Draft January 2002) Key Financial Strategies For Elk River 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. 10. Capital Investment 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. 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. In most cases, private developers will be responsible for the construction of streets, sanitary sewer, watermain, and storm water collection systems 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 Staff will provide the City Council with the estimated cost of storm water improvements over the next five Page 20 (Draft January 2002) Key Financial Strategies For Elk River 10.9 10.9.1 10.9.2 11.1 11.2 11.3 11.4 11.5 fiscal years and options for financing the improvements. Financial projections for the storm water management system shall be updated annually. The City will establish and maintain a program for the maintenance of the municipal street system. 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. The City will prepare an on-going plan for the reconstruction of al/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 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 timdy 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 11. Debt Page 21 11.6 11.7 11.8 11.9 11.10 11.11 11.12 11.13 (Draft January 2002) Key Financial Strategies For Elk River 50% 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 chat $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 non-tax sources to support debt. Moody's Investors Service currently assigns an "AY' rating with a positive outlook to the general obligation debt of Elk River. The City shah 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 of an independent financial advisor to assist City Staff with the issuance and management of debt. City Staff, with the assistance of the financial advisor, 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 3% of the refunded principal and 125% of costs of issuance plus underwriter's discount. Page 22 (Draft January 2002) Key Financial Strate~es For Elk River Development of key financial strategies occurred through a series of City Council workshops. These workshops allowed the City Council to review and consider information about various aspects of city finances. The data presented in the workshops is summarized in this section. Planning begins with an examination of trends. The future builds off of what exists today. Trends show how you arrived at the current financial conditions. Trends illustrate forces of changes that will influence future directions. Population for City services and facilities. Population trends for Elk River show: DATA Trends Elk River's population increased 47% from 1990 to 1999. The City gained an average of 584 people per year. 1,200 1,000 80O 1 Populabon I 600 L 4OO 200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 F/gure I - Population Trends Building Perm/ts Population change deals with people. Building permit data points to physical changes in the community. Elk River reports building permit data for various types of development. Elk River grows by an average of 200 new homes (single and twin) each year. Page 23 (Draft January 2002) Key Financial Strategies For Elk River · 250 200 150 100 50 0 The average value of new homes (based on the building permit) increased by 40% from 1996 to 2000. This trend suggests that larger homes are being built. 1996 1997 1998 1999 2000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 mm Number ~e'--Average Va ue Figure 2 - Building Perm/ts [New Single Family Housing) Trends in permits data for new multi-family housing suggest some diversification of the housing stock. It is important to note that this data does not represent construction of new apartments. 1996 1997 1998 1999 2000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 m Number Value '--e-'Average Figure $ - Building Remits (New Mu/ti-Family Housing) Page 24 (Draft January 2002) Key Financial Strategies For Elk River Building permits for non-residential development represent commercial, industrial and institutional growth. Elk River has experience a steady growth in non-residential uses. + 1996 1997 1998 1999 2000 800,000 700,000 600,000 500,000 mm Number 400,000 -.4--A~rage Va ue 300,000 200,000 100,000 0 Figure 4- Building Permits (Non-Residential) Property Valuat/on Property valuation provides another measure of physical development. Property values are reported as of January 2 of year X for property taxes payable in the following year. From 1991 to 2000, Estimated Market Value (EMV) increased by 145%. During the same period, the Tax Capacity (NTC) value of property increased by 81%. 1,000,000,000 900,000,000 - 800,000,000 700,000,000 600,000,000 500,000,000 400,000,000 300,000,000 200,000,000 100,000,000 0 % % % % % 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 R~ure $- Property Valuation Page 25 (Draft January 2002) Key Financial Strategies For Elk River Legislative policies account for the difference in growth rates between Estimated Market Value and Tax Capacity. The county assessor sets the EMV for every parcd of property in the City. The State Legislature sets the percentage factors (class rates) that convert EMV to Tax Capacity. The chart bellows shows adjusted net tax capacity (after deducting values in tax increment financing districts) as a percent of total estimated market value. This ratio provides a measure of how growth converts to tax base. · The tax base created by new development eroded steadily over time. · This trend is the result of legislative changes t© reduce class rates. · Significant changes to class rates in 2001 continued this trend. This trend is a key financial strategy for the City. The ability to capture tax base and new revenues from growth is controlled by the Legislature. Future legislative actions cannot be predicted. 2.50% 2,25% 2.00% 1,75% 1.50% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Figure 6- Market Value to Tax £apadty Ratio Page 26 (Draft January 2002) Key Financial Strategies For Elk River General Fund Many basic municipal Fund also places the · General Fund expenditures have increased over time, following the growth of Elk River. 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 - -~p~lture and recreation ic works neral ~overnment ic s~fe~ 1,000,000 Figure 7 - General Fund Expenditure Trends · Elk River provides a basic mix of services, with almost three-quarters of spending on core services of public safety and public works. · This pattern remained consistent as spending increased. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% [] Culture and recreal~on · Public works · General government o Pul:lic safety Figure 8 - General Fund Expenditure Trends Page 27 (Draft January 2002) Key Financial Strategies For Elk River Another way of looking at the cost of city services is type of expenditure. · Services are driven by people costs. · Over 70% of General Fund spending goes for wages, benefits and other personnel expense. · This trend has remained consistent over time. 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,OO0 0 r~ Contractual services & c~arges · Su~ies [] Persona services Fi#ute 9 - General Fund £xpend/tures 100% 90% 80% 70% 60% 5O% 40% 30% 20% 10% 0% o Contractual senates & charges · Olfier ser~4ces & charges · Supplies r~ Personal services Figure 10- Genera/Fund 5xpenditures The role of personnel expense is another key financial strategy. · Wage and benefit expense will increase regardless of growth. · Service capacity expands to meet the demands of growth by adding staff. Expenditures will "spike" up when new personnel are added. Page 28 (Draft January 2002) Key Financial Strategics For Elk River General Fund revenues form the other part of the finance equation. The review of revenue trends shows several important issues. The revenue base has expanded as the City has grown. · Revenue from Intergovernmental (non-local) sources has shrank as share of total revenues. · User fees and service charges are the only sources of non-property tax revenues available to the City. · Property taxes have filled the gap in Intergovernmental revenues. 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 1994 1995 1996 1997 1998 1999 · In~rgovernrn~n~l · Oh~mr n Fines · Charge for se~ce · licenses/permit [] Property taxes Figure 11 - General Fun# Revenues 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% I · Intergovernmental · Other ID Fines · Charge for sen4ce · Ucenses/permit {3 Property I~xes 1994 1995 1996 1997 1998 1999 Figure/2 - Ceneral Fun# Revenues Page 29 (Draft January 2002) Key Financial Strategies For Elk River The balance in the General Fund is an essential asset of the City. The Fund balance serves several purposes: · Cash Flow. Revenues are not collected evenly over the course of the year. For example, revenues from property taxes and many State aids are received in July and December. · Contingency. Not all expenditures can be planned. · Financial Management. Reserves can be used to meet unusual needs and prevent spikes in tax rates. · Rating. General Fund balance is a key factor in the bond rating analysis. The City has demonstrated the commitment to build and maintain the necessary balance in the General Fund. 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 1994 1995 1996 1997 1998 1999 [l110¢1 F.~enditures r--m General Fund Balance --~--Balance as % of F-x~nditures I h'~ure 13 - General Fund Balance 50.00% 45.00% 40.00% 35,00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Page 30 (Draft January 2002) Key Financial Strategies For Elk River Special Revenue Funds Special Revenue funds account for revenue sources earmarked for specific purposes. These funds are important funding sources for the City. The City has the following special revenue funds: · Library maintenance · Ice arena Senior citizens special account · Park dedication · Landfill · Landfill construction debris · Revolving loan · DTED grant/loan · Development fund · Capital outlay reserve · Insurance reserve · Government buildings reserve · Street improvement Drug forfeiture reserve · Severance pay reserve · NSP/RDF reserve · EDA An examination of revenues for the Special Revenue funds shows several trends: · Property taxes are a small source of funds. · The Landfill Surcharge is a key source of revenue. Revenues vary from year to year, but show an overall growth trend. 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 -- 1,000,000 -- 500,000 0 1995 1996 1997 1998 1999 n Ot~er · Park dedicalJon · landfill surcharge · Charges [] Intergovernmental[ [m Property tax Figure 14 - Special Re~,enue Fund Revenues Page 31 (Dra/t January 2002) Key Financial Strategies For Elk River Expenditure trends show how monies in these funds are used: Special Revenue funds play a key role in financing capital improvement projects. · A separate fund for the tracking of revenues and expenditures of specific activities such as the Ice Arena. · The special revenue funds enable the City to accumulate and maintain reserves for specific needs such as library improvements. 2,500,000 [ [] Ca[~ml ou~ay · O~er current · EDA · Revol~qng loan [] Landfill · Ice arena 2,000,000 1,500,000 ,ooo,ooo / 500,000 0 , ~995 1996 1997 ~998 1999 Figure I$- Spec/al Revenue Expenditures Page 32 (Draft January 2002) Key Financial Strategies For Elk River Entergrise Funds Enterprise funds account for activities of municipal utilities. Utilities are intended to be financially self-sufficient. These funds play an important role in long-term financial planning. The City operates the following enterprises: garbage collection, municipal hquor, sewage disposal, water, and electric. Electric and water services are operated by the Utilities Commission. Revenue and expenditure trends in the Garbage Collection Fund show a solid and sustaining financial position. 1995 1996 1997 1998 1999 Revenues 694,863 734,403 683,785 718,216 754,804 Expenses 691.892 733.555 678,739 717,400 748.683 Operating Income 2,971 848 5,046 816 6,121 Adjustments 13,973 4,014 10,997 27,447 112,867 Noncapital activities 0 0 0 3,020 0 Capital acitivities 0 0 0 0 0 Interest Z 132 Z 300 Z 938 3:940 5~ 300 Net change in cash 19,076 7,162 18,981 35,223 124,288 Year end cash 36,378 43,540 62,521 98,662 222,950 Figure 16- Garbage Collection Fund The trend analysis shows that the City runs a profitable municipal liquor store. In addition to annual net income, the Liquor Fund has grown a strong fund balance. Operating income from the Liquor Fund is used to support other services and capital projects. 1995 1996 1997 1998 1999 Revenues 563,178 629,525 675,454 691,512 826,546 Expenses 275.855 292.064 352.551 455,045 431,835 Operating Income 287,323 337,461 322,903 236,467 394,711 Adjustments 26,208 (134,155) 7,375 117,348 64,556 Noncapital activities (183,450) (163,450) (153,450) (131,651) (141,250) Capital acitivities (403,371) (51,066) (362,997) (166,980) (151,623) Interest 36.612 30.344 33.615 24.§;~5 20.699 Net change in cash (236,678) 19,134 (152,554) 79,809 187,093 Year end cash 737,324 756,458 603,904 691,795 878,888 Figure 17 - Liquor Fund Page 33 (Draft January 2002) Key Financial Strategies For Elk River With positive operating income, trends in the Sewer Fund do not suggest the immediate need for rate adjustments. The Sewer Fund not only receives revenue from user charges, but also collects monies for connection and other capital charges. The balance in the Sewer Fund is a key resource for future capital investment. 1995 1996 1997 1998 1999 Revenues 554,537 634,536 677,804 730,294 797,101 Expenses 542,355 543,052 573,531 702,774 . 692,018 Operating Income 12,182 91,484 104,273 27,520 105,083 Adjustments 779,186 1,177,253 53,338 702,368 673,541 Noncapital activities (122,254) (6,000) (6,000) (8,000) (8,000 Capital acitivities (235,404) (937,778) (660,315) (387,331) (478,273 Interest 108,656 106,506 105,069 90,697 ... 85,691 Net change in cash 542,366 431,465 (403,635) 425,254 378,042 Year end cash 1,779,346 2,211,240 1,807,605 2,256,923 2,634,965 Figure 18 - Sewer Fund Trends in the Water Fund mirror those for Sewer - good financial condition, no immediate rate adjustments and assets for future investment. 1995 1996 1997 1998 1999 Revenues 342,671 388,837 525,646 610,491 627,449 Expert ses 228.460 320.581 381. ~ 15 403.996 489.272 Operating Income 114,211 68,256 144,331 206,495 138,177 Adjustments 417,160 460,354 152,233 948,580 648,604 Noncapital activities (25,349) 368,305 (108,382) (124,210) (604,347) Capital acitivities (29,846) (323,554) (260,066) 231,980 (1,431,236) Interest 7,364 68,275 66,476 76,454 .. 98,406 Net change in cash 483,540 641,636 (5,408) 1,339,299 (1,150,396) Year end cash 857,944 1,614,219 1,608,811 2,948,110 1,797,714 Figure 19 - Water Fund Page 34 (Draft January 2002) Key Financial Strategies For Elk River As with the previous utihties, the City operates a financially sound electric system. Net operating income is consistently returned to the system through capital investment. The year end cash position is less in proportion to annual operations than in Water and Sewer. Additional reserves may be needed if larger capital projects are anticipated for system expansion and improvement. Additional reserves would also help manage future rate increases and the potential for competition for customer base. 1995 1996 1997 1998 1999 Revenues 6,144,733 6,642,320 7,281,411 8,060,459 8,596,004 Expert ses 5,546,960 6,045,909 6,182,456 6,887,665 7,174,805 Op~ing Income 597,773 596,411 1,098,955 1,172,794 1,421,199 Ad)ustments 333,734 561,533 1,024,885 719,540 1,097,333 Noncapital activities (99,177) (71,617) (81,227) (353,063) (366,909) Capital acitivities (866,573) (1,292,234) (1,720,790) (1,303,824) (1,709,602) Interest 50,564 47, 361 59.156 52, 317 72,155 Net change in cash 16,321 (158,546) 380,979 287,764 514,176 Year end cash 290,631 132,085 513,064 800,828 1,315,004 h'gure 20 - Electric Fund Page 35 (Draft January 2002) Key Financial Strategies For Elk River Debt Debt provides the capacity to finance needed infrastructure, facilities and equipment. Debt creates long-term commitments for city revenues. Debt that requires property tax support competes with services for limited tax dollars. Each debt tool is governed by a separate set of statutes. The relevant statutes describe the limitation on the debt and process for issuance. The statutory debt limit is 2% of taxable market value. The amount of the debt limit changes over time as valuation increases, existing debt is retired and new debt is added. The debt limit does not apply to many types of debt. In general, bonds subject to the debt limit include voter approved bonds, equipment certificates/capital notes, and lease financing over $1,000,000. State Law excludes most other forms of debt from the debt limit. The chart below shows a snapshot of outstanding general obligation debt. The key point illustrated by this chart is the source of support for the City's debt. The vast majority of the debt is self-supporting, paid with special assessments and utility revenues. 2,125,000 2,476,500 8,860, 0,580,000 Tax increment ·Improvement · Revenue [] Lease R'gure 21 - Outstanding G.O. Debt (12/$1100) Another measure of debt is the speed of repayment. The figure on the next page shows an excellent plan to retire outstanding G.O. bonds. · More than one-half of the debt is retired within five years. · After ten years, less than 15% of total principal remains unpaid. Page 36 (Draft January 2002) Key Financial Strategies For Elk River 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 I~ase Revenue F/gure 22 - Out~tand/ng G.O. Debt Debt is also measured in the demand on financial resources. The chart below contains the annual debt service payments for existing debt. Debt is largely supported by utility revenues and special assessments. · A small portion of the debt is supported by tax increments. · Annual payments drop creating capacity to support future projects. 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 · Lease o Revenue · Improvement F/gure 23 - Annual Debt Sen,ice The bond rating provides a benchmark for the creditworthiness of the City. Moody's Investors Service currently assigns an "A3" rating with a positive outlook to the general obligation debt of the City. The positive outlook signals Page 37 (Draft January 2002) Key Financial Strategies For Elk River the rating agency's view that the rating may be upgraded in the foreseeable future. The rating was last upgraded in 1999. Moody's cites the following factors in its analysis of Elk River: · Continued growth ~ Expanding tax base, growth in both housing and commercial~industr~al, support of commuter rail. · Local economics ~ Wealth and property values above average, low unemployment. · Improved City financial position ~ Favorable reserves in General Fund, conservative budgeting practices, controlling increases in tax rates. High debt burden from growth * City and overall debt above median. · Good debt management ~ Rapid payoff, largely self~supporting. · Overlapping debt is important ~ School District downgraded in 2000 due to a combination of District finances and debt burden. Page 38 . (Draft January 2002) Key Financial Strategies For Elk River ?ropetty Taxes Operations (General Fund plus HRA/EDA) account for over 86% of the demand on property taxes. At this point, relatively little property tax revenue is used for capital expenditures and debt. Development fund 3% OUter HRA/EDA/- Debt_~ \ / ~ General fund 81% Figure 24- Breakdown of 2001 Tax Levy Up to taxes payable 2001, City taxes placed the least influence on overall property taxes. Legislative changes in 2001 will alter this relationship into the future. The chart below shows the rates for taxes levied on tax capacity values. A small portion of taxes are levied on market value. 140.00% 120.00% 100.00% · School 80.00% [] Count ·NRA · EDA 60'00°1° [] otv 40,00% 20.00% 0,00% ' 1996 1997 1998 1999 2000 2001 Figure 25- Total Tax Rate Page 39 (Draft January 2002) Key Financial Strategies For Elk River The frequency of legislative changes and the difficulty in accurately projecting development trends are barriers to long-term planning. Nonetheless, it is important attempt to forecast future demands on property taxes. The first step in making tax projections is to forecast General Fund expenditures. This spending accounts for the largest demand on property taxes. The chart below contrasts two scenarios. The "Current Trend" scenario extends the actual average increase (8.9% per year) experienced by the City from 1994 to 1999. The "Best Guess" scenario applies more current factors to future spending increases: Personal services - 6.4% · Supplies - 4.6% · Other services/charges - 4.2% · Contractual services - 2.3% Projections 16,000,000- Il - 14,000,000- 12,000,000- 10,000,000- 8,000,000- 6,000,000- 4,000,000- 2,000,000- 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 J1:3 Current trend j · Best 9uess I R'~ure 26- Projeaed General Fund Expend/lures The second step in forecasting the future requires projections of property valuation. The graph on the next page compares four rates of growth based on changes in estimated market value and the EMV/Tax Capacity ratio applicable in 2001: · 10-year average · 9% · 7% · Growth with slow down after 2005 (3% inflation with 200 single/20 multi/10 Commercial/Industrial to 2005 and 100 single/10 multi/5 CI after) Page 40 (Draft January 2002) Key Financial Strategies For Elk River 40,000,000- 35,000,000- 30,000,000- 25,000,000- [] lO-year avg 20,000,000- · 9% · 7% 15,000,000- [] Growth, slowed 10,000,000- 5,000,000- 0- 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Figure 27- Projeded Tax Capac/ty The final step leads to a projected City Tax Rate. The tax rate projections in the following graph assume that property taxes are used to meet future General Fund expenditure requirements after accounting for all other revenues. These projections assume that revenue from fines will increase by 3%/year and all other revenues increase at a 1% annual rate. The objective of this exercise is not to create a meaningful target for a tax rate, but to illustrate the challenges the City faces in managing the tax rate into the future. 50.00%' 45.00%' 40.00%' 35.00%' 30.00%' 25.00%' 20.00% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 [] 10-year avg · 9% · 7% [] Growth, slowed 2001 - 26.3% Figure 28 - Projeded Ceneral Fund Tax Rate Page 41 (Draft ]anuary 2002) Key Financial Strategies For Elk River Workshop #3 in the Key Financial Strategies planning process examined the financial implications of future capital improvements for the City of Elk River. The following pages contain project summaries for currently identified capital improvements. The purpose of this workshop was to: · Review and discuss proposed CIP projects. · Consider funding options for each project. · Identify funding gaps and other financial issues. Finance Tools The evaluation of capital improvements projects combines need and financial feasibility. This summary does not attempt to assemble an overall finance plan for capital improvements. This step will follow in the planning process. It is important, however, to have a brief discussion of the finance tools available to the City of Elk River for the financing of capital improvements. Revenues Property taxes. The City can levy property taxes to support almost every form of capital improvement. Capital improvements will compete with services for limited tax dollars. If levy limits are reinstated, it may be necessary to incur debt to leW outside of limitations for capital projects. Landfill surcharge. Revenues from the operation of the landfill provide a significant financial asset to the City. Landfill revenues are currently paid into the Library Maintenance, Street Improvement and Government Buildings Reserve funds. The amount and duration of these revenues play a significant role in capital improvements planning. User fees. The City collects user fees for a variety of purposes. The primary sources of user revenues include municipal utilities, ice arena, and municipal liquor operations. Assessments. Special assessments may be levied against benefited properties to pay for all or a portion of the cost of public improvements. The infrastructure needed to open land for development is generally 100% financed by assessments. Assessments will play an important role in the rehabilitation of streets and utilities. The rehabilitation of existing improvements cannot be fully supported by assessments. Other sources of revenue will be needed for these projects. Capital Charges. The City collects capital (connection) charges from the growth of the utility system. This money is saved for future improvements. Fund Balances The City saves money for capital improvements in a variety of special revenue, capital project and enterprise funds. These funds create important flexibility in Capital Improvements Page 42 (Draft January 2002) Key Financial Strategies For Elk River the capital improvements planning process. Cash reserves can be used to eliminate or reduce debt. Reserves can be drawn upon to supplement other revenues to support debt. The use of fund balances must be carefully considered in the planning process. Once spent, these monies cannot be recaptured for other purposes. Debt It is unlikely that the City will meet its capital improvement needs without debt. Debt Limit. State Law limits municipal indebtedness to 2% of the total taxable market value of property in the City. This limit is misleading because many forms of debt are excluded from the debt limit calculation. For Elk River, the debt subject to the debt limit includes general obligation bonds approved by voters, general obligation notes for equipment, and lease purchase financing over $1,000,000. Levy_ Limits. It is likely that some form of levy limits will exist in the future. While the State has no consistent or long-term policy about levy limits, some form of limitation has existed over most of the past twenty years. The treatment of debt under a system of limited levies is important. All previous forms of levy limits have allowed the levy of taxes for debt to be outside of levy limits. Under levy limits, debt carries broader implications. Borrowing may be needed to free up fund balances or revenues for other purposes. Buildings. While the State Legislature gives cities broad powers to borrow money for public improvements, there are limited debt options for buildings. For the purposes of the capital improvement projects discussed in this document, the City may finance buildings with voter-approved general obligation bonds or lease revenue bonds. The nature of the bonds has property tax implications. The tax leW for voter-approved is spread on the basis of market value. The levy for lease revenue bonds is based on tax capacity, similar to all other City levies. Page 43 (Draft January 2009) Key Financial Strategies For Elk River Project Summaries Library Expansion Expand existing library facility. Adjacent residential parcels will be acquired to facilitate the expansion. (One parcel has already been acquired.) Timing Estimated Cost Funding The nature of the expansion has not yet been determined. Acquire parcels as available. Design and construct expansion in next five to ten years. $1,100,000 including land. Cost will vary based on nature and timing of actual improvements. Library Maintenance Fund. Fund financed primarily by property tax levy and landfill surcharge. Increased funding from landfill surcharge in 2001. Property taxes are sufficient to finance current operating expense. Landfill revenues should be accumulated and earmarked to pay for improvements. Library building financed by 1994D TIF Bonds. Bonds mature 2/1/07 and callable 2/1/04. $120,146 of fund balance reserved for existing debt. If fund balance is inadequate, internal borrowing or lease revenue bonds can be used to leverage future revenues. Ubmry Maintenance Fund F~=¥6rlue Expenditures Net transfers Surplus/Defidt Fund Balance Property tax Landfill surcharge Interest O~her Current Capital BE~gin 1997 1998 1999 2000 45,141 46,003 53,534 56,965 37,198 42,580 40,922 57,266 5,701 4,845 5,142 13,114 9,352 8,469 9,881 8,717 97,392 101,897 109,479 136,064 35,199 28,206 39,276 46,407 100,262 39,854 5,381 3,204 135,461 68,060 44,657 49,611 (11,000) (11,000) (11,000) (11,000) (49,069) 22,837 53,822 75,453 143,044 95,261 118,098 171,920 93,975 118,098 171,920 247,373 Page 44 (Draft January 2002) Key Financial Strategies For Elk River City Hall Expansion Expand existing City Hall and Police facilities. Programming of space began in 2001. This planning will determine the scope and cost of the expansion. Timing Final tirmng to be determined, but construction anticipated in 2002 or 2003. Estimated Cost $2,500,000 to $3,500,000 (including FFE). Cost will vary based on nature and riming of actual improvements. Funding Government Buildings Reserve and/or lease revenue bonds. This fund receives a portion of the landfill surcharge revenue. A portion of the project costs can be paid with reserves. The amount of the cash contribution will depend on revenues for the Government Buildings Reserve and the use of the Reserve for other projects. Current fund balance and future revenues should be earmarked to pay for improvements. Current City Hall financed with lease revenue bonds. 1997 Refunding Bonds mature 2/1/11 and are callable 2/1/06. $825,000 of balance in Government Buildings Reserve is reserved for existing building debt. The use of debt for the City Hall expansion should account for this existing obligation. Internal borrowing or lease revenue bonds can be used to finance costs not supported by reserves. Fire Station(s) Timing The continued growth of the City will create the need for one or more new fire stations. Land has been acquired for a facility in western part of the City. A site for a "north" station needs to be acquired (approximately 1.5 acres). The fire stations will be built as needed to provide service. A specific timetable has not been established. A north site should be acquired within the next five years. Current growth trends suggest that the West Station will be built within three years and the North Station will be built within ten to twenty years. Estimated Cost Funding To be determined. The cost will be influenced by site costs, design of the facility, amount of furniture and equipment, and timing of actual improvements. Recent facilities in other cities have ranged from $1,500,000 to $3,500,000. Government Buildings Reserve and/or bonds. Monies in the Government Buildings Reserve fund can be used to acquire land for a fire station. Page 45 (Draft January 2002) Key Financial Strategies For Elk River F~.qonue Expenditures Net transfers Surplus/Deficit Fund Balance The construction of the fire station(s) will require the issuance of bonds. The type of bond becomes a policy decision for the City. The City can seek voter approval to issue general obligation bonds. The fire stations can be financed without an election using lease revenue bonds. Regardless of the type of bond, the debt will be supported with property taxes. Property tax Landfill surcharge Int a-est Other Governme~Buil~ngsRese~e 1997 1998 1999 2000 0 0 0 0 361,990 416,804 400,226 563,682 20,984 31,422 37,733 91,242 1,800 1,800 1,800 1,800 384,774 450,026 439,759 656,724 Current Capital 0 0 0 0 0 0 0 0 0 0 0 0 (75,000) (185,000) (75,000) 0 309,774 265,026 364,759 656,724 Begin End 186,649 500,669 765,695 1,130,454 496,423 765,695 1,130,454 1,787,178 Page 46 (Draft January 2002) Key Financial Strategies For Elk River Liquor Store Build second municipal liquor store. A site for this facihty has been acquired. The size and timing of the facility will be influenced by legislative action to allow beer and wine sales at grocery stores and the results of a market analysis. Timing Final timing to be determined, but construction anticipated in next five years. A market analysis will be undertaken in 2002. Estimated Cost Funding To be determined. The cost will be influenced by design of the facility, amount of equipment and initial stock, and timing of actual improvements. Liquor Fund and bonds. Depending on timing, costs and operations, the liquor Fund could have enough reserves to finance the project with cash. The City can issue liquor revenue bonds to finance all or a part of the project costs. Any new debt should account for the outstanding debt (1997 Bonds) supported by Liquor Fund revenues. The 1997 Bonds will mature on 2/1/07 and can be called at any time. $920,000 in principal remains to be paid. Annual debt service is approximately $196,000. Municipal Liquor Fund ReveRu6s Expenses Operating Income Adjustments Noncapital activities Capital acitivities Interest Net change in cash Year end cash 1997 1998 1999 2000 675,454 691,512 826,546 941,722 352,551 455,045 431,835 451,197 322,903 236,467 394,711 490,525 7,375 (153,450 (362,997 33,615 117,348 64,556 49,508 (131,651) (141,250) 78,600 (166,980) (151,623) (156,025) 24,625 20,699 75,439 (152,554 79,809 187,093 538,047 603,904 691,795 878,888 1,416,935 Page 47 (Draft January 2002) Key Financial Strategies For Elk River YMCA/ Community Center The City and the YMCA are considering the construction of facility that would contain fitness, recreation and meeting uses. No programming or design for this facility has been undertaken. Timing A timetable for the project has not been determined. Financial feasibility for the City and the YMCA will be a driving force. Estimated Cost Initial planning suggests that the City will contribute one- third of the cost. The costs will become more clearly defined as project planning continues. Funding Cash and bonds. No specific funds are currently earmarked for community center facilities. The use of cash for the YMCA will create financial implications for other facility projects. Debt for this facility could come from voter-approved general obligation bonds or lease revenue bonds. Revenue to support the debt could come from property taxes, landfill surcharge and liquor fund. It is likely that the allocation of revenues to the YMCA/community center will impact other projects. Page 48 (Draft January 2002) Key Financial Strategies For Elk River Ice Arena The Ice Arena will require improvements, although the specific needs have not been determined. Replacement of roof and floor are likely during this period. Continued growth may als0 create pressure for cxpansion of the Arena. Timing Building improvements will be needed within the next five years. Estimated Cost $500,000 - preliminary estimate. Additional planning needed to estimate. create more accurate Funding Funding for the improvements must be identified. The Ice Arena operation does not produce net revenues or accumulate a fund balance. Funding for facilities improvements will come from user charges or general City revenues. As the City moves to comply with GASB 34, the Ice Arena fund will change from special revenue to enterprise. Expenditures Net transfers Surplus/Deficit Fund Balance Ice Arena 1997 1998 1999 2000 Property tax 0 0 0 0 Landfill surcharge 0 0 0 0 Interest 1,490 0 1,543 940 Other 392,849 439,120 499,234 567,035 394,339 439,120 500,777 567,975 Current 229,707 299,531 319,629 397,288 Capital 10,847 120,447 116,965 0 Begin End 240,554 419,978 436,594 397,288 (204,588) 35,809 (64,183) (170,687) (50,803) 54,951 0 0 (4,148) (54,951) 0 0 (54,951) 0 0 0 Page 49 (Draft January 2002) Key Financial Strategies For Elk River Equipment Acquisition Replacement and Capital equipment is an essential element of municipal services. The City creates and maintains 10-year projections of equipment acquisition and replacement needs. Timing On-going Estimated Cost Funding $500,000 to $600,000 per year. The City does not currently have a long-term funding plan for capital equipment. In the past, purchases have been financed with a combination of operating revenues, reserves and debt. While the City has the ability to borrow money for all types of capital equipment, a cash-based funding plan avoids the additional finance and interest expense. Equipment is currently financed through the General Fund and the Capital Outlay Reserve. The General Fund budgets approximately $320,000 for equipment purchases. The Capital Outlay Reserve receives $120,000 in transfer of funds from municipal utilities. Additional annual revenues will be needed in 2002 and beyond to provide for a sustainable funding plan. Property taxes and enterprise funds are the most likely sources. Financing all costs through the Capital Outlay Reserve would improve the ability for long-term planning. Capital Outlay Resewe R6,verlue 1997 1998 1999 2000 Property tax 299 0 0 0 Landfill surcharge 0 0 0 0 Interest 26,400 25,294 15,285 20,137 C~her 207,340 70,495 210,973 145,699 234,039 95,789 226,258 165,836 Expenditures Current 46,113 27,097 29,663 103,360 Capital 222,705 148,767 403,371 1187621 268,818 175,864 433,034 221,981 Ne~ transfers 105,182 66,976 18,439 103,623 Surplus/Defidt Fund Balance 70,403 (13,099) (188,337) 47,478 Begin 437,139 514,339 501,240 312,903 End 507,542 501,240 312,903 360,381 Page 50 (Draft January 2002) Key Financial Strategies For Elk River Pavement Management Program This program represents the costs of rebuilding the municipal street system. The Program finances reconstruction projects. It does not finance sealcoating or new construction. Timing On-going. Estimated Cost Funding Approximately $500,000 per year. Street Improvement Fund - The City has established a fund for street improvement projects. This Fund provides a funding vehicle, but the current balance is not sufficient for long-term sustainability. The City may wish to establish a street improvement permanent improvement revolving fund under M.S. 429.091. This approach gives greater flexibility in the use of assessment revenue and creates bonding authority. Assessments - Special assessments are a key to financing pavement management activities. The amount assessed determines the funding needed from other sources. The timing and flow of assessment revenues influences other financial decisions. Current planning assesses 33% of the improvement costs with a ten-year repayment period. Other Revenues - Unless all of the costs are assessed, some other sources of revenue will be needed. Currently, the Street Improvement Fund receives a portion of the Landfill surcharge. This revenue plus interest on the investment of the Fund balance should be sufficient to support the Program for the foreseeable future. If the landfill monies are not available, then other revenues will be needed. State aid for road maintenance and construction can only be used for streets that are included in the state aid street system. Other non-tax revenues are currently earmarked for various public facility projects. The only remaining revenue source is the property tax. Debt - The City does not have sufficient reserves to internally finance this program. The City should finance improvement costs through the issuance of bonds and use cash reserves to manage the cash flow. The City may issue traditional G.O. improvement bonds or G.O. bonds of a permanent improvement revolving fund. Both options require (1) not less than 20% of the costs are assessed and (2) the City must conduct the improvement hearing pursuant to Minnesota Statutes, Chapter 429. Page 51 (Draft January 2002) Key Financial Strategies For Elk River Public Works Facilities Timing Two projects are planned for City public work facilities. The existing building will be remodeled. Additional storage will be built. The remodeling started in 2001. The storage facilities are planned for 2003. Estimated Cost $125,000 - remodeling $225,000. storage Funding Street Improvement Reserve Pav~mant Managa'~mt Pm~am 2001 2002 2003 2004 2005 ~ 20O7 20O8 2009 Bond p~meeds 500,000 515,000 530,450 546,364 562.754 579,637 597,026 614,937 ~mts 0 0 0 0 0 0 0 0 M~ ~n~ill ~ 229,000 229,000 229.000 229,000 229,000 229,000 229,000 229,000 lnt~t in~e 4% 44,455 48,004 55,013 66,234 77,819 89,860 102,373 115,378 Total I::~wenue 229,000 773,455 792,004 Improvema3! costs 500,000 515,000 Debt set-ce 0 0 OIh~r 125~000 200,000 Total Expeqse 125,000 700,000 515,000 Be~nningbalance 1,059,378 1,163,378 1,236,833 Ending balance 1,163,378 1,236,833 1,513,837 814,463 841.597 869,573 898,497 928,399 730,315 530,450 546,364 562,754 579,637 597,026 614,937 0 0 0 0 0 0 530,450 546,364 562,754 579,637 597,026 614.937 1,513,837 1,797,851 2,093,085 2,399,903 2,718,763 3,050,136 1,797,851 2,093,085 2,399,903 2,718,763 3,050,136 3,165,514 Utility System Rehabilitation Municipal utilities will be replaced or improved in conjunction with street reconstruction projects. Timing Tied to Pavement Management Program Estimated Cost To be determined Funding Reserves in enterprise funds and/or operating revenues. These costs can be financed separately using G.O. utility revenue bonds or included with improvement bonds issued to finance street reconstruction. Page 52 (Draft January 2002) Key Financial Strategies For Elk River Sanitary Sewer System The municipal sanitary sewer system consists of three basic elements: lateral collection, trunk collection and treatment. The lateral collection system is built as the City grows. These costs are fully assessed to benefited properties. Capacity in the trunk collection system allows the sewer system to expand. The City is responsible for providing adequate facilities to treat wastewater collected by the sewer system. Beyond a digester core ($200,000), no major capital investments in the sanitary sewer system have been identified over the next five years. Timing NA Estimated Cost NA Funding Capital improvements will be paid from net income and reserves in the Sewage Disposal Fund. Income for the Fund comes from user fees and connection charges. Sewage Di~l Fund R6,veflLleS Expenses Operating Income 1997 1998 1999 2000 677,804 730,294 797,101 877,655 573,531 702,774 692,018 756,869 104,273 27,520 105,083 120,786 Adjustments Noncapital activities Capital adtivities Interest 53,338 702,368 673,541 952,222 (6,000) (8,000) (8,000) (20,336) (660,315) (387,331) (478,273) (449,628) 105,069 90,697 85,691 190,115 Net change in cash (403,635) 425,254 378,042 793,159 Year end cash 1,807,605 2,256,923 2,634,965 3,428,124 Page 53 (Draft January 2002) Key Financial Strategies For Elk River Water System The municipal water system consists of three basic elements: lateral distribution, trunk distribution, storage and treatment. The lateral collection system is built as the City grows. These costs are fully assessed to benefited properties. Capacity in the trunk collection system allows the water system to expand. The City is responsible for providing adequate facilities to treat and store water needed to serve the community. Planning is underway for a new water tower and well. No other major capital investments in the water system have been identified over the next five years Timing Water tower and well - 2001 Estimated Cost $3,600,000 Funding Capital improvements will be paid from net income and reserves in the Water Fund. Income for the Fund comes from user fees and connection charges. The City issued G.O. water revenue bonds in 2001 to finance a portion of the water tower and well improvements. Water Fund Revenues Expenses Operating Income Adjustments Noncapital activities Capital acitivities Interest Net change in cash Year end cash 1997 1998 1999 2000 525,646 610,491 627,449 755,462 381,315 403,996 489,272 615,042 144,331 206,495 138,177 140,420 152,233 948,580 648,604 687,559 (108,382) (124,210) (604,347) (191,303) (260,066) 231,980 (1,431,236) (826,454) 66,476 76,454 98,406 83,375 (5,408) 1,339,299 (1,150,396) (106,403) 1,608,811 2,948,110 1,797,714 1,393,254 Page 54 (Draft January 2002) Key Financial Strategies For Elk River Storm Sewer System The City builds and maintains facilities for the collection and management of surface water/drainage. The City does not currently have a long-term improvement or funding plan for the storm sewer system. Timing NA Estimated Cost NA Funding The City has established a capital projects fund for Storm Sewer Projects. At the end of 2000, the fund contained a balance of $312,227. No on-going source of revenue has been dedicated to storm sewer improvements. The current situation does not allow the. City to borrow money to finance storm sewer improvements. Debt options for storm sewer improvements include: Improvement bonds or permanent improvement revolving fund bonds if not less than 20% of improvement costs are assessed. Bonds supported by taxes collected within a storm sewer improvement district. Bonds supported by revenues of a storm sewer utility. Page 55 (Draft January 2002) Key Financial Strategies For Elk River Electric System The municipal electric system provides electric service to the community. Revenues of the electric system pay for expansion of the distribution system and other capital improvements. Operation and maintenance of the electric system is the responsibility of the Utilities Commission. No major capital investments in the electric system have been identified over the next five years. Timing NA Estimated Cost NA Funding Capital improvements will be paid from net income and reserves in the Electric Fund. Income for the Fund comes from user fees and connection charges. Electric Fund F~enues Expenses Operating Income 1997 1998 1999 2000 7,281,411 8,060,459 8,596,004 9,389,846 6,182,456 6,887,665 7,174,805 8,268,789 1,098,955 1,172,794 1,421,199 1,121,057 Adjustments Noncapital activities Capital adtivities Interest 1,024,885 719,540 1,097,333 1,108,046 (81,227) (353,063) (366,909) (382,249) (1,720,790) (1,303,824) (1,709,602) (1,849,208) 59,156 52,317 72,155 95,256 Net change in cash 380,979 287,764 514,176 92,902 Year end cash 513,064 800,828 1,315,004 1,407,906 Page 56 (Draft January 2002) Key Financial Strategies For Elk River Park Development The City has needs for the acquisition of land for new parks and the development of existing park lands. The Park and Recreation Commission is working to create a plan for park improvements. Timing Estimated Cost Funding To be determined. The Council will receive recommendations from Park and Recreation Commission planning. To be determined. The Council will receive recommendations from Park and Recreation Commission planning. The City receives park dedication fees from new development. These monies will not be adequate to meet the City's park development needs. The City has also used monies in the NSP/RDF special revenue fund for park improvements. Park improvements can be financed under Chapter 429 subject to the process and assessment requirements. The other option is to seek voter approval to issue general obligation bonds for park improvements. [:~8q~que Expenditures Net transfers Surplus/Defidt Fund Balance Park Dedication Fund 1997 1998 1999 2000 Park dedication 148,339 68,418 627,919 205,440 Landfill surcharge 0 0 0 0 Interest 10,044 8,275 9,954 45,014 Other 0 57,730 49,000 0 158,383 134,423 686,873 250,454 Cu~mt 74,638 46,205 34,266 66,017 Capital 148,642 69,744 190,920 116~931 223,280 115,949 225,186 182,948 100,000 (6,875) 0 0 35,103 11,599 461,687 67,506 Begin 168,266 206,124 217,723 679,410 End 203,369 217,723 679,410 746,916 Page 57 (Draft January 2002) Key Financial Strategies For Elk River Expenditures Ne~ transfers Surplus/Deficit Fund Balance NSP/RDF Reserve Property tax Landfill surcharge Interest Other Current Capital Begin End 1997 1998 1999 0 0 0 0 0 0 16,276 11,690 16,210 459,123 5,500 238,166 2000 0 0 27,288 287,908 475,399 17,190 254,376 315,196 0 0 0 0 0 0 0 0 0 0 0 0 (216,412) (118,346) (232,237) (122,329) 258,987 (101,156) 22,139 192,867 24,734 287,395 186,239 208,378 283,721 186,239 208,378 401,245 Page 58