7.2. SR 04-06-2009~j
City of
Elk
River
REQUEST FOR ACTION
To Item Number
Ci Council 7.2.
Agenda Section Meeting Date Prepared by
Administration A ri16, 2009 Tim Simon, Finance Director
Item Description Reviewed by
2008 Fund Balance Designations
Reviewed by
Action Requested
Approval on the 2008 Unreserved, designated fund balances in the General and Severance pay reserve
fund.
Background/Discussion
Fund balance designations are presented to the City Council in accordance with the City's Financial
Management Plan. Section 9.2 of the Financial Management Plan regarding General fund balance is
reprinted below for your reference.
9.2 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.
In previous years the City Council has set the unreserved, designated fund balance at 41.5 percent of next
year's General fund budgeted expenditures and allocated the amount over that for capital equipment, pay
adjustments, or other one-time expenditures. In 2007, the fund balance was 42.8 percent of next year's
budgeted expenditures as we anticipated some uncertainty with future LGA impacts and the potential to
use reserves to offset some of the loss of revenue. The 2008 unreserved, designated fund balance has
decreased to 41.1 percent of next year's budgeted expenditures. The main reason for the decrease is the
reductions in revenues (LGA, MVHC), but the percent would have been decreased further if not for all
the City departments working together to reduce expenditures to help offset the sudden reduction of
revenue. The City managed to stay above the goal of 40 percent of next year's budgeted expenditures
and still maintain a strong financial position at year-end.
Moody's investor services have consistently reviewed the fund balance level in the General fund as a
financial condition of the City. Maintaining a fund balance for working capital is very important to cash
flow the City's General fund between tax cycles Qune, Dec) and Local government aid payments Quly,
Dec).
With the 2008 Financial Statements the City had to implement Governmental Accounting Standards
Board (GASB) statement number 45. The statement related to the accounting and reporting for
postemployment benefits other than pensions (OPEB). The city has a very small OPEB liability since we
only have the implicit rate subsidy. Last fall, we reviewed the actuarial calculations and our total actuarial
C:\Documents and Settings\jjohnson\Local Settings\Temporary Internet Fi]es\OLK49\2008fundbalancedesignations.doc
accrued liability is $88,718. Designating the fund balance in the Severance pay reserve fund will show the
commitment to addressing the liability.
Financial Impact
The 2008 unreserved, designated for working capital fund balance will be 41.1 percent of next year's
budgeted expenditures for the General fund. The Severance pay reserve fund balance will be designated
in the amount of $88,718 for OPEB liability.
Attachments
• Statement of Position -Fund Balances for Local Governments
• Memo from September 8, 2008 regarding the actuarial valuation
Action Motion by Second by Vote
FOllow Up
C:\Documents and Settings\jjohnson\Local Settings\Temporary Internet Files\OLK49\2008fundbalancedesignations.doc
~~~`~"'~"~~. STATE OF MINNESOTA
~~=~ ~ -~ OFFICE OF THE STATE AUDITOR
~~~•r~~~ ;. ~-
~~~ ~`" `~ ~ 525 PARK STREET (651.) 296-2551 (Voice)
REBECCA OTTO SAINT PAUL, MN 55103-2139 (651} 296-4755 (Fax)
state.auditor~a~state.mn.us (F,-mail)
STATE AIJDITOR 1-800-627-3529 (Relay Service)
Statement of Position
Fund Balances for Local Governments
Back rg ound
In governmental fundst, a local government should identify fund balance separately
between reserved and unreserved fund balance. The local government may assign and
report some or all of the unreserved fund balance as designated and undesignated. This
statement of position is based on generally accepted accounting principles (GAAP) for
government as established by the Governmental Accounting Standards Board. Future
changes in GAAP may result in a change in the position of the Office of the State
Auditor.
Reserved Fund Balance
The function of reserved fund balance is to separate the portion of fund balance that is
not appropriable for expenditure or is legally segregated for specific future uses, so that
the unreserved fund balance can serve as a measure of current available financial
resources.
Under GAAP, the portion of fund balance that meets the following criteria should be
classified as reserved:
• Resources not available for spending. Some of the assets reported in
governmental funds are not available for spending in the subsequent year's
budget. For example, along-term loan receivable, such as an advance to another
fund, is not available for current spending. Likewise, local governments that
report supplies, inventories, and prepaid items in governmental funds typically
would report a corresponding amount of reserved fund balance to indicate that
these amounts are not actually available for spending.
• Legal restrictions on spending. Fund balance also is reserved to indicate situations
where a portion of fund balance is not available for new spending because of legal
Governmental fund reporting focuses primarily on the sources, uses, and balances of current financial
resources and often has a budgetary orientation. The governmental fund category includes the general fund,
special revenue funds, capital projects funds, debt service funds, and permanent funds. (Codification of
Governmental Accounting and Financial Reporting Standards § 1300.102).
Reviewed: January 2008
Revised: NA 2007-1022
restrictions involving parties outside the financial reporting entity. One common
example is amounts reserved for encumbrances, which represent contracts for
goods or services with outside parties still outstanding at the end of the year.
Reservations also are commonly used to report legal restrictions arising from state
statutes or grant requirements placed on the use of specific resources.
Unreserved Fund Balance
The part of fund balance not identified as reserved is the unreserved fund balance. The
unreserved fund balance may, in turn, be subdivided into designated and undesignated
portions.
Designated Fund Balance
Whereas GAAP dictates the criteria for reserved fund balance, fund balance designations
represent management's intended use of resources. Fund balance designations may be
established to indicate management's tentative plans for financial resource utilization in a
future period, such as for general contingencies or for equipment replacement. Such
designations reflect tentative managerial plans or intent and should be clearly
distinguished from that which is reserved. Designations should be supported by actual
plans approved by either the governing body or an appropriate officer. Such plans or
intent are subject to change and may never be legally authorized or result in expenditures.
Expressed another way, designations are a government's self-imposed limitations on the
use of available current financial resources.
Unreserved fund balance is designated for a local government's intended use of current
available financial resources. The focus on current financial resources is unique to
governmental funds. Accordingly, designations are reported on the face of the balance
sheet only in connection with governmental funds. Designations should be reported as
part of the unreserved fund balance designated for ... , or disclosed parenthetically or in
the notes to the financial statements.2 GAAP does not allow for any equivalent equity
designation to be used for government-wide financial reporting or for proprietary fund
and fiduciary fund financial reporting.
Undesignated Fund Balance
The unreserved undesignated fund balance consists of current resources available for
which there are no government self-imposed limitations or set spending plan. Although
there is generally no set spending plan for the undesignated portion, there is a need to
maintain a certain funding level. Undesignated fund balance is commonly used for
emergency expenditures not previously considered. In addition, the resources classified
as undesignated can be used to cover expenditures for revenues not yet received.
z Codification of Governmental Accounting and Financial Reporting Standards § 1800.144.
Reviewed: January 2008 2
Revised: NA 2007-1022
The basic financial statements should provide information on the nature and purpose of
each major component of reserved fund balance and unreserved fund balance. The notes
to the financial statements should disclose this information when it is not discernible on
the face of the financial statements.
Recommendations
Adoption of Fund Balance Policy
The Office of the State Auditor recommends that each local government establish a
formal policy on the level of unreserved fund balance that should be maintained in the
general fund and special revenue funds. The policy should be set by the governing body
and should provide both a time frame and a specific plan for increasing or decreasing the
level of unreserved fund balance. If the fund balance does not match the policy, a plan
should be developed by the governing body that will allow for compliance with the
policy.
The Office of the State Auditor recommends each local government adopt a policy
specifying the types of future expenditures to be designated, how the amounts for such
designations are arrived at, and. whether the governing body will set the designations
annually or will set up a designation process and appoint someone to make the
determination based on the guidelines established by the governing body.
The local government's revenue streams should be kept in mind when drafting such a
policy. For example, funds that rely heavily on property taxes must maintain sufficient
financial resources to provide adequate resources until the next tax revenue collection
cycle. Funds that rely on state appropriations and grants should consider the timing of
those payments. Also, local governments need to maintain a prudent level of financial
resources to protect against a forced service level reduction or having to raise taxes and
fees because of temporary revenue shortfalls or unpredicted one-time expenditures.
Other considerations include the predictability of revenues and the volatility of
expenditures--higher levels of unreserved fund balance may be needed if significant
revenue sources are subject to unpredictable fluctuations or if operating expenditures are
highly volatile. The availability of resources in other funds as well as the potential drain
on the general fund resources from other funds could affect the level of unreserved fund
balance needed. The availability of resources in other funds may reduce the amount of
unreserved fund balance needed in the general fund, just as deficits in other funds may
require that a higher level of unreserved fund balance be maintained in the general fund.
In some cases, the unreserved fund balance in special revenue funds may not be available
for use for general operations of the local government, for example a park dedication
special revenue fund in a city or a ditch special revenue fund in a county. In these
situations, it is important for the local government's fund balance policy to document that
these type of funds are not available for future appropriation to the general operations of
the local government.
Reviewed: January 2008 3
Revised: NA 2007-1022
Appropriate Fund Balance Levels
The Office of the State Auditor recommends that at year-end local governments maintain
an unreserved fund balance in their general fund and special revenue funds of
approximately 35 to 50 percent of fund operating revenues or no less than five months of
operating expenditures, which should provide the local government with adequate funds
until the next property tax revenue collection cycle. The adequacy of unreserved fund
balance should be assessed based on an individual local government's own
circumstances. If the local government's unreserved fund balance is less than or greater
than the 35 to 50 percent recommended above the local government should be able to
explain the reason for the difference.
Local governments should also consider taking a position on the level of unreserved fund
balance in other funds that have unrestricted revenues. In setting an appropriate level, the
local government should consider any long-term forecasting/planning issues, to avoid the
risk of placing too much emphasis on the level of unreserved fund balance at any one
time.
Reviewed: January 2008 4
Revised: NA 2007-1022
Item #5.2.
~f'~
~lE~'I®~N®Uh7
TO: P'layor and City Council
FROirI: Tim Simon, Finance Director
DATE: September 8, 2Q08
SUBJECT: Actuarial Valuation Other Past-Employment Benefits
In June 2004, Goveznmental Accounting Standards Board (GASB) issued statement No.
45 - accozir~ting and financial repartrng by employers, for po.rtemployrnent benefits other
tharr pe~~siorts. Employees are compensated for the services provided. The benefits
received today include items like wages and insurance premiums. The benefits received
in the future can include items like retirement income and post retirement health care
benefits. These fiiture benefits other than pensions are called Other Post-Employment
Benefits (OPEB). The intent of the standard was to move fiom a cash basis or pay-as-
you go way of paying for OPEB to an accrual basis of accounting. Cities with fewer than
200 employees/retirees are required to have an actuarial valuation at least triennially. We
currently have around 120 full-time employees.
GASB statement No. ~~ is applicable to the City of Elk River in determining the
additional cast of including retired employees in the same health plan used by our active
employees. This is known as the "implicit rate subsidy" which means if retirees pay the
same health insurance casts there is an implicit subsidy to the retiree. Not only does this
liability take into account the current retirees, but we will make assumptions and
probabilities of all employees at the City. Other municipalities may offer future benefits
like retiree health insurance premiums paid and budgeted by the City in which case the
liability may be significantly higher.
For our 2008 financial statements the City performed an actuarial valuation of the other
post-employment benefits. The firm Van Iwaarden has completed the actuarial
calculation and the results will be incorporated in the 2008 financial statements. The
primary number used to determine the liability to report in the financial statements is the
actuarial accrued liability which is $88,718. I have discussed the amounts with the City's
auditors and they indicated that the preliminary amounts look immaterial to the financial
statements and may only require note disclosure. If we decide to report the liability in the
Statement of Net assets, the City could designate fund balance in the Severance Pay
Reserve in the amount of $88,718 to show that the City is 100% funded. The $88,718
may seem like a significant number but other cities, counties, and schools may be dealing
with much higher numbers.
Attachments:
Example Statement of Net Assets that has incoFporated the OPEB liability
® Summary of results from the Van Iwaarden report.
Primary Government
Governmental Business-type Component
Activities Activities Total Units
Assets
Pooled cash and investments $ 77,764,986 $ 8,486,524 $ 86,250,510 $ 12,629,212
Pooled cash and investments -restricted 374,187 7,629,232 8,003,419 -
Receivables, net 36,274,404 19,399,477 55,673,881 29,213,364
Internal balances 2,061,293 {840,571) 1,220,722
Other assets 1,725,365 41,588 1,766,9x3 2,763,777
Other assets -restricted - 41,497 41,497 -
Capital assets not being depreciated 4,160,682 464,990 4,625,672 34,791,340
Capital assets being depreciated, net 42,648,251 9,869,291 52,517,542 99,941,1x3
'Total assets 165,009,168 45,091,028 210,100,196 179,339,046
Liabilities
Accounts payable cad accrued liabilities li,690,625 1,393,470 15,084,095 4,695,881
Accrued interest payable 373,168 111,090 486,258 -
Unearned revenue 20,480,579 15,357 20,=195,936 1?5,912
Short-term notes payable 4,626,025
{Net other postemployment benefit liability 6,301,785 530,919 6,332,704 117,140
Long-term liabilities:
Due within one year 3,992,284 9,281,279 13,273,563 2,044;355
Aue in more than one year ?3,686,745 5,959,903 29,646,648 26,504,878
Total liabilities 68,527,186 17,292,018 85,819,204 38,114,191
Net assets
Invested in capital assets, net of related debt 22,895,764 10,334,281 33,230,045 105,769,744
Restricted far:
Statutory fees - 585,273 585,278 -
Debt service - 847,924 8x7,924 3,389,794
Capital improvements 465,=4x0 7,594,083 8,059,533
Retiree health care benefits 759,021 - 759,021 -
Unresuicted 72,361,747 8,437,444 80,799,191 33,065,x17
Total net assets $ 96,481,982 $ 27,799,010 $ 12=4,280,992 $ 141,224,855
The accompanying notes are an integral part of these financial statements.
-14-
'CITY OF ELK RIVER
.January 1, Zd08 Actuarial I/aluation Pasf Employment Benefits
Summary of Resuffis
A. f/aluation Census Data
1. Active employees
2. Covered retirees and beneficiaries
3. Total
B. GASB 43 and GASB 45 Results
1. Benefit obligations
a. Present value of OPEB benefits
b. Actuarial Accrued Liability (AAL)
c. Normal cast (beginning of year)
d. Expected contributions during year
2. Annual Required Contribution (ARC)
3. Annual OPEB Cost
C. Reconciliation of/!!et QPEB Obligation
1. Net OPEB obligation as of January 1, 2008
2. Annual OPEB cost (expense)
3. Expected contributions and adjustment for active employees
4. Net OPEB obligation as of December 31, 2008 (1. + 2. +3.)
D, Key Economic Assumptions
1. Discount rate for liabilities
2. Health care cost trend rate
January 1, 2008
117
6
123
361,640
88,7181f•
6,861
(2,030)
12,266
12,266
0
12,266
2 030
10,236
4.00%
10% to 5%
in 5 years
2
]]'' ~~