HomeMy WebLinkAboutIR 7320 INFORMAL REPORT TO CITY COUNCIL MEMBERS No 7177
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To the Mayor and Members of the City Council September 20, 1988
1"P
rr X Subject: Status Report and Policy Considerations Regarding
167'3 City Reserves
Discussion of the financial status of a municipal government usually involves
the use of the terms "fund balance", "reserves" or "surplus". These terms
have technical and legal distinctions related to the particular government
fund to which they refer; however, as a general definition they can be said
to refer to an equity account within a fund resulting from the accumulation
of assets in excess of liabilities. Such accounts may be subdivided into
that portion which is legally or administratively restricted and that portion
which is unrestricted. It is this unrestricted or undesignated portion to
which reference is generally being made in discussions with the City Council.
Of the many such accounts maintained in the City's financial/accounting
system, only three have significant dollar amounts over which the Council has
discretionary control. These are the General Fund Undesignated Fund Balance,
the General Debt Service Fund Balance and the Capital Projects Reserve Fund
Undesignated Fund Balance. The year-end balance in these accounts for each
of the past four fiscal years plus the balances projected for 9/30/88 are as
follows:
83/84 84/85 85/86 86/87 87/88
op� (000's)
Gen. Fd. $17,567 $24,635 $26,245 $16,059 $17,983
(% of budget) 10.4% 12.9% 12.8% 7.7% 8.2%
Gen. Debt. Fd. $ 9,862 $17,328 $15,999 $17,972 $15,748
Cap. Proj .
Resv. Fd. $ 2,555 2,227 $ 7,161 6,884 $ 4,343
Whenever numbers of this dollar size are reported and perceived as "surplus"
funds, a question often arises as to the justification for a tax-supported
entity's maintaining such funds. Response to this question is best given
according to the particular fund being discussed.
General Fund
In August, 1978, (I.R. No. 3173), General Fund Reserves-Guidelines was
presented to the City Council with a recommendation that the Undesignated
Fund Balance of the General Fund be maintained at a level of 10-15% of the
annual operating budget. This policy recommendation was predicated primarily
on the fact that this is the only source of funds to sustain general
government operations in the event of things outside of management control
such as: fluctuations in the economy; unexpected major expenditures created
by disasters; or litigation. This 1978 recommendation remained the accepted
policy through 1985-86. During the years of 83-84 through 85-86 the average
position was 12.1% of budget, as shown in the table pesented above.
[ISSUED BY THE CITY MANAGER FORT WORTH TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No 712Q-7
September 20, 1988
To the Mayor and Members of the City Council
0011*-
Subject:
Status Report and Policy Consideration Regarding
City Reserves
In the 1986-87 Budget Message, the staff recommended using $4.5 million of the
General Fund Reserve and temporarily reducing the Reserve level to $15 million
or 77 of the proposed budget. This recommendation was considered "reasonable
in light of the existence of adequate insurance funds, debt service reserves
and the Capital Project Reserve Fund". Since then, the fiscal situation has
changed materially in that soaring health insurance costs have depleted our
insurance reserves, federal tax reform threatens our debt service reserves,
and continued deterioration of the Texas economy has caused an undercollection
of our general revenues. The actual level for 1986-87 was 10.47 and for
1987-88 was 7.7 Z. Based on a projected $18 million at 9-30-88, the level
entering 1988 would be 8.27 if the budget is adopted at $217 million.
General Debt Service Fund Balance
A Fund Balance in the General Debt Service Fund is the City' s protection
against default (failure to pay bond principal and interest when due) on its
general obligation debt. The City' s total 1988-89 general obligation debt
service requirement is $55,133,000. Of this amount, $40 million is due on
March 1, 1989. The cash source for making this payment is the debt service
tax levy collected plus any interest earned plus the cash in Fund Balance.
The City averages collecting 907 of the total tax levy by the March I date. A
0P*1 disruption in the normal collection cycle is most likely to occur as the
result of litigation and could seriously affect the City's ability to make the
March I debt service payment. Effectively, the level of the Fund Balance is
the security against default.
The staff believes that a Debt Service Fund Balance equal to 20-257 of the
annual debt service requirement is a prudent goal. At the beginning of the
new fiscal year, the level will be 297; however, due to Tax Reform limitations
and the use of $13.2 million in reserves during 1988-89, the level is
projected to decline to 187 by 9-30-89.
Capital Project Reserve Fund Balance
On 518/79, (M&C G-4167) , the City Council adopted a Capital Projects Financing
Policy" which states, "". . . .all proceeds from the sale of real property assets
in the General Fund Assets account group or refunds of expenditures from other
governmental agencies be placed into a Capital Projects Reserve Account to be
appropriated by the Council for capital projects". Since 1979, this policy
has provided the Council with a means of funding $27.8 million in capital
projects which have either been of an emergency nature or the need for which
was unforeseen at the time of seeking approval for a capital projects bond
program.
The Policy does not target any level of fund balance to be maintained;
however, based on historical use a level of $3-4 million appears to be
prudent.
L
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
^
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. ;=zo-3
I September 20, 1988
R To the Mayor and Members of the City Council
Subject: Status Report and Policy Considerations Regarding
City Reserves
Bond Rating Consideration
In addition to the above points, another important consideration is the
relationship of fund balance levels to the City's bond rating and the
relationship of the City's bond rating to the interest rate at which the City
sells its bonds. Since 1971, the City has consistently achieved an AA bond
rating from both major bond rating agencies. Professionals agree that the AA
bond rating, plus a reputation for good financial management, are key factors
in the City regularly selling at better-than-market rates.
A number of factors are included in the bond rating process. Primary among
fiscal factors considered is the level of fund balances, especially that of
the General Fund. This includes current fund balances as well as the trend
in fund balances . Quoting f rom an explanation of the bond rating process
published by TML, "Regardless of economic, spending, and taxing realities, a
local government is expected to manage its finances so that annual revenues
meet or exceed annual expenditures and also to accumulate sufficient
financial resources to meet unforeseen situations and normal cash flow
Conclusion
The level of fund balances is of vital importance to the City's ability to
practice sound financial management and to the cost of bond financing;
therefore, the staff recommends the City Council formally reconsider and
adopt updated fund balance policies for the General Fund, the General Debt
Service Fund and the Capital Projects Reserve Fund.
A more immediate decision which relates directly to the issue of fund
balances presently faces the City Council in the form of the budget and tax
rate for 1988-89. One option before Council entails the adoption of a tax
rate which balances anticipated expenditures with anticipated revenues. The
other option involves the adoption of a slightly higher tax rate and allows
for estimated revenues of approximately $1 million in excess of projected
expenditures. This additional revenue would be available to offset
unanticipated revenue shortfalls in other areas or as a contingency amount to
meet unforeseen City requirements without further deteriorating the General
Fund Balance. If the additional revenue were not required for either of
these purposes, it would be added to the undesignated portion of the fund
balance at year end. The enactment of the higher tax rate is a safer option
from a financial management perspective.
Should you have any questions regarding this report, the staff is prepared to
answer them and provide any additional information.
DougW Harman
[ISSUED BY THE CITY MANAGER City Manager FORT WORTH, TEXAS