The city's fund balance policy was last revised in October 2010. There hasn't been any outside regulatory requirements that require an update to the policy. Similar to the investment policy update, having updated financial management policies in place will be beneficial for achieving an increase in the city's bond rating.

Just as we did with the amended investment policy, staff utilized best practice policy recommendations from both the Government Finance Officers Association (GFOA) and the Office of the State Auditor (OSA) in developing the revised fund balance policy.

Revisions were made to the fund balance parameters of both the General Fund and the Enterprise Funds. The General Fund is amended to increase the target level from 35 to 50 percent of the ensuing year's expenditure budget. The previous policy called for an unassigned fund balance of 40 to 45 percent. The larger range provides more latitude for the final fund balance which often requires specific transfers to accommodate the small percentage range. The revised range is also the OSA recommendation. 

The revised policy also clears up some ambiguity on what criteria the fund balance percentage is calculated. The revised policy calculates the fund balance percentage on the ensuing year's expenditure budget. The prior policy did not specify whether the percentage was based on the current or ensuing year's expenditure budget. Calculating the fund balance on ensuing year's budget is the most logical since fund balance is technically in place to cover expenditures until the next tax payment is received in June of the ensuing year.  

The enterprise fund balance was also amended. Enterprise funds are funds that are run similar to private businesses, they are supported mainly by user fees. The city's enterprise funds consist of the Sanitary Sewer, Storm Drainage and Refuse. The current policy calls for 3 to 5 months of operating costs and to have at least as much as the amount of accumulated depreciation. Theoretically, there is no need to have cash on hand to cover 100 percent of accumulated depreciation since we would never be rebuilding our entire system in one year, especially on assets that typically have useful lives over 50+ years.

The revised policy amends the requirements to cover 6 to 12 months of operations, current year debt service requirements (if any), and maintain 10 percent of accumulated depreciation. 10 percent accumulated depreciation for

the Sanitary Sewer and Storm Drainage funds amounts to about $1.5 million, which typically more than covers any annual reconstruction project costs.

These amended enterprise fund balance parameters are what we have been using as a guideline for the last year or so when determining annual utility rates and long-term financial forecasts. Any fund balance in excess of the parameters will directed to towards capital outlay projects for that fund's specific purpose via the Capital Improvement Plan (CIP).