01-14-2002 Council Packet - Laserfiche WebLink

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Cities may have reserves in dedicated funds, such as sewer and water utilities or enterprise funds, which are generated from user fees. These reserves are dedicated for operation, maintenance, and improvement of the utility or enterprise. In each of these situations, if the funds are classified as reserved, the funds cannot be used for any other purpose. Similarly, monies in debt service funds can only be used for the repayment of debt for the particular project. Rainy day fiinds The state of Minnesota maintains a budget reserve of $653 million. This is conunonly referred to as the rainy day fund. Due to the volatility m estimating state income and sales tax revenues, this fund helps the state address unexpected economic downturns, other fluctuations in state revenues, or unexpected expenditure needs. Similarly, city fund balances act as a rainy day fund for revenue shortfalls, unexpected expenditures or emergencies. Given that cities only receive property taxes and state aids twice a year, these funds can be critical for responding to unforeseen local needs. Fund balances and credit ratings Cash flow needs, savings for projects, and reserves for unforeseen needs are three important reasons why fund balances are important. Gov. Ventura outlined a fourth reason in his State of the State speech last week: favorable bond ratings. The governor said that the state’s triple>A bond rating “allows us to borrow money to finance building j-Tojects at the lowest interest rate available and consequently save millions of dollars in interest payments. If we try to solve this budget problem with quick fix accounting gimmicks or borrowing on future revenue sources, you can be sure that Wall Street will be watching and our credit rating will suffer.” As with the state. Wall Street takes into account the financial well-being of a city when determining its municipal bond rating. The city’s reserves are an important indicator of a city’s overall financial health; a citv is more likely to be given a higher bond rating if they are deemed to have a healthy city fund balance. Like the state, a high rating for a city reflects the strength of the local economy and indicates its sound fiscal management. Like the state, a high rating bolsters the confidence of other investors and its taxpaying residents. This high bond rating is significant for taxpayers as its issuance enables the city to borrow at a lower interest rate, thereby lowering the cost of municipal debt, and ultimately saving the taxpayers ’ money. League of Minnesota Cities January 7,2002 . i II 5 j ■ ^ n i I ■ - ■ A