00-745Council File # pp � ���
Presented By
Referred To
0 R l G i N� � RESOLUTION Green Sheet # iozs�6
�, I OF SAINT PAUL, MINNESOTA
Committee: Date
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1 Establish a Designation for Sewer Utilitv Budget and Rate Stabilization and
2 Adont Policies fox Contributions and Uses
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4 WHEftEAS, since 1994 the City Administration and the City Council have endeavored to rebuild
5 Sewer Utility Enterprise Fund cash and reserves; and
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7 WHEREAS, as a result of prudent rate setting the Sewer Utility was able to build year end 1999
8 operating cash on hand to approximately thirty percent (35%) of 1999 revenues; and
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10 WHEREAS, prudent financial management and sound accounting practice recommend
11 establishing designated cash and retained earnings equal to ten to fifteen percent (10% to 15%)
12 of annual sanitary and storm sewer revenue to be used for sewer infrastructure emergencies,
13 operating emergencies and rate stabilization; and
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15 WHEREAS, a Sewer Utility designation of this nature decreases the Utilit�s need for short-terxn
16 borrowing from the General F�xnd, which could negatively impact other City programs and is an
17 indication of the Utility's financial health; and
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1 9 WHEREAS, a Sewer Utility designation of this nature decreases the Utility's need to raise
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sanitary and storxn sewer rates sharply due to emergencies and variable economic factors, which
may exacerbate negative economic effects; and
WHEREAS, this designation must be governed by a written financial management policy that
includes direction on designation contribution and use requirements; and
WHEREAS, it is important for the City Administration and the City Council to adopt policies
governing the City's Sewer Utility Budget and Rate Stabilization Designation for control at the
appropriate policy setting level, clarity and uniformity of direction; and
1Vow, therefore, be it RESOLVED, that the Mayor and Council of the City of 8aint Paul do
hereby designate Cash and Retained Earnings equal to ten percent (10%) of the annual budget
for sasutary and storm sewer revenue for Sewer Utility Budget and Rate Stabilization and adopt
the contribution and use policy below.
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36 1. Cash for day-to-day operations shall not be allowed to fall below ninety (90) days operating
37 expenses as defined as the sum of:
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39 a. The forty-five (45) day cash reserve for operation and maintenance as required by revenue
40 bond authorizing resolutions, calculated by Public Wor�s Accounting and audited as part of the
41 City's annual financial audit; and
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43 b. An additional amount equal to the forty-five (45) day reserve calculated above in the
44 operation and maintenance reserve cash account.
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c. After revenue bond related operation and maintenance cash requirements described in item
a. lapse, cash for day-to-day operations will no longer be the sum of items a. and b., but will
equal ninety (90) days operating expenses by separate calculation.
2. The Designation for Sewer Utility Budget and Rate Stabilization shall be equal to ten
percent (10%) of budgeted annual sanitary and storm sewer revenue, and shall be revised
annually. The initial designation shall be made within si�y (60) days following adoption of this
document and subsequent adjustments to this designation shall be made within sixty (60) days
after adoption of the annual revenue budget by the City Couneil.
3. The first one-half (�/z) or five percent (5%) designation is defined as an Emergency
Designation available only to the Sewer Utility Enterprise Fund to finance one-time,
emergency, unanticipated capital or operating expense requirements or to offset unanticipated
revenue fluctuations occurring within a fiscal year.
4. The Emergency Designation may be accessed when emergency expenses or an unanticipated
revenue reduction causes an operating cash balance less than the requirements set forth in item
1 above for the Sewer Utility Enterprise Fund only.
5. The second one-half (�/z) or five percent (5%) designation is defined as a Rate Stabilization
Designation available only to the Sewer Utility Enterprise Fund to either maintain current
service level programs or transition expense levels to match lower revenue levels during the
first eighteen (18) to twenty-four (24) months of a recession or following the loss of a major
sewer use customer as defined in item 6 below.
6. The Rate Stabilization Designation may be accessed when sanitary or storm sewer revenue
is projected to end the year five percent (5%) lower than the previous year, causing an operating
cash balance less than the requirements set forth in item 1 above for the Sewer Utility
Enterprise Fund only and one or more of the following conditions occurs in conjunction with the
five percent (5%) reduction in revenue:
a. The Storm Sewer Charge delinquency rate (an indicator of economic recession) exceeds ten
percent (10%) at the end of the previous fiscal year; or
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b. The Storm Sewer Charge delinquency rate (an indicator of economic recession) is predicted to
exceed ten percent (10%) during the cuxrent fiscal year; or
c. The Storm Sewer Charge delinquency rate (an indicator of economic recession) is predicted to
e%ceed ten percent (10%) during the next fiscal year; or
d. Net Sanitary Sewer volume (gross volume less credits) declines egceed two and one-half
percent (2 i/2%) compared to the previous fiscal year; or
e. Net Sanitary Sewer volume (gross volume less credits) declines are predicted to exceed two
and one-half percent (2 during the nest fiscal year.
7. For either the Emergency Designation or the Rate Stabilization Designation, use shall be
authorized by a properly executed council resolution or adopted as part of the annual budget.
8. Emergency Designation resources must be restored. Restoration shall commence in the first
fiscal year following use. Restoration shall be accomplished in annual installments no smaller
than one percent (1%) of total Sewer Utility sanitary and storm sewer revenues in the year the
Emergency Designation was used. If sanitary and storm sewer charges for the following year
have already been adopted, the Administration and City Council shall act to revise those charge
rates to include this restoration.
103 9. Rate Stabilization Designation resources must be restored. Restoration shall commence in
104 the fiscal year that is two years following the year of use. Restoration shall be accomplished in
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annual installments no smaller than one percent (1%) of total Sewer Utility sanitary and storm
sewer revenues in the year the Rate Stabilization Designation was used. If sanitary and storm
sewer charges for that year have already been adopted, the Administration and City Council
shall act to revise those charge rates to include this restoration.
10. If needs arise that cause both the Emergency Designation and the Rate Stabilization
Designation to be used, and restoration of those designations are concurrent, restoration shall
be accomplished in annual installments no smaller than a total of two percent (2%) of total
Sewer Utility sanitary and storm sewer revenues according to items 8 and 9 above. If sanitary
and storm sewer charges for that year have already been adopted, the Administration and City
Council shall act to revise those charge rates to include this restoration.
Be if further R,ESOLVED, that this combined ten percent (10%) designation shall be placed in a
separate interest earning account on the books and records of the City Treasuxy and the Sewer
Utility Enterprise Fund and shall be managed as part of the City Treasury Investment Pool.
Interest income shall be used to keep this designation at the appropriate ten percent (10%)
level. The impact of interest earnings on this account shall be reviewed annually by Public
Works Accounting and Office of Financial Services staff. If at the time of this annual review
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Yeas
Benanav �
Ba eTTcy -
Bostrom
Coleman �
Harris
Lantzy �
Reiter �
Absent
Adopted by Council: Date � 6 �
Adoption Certified by Council Secretary
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Requested by Department of:
Public Works
BY� r .
Approval Recommended Bud e D rector:
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By: y�""
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Form Approved by City Attorney:
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Approved By Mayor: Date • '7LG1 �� � Approv y ayor for Su ission to Council:
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By: By:
this designation has grown larger than ten percent (10%) of budgeted sanitary and storm sewer
revenue, the excess may only be used to fund a portion of a following fiscal year's Sewer Utility
Enterprise Fund Budget as proposed by the Mayor and adopted by the City Council.
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Public Works
RogerPuchreiter, 266-6248
MU5T BE ON COUNCIL AGENDA BY (DAT�
DATEINITIATED GREEN SHEET No. 102876
6/16/2000
COUNCiI OO
nss�cx ❑5 �?,Q(.b�
CfTV ATTORNEY �l1Y GLERK
NUMBFR WR
4
ROVfING ❑ FlNANCIALSER410ES0 $ FINPNCIALSERVlAGCTG
❑ s �
MAYOR(ORASSISiANrj ��rUtiliryManager� '�
� 2 zt-oo
Deoartme
TOTAL # OF SIGNATURE PAGES 1 (CLIP ALL LOCATIONS FOR SIGNATURE)
ACfION PEpUE5TE0
Review and approve attached resolution establishing a designation of Operating Cash and Retained Eamings in the Public Works Sewer
Utility for Budget and Rate Sfabilization.
RECEIVED
JUL 31 200�
RECOMMENDATIONS.Approve (A) or Rel� (R)
PLANNING COMMISSION
1. HazthispersorvYirtnevetvrorketluntleracron�2clforNistlepaztrnent'�
YES NO
CIB COMMITTEE
2. Hu this persoNfirtn ever been a ary emptoyee?
CINLSERVICECOMMISSION �ES NO ,{°.¢ a
3. Dces this persoNfirtn possess a slull not nortnally possessetl by any wrrent dry emplo � *�°''� ��
� YES NO ��
4. Is this persoMirm a targetetl ventloR
VES NO � � �oQ�
ExpWin all yes answers on separeM sheet antl attae� M green sheet R,1� �3
Mv
INITIATING PROBLEM, ISSUE, OPPORTUNITY (WHQ WHAT, WHEN, WHEHE, WHh'
The Saint Paul Sewer Utility experienced financial difficulties in [he early 1990s. Part of these difficulties were related to the effects of an
economic recession and changes in sewer use by major customers, who implemented water conserva[ion methods that reduced the overall
billabFe flow of the Utility.
Since 1994, the Sewer Utility has experienced renewed financial health due to sound financial managment, prudent rate setting and a healthy
regional economy. The next recession or change in the operating practices of our major customers should be prepared for now, while the
Sewer Utility is healthy.
The attached resolution establishes the Designation for Sewer Utility Budget and Rate Stabilization and sets policy on how the designation
should be used and funded. The designation is split into two parts: One-half for major infrastructure emergencies or unexpected revenue
losses, and one-haif ro be used as a countercyclical economic tool to prevent sanitary and stornt sewer rate spikes caused by changes in
economic conditions.
Please see attached policy briefing paper prepazed by Bmce Beese on these issues.
ADVANTAGESIFAPPROVEP. ��
The Sewer Utility will be more able to: Prevent rate spikes, reduce the impact of adverse economic cycles, allow the Administration and
City Council the time necessary to make good and sustainable decisions to correct any revenue%xpense imbalance, and demonstraie prudent
management to the financial community.
DISADVANTAGES IF APPROVED:
Reserves aze sometimes viewed as overchuging and could be seen by some as an inter-genera6onal equity issue.
DISADVANTAGESIFNOTAPPROVED:
The Administration and Ciry Council may not be kept fully awaze of and involved in unusually large extraordinary needs arising from
FINANCIAL INFORMATION (EXPLAIN)
fO7ALAMOUNT OF TRANSACTION $ 0.00 (See No[e) COS7/REVENUE BUDGE7ED (CIRCLE ONE) YES Ho
FUNOING SOURCE $ewei U[Ility Re[ained EamingS AC71VffY NUMBER 2
Note: This resoluflon has no effect on cuxrent yeaz revenues and expenses, however it will cause the crea[ion of speci£c designations of Operaung Cash and
Retained Eamings in the Sewer Ufility Entelprise Fund in the amount of $3,702,500. ,
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The Ant and the Grasshopper:
Which will the Saint Paul Sewer Utility Be?
Bruce E. Beese
December 15, 1999
Public Policy Analysis: GPA 804
Ellen Dickson, Ph.D.
Policy Briefing Paper
' Haxnline University
Graduate School of Public Administration and Management
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TABLE OF CONTENTS
EXECL3TIVE STJMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
THE ISSITE .................................................... 1
RESEARCH METHODS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PROSLEM CONTEXT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
' ADVANTAGES AND DISADVANTAGES OF RESERVES . . . . . . . . . . . . . . 7
Advantages............................................... 7
Disadvantages ............................................ 9
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CREATING AND SIZING RESERVE FUNDS . . . . . . . . . . . . . . . . . . . . . . . 10
Fiscal Slight of Hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
BEST PRACTICE RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 14
RELATED EXPERIENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
New York City ........................................... 17
Philadelphia ............................................. 18
Portland,Oregon ......................................... 18
State Ohio ............................................. 21
The Milwaukee Metropolitan Sewerage District . . . . . . . . . . . . . . . . 21
' CHOICES FOR SAINT PAUL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
DoNothing .............................................. 25
Emergency Designation Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
, Rate Stabilization Designation Only . . . . . . . . . . . . . . . . . . . . . . . . . . 27
A Combination Emergency and Rate Stabilization Designation .... 31
A Simple Contingency Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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RECOMMENDATION .......................................... 32
CONCLUSION ................................................ 33
ANNOTATED BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
LIST OF INTERVIEWEES ...................................... 42
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' APPENDIX A, Proposed Saint Paul City Council Resolution . . . . . . . . . . . 43
' APPENDIX B, Electronic Mail Survey Sent to GFOA list servers ........ 47
APPENDIX C, History of Billable Sewer Volumes - 1985 through 1998 ... 50
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Execntive Summary
The Ant and the Grasshopper:
Which will the Saint Paul Sewer Utility Be?
' The Issue
The Saint Paul Public Works Department is currently egploring the
feasibility of designating a portion of cash and retained earnings within the Sewer
' Utility to help the City prepare for the negt recession by setting aside a fund for
emergencies and rate stability. The recent sound economy has provided the Utility
' with revenues in excess of expenses and some of this surplus can possibly be used to
provide for emergencies and economic downturns. Recession will certainly return
because it is a normal part of the business cycle.
, This analysis examines other government agencies that have used
designations of this nature and determines alternatives in use now and in the past.
Additionally the analysis will address questions of the appropriate level, the
' objectives of the reserve/designation, whether and to what extent these designations
accomplished their objectives in other governments, and the structure of a reserve
fund.
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Problem Context
The Saint Paul Sewer Utility experienced financial hardship during the last
recession, that occurred from 1990 to 1993. Difficult decisions were made regarding
the use of reserves and rates, and still the Utility was strained. The year end
operating cash balance of the Utility reached a low point of $335,012 in 1993. At
the same time, Standard and Poox's Rating Group downgraded their rating of the
Sewer Utilit�s revenue bonds from A+ to BBB+ with a negative outlook.
Advantages of Reserves
Reserves stabilize revenues by preventing t� or fee "spikes" when
unexpected events occur. Reserves reduce the impact of economic cycles and create
a bridge that enables the government to continue with its programs unchanged
while it searches for and debates long-term, reasoned and sustainable solutions to
the revenue%xpense imbalance. Reserves are viewed positively by the financial
community and bond rating agencies.
Related Experiences
Cities such as San Antonio, Texas, Baltimore, Maryland and Portland,
, Oregon maintain fund balances as a rainy-day fund to cushion against fiscal
emergencies and recession. Currently the City of Philadelphia, Pennsylvania is
working on creating such a fund. Baltimore officials established the Cit�s
' rainy-day fund in 1993 as a cushion against a future economic slowdowns, which
has grown by appro�mately $800,000 each year during economic expansion.
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Policy Alternatives
There are several policy alternatives available to the Saint Paul Public
Works Department, including:
Do Nothine:
A larger than normal cash balance exists in the operating cash account
already, a reserve may not be required at this time.
Create a Five Percent Designation for Emergencies:
The Designation for Emergencies would be used for major
infrastructure failures or unexpected revenue fluctuations. The
Designation for Emergencies will provide additional retained earnings
equal to $1,851,250.
Create a Five Percent DesiEnation for Rate Stabilitv:
The Designation for Rate Stability would allow the Sewer Utility to
maintain current service level programs or transition expense levels to
match lower revenue levels during the first 18 to 24 months of a
recession or following the loss of a major sewer use customer. The
Designation for Rate Stability will provide additional retained
eai•vings equal to $1,851,250.
Create a Combination Ten Percent Emergencv and Rate Stabilization
Desi2nation:
The Combined Designation for Emergencies and Rate Stability would
combine the benefits of the Emergency and Rate Stability options
previously described, and will provide additional retained earnings
equal to $3,702,500.
Create a Simnle Ten Percent Contingencv Designation:
The Simple Ten Percent Contingency Designation would combine the
benefits of the Emergency and Rate Stability options previously
described, and will provide additional retained earnings equal to
$3,702,500, but would not segregate amoants for either contingency.
Recommendation
The best option for the Sewer IJtility is the combined Emergency and Rate
Stabilization Designation with segregated designations for each event. Currently
cash and retained earniugs are available to fully fund this designation. Creation of
a designation for emergencies and rate stabilization within the Sewer Utility will
help the City prepare for the next recession by setting aside money that could
prevent potentially large rate increases when our customers could least afford to
pay them. The recent sound economy has provided the Utility with revenues in
excess of expenses. Some of this surplus should certainly be used to provide for
emergencies and poor economic conditions. This will also provide assurance to
purchasers of Sewer Utility debt and bond raters that the Utility will be able to
meet all financial obligations into the future.
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The Issue
The Saint Paul Public Works Department is currently exploring the
feasibility of designating a portion of cash and retained earnings within the Sewer
Utility to help the City prepare for the next recession by setting aside a fund for
emergencies and rate stability. The recent sound economy has provided the Utility
with revenues in egcess of expenses and some of this surplus may be used to provide
for emergencies and economic downturns.
At the peak of the economic cycle it is prudent to study whether the Utility
has the ability after su� years of solid performance to prepare for the next recession
and mitigate possible negative effects. According to the Office of the Controller for
the City of Philadelphia (1999), recession will certainly return because it is a
normal part of the business cycle. The City of Philadelphia used the ancient
children's fable of the Ant and the Grasshopper written by Aesop, which tells the
story of the ant that worked all summer long, storing up food for the winter, while
the grasshopper played the summer away. When winter came, the grasshopper was
This analogy applies equally well to long term planning for an inevitable income
hungry and cold, thanks to his unwillingness to provide for the coming lean period.
downturn. Summer, in the form of budget surpluses, is now here and the sun has
been shining since 1994. It is time for the Sewer Utility to plan for more difficult
fiscal conditions, to ensure that what Saint Paul has is not squandered or used to
mask changes in the revenue stream unbeknownst to policy makers.
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Some government units use a two-part designation of surpluses: One
component is set aside for infrastructure emergencies, and the other component is
held to ease the transition to higher rates or spending reductions required by the
loss of a major customer or economic recession. 1`here are several possible positive
benefits from having a reserve or designation: Long term financial health, higher
bond ratings, time to make thoughtfully placed cuts and reasonable rate increases,
ready funding for potential health and safety emergencies, and rate stability.
This analysis examines other government agencies that have used
designations to deternune current and potential alternatives. Additionally the
analysis will address the following questions:
• What is an appropriate level of reserve or designation?
• What is (are) the stated objective(s) of the reserve/designation?
• Does a designation of cash and retained earnings accomplish
those stated objectives?
• How should the reserve or designation be structured?
Research Methods
This study uses multiple methods for collecting information, including a mix
of quantitative and qualitative methods. Quantitative methods included gathering
and evaivating information from a literature review and financial data from annual
financial reports of Saint Paul and other governments. A comprehensive literature
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review was completed, bringing together most of the published scholarly work on
the designation, use and policies related to contingency funds, emergency funds and
"rainy-day" funds. Qualitative methods included intexviews with experts in the
field of government finance, City of Saint Paul managers and officials from
government agencies already using designated reserves.
Additionally, a sur.vey was mailed electronically to four different list servers
of the Government Finance Officers Association (GFOA). This survey is included as
Appendix "B." The low response rate however, made it impossible to draw
conclusions about the use and effectiveness of these reserve designations from these
responses.
The advantage of quantitative methods is the possibility of comparing a large
number of financial results to a limited set of questions, statistical aggregation, and
summary of data across governmental units. Qualitative methods add the needed
depth and detail this study seeks to address, putting into conteat financial
information and judgements about the information that may establish new links
between holding specific designations of retained earnings and the achievement of
financial health, higher bond ratings and rate stability.
Problem Context
The Saint Paul Sewer Utility experienced financial hardship during the last
recession, which occurred from appro�mately 1990 through 1993. Difficult
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decisions had to be made about use of reserves and rates. The financial strain on
the Utility is evidenced by year end cash balances, which reached a low point in
1993. At the same time, Standard and Poor's Rating Group downgraded their
rating of the Sewer Utilit�s revenue bonds from A+ to BBB+ with a negative
outlook. In April 1997, Standard and Poor's improved the rating to A with a stable
outlook. A history of Sewer Utility operating cash balances is show in Table 1.
Table 1
Saint Paul Sewer Utility Operatine Cash Balances 1988 through 1998
1988
1989
I990
1991
1992
1993
1994
1995
1996
1997
1998
13,775,885
16,178,736
9,807,354
5,728,957
3,228,575
335,012
1,668,770
3,501,052
6,006,483
8,775,819
13,135,864
Source: City of Saint Paul Comprehensive Annual F�nancial Reports, 1988 through 1998.
As part of the Administration and City Council's response to the financial
hardships, the Task Force for Sewer Rate Relief was established. The Task Force
was a committee of interested citizens, representatives of large, water-intensive
industrial customers, and Sewer Utility staff. Committee members analyzed the
scope of the Sewer Utility's operations, reviewed historic trends, and attempted to
predict the future of sewer use in Saint Paul. After a 16 month period, studying a
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broad range of topics, the task force recommended that the Storm Sewer System
Charge rate be increased 92% for 1994, and the Sanitary Sewer rate be reduced 8%
for 1994. The Task Force concluded that sewer rates were going to be increasing
faster than the general inflation rate for at least the negt decade (City of Saint
Paul, 1994). Generally, the future expected increases are related to new Federal
mandates for cleaning storm water; the loss of Federal grants for Metropolitan
Council sewer projects, thus requiring more bonding and more local financing; and
the 1988 policy change of the City Council to modify the sanitary sewer rate
structure from a large volume structure to a conservation rate structure, thereby
encouraging all users to puxchase less water. This ultimately increases rates
because billable volumes decrease and water consumption in Saint Paul is the basis
of Sanitary Sewer use charges. A history of Sanitary and Storm Sewer charge rate
increases and decreases is shown in Table 2.
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Table 2
Saint Paul Sewer Utility Sanitarv and Storm Sewer Rate Chan�es
1988 through 1998
Year
Sanitarv
Storm
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
30.1%
-20.0%
7.9%
3.7%
7.6%
6.0%
5.5%
8.0%
3.6%
22%
3.5%
0.0%
0.0%
0.0%
4.8%
0.0%
5.7%
16.8%
15%
3.6%
2.0%
2.0%
Source: City of Saint Paul Annual Budget Documents, 1988 through 1998.
According to 1�er (1993), municipalities have to anticipate financial
requirements. The time frame required to adequately anticipate needs must be
longer than the annual budget allows. Politicians and staff must break free from
the tyranny of daily problems to fceus on the long term, to eliminate some of their
emerging problems.
Building reserves can give a large degree of comfort to program staff and
eIected officials. There is a direct reIationship between reserve size and program
manager or financial staff comfort. Savings provide flexibility and opportunity:
More is better. In government however, more is not always better. Savings held by
governments do not belong to the department or agency: The accumulated savings
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belongs to the customers -- the tax and rate payers. This analysis identifies the
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point where reserves cease to be good, when they become an unfair and unnecessary
transference of wealth from tagpayers to the government unit. This analysis also
examines policies in use by other government units regarding uses of reserves for
emergencies and budget stabilization, in order to apply those practices to the City of
Saint Paul Sewer Utility.
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Advantages and Disadvantages of Reserves
According to the Govex•ninent Finance Officers Association (GFOA) (1998),
reserves can play a key role in stabilizing a government revenue stream.
Designated reserves are an important tool for making a one-year budget part of a
multi-year strategic financial plan. There are advantages to using reserves to
stabilize revenues such as preventing t� or fee "spikes" when unexpected events
occur and the ctu-rent adopted budget is not sufficient to cover the event. Reserves
can reduce the impact of economic cycles on the government agency through reserve
use when revenue is poor and reserve building when revenne is good. Reserves can
create a bridge that enables the government to continue with its programs
unchanged while it researches and debates long-term, reasoned, and sustainable
solutions to the revenue%xpense imbalance. Reserves are viewed positively by the
financial community and bond rating agencies. Lastly, reserves discourage the
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tendency to generate more revenue than is needed based on the possibility that
income will be less than predicted.
Tyer (1993) explained the difference between a simple reserve fund and a
contingency fund. Contingency funds are a special subset of reserve funds that may
only be used for uneapected events and emergencies. Reserve funds not designated
for contingencies have far fewer restrictions, All reserve funds attempt to
accomplish the following: stabilize the government's revenue stream; maintain the
government's ability to provide necessary services; and provide rate, fee and tax
stability.
According to Navin and Navin (1997), many states have created a Budget
Stabilization Fund (BSF). One objective of the BSF is to reduce or eliminate what
they term the "revenue rachet". This happens when the economy experiences a
slowdown in general economic activity. The resulting revenue shortfall to the state
may be addressed by raising t�es. But when the economy returns to a positive
growth trend, the state does not reduce its tas rates in recognition of this return to
normalcy. Then during the neat recession, taxes are raised again, "ratcheting np"
the tax rate and total taz� revenue of that state.
Navin and Navin (1997) noted that it is reasonable and rational to expect the
unexpected. Accordingly, taking the steps necessary to prevent the unexpected
event from suddenly and sharply increasing taxes or fees is reasonable. Building
emergency and contingency funds reduces the likelihoocl that significant revenues
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will be required from customers all at once, which will often egacerbate the
problem, and provides more time to assemble creative solutions. Tlus is important
politically because a contingency fund can stabilize rates, fees and taxes, and can
help elected officials avoid sacrificing quality services while they examine long term
revenue options.
Many factors affect the accuracy of budgets. There can be errors in
forecasting economic conditions: The time lapse between budget development and
the actual spending or receipt can be up to 18 months. Ghanges in economic
conditions, particularly at the state level, cause changes in revenues and revenue
estimating errors. The size of revenue estimating error varies by year, but is
always an issue for budget officers, because statistical error margins are natural to
any estimating model, and staff are unable to make 100% accurate economic
forecasts. If revenue estimating errors are too large, they can be very disruptive to
government service delivery. Building and using a budget stabilization or
contingency fund is the single most reliable way to ensure that a continuous flow of
public services can be maintained while policy makers and administrators examine
the problem and determine a future direction change, if any.
Disadvanta�es
According to the GFOA (1998), there are some disadvantages of using
reserves to stabilize revenues. Reserves can create an overly conservative state of
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mind that prevents appropriate use when needed. Maintaining a high level of
reserves can be viewed as over-taxation and hoarding. There are questions of inter-
generational equity; specifically, should not current year revenues pay for current
year services? Use of reserves in times of fiscal stress-may help policy makers avoid
difficult and unpopular decisions that must be made to ensure long-term program
viability. Even with these negatives in mind, reserves are an important part of
program management, and therefore must be fully disclosed, completely explained,
and justified to policy makers and citizens alike.
Creating and Sizing Reserve Funds
Professor Joyce was the first to review state rainy-day funds on a national
level. According to Joyce (1999), quoting Vasche and Williams, governments have
four ways to correct revenue or expenditure levels that have adverse effects on
budgets: revenues can be increased, expenses can be reduced, money can be
borrowed, or contingencies can be used. Governments are beginning to recognize
that for long-term sustainability, they need to plan for the troughs of the business
cycle dnring the peaks of the business cycle. States-have increasingly turned to
"rainy-day funds" or countercyclical stabilization funds since about 1984. As of
1997, 44 states had some form of budget stabilization fund, although Joyce (1999)
noted that many do not meet the strict definition of a rainy-day fund because of the
way the reserve is built or used.
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Many states and funds have vastly different methods for disbursement. For
contingency funds to accomplish their countercyclical intent, the fund must be
created in a way that makes it unable to be used unless an independent, objective
and verifiable measure says it should be used. In addition, some states require a
legislative "supermajority" vote for use.
According to Joyce, many states operate under the "five percent rule" (that is
to say that the reserve should be five percent of the annual expenditure program),
but there is no specific source to base this five percent judgement upon. Navin and
Navin (1997) cited the National Conference of State Legislatures (NCSL), which in
turn cited Wall Street Analysts in favor of the five percent rule. According to many
experts however, five percent is a start, but is not nearly enough (Joyce, 1999;
Navin & Navin, 1997; Lav & Berube, 1999; and Barrett & Greene 1999).
Navin and Navin (1995) cited in Joyce (1999), found that, after studying
seven Midwestern states' rainy-day funds, only three (Indiana, Michigan and Ohio)
perform like countercyclical funds. The Navins also studied the state of Ohio to
They found that using the suggested five percent target would not be large enough
determine for that state, what an optimal budget stabilization amount should be.
to meet the needs of the state of Ohio in the event of an economic downturn. The
Navins estimated that Ohio would need appro�umately of 13% in a contingency
reserve fund to help the state weather a mild recession.
The optimal size of a reserve fund depends on how the government obtains its
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revenues and the nature of the government's expenses, unfortunately there is no
simple formula for calculating these reserves. Joyce (1999) concluded that the
reserve fund must be calculated on an individual government-by-government basis
because the revenue mix is so vastly different and the policy that created that
revenue mix has evolved so differently over time. Joyce discussed the factors
influencing optimal size, and concluded that the factors are primarily driven by
differences in the revenue stream. Joyce recognized that some governments have
revenue streams that are more suseeptible to economic downturns and volatility
The following five factors influence volatility: Governments with progressive tax
sqstems, governments that receive more federal aid, governments with less diverse
revenue streams, governments that rely on gambling revenues, and states with
larger medicaid expenditures, (Joyce, 1999).
Joyce (1999) created a ranking system, or volatility score, for each of these
factors from zero to five, with five being the most volatile. He then created a
composite volatifity score, which brings all the separate volatility scores together.
He found that aIl states and governments should not be aiming for the same
tazgeted reserves. Five percent is not adequate for some governments and it may
be too much for others. Joyce argued that all governments need to assess their own
revenue and egpense picture to determine egactly what amount is right for them.
There is a wide variation among states in terms of the appropriate size of a rainy-
day fund.
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�er (1993) described ways to build reserves. The government can under-
budget revenues, over-budget expenditures, actually budget the buildup of a reserve
fund, or use a combination of approaches. Many states rely on discretionary
appropriations to put money into their rainy-day funds. In some cases, money
never gets put into the fund.
Fiscal Sli�'ht of Hand
When budgets get tight, Vasche and Williams (1987} found that program
managers and budget officers often use budget gimmicks. Some of these gimmicks
included: Postponing payments to employees, vendors or residents, and arranging to
collect revenue sooner than normal. Unfortunately, gimmicks only produce one-
tune relief. The Sewer Utility had to resort to the use of revenue bond construction
cash of $1.6 million in 1992 (City of Saint Paul, 1992) to pay for operating expenses.
When it became clear that this $1.6 million cash infusion was not enough, an
arrangement was made with the St. Paul Water Utility to advance payment on -
their monthly collection of sewer revenues for the Sewer Utility
When taY rates are increased or the tas base broadened to supplement
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revenues, the exact timing of the new revenue receipt can be hard to predict.
Accelerating revenue accomplished by shortening payment due dates are sometimes
popular with local governments because their negative consequences are not
immediately felt. Administrative actions to reduce spending are often not enough
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because only a percentage of the program manager's buaget is diseretionary_
Additionally, decisions made in a crisis mode o#ten are not prepared thoughtfully
and carefully, and lack the rigorous study required for maintaining the best
program possible at the least possible cost.
Best Practice Recommendations
The Government Finance Officers Association (1999) recommended that a
government shonld "develog policies to guide the creation, maintenanee and use of
resources for financial stabilization purposes" (1998, p.1}. By doing this,
governments maintain enough money in the bank to keep from cutting services or
raising taxes and fees due to revenue difficulties or unexpectedly large
expenditures. The Government Finance Officers Association (GFOA) policies
discussed how and when a stabilization fund is developed, that the purpose of the
fund and the minimum and maximum reserve levels should be clearly stated, and
noted that the policy should be publicly available for review.
Stabilization funds may be used at a government's discretion to address
temporary cash flow shortages, emergencies, and unanticipated economic
downturns. Policies on the use of these funds should be tied to an adverse change
in an economic indicator, such as rising unemployment or changes in personal
income growth, to ensure that the funds are not depleted be£ore an emergency
arises. This type of statistical triggering mechanism assumes the fund is a true
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"countercyclical" fund. The range of amounts to be held should be based on the
types of revenue and the level of uncertainty associated with those revenues.
Appropriate budgeting and spending are equally damaged by unnecessary expenses
during good times as they are harmed by indiscriminate cuts during lean times.
Financial mechanisms should be used to limit spending on the upside as well as the
downside. These mechanisms may include triggering criteria and formulas that are
written into law.
According to Lav and Berube (1999), the most recent U.S. recession began in
July 1990 and only lasted until March 1991. Even so, many states experienced
financial difficulty from 1989 through 1992. By mid-year 1991, the cumulative gap
between projected revenues and expenditures for 30 states was almost $15 billion
(Lav and Berube, 1999).
Recessions are particularly difficult for states because their revenues usually
go down at the same time their social service expenditures go up (Lav & Berube,
1999; and Joyce, 1999). This is because recessions cause more demand for social
services. According to Lav and Berube (1999), during the recession of the early
1990s, increases in unemployment led to increases in AFDC, Emergency Assistance,
and Medicaid spending. Without the substantial tas increases adopted by the
states during that period, state expenditures would have more than consumed state
revenues at that time.
Lav and Berube (1999) recommended that states should have reserve funds
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averaging just over 18% of general fund budgets to weather the next recession,
however, a Sewer Utility is not as susceptible to the inverse relationship of
decreased revenue and increased social spending, therefore their reserve need not
be as high. However, Hyman Grossman of Standard and Poor's Rating Group called
the 18% mark "naive and counterproductive. You can get to the point where
reserves are obscene" (Barrett and Greene, 1999, p. 68).
Despite the healthy growth in state revenue collection over the past few
years, the relatively smaIl growth in spending over the same period, and the
resultant revenue over expenditures or net income, most states have not done what
is necessary to withstand even a relatively mild economic recession similar to what
occurred in the early 1990s. This increases the chances that an economic downturn
may make governments pass large tax or fee increases and to make unhealthy
spending cuts in order to balance their budgets. This is particularly important
because municipalities occasionally "share the pain" by the shifting of costs of
service, lost intergovernmental cost participation, or spending cuts from one fund to
another in difficult financial times.
Related Experiences
The idea of creating a budget stabilization fund is not only the province of
state government. Some cities have done this as well. While some cities have
adopted the concept after it became popular with states, others, like Portland,
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Oregon, pioneered this concept for cities (Government Finance Officers Association,
1998). According to the Office of the Controller for the City of Philadelphia (1999),
cities such as San Antonio, Tegas, and Baltimore, Maryland maintain fund balances
as a rainy-day fund to cushion against fiscal emergeneies and recession. Currently
the City of Philadelphia, Pennsylvania is working on creating one. Baltimore
officials established the City's rainy-day fund in 1993 as a cushion against a future
economic slowdowns, and it is grows by appro�mately $800,000 each year during
eeonomic expansion (City of Philadelphia, 1999}.
New York Citv
According to the Office of the Controller for the City of Philadelphia (1999),
New York City is slightly different, because the City is legally prohibited from
carrying forward funds from one �iscal year to the next. The City employs a
budget-stabilization account to designate excess current revenues for yet unknown
future expenses. The budget-stabilization account is established by law. If at any
time during the fiscal year additional revenue is recognized in a modification of the
budget, the City is required to set aside one-half of the new revenue into the
budget-stabilization account. Expenditures from the budget-stabilization account
must have a specific request for appropriation that identifies the purpose for the
money, and must be approved by a Gity Council supermajority. Unlike a true
rainy-day fund, the budget-stabilization account must be fully spent each year.
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However, the City can rebuild the account in the subsequent year if new revenue is
available.
Philadelnhia
According to the Office of the Controller for the City of Philadelphia (1999),
Philadelphia officials decided that by creating a rainy-day fund, Philadelphia could
sustain the appropriate level of government services over the long-term without
resorting to staff cuts, rednctions in service, or ta$ increases in the event of an
economic recession. The Controllei's Office concluded this could improve the Cit�s
long-term financial health and improve its chances of obtaining favorable bond
ratings, which could reduce future interest rates on city issued debt and thereby
reduce future debt service costs. The Controller's Office is seeking to set the
account up so that contributions to the budget-stabiIization fund wilI be made when
the rate of increase in revenue collections surpasses long-term economic growth
rates, and use of the fund will be allowed only when revenue collection falls below
long-term economic growth rates.
Portland. Oreeon
Portland Oregon was perhaps the pioneer in establishing a locai government
budget stabilization fund. According to the Government Finance Officers
Association (1998), during the early 1980s, Portland experienced severe financial
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stress resulting from the loss of federal revenue sharing and a severe recession.
Additionally, one-time revenues were being used to fund on-going programs, and an
overly optimistic anne%ation policy designed to give the General Fund more revenue
failed. As a result, the City of Portland closed fiscal year 1986-1987 with a General
Fund fund balance of $600,000 with literally no cash in the bank.
Staff and elected officials discussed reserves and they decided a reserve
would provide the City Council with more financial flexibility. They decided their
reserve could be used for emergencies and as a countercyclical tool to make the
transition through economic downturns. Part of their hope was to salvage
Portland's AAA bond rating.
With the help of staff economists, Portland developed the following model:
Reserves were to be composed of two parts, one part to be used only for emergencies
and the second part for countercyclical needs. The reserves were set up separate
from the General Fund, in the "General Reserve Fund." The emergency reserve was
pegged at five percent of net revenues based solely on discussion and their "expert
, judgement."
The determination of countercyclical reserve size proved to be more difficult.
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A 19 year revenue history that included the recessions of 1973 and 1981 was used.
Long run revenue growth was historically five and one-half percent. An
independent objective indicator was needed as a trigger; staff found that when
growth was less than five and one-half percent, the area's unemployment rate
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tended to exceed sis and one-hal£ percent and the property tax delinqueney rate (the
percentage of the new annuaI tax Ievy that was not coIlected in the first year}
exceeded eight percent. Applying this analysis, Portland officials determined that
an average slowdown in the economy caused a revenue loss in the first year o€ a
recession of $2.8 million, the 24 month revenue loss was estimated to be $8.4
million or approffimately another five percent. When the five percent emergency
reserve is added to the estimated 24 month countercyclical reserve requirement of
five percent, Port�and created a ten percent budget-stabilization fvnd.
7'hrough the use of the property t� delinquency trigger, the countercyclical
reserve use is governed by economic indicators and not politics. To rebuild both the
emergency and countercyclical reserves after use, the policy requires payback and a
scheduled rebuilding of the fund.
Immediate success was achieved: The fund eliminated Portland's need for
$30 million in tax anticipation note borrowing, the Council resolution and adopted
policy was critical for preventing raids on the fund for other purposes, and the AAA
bond rating was saved according to the Government EYnance Officers Association
(1998). Portland found that using the reserves prudently helped the city weather
two property tax limitations passed by the state of Oregon that otherwise would
have caused reductions in city services.
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State of Oluo
Navin and Navin (1997) discussed the approach that Oluo used to establish
both a statutory formula for contributing to the state Budget Stabilization Fund
and provide a procedure for withdrawal from the fund in times of fiscal stress. Ohio
uses a system similar to Portland, Oregon except Ohio's trigger is the annual
growth in "adjusted personal income" as compared to a one and four-tenths percent
benchmark estimate of normal personal income growth or personal income growth
adjusted by the consumer price index.
The Milwaukee Metropolitan Sewerage District
The Milwaukee Metropolitan Sewerage District (MMSD) also maintains
reserves for budget-stabilization, according to Kirchen (1996) and Miller (1999).
There had been complaints by critics of the MMSD that the reserve was too large.
Because of these complaints the Wisconsin legislature tried unsuccessfully to pass a
bill that would have required the MMSD to return the reserves to taspayers.
During the debate in the legislature, MMSD officials hired Bear, Stearns and
Company, a New York City investment bank, to conduct a review of their reserves.
This review determined the estimated $120 million cash reserve the Milwaukee
Metropolitan Sewerage District was reasonable and prudent. Bear Stearns based
this opinion on the MMSD's capital project requirements and cash flow needs.
According to Kirchen (1996), Bear Stearns found that cash reserves played an
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important role in supporting MMSD's financial credibility when it went to the bond
market. In �995, Mood�s Investor's Service Incorporated maintained its Aa rating
of the district, partly due to the soiid financial management demonstrated by the
reserve fund. Bear Stearns concluded that if the legislature caused the reserve fund
to be eliminated, this could cause rating agencies to downgrade their ratings on
MMSD bonds.
Choices for Saint Paul
In response to the poor financial performance of the Saint Paul Sewer Utility
in the early 1990s, Utility staff decided to survey major customers and stakeholders
to obtain their interpretation of what the Utilit3�s priorities should be. The Report
on the 1995 Sewer Rate Structure Survey Results (City of Saint Paul, 1995), briefly
discussed the guiding principles, the initial draft done by UtiIity staff and the final
review done by the University of Minnesota Center for Survey Research. This
survey was sent to policy makers from the City Council, local District Councils, the
City Finance Department, Mayor's Office, Public Works, members of the Task Force
for Saint Paul Sewer Rate Relief, Saint Paul Water Utility and several outside
agencies including the Minnesota Pollution Control Agency and Saint Paul's State
legislative delegation. Of the 92 surveys sent, 43 were returned, providing a
response rate of 47%.
The survey indicated that Sewer Utility Fund financiat stability was the
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most important objective. Respondents indicated that the sewer system should be
self supporting and rates charged should be based on the full cost of service
provided, and the concept of fairness and equity inherent in that. Respondents
were interested in flattening out fluctuations in annual sewer rate increases.
When indicators of regional or local economic health are reviewed for possible
use as a triggering mechanism for a budget-stabilization fund for the Sewer Utility,
it became clear that annual revenue growth does not work well. Annual revenue
growth does not work well because sewer revenues do not respond as quickly or as
directly to the economy as personal income taxes, neither do the volatility factors
established by Joyce (1999).
The factors that must be watched closely are: Negative changes in the local
economy, losses of major customers, and infrastructure emergencies. Sewer
revenues are fairly inelastic and increases in revenue are more closely related to
changes in the rate charged per hundred cubic feet (ccf) than in changes in the local
economy. Similarly, domestic (residential) volume is largely fixed, since it is tied to
winter water consumption, and therefore is stable all through the year. Commercial
customers, on the other hand, are billed monthly and are billed for sewer usage
based on the actual water used for the prior period. Changes in the economy will
definitely affect the health of this customer segment and in turn, this will have an
effect on the financial health of the Sewer Utility.
The financial health of large customers, and of large vendors such as
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Metropolitan Council Environmental Services (from whom the City buys its
sewerage treatment), does have an impact on the revenue generating and cost
environment of the Sewer Utility. The Utilit�s largest customers are Rock Tenn
Corporation (a recycled paper manufacturer in the Midway area), Ford Motor
Corporation (producing Ranger pickup trucks at its Highland Park facility), and
Minnesota Mining and Manufacturing (producing tape at its East Side facility).
Should the local economy force the closure or movement of one of these production
facilities, the budget-stabilization fund should be triggered and used if neeessary.
Even if a poor eeonomy caused one of the major customers to close temporarily, the
eflect on the remaining customers would be burdensome.
Creation of this account would need to be technicalIy called a"designation"
and not a"reserve." The term reserve is typically withheld for those special parts of
retained earnings or fund balance that are "externally restricted." This limits
reserves to items specifically identified by bond agreements and other contractual
obligations with arms length individuals and entities. Any amount that the City
Council sets aside must be a called a designation, because the City is not legally
required by agreement with another to keep the amount in reserve. The City
Council could decide to undo what it had designated at any time, so therefore this
term should not be confused with reserves.
City Administration and the City Council have several alternatives. These
alternatives are briefly described in Table 3.
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Table 3
' City of Saint Paul Sewer Utility Budget Stabilization Desi2.nation
Policv Alternatives
� Designated Cash &
Policv Alternative �igger or Need Retained Earnin2s
, Do Nothing
' Emergency Designation
, Rate Stabilization
Designation
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Combined Emergency
' and Rate Stabilization
Designation
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� Simple Contingency
Designation
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No trigger; any need
Infrastructure or
unexpected revenue loss.
SSSC delinquencies;
large billable sanitary
sewer volume losses
Tnfrastructure; unexpected
revenue loss; SSSC
delinquencies; large
billable sanitary
sewer volume losses
Infrastructure; unexpected
revenue loss; SSSC
delinquencies; large
billable sanitary
sewer volume losses
$0.00
$1,851,250
$1,851,250
$3,702,500
$3,702,500
ITnder the "do nothing" scenario, there is no real change in outcomes or
difference in financial planning in the short-term. A larger than normal cash
balance e�usts in the operating cash account and the unreserved, undesignated
retained earnings account. These balances may still exist and be available for use
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in an emergency or in the event of an economic recession. This alternative presents
difficulties if these funds are foolishly spent, appropriated by the governing body for
non-sewer related uses or used during the early stages of a financial crisis. This
atternative is particutarly troublesome because it may provide no warning to policy
makers until the entire operating reserve is spent.
Emergencv Designation O �
The City of Saint Paul's sewer system has an estimated replacement value of
one billion dollars. At the same time, many parts of the sewer infrastructure
facilities are over 100 years old. Saint Paul is currently in the second year of a 20
year program to systematically inspect and rehabilitate all the sewers in the city.
Even with this aggressive rehabilitation program, the possibility e�sts that a major
sewer infrastructure problem will occur, for which additional emergency spending
will be needed. Storm sewers are periodically under extreme stress from high flow
conditions during heavy rainfalls. All sewers, both storm and sanitary, can develop
structural problems that slowly cause collapse or failure that cannot be readily
detected from the surface. When an nnderground void opens, large portions of
street or surface can be damaged.
fihe Emergency Designation should be equal to five percent of annual
operating revenues as adopted by the City Council and only available to the Sewer
Utility Enterprise Fund to finance one-time, emergency, unanticipated capital or
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operating egpense requirements or to offset unanticipated revenue fluctuations
occurring within a fiscal yeaz. Based on budgeted 1999 sanitary and storm sewer
revenues of $28,322,416 and $8,702,580 respectively, this designation would be
� $1,851,250.
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The Emergency Designation may be accessed when emexgency expenses or
an unanticipated revenue reduction causes an operating cash balance less than 90
days of operating expenses. The amount of this designation should be reviewed
annually to ensure that the new budgeted amounts are included in the formula.
Use of the Emergency Designation must be authorized by a properly executed
council resolution or adopted as part of the annual budget.
Emergency Designation resources must be restored. Restoration should
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commence in the first fiscal year following use. Restoration shall be accomplished
in annual installments no smaller than one percent of total Sewer Utility sanitary
and storm sewer revenues in the year the Emergency Designation was used. If
sanitary and storm sewer charges for the following year have already been adopted,
the Administration and City Council should act to revise those charge rates to
include this restoration.
Rate Stabilization Desi�nation Onlv
The Rate Stabilization Designation would be available to address revenue
shortfalls or expense overruns related to adverse changes in the local economy. Use
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of this fund woul d be triggered by an independently verifiable measure of the health
of the economy as it relates to the Sewer Utility.
I propose using a ratio of delinquent Storm Sewer System Charge fees to
annuaI total current year Storm Sewer System Charge revenue. The Storm Sewer
System Charge (SSSC) was a new charge in 1986, and since the G`ity carries
delinqnent charges on its financial statements for five years, the first year with a
full compliment of delinquent charges was 1991. I have included delinquent
property taxes in the chart to demonstrate the trend as it relates to property t�es
as support. The levies and delinquencies since 1985 are summarized in Table 4.
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Table 4
Saint Paul Propertv Tax and Storm Sewer Svstem Char�e (SSSC) Delinquencies
from 1985 through 1998.
Property Percentage Percentage
Tax SSSC Delinquent Delinquent Prop.Taxes SSSC
Yeaz Lev Revenue Taxes SSSC Delinquent Delinquent
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
46,204,903
51,431,349
54,308,956
57,450,556
53,713,945
58,282,981
64,408,993
65,160,804
66,737,196
66,736,547
66,461,547
65,811,463
64,186,727
62,386,509
4,322,861
4,571,220
4,528,Q32
4,841,369
5,678,226
6,515,184
6,767,190
6,966,792
2,086,818
2,744,720
3,127,982
4,149,925
4,855,561
4,599,094
5,627,401
6,479,632
6,307,292
5,094,235
4,062,395
3,388,266
2,918,052
2,072,197
510,565
572,124
508,555
505,125
394,531
382,487
341,535
276,785
4.95%
5.94%
6.08%
7.64%
8.45%
8.56%
9.66%
10.06%
9.68%
7.63%
6.09%
5.10%
4.43%
323%
12.45%
1323%
11.13%a
11.16%
8.15%
6.74%
524%
4.09%
Source: City of Saint Paul Comprehensive Annual Financial Reports, 1985 through 1998.
rates higher than ten percent clearly coincide with the recession of the 1989 to 1993
Table 4 clearly shows the recession from 1989 through 1992, with residual
effects occurring in delinquent storm sewer collections well into 1994. Delinquency
' period.
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The Rate Stabilization Designation sl�ould be equal to five percent of annual
operating revenues as adopted by the City Council and only available to the Sewer
L3tility Enterprise Fund to either maintain current service level programs or
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transition expense levels to match lower revenue levels during the first 18 to 24
months of a recession or following the loss of a major sewer use customer. The
amount of this designation should be reviewed annually to ensure that the new
budgeted amounts are included in the formula. Based on budgeted 1999 sanitary
and storm sewer revenues of $28,322,416 and $8,702,580 respectively, this
designation would be $1,851,250.
The Rate Stabilization Designation xnay be aecessed when the operating cash
balance is less than 90 days of operating egpenses. In aadition, one or more of the
following conditions must occur in eonjunetion with the cash balance trigger:
The Storm Sewer Charge delinquency rate (an indicator of economic
recession) exceeds ten percent or is predicted to exceed ten percent
during the current or next fiscal year�, or
Net Sanitary Sewer volume (gross volume less credits) decIines exceed
two and one-half percent compared to the previous fiscal year or are
predicted to exceed two and one-half percent during the next fiscal
year.
A history of billable sanitary sewer volumes is included in Appendix "C." Use of
the Rate Stabilization Designation should be authorized by a properly executed
council resolution or adopted as part of the annual budget.
Rate Stabilization Designation resources must be restored. Restoration
should commence in the fiscal year that is two years (two years should in most cases
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place the restoration after the worst of the recession is over) following the year of
use. Restoration shall be accomplished in annual installments no smaller than one
percent of total Sewer Utility sanitary and storm sewer revenues in the year the
Rate Stabilization Designation was used. If sanitary and storm sewer charges for
that year have already been adopted, the Administration and City Council should
act to revise those charge rates to include this restoration.
A Combination Emer�'encv and Rate Stabilization Designation
The Combination Emergency and Rate Stabilization Designation would be
structured similar to Portland, Oregon's model, but would be based on the Storm
Sewer delinquency trigger previously described. The designations would be
separate so that, if one part of the designation was triggered, the other balance
would remain whole for use. Use of the Emergency and Rate Stabilization
Designation must be authorized by a properly executed council resolution or
adopted as part of the annual budget. The Designation for Sewer Utility Budget
and Rate Stabilization should be equal to 10% of budgeted annual sanitary and
storm sewer revenue. This amount should be revised annually. Based on budgeted
1999 sanitary and storm sewer revenues of $28,322,416 and $8,702,580
respectively, this designation would be $3,702,500.
If needs arise that cause both the Emergency Designation and the Rate
Stabilization Designation to be used, and restoration of those designations are
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concurrent, restoration shall be accomplished in annual installments no smaller
than a total of two percent of total Sewer Utility sanitary and storm sewer
revenuea. If sanitary and storm sewer charges for that year have alxeady been
adopted, the Administration and City Council should act to revise those charge
rates to include this restoration.
A Simple Contingency Designation
A Simple Contingency Designation could be created and used for either an
infrastructure emergency or as a budget stabilization fund. The amount and
calculation of the designation would essentially use the same methods as the
combination fund previously described. However, this alternative would not have
the statutorily established firewall between the emergency and rate stabilization
portions, so the designated funds could be e�austed on one type of problem,
leaving none to solve any others. Based on budgeted 1999 sanitary and storm
sewer revenues of $28,322,416 and $8,702,580 respectively, this designation would
be $3,702,500.
Recommendation
The best option for the Sewer Utility is the combination Emergency and Rate
Stabilization Designation. A proposed City Council Resolution to enact this policy
is included in Appendig "A." This designation would provide a safety valve for both
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of the most serious revenue shortage causes, and segregate the amounts for each.
Currently cash and retained earnings are available to fully fund this designation.
Even though cash and retained earnings in this amount do e�st, this is an area
where some reassessment of policies and laws may now be appropriate and
, necessary.
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In addition, this combined ten percent designation should be placed in a
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separate interest earning account in the books and records of the City Treasury and
the Sewer Utility Enterprise Fund and shall be managed as part of the City
'IYeasury Investment Pool. Interest income earned on the account should be used to
keep the designation at the appropriate 10% level. The impact of interest earnings
on this account should be reviewed annually by Public Works Accounting and Office
of Financial Services staff. If at the time of this annual review this designation has
grown larger than 10% of budgeted sanitary and storm sewer revenue, the excess
may only be used to fund a portion of a following fiscal year's Sewer Utility
Enterprise Fund Budget as proposed by the Mayor and adopted by the City Council.
Conclusion
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Creation of a designation for emergencies and rate stabilization within the
Sewer Utility will help the City prepare for the next recession by setting aside
money that could prevent potential hardship for our customers. The recent sound
economy has provided the Utility with revenues in excess of expenses: Some of this
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surplus should certainly be used to provide for emergencies and poor economic
conditions. This will also provide assurance to purchasers of Sewer Utility debt and
bond raters that the Utiiity will be able to meet all financiai obligations into the
future. Unfortunately, bond ratings for the Sewer Utility are likely subservient to
the bond rating for the Cit�s General Obligation Debt. The Cit�s General
Obligation debt is currently rated AA by Standazd and Poor's, and that rating may
need to be improved to AAA before the Sewer Utility's bond rating can be upgraded.
Perhaps application of these principles and methods to the General Fund would
have an impact in that regard.
The warm economic winds of summer have blown the chaff from the wheat
and neatly piled it in front of the Sewer Utilit�s granary door. The time is right for
the ants to carefully, thoughtfully and methodically cany that wheat into the safety
of the garner for the long winter which inevitably will soon be upon us.
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Annotated Biblio2ranhv
Barrett, K. & Greene, R. (1999, September). The gospel of guidelines.
Governing, 12 (12), 6$. A good summary analysis which brought together the work
of Phil Joyce, Iris Lav, and additional insight from Hyman Grossman of Standard &
Poors Corp.
Campi, F. & Sullivan, D. (1998, April). State and local government fiscal
� position in 1997. Survev of Current Business. 78, (4), 10-15. States and local
governments had surpluses totaling $107.8 billion at the end of 1997. The majority
' of these surpluses were generated through operating programs such as education,
highways and streets, and medical programs.
LI
,
City of Saint Paul. Budget Office. (1988). Citv council adopted budget for the
vear 1988. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1988.
City of Saint Paul. Budget Office. (1989). Citv council adopted bud�et for the
, year 1989. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1989.
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City of Saint Paul. Budget Office. (1990). Citv council adopted budget for the
vear 1988. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1990.
City of Saint Paul. Budget Office. (1991). City council adopted budget for the
vear 1991. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1991.
City of Saint Paul. Budget Office. (1992). Citv council adopted bud�et for the
„�ar 1992. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1992.
City of Saint Paul. City Council. (1992) Resolution of the Saint Paul Citv
Council: CF 92-1373. Saint Paul, Minnesota: City of Saint Paul. This resolution
directed the use of $1.6 million in cash intended for construction projects to be used
for operating expenses to balance the operating budget.
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City of Saint Paul. Budget Office. (1993). City council adopted budget for the
vear 1993. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
2993.
City of Saint Paul. Bndget Office. (1994). Citv council adopted budget for the
,�ear 1994. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer ITtility for
1994.
City of Saint Paul. Budget Office. (1995). City council adopted bud�et for the
vear 1994. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1994.
City of Saint Paul. Department of Finance and Management Services.
(1986). Comprehensive annual financial report for the fiscal vear ended December
31, 1985. Saint Paul, Minnesota: City of Saint Paul. This annual report was used to
gather specific data regarding the relationship of Delinquent Property Taxes
Receivable to the total revenue generated from property taxes for 1985.
City of Saint Paul. Department of Finance and Management Services.
(1987). Comprehensive annual financial report for the fiscal vear ended December
31, 1986. Saint Paul, Minnesota: City of Saint Paul. This annual report was used to
gather specific data regarding the relationship of Delinquent Property Tages
Receivable to the total revenue generated from property taxes for 1986.
City of Saint Paul. Department of Finance and Management Services. (1988).
Comprehensive annual financial report for the fiscal vear ended December 31, 1987.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Taxes Receivable to
the total revenue generated from property taxes for 1987.
City of Saint Paul. Department of Finance and Management Services. (1989).
Comprehensive annual financial report far the fiscal vear ended December 31, 1988.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the retationship of Delinquent Property Taxes Receivable to
the total revenue generated from property taxes for 1988.
City of Saint Paul. Department of Finance and Management Services. (1990).
Comprehensive annual financial report for the fiscal year ended December 31, 1989.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
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specific data regazding the relationship of Delinquent Property Taxes Receivable to
the total revenue generated from property taxes for 1989_
City of Saint Paul. Department of Finance and Management Services. (1991).
Comprehensive annual financial report for the fiscal �ar ended December 31, 1990.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Taxes and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1990.
' City of Saint Paul. Department of F4nance and Management Services. (1992).
Comprehensive annual financial report for the fiscal year ended December 31, 1991.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
' specific data regarding the relationship of Delinquent Property Taxes and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1991.
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City of Saint Paul. Department of Finance and Management. (1993).
Comprehensive annual financial report for the fiscal vear ended December 31. 1992.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Taxes and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1992.
' City of Saint Paul. Department of Finance and Management. (1994).
Comprehensive annual financial report for the fiscal year ended December 31. 1993.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
� specific data regarding the relationship of Delinquent Property Tases and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1993.
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City of Saint Paul. Department of Finance and Management. (1995).
Comnrehensive annual financial report for the fiscal vear ended December 31. 1994.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Tases and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1994.
City of Saint Paul. Office of F4nancial Services. (1996). City council ado�ted
btx�et for the year 1996. Saint Paul, Minnesota: City of Saint Paul. This annual
budget was used to gather specific data on rates and fees charged by the Saint Paul
Sewer Utility for 1996.
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City of Saint Paul. Office of Financial Services. (1996). Comnrehensive
annual financial re�ort for the fiscal vear ended December 31. 1995. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinquent Property Taxes and Delinquent Storm
Sewer System Charges Receivable to the total revenue generated from those
funding sources for 1995.
City of Saint Paul. Office of Financial Services. (1997). C� council adopted
budget for the �ar 1997. Saint Paul, Minnesota: City of Saint Paul. This annual
budget was used to gather specific data on rates and fees charged by the Saint Paul
Sewer Utility for 1997.
City of Saint Paul. Offiee of Financial Serviees. (1997). Comprehensive
annual financial report for the fiscal vear ended December 31. 1996. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinquent Property Taxes and Delinquent Storm
Sewer System Chazges Receivable to the total revenue generated from those
funding sources for 1996.
City of Saint Paul. Office of Financial Services. (1998). City council ad�ted
bud�et for the vear 1998. Saint Paul, Minnesota: City of Saint Paul. This annual
budget was used to gather specific data on rates and fees charged by the Saint Paul
Sewer Utility for 1998.
City of Saint Paul. Office of Financial Services. (1998). Comprehensive
annual financial report for the fiscal vear ended December 31. 1997. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinquent Property Tages and DeIinquent Storm
Sewer System Charges Receivable to the total revenue generated from those
funding sources for 1997.
City of Saint Paul. Office of Financial Services. (1999). Comnrehensive
annual financial report for the fiscal vear ended December 31. 1998. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinqnent Property Taxes and Delinquent Storm
Sewer System Charges Receivable to the total revenue generated from those
funding sources for 1998.
City of Saint Paul. Department of Public Works. (1994, January 26). Final
renort submitted by the Task Foree for Saint Paul Sewer Rate Relief. Saint Paul
Minnesota: City of Saint Paul. This report details the findings of a working group
of City staff, interested citizens and representatives of industrial customers. This
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group studied the financial and operating environments and made
recommendations about how they felt the Cit�s sewer rate structures should
respond to pressures from those environments.
City of Saint Paul. Department of Public Works. (1995, August 21). Re�ort
on the 1995 sewer rate structure survev results. Saint Paul Minnesota: City of
Saint Paul. 'I'his report detailed the findings of a survey sent to City Council
members, staff, district councils, the Saint Paul Water Utility and large industrial
clients.
City of Philadelphia. Office of the City Controller. (1999). Philadelphia: a
new urban direction. Philadelphia: Saint Joseph's University Press. Chapter Three
of this book discussed fiscal policies required for long-term financial stability. One
of the policies highlighted is the creation of a budget-stabilization fund.
Clifford, C. (1998, August). Linking strategic planning and budgeting in
Scottsdale, Arizona. Government Finance Review. 14, {4), 9-15. The budget process
in Scottsdale Arizona was discussed including how annual operating and capital
budgets are linked to the financial plan and strategic goals.
Gilroy, Calif., has $8.8 million in the bank -- for now. (1997, June 7). The
Dispatch, Gilrov. California, p. 6. City Administrator Jay Baksa used the cash
portion of the fund balance of Gilroy, CA mainly as an emergency fund, carrying the
amount forward from year to year. The Gilroy City Council has had a policy of
keeping fund balance at roughly five percent of city expenses.
Government Finance Officers Association of the United States and Canada.
' (1998). Revenue analvsis and forecastin�'. Chicago: Government Finance Of�icers
Association of the United States and Canada. This course reader provided as part
of a two day revenue analysis seminar in New Orleans, LA provided valuable
' reasons why governments should have reserve funds and offered examples on how
to create one, including a sample city council resolution.
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Government Finance Officers Association of the United States and Canada.
(1998). Recommended budget nractices: A fraxnework for improved state and local
government bu eting. Practice 4.1- Develop Policy on Stabilization Funds
Chicago: Government Finance Officers Association of the United States and
Canada. Retrieved November 16, 1999 from World Wide Web:
http://www.gfoa.org/resrch/bestcd/bestpraclpra4_l.htm This downloadable
document discussed best practices for state and local budgeting. It recommended
the correct rationale to use and why these funds can be an important part of the
government's financial plan
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fiighlights. (National league of cities' annual city fiscal conditions survey).
(1999, July 12). Nations Cities Weekl� 22, (28), 11. The municipal sector's ending
balances (budget surpluses) as a percentage of expenditures increased during 1998
to 17.6%.
Joyce, P. (1999). What's so magical about 5 percent? A nationwide look at the
optimal size of state rainv day funds. The George Washington University,
Department of Public Administration. Professor Joyce egamined the rationale
behind the common usage of five percent for budget reserves, and created a
mathematical model, based on certain risk factors, that can calculate the reserve
percentage appropriate for a particular state.
Kirchen, R. (1996, July 13). MMSD's $120 million reserve `prudent,' says
Bear Stearns. The Business Journal - Milwankee. 13, (41), 4. The New York
investment bank Bear Stearns estimated that the cash reserve of the MMSD is
reasonable and prudent when construction projects are concerned and the MMSD
must meet cash flow needs while awaiting federal and state grants.
Kovener, R. (1997, January). Your responsibility for reserves. Association
Management. 49, (1), 107-109. This article estplored the juxtaposition of saving for
a rainy day versus spending the money required for important lang-term
investments.
Lav, I. & Berube, A. (1999, March). When it rains it pours. Center On
Budget and Polic�Priorities. Retrieved October 7, 1999 from World Wide Web:
http://www.cbpp.org/3-11-99sfp.pdf This report of required reserves for budget
stabilization in event of a recession ranked states by the percentage of reserve to
general expenditures. It suggested that a state government shouId have reserves
approaching 20% of operating egpenditures.
Milan, N. (1998, December 30). 50 state report on fiscal 1999 budgets
released. NGA On-line News Releases. Retrieved October 7, 1999 from the World
Wide Web: http//www.nga.org/Releases/PR-30December1998Fiscal.htm
This on-line report indicated that state and local reserve balances as a percent of
budgeted expenditures continues to grow. 1998 year end balances in two-thirds of
the states were expected to be more than 5% of budgeted expenditures.
Navin, J. & Navin, L. (1997). The optimal size of countercyclical budget
stabilization funds: A case study of Ohio. Public Bud,g'eting and Finance, 17 (4),
114-127. The Navins discussed the widely held belief that five percent is an
appropriate budget reserve amount using the State of Ohio as a case study. They
found that five percent is no where near the amount of reserve required to bring
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stability to General Fund revenues in periods of decline.
Nunn, S. (1996, March). Urban infrastructure policies and capital spending
in city manager and strong mayor cities. American Review of Public
Administration. 26, (1), 93-112. This article discussed infrastructure policies of
seven cities in the state of Texas that are defined as "City Manager" cities, and
contrasted them to seven cities in the state of Indiana that are defined as "Strong
Mayor" cities to see if there was any statistically significant impact on policy,
financial participation and egpenditure patterns.
Sekwat, A. (1999, June). Capital budgeting practices among Tennessee
municipal governments. Government Finance Review. 15, (3), 15-19. Tennessee
uses separate capital budget programs to avoid deficits in their annual operating
budgets.
Tyer, C. (1993). Local government reserve funds: Policy alternatives and
political strategies. Public Budgeting and Finance. 13 (2), 75-84. This article
discussed some of the reasons for establishing and using reserve funds, different
ways of building reserves, and brought to light major policy areas governments
should be aware of when planning to build and use these funds.
Vasche, J. & Williams, B. (1987). Optimal governmental budgeting
� contingency reserve funds. Public Bud�eting and Finance. 7(1), 66-82. This article
discussed the growing ntunber of state contingency reserve funds and their
t purposes. The authors felt that the criteria used to decide whether to establish a
contingency fund and what formula should be used to develop the optimal amount
of reserve had received little attention in scholarly research, so they reviewed these
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two issues using the State of California as an example.
Vehaum, D. (1998, April). Long-range financial planning: New strategies for
old problems (Rock Hill, South Carolina). Government Finance Review 14, (2), 39-
39. The city of Rock Hill, South Carolina created a long-range financial plan to
reduce its $8 million annual debt service requirement. Rock Fiill's plan enabled the
city to accumulate additional revenues and reduced expenses totaling $20 million in
four years.
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List of Interviewees
Barrett, K. & Greene, R. (personal communication, October 15, 1999).
Katherine Barrett and Richard Greene provided more background information on
the Governing article they had written. We also discussed whether or not they
would be willing to share additional source material they did not include in their
original article.
Fu�, W. (personal communication, November 1, 1999). William Fix works for
the Charlotte-Mecklenburg North Carolina School District. He responded to the
email message I sent to a list server on policies and uses of reserves.
Fuller, L. (personal communication, November 1, 1999). Lenora Fuller works
for Washington, D.C.. She responded to the email message I sent to a list server on
policies and uses of reserves.
Martin, G. (personal communication, November 1, 1999). Gary Martin is the
Director of Internal Audit for Henrico County Virginia. He provided valuable
information in response to the email message I sent to a list server on policies and
uses of reserves.
Miller, K. (personal eommunication, November 2, 1999). Kate Miller is the
Manager of Budget and Financial Planning for the Milwaukee Metropolitan
Sewerage District (MMSD). She provided valuable information in response to the
email message I sent to a list server on policies and uses of reserves. This also
supports the journal article listed above by Kirchen.
Rainey, A. (personal communication, October 29, 1999). Anthony Rainey is
the Assistant F�nance Director of the City of Norfolk Virginia. He provided
valuable information in response to the email message I sent to a list server on
policies and uses of reserves.
Romaine, J. (personal communication, November 2, 1999). John Romaine
works for the Federal Aviation Administration. He responded to the email message
I sent to a list server on policies and uses of reserves.
Starr, G. (personal communication, October 29, 1999). Gerald Starr works
for the State of Oklahoma. He responded to the email message I sent to a list
server on policies and uses of reserves.
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Appendix A
Council File �
RESOLUTION
Green Sheet n
CITY OF SAINT PAUL, MINNESOTA
Establish a Desi�nation for Sewer Utilitv Budget and Rate Stabilization and
Adogt Policies for Contributions and Uses
WHEREAS since 1994 the City Administration and the City Council have endeavored to rebuild
Sewer Utility Enterprise Fund cash and reserves; and
WHEREAS, as a result of prudent rate setting the Sewer Utility was able to build year end 1998
operating cash on hand to appro�mately thirty percent (30%) of 1998 revenues; and
WHEREAS, prudent financiat management and sound accounting practice recommend
establishing designated cash and retained earnings equal to ten to fifteen percent (10% to 15%)
of annual sanitary and storm sewer revenue to be used for sewer infrastructure e�ergencies,
operating emergencies and rate stabilization; and
14
15 WHEREAS, a Sewer Utility designation of this nature decreases the Utilit�s need for short-term
16 borrowing from the Generai Fund, which could negatively impact other City programs and is an
, 17 indication of the Utility's financial health; and
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WHEREAS, a Sewer Utility designation of this nature decreases the Utility's need to raise
sanitary and storm sewer rates sharply due to emergencies and variable economic factors, which
may exacerbate negative economic effects; and
WHEREAS this designation must be governed by a written financial management policy that
includes direction on designation contribution and use requirements; and
WHEREAS, it is important for the City Administration and the City Council to adopt policies
governing the Cit�s Sewer Utility Budget and Rate Stabilization Designation for control at the
appropriate policy setting level, clarity and uniformity of direction; and
Now, therefore, be it RESOLVED, that the Mayor and Council of the City of Saint Paul do
hereby designate Cash and Retained Earnings equal to ten percent (10%) of the annual budget
for sanitary and storm sewer revenue for Sewer Utility Budget and Rate Stabilization and adopt
the contribution and use policy below.
Page 1 of 4
Page 43
Appendix A
36 1. Cash for day-to-day operations shall not be allowed to fall below ninety (90) days operating
37 expenses as defined as the sum of:
38
39 a. The forty-five (45) day cash reserve for operation and maintenance as required by revenue
40 bond authorizing resolutions, calculated by Public Works Accounting and audited as part of the
41 Cit�'s annual financial audit; and
42
43 b. An additional amount equal to the forty-five (45) day reserve calculated above in the
44 operation and maintenance reserve cash account.
45
46 c. After revenue bond related operation and mainteriance cash requirements described in item
47 a. lapse, cash for day-to-day operations will no longer be the sum of items a. and b., but will
48 equal ninety (90) days operating expenses by separate calculation.
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50
51
52
53
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56
57
58
59
60
61
62
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2. The Designation for Sewer Utility Budget and Rate Stabilization shall be equal to ten '
percent (10%) of budgeted annual sanitary and storm sewer revenue, and shall be revised
annually. The initial designation shall be made within su�ty (60) days following adoption of this'
document and subsequent adjustments to this designation shall be made within sixty (60) days
after adoption of the annual revenue budget by the City Council. '
3. The first one-half (�/s) or five percent (5%) designation is defined as an Emergency
Designation available only to the Sewer I3tility Enterprise Fund to finance one-time, ,
emergency, unanticipated capital or operating expense requirements or to offset unanticipated
revenue fluctuations occurring within a fiscal year.
4. The Emergency Designation may be accessed when emergency expenses or an unanticipated'
revenue reduction causes an operating cash balance less than the requirements set forth in item
1 above for the Sewer Utility Enterprise Fund only.
5. The second one-half (�/2) or five percent (5%) designation is defined as a Rate Stabilization
Designation available only to the Sewer Utility Enterprise Fund to either maintain eurrent
sexvice level programs or transition expense levels to match lower revenue levels during the
first eighteen (18) to twenty-four (24) months of a recession or following the loss of a major
sewer use customer.
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6. The Rate Stabilization Designation may be accessed when sanitary or storm sewer revenue
is projected to end the year five percent (5%) lower than the previous year, causing an operating
cash balance less than the requirements set forth in item 1 above for the Sewer Utility
Enterprise Fund only and one or more of the following conditions occurs in conjunction with the,
five percent (5%a} reduction in revenue:
a. The Storm Sewer Chazge delinquency rate (an indicator of economic recession) exceeds ten
percent (10%) at the end of the previous fiscal year; or
Page 2 of 4
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b. Tlze Storm Sewer Charge delinquency rate (an indicator of economic recession} is predicted to
exceed ten percent (10%) during the current fiscal year; or
c. The Storm Sewer Charge delinqueucy rate (an indicator of economic recession) is predicted to
' 85 exceed ten percent (10%) during the ne� fiscal year; or
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87 d. Net Sanitary Sewer volume (gross volume less credits} declines exceed two and one-half
' 88 percent (2 i/z%) compared to the previous fiscai year; or
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e. Net Sanitary Sewer volume (gross volume less credits) declines are predicted to exceed two
and one-half percent (2 �/z%) during the next fiscaI year.
7. For either the Emergency Designation or the Rate Stabilization Designation, use shall be
authorized bq a properiy executed council resolution or adopted as part af the annual budget.
8. Emergency Designation resources must be restored. Restoration shall commence in the first
fiscal year following use. Restoration shall be accomplished in annual instaliments no smaller
than one percent (1%? of total Sewer Utility sanitary and storm sewer revenues in the year the
Emergency Designation was used. If sanitary and storm sewer charges for the following year
have already been adopted, the Administration and City Council shall act to revise those charge
rates to include this restoration.
9. Rate Stabilization Designation resources must be restored. Restoration shall commence in
the fiscal year that is two years following the year of use. Restoration shall be accomplished in
annual installments no smaller than one percent (1%) of total Sewer Utility sanitary and storm
sewer revenues in the year the Rate Stabilization Designation was used. If sanitary and storm
sewer charges for that year have already been adopted, the Administration and City Council
shall act to revise those charge rates to include this restoration.
10. If needs arise that cause both the Emergency Designation and the Rate Stabilization
Designation to be used, and restoration of those designations are concnrrent, restoration shall
be accomplished in annual installments no smaller than a total of two percent (2%) af total
Sewer Utility sanitary and storm sewer revenues according to items 8 and 9 above. If sanita�^
and storm sewer charges for that year have already been adapted, the Administration and Cit=
Council shali act to revise those charge rates to include this restoration.
Be if further RESOLVED, that this combined ten percent (10%) designation shail be piaced i
separate interest earning account on the books and records of the City Treasury and tlte Sew.
Utility Enterprise Fund and shall be managed as part of the City Treasury Investment Pool.
Interest income shall be used to keep this designation at the appropriate ten percent (10%o)
level. The unpact of interest earnings on this account shall be reviewed annually by Public
Works Accounting and Office of F`inancial Services staff. If at the time of this annual review
Page 3 of 4
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this designation has grown larger than ten percent (10%) of budgeted sanitary and storm sewer
revenue, the excess may only be used to fund a portion of a following $scal yeai's Sewer Utility'
Enterprise Fund Budget as proposed by the Mayor and adopted by the City Council.
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Yeas �� Nays �� �sent
Requested by Departsnent of:
public Works
gl, RP
Apgroval Recommended by Budget Director:
lopted by Council: Date
option Certified by Council Secretary
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>roved By Mayor: Date
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Form Approved by City Attorney:
Page �,:
Approved by Mayor for Submission to Council:
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Appendix B �D
' accounting@f'nattcenet.gov, Budget-NetG�f'xnancenet.gov, fin-opera, 1223 PM 10/29/99 -0700, PoIicies
To: accouaLing@financenet.gov, Budget-NetCfinancenet.gov, fin-operations@financenet.gov, fin-
' policy@financenet.gov, friet-supportC�financenet.gov
From: Bruce Beese <bruce.beeseC�ci.sLpanl.mn.us>
Subject: Policies and Use of Desianated Reserves held by governments
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Attached:
Dear Fellow Government Finance Professional,
I am currently researching the possibility of establishing designated retained eamings
for the City of Saint Paul, Minnesota Sewer Utility both from a professional point of
view (I am an accountant with the St. Paul Public Works Department) and as part of a
Policy Formulation graduate class I am taking at Hamline University in St. Paul. As
government finance professionals, T am certain you can provide valuab)e experience
and insight for my analysis.
I believe designating a portion of retained earnings within the Sewer Utility will help
the City prepare for the next recession by setting aside a fund for emergencies and rate
stability. The recent sound economy has provided the Utility with revenues in excess
of expenses and some of this surplus can possibly be used to provide for emergencies
and economic downturns.
Preliminary information inclicates that other government units use a two-part
designation. One component is set aside for infrastructure emergencies, and the other
component is held to ease the transition to higher rates or spending reductions
required by the loss of a major customer or economic recession (this is not meant to
preclude discussion of reserves or designations set aside for other purposes}. There are
several possible positive benefits from having a reserve or designation of this nature:
long term financial health, higher bond ratings, time to make thoughtfulIy placed cuts
and reasonable rate increases, ready fund'zng for potential heaith and safety
emergencies, and rate stability.
My analysis will be enhanced if I can obtain information about other government
agencies that have used designations of this nature and determine alternatives in use
now and in the past. If you can answer the foliowing questions, I would be grateful:
1. a. Has your governmental unit established a reserve or designation for emergencies
or adverse economic conditions?
1. b. Is the application of this policy jurisdiction-wide or does it only apply to particular
funds?
1. c. If not jurisdiction-wide, what major funds are setting aside a reserve or
Printed £or Bruce Beese <bruce.beese@cistpaul.mn.vs>
Page 47
Appendix B
accountangCf"nancenet.gov, Budget-Net@f'inancenet.gov, �n-opera, 12:23 PM 10J29t99 -0700� Policies
designation? Please also list if they are proprietary or governmentai fund types.
2. What year was this policy put into practice?
3. What is (are� the stated objective(s) of the reserve or designation?
4. What level of reserve or designation was deemed appropriate?
a. What is the dollar amount of the current reserve or designation?
b. As it relates to annual revenues, what percentage of annual revenues is the current
reserve or designation?
5. What was your reasoning for determining this level?
6. a. Has your governmental unit ever nsed part or all of the reservs or designation?
6. b. When did you use it?
6. c. What did you use it for?
7. Do you feel that the objective(s) was (were? �et after it's establishment or if it was
used?
8. a. What was your General Obligation Bond rating (or other bond rating if
appropriate) before establishing the reserve or designation?
8. b. Did your General Obligation Bond rating (or other bond rating if appropriate)
improve after establishing the reserve or designation?
8. c. What is your new rating and how much time passed before this rating was
improved?
9. I would like to list you as a source in the references for my work I would appreciate
your providing the followuig information if you are comfortable doing so:
Your full name
Your title
Your work address
Your work telephone number
Please indicate your willingness to be contacted a second time for clarifications and
follow up questions if necessary.
Please reply to my email address listed or if you'd like yon may call me at (651) 266-
6063.
Printed for Bruce Beese <bruce.beese�cistpaul.mn.us>
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PaQe 48
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Appendix B � 'y5
accounting@f'nancenet.gov, Budget-NetCfinancenet.gov, fin-opera, I223 PM 10/29/99 -0700, Policies
Thank you very much for your time completing this survey.
Printed for Bruce $eese <bruce.beeseCdci.stpaul.mn.us>
Page 49
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Appendix C
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Page 50
Council File # pp � ���
Presented By
Referred To
0 R l G i N� � RESOLUTION Green Sheet # iozs�6
�, I OF SAINT PAUL, MINNESOTA
Committee: Date
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1 Establish a Designation for Sewer Utilitv Budget and Rate Stabilization and
2 Adont Policies fox Contributions and Uses
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4 WHEftEAS, since 1994 the City Administration and the City Council have endeavored to rebuild
5 Sewer Utility Enterprise Fund cash and reserves; and
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7 WHEREAS, as a result of prudent rate setting the Sewer Utility was able to build year end 1999
8 operating cash on hand to approximately thirty percent (35%) of 1999 revenues; and
9
10 WHEREAS, prudent financial management and sound accounting practice recommend
11 establishing designated cash and retained earnings equal to ten to fifteen percent (10% to 15%)
12 of annual sanitary and storm sewer revenue to be used for sewer infrastructure emergencies,
13 operating emergencies and rate stabilization; and
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15 WHEREAS, a Sewer Utility designation of this nature decreases the Utilit�s need for short-terxn
16 borrowing from the General F�xnd, which could negatively impact other City programs and is an
17 indication of the Utility's financial health; and
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1 9 WHEREAS, a Sewer Utility designation of this nature decreases the Utility's need to raise
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sanitary and storxn sewer rates sharply due to emergencies and variable economic factors, which
may exacerbate negative economic effects; and
WHEREAS, this designation must be governed by a written financial management policy that
includes direction on designation contribution and use requirements; and
WHEREAS, it is important for the City Administration and the City Council to adopt policies
governing the City's Sewer Utility Budget and Rate Stabilization Designation for control at the
appropriate policy setting level, clarity and uniformity of direction; and
1Vow, therefore, be it RESOLVED, that the Mayor and Council of the City of 8aint Paul do
hereby designate Cash and Retained Earnings equal to ten percent (10%) of the annual budget
for sasutary and storm sewer revenue for Sewer Utility Budget and Rate Stabilization and adopt
the contribution and use policy below.
Page 1 of 4
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36 1. Cash for day-to-day operations shall not be allowed to fall below ninety (90) days operating
37 expenses as defined as the sum of:
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39 a. The forty-five (45) day cash reserve for operation and maintenance as required by revenue
40 bond authorizing resolutions, calculated by Public Wor�s Accounting and audited as part of the
41 City's annual financial audit; and
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43 b. An additional amount equal to the forty-five (45) day reserve calculated above in the
44 operation and maintenance reserve cash account.
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c. After revenue bond related operation and maintenance cash requirements described in item
a. lapse, cash for day-to-day operations will no longer be the sum of items a. and b., but will
equal ninety (90) days operating expenses by separate calculation.
2. The Designation for Sewer Utility Budget and Rate Stabilization shall be equal to ten
percent (10%) of budgeted annual sanitary and storm sewer revenue, and shall be revised
annually. The initial designation shall be made within si�y (60) days following adoption of this
document and subsequent adjustments to this designation shall be made within sixty (60) days
after adoption of the annual revenue budget by the City Couneil.
3. The first one-half (�/z) or five percent (5%) designation is defined as an Emergency
Designation available only to the Sewer Utility Enterprise Fund to finance one-time,
emergency, unanticipated capital or operating expense requirements or to offset unanticipated
revenue fluctuations occurring within a fiscal year.
4. The Emergency Designation may be accessed when emergency expenses or an unanticipated
revenue reduction causes an operating cash balance less than the requirements set forth in item
1 above for the Sewer Utility Enterprise Fund only.
5. The second one-half (�/z) or five percent (5%) designation is defined as a Rate Stabilization
Designation available only to the Sewer Utility Enterprise Fund to either maintain current
service level programs or transition expense levels to match lower revenue levels during the
first eighteen (18) to twenty-four (24) months of a recession or following the loss of a major
sewer use customer as defined in item 6 below.
6. The Rate Stabilization Designation may be accessed when sanitary or storm sewer revenue
is projected to end the year five percent (5%) lower than the previous year, causing an operating
cash balance less than the requirements set forth in item 1 above for the Sewer Utility
Enterprise Fund only and one or more of the following conditions occurs in conjunction with the
five percent (5%) reduction in revenue:
a. The Storm Sewer Charge delinquency rate (an indicator of economic recession) exceeds ten
percent (10%) at the end of the previous fiscal year; or
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b. The Storm Sewer Charge delinquency rate (an indicator of economic recession) is predicted to
exceed ten percent (10%) during the cuxrent fiscal year; or
c. The Storm Sewer Charge delinquency rate (an indicator of economic recession) is predicted to
e%ceed ten percent (10%) during the next fiscal year; or
d. Net Sanitary Sewer volume (gross volume less credits) declines egceed two and one-half
percent (2 i/2%) compared to the previous fiscal year; or
e. Net Sanitary Sewer volume (gross volume less credits) declines are predicted to exceed two
and one-half percent (2 during the nest fiscal year.
7. For either the Emergency Designation or the Rate Stabilization Designation, use shall be
authorized by a properly executed council resolution or adopted as part of the annual budget.
8. Emergency Designation resources must be restored. Restoration shall commence in the first
fiscal year following use. Restoration shall be accomplished in annual installments no smaller
than one percent (1%) of total Sewer Utility sanitary and storm sewer revenues in the year the
Emergency Designation was used. If sanitary and storm sewer charges for the following year
have already been adopted, the Administration and City Council shall act to revise those charge
rates to include this restoration.
103 9. Rate Stabilization Designation resources must be restored. Restoration shall commence in
104 the fiscal year that is two years following the year of use. Restoration shall be accomplished in
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annual installments no smaller than one percent (1%) of total Sewer Utility sanitary and storm
sewer revenues in the year the Rate Stabilization Designation was used. If sanitary and storm
sewer charges for that year have already been adopted, the Administration and City Council
shall act to revise those charge rates to include this restoration.
10. If needs arise that cause both the Emergency Designation and the Rate Stabilization
Designation to be used, and restoration of those designations are concurrent, restoration shall
be accomplished in annual installments no smaller than a total of two percent (2%) of total
Sewer Utility sanitary and storm sewer revenues according to items 8 and 9 above. If sanitary
and storm sewer charges for that year have already been adopted, the Administration and City
Council shall act to revise those charge rates to include this restoration.
Be if further R,ESOLVED, that this combined ten percent (10%) designation shall be placed in a
separate interest earning account on the books and records of the City Treasuxy and the Sewer
Utility Enterprise Fund and shall be managed as part of the City Treasury Investment Pool.
Interest income shall be used to keep this designation at the appropriate ten percent (10%)
level. The impact of interest earnings on this account shall be reviewed annually by Public
Works Accounting and Office of Financial Services staff. If at the time of this annual review
Page 3 of 4
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Yeas
Benanav �
Ba eTTcy -
Bostrom
Coleman �
Harris
Lantzy �
Reiter �
Absent
Adopted by Council: Date � 6 �
Adoption Certified by Council Secretary
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Requested by Department of:
Public Works
BY� r .
Approval Recommended Bud e D rector:
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By: y�""
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Form Approved by City Attorney:
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Approved By Mayor: Date • '7LG1 �� � Approv y ayor for Su ission to Council:
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By: By:
this designation has grown larger than ten percent (10%) of budgeted sanitary and storm sewer
revenue, the excess may only be used to fund a portion of a following fiscal year's Sewer Utility
Enterprise Fund Budget as proposed by the Mayor and adopted by the City Council.
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Public Works
RogerPuchreiter, 266-6248
MU5T BE ON COUNCIL AGENDA BY (DAT�
DATEINITIATED GREEN SHEET No. 102876
6/16/2000
COUNCiI OO
nss�cx ❑5 �?,Q(.b�
CfTV ATTORNEY �l1Y GLERK
NUMBFR WR
4
ROVfING ❑ FlNANCIALSER410ES0 $ FINPNCIALSERVlAGCTG
❑ s �
MAYOR(ORASSISiANrj ��rUtiliryManager� '�
� 2 zt-oo
Deoartme
TOTAL # OF SIGNATURE PAGES 1 (CLIP ALL LOCATIONS FOR SIGNATURE)
ACfION PEpUE5TE0
Review and approve attached resolution establishing a designation of Operating Cash and Retained Eamings in the Public Works Sewer
Utility for Budget and Rate Sfabilization.
RECEIVED
JUL 31 200�
RECOMMENDATIONS.Approve (A) or Rel� (R)
PLANNING COMMISSION
1. HazthispersorvYirtnevetvrorketluntleracron�2clforNistlepaztrnent'�
YES NO
CIB COMMITTEE
2. Hu this persoNfirtn ever been a ary emptoyee?
CINLSERVICECOMMISSION �ES NO ,{°.¢ a
3. Dces this persoNfirtn possess a slull not nortnally possessetl by any wrrent dry emplo � *�°''� ��
� YES NO ��
4. Is this persoMirm a targetetl ventloR
VES NO � � �oQ�
ExpWin all yes answers on separeM sheet antl attae� M green sheet R,1� �3
Mv
INITIATING PROBLEM, ISSUE, OPPORTUNITY (WHQ WHAT, WHEN, WHEHE, WHh'
The Saint Paul Sewer Utility experienced financial difficulties in [he early 1990s. Part of these difficulties were related to the effects of an
economic recession and changes in sewer use by major customers, who implemented water conserva[ion methods that reduced the overall
billabFe flow of the Utility.
Since 1994, the Sewer Utility has experienced renewed financial health due to sound financial managment, prudent rate setting and a healthy
regional economy. The next recession or change in the operating practices of our major customers should be prepared for now, while the
Sewer Utility is healthy.
The attached resolution establishes the Designation for Sewer Utility Budget and Rate Stabilization and sets policy on how the designation
should be used and funded. The designation is split into two parts: One-half for major infrastructure emergencies or unexpected revenue
losses, and one-haif ro be used as a countercyclical economic tool to prevent sanitary and stornt sewer rate spikes caused by changes in
economic conditions.
Please see attached policy briefing paper prepazed by Bmce Beese on these issues.
ADVANTAGESIFAPPROVEP. ��
The Sewer Utility will be more able to: Prevent rate spikes, reduce the impact of adverse economic cycles, allow the Administration and
City Council the time necessary to make good and sustainable decisions to correct any revenue%xpense imbalance, and demonstraie prudent
management to the financial community.
DISADVANTAGES IF APPROVED:
Reserves aze sometimes viewed as overchuging and could be seen by some as an inter-genera6onal equity issue.
DISADVANTAGESIFNOTAPPROVED:
The Administration and Ciry Council may not be kept fully awaze of and involved in unusually large extraordinary needs arising from
FINANCIAL INFORMATION (EXPLAIN)
fO7ALAMOUNT OF TRANSACTION $ 0.00 (See No[e) COS7/REVENUE BUDGE7ED (CIRCLE ONE) YES Ho
FUNOING SOURCE $ewei U[Ility Re[ained EamingS AC71VffY NUMBER 2
Note: This resoluflon has no effect on cuxrent yeaz revenues and expenses, however it will cause the crea[ion of speci£c designations of Operaung Cash and
Retained Eamings in the Sewer Ufility Entelprise Fund in the amount of $3,702,500. ,
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The Ant and the Grasshopper:
Which will the Saint Paul Sewer Utility Be?
Bruce E. Beese
December 15, 1999
Public Policy Analysis: GPA 804
Ellen Dickson, Ph.D.
Policy Briefing Paper
' Haxnline University
Graduate School of Public Administration and Management
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TABLE OF CONTENTS
EXECL3TIVE STJMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
THE ISSITE .................................................... 1
RESEARCH METHODS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PROSLEM CONTEXT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
' ADVANTAGES AND DISADVANTAGES OF RESERVES . . . . . . . . . . . . . . 7
Advantages............................................... 7
Disadvantages ............................................ 9
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CREATING AND SIZING RESERVE FUNDS . . . . . . . . . . . . . . . . . . . . . . . 10
Fiscal Slight of Hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
BEST PRACTICE RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 14
RELATED EXPERIENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
New York City ........................................... 17
Philadelphia ............................................. 18
Portland,Oregon ......................................... 18
State Ohio ............................................. 21
The Milwaukee Metropolitan Sewerage District . . . . . . . . . . . . . . . . 21
' CHOICES FOR SAINT PAUL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
DoNothing .............................................. 25
Emergency Designation Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
, Rate Stabilization Designation Only . . . . . . . . . . . . . . . . . . . . . . . . . . 27
A Combination Emergency and Rate Stabilization Designation .... 31
A Simple Contingency Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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RECOMMENDATION .......................................... 32
CONCLUSION ................................................ 33
ANNOTATED BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
LIST OF INTERVIEWEES ...................................... 42
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' APPENDIX A, Proposed Saint Paul City Council Resolution . . . . . . . . . . . 43
' APPENDIX B, Electronic Mail Survey Sent to GFOA list servers ........ 47
APPENDIX C, History of Billable Sewer Volumes - 1985 through 1998 ... 50
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Execntive Summary
The Ant and the Grasshopper:
Which will the Saint Paul Sewer Utility Be?
' The Issue
The Saint Paul Public Works Department is currently egploring the
feasibility of designating a portion of cash and retained earnings within the Sewer
' Utility to help the City prepare for the negt recession by setting aside a fund for
emergencies and rate stability. The recent sound economy has provided the Utility
' with revenues in excess of expenses and some of this surplus can possibly be used to
provide for emergencies and economic downturns. Recession will certainly return
because it is a normal part of the business cycle.
, This analysis examines other government agencies that have used
designations of this nature and determines alternatives in use now and in the past.
Additionally the analysis will address questions of the appropriate level, the
' objectives of the reserve/designation, whether and to what extent these designations
accomplished their objectives in other governments, and the structure of a reserve
fund.
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Problem Context
The Saint Paul Sewer Utility experienced financial hardship during the last
recession, that occurred from 1990 to 1993. Difficult decisions were made regarding
the use of reserves and rates, and still the Utility was strained. The year end
operating cash balance of the Utility reached a low point of $335,012 in 1993. At
the same time, Standard and Poox's Rating Group downgraded their rating of the
Sewer Utilit�s revenue bonds from A+ to BBB+ with a negative outlook.
Advantages of Reserves
Reserves stabilize revenues by preventing t� or fee "spikes" when
unexpected events occur. Reserves reduce the impact of economic cycles and create
a bridge that enables the government to continue with its programs unchanged
while it searches for and debates long-term, reasoned and sustainable solutions to
the revenue%xpense imbalance. Reserves are viewed positively by the financial
community and bond rating agencies.
Related Experiences
Cities such as San Antonio, Texas, Baltimore, Maryland and Portland,
, Oregon maintain fund balances as a rainy-day fund to cushion against fiscal
emergencies and recession. Currently the City of Philadelphia, Pennsylvania is
working on creating such a fund. Baltimore officials established the Cit�s
' rainy-day fund in 1993 as a cushion against a future economic slowdowns, which
has grown by appro�mately $800,000 each year during economic expansion.
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Policy Alternatives
There are several policy alternatives available to the Saint Paul Public
Works Department, including:
Do Nothine:
A larger than normal cash balance exists in the operating cash account
already, a reserve may not be required at this time.
Create a Five Percent Designation for Emergencies:
The Designation for Emergencies would be used for major
infrastructure failures or unexpected revenue fluctuations. The
Designation for Emergencies will provide additional retained earnings
equal to $1,851,250.
Create a Five Percent DesiEnation for Rate Stabilitv:
The Designation for Rate Stability would allow the Sewer Utility to
maintain current service level programs or transition expense levels to
match lower revenue levels during the first 18 to 24 months of a
recession or following the loss of a major sewer use customer. The
Designation for Rate Stability will provide additional retained
eai•vings equal to $1,851,250.
Create a Combination Ten Percent Emergencv and Rate Stabilization
Desi2nation:
The Combined Designation for Emergencies and Rate Stability would
combine the benefits of the Emergency and Rate Stability options
previously described, and will provide additional retained earnings
equal to $3,702,500.
Create a Simnle Ten Percent Contingencv Designation:
The Simple Ten Percent Contingency Designation would combine the
benefits of the Emergency and Rate Stability options previously
described, and will provide additional retained earnings equal to
$3,702,500, but would not segregate amoants for either contingency.
Recommendation
The best option for the Sewer IJtility is the combined Emergency and Rate
Stabilization Designation with segregated designations for each event. Currently
cash and retained earniugs are available to fully fund this designation. Creation of
a designation for emergencies and rate stabilization within the Sewer Utility will
help the City prepare for the next recession by setting aside money that could
prevent potentially large rate increases when our customers could least afford to
pay them. The recent sound economy has provided the Utility with revenues in
excess of expenses. Some of this surplus should certainly be used to provide for
emergencies and poor economic conditions. This will also provide assurance to
purchasers of Sewer Utility debt and bond raters that the Utility will be able to
meet all financial obligations into the future.
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The Issue
The Saint Paul Public Works Department is currently exploring the
feasibility of designating a portion of cash and retained earnings within the Sewer
Utility to help the City prepare for the next recession by setting aside a fund for
emergencies and rate stability. The recent sound economy has provided the Utility
with revenues in egcess of expenses and some of this surplus may be used to provide
for emergencies and economic downturns.
At the peak of the economic cycle it is prudent to study whether the Utility
has the ability after su� years of solid performance to prepare for the next recession
and mitigate possible negative effects. According to the Office of the Controller for
the City of Philadelphia (1999), recession will certainly return because it is a
normal part of the business cycle. The City of Philadelphia used the ancient
children's fable of the Ant and the Grasshopper written by Aesop, which tells the
story of the ant that worked all summer long, storing up food for the winter, while
the grasshopper played the summer away. When winter came, the grasshopper was
This analogy applies equally well to long term planning for an inevitable income
hungry and cold, thanks to his unwillingness to provide for the coming lean period.
downturn. Summer, in the form of budget surpluses, is now here and the sun has
been shining since 1994. It is time for the Sewer Utility to plan for more difficult
fiscal conditions, to ensure that what Saint Paul has is not squandered or used to
mask changes in the revenue stream unbeknownst to policy makers.
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Some government units use a two-part designation of surpluses: One
component is set aside for infrastructure emergencies, and the other component is
held to ease the transition to higher rates or spending reductions required by the
loss of a major customer or economic recession. 1`here are several possible positive
benefits from having a reserve or designation: Long term financial health, higher
bond ratings, time to make thoughtfully placed cuts and reasonable rate increases,
ready funding for potential health and safety emergencies, and rate stability.
This analysis examines other government agencies that have used
designations to deternune current and potential alternatives. Additionally the
analysis will address the following questions:
• What is an appropriate level of reserve or designation?
• What is (are) the stated objective(s) of the reserve/designation?
• Does a designation of cash and retained earnings accomplish
those stated objectives?
• How should the reserve or designation be structured?
Research Methods
This study uses multiple methods for collecting information, including a mix
of quantitative and qualitative methods. Quantitative methods included gathering
and evaivating information from a literature review and financial data from annual
financial reports of Saint Paul and other governments. A comprehensive literature
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review was completed, bringing together most of the published scholarly work on
the designation, use and policies related to contingency funds, emergency funds and
"rainy-day" funds. Qualitative methods included intexviews with experts in the
field of government finance, City of Saint Paul managers and officials from
government agencies already using designated reserves.
Additionally, a sur.vey was mailed electronically to four different list servers
of the Government Finance Officers Association (GFOA). This survey is included as
Appendix "B." The low response rate however, made it impossible to draw
conclusions about the use and effectiveness of these reserve designations from these
responses.
The advantage of quantitative methods is the possibility of comparing a large
number of financial results to a limited set of questions, statistical aggregation, and
summary of data across governmental units. Qualitative methods add the needed
depth and detail this study seeks to address, putting into conteat financial
information and judgements about the information that may establish new links
between holding specific designations of retained earnings and the achievement of
financial health, higher bond ratings and rate stability.
Problem Context
The Saint Paul Sewer Utility experienced financial hardship during the last
recession, which occurred from appro�mately 1990 through 1993. Difficult
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decisions had to be made about use of reserves and rates. The financial strain on
the Utility is evidenced by year end cash balances, which reached a low point in
1993. At the same time, Standard and Poor's Rating Group downgraded their
rating of the Sewer Utilit�s revenue bonds from A+ to BBB+ with a negative
outlook. In April 1997, Standard and Poor's improved the rating to A with a stable
outlook. A history of Sewer Utility operating cash balances is show in Table 1.
Table 1
Saint Paul Sewer Utility Operatine Cash Balances 1988 through 1998
1988
1989
I990
1991
1992
1993
1994
1995
1996
1997
1998
13,775,885
16,178,736
9,807,354
5,728,957
3,228,575
335,012
1,668,770
3,501,052
6,006,483
8,775,819
13,135,864
Source: City of Saint Paul Comprehensive Annual F�nancial Reports, 1988 through 1998.
As part of the Administration and City Council's response to the financial
hardships, the Task Force for Sewer Rate Relief was established. The Task Force
was a committee of interested citizens, representatives of large, water-intensive
industrial customers, and Sewer Utility staff. Committee members analyzed the
scope of the Sewer Utility's operations, reviewed historic trends, and attempted to
predict the future of sewer use in Saint Paul. After a 16 month period, studying a
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broad range of topics, the task force recommended that the Storm Sewer System
Charge rate be increased 92% for 1994, and the Sanitary Sewer rate be reduced 8%
for 1994. The Task Force concluded that sewer rates were going to be increasing
faster than the general inflation rate for at least the negt decade (City of Saint
Paul, 1994). Generally, the future expected increases are related to new Federal
mandates for cleaning storm water; the loss of Federal grants for Metropolitan
Council sewer projects, thus requiring more bonding and more local financing; and
the 1988 policy change of the City Council to modify the sanitary sewer rate
structure from a large volume structure to a conservation rate structure, thereby
encouraging all users to puxchase less water. This ultimately increases rates
because billable volumes decrease and water consumption in Saint Paul is the basis
of Sanitary Sewer use charges. A history of Sanitary and Storm Sewer charge rate
increases and decreases is shown in Table 2.
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Table 2
Saint Paul Sewer Utility Sanitarv and Storm Sewer Rate Chan�es
1988 through 1998
Year
Sanitarv
Storm
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
30.1%
-20.0%
7.9%
3.7%
7.6%
6.0%
5.5%
8.0%
3.6%
22%
3.5%
0.0%
0.0%
0.0%
4.8%
0.0%
5.7%
16.8%
15%
3.6%
2.0%
2.0%
Source: City of Saint Paul Annual Budget Documents, 1988 through 1998.
According to 1�er (1993), municipalities have to anticipate financial
requirements. The time frame required to adequately anticipate needs must be
longer than the annual budget allows. Politicians and staff must break free from
the tyranny of daily problems to fceus on the long term, to eliminate some of their
emerging problems.
Building reserves can give a large degree of comfort to program staff and
eIected officials. There is a direct reIationship between reserve size and program
manager or financial staff comfort. Savings provide flexibility and opportunity:
More is better. In government however, more is not always better. Savings held by
governments do not belong to the department or agency: The accumulated savings
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belongs to the customers -- the tax and rate payers. This analysis identifies the
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point where reserves cease to be good, when they become an unfair and unnecessary
transference of wealth from tagpayers to the government unit. This analysis also
examines policies in use by other government units regarding uses of reserves for
emergencies and budget stabilization, in order to apply those practices to the City of
Saint Paul Sewer Utility.
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Advantages and Disadvantages of Reserves
According to the Govex•ninent Finance Officers Association (GFOA) (1998),
reserves can play a key role in stabilizing a government revenue stream.
Designated reserves are an important tool for making a one-year budget part of a
multi-year strategic financial plan. There are advantages to using reserves to
stabilize revenues such as preventing t� or fee "spikes" when unexpected events
occur and the ctu-rent adopted budget is not sufficient to cover the event. Reserves
can reduce the impact of economic cycles on the government agency through reserve
use when revenue is poor and reserve building when revenne is good. Reserves can
create a bridge that enables the government to continue with its programs
unchanged while it researches and debates long-term, reasoned, and sustainable
solutions to the revenue%xpense imbalance. Reserves are viewed positively by the
financial community and bond rating agencies. Lastly, reserves discourage the
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tendency to generate more revenue than is needed based on the possibility that
income will be less than predicted.
Tyer (1993) explained the difference between a simple reserve fund and a
contingency fund. Contingency funds are a special subset of reserve funds that may
only be used for uneapected events and emergencies. Reserve funds not designated
for contingencies have far fewer restrictions, All reserve funds attempt to
accomplish the following: stabilize the government's revenue stream; maintain the
government's ability to provide necessary services; and provide rate, fee and tax
stability.
According to Navin and Navin (1997), many states have created a Budget
Stabilization Fund (BSF). One objective of the BSF is to reduce or eliminate what
they term the "revenue rachet". This happens when the economy experiences a
slowdown in general economic activity. The resulting revenue shortfall to the state
may be addressed by raising t�es. But when the economy returns to a positive
growth trend, the state does not reduce its tas rates in recognition of this return to
normalcy. Then during the neat recession, taxes are raised again, "ratcheting np"
the tax rate and total taz� revenue of that state.
Navin and Navin (1997) noted that it is reasonable and rational to expect the
unexpected. Accordingly, taking the steps necessary to prevent the unexpected
event from suddenly and sharply increasing taxes or fees is reasonable. Building
emergency and contingency funds reduces the likelihoocl that significant revenues
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will be required from customers all at once, which will often egacerbate the
problem, and provides more time to assemble creative solutions. Tlus is important
politically because a contingency fund can stabilize rates, fees and taxes, and can
help elected officials avoid sacrificing quality services while they examine long term
revenue options.
Many factors affect the accuracy of budgets. There can be errors in
forecasting economic conditions: The time lapse between budget development and
the actual spending or receipt can be up to 18 months. Ghanges in economic
conditions, particularly at the state level, cause changes in revenues and revenue
estimating errors. The size of revenue estimating error varies by year, but is
always an issue for budget officers, because statistical error margins are natural to
any estimating model, and staff are unable to make 100% accurate economic
forecasts. If revenue estimating errors are too large, they can be very disruptive to
government service delivery. Building and using a budget stabilization or
contingency fund is the single most reliable way to ensure that a continuous flow of
public services can be maintained while policy makers and administrators examine
the problem and determine a future direction change, if any.
Disadvanta�es
According to the GFOA (1998), there are some disadvantages of using
reserves to stabilize revenues. Reserves can create an overly conservative state of
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mind that prevents appropriate use when needed. Maintaining a high level of
reserves can be viewed as over-taxation and hoarding. There are questions of inter-
generational equity; specifically, should not current year revenues pay for current
year services? Use of reserves in times of fiscal stress-may help policy makers avoid
difficult and unpopular decisions that must be made to ensure long-term program
viability. Even with these negatives in mind, reserves are an important part of
program management, and therefore must be fully disclosed, completely explained,
and justified to policy makers and citizens alike.
Creating and Sizing Reserve Funds
Professor Joyce was the first to review state rainy-day funds on a national
level. According to Joyce (1999), quoting Vasche and Williams, governments have
four ways to correct revenue or expenditure levels that have adverse effects on
budgets: revenues can be increased, expenses can be reduced, money can be
borrowed, or contingencies can be used. Governments are beginning to recognize
that for long-term sustainability, they need to plan for the troughs of the business
cycle dnring the peaks of the business cycle. States-have increasingly turned to
"rainy-day funds" or countercyclical stabilization funds since about 1984. As of
1997, 44 states had some form of budget stabilization fund, although Joyce (1999)
noted that many do not meet the strict definition of a rainy-day fund because of the
way the reserve is built or used.
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Many states and funds have vastly different methods for disbursement. For
contingency funds to accomplish their countercyclical intent, the fund must be
created in a way that makes it unable to be used unless an independent, objective
and verifiable measure says it should be used. In addition, some states require a
legislative "supermajority" vote for use.
According to Joyce, many states operate under the "five percent rule" (that is
to say that the reserve should be five percent of the annual expenditure program),
but there is no specific source to base this five percent judgement upon. Navin and
Navin (1997) cited the National Conference of State Legislatures (NCSL), which in
turn cited Wall Street Analysts in favor of the five percent rule. According to many
experts however, five percent is a start, but is not nearly enough (Joyce, 1999;
Navin & Navin, 1997; Lav & Berube, 1999; and Barrett & Greene 1999).
Navin and Navin (1995) cited in Joyce (1999), found that, after studying
seven Midwestern states' rainy-day funds, only three (Indiana, Michigan and Ohio)
perform like countercyclical funds. The Navins also studied the state of Ohio to
They found that using the suggested five percent target would not be large enough
determine for that state, what an optimal budget stabilization amount should be.
to meet the needs of the state of Ohio in the event of an economic downturn. The
Navins estimated that Ohio would need appro�umately of 13% in a contingency
reserve fund to help the state weather a mild recession.
The optimal size of a reserve fund depends on how the government obtains its
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revenues and the nature of the government's expenses, unfortunately there is no
simple formula for calculating these reserves. Joyce (1999) concluded that the
reserve fund must be calculated on an individual government-by-government basis
because the revenue mix is so vastly different and the policy that created that
revenue mix has evolved so differently over time. Joyce discussed the factors
influencing optimal size, and concluded that the factors are primarily driven by
differences in the revenue stream. Joyce recognized that some governments have
revenue streams that are more suseeptible to economic downturns and volatility
The following five factors influence volatility: Governments with progressive tax
sqstems, governments that receive more federal aid, governments with less diverse
revenue streams, governments that rely on gambling revenues, and states with
larger medicaid expenditures, (Joyce, 1999).
Joyce (1999) created a ranking system, or volatility score, for each of these
factors from zero to five, with five being the most volatile. He then created a
composite volatifity score, which brings all the separate volatility scores together.
He found that aIl states and governments should not be aiming for the same
tazgeted reserves. Five percent is not adequate for some governments and it may
be too much for others. Joyce argued that all governments need to assess their own
revenue and egpense picture to determine egactly what amount is right for them.
There is a wide variation among states in terms of the appropriate size of a rainy-
day fund.
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�er (1993) described ways to build reserves. The government can under-
budget revenues, over-budget expenditures, actually budget the buildup of a reserve
fund, or use a combination of approaches. Many states rely on discretionary
appropriations to put money into their rainy-day funds. In some cases, money
never gets put into the fund.
Fiscal Sli�'ht of Hand
When budgets get tight, Vasche and Williams (1987} found that program
managers and budget officers often use budget gimmicks. Some of these gimmicks
included: Postponing payments to employees, vendors or residents, and arranging to
collect revenue sooner than normal. Unfortunately, gimmicks only produce one-
tune relief. The Sewer Utility had to resort to the use of revenue bond construction
cash of $1.6 million in 1992 (City of Saint Paul, 1992) to pay for operating expenses.
When it became clear that this $1.6 million cash infusion was not enough, an
arrangement was made with the St. Paul Water Utility to advance payment on -
their monthly collection of sewer revenues for the Sewer Utility
When taY rates are increased or the tas base broadened to supplement
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revenues, the exact timing of the new revenue receipt can be hard to predict.
Accelerating revenue accomplished by shortening payment due dates are sometimes
popular with local governments because their negative consequences are not
immediately felt. Administrative actions to reduce spending are often not enough
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because only a percentage of the program manager's buaget is diseretionary_
Additionally, decisions made in a crisis mode o#ten are not prepared thoughtfully
and carefully, and lack the rigorous study required for maintaining the best
program possible at the least possible cost.
Best Practice Recommendations
The Government Finance Officers Association (1999) recommended that a
government shonld "develog policies to guide the creation, maintenanee and use of
resources for financial stabilization purposes" (1998, p.1}. By doing this,
governments maintain enough money in the bank to keep from cutting services or
raising taxes and fees due to revenue difficulties or unexpectedly large
expenditures. The Government Finance Officers Association (GFOA) policies
discussed how and when a stabilization fund is developed, that the purpose of the
fund and the minimum and maximum reserve levels should be clearly stated, and
noted that the policy should be publicly available for review.
Stabilization funds may be used at a government's discretion to address
temporary cash flow shortages, emergencies, and unanticipated economic
downturns. Policies on the use of these funds should be tied to an adverse change
in an economic indicator, such as rising unemployment or changes in personal
income growth, to ensure that the funds are not depleted be£ore an emergency
arises. This type of statistical triggering mechanism assumes the fund is a true
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"countercyclical" fund. The range of amounts to be held should be based on the
types of revenue and the level of uncertainty associated with those revenues.
Appropriate budgeting and spending are equally damaged by unnecessary expenses
during good times as they are harmed by indiscriminate cuts during lean times.
Financial mechanisms should be used to limit spending on the upside as well as the
downside. These mechanisms may include triggering criteria and formulas that are
written into law.
According to Lav and Berube (1999), the most recent U.S. recession began in
July 1990 and only lasted until March 1991. Even so, many states experienced
financial difficulty from 1989 through 1992. By mid-year 1991, the cumulative gap
between projected revenues and expenditures for 30 states was almost $15 billion
(Lav and Berube, 1999).
Recessions are particularly difficult for states because their revenues usually
go down at the same time their social service expenditures go up (Lav & Berube,
1999; and Joyce, 1999). This is because recessions cause more demand for social
services. According to Lav and Berube (1999), during the recession of the early
1990s, increases in unemployment led to increases in AFDC, Emergency Assistance,
and Medicaid spending. Without the substantial tas increases adopted by the
states during that period, state expenditures would have more than consumed state
revenues at that time.
Lav and Berube (1999) recommended that states should have reserve funds
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averaging just over 18% of general fund budgets to weather the next recession,
however, a Sewer Utility is not as susceptible to the inverse relationship of
decreased revenue and increased social spending, therefore their reserve need not
be as high. However, Hyman Grossman of Standard and Poor's Rating Group called
the 18% mark "naive and counterproductive. You can get to the point where
reserves are obscene" (Barrett and Greene, 1999, p. 68).
Despite the healthy growth in state revenue collection over the past few
years, the relatively smaIl growth in spending over the same period, and the
resultant revenue over expenditures or net income, most states have not done what
is necessary to withstand even a relatively mild economic recession similar to what
occurred in the early 1990s. This increases the chances that an economic downturn
may make governments pass large tax or fee increases and to make unhealthy
spending cuts in order to balance their budgets. This is particularly important
because municipalities occasionally "share the pain" by the shifting of costs of
service, lost intergovernmental cost participation, or spending cuts from one fund to
another in difficult financial times.
Related Experiences
The idea of creating a budget stabilization fund is not only the province of
state government. Some cities have done this as well. While some cities have
adopted the concept after it became popular with states, others, like Portland,
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Oregon, pioneered this concept for cities (Government Finance Officers Association,
1998). According to the Office of the Controller for the City of Philadelphia (1999),
cities such as San Antonio, Tegas, and Baltimore, Maryland maintain fund balances
as a rainy-day fund to cushion against fiscal emergeneies and recession. Currently
the City of Philadelphia, Pennsylvania is working on creating one. Baltimore
officials established the City's rainy-day fund in 1993 as a cushion against a future
economic slowdowns, and it is grows by appro�mately $800,000 each year during
eeonomic expansion (City of Philadelphia, 1999}.
New York Citv
According to the Office of the Controller for the City of Philadelphia (1999),
New York City is slightly different, because the City is legally prohibited from
carrying forward funds from one �iscal year to the next. The City employs a
budget-stabilization account to designate excess current revenues for yet unknown
future expenses. The budget-stabilization account is established by law. If at any
time during the fiscal year additional revenue is recognized in a modification of the
budget, the City is required to set aside one-half of the new revenue into the
budget-stabilization account. Expenditures from the budget-stabilization account
must have a specific request for appropriation that identifies the purpose for the
money, and must be approved by a Gity Council supermajority. Unlike a true
rainy-day fund, the budget-stabilization account must be fully spent each year.
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However, the City can rebuild the account in the subsequent year if new revenue is
available.
Philadelnhia
According to the Office of the Controller for the City of Philadelphia (1999),
Philadelphia officials decided that by creating a rainy-day fund, Philadelphia could
sustain the appropriate level of government services over the long-term without
resorting to staff cuts, rednctions in service, or ta$ increases in the event of an
economic recession. The Controllei's Office concluded this could improve the Cit�s
long-term financial health and improve its chances of obtaining favorable bond
ratings, which could reduce future interest rates on city issued debt and thereby
reduce future debt service costs. The Controller's Office is seeking to set the
account up so that contributions to the budget-stabiIization fund wilI be made when
the rate of increase in revenue collections surpasses long-term economic growth
rates, and use of the fund will be allowed only when revenue collection falls below
long-term economic growth rates.
Portland. Oreeon
Portland Oregon was perhaps the pioneer in establishing a locai government
budget stabilization fund. According to the Government Finance Officers
Association (1998), during the early 1980s, Portland experienced severe financial
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stress resulting from the loss of federal revenue sharing and a severe recession.
Additionally, one-time revenues were being used to fund on-going programs, and an
overly optimistic anne%ation policy designed to give the General Fund more revenue
failed. As a result, the City of Portland closed fiscal year 1986-1987 with a General
Fund fund balance of $600,000 with literally no cash in the bank.
Staff and elected officials discussed reserves and they decided a reserve
would provide the City Council with more financial flexibility. They decided their
reserve could be used for emergencies and as a countercyclical tool to make the
transition through economic downturns. Part of their hope was to salvage
Portland's AAA bond rating.
With the help of staff economists, Portland developed the following model:
Reserves were to be composed of two parts, one part to be used only for emergencies
and the second part for countercyclical needs. The reserves were set up separate
from the General Fund, in the "General Reserve Fund." The emergency reserve was
pegged at five percent of net revenues based solely on discussion and their "expert
, judgement."
The determination of countercyclical reserve size proved to be more difficult.
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A 19 year revenue history that included the recessions of 1973 and 1981 was used.
Long run revenue growth was historically five and one-half percent. An
independent objective indicator was needed as a trigger; staff found that when
growth was less than five and one-half percent, the area's unemployment rate
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tended to exceed sis and one-hal£ percent and the property tax delinqueney rate (the
percentage of the new annuaI tax Ievy that was not coIlected in the first year}
exceeded eight percent. Applying this analysis, Portland officials determined that
an average slowdown in the economy caused a revenue loss in the first year o€ a
recession of $2.8 million, the 24 month revenue loss was estimated to be $8.4
million or approffimately another five percent. When the five percent emergency
reserve is added to the estimated 24 month countercyclical reserve requirement of
five percent, Port�and created a ten percent budget-stabilization fvnd.
7'hrough the use of the property t� delinquency trigger, the countercyclical
reserve use is governed by economic indicators and not politics. To rebuild both the
emergency and countercyclical reserves after use, the policy requires payback and a
scheduled rebuilding of the fund.
Immediate success was achieved: The fund eliminated Portland's need for
$30 million in tax anticipation note borrowing, the Council resolution and adopted
policy was critical for preventing raids on the fund for other purposes, and the AAA
bond rating was saved according to the Government EYnance Officers Association
(1998). Portland found that using the reserves prudently helped the city weather
two property tax limitations passed by the state of Oregon that otherwise would
have caused reductions in city services.
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State of Oluo
Navin and Navin (1997) discussed the approach that Oluo used to establish
both a statutory formula for contributing to the state Budget Stabilization Fund
and provide a procedure for withdrawal from the fund in times of fiscal stress. Ohio
uses a system similar to Portland, Oregon except Ohio's trigger is the annual
growth in "adjusted personal income" as compared to a one and four-tenths percent
benchmark estimate of normal personal income growth or personal income growth
adjusted by the consumer price index.
The Milwaukee Metropolitan Sewerage District
The Milwaukee Metropolitan Sewerage District (MMSD) also maintains
reserves for budget-stabilization, according to Kirchen (1996) and Miller (1999).
There had been complaints by critics of the MMSD that the reserve was too large.
Because of these complaints the Wisconsin legislature tried unsuccessfully to pass a
bill that would have required the MMSD to return the reserves to taspayers.
During the debate in the legislature, MMSD officials hired Bear, Stearns and
Company, a New York City investment bank, to conduct a review of their reserves.
This review determined the estimated $120 million cash reserve the Milwaukee
Metropolitan Sewerage District was reasonable and prudent. Bear Stearns based
this opinion on the MMSD's capital project requirements and cash flow needs.
According to Kirchen (1996), Bear Stearns found that cash reserves played an
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important role in supporting MMSD's financial credibility when it went to the bond
market. In �995, Mood�s Investor's Service Incorporated maintained its Aa rating
of the district, partly due to the soiid financial management demonstrated by the
reserve fund. Bear Stearns concluded that if the legislature caused the reserve fund
to be eliminated, this could cause rating agencies to downgrade their ratings on
MMSD bonds.
Choices for Saint Paul
In response to the poor financial performance of the Saint Paul Sewer Utility
in the early 1990s, Utility staff decided to survey major customers and stakeholders
to obtain their interpretation of what the Utilit3�s priorities should be. The Report
on the 1995 Sewer Rate Structure Survey Results (City of Saint Paul, 1995), briefly
discussed the guiding principles, the initial draft done by UtiIity staff and the final
review done by the University of Minnesota Center for Survey Research. This
survey was sent to policy makers from the City Council, local District Councils, the
City Finance Department, Mayor's Office, Public Works, members of the Task Force
for Saint Paul Sewer Rate Relief, Saint Paul Water Utility and several outside
agencies including the Minnesota Pollution Control Agency and Saint Paul's State
legislative delegation. Of the 92 surveys sent, 43 were returned, providing a
response rate of 47%.
The survey indicated that Sewer Utility Fund financiat stability was the
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most important objective. Respondents indicated that the sewer system should be
self supporting and rates charged should be based on the full cost of service
provided, and the concept of fairness and equity inherent in that. Respondents
were interested in flattening out fluctuations in annual sewer rate increases.
When indicators of regional or local economic health are reviewed for possible
use as a triggering mechanism for a budget-stabilization fund for the Sewer Utility,
it became clear that annual revenue growth does not work well. Annual revenue
growth does not work well because sewer revenues do not respond as quickly or as
directly to the economy as personal income taxes, neither do the volatility factors
established by Joyce (1999).
The factors that must be watched closely are: Negative changes in the local
economy, losses of major customers, and infrastructure emergencies. Sewer
revenues are fairly inelastic and increases in revenue are more closely related to
changes in the rate charged per hundred cubic feet (ccf) than in changes in the local
economy. Similarly, domestic (residential) volume is largely fixed, since it is tied to
winter water consumption, and therefore is stable all through the year. Commercial
customers, on the other hand, are billed monthly and are billed for sewer usage
based on the actual water used for the prior period. Changes in the economy will
definitely affect the health of this customer segment and in turn, this will have an
effect on the financial health of the Sewer Utility.
The financial health of large customers, and of large vendors such as
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Metropolitan Council Environmental Services (from whom the City buys its
sewerage treatment), does have an impact on the revenue generating and cost
environment of the Sewer Utility. The Utilit�s largest customers are Rock Tenn
Corporation (a recycled paper manufacturer in the Midway area), Ford Motor
Corporation (producing Ranger pickup trucks at its Highland Park facility), and
Minnesota Mining and Manufacturing (producing tape at its East Side facility).
Should the local economy force the closure or movement of one of these production
facilities, the budget-stabilization fund should be triggered and used if neeessary.
Even if a poor eeonomy caused one of the major customers to close temporarily, the
eflect on the remaining customers would be burdensome.
Creation of this account would need to be technicalIy called a"designation"
and not a"reserve." The term reserve is typically withheld for those special parts of
retained earnings or fund balance that are "externally restricted." This limits
reserves to items specifically identified by bond agreements and other contractual
obligations with arms length individuals and entities. Any amount that the City
Council sets aside must be a called a designation, because the City is not legally
required by agreement with another to keep the amount in reserve. The City
Council could decide to undo what it had designated at any time, so therefore this
term should not be confused with reserves.
City Administration and the City Council have several alternatives. These
alternatives are briefly described in Table 3.
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Table 3
' City of Saint Paul Sewer Utility Budget Stabilization Desi2.nation
Policv Alternatives
� Designated Cash &
Policv Alternative �igger or Need Retained Earnin2s
, Do Nothing
' Emergency Designation
, Rate Stabilization
Designation
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Combined Emergency
' and Rate Stabilization
Designation
,
� Simple Contingency
Designation
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No trigger; any need
Infrastructure or
unexpected revenue loss.
SSSC delinquencies;
large billable sanitary
sewer volume losses
Tnfrastructure; unexpected
revenue loss; SSSC
delinquencies; large
billable sanitary
sewer volume losses
Infrastructure; unexpected
revenue loss; SSSC
delinquencies; large
billable sanitary
sewer volume losses
$0.00
$1,851,250
$1,851,250
$3,702,500
$3,702,500
ITnder the "do nothing" scenario, there is no real change in outcomes or
difference in financial planning in the short-term. A larger than normal cash
balance e�usts in the operating cash account and the unreserved, undesignated
retained earnings account. These balances may still exist and be available for use
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in an emergency or in the event of an economic recession. This alternative presents
difficulties if these funds are foolishly spent, appropriated by the governing body for
non-sewer related uses or used during the early stages of a financial crisis. This
atternative is particutarly troublesome because it may provide no warning to policy
makers until the entire operating reserve is spent.
Emergencv Designation O �
The City of Saint Paul's sewer system has an estimated replacement value of
one billion dollars. At the same time, many parts of the sewer infrastructure
facilities are over 100 years old. Saint Paul is currently in the second year of a 20
year program to systematically inspect and rehabilitate all the sewers in the city.
Even with this aggressive rehabilitation program, the possibility e�sts that a major
sewer infrastructure problem will occur, for which additional emergency spending
will be needed. Storm sewers are periodically under extreme stress from high flow
conditions during heavy rainfalls. All sewers, both storm and sanitary, can develop
structural problems that slowly cause collapse or failure that cannot be readily
detected from the surface. When an nnderground void opens, large portions of
street or surface can be damaged.
fihe Emergency Designation should be equal to five percent of annual
operating revenues as adopted by the City Council and only available to the Sewer
Utility Enterprise Fund to finance one-time, emergency, unanticipated capital or
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operating egpense requirements or to offset unanticipated revenue fluctuations
occurring within a fiscal yeaz. Based on budgeted 1999 sanitary and storm sewer
revenues of $28,322,416 and $8,702,580 respectively, this designation would be
� $1,851,250.
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The Emergency Designation may be accessed when emexgency expenses or
an unanticipated revenue reduction causes an operating cash balance less than 90
days of operating expenses. The amount of this designation should be reviewed
annually to ensure that the new budgeted amounts are included in the formula.
Use of the Emergency Designation must be authorized by a properly executed
council resolution or adopted as part of the annual budget.
Emergency Designation resources must be restored. Restoration should
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commence in the first fiscal year following use. Restoration shall be accomplished
in annual installments no smaller than one percent of total Sewer Utility sanitary
and storm sewer revenues in the year the Emergency Designation was used. If
sanitary and storm sewer charges for the following year have already been adopted,
the Administration and City Council should act to revise those charge rates to
include this restoration.
Rate Stabilization Desi�nation Onlv
The Rate Stabilization Designation would be available to address revenue
shortfalls or expense overruns related to adverse changes in the local economy. Use
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of this fund woul d be triggered by an independently verifiable measure of the health
of the economy as it relates to the Sewer Utility.
I propose using a ratio of delinquent Storm Sewer System Charge fees to
annuaI total current year Storm Sewer System Charge revenue. The Storm Sewer
System Charge (SSSC) was a new charge in 1986, and since the G`ity carries
delinqnent charges on its financial statements for five years, the first year with a
full compliment of delinquent charges was 1991. I have included delinquent
property taxes in the chart to demonstrate the trend as it relates to property t�es
as support. The levies and delinquencies since 1985 are summarized in Table 4.
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Table 4
Saint Paul Propertv Tax and Storm Sewer Svstem Char�e (SSSC) Delinquencies
from 1985 through 1998.
Property Percentage Percentage
Tax SSSC Delinquent Delinquent Prop.Taxes SSSC
Yeaz Lev Revenue Taxes SSSC Delinquent Delinquent
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
46,204,903
51,431,349
54,308,956
57,450,556
53,713,945
58,282,981
64,408,993
65,160,804
66,737,196
66,736,547
66,461,547
65,811,463
64,186,727
62,386,509
4,322,861
4,571,220
4,528,Q32
4,841,369
5,678,226
6,515,184
6,767,190
6,966,792
2,086,818
2,744,720
3,127,982
4,149,925
4,855,561
4,599,094
5,627,401
6,479,632
6,307,292
5,094,235
4,062,395
3,388,266
2,918,052
2,072,197
510,565
572,124
508,555
505,125
394,531
382,487
341,535
276,785
4.95%
5.94%
6.08%
7.64%
8.45%
8.56%
9.66%
10.06%
9.68%
7.63%
6.09%
5.10%
4.43%
323%
12.45%
1323%
11.13%a
11.16%
8.15%
6.74%
524%
4.09%
Source: City of Saint Paul Comprehensive Annual Financial Reports, 1985 through 1998.
rates higher than ten percent clearly coincide with the recession of the 1989 to 1993
Table 4 clearly shows the recession from 1989 through 1992, with residual
effects occurring in delinquent storm sewer collections well into 1994. Delinquency
' period.
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The Rate Stabilization Designation sl�ould be equal to five percent of annual
operating revenues as adopted by the City Council and only available to the Sewer
L3tility Enterprise Fund to either maintain current service level programs or
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transition expense levels to match lower revenue levels during the first 18 to 24
months of a recession or following the loss of a major sewer use customer. The
amount of this designation should be reviewed annually to ensure that the new
budgeted amounts are included in the formula. Based on budgeted 1999 sanitary
and storm sewer revenues of $28,322,416 and $8,702,580 respectively, this
designation would be $1,851,250.
The Rate Stabilization Designation xnay be aecessed when the operating cash
balance is less than 90 days of operating egpenses. In aadition, one or more of the
following conditions must occur in eonjunetion with the cash balance trigger:
The Storm Sewer Charge delinquency rate (an indicator of economic
recession) exceeds ten percent or is predicted to exceed ten percent
during the current or next fiscal year�, or
Net Sanitary Sewer volume (gross volume less credits) decIines exceed
two and one-half percent compared to the previous fiscal year or are
predicted to exceed two and one-half percent during the next fiscal
year.
A history of billable sanitary sewer volumes is included in Appendix "C." Use of
the Rate Stabilization Designation should be authorized by a properly executed
council resolution or adopted as part of the annual budget.
Rate Stabilization Designation resources must be restored. Restoration
should commence in the fiscal year that is two years (two years should in most cases
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place the restoration after the worst of the recession is over) following the year of
use. Restoration shall be accomplished in annual installments no smaller than one
percent of total Sewer Utility sanitary and storm sewer revenues in the year the
Rate Stabilization Designation was used. If sanitary and storm sewer charges for
that year have already been adopted, the Administration and City Council should
act to revise those charge rates to include this restoration.
A Combination Emer�'encv and Rate Stabilization Designation
The Combination Emergency and Rate Stabilization Designation would be
structured similar to Portland, Oregon's model, but would be based on the Storm
Sewer delinquency trigger previously described. The designations would be
separate so that, if one part of the designation was triggered, the other balance
would remain whole for use. Use of the Emergency and Rate Stabilization
Designation must be authorized by a properly executed council resolution or
adopted as part of the annual budget. The Designation for Sewer Utility Budget
and Rate Stabilization should be equal to 10% of budgeted annual sanitary and
storm sewer revenue. This amount should be revised annually. Based on budgeted
1999 sanitary and storm sewer revenues of $28,322,416 and $8,702,580
respectively, this designation would be $3,702,500.
If needs arise that cause both the Emergency Designation and the Rate
Stabilization Designation to be used, and restoration of those designations are
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concurrent, restoration shall be accomplished in annual installments no smaller
than a total of two percent of total Sewer Utility sanitary and storm sewer
revenuea. If sanitary and storm sewer charges for that year have alxeady been
adopted, the Administration and City Council should act to revise those charge
rates to include this restoration.
A Simple Contingency Designation
A Simple Contingency Designation could be created and used for either an
infrastructure emergency or as a budget stabilization fund. The amount and
calculation of the designation would essentially use the same methods as the
combination fund previously described. However, this alternative would not have
the statutorily established firewall between the emergency and rate stabilization
portions, so the designated funds could be e�austed on one type of problem,
leaving none to solve any others. Based on budgeted 1999 sanitary and storm
sewer revenues of $28,322,416 and $8,702,580 respectively, this designation would
be $3,702,500.
Recommendation
The best option for the Sewer Utility is the combination Emergency and Rate
Stabilization Designation. A proposed City Council Resolution to enact this policy
is included in Appendig "A." This designation would provide a safety valve for both
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of the most serious revenue shortage causes, and segregate the amounts for each.
Currently cash and retained earnings are available to fully fund this designation.
Even though cash and retained earnings in this amount do e�st, this is an area
where some reassessment of policies and laws may now be appropriate and
, necessary.
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In addition, this combined ten percent designation should be placed in a
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separate interest earning account in the books and records of the City Treasury and
the Sewer Utility Enterprise Fund and shall be managed as part of the City
'IYeasury Investment Pool. Interest income earned on the account should be used to
keep the designation at the appropriate 10% level. The impact of interest earnings
on this account should be reviewed annually by Public Works Accounting and Office
of Financial Services staff. If at the time of this annual review this designation has
grown larger than 10% of budgeted sanitary and storm sewer revenue, the excess
may only be used to fund a portion of a following fiscal year's Sewer Utility
Enterprise Fund Budget as proposed by the Mayor and adopted by the City Council.
Conclusion
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Creation of a designation for emergencies and rate stabilization within the
Sewer Utility will help the City prepare for the next recession by setting aside
money that could prevent potential hardship for our customers. The recent sound
economy has provided the Utility with revenues in excess of expenses: Some of this
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surplus should certainly be used to provide for emergencies and poor economic
conditions. This will also provide assurance to purchasers of Sewer Utility debt and
bond raters that the Utiiity will be able to meet all financiai obligations into the
future. Unfortunately, bond ratings for the Sewer Utility are likely subservient to
the bond rating for the Cit�s General Obligation Debt. The Cit�s General
Obligation debt is currently rated AA by Standazd and Poor's, and that rating may
need to be improved to AAA before the Sewer Utility's bond rating can be upgraded.
Perhaps application of these principles and methods to the General Fund would
have an impact in that regard.
The warm economic winds of summer have blown the chaff from the wheat
and neatly piled it in front of the Sewer Utilit�s granary door. The time is right for
the ants to carefully, thoughtfully and methodically cany that wheat into the safety
of the garner for the long winter which inevitably will soon be upon us.
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Annotated Biblio2ranhv
Barrett, K. & Greene, R. (1999, September). The gospel of guidelines.
Governing, 12 (12), 6$. A good summary analysis which brought together the work
of Phil Joyce, Iris Lav, and additional insight from Hyman Grossman of Standard &
Poors Corp.
Campi, F. & Sullivan, D. (1998, April). State and local government fiscal
� position in 1997. Survev of Current Business. 78, (4), 10-15. States and local
governments had surpluses totaling $107.8 billion at the end of 1997. The majority
' of these surpluses were generated through operating programs such as education,
highways and streets, and medical programs.
LI
,
City of Saint Paul. Budget Office. (1988). Citv council adopted budget for the
vear 1988. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1988.
City of Saint Paul. Budget Office. (1989). Citv council adopted bud�et for the
, year 1989. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1989.
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City of Saint Paul. Budget Office. (1990). Citv council adopted budget for the
vear 1988. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1990.
City of Saint Paul. Budget Office. (1991). City council adopted budget for the
vear 1991. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1991.
City of Saint Paul. Budget Office. (1992). Citv council adopted bud�et for the
„�ar 1992. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1992.
City of Saint Paul. City Council. (1992) Resolution of the Saint Paul Citv
Council: CF 92-1373. Saint Paul, Minnesota: City of Saint Paul. This resolution
directed the use of $1.6 million in cash intended for construction projects to be used
for operating expenses to balance the operating budget.
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City of Saint Paul. Budget Office. (1993). City council adopted budget for the
vear 1993. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
2993.
City of Saint Paul. Bndget Office. (1994). Citv council adopted budget for the
,�ear 1994. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer ITtility for
1994.
City of Saint Paul. Budget Office. (1995). City council adopted bud�et for the
vear 1994. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1994.
City of Saint Paul. Department of Finance and Management Services.
(1986). Comprehensive annual financial report for the fiscal vear ended December
31, 1985. Saint Paul, Minnesota: City of Saint Paul. This annual report was used to
gather specific data regarding the relationship of Delinquent Property Taxes
Receivable to the total revenue generated from property taxes for 1985.
City of Saint Paul. Department of Finance and Management Services.
(1987). Comprehensive annual financial report for the fiscal vear ended December
31, 1986. Saint Paul, Minnesota: City of Saint Paul. This annual report was used to
gather specific data regarding the relationship of Delinquent Property Tages
Receivable to the total revenue generated from property taxes for 1986.
City of Saint Paul. Department of Finance and Management Services. (1988).
Comprehensive annual financial report for the fiscal vear ended December 31, 1987.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Taxes Receivable to
the total revenue generated from property taxes for 1987.
City of Saint Paul. Department of Finance and Management Services. (1989).
Comprehensive annual financial report far the fiscal vear ended December 31, 1988.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the retationship of Delinquent Property Taxes Receivable to
the total revenue generated from property taxes for 1988.
City of Saint Paul. Department of Finance and Management Services. (1990).
Comprehensive annual financial report for the fiscal year ended December 31, 1989.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
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specific data regazding the relationship of Delinquent Property Taxes Receivable to
the total revenue generated from property taxes for 1989_
City of Saint Paul. Department of Finance and Management Services. (1991).
Comprehensive annual financial report for the fiscal �ar ended December 31, 1990.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Taxes and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1990.
' City of Saint Paul. Department of F4nance and Management Services. (1992).
Comprehensive annual financial report for the fiscal year ended December 31, 1991.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
' specific data regarding the relationship of Delinquent Property Taxes and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1991.
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City of Saint Paul. Department of Finance and Management. (1993).
Comprehensive annual financial report for the fiscal vear ended December 31. 1992.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Taxes and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1992.
' City of Saint Paul. Department of Finance and Management. (1994).
Comprehensive annual financial report for the fiscal year ended December 31. 1993.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
� specific data regarding the relationship of Delinquent Property Tases and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1993.
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City of Saint Paul. Department of Finance and Management. (1995).
Comnrehensive annual financial report for the fiscal vear ended December 31. 1994.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Tases and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1994.
City of Saint Paul. Office of F4nancial Services. (1996). City council ado�ted
btx�et for the year 1996. Saint Paul, Minnesota: City of Saint Paul. This annual
budget was used to gather specific data on rates and fees charged by the Saint Paul
Sewer Utility for 1996.
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City of Saint Paul. Office of Financial Services. (1996). Comnrehensive
annual financial re�ort for the fiscal vear ended December 31. 1995. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinquent Property Taxes and Delinquent Storm
Sewer System Charges Receivable to the total revenue generated from those
funding sources for 1995.
City of Saint Paul. Office of Financial Services. (1997). C� council adopted
budget for the �ar 1997. Saint Paul, Minnesota: City of Saint Paul. This annual
budget was used to gather specific data on rates and fees charged by the Saint Paul
Sewer Utility for 1997.
City of Saint Paul. Offiee of Financial Serviees. (1997). Comprehensive
annual financial report for the fiscal vear ended December 31. 1996. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinquent Property Taxes and Delinquent Storm
Sewer System Chazges Receivable to the total revenue generated from those
funding sources for 1996.
City of Saint Paul. Office of Financial Services. (1998). City council ad�ted
bud�et for the vear 1998. Saint Paul, Minnesota: City of Saint Paul. This annual
budget was used to gather specific data on rates and fees charged by the Saint Paul
Sewer Utility for 1998.
City of Saint Paul. Office of Financial Services. (1998). Comprehensive
annual financial report for the fiscal vear ended December 31. 1997. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinquent Property Tages and DeIinquent Storm
Sewer System Charges Receivable to the total revenue generated from those
funding sources for 1997.
City of Saint Paul. Office of Financial Services. (1999). Comnrehensive
annual financial report for the fiscal vear ended December 31. 1998. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinqnent Property Taxes and Delinquent Storm
Sewer System Charges Receivable to the total revenue generated from those
funding sources for 1998.
City of Saint Paul. Department of Public Works. (1994, January 26). Final
renort submitted by the Task Foree for Saint Paul Sewer Rate Relief. Saint Paul
Minnesota: City of Saint Paul. This report details the findings of a working group
of City staff, interested citizens and representatives of industrial customers. This
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group studied the financial and operating environments and made
recommendations about how they felt the Cit�s sewer rate structures should
respond to pressures from those environments.
City of Saint Paul. Department of Public Works. (1995, August 21). Re�ort
on the 1995 sewer rate structure survev results. Saint Paul Minnesota: City of
Saint Paul. 'I'his report detailed the findings of a survey sent to City Council
members, staff, district councils, the Saint Paul Water Utility and large industrial
clients.
City of Philadelphia. Office of the City Controller. (1999). Philadelphia: a
new urban direction. Philadelphia: Saint Joseph's University Press. Chapter Three
of this book discussed fiscal policies required for long-term financial stability. One
of the policies highlighted is the creation of a budget-stabilization fund.
Clifford, C. (1998, August). Linking strategic planning and budgeting in
Scottsdale, Arizona. Government Finance Review. 14, {4), 9-15. The budget process
in Scottsdale Arizona was discussed including how annual operating and capital
budgets are linked to the financial plan and strategic goals.
Gilroy, Calif., has $8.8 million in the bank -- for now. (1997, June 7). The
Dispatch, Gilrov. California, p. 6. City Administrator Jay Baksa used the cash
portion of the fund balance of Gilroy, CA mainly as an emergency fund, carrying the
amount forward from year to year. The Gilroy City Council has had a policy of
keeping fund balance at roughly five percent of city expenses.
Government Finance Officers Association of the United States and Canada.
' (1998). Revenue analvsis and forecastin�'. Chicago: Government Finance Of�icers
Association of the United States and Canada. This course reader provided as part
of a two day revenue analysis seminar in New Orleans, LA provided valuable
' reasons why governments should have reserve funds and offered examples on how
to create one, including a sample city council resolution.
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Government Finance Officers Association of the United States and Canada.
(1998). Recommended budget nractices: A fraxnework for improved state and local
government bu eting. Practice 4.1- Develop Policy on Stabilization Funds
Chicago: Government Finance Officers Association of the United States and
Canada. Retrieved November 16, 1999 from World Wide Web:
http://www.gfoa.org/resrch/bestcd/bestpraclpra4_l.htm This downloadable
document discussed best practices for state and local budgeting. It recommended
the correct rationale to use and why these funds can be an important part of the
government's financial plan
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fiighlights. (National league of cities' annual city fiscal conditions survey).
(1999, July 12). Nations Cities Weekl� 22, (28), 11. The municipal sector's ending
balances (budget surpluses) as a percentage of expenditures increased during 1998
to 17.6%.
Joyce, P. (1999). What's so magical about 5 percent? A nationwide look at the
optimal size of state rainv day funds. The George Washington University,
Department of Public Administration. Professor Joyce egamined the rationale
behind the common usage of five percent for budget reserves, and created a
mathematical model, based on certain risk factors, that can calculate the reserve
percentage appropriate for a particular state.
Kirchen, R. (1996, July 13). MMSD's $120 million reserve `prudent,' says
Bear Stearns. The Business Journal - Milwankee. 13, (41), 4. The New York
investment bank Bear Stearns estimated that the cash reserve of the MMSD is
reasonable and prudent when construction projects are concerned and the MMSD
must meet cash flow needs while awaiting federal and state grants.
Kovener, R. (1997, January). Your responsibility for reserves. Association
Management. 49, (1), 107-109. This article estplored the juxtaposition of saving for
a rainy day versus spending the money required for important lang-term
investments.
Lav, I. & Berube, A. (1999, March). When it rains it pours. Center On
Budget and Polic�Priorities. Retrieved October 7, 1999 from World Wide Web:
http://www.cbpp.org/3-11-99sfp.pdf This report of required reserves for budget
stabilization in event of a recession ranked states by the percentage of reserve to
general expenditures. It suggested that a state government shouId have reserves
approaching 20% of operating egpenditures.
Milan, N. (1998, December 30). 50 state report on fiscal 1999 budgets
released. NGA On-line News Releases. Retrieved October 7, 1999 from the World
Wide Web: http//www.nga.org/Releases/PR-30December1998Fiscal.htm
This on-line report indicated that state and local reserve balances as a percent of
budgeted expenditures continues to grow. 1998 year end balances in two-thirds of
the states were expected to be more than 5% of budgeted expenditures.
Navin, J. & Navin, L. (1997). The optimal size of countercyclical budget
stabilization funds: A case study of Ohio. Public Bud,g'eting and Finance, 17 (4),
114-127. The Navins discussed the widely held belief that five percent is an
appropriate budget reserve amount using the State of Ohio as a case study. They
found that five percent is no where near the amount of reserve required to bring
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stability to General Fund revenues in periods of decline.
Nunn, S. (1996, March). Urban infrastructure policies and capital spending
in city manager and strong mayor cities. American Review of Public
Administration. 26, (1), 93-112. This article discussed infrastructure policies of
seven cities in the state of Texas that are defined as "City Manager" cities, and
contrasted them to seven cities in the state of Indiana that are defined as "Strong
Mayor" cities to see if there was any statistically significant impact on policy,
financial participation and egpenditure patterns.
Sekwat, A. (1999, June). Capital budgeting practices among Tennessee
municipal governments. Government Finance Review. 15, (3), 15-19. Tennessee
uses separate capital budget programs to avoid deficits in their annual operating
budgets.
Tyer, C. (1993). Local government reserve funds: Policy alternatives and
political strategies. Public Budgeting and Finance. 13 (2), 75-84. This article
discussed some of the reasons for establishing and using reserve funds, different
ways of building reserves, and brought to light major policy areas governments
should be aware of when planning to build and use these funds.
Vasche, J. & Williams, B. (1987). Optimal governmental budgeting
� contingency reserve funds. Public Bud�eting and Finance. 7(1), 66-82. This article
discussed the growing ntunber of state contingency reserve funds and their
t purposes. The authors felt that the criteria used to decide whether to establish a
contingency fund and what formula should be used to develop the optimal amount
of reserve had received little attention in scholarly research, so they reviewed these
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two issues using the State of California as an example.
Vehaum, D. (1998, April). Long-range financial planning: New strategies for
old problems (Rock Hill, South Carolina). Government Finance Review 14, (2), 39-
39. The city of Rock Hill, South Carolina created a long-range financial plan to
reduce its $8 million annual debt service requirement. Rock Fiill's plan enabled the
city to accumulate additional revenues and reduced expenses totaling $20 million in
four years.
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List of Interviewees
Barrett, K. & Greene, R. (personal communication, October 15, 1999).
Katherine Barrett and Richard Greene provided more background information on
the Governing article they had written. We also discussed whether or not they
would be willing to share additional source material they did not include in their
original article.
Fu�, W. (personal communication, November 1, 1999). William Fix works for
the Charlotte-Mecklenburg North Carolina School District. He responded to the
email message I sent to a list server on policies and uses of reserves.
Fuller, L. (personal communication, November 1, 1999). Lenora Fuller works
for Washington, D.C.. She responded to the email message I sent to a list server on
policies and uses of reserves.
Martin, G. (personal communication, November 1, 1999). Gary Martin is the
Director of Internal Audit for Henrico County Virginia. He provided valuable
information in response to the email message I sent to a list server on policies and
uses of reserves.
Miller, K. (personal eommunication, November 2, 1999). Kate Miller is the
Manager of Budget and Financial Planning for the Milwaukee Metropolitan
Sewerage District (MMSD). She provided valuable information in response to the
email message I sent to a list server on policies and uses of reserves. This also
supports the journal article listed above by Kirchen.
Rainey, A. (personal communication, October 29, 1999). Anthony Rainey is
the Assistant F�nance Director of the City of Norfolk Virginia. He provided
valuable information in response to the email message I sent to a list server on
policies and uses of reserves.
Romaine, J. (personal communication, November 2, 1999). John Romaine
works for the Federal Aviation Administration. He responded to the email message
I sent to a list server on policies and uses of reserves.
Starr, G. (personal communication, October 29, 1999). Gerald Starr works
for the State of Oklahoma. He responded to the email message I sent to a list
server on policies and uses of reserves.
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Appendix A
Council File �
RESOLUTION
Green Sheet n
CITY OF SAINT PAUL, MINNESOTA
Establish a Desi�nation for Sewer Utilitv Budget and Rate Stabilization and
Adogt Policies for Contributions and Uses
WHEREAS since 1994 the City Administration and the City Council have endeavored to rebuild
Sewer Utility Enterprise Fund cash and reserves; and
WHEREAS, as a result of prudent rate setting the Sewer Utility was able to build year end 1998
operating cash on hand to appro�mately thirty percent (30%) of 1998 revenues; and
WHEREAS, prudent financiat management and sound accounting practice recommend
establishing designated cash and retained earnings equal to ten to fifteen percent (10% to 15%)
of annual sanitary and storm sewer revenue to be used for sewer infrastructure e�ergencies,
operating emergencies and rate stabilization; and
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15 WHEREAS, a Sewer Utility designation of this nature decreases the Utilit�s need for short-term
16 borrowing from the Generai Fund, which could negatively impact other City programs and is an
, 17 indication of the Utility's financial health; and
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WHEREAS, a Sewer Utility designation of this nature decreases the Utility's need to raise
sanitary and storm sewer rates sharply due to emergencies and variable economic factors, which
may exacerbate negative economic effects; and
WHEREAS this designation must be governed by a written financial management policy that
includes direction on designation contribution and use requirements; and
WHEREAS, it is important for the City Administration and the City Council to adopt policies
governing the Cit�s Sewer Utility Budget and Rate Stabilization Designation for control at the
appropriate policy setting level, clarity and uniformity of direction; and
Now, therefore, be it RESOLVED, that the Mayor and Council of the City of Saint Paul do
hereby designate Cash and Retained Earnings equal to ten percent (10%) of the annual budget
for sanitary and storm sewer revenue for Sewer Utility Budget and Rate Stabilization and adopt
the contribution and use policy below.
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Appendix A
36 1. Cash for day-to-day operations shall not be allowed to fall below ninety (90) days operating
37 expenses as defined as the sum of:
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39 a. The forty-five (45) day cash reserve for operation and maintenance as required by revenue
40 bond authorizing resolutions, calculated by Public Works Accounting and audited as part of the
41 Cit�'s annual financial audit; and
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43 b. An additional amount equal to the forty-five (45) day reserve calculated above in the
44 operation and maintenance reserve cash account.
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46 c. After revenue bond related operation and mainteriance cash requirements described in item
47 a. lapse, cash for day-to-day operations will no longer be the sum of items a. and b., but will
48 equal ninety (90) days operating expenses by separate calculation.
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2. The Designation for Sewer Utility Budget and Rate Stabilization shall be equal to ten '
percent (10%) of budgeted annual sanitary and storm sewer revenue, and shall be revised
annually. The initial designation shall be made within su�ty (60) days following adoption of this'
document and subsequent adjustments to this designation shall be made within sixty (60) days
after adoption of the annual revenue budget by the City Council. '
3. The first one-half (�/s) or five percent (5%) designation is defined as an Emergency
Designation available only to the Sewer I3tility Enterprise Fund to finance one-time, ,
emergency, unanticipated capital or operating expense requirements or to offset unanticipated
revenue fluctuations occurring within a fiscal year.
4. The Emergency Designation may be accessed when emergency expenses or an unanticipated'
revenue reduction causes an operating cash balance less than the requirements set forth in item
1 above for the Sewer Utility Enterprise Fund only.
5. The second one-half (�/2) or five percent (5%) designation is defined as a Rate Stabilization
Designation available only to the Sewer Utility Enterprise Fund to either maintain eurrent
sexvice level programs or transition expense levels to match lower revenue levels during the
first eighteen (18) to twenty-four (24) months of a recession or following the loss of a major
sewer use customer.
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6. The Rate Stabilization Designation may be accessed when sanitary or storm sewer revenue
is projected to end the year five percent (5%) lower than the previous year, causing an operating
cash balance less than the requirements set forth in item 1 above for the Sewer Utility
Enterprise Fund only and one or more of the following conditions occurs in conjunction with the,
five percent (5%a} reduction in revenue:
a. The Storm Sewer Chazge delinquency rate (an indicator of economic recession) exceeds ten
percent (10%) at the end of the previous fiscal year; or
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b. Tlze Storm Sewer Charge delinquency rate (an indicator of economic recession} is predicted to
exceed ten percent (10%) during the current fiscal year; or
c. The Storm Sewer Charge delinqueucy rate (an indicator of economic recession) is predicted to
' 85 exceed ten percent (10%) during the ne� fiscal year; or
86
87 d. Net Sanitary Sewer volume (gross volume less credits} declines exceed two and one-half
' 88 percent (2 i/z%) compared to the previous fiscai year; or
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e. Net Sanitary Sewer volume (gross volume less credits) declines are predicted to exceed two
and one-half percent (2 �/z%) during the next fiscaI year.
7. For either the Emergency Designation or the Rate Stabilization Designation, use shall be
authorized bq a properiy executed council resolution or adopted as part af the annual budget.
8. Emergency Designation resources must be restored. Restoration shall commence in the first
fiscal year following use. Restoration shall be accomplished in annual instaliments no smaller
than one percent (1%? of total Sewer Utility sanitary and storm sewer revenues in the year the
Emergency Designation was used. If sanitary and storm sewer charges for the following year
have already been adopted, the Administration and City Council shall act to revise those charge
rates to include this restoration.
9. Rate Stabilization Designation resources must be restored. Restoration shall commence in
the fiscal year that is two years following the year of use. Restoration shall be accomplished in
annual installments no smaller than one percent (1%) of total Sewer Utility sanitary and storm
sewer revenues in the year the Rate Stabilization Designation was used. If sanitary and storm
sewer charges for that year have already been adopted, the Administration and City Council
shall act to revise those charge rates to include this restoration.
10. If needs arise that cause both the Emergency Designation and the Rate Stabilization
Designation to be used, and restoration of those designations are concnrrent, restoration shall
be accomplished in annual installments no smaller than a total of two percent (2%) af total
Sewer Utility sanitary and storm sewer revenues according to items 8 and 9 above. If sanita�^
and storm sewer charges for that year have already been adapted, the Administration and Cit=
Council shali act to revise those charge rates to include this restoration.
Be if further RESOLVED, that this combined ten percent (10%) designation shail be piaced i
separate interest earning account on the books and records of the City Treasury and tlte Sew.
Utility Enterprise Fund and shall be managed as part of the City Treasury Investment Pool.
Interest income shall be used to keep this designation at the appropriate ten percent (10%o)
level. The unpact of interest earnings on this account shall be reviewed annually by Public
Works Accounting and Office of F`inancial Services staff. If at the time of this annual review
Page 3 of 4
Page 45
Appendix A �
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this designation has grown larger than ten percent (10%) of budgeted sanitary and storm sewer
revenue, the excess may only be used to fund a portion of a following $scal yeai's Sewer Utility'
Enterprise Fund Budget as proposed by the Mayor and adopted by the City Council.
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Yeas �� Nays �� �sent
Requested by Departsnent of:
public Works
gl, RP
Apgroval Recommended by Budget Director:
lopted by Council: Date
option Certified by Council Secretary
e
>roved By Mayor: Date
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Form Approved by City Attorney:
Page �,:
Approved by Mayor for Submission to Council:
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Appendix B �D
' accounting@f'nattcenet.gov, Budget-NetG�f'xnancenet.gov, fin-opera, 1223 PM 10/29/99 -0700, PoIicies
To: accouaLing@financenet.gov, Budget-NetCfinancenet.gov, fin-operations@financenet.gov, fin-
' policy@financenet.gov, friet-supportC�financenet.gov
From: Bruce Beese <bruce.beeseC�ci.sLpanl.mn.us>
Subject: Policies and Use of Desianated Reserves held by governments
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Attached:
Dear Fellow Government Finance Professional,
I am currently researching the possibility of establishing designated retained eamings
for the City of Saint Paul, Minnesota Sewer Utility both from a professional point of
view (I am an accountant with the St. Paul Public Works Department) and as part of a
Policy Formulation graduate class I am taking at Hamline University in St. Paul. As
government finance professionals, T am certain you can provide valuab)e experience
and insight for my analysis.
I believe designating a portion of retained earnings within the Sewer Utility will help
the City prepare for the next recession by setting aside a fund for emergencies and rate
stability. The recent sound economy has provided the Utility with revenues in excess
of expenses and some of this surplus can possibly be used to provide for emergencies
and economic downturns.
Preliminary information inclicates that other government units use a two-part
designation. One component is set aside for infrastructure emergencies, and the other
component is held to ease the transition to higher rates or spending reductions
required by the loss of a major customer or economic recession (this is not meant to
preclude discussion of reserves or designations set aside for other purposes}. There are
several possible positive benefits from having a reserve or designation of this nature:
long term financial health, higher bond ratings, time to make thoughtfulIy placed cuts
and reasonable rate increases, ready fund'zng for potential heaith and safety
emergencies, and rate stability.
My analysis will be enhanced if I can obtain information about other government
agencies that have used designations of this nature and determine alternatives in use
now and in the past. If you can answer the foliowing questions, I would be grateful:
1. a. Has your governmental unit established a reserve or designation for emergencies
or adverse economic conditions?
1. b. Is the application of this policy jurisdiction-wide or does it only apply to particular
funds?
1. c. If not jurisdiction-wide, what major funds are setting aside a reserve or
Printed £or Bruce Beese <bruce.beese@cistpaul.mn.vs>
Page 47
Appendix B
accountangCf"nancenet.gov, Budget-Net@f'inancenet.gov, �n-opera, 12:23 PM 10J29t99 -0700� Policies
designation? Please also list if they are proprietary or governmentai fund types.
2. What year was this policy put into practice?
3. What is (are� the stated objective(s) of the reserve or designation?
4. What level of reserve or designation was deemed appropriate?
a. What is the dollar amount of the current reserve or designation?
b. As it relates to annual revenues, what percentage of annual revenues is the current
reserve or designation?
5. What was your reasoning for determining this level?
6. a. Has your governmental unit ever nsed part or all of the reservs or designation?
6. b. When did you use it?
6. c. What did you use it for?
7. Do you feel that the objective(s) was (were? �et after it's establishment or if it was
used?
8. a. What was your General Obligation Bond rating (or other bond rating if
appropriate) before establishing the reserve or designation?
8. b. Did your General Obligation Bond rating (or other bond rating if appropriate)
improve after establishing the reserve or designation?
8. c. What is your new rating and how much time passed before this rating was
improved?
9. I would like to list you as a source in the references for my work I would appreciate
your providing the followuig information if you are comfortable doing so:
Your full name
Your title
Your work address
Your work telephone number
Please indicate your willingness to be contacted a second time for clarifications and
follow up questions if necessary.
Please reply to my email address listed or if you'd like yon may call me at (651) 266-
6063.
Printed for Bruce Beese <bruce.beese�cistpaul.mn.us>
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PaQe 48
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Appendix B � 'y5
accounting@f'nancenet.gov, Budget-NetCfinancenet.gov, fin-opera, I223 PM 10/29/99 -0700, Policies
Thank you very much for your time completing this survey.
Printed for Bruce $eese <bruce.beeseCdci.stpaul.mn.us>
Page 49
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Appendix C
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Council File # pp � ���
Presented By
Referred To
0 R l G i N� � RESOLUTION Green Sheet # iozs�6
�, I OF SAINT PAUL, MINNESOTA
Committee: Date
m
1 Establish a Designation for Sewer Utilitv Budget and Rate Stabilization and
2 Adont Policies fox Contributions and Uses
3
4 WHEftEAS, since 1994 the City Administration and the City Council have endeavored to rebuild
5 Sewer Utility Enterprise Fund cash and reserves; and
6
7 WHEREAS, as a result of prudent rate setting the Sewer Utility was able to build year end 1999
8 operating cash on hand to approximately thirty percent (35%) of 1999 revenues; and
9
10 WHEREAS, prudent financial management and sound accounting practice recommend
11 establishing designated cash and retained earnings equal to ten to fifteen percent (10% to 15%)
12 of annual sanitary and storm sewer revenue to be used for sewer infrastructure emergencies,
13 operating emergencies and rate stabilization; and
14
15 WHEREAS, a Sewer Utility designation of this nature decreases the Utilit�s need for short-terxn
16 borrowing from the General F�xnd, which could negatively impact other City programs and is an
17 indication of the Utility's financial health; and
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1 9 WHEREAS, a Sewer Utility designation of this nature decreases the Utility's need to raise
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sanitary and storxn sewer rates sharply due to emergencies and variable economic factors, which
may exacerbate negative economic effects; and
WHEREAS, this designation must be governed by a written financial management policy that
includes direction on designation contribution and use requirements; and
WHEREAS, it is important for the City Administration and the City Council to adopt policies
governing the City's Sewer Utility Budget and Rate Stabilization Designation for control at the
appropriate policy setting level, clarity and uniformity of direction; and
1Vow, therefore, be it RESOLVED, that the Mayor and Council of the City of 8aint Paul do
hereby designate Cash and Retained Earnings equal to ten percent (10%) of the annual budget
for sasutary and storm sewer revenue for Sewer Utility Budget and Rate Stabilization and adopt
the contribution and use policy below.
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36 1. Cash for day-to-day operations shall not be allowed to fall below ninety (90) days operating
37 expenses as defined as the sum of:
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39 a. The forty-five (45) day cash reserve for operation and maintenance as required by revenue
40 bond authorizing resolutions, calculated by Public Wor�s Accounting and audited as part of the
41 City's annual financial audit; and
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43 b. An additional amount equal to the forty-five (45) day reserve calculated above in the
44 operation and maintenance reserve cash account.
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c. After revenue bond related operation and maintenance cash requirements described in item
a. lapse, cash for day-to-day operations will no longer be the sum of items a. and b., but will
equal ninety (90) days operating expenses by separate calculation.
2. The Designation for Sewer Utility Budget and Rate Stabilization shall be equal to ten
percent (10%) of budgeted annual sanitary and storm sewer revenue, and shall be revised
annually. The initial designation shall be made within si�y (60) days following adoption of this
document and subsequent adjustments to this designation shall be made within sixty (60) days
after adoption of the annual revenue budget by the City Couneil.
3. The first one-half (�/z) or five percent (5%) designation is defined as an Emergency
Designation available only to the Sewer Utility Enterprise Fund to finance one-time,
emergency, unanticipated capital or operating expense requirements or to offset unanticipated
revenue fluctuations occurring within a fiscal year.
4. The Emergency Designation may be accessed when emergency expenses or an unanticipated
revenue reduction causes an operating cash balance less than the requirements set forth in item
1 above for the Sewer Utility Enterprise Fund only.
5. The second one-half (�/z) or five percent (5%) designation is defined as a Rate Stabilization
Designation available only to the Sewer Utility Enterprise Fund to either maintain current
service level programs or transition expense levels to match lower revenue levels during the
first eighteen (18) to twenty-four (24) months of a recession or following the loss of a major
sewer use customer as defined in item 6 below.
6. The Rate Stabilization Designation may be accessed when sanitary or storm sewer revenue
is projected to end the year five percent (5%) lower than the previous year, causing an operating
cash balance less than the requirements set forth in item 1 above for the Sewer Utility
Enterprise Fund only and one or more of the following conditions occurs in conjunction with the
five percent (5%) reduction in revenue:
a. The Storm Sewer Charge delinquency rate (an indicator of economic recession) exceeds ten
percent (10%) at the end of the previous fiscal year; or
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b. The Storm Sewer Charge delinquency rate (an indicator of economic recession) is predicted to
exceed ten percent (10%) during the cuxrent fiscal year; or
c. The Storm Sewer Charge delinquency rate (an indicator of economic recession) is predicted to
e%ceed ten percent (10%) during the next fiscal year; or
d. Net Sanitary Sewer volume (gross volume less credits) declines egceed two and one-half
percent (2 i/2%) compared to the previous fiscal year; or
e. Net Sanitary Sewer volume (gross volume less credits) declines are predicted to exceed two
and one-half percent (2 during the nest fiscal year.
7. For either the Emergency Designation or the Rate Stabilization Designation, use shall be
authorized by a properly executed council resolution or adopted as part of the annual budget.
8. Emergency Designation resources must be restored. Restoration shall commence in the first
fiscal year following use. Restoration shall be accomplished in annual installments no smaller
than one percent (1%) of total Sewer Utility sanitary and storm sewer revenues in the year the
Emergency Designation was used. If sanitary and storm sewer charges for the following year
have already been adopted, the Administration and City Council shall act to revise those charge
rates to include this restoration.
103 9. Rate Stabilization Designation resources must be restored. Restoration shall commence in
104 the fiscal year that is two years following the year of use. Restoration shall be accomplished in
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annual installments no smaller than one percent (1%) of total Sewer Utility sanitary and storm
sewer revenues in the year the Rate Stabilization Designation was used. If sanitary and storm
sewer charges for that year have already been adopted, the Administration and City Council
shall act to revise those charge rates to include this restoration.
10. If needs arise that cause both the Emergency Designation and the Rate Stabilization
Designation to be used, and restoration of those designations are concurrent, restoration shall
be accomplished in annual installments no smaller than a total of two percent (2%) of total
Sewer Utility sanitary and storm sewer revenues according to items 8 and 9 above. If sanitary
and storm sewer charges for that year have already been adopted, the Administration and City
Council shall act to revise those charge rates to include this restoration.
Be if further R,ESOLVED, that this combined ten percent (10%) designation shall be placed in a
separate interest earning account on the books and records of the City Treasuxy and the Sewer
Utility Enterprise Fund and shall be managed as part of the City Treasury Investment Pool.
Interest income shall be used to keep this designation at the appropriate ten percent (10%)
level. The impact of interest earnings on this account shall be reviewed annually by Public
Works Accounting and Office of Financial Services staff. If at the time of this annual review
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Yeas
Benanav �
Ba eTTcy -
Bostrom
Coleman �
Harris
Lantzy �
Reiter �
Absent
Adopted by Council: Date � 6 �
Adoption Certified by Council Secretary
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Requested by Department of:
Public Works
BY� r .
Approval Recommended Bud e D rector:
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By: y�""
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Form Approved by City Attorney:
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Approved By Mayor: Date • '7LG1 �� � Approv y ayor for Su ission to Council:
i
By: By:
this designation has grown larger than ten percent (10%) of budgeted sanitary and storm sewer
revenue, the excess may only be used to fund a portion of a following fiscal year's Sewer Utility
Enterprise Fund Budget as proposed by the Mayor and adopted by the City Council.
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Public Works
RogerPuchreiter, 266-6248
MU5T BE ON COUNCIL AGENDA BY (DAT�
DATEINITIATED GREEN SHEET No. 102876
6/16/2000
COUNCiI OO
nss�cx ❑5 �?,Q(.b�
CfTV ATTORNEY �l1Y GLERK
NUMBFR WR
4
ROVfING ❑ FlNANCIALSER410ES0 $ FINPNCIALSERVlAGCTG
❑ s �
MAYOR(ORASSISiANrj ��rUtiliryManager� '�
� 2 zt-oo
Deoartme
TOTAL # OF SIGNATURE PAGES 1 (CLIP ALL LOCATIONS FOR SIGNATURE)
ACfION PEpUE5TE0
Review and approve attached resolution establishing a designation of Operating Cash and Retained Eamings in the Public Works Sewer
Utility for Budget and Rate Sfabilization.
RECEIVED
JUL 31 200�
RECOMMENDATIONS.Approve (A) or Rel� (R)
PLANNING COMMISSION
1. HazthispersorvYirtnevetvrorketluntleracron�2clforNistlepaztrnent'�
YES NO
CIB COMMITTEE
2. Hu this persoNfirtn ever been a ary emptoyee?
CINLSERVICECOMMISSION �ES NO ,{°.¢ a
3. Dces this persoNfirtn possess a slull not nortnally possessetl by any wrrent dry emplo � *�°''� ��
� YES NO ��
4. Is this persoMirm a targetetl ventloR
VES NO � � �oQ�
ExpWin all yes answers on separeM sheet antl attae� M green sheet R,1� �3
Mv
INITIATING PROBLEM, ISSUE, OPPORTUNITY (WHQ WHAT, WHEN, WHEHE, WHh'
The Saint Paul Sewer Utility experienced financial difficulties in [he early 1990s. Part of these difficulties were related to the effects of an
economic recession and changes in sewer use by major customers, who implemented water conserva[ion methods that reduced the overall
billabFe flow of the Utility.
Since 1994, the Sewer Utility has experienced renewed financial health due to sound financial managment, prudent rate setting and a healthy
regional economy. The next recession or change in the operating practices of our major customers should be prepared for now, while the
Sewer Utility is healthy.
The attached resolution establishes the Designation for Sewer Utility Budget and Rate Stabilization and sets policy on how the designation
should be used and funded. The designation is split into two parts: One-half for major infrastructure emergencies or unexpected revenue
losses, and one-haif ro be used as a countercyclical economic tool to prevent sanitary and stornt sewer rate spikes caused by changes in
economic conditions.
Please see attached policy briefing paper prepazed by Bmce Beese on these issues.
ADVANTAGESIFAPPROVEP. ��
The Sewer Utility will be more able to: Prevent rate spikes, reduce the impact of adverse economic cycles, allow the Administration and
City Council the time necessary to make good and sustainable decisions to correct any revenue%xpense imbalance, and demonstraie prudent
management to the financial community.
DISADVANTAGES IF APPROVED:
Reserves aze sometimes viewed as overchuging and could be seen by some as an inter-genera6onal equity issue.
DISADVANTAGESIFNOTAPPROVED:
The Administration and Ciry Council may not be kept fully awaze of and involved in unusually large extraordinary needs arising from
FINANCIAL INFORMATION (EXPLAIN)
fO7ALAMOUNT OF TRANSACTION $ 0.00 (See No[e) COS7/REVENUE BUDGE7ED (CIRCLE ONE) YES Ho
FUNOING SOURCE $ewei U[Ility Re[ained EamingS AC71VffY NUMBER 2
Note: This resoluflon has no effect on cuxrent yeaz revenues and expenses, however it will cause the crea[ion of speci£c designations of Operaung Cash and
Retained Eamings in the Sewer Ufility Entelprise Fund in the amount of $3,702,500. ,
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The Ant and the Grasshopper:
Which will the Saint Paul Sewer Utility Be?
Bruce E. Beese
December 15, 1999
Public Policy Analysis: GPA 804
Ellen Dickson, Ph.D.
Policy Briefing Paper
' Haxnline University
Graduate School of Public Administration and Management
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TABLE OF CONTENTS
EXECL3TIVE STJMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
THE ISSITE .................................................... 1
RESEARCH METHODS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PROSLEM CONTEXT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
' ADVANTAGES AND DISADVANTAGES OF RESERVES . . . . . . . . . . . . . . 7
Advantages............................................... 7
Disadvantages ............................................ 9
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CREATING AND SIZING RESERVE FUNDS . . . . . . . . . . . . . . . . . . . . . . . 10
Fiscal Slight of Hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
BEST PRACTICE RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 14
RELATED EXPERIENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
New York City ........................................... 17
Philadelphia ............................................. 18
Portland,Oregon ......................................... 18
State Ohio ............................................. 21
The Milwaukee Metropolitan Sewerage District . . . . . . . . . . . . . . . . 21
' CHOICES FOR SAINT PAUL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
DoNothing .............................................. 25
Emergency Designation Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
, Rate Stabilization Designation Only . . . . . . . . . . . . . . . . . . . . . . . . . . 27
A Combination Emergency and Rate Stabilization Designation .... 31
A Simple Contingency Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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RECOMMENDATION .......................................... 32
CONCLUSION ................................................ 33
ANNOTATED BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
LIST OF INTERVIEWEES ...................................... 42
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' APPENDIX A, Proposed Saint Paul City Council Resolution . . . . . . . . . . . 43
' APPENDIX B, Electronic Mail Survey Sent to GFOA list servers ........ 47
APPENDIX C, History of Billable Sewer Volumes - 1985 through 1998 ... 50
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Execntive Summary
The Ant and the Grasshopper:
Which will the Saint Paul Sewer Utility Be?
' The Issue
The Saint Paul Public Works Department is currently egploring the
feasibility of designating a portion of cash and retained earnings within the Sewer
' Utility to help the City prepare for the negt recession by setting aside a fund for
emergencies and rate stability. The recent sound economy has provided the Utility
' with revenues in excess of expenses and some of this surplus can possibly be used to
provide for emergencies and economic downturns. Recession will certainly return
because it is a normal part of the business cycle.
, This analysis examines other government agencies that have used
designations of this nature and determines alternatives in use now and in the past.
Additionally the analysis will address questions of the appropriate level, the
' objectives of the reserve/designation, whether and to what extent these designations
accomplished their objectives in other governments, and the structure of a reserve
fund.
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Problem Context
The Saint Paul Sewer Utility experienced financial hardship during the last
recession, that occurred from 1990 to 1993. Difficult decisions were made regarding
the use of reserves and rates, and still the Utility was strained. The year end
operating cash balance of the Utility reached a low point of $335,012 in 1993. At
the same time, Standard and Poox's Rating Group downgraded their rating of the
Sewer Utilit�s revenue bonds from A+ to BBB+ with a negative outlook.
Advantages of Reserves
Reserves stabilize revenues by preventing t� or fee "spikes" when
unexpected events occur. Reserves reduce the impact of economic cycles and create
a bridge that enables the government to continue with its programs unchanged
while it searches for and debates long-term, reasoned and sustainable solutions to
the revenue%xpense imbalance. Reserves are viewed positively by the financial
community and bond rating agencies.
Related Experiences
Cities such as San Antonio, Texas, Baltimore, Maryland and Portland,
, Oregon maintain fund balances as a rainy-day fund to cushion against fiscal
emergencies and recession. Currently the City of Philadelphia, Pennsylvania is
working on creating such a fund. Baltimore officials established the Cit�s
' rainy-day fund in 1993 as a cushion against a future economic slowdowns, which
has grown by appro�mately $800,000 each year during economic expansion.
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Policy Alternatives
There are several policy alternatives available to the Saint Paul Public
Works Department, including:
Do Nothine:
A larger than normal cash balance exists in the operating cash account
already, a reserve may not be required at this time.
Create a Five Percent Designation for Emergencies:
The Designation for Emergencies would be used for major
infrastructure failures or unexpected revenue fluctuations. The
Designation for Emergencies will provide additional retained earnings
equal to $1,851,250.
Create a Five Percent DesiEnation for Rate Stabilitv:
The Designation for Rate Stability would allow the Sewer Utility to
maintain current service level programs or transition expense levels to
match lower revenue levels during the first 18 to 24 months of a
recession or following the loss of a major sewer use customer. The
Designation for Rate Stability will provide additional retained
eai•vings equal to $1,851,250.
Create a Combination Ten Percent Emergencv and Rate Stabilization
Desi2nation:
The Combined Designation for Emergencies and Rate Stability would
combine the benefits of the Emergency and Rate Stability options
previously described, and will provide additional retained earnings
equal to $3,702,500.
Create a Simnle Ten Percent Contingencv Designation:
The Simple Ten Percent Contingency Designation would combine the
benefits of the Emergency and Rate Stability options previously
described, and will provide additional retained earnings equal to
$3,702,500, but would not segregate amoants for either contingency.
Recommendation
The best option for the Sewer IJtility is the combined Emergency and Rate
Stabilization Designation with segregated designations for each event. Currently
cash and retained earniugs are available to fully fund this designation. Creation of
a designation for emergencies and rate stabilization within the Sewer Utility will
help the City prepare for the next recession by setting aside money that could
prevent potentially large rate increases when our customers could least afford to
pay them. The recent sound economy has provided the Utility with revenues in
excess of expenses. Some of this surplus should certainly be used to provide for
emergencies and poor economic conditions. This will also provide assurance to
purchasers of Sewer Utility debt and bond raters that the Utility will be able to
meet all financial obligations into the future.
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The Issue
The Saint Paul Public Works Department is currently exploring the
feasibility of designating a portion of cash and retained earnings within the Sewer
Utility to help the City prepare for the next recession by setting aside a fund for
emergencies and rate stability. The recent sound economy has provided the Utility
with revenues in egcess of expenses and some of this surplus may be used to provide
for emergencies and economic downturns.
At the peak of the economic cycle it is prudent to study whether the Utility
has the ability after su� years of solid performance to prepare for the next recession
and mitigate possible negative effects. According to the Office of the Controller for
the City of Philadelphia (1999), recession will certainly return because it is a
normal part of the business cycle. The City of Philadelphia used the ancient
children's fable of the Ant and the Grasshopper written by Aesop, which tells the
story of the ant that worked all summer long, storing up food for the winter, while
the grasshopper played the summer away. When winter came, the grasshopper was
This analogy applies equally well to long term planning for an inevitable income
hungry and cold, thanks to his unwillingness to provide for the coming lean period.
downturn. Summer, in the form of budget surpluses, is now here and the sun has
been shining since 1994. It is time for the Sewer Utility to plan for more difficult
fiscal conditions, to ensure that what Saint Paul has is not squandered or used to
mask changes in the revenue stream unbeknownst to policy makers.
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Some government units use a two-part designation of surpluses: One
component is set aside for infrastructure emergencies, and the other component is
held to ease the transition to higher rates or spending reductions required by the
loss of a major customer or economic recession. 1`here are several possible positive
benefits from having a reserve or designation: Long term financial health, higher
bond ratings, time to make thoughtfully placed cuts and reasonable rate increases,
ready funding for potential health and safety emergencies, and rate stability.
This analysis examines other government agencies that have used
designations to deternune current and potential alternatives. Additionally the
analysis will address the following questions:
• What is an appropriate level of reserve or designation?
• What is (are) the stated objective(s) of the reserve/designation?
• Does a designation of cash and retained earnings accomplish
those stated objectives?
• How should the reserve or designation be structured?
Research Methods
This study uses multiple methods for collecting information, including a mix
of quantitative and qualitative methods. Quantitative methods included gathering
and evaivating information from a literature review and financial data from annual
financial reports of Saint Paul and other governments. A comprehensive literature
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review was completed, bringing together most of the published scholarly work on
the designation, use and policies related to contingency funds, emergency funds and
"rainy-day" funds. Qualitative methods included intexviews with experts in the
field of government finance, City of Saint Paul managers and officials from
government agencies already using designated reserves.
Additionally, a sur.vey was mailed electronically to four different list servers
of the Government Finance Officers Association (GFOA). This survey is included as
Appendix "B." The low response rate however, made it impossible to draw
conclusions about the use and effectiveness of these reserve designations from these
responses.
The advantage of quantitative methods is the possibility of comparing a large
number of financial results to a limited set of questions, statistical aggregation, and
summary of data across governmental units. Qualitative methods add the needed
depth and detail this study seeks to address, putting into conteat financial
information and judgements about the information that may establish new links
between holding specific designations of retained earnings and the achievement of
financial health, higher bond ratings and rate stability.
Problem Context
The Saint Paul Sewer Utility experienced financial hardship during the last
recession, which occurred from appro�mately 1990 through 1993. Difficult
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decisions had to be made about use of reserves and rates. The financial strain on
the Utility is evidenced by year end cash balances, which reached a low point in
1993. At the same time, Standard and Poor's Rating Group downgraded their
rating of the Sewer Utilit�s revenue bonds from A+ to BBB+ with a negative
outlook. In April 1997, Standard and Poor's improved the rating to A with a stable
outlook. A history of Sewer Utility operating cash balances is show in Table 1.
Table 1
Saint Paul Sewer Utility Operatine Cash Balances 1988 through 1998
1988
1989
I990
1991
1992
1993
1994
1995
1996
1997
1998
13,775,885
16,178,736
9,807,354
5,728,957
3,228,575
335,012
1,668,770
3,501,052
6,006,483
8,775,819
13,135,864
Source: City of Saint Paul Comprehensive Annual F�nancial Reports, 1988 through 1998.
As part of the Administration and City Council's response to the financial
hardships, the Task Force for Sewer Rate Relief was established. The Task Force
was a committee of interested citizens, representatives of large, water-intensive
industrial customers, and Sewer Utility staff. Committee members analyzed the
scope of the Sewer Utility's operations, reviewed historic trends, and attempted to
predict the future of sewer use in Saint Paul. After a 16 month period, studying a
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broad range of topics, the task force recommended that the Storm Sewer System
Charge rate be increased 92% for 1994, and the Sanitary Sewer rate be reduced 8%
for 1994. The Task Force concluded that sewer rates were going to be increasing
faster than the general inflation rate for at least the negt decade (City of Saint
Paul, 1994). Generally, the future expected increases are related to new Federal
mandates for cleaning storm water; the loss of Federal grants for Metropolitan
Council sewer projects, thus requiring more bonding and more local financing; and
the 1988 policy change of the City Council to modify the sanitary sewer rate
structure from a large volume structure to a conservation rate structure, thereby
encouraging all users to puxchase less water. This ultimately increases rates
because billable volumes decrease and water consumption in Saint Paul is the basis
of Sanitary Sewer use charges. A history of Sanitary and Storm Sewer charge rate
increases and decreases is shown in Table 2.
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Table 2
Saint Paul Sewer Utility Sanitarv and Storm Sewer Rate Chan�es
1988 through 1998
Year
Sanitarv
Storm
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
30.1%
-20.0%
7.9%
3.7%
7.6%
6.0%
5.5%
8.0%
3.6%
22%
3.5%
0.0%
0.0%
0.0%
4.8%
0.0%
5.7%
16.8%
15%
3.6%
2.0%
2.0%
Source: City of Saint Paul Annual Budget Documents, 1988 through 1998.
According to 1�er (1993), municipalities have to anticipate financial
requirements. The time frame required to adequately anticipate needs must be
longer than the annual budget allows. Politicians and staff must break free from
the tyranny of daily problems to fceus on the long term, to eliminate some of their
emerging problems.
Building reserves can give a large degree of comfort to program staff and
eIected officials. There is a direct reIationship between reserve size and program
manager or financial staff comfort. Savings provide flexibility and opportunity:
More is better. In government however, more is not always better. Savings held by
governments do not belong to the department or agency: The accumulated savings
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belongs to the customers -- the tax and rate payers. This analysis identifies the
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point where reserves cease to be good, when they become an unfair and unnecessary
transference of wealth from tagpayers to the government unit. This analysis also
examines policies in use by other government units regarding uses of reserves for
emergencies and budget stabilization, in order to apply those practices to the City of
Saint Paul Sewer Utility.
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Advantages and Disadvantages of Reserves
According to the Govex•ninent Finance Officers Association (GFOA) (1998),
reserves can play a key role in stabilizing a government revenue stream.
Designated reserves are an important tool for making a one-year budget part of a
multi-year strategic financial plan. There are advantages to using reserves to
stabilize revenues such as preventing t� or fee "spikes" when unexpected events
occur and the ctu-rent adopted budget is not sufficient to cover the event. Reserves
can reduce the impact of economic cycles on the government agency through reserve
use when revenue is poor and reserve building when revenne is good. Reserves can
create a bridge that enables the government to continue with its programs
unchanged while it researches and debates long-term, reasoned, and sustainable
solutions to the revenue%xpense imbalance. Reserves are viewed positively by the
financial community and bond rating agencies. Lastly, reserves discourage the
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tendency to generate more revenue than is needed based on the possibility that
income will be less than predicted.
Tyer (1993) explained the difference between a simple reserve fund and a
contingency fund. Contingency funds are a special subset of reserve funds that may
only be used for uneapected events and emergencies. Reserve funds not designated
for contingencies have far fewer restrictions, All reserve funds attempt to
accomplish the following: stabilize the government's revenue stream; maintain the
government's ability to provide necessary services; and provide rate, fee and tax
stability.
According to Navin and Navin (1997), many states have created a Budget
Stabilization Fund (BSF). One objective of the BSF is to reduce or eliminate what
they term the "revenue rachet". This happens when the economy experiences a
slowdown in general economic activity. The resulting revenue shortfall to the state
may be addressed by raising t�es. But when the economy returns to a positive
growth trend, the state does not reduce its tas rates in recognition of this return to
normalcy. Then during the neat recession, taxes are raised again, "ratcheting np"
the tax rate and total taz� revenue of that state.
Navin and Navin (1997) noted that it is reasonable and rational to expect the
unexpected. Accordingly, taking the steps necessary to prevent the unexpected
event from suddenly and sharply increasing taxes or fees is reasonable. Building
emergency and contingency funds reduces the likelihoocl that significant revenues
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will be required from customers all at once, which will often egacerbate the
problem, and provides more time to assemble creative solutions. Tlus is important
politically because a contingency fund can stabilize rates, fees and taxes, and can
help elected officials avoid sacrificing quality services while they examine long term
revenue options.
Many factors affect the accuracy of budgets. There can be errors in
forecasting economic conditions: The time lapse between budget development and
the actual spending or receipt can be up to 18 months. Ghanges in economic
conditions, particularly at the state level, cause changes in revenues and revenue
estimating errors. The size of revenue estimating error varies by year, but is
always an issue for budget officers, because statistical error margins are natural to
any estimating model, and staff are unable to make 100% accurate economic
forecasts. If revenue estimating errors are too large, they can be very disruptive to
government service delivery. Building and using a budget stabilization or
contingency fund is the single most reliable way to ensure that a continuous flow of
public services can be maintained while policy makers and administrators examine
the problem and determine a future direction change, if any.
Disadvanta�es
According to the GFOA (1998), there are some disadvantages of using
reserves to stabilize revenues. Reserves can create an overly conservative state of
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mind that prevents appropriate use when needed. Maintaining a high level of
reserves can be viewed as over-taxation and hoarding. There are questions of inter-
generational equity; specifically, should not current year revenues pay for current
year services? Use of reserves in times of fiscal stress-may help policy makers avoid
difficult and unpopular decisions that must be made to ensure long-term program
viability. Even with these negatives in mind, reserves are an important part of
program management, and therefore must be fully disclosed, completely explained,
and justified to policy makers and citizens alike.
Creating and Sizing Reserve Funds
Professor Joyce was the first to review state rainy-day funds on a national
level. According to Joyce (1999), quoting Vasche and Williams, governments have
four ways to correct revenue or expenditure levels that have adverse effects on
budgets: revenues can be increased, expenses can be reduced, money can be
borrowed, or contingencies can be used. Governments are beginning to recognize
that for long-term sustainability, they need to plan for the troughs of the business
cycle dnring the peaks of the business cycle. States-have increasingly turned to
"rainy-day funds" or countercyclical stabilization funds since about 1984. As of
1997, 44 states had some form of budget stabilization fund, although Joyce (1999)
noted that many do not meet the strict definition of a rainy-day fund because of the
way the reserve is built or used.
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Many states and funds have vastly different methods for disbursement. For
contingency funds to accomplish their countercyclical intent, the fund must be
created in a way that makes it unable to be used unless an independent, objective
and verifiable measure says it should be used. In addition, some states require a
legislative "supermajority" vote for use.
According to Joyce, many states operate under the "five percent rule" (that is
to say that the reserve should be five percent of the annual expenditure program),
but there is no specific source to base this five percent judgement upon. Navin and
Navin (1997) cited the National Conference of State Legislatures (NCSL), which in
turn cited Wall Street Analysts in favor of the five percent rule. According to many
experts however, five percent is a start, but is not nearly enough (Joyce, 1999;
Navin & Navin, 1997; Lav & Berube, 1999; and Barrett & Greene 1999).
Navin and Navin (1995) cited in Joyce (1999), found that, after studying
seven Midwestern states' rainy-day funds, only three (Indiana, Michigan and Ohio)
perform like countercyclical funds. The Navins also studied the state of Ohio to
They found that using the suggested five percent target would not be large enough
determine for that state, what an optimal budget stabilization amount should be.
to meet the needs of the state of Ohio in the event of an economic downturn. The
Navins estimated that Ohio would need appro�umately of 13% in a contingency
reserve fund to help the state weather a mild recession.
The optimal size of a reserve fund depends on how the government obtains its
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revenues and the nature of the government's expenses, unfortunately there is no
simple formula for calculating these reserves. Joyce (1999) concluded that the
reserve fund must be calculated on an individual government-by-government basis
because the revenue mix is so vastly different and the policy that created that
revenue mix has evolved so differently over time. Joyce discussed the factors
influencing optimal size, and concluded that the factors are primarily driven by
differences in the revenue stream. Joyce recognized that some governments have
revenue streams that are more suseeptible to economic downturns and volatility
The following five factors influence volatility: Governments with progressive tax
sqstems, governments that receive more federal aid, governments with less diverse
revenue streams, governments that rely on gambling revenues, and states with
larger medicaid expenditures, (Joyce, 1999).
Joyce (1999) created a ranking system, or volatility score, for each of these
factors from zero to five, with five being the most volatile. He then created a
composite volatifity score, which brings all the separate volatility scores together.
He found that aIl states and governments should not be aiming for the same
tazgeted reserves. Five percent is not adequate for some governments and it may
be too much for others. Joyce argued that all governments need to assess their own
revenue and egpense picture to determine egactly what amount is right for them.
There is a wide variation among states in terms of the appropriate size of a rainy-
day fund.
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�er (1993) described ways to build reserves. The government can under-
budget revenues, over-budget expenditures, actually budget the buildup of a reserve
fund, or use a combination of approaches. Many states rely on discretionary
appropriations to put money into their rainy-day funds. In some cases, money
never gets put into the fund.
Fiscal Sli�'ht of Hand
When budgets get tight, Vasche and Williams (1987} found that program
managers and budget officers often use budget gimmicks. Some of these gimmicks
included: Postponing payments to employees, vendors or residents, and arranging to
collect revenue sooner than normal. Unfortunately, gimmicks only produce one-
tune relief. The Sewer Utility had to resort to the use of revenue bond construction
cash of $1.6 million in 1992 (City of Saint Paul, 1992) to pay for operating expenses.
When it became clear that this $1.6 million cash infusion was not enough, an
arrangement was made with the St. Paul Water Utility to advance payment on -
their monthly collection of sewer revenues for the Sewer Utility
When taY rates are increased or the tas base broadened to supplement
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revenues, the exact timing of the new revenue receipt can be hard to predict.
Accelerating revenue accomplished by shortening payment due dates are sometimes
popular with local governments because their negative consequences are not
immediately felt. Administrative actions to reduce spending are often not enough
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because only a percentage of the program manager's buaget is diseretionary_
Additionally, decisions made in a crisis mode o#ten are not prepared thoughtfully
and carefully, and lack the rigorous study required for maintaining the best
program possible at the least possible cost.
Best Practice Recommendations
The Government Finance Officers Association (1999) recommended that a
government shonld "develog policies to guide the creation, maintenanee and use of
resources for financial stabilization purposes" (1998, p.1}. By doing this,
governments maintain enough money in the bank to keep from cutting services or
raising taxes and fees due to revenue difficulties or unexpectedly large
expenditures. The Government Finance Officers Association (GFOA) policies
discussed how and when a stabilization fund is developed, that the purpose of the
fund and the minimum and maximum reserve levels should be clearly stated, and
noted that the policy should be publicly available for review.
Stabilization funds may be used at a government's discretion to address
temporary cash flow shortages, emergencies, and unanticipated economic
downturns. Policies on the use of these funds should be tied to an adverse change
in an economic indicator, such as rising unemployment or changes in personal
income growth, to ensure that the funds are not depleted be£ore an emergency
arises. This type of statistical triggering mechanism assumes the fund is a true
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"countercyclical" fund. The range of amounts to be held should be based on the
types of revenue and the level of uncertainty associated with those revenues.
Appropriate budgeting and spending are equally damaged by unnecessary expenses
during good times as they are harmed by indiscriminate cuts during lean times.
Financial mechanisms should be used to limit spending on the upside as well as the
downside. These mechanisms may include triggering criteria and formulas that are
written into law.
According to Lav and Berube (1999), the most recent U.S. recession began in
July 1990 and only lasted until March 1991. Even so, many states experienced
financial difficulty from 1989 through 1992. By mid-year 1991, the cumulative gap
between projected revenues and expenditures for 30 states was almost $15 billion
(Lav and Berube, 1999).
Recessions are particularly difficult for states because their revenues usually
go down at the same time their social service expenditures go up (Lav & Berube,
1999; and Joyce, 1999). This is because recessions cause more demand for social
services. According to Lav and Berube (1999), during the recession of the early
1990s, increases in unemployment led to increases in AFDC, Emergency Assistance,
and Medicaid spending. Without the substantial tas increases adopted by the
states during that period, state expenditures would have more than consumed state
revenues at that time.
Lav and Berube (1999) recommended that states should have reserve funds
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averaging just over 18% of general fund budgets to weather the next recession,
however, a Sewer Utility is not as susceptible to the inverse relationship of
decreased revenue and increased social spending, therefore their reserve need not
be as high. However, Hyman Grossman of Standard and Poor's Rating Group called
the 18% mark "naive and counterproductive. You can get to the point where
reserves are obscene" (Barrett and Greene, 1999, p. 68).
Despite the healthy growth in state revenue collection over the past few
years, the relatively smaIl growth in spending over the same period, and the
resultant revenue over expenditures or net income, most states have not done what
is necessary to withstand even a relatively mild economic recession similar to what
occurred in the early 1990s. This increases the chances that an economic downturn
may make governments pass large tax or fee increases and to make unhealthy
spending cuts in order to balance their budgets. This is particularly important
because municipalities occasionally "share the pain" by the shifting of costs of
service, lost intergovernmental cost participation, or spending cuts from one fund to
another in difficult financial times.
Related Experiences
The idea of creating a budget stabilization fund is not only the province of
state government. Some cities have done this as well. While some cities have
adopted the concept after it became popular with states, others, like Portland,
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Oregon, pioneered this concept for cities (Government Finance Officers Association,
1998). According to the Office of the Controller for the City of Philadelphia (1999),
cities such as San Antonio, Tegas, and Baltimore, Maryland maintain fund balances
as a rainy-day fund to cushion against fiscal emergeneies and recession. Currently
the City of Philadelphia, Pennsylvania is working on creating one. Baltimore
officials established the City's rainy-day fund in 1993 as a cushion against a future
economic slowdowns, and it is grows by appro�mately $800,000 each year during
eeonomic expansion (City of Philadelphia, 1999}.
New York Citv
According to the Office of the Controller for the City of Philadelphia (1999),
New York City is slightly different, because the City is legally prohibited from
carrying forward funds from one �iscal year to the next. The City employs a
budget-stabilization account to designate excess current revenues for yet unknown
future expenses. The budget-stabilization account is established by law. If at any
time during the fiscal year additional revenue is recognized in a modification of the
budget, the City is required to set aside one-half of the new revenue into the
budget-stabilization account. Expenditures from the budget-stabilization account
must have a specific request for appropriation that identifies the purpose for the
money, and must be approved by a Gity Council supermajority. Unlike a true
rainy-day fund, the budget-stabilization account must be fully spent each year.
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However, the City can rebuild the account in the subsequent year if new revenue is
available.
Philadelnhia
According to the Office of the Controller for the City of Philadelphia (1999),
Philadelphia officials decided that by creating a rainy-day fund, Philadelphia could
sustain the appropriate level of government services over the long-term without
resorting to staff cuts, rednctions in service, or ta$ increases in the event of an
economic recession. The Controllei's Office concluded this could improve the Cit�s
long-term financial health and improve its chances of obtaining favorable bond
ratings, which could reduce future interest rates on city issued debt and thereby
reduce future debt service costs. The Controller's Office is seeking to set the
account up so that contributions to the budget-stabiIization fund wilI be made when
the rate of increase in revenue collections surpasses long-term economic growth
rates, and use of the fund will be allowed only when revenue collection falls below
long-term economic growth rates.
Portland. Oreeon
Portland Oregon was perhaps the pioneer in establishing a locai government
budget stabilization fund. According to the Government Finance Officers
Association (1998), during the early 1980s, Portland experienced severe financial
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stress resulting from the loss of federal revenue sharing and a severe recession.
Additionally, one-time revenues were being used to fund on-going programs, and an
overly optimistic anne%ation policy designed to give the General Fund more revenue
failed. As a result, the City of Portland closed fiscal year 1986-1987 with a General
Fund fund balance of $600,000 with literally no cash in the bank.
Staff and elected officials discussed reserves and they decided a reserve
would provide the City Council with more financial flexibility. They decided their
reserve could be used for emergencies and as a countercyclical tool to make the
transition through economic downturns. Part of their hope was to salvage
Portland's AAA bond rating.
With the help of staff economists, Portland developed the following model:
Reserves were to be composed of two parts, one part to be used only for emergencies
and the second part for countercyclical needs. The reserves were set up separate
from the General Fund, in the "General Reserve Fund." The emergency reserve was
pegged at five percent of net revenues based solely on discussion and their "expert
, judgement."
The determination of countercyclical reserve size proved to be more difficult.
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A 19 year revenue history that included the recessions of 1973 and 1981 was used.
Long run revenue growth was historically five and one-half percent. An
independent objective indicator was needed as a trigger; staff found that when
growth was less than five and one-half percent, the area's unemployment rate
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tended to exceed sis and one-hal£ percent and the property tax delinqueney rate (the
percentage of the new annuaI tax Ievy that was not coIlected in the first year}
exceeded eight percent. Applying this analysis, Portland officials determined that
an average slowdown in the economy caused a revenue loss in the first year o€ a
recession of $2.8 million, the 24 month revenue loss was estimated to be $8.4
million or approffimately another five percent. When the five percent emergency
reserve is added to the estimated 24 month countercyclical reserve requirement of
five percent, Port�and created a ten percent budget-stabilization fvnd.
7'hrough the use of the property t� delinquency trigger, the countercyclical
reserve use is governed by economic indicators and not politics. To rebuild both the
emergency and countercyclical reserves after use, the policy requires payback and a
scheduled rebuilding of the fund.
Immediate success was achieved: The fund eliminated Portland's need for
$30 million in tax anticipation note borrowing, the Council resolution and adopted
policy was critical for preventing raids on the fund for other purposes, and the AAA
bond rating was saved according to the Government EYnance Officers Association
(1998). Portland found that using the reserves prudently helped the city weather
two property tax limitations passed by the state of Oregon that otherwise would
have caused reductions in city services.
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State of Oluo
Navin and Navin (1997) discussed the approach that Oluo used to establish
both a statutory formula for contributing to the state Budget Stabilization Fund
and provide a procedure for withdrawal from the fund in times of fiscal stress. Ohio
uses a system similar to Portland, Oregon except Ohio's trigger is the annual
growth in "adjusted personal income" as compared to a one and four-tenths percent
benchmark estimate of normal personal income growth or personal income growth
adjusted by the consumer price index.
The Milwaukee Metropolitan Sewerage District
The Milwaukee Metropolitan Sewerage District (MMSD) also maintains
reserves for budget-stabilization, according to Kirchen (1996) and Miller (1999).
There had been complaints by critics of the MMSD that the reserve was too large.
Because of these complaints the Wisconsin legislature tried unsuccessfully to pass a
bill that would have required the MMSD to return the reserves to taspayers.
During the debate in the legislature, MMSD officials hired Bear, Stearns and
Company, a New York City investment bank, to conduct a review of their reserves.
This review determined the estimated $120 million cash reserve the Milwaukee
Metropolitan Sewerage District was reasonable and prudent. Bear Stearns based
this opinion on the MMSD's capital project requirements and cash flow needs.
According to Kirchen (1996), Bear Stearns found that cash reserves played an
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important role in supporting MMSD's financial credibility when it went to the bond
market. In �995, Mood�s Investor's Service Incorporated maintained its Aa rating
of the district, partly due to the soiid financial management demonstrated by the
reserve fund. Bear Stearns concluded that if the legislature caused the reserve fund
to be eliminated, this could cause rating agencies to downgrade their ratings on
MMSD bonds.
Choices for Saint Paul
In response to the poor financial performance of the Saint Paul Sewer Utility
in the early 1990s, Utility staff decided to survey major customers and stakeholders
to obtain their interpretation of what the Utilit3�s priorities should be. The Report
on the 1995 Sewer Rate Structure Survey Results (City of Saint Paul, 1995), briefly
discussed the guiding principles, the initial draft done by UtiIity staff and the final
review done by the University of Minnesota Center for Survey Research. This
survey was sent to policy makers from the City Council, local District Councils, the
City Finance Department, Mayor's Office, Public Works, members of the Task Force
for Saint Paul Sewer Rate Relief, Saint Paul Water Utility and several outside
agencies including the Minnesota Pollution Control Agency and Saint Paul's State
legislative delegation. Of the 92 surveys sent, 43 were returned, providing a
response rate of 47%.
The survey indicated that Sewer Utility Fund financiat stability was the
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most important objective. Respondents indicated that the sewer system should be
self supporting and rates charged should be based on the full cost of service
provided, and the concept of fairness and equity inherent in that. Respondents
were interested in flattening out fluctuations in annual sewer rate increases.
When indicators of regional or local economic health are reviewed for possible
use as a triggering mechanism for a budget-stabilization fund for the Sewer Utility,
it became clear that annual revenue growth does not work well. Annual revenue
growth does not work well because sewer revenues do not respond as quickly or as
directly to the economy as personal income taxes, neither do the volatility factors
established by Joyce (1999).
The factors that must be watched closely are: Negative changes in the local
economy, losses of major customers, and infrastructure emergencies. Sewer
revenues are fairly inelastic and increases in revenue are more closely related to
changes in the rate charged per hundred cubic feet (ccf) than in changes in the local
economy. Similarly, domestic (residential) volume is largely fixed, since it is tied to
winter water consumption, and therefore is stable all through the year. Commercial
customers, on the other hand, are billed monthly and are billed for sewer usage
based on the actual water used for the prior period. Changes in the economy will
definitely affect the health of this customer segment and in turn, this will have an
effect on the financial health of the Sewer Utility.
The financial health of large customers, and of large vendors such as
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Metropolitan Council Environmental Services (from whom the City buys its
sewerage treatment), does have an impact on the revenue generating and cost
environment of the Sewer Utility. The Utilit�s largest customers are Rock Tenn
Corporation (a recycled paper manufacturer in the Midway area), Ford Motor
Corporation (producing Ranger pickup trucks at its Highland Park facility), and
Minnesota Mining and Manufacturing (producing tape at its East Side facility).
Should the local economy force the closure or movement of one of these production
facilities, the budget-stabilization fund should be triggered and used if neeessary.
Even if a poor eeonomy caused one of the major customers to close temporarily, the
eflect on the remaining customers would be burdensome.
Creation of this account would need to be technicalIy called a"designation"
and not a"reserve." The term reserve is typically withheld for those special parts of
retained earnings or fund balance that are "externally restricted." This limits
reserves to items specifically identified by bond agreements and other contractual
obligations with arms length individuals and entities. Any amount that the City
Council sets aside must be a called a designation, because the City is not legally
required by agreement with another to keep the amount in reserve. The City
Council could decide to undo what it had designated at any time, so therefore this
term should not be confused with reserves.
City Administration and the City Council have several alternatives. These
alternatives are briefly described in Table 3.
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Table 3
' City of Saint Paul Sewer Utility Budget Stabilization Desi2.nation
Policv Alternatives
� Designated Cash &
Policv Alternative �igger or Need Retained Earnin2s
, Do Nothing
' Emergency Designation
, Rate Stabilization
Designation
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Combined Emergency
' and Rate Stabilization
Designation
,
� Simple Contingency
Designation
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Do Nothine
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No trigger; any need
Infrastructure or
unexpected revenue loss.
SSSC delinquencies;
large billable sanitary
sewer volume losses
Tnfrastructure; unexpected
revenue loss; SSSC
delinquencies; large
billable sanitary
sewer volume losses
Infrastructure; unexpected
revenue loss; SSSC
delinquencies; large
billable sanitary
sewer volume losses
$0.00
$1,851,250
$1,851,250
$3,702,500
$3,702,500
ITnder the "do nothing" scenario, there is no real change in outcomes or
difference in financial planning in the short-term. A larger than normal cash
balance e�usts in the operating cash account and the unreserved, undesignated
retained earnings account. These balances may still exist and be available for use
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in an emergency or in the event of an economic recession. This alternative presents
difficulties if these funds are foolishly spent, appropriated by the governing body for
non-sewer related uses or used during the early stages of a financial crisis. This
atternative is particutarly troublesome because it may provide no warning to policy
makers until the entire operating reserve is spent.
Emergencv Designation O �
The City of Saint Paul's sewer system has an estimated replacement value of
one billion dollars. At the same time, many parts of the sewer infrastructure
facilities are over 100 years old. Saint Paul is currently in the second year of a 20
year program to systematically inspect and rehabilitate all the sewers in the city.
Even with this aggressive rehabilitation program, the possibility e�sts that a major
sewer infrastructure problem will occur, for which additional emergency spending
will be needed. Storm sewers are periodically under extreme stress from high flow
conditions during heavy rainfalls. All sewers, both storm and sanitary, can develop
structural problems that slowly cause collapse or failure that cannot be readily
detected from the surface. When an nnderground void opens, large portions of
street or surface can be damaged.
fihe Emergency Designation should be equal to five percent of annual
operating revenues as adopted by the City Council and only available to the Sewer
Utility Enterprise Fund to finance one-time, emergency, unanticipated capital or
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operating egpense requirements or to offset unanticipated revenue fluctuations
occurring within a fiscal yeaz. Based on budgeted 1999 sanitary and storm sewer
revenues of $28,322,416 and $8,702,580 respectively, this designation would be
� $1,851,250.
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The Emergency Designation may be accessed when emexgency expenses or
an unanticipated revenue reduction causes an operating cash balance less than 90
days of operating expenses. The amount of this designation should be reviewed
annually to ensure that the new budgeted amounts are included in the formula.
Use of the Emergency Designation must be authorized by a properly executed
council resolution or adopted as part of the annual budget.
Emergency Designation resources must be restored. Restoration should
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commence in the first fiscal year following use. Restoration shall be accomplished
in annual installments no smaller than one percent of total Sewer Utility sanitary
and storm sewer revenues in the year the Emergency Designation was used. If
sanitary and storm sewer charges for the following year have already been adopted,
the Administration and City Council should act to revise those charge rates to
include this restoration.
Rate Stabilization Desi�nation Onlv
The Rate Stabilization Designation would be available to address revenue
shortfalls or expense overruns related to adverse changes in the local economy. Use
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of this fund woul d be triggered by an independently verifiable measure of the health
of the economy as it relates to the Sewer Utility.
I propose using a ratio of delinquent Storm Sewer System Charge fees to
annuaI total current year Storm Sewer System Charge revenue. The Storm Sewer
System Charge (SSSC) was a new charge in 1986, and since the G`ity carries
delinqnent charges on its financial statements for five years, the first year with a
full compliment of delinquent charges was 1991. I have included delinquent
property taxes in the chart to demonstrate the trend as it relates to property t�es
as support. The levies and delinquencies since 1985 are summarized in Table 4.
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Table 4
Saint Paul Propertv Tax and Storm Sewer Svstem Char�e (SSSC) Delinquencies
from 1985 through 1998.
Property Percentage Percentage
Tax SSSC Delinquent Delinquent Prop.Taxes SSSC
Yeaz Lev Revenue Taxes SSSC Delinquent Delinquent
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
46,204,903
51,431,349
54,308,956
57,450,556
53,713,945
58,282,981
64,408,993
65,160,804
66,737,196
66,736,547
66,461,547
65,811,463
64,186,727
62,386,509
4,322,861
4,571,220
4,528,Q32
4,841,369
5,678,226
6,515,184
6,767,190
6,966,792
2,086,818
2,744,720
3,127,982
4,149,925
4,855,561
4,599,094
5,627,401
6,479,632
6,307,292
5,094,235
4,062,395
3,388,266
2,918,052
2,072,197
510,565
572,124
508,555
505,125
394,531
382,487
341,535
276,785
4.95%
5.94%
6.08%
7.64%
8.45%
8.56%
9.66%
10.06%
9.68%
7.63%
6.09%
5.10%
4.43%
323%
12.45%
1323%
11.13%a
11.16%
8.15%
6.74%
524%
4.09%
Source: City of Saint Paul Comprehensive Annual Financial Reports, 1985 through 1998.
rates higher than ten percent clearly coincide with the recession of the 1989 to 1993
Table 4 clearly shows the recession from 1989 through 1992, with residual
effects occurring in delinquent storm sewer collections well into 1994. Delinquency
' period.
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The Rate Stabilization Designation sl�ould be equal to five percent of annual
operating revenues as adopted by the City Council and only available to the Sewer
L3tility Enterprise Fund to either maintain current service level programs or
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transition expense levels to match lower revenue levels during the first 18 to 24
months of a recession or following the loss of a major sewer use customer. The
amount of this designation should be reviewed annually to ensure that the new
budgeted amounts are included in the formula. Based on budgeted 1999 sanitary
and storm sewer revenues of $28,322,416 and $8,702,580 respectively, this
designation would be $1,851,250.
The Rate Stabilization Designation xnay be aecessed when the operating cash
balance is less than 90 days of operating egpenses. In aadition, one or more of the
following conditions must occur in eonjunetion with the cash balance trigger:
The Storm Sewer Charge delinquency rate (an indicator of economic
recession) exceeds ten percent or is predicted to exceed ten percent
during the current or next fiscal year�, or
Net Sanitary Sewer volume (gross volume less credits) decIines exceed
two and one-half percent compared to the previous fiscal year or are
predicted to exceed two and one-half percent during the next fiscal
year.
A history of billable sanitary sewer volumes is included in Appendix "C." Use of
the Rate Stabilization Designation should be authorized by a properly executed
council resolution or adopted as part of the annual budget.
Rate Stabilization Designation resources must be restored. Restoration
should commence in the fiscal year that is two years (two years should in most cases
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place the restoration after the worst of the recession is over) following the year of
use. Restoration shall be accomplished in annual installments no smaller than one
percent of total Sewer Utility sanitary and storm sewer revenues in the year the
Rate Stabilization Designation was used. If sanitary and storm sewer charges for
that year have already been adopted, the Administration and City Council should
act to revise those charge rates to include this restoration.
A Combination Emer�'encv and Rate Stabilization Designation
The Combination Emergency and Rate Stabilization Designation would be
structured similar to Portland, Oregon's model, but would be based on the Storm
Sewer delinquency trigger previously described. The designations would be
separate so that, if one part of the designation was triggered, the other balance
would remain whole for use. Use of the Emergency and Rate Stabilization
Designation must be authorized by a properly executed council resolution or
adopted as part of the annual budget. The Designation for Sewer Utility Budget
and Rate Stabilization should be equal to 10% of budgeted annual sanitary and
storm sewer revenue. This amount should be revised annually. Based on budgeted
1999 sanitary and storm sewer revenues of $28,322,416 and $8,702,580
respectively, this designation would be $3,702,500.
If needs arise that cause both the Emergency Designation and the Rate
Stabilization Designation to be used, and restoration of those designations are
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concurrent, restoration shall be accomplished in annual installments no smaller
than a total of two percent of total Sewer Utility sanitary and storm sewer
revenuea. If sanitary and storm sewer charges for that year have alxeady been
adopted, the Administration and City Council should act to revise those charge
rates to include this restoration.
A Simple Contingency Designation
A Simple Contingency Designation could be created and used for either an
infrastructure emergency or as a budget stabilization fund. The amount and
calculation of the designation would essentially use the same methods as the
combination fund previously described. However, this alternative would not have
the statutorily established firewall between the emergency and rate stabilization
portions, so the designated funds could be e�austed on one type of problem,
leaving none to solve any others. Based on budgeted 1999 sanitary and storm
sewer revenues of $28,322,416 and $8,702,580 respectively, this designation would
be $3,702,500.
Recommendation
The best option for the Sewer Utility is the combination Emergency and Rate
Stabilization Designation. A proposed City Council Resolution to enact this policy
is included in Appendig "A." This designation would provide a safety valve for both
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of the most serious revenue shortage causes, and segregate the amounts for each.
Currently cash and retained earnings are available to fully fund this designation.
Even though cash and retained earnings in this amount do e�st, this is an area
where some reassessment of policies and laws may now be appropriate and
, necessary.
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In addition, this combined ten percent designation should be placed in a
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separate interest earning account in the books and records of the City Treasury and
the Sewer Utility Enterprise Fund and shall be managed as part of the City
'IYeasury Investment Pool. Interest income earned on the account should be used to
keep the designation at the appropriate 10% level. The impact of interest earnings
on this account should be reviewed annually by Public Works Accounting and Office
of Financial Services staff. If at the time of this annual review this designation has
grown larger than 10% of budgeted sanitary and storm sewer revenue, the excess
may only be used to fund a portion of a following fiscal year's Sewer Utility
Enterprise Fund Budget as proposed by the Mayor and adopted by the City Council.
Conclusion
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Creation of a designation for emergencies and rate stabilization within the
Sewer Utility will help the City prepare for the next recession by setting aside
money that could prevent potential hardship for our customers. The recent sound
economy has provided the Utility with revenues in excess of expenses: Some of this
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surplus should certainly be used to provide for emergencies and poor economic
conditions. This will also provide assurance to purchasers of Sewer Utility debt and
bond raters that the Utiiity will be able to meet all financiai obligations into the
future. Unfortunately, bond ratings for the Sewer Utility are likely subservient to
the bond rating for the Cit�s General Obligation Debt. The Cit�s General
Obligation debt is currently rated AA by Standazd and Poor's, and that rating may
need to be improved to AAA before the Sewer Utility's bond rating can be upgraded.
Perhaps application of these principles and methods to the General Fund would
have an impact in that regard.
The warm economic winds of summer have blown the chaff from the wheat
and neatly piled it in front of the Sewer Utilit�s granary door. The time is right for
the ants to carefully, thoughtfully and methodically cany that wheat into the safety
of the garner for the long winter which inevitably will soon be upon us.
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Annotated Biblio2ranhv
Barrett, K. & Greene, R. (1999, September). The gospel of guidelines.
Governing, 12 (12), 6$. A good summary analysis which brought together the work
of Phil Joyce, Iris Lav, and additional insight from Hyman Grossman of Standard &
Poors Corp.
Campi, F. & Sullivan, D. (1998, April). State and local government fiscal
� position in 1997. Survev of Current Business. 78, (4), 10-15. States and local
governments had surpluses totaling $107.8 billion at the end of 1997. The majority
' of these surpluses were generated through operating programs such as education,
highways and streets, and medical programs.
LI
,
City of Saint Paul. Budget Office. (1988). Citv council adopted budget for the
vear 1988. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1988.
City of Saint Paul. Budget Office. (1989). Citv council adopted bud�et for the
, year 1989. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1989.
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City of Saint Paul. Budget Office. (1990). Citv council adopted budget for the
vear 1988. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1990.
City of Saint Paul. Budget Office. (1991). City council adopted budget for the
vear 1991. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1991.
City of Saint Paul. Budget Office. (1992). Citv council adopted bud�et for the
„�ar 1992. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1992.
City of Saint Paul. City Council. (1992) Resolution of the Saint Paul Citv
Council: CF 92-1373. Saint Paul, Minnesota: City of Saint Paul. This resolution
directed the use of $1.6 million in cash intended for construction projects to be used
for operating expenses to balance the operating budget.
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City of Saint Paul. Budget Office. (1993). City council adopted budget for the
vear 1993. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
2993.
City of Saint Paul. Bndget Office. (1994). Citv council adopted budget for the
,�ear 1994. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer ITtility for
1994.
City of Saint Paul. Budget Office. (1995). City council adopted bud�et for the
vear 1994. Saint Paul, Minnesota: City of Saint Paul. This annual budget was used
to gather specific data on rates and fees charged by the Saint Paul Sewer Utility for
1994.
City of Saint Paul. Department of Finance and Management Services.
(1986). Comprehensive annual financial report for the fiscal vear ended December
31, 1985. Saint Paul, Minnesota: City of Saint Paul. This annual report was used to
gather specific data regarding the relationship of Delinquent Property Taxes
Receivable to the total revenue generated from property taxes for 1985.
City of Saint Paul. Department of Finance and Management Services.
(1987). Comprehensive annual financial report for the fiscal vear ended December
31, 1986. Saint Paul, Minnesota: City of Saint Paul. This annual report was used to
gather specific data regarding the relationship of Delinquent Property Tages
Receivable to the total revenue generated from property taxes for 1986.
City of Saint Paul. Department of Finance and Management Services. (1988).
Comprehensive annual financial report for the fiscal vear ended December 31, 1987.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Taxes Receivable to
the total revenue generated from property taxes for 1987.
City of Saint Paul. Department of Finance and Management Services. (1989).
Comprehensive annual financial report far the fiscal vear ended December 31, 1988.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the retationship of Delinquent Property Taxes Receivable to
the total revenue generated from property taxes for 1988.
City of Saint Paul. Department of Finance and Management Services. (1990).
Comprehensive annual financial report for the fiscal year ended December 31, 1989.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
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specific data regazding the relationship of Delinquent Property Taxes Receivable to
the total revenue generated from property taxes for 1989_
City of Saint Paul. Department of Finance and Management Services. (1991).
Comprehensive annual financial report for the fiscal �ar ended December 31, 1990.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Taxes and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1990.
' City of Saint Paul. Department of F4nance and Management Services. (1992).
Comprehensive annual financial report for the fiscal year ended December 31, 1991.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
' specific data regarding the relationship of Delinquent Property Taxes and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1991.
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City of Saint Paul. Department of Finance and Management. (1993).
Comprehensive annual financial report for the fiscal vear ended December 31. 1992.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Taxes and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1992.
' City of Saint Paul. Department of Finance and Management. (1994).
Comprehensive annual financial report for the fiscal year ended December 31. 1993.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
� specific data regarding the relationship of Delinquent Property Tases and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1993.
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City of Saint Paul. Department of Finance and Management. (1995).
Comnrehensive annual financial report for the fiscal vear ended December 31. 1994.
Saint Paul, Minnesota: City of Saint Paul. This annual report was used to gather
specific data regarding the relationship of Delinquent Property Tases and
Delinquent Storm Sewer System Charges Receivable to the total revenue generated
from those funding sources for 1994.
City of Saint Paul. Office of F4nancial Services. (1996). City council ado�ted
btx�et for the year 1996. Saint Paul, Minnesota: City of Saint Paul. This annual
budget was used to gather specific data on rates and fees charged by the Saint Paul
Sewer Utility for 1996.
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City of Saint Paul. Office of Financial Services. (1996). Comnrehensive
annual financial re�ort for the fiscal vear ended December 31. 1995. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinquent Property Taxes and Delinquent Storm
Sewer System Charges Receivable to the total revenue generated from those
funding sources for 1995.
City of Saint Paul. Office of Financial Services. (1997). C� council adopted
budget for the �ar 1997. Saint Paul, Minnesota: City of Saint Paul. This annual
budget was used to gather specific data on rates and fees charged by the Saint Paul
Sewer Utility for 1997.
City of Saint Paul. Offiee of Financial Serviees. (1997). Comprehensive
annual financial report for the fiscal vear ended December 31. 1996. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinquent Property Taxes and Delinquent Storm
Sewer System Chazges Receivable to the total revenue generated from those
funding sources for 1996.
City of Saint Paul. Office of Financial Services. (1998). City council ad�ted
bud�et for the vear 1998. Saint Paul, Minnesota: City of Saint Paul. This annual
budget was used to gather specific data on rates and fees charged by the Saint Paul
Sewer Utility for 1998.
City of Saint Paul. Office of Financial Services. (1998). Comprehensive
annual financial report for the fiscal vear ended December 31. 1997. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinquent Property Tages and DeIinquent Storm
Sewer System Charges Receivable to the total revenue generated from those
funding sources for 1997.
City of Saint Paul. Office of Financial Services. (1999). Comnrehensive
annual financial report for the fiscal vear ended December 31. 1998. Saint Paul,
Minnesota: City of Saint Paul. This annual report was used to gather specific data
regarding the relationship of Delinqnent Property Taxes and Delinquent Storm
Sewer System Charges Receivable to the total revenue generated from those
funding sources for 1998.
City of Saint Paul. Department of Public Works. (1994, January 26). Final
renort submitted by the Task Foree for Saint Paul Sewer Rate Relief. Saint Paul
Minnesota: City of Saint Paul. This report details the findings of a working group
of City staff, interested citizens and representatives of industrial customers. This
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group studied the financial and operating environments and made
recommendations about how they felt the Cit�s sewer rate structures should
respond to pressures from those environments.
City of Saint Paul. Department of Public Works. (1995, August 21). Re�ort
on the 1995 sewer rate structure survev results. Saint Paul Minnesota: City of
Saint Paul. 'I'his report detailed the findings of a survey sent to City Council
members, staff, district councils, the Saint Paul Water Utility and large industrial
clients.
City of Philadelphia. Office of the City Controller. (1999). Philadelphia: a
new urban direction. Philadelphia: Saint Joseph's University Press. Chapter Three
of this book discussed fiscal policies required for long-term financial stability. One
of the policies highlighted is the creation of a budget-stabilization fund.
Clifford, C. (1998, August). Linking strategic planning and budgeting in
Scottsdale, Arizona. Government Finance Review. 14, {4), 9-15. The budget process
in Scottsdale Arizona was discussed including how annual operating and capital
budgets are linked to the financial plan and strategic goals.
Gilroy, Calif., has $8.8 million in the bank -- for now. (1997, June 7). The
Dispatch, Gilrov. California, p. 6. City Administrator Jay Baksa used the cash
portion of the fund balance of Gilroy, CA mainly as an emergency fund, carrying the
amount forward from year to year. The Gilroy City Council has had a policy of
keeping fund balance at roughly five percent of city expenses.
Government Finance Officers Association of the United States and Canada.
' (1998). Revenue analvsis and forecastin�'. Chicago: Government Finance Of�icers
Association of the United States and Canada. This course reader provided as part
of a two day revenue analysis seminar in New Orleans, LA provided valuable
' reasons why governments should have reserve funds and offered examples on how
to create one, including a sample city council resolution.
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Government Finance Officers Association of the United States and Canada.
(1998). Recommended budget nractices: A fraxnework for improved state and local
government bu eting. Practice 4.1- Develop Policy on Stabilization Funds
Chicago: Government Finance Officers Association of the United States and
Canada. Retrieved November 16, 1999 from World Wide Web:
http://www.gfoa.org/resrch/bestcd/bestpraclpra4_l.htm This downloadable
document discussed best practices for state and local budgeting. It recommended
the correct rationale to use and why these funds can be an important part of the
government's financial plan
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fiighlights. (National league of cities' annual city fiscal conditions survey).
(1999, July 12). Nations Cities Weekl� 22, (28), 11. The municipal sector's ending
balances (budget surpluses) as a percentage of expenditures increased during 1998
to 17.6%.
Joyce, P. (1999). What's so magical about 5 percent? A nationwide look at the
optimal size of state rainv day funds. The George Washington University,
Department of Public Administration. Professor Joyce egamined the rationale
behind the common usage of five percent for budget reserves, and created a
mathematical model, based on certain risk factors, that can calculate the reserve
percentage appropriate for a particular state.
Kirchen, R. (1996, July 13). MMSD's $120 million reserve `prudent,' says
Bear Stearns. The Business Journal - Milwankee. 13, (41), 4. The New York
investment bank Bear Stearns estimated that the cash reserve of the MMSD is
reasonable and prudent when construction projects are concerned and the MMSD
must meet cash flow needs while awaiting federal and state grants.
Kovener, R. (1997, January). Your responsibility for reserves. Association
Management. 49, (1), 107-109. This article estplored the juxtaposition of saving for
a rainy day versus spending the money required for important lang-term
investments.
Lav, I. & Berube, A. (1999, March). When it rains it pours. Center On
Budget and Polic�Priorities. Retrieved October 7, 1999 from World Wide Web:
http://www.cbpp.org/3-11-99sfp.pdf This report of required reserves for budget
stabilization in event of a recession ranked states by the percentage of reserve to
general expenditures. It suggested that a state government shouId have reserves
approaching 20% of operating egpenditures.
Milan, N. (1998, December 30). 50 state report on fiscal 1999 budgets
released. NGA On-line News Releases. Retrieved October 7, 1999 from the World
Wide Web: http//www.nga.org/Releases/PR-30December1998Fiscal.htm
This on-line report indicated that state and local reserve balances as a percent of
budgeted expenditures continues to grow. 1998 year end balances in two-thirds of
the states were expected to be more than 5% of budgeted expenditures.
Navin, J. & Navin, L. (1997). The optimal size of countercyclical budget
stabilization funds: A case study of Ohio. Public Bud,g'eting and Finance, 17 (4),
114-127. The Navins discussed the widely held belief that five percent is an
appropriate budget reserve amount using the State of Ohio as a case study. They
found that five percent is no where near the amount of reserve required to bring
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stability to General Fund revenues in periods of decline.
Nunn, S. (1996, March). Urban infrastructure policies and capital spending
in city manager and strong mayor cities. American Review of Public
Administration. 26, (1), 93-112. This article discussed infrastructure policies of
seven cities in the state of Texas that are defined as "City Manager" cities, and
contrasted them to seven cities in the state of Indiana that are defined as "Strong
Mayor" cities to see if there was any statistically significant impact on policy,
financial participation and egpenditure patterns.
Sekwat, A. (1999, June). Capital budgeting practices among Tennessee
municipal governments. Government Finance Review. 15, (3), 15-19. Tennessee
uses separate capital budget programs to avoid deficits in their annual operating
budgets.
Tyer, C. (1993). Local government reserve funds: Policy alternatives and
political strategies. Public Budgeting and Finance. 13 (2), 75-84. This article
discussed some of the reasons for establishing and using reserve funds, different
ways of building reserves, and brought to light major policy areas governments
should be aware of when planning to build and use these funds.
Vasche, J. & Williams, B. (1987). Optimal governmental budgeting
� contingency reserve funds. Public Bud�eting and Finance. 7(1), 66-82. This article
discussed the growing ntunber of state contingency reserve funds and their
t purposes. The authors felt that the criteria used to decide whether to establish a
contingency fund and what formula should be used to develop the optimal amount
of reserve had received little attention in scholarly research, so they reviewed these
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two issues using the State of California as an example.
Vehaum, D. (1998, April). Long-range financial planning: New strategies for
old problems (Rock Hill, South Carolina). Government Finance Review 14, (2), 39-
39. The city of Rock Hill, South Carolina created a long-range financial plan to
reduce its $8 million annual debt service requirement. Rock Fiill's plan enabled the
city to accumulate additional revenues and reduced expenses totaling $20 million in
four years.
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List of Interviewees
Barrett, K. & Greene, R. (personal communication, October 15, 1999).
Katherine Barrett and Richard Greene provided more background information on
the Governing article they had written. We also discussed whether or not they
would be willing to share additional source material they did not include in their
original article.
Fu�, W. (personal communication, November 1, 1999). William Fix works for
the Charlotte-Mecklenburg North Carolina School District. He responded to the
email message I sent to a list server on policies and uses of reserves.
Fuller, L. (personal communication, November 1, 1999). Lenora Fuller works
for Washington, D.C.. She responded to the email message I sent to a list server on
policies and uses of reserves.
Martin, G. (personal communication, November 1, 1999). Gary Martin is the
Director of Internal Audit for Henrico County Virginia. He provided valuable
information in response to the email message I sent to a list server on policies and
uses of reserves.
Miller, K. (personal eommunication, November 2, 1999). Kate Miller is the
Manager of Budget and Financial Planning for the Milwaukee Metropolitan
Sewerage District (MMSD). She provided valuable information in response to the
email message I sent to a list server on policies and uses of reserves. This also
supports the journal article listed above by Kirchen.
Rainey, A. (personal communication, October 29, 1999). Anthony Rainey is
the Assistant F�nance Director of the City of Norfolk Virginia. He provided
valuable information in response to the email message I sent to a list server on
policies and uses of reserves.
Romaine, J. (personal communication, November 2, 1999). John Romaine
works for the Federal Aviation Administration. He responded to the email message
I sent to a list server on policies and uses of reserves.
Starr, G. (personal communication, October 29, 1999). Gerald Starr works
for the State of Oklahoma. He responded to the email message I sent to a list
server on policies and uses of reserves.
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Appendix A
Council File �
RESOLUTION
Green Sheet n
CITY OF SAINT PAUL, MINNESOTA
Establish a Desi�nation for Sewer Utilitv Budget and Rate Stabilization and
Adogt Policies for Contributions and Uses
WHEREAS since 1994 the City Administration and the City Council have endeavored to rebuild
Sewer Utility Enterprise Fund cash and reserves; and
WHEREAS, as a result of prudent rate setting the Sewer Utility was able to build year end 1998
operating cash on hand to appro�mately thirty percent (30%) of 1998 revenues; and
WHEREAS, prudent financiat management and sound accounting practice recommend
establishing designated cash and retained earnings equal to ten to fifteen percent (10% to 15%)
of annual sanitary and storm sewer revenue to be used for sewer infrastructure e�ergencies,
operating emergencies and rate stabilization; and
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15 WHEREAS, a Sewer Utility designation of this nature decreases the Utilit�s need for short-term
16 borrowing from the Generai Fund, which could negatively impact other City programs and is an
, 17 indication of the Utility's financial health; and
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WHEREAS, a Sewer Utility designation of this nature decreases the Utility's need to raise
sanitary and storm sewer rates sharply due to emergencies and variable economic factors, which
may exacerbate negative economic effects; and
WHEREAS this designation must be governed by a written financial management policy that
includes direction on designation contribution and use requirements; and
WHEREAS, it is important for the City Administration and the City Council to adopt policies
governing the Cit�s Sewer Utility Budget and Rate Stabilization Designation for control at the
appropriate policy setting level, clarity and uniformity of direction; and
Now, therefore, be it RESOLVED, that the Mayor and Council of the City of Saint Paul do
hereby designate Cash and Retained Earnings equal to ten percent (10%) of the annual budget
for sanitary and storm sewer revenue for Sewer Utility Budget and Rate Stabilization and adopt
the contribution and use policy below.
Page 1 of 4
Page 43
Appendix A
36 1. Cash for day-to-day operations shall not be allowed to fall below ninety (90) days operating
37 expenses as defined as the sum of:
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39 a. The forty-five (45) day cash reserve for operation and maintenance as required by revenue
40 bond authorizing resolutions, calculated by Public Works Accounting and audited as part of the
41 Cit�'s annual financial audit; and
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43 b. An additional amount equal to the forty-five (45) day reserve calculated above in the
44 operation and maintenance reserve cash account.
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46 c. After revenue bond related operation and mainteriance cash requirements described in item
47 a. lapse, cash for day-to-day operations will no longer be the sum of items a. and b., but will
48 equal ninety (90) days operating expenses by separate calculation.
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2. The Designation for Sewer Utility Budget and Rate Stabilization shall be equal to ten '
percent (10%) of budgeted annual sanitary and storm sewer revenue, and shall be revised
annually. The initial designation shall be made within su�ty (60) days following adoption of this'
document and subsequent adjustments to this designation shall be made within sixty (60) days
after adoption of the annual revenue budget by the City Council. '
3. The first one-half (�/s) or five percent (5%) designation is defined as an Emergency
Designation available only to the Sewer I3tility Enterprise Fund to finance one-time, ,
emergency, unanticipated capital or operating expense requirements or to offset unanticipated
revenue fluctuations occurring within a fiscal year.
4. The Emergency Designation may be accessed when emergency expenses or an unanticipated'
revenue reduction causes an operating cash balance less than the requirements set forth in item
1 above for the Sewer Utility Enterprise Fund only.
5. The second one-half (�/2) or five percent (5%) designation is defined as a Rate Stabilization
Designation available only to the Sewer Utility Enterprise Fund to either maintain eurrent
sexvice level programs or transition expense levels to match lower revenue levels during the
first eighteen (18) to twenty-four (24) months of a recession or following the loss of a major
sewer use customer.
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6. The Rate Stabilization Designation may be accessed when sanitary or storm sewer revenue
is projected to end the year five percent (5%) lower than the previous year, causing an operating
cash balance less than the requirements set forth in item 1 above for the Sewer Utility
Enterprise Fund only and one or more of the following conditions occurs in conjunction with the,
five percent (5%a} reduction in revenue:
a. The Storm Sewer Chazge delinquency rate (an indicator of economic recession) exceeds ten
percent (10%) at the end of the previous fiscal year; or
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b. Tlze Storm Sewer Charge delinquency rate (an indicator of economic recession} is predicted to
exceed ten percent (10%) during the current fiscal year; or
c. The Storm Sewer Charge delinqueucy rate (an indicator of economic recession) is predicted to
' 85 exceed ten percent (10%) during the ne� fiscal year; or
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87 d. Net Sanitary Sewer volume (gross volume less credits} declines exceed two and one-half
' 88 percent (2 i/z%) compared to the previous fiscai year; or
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e. Net Sanitary Sewer volume (gross volume less credits) declines are predicted to exceed two
and one-half percent (2 �/z%) during the next fiscaI year.
7. For either the Emergency Designation or the Rate Stabilization Designation, use shall be
authorized bq a properiy executed council resolution or adopted as part af the annual budget.
8. Emergency Designation resources must be restored. Restoration shall commence in the first
fiscal year following use. Restoration shall be accomplished in annual instaliments no smaller
than one percent (1%? of total Sewer Utility sanitary and storm sewer revenues in the year the
Emergency Designation was used. If sanitary and storm sewer charges for the following year
have already been adopted, the Administration and City Council shall act to revise those charge
rates to include this restoration.
9. Rate Stabilization Designation resources must be restored. Restoration shall commence in
the fiscal year that is two years following the year of use. Restoration shall be accomplished in
annual installments no smaller than one percent (1%) of total Sewer Utility sanitary and storm
sewer revenues in the year the Rate Stabilization Designation was used. If sanitary and storm
sewer charges for that year have already been adopted, the Administration and City Council
shall act to revise those charge rates to include this restoration.
10. If needs arise that cause both the Emergency Designation and the Rate Stabilization
Designation to be used, and restoration of those designations are concnrrent, restoration shall
be accomplished in annual installments no smaller than a total of two percent (2%) af total
Sewer Utility sanitary and storm sewer revenues according to items 8 and 9 above. If sanita�^
and storm sewer charges for that year have already been adapted, the Administration and Cit=
Council shali act to revise those charge rates to include this restoration.
Be if further RESOLVED, that this combined ten percent (10%) designation shail be piaced i
separate interest earning account on the books and records of the City Treasury and tlte Sew.
Utility Enterprise Fund and shall be managed as part of the City Treasury Investment Pool.
Interest income shall be used to keep this designation at the appropriate ten percent (10%o)
level. The unpact of interest earnings on this account shall be reviewed annually by Public
Works Accounting and Office of F`inancial Services staff. If at the time of this annual review
Page 3 of 4
Page 45
Appendix A �
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this designation has grown larger than ten percent (10%) of budgeted sanitary and storm sewer
revenue, the excess may only be used to fund a portion of a following $scal yeai's Sewer Utility'
Enterprise Fund Budget as proposed by the Mayor and adopted by the City Council.
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Yeas �� Nays �� �sent
Requested by Departsnent of:
public Works
gl, RP
Apgroval Recommended by Budget Director:
lopted by Council: Date
option Certified by Council Secretary
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>roved By Mayor: Date
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Form Approved by City Attorney:
Page �,:
Approved by Mayor for Submission to Council:
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Appendix B �D
' accounting@f'nattcenet.gov, Budget-NetG�f'xnancenet.gov, fin-opera, 1223 PM 10/29/99 -0700, PoIicies
To: accouaLing@financenet.gov, Budget-NetCfinancenet.gov, fin-operations@financenet.gov, fin-
' policy@financenet.gov, friet-supportC�financenet.gov
From: Bruce Beese <bruce.beeseC�ci.sLpanl.mn.us>
Subject: Policies and Use of Desianated Reserves held by governments
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Attached:
Dear Fellow Government Finance Professional,
I am currently researching the possibility of establishing designated retained eamings
for the City of Saint Paul, Minnesota Sewer Utility both from a professional point of
view (I am an accountant with the St. Paul Public Works Department) and as part of a
Policy Formulation graduate class I am taking at Hamline University in St. Paul. As
government finance professionals, T am certain you can provide valuab)e experience
and insight for my analysis.
I believe designating a portion of retained earnings within the Sewer Utility will help
the City prepare for the next recession by setting aside a fund for emergencies and rate
stability. The recent sound economy has provided the Utility with revenues in excess
of expenses and some of this surplus can possibly be used to provide for emergencies
and economic downturns.
Preliminary information inclicates that other government units use a two-part
designation. One component is set aside for infrastructure emergencies, and the other
component is held to ease the transition to higher rates or spending reductions
required by the loss of a major customer or economic recession (this is not meant to
preclude discussion of reserves or designations set aside for other purposes}. There are
several possible positive benefits from having a reserve or designation of this nature:
long term financial health, higher bond ratings, time to make thoughtfulIy placed cuts
and reasonable rate increases, ready fund'zng for potential heaith and safety
emergencies, and rate stability.
My analysis will be enhanced if I can obtain information about other government
agencies that have used designations of this nature and determine alternatives in use
now and in the past. If you can answer the foliowing questions, I would be grateful:
1. a. Has your governmental unit established a reserve or designation for emergencies
or adverse economic conditions?
1. b. Is the application of this policy jurisdiction-wide or does it only apply to particular
funds?
1. c. If not jurisdiction-wide, what major funds are setting aside a reserve or
Printed £or Bruce Beese <bruce.beese@cistpaul.mn.vs>
Page 47
Appendix B
accountangCf"nancenet.gov, Budget-Net@f'inancenet.gov, �n-opera, 12:23 PM 10J29t99 -0700� Policies
designation? Please also list if they are proprietary or governmentai fund types.
2. What year was this policy put into practice?
3. What is (are� the stated objective(s) of the reserve or designation?
4. What level of reserve or designation was deemed appropriate?
a. What is the dollar amount of the current reserve or designation?
b. As it relates to annual revenues, what percentage of annual revenues is the current
reserve or designation?
5. What was your reasoning for determining this level?
6. a. Has your governmental unit ever nsed part or all of the reservs or designation?
6. b. When did you use it?
6. c. What did you use it for?
7. Do you feel that the objective(s) was (were? �et after it's establishment or if it was
used?
8. a. What was your General Obligation Bond rating (or other bond rating if
appropriate) before establishing the reserve or designation?
8. b. Did your General Obligation Bond rating (or other bond rating if appropriate)
improve after establishing the reserve or designation?
8. c. What is your new rating and how much time passed before this rating was
improved?
9. I would like to list you as a source in the references for my work I would appreciate
your providing the followuig information if you are comfortable doing so:
Your full name
Your title
Your work address
Your work telephone number
Please indicate your willingness to be contacted a second time for clarifications and
follow up questions if necessary.
Please reply to my email address listed or if you'd like yon may call me at (651) 266-
6063.
Printed for Bruce Beese <bruce.beese�cistpaul.mn.us>
2 ,
PaQe 48
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Appendix B � 'y5
accounting@f'nancenet.gov, Budget-NetCfinancenet.gov, fin-opera, I223 PM 10/29/99 -0700, Policies
Thank you very much for your time completing this survey.
Printed for Bruce $eese <bruce.beeseCdci.stpaul.mn.us>
Page 49
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Appendix C
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