Full Agenda Packet
CITY OF JANESVILLE
CITY COUNCIL SPECIAL MEETING (STUDY SESSION)
WEDNESDAY, APRIL 27, 2011
5:30 P.M.
(Municipal Building Council Chambers (Room #417)
1. Call to Order.
2. Roll call.
3. Review financial policies on debt issuance and fund balance.
4. Matters not on the agenda.
5. Motion to adjourn.
CITY MANAGER’S OFFICE MEMORANDUM
April 22, 2011
TO: City Council
FROM: Jacob J Winzenz, Director of Admin. Services/Assistant City Manager
Patty Lynch, Comptroller
SUBJECT: Financial Policies Study Session
Summary
The City of Janesville’s financial policies set forth the basic framework for the fiscal
management of the city. Operating concurrently with the changing circumstance and
conditions, these policies assist the decision-making process of the City Council. These
policies provide guidelines for evaluating both current activities and future programs.
The Governmental Accounting Standard Board (GASB) issues standards in
governmental accounting and financial reporting that are intended to result in useful
information to the users of financial reports. This year the City is implementing GASB
Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions.
Implementation of this standard impacts the fund balance policy and is incorporated in
the fund policy and analysis.
City Manager Recommendation
There are some key questions facing the City Council in looking at debt management
and fund balance policies. A State policy that impacts our discussion is the levy limit
which is proposed to be restricted at 0% for the next two years. The tax levy for
General Obligation Debt is outside of the levy limit.
Thus, while some Council members have mentioned doing a pay as you go program for
Capital Improvements, there are two barriers to this methodology under our revenue
make-up. First, the State law does not allow the Council go outside the levy limit for this
purpose. Therefore, this policy would require operational reductions beyond what we
are currently facing. Second, some projects provide benefits that will be experienced
over a longer term period and the question would be whether they should be paid up-
front rather than allow future beneficiaries to pay a portion of the cost of the capital
improvement.
I would like to present several questions for the Council to contemplate in providing
direction on the final development of the debt and fund balance policies.
1. The City currently is at 39% of the General Obligation Debt Limit (1.93% of the
Equalized Value). Staff recommends placing a cap at 50%. This cap may require a
supermajority vote of the Council to borrow above the cap.
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2. Some City Council members have mentioned the feasibility of establishing a cap by
using current debt service and either setting the cap at the current debt service or at
a 10% increase over the current debt service. The current debt service will
decrease by $200,000 in 2012 prior to the 2011 note issue.
3. The City currently has an informal policy of 10 year notes at equal principal
payments and declining interest. This payment schedule provides less interest
being paid, but may increase tax rates in early years on large projects.
4. Staff recommends maintaining the General Fund Balance between 15 and 25% of
operating expenditures.
5. The City has continued to look at ways to reduce the use of Fund Balance as a part
of the budget process. Currently it is at $890,000. However, this is a question that
should be addressed since it will likely require cuts in services due to 84% of our
revenues consisting of State Shared revenue and property taxes. These revenues
are being reduced in one case and the City is not allowed to increase them in
another case.
The other issue that should be thought of is that while we budget a part of the fund
balance our goal is to eliminate it for the eventual use during the year.
Debt Management
Debt issuance is a vital local government financial tool to raise the money necessary to
implement major capital improvements projects. Although vital to local government
finance, debt should be issued prudently to maintain the long-term financial well being
of the government and the community. Sound debt management practices demonstrate
to credit reporting agencies the credit worthiness (credit rating) of the City of Janesville
for borrowing monies at favorable interest rates.
Council Policy Statement No. 75 (Debt Management) - approved on May 13, 1997 -
sets the City’s parameters for debt issuance and management (see attached). It is best
to periodically review these policies to make sure they reflect the priorities of the current
City Council and community, as well as best practices of the Government Officers
Finance Association (GFOA). The Government Officers Finance Association (GFOA)
recommends that a debt management policy address five (5) issues:
1. Debt Limits
2. Use of Derivatives
3. Debt Structuring Practices
4. Debt Issuance Practices
5. Debt Management Practices
Debt Limits - The current debt management policy does not establish limits on the
amount of total General Obligation (GO) debt, other than the legal debt limit, or any
financing limits based upon the ability of the community to pay. Section 67.03(1) of the
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Wisconsin Statutes provides that the amount of indebtedness of a municipality shall not
exceed five (5) percent of the equalized assessed valuation of the taxable property in
the municipality. This is referred to as the “Legal Debt Limit”. The following table
summarizes total debt subject to the legal limit over the last five (5) years:
5-Year Debt History
20062007200820092010
Equalized Assessed Value$ 3,927,834,200$ 4,160,780,300$ 4,370,063,000$ 4,251,636,500$ 3,991,153,400
Legal Debt Limit 196,391,710 208,039,015 218,503,150 212,581,825 199,577,670
Debt Applicale to Limit 78,630,253 80,214,198 82,529,034 87,480,869 76,914,462
Legal Debt Margin$ 117,761,457 $ 127,824,817 $ 135,974,116 $ 125,100,956 $ 122,663,208
Total debt applicable to limit
40.04%38.56%37.77%41.15%38.54%
as a percentage of debt limit
Over the last five (5) years, debt in Janesville as a percentage of the legal limit has
been fairly stable fluctuating between 38% and 41%. There does not appear to be a
trend of increasing debt as a percentage of the legal limit, and in fact the current
percentage is lower than in 2006.
The following tables compare Janesville to our peer cities:
GO Debt as a Pecent of Legal Limit and GO Debt per Capita - 12/31/2009
EqualizedLegalActual% of%GO Debt/
ValueDebt LimitGO DebtLimitEqual ValCapita
Oshkosh$ 3,801,817,900$ 190,090,895$ 143,157,24975%3.77%$ 2,166
Manitowoc 2,057,147,400 102,857,370 76,641,84075%3.73% 2,272
La Crosse 3,162,233,300 158,111,665 103,925,000 66%3.29% 2,025
Beloit 1,744,186,100 87,209,305 53,788,77962%3.08% 1,456
Racine 4,133,491,100 206,674,555 104,930,000 51%2.54% 1,331
Fond du Lac 2,736,857,700 136,842,885 67,802,47750%2.48% 1,576
Green Bay 6,234,597,300 311,729,865 144,083,225 46%2.31% 1,385
Kenosha 6,799,688,900 339,984,445 152,367,692 45%2.24% 1,536
Eau Claire 4,315,946,500 215,797,325 88,094,68841%2.04% 1,337
Sheboygan 2,865,434,000 143,271,700 56,376,12639%1.97% 1,144
Wausau 2,726,775,100 136,338,755 52,334,07538%1.92% 1,338
Waukesha 5,904,933,100 295,246,655 100,739,201 34%1.71% 1,425
Appleton 4,789,062,900 239,453,145 47,460,34420%0.99% 654
Brookfield 6,566,898,300 328,344,915 52,399,32716%0.80% 1,382
Average$ 4,131,362,114$ 206,568,106$ 88,864,287 43%2.35%$ 1,502
Janesville 4,251,636,500 212,581,825 87,480,86941%2.06% 1,376
Janesville (2010) 3,991,153,400 199,557,670 76,914,46239%1.93% 1,210
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The amount of debt subject to the legal debt limit actually issued by each peer
community is contained in the “Actual GO Debt” column. The range of debt as a
percentage of the legal debt limit in our peer communities ranges from 16% to 75%. As
of December 31, 2009, Janesville was tied for the sixth lowest amount of GO debt as a
percentage of the legal debt limit among our peer communities.
Additional statistics show that the 2010 debt burden per capita at $1,210 and 1.93% of
equalized value are low to moderate and compare favorably with our peer cities.
Standard and Poor’s indicates that a GO debt as a percentage of equalized assessed
value below 3% indicates low fiscal stress. Standard and Poor’s benchmark equates to
60% of the legal debt limit for Wisconsin municipalities.
The legal debt limit is only one measure and does not really consider the ability of a
community to make the annual debt service payments. Two measures of this are debt
service as a percentage of General Fund expenditures and debt service per capita. The
following table compares Janesville against our peer communities on these measures:
General Fund Debt Service vs. Expenditures - 2010
General FundGeneral FundDebt as % ofDebt Service/
Debt ServiceExpendituresExpendituresCapita
Oshkosh17,083,23941,711,00041%259
Green Bay19,451,36078,462,07025%187
Waukesha9,731,81657,542,22017%138
Manitowoc4,974,89229,535,67717%147
Brookfield5,200,00036,383,75314%137
La Crosse9,719,00072,447,55513%189
Beloit4,298,47733,833,72013%116
Sheboygan4,227,01135,096,94112%86
Racine8,755,75981,993,75011%111
Kenosha7,499,56770,987,33311%76
Wausau 4,156,86638,121,67211%106
Fond du Lac3,308,10529,120,39311%77
Eau Claire4,971,60054,340,4009%75
Appleton$3,852,111$66,048,8266%$53
Average$7,659,272$51,830,37915%126
Janesville$5,368,643$41,467,99913%$84
Janesville - 20114,997,52141,583,74412%79
Janesville compares favorably to our peer communities when looking at debt service as
a percentage of General Fund budget expenditures at 12 percent. This is below the
average for our peer communities and tied for the sixth lowest. Standard and Poor’s
indicates that 10 to 15 percent represents a moderate level of spending flexibility.
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Furthermore, Janesville’s tax-supported debt service per capita is $79 and the fifth
lowest of our peer communities.
Based upon our debt history and a comparison to our peer communities, our debt
management policy has been revised to establish maximum debt at 50 percent of the
legal debt limit and General Fund debt service at 15 percent of General Fund
expenditure budget. Staff believes these limits will allow flexibility in the management of
our debt and keep debt service affordable for the community. These limits may be
exceeded by a super-majority vote of the City Council.
Use of Derivatives – We have not used nor do we intend to use derivatives as a
financing mechanism.
Debt Structuring Practices – In general, our debt is structured with a 10-year period of
amortization. However, we match the amortization term with the expected life of the
asset. In addition, in the past special assessment debt has been structured with a 6
year amortization period because the source used to repay this debt has been
developers and residents using the five (5) year payment plan.
Debt repayment has historically been structured with equal principal payments with
declining interest payments. However, staff would like the flexibility to structure debt
based upon the ability of the community to pay and the goals of the City Council.
Therefore, at times it may be appropriate to consider other repayment terms.
Debt Issuance Practices – Janesville has historically worked with a financial advisor and
used competitive sales. All bids are reviewed and approved by the City Council. In
consultation with our financial consultant we may also recommend refunding of prior
issues to either reduce interest costs or restructure the debt. Such refunding also must
be approved by the City Council.
Debt Management Practices – Due to both the City Council request to review the City’s
Debt Management Practices and the new Governmental Finance Officers Association
(GFOA) best practices regarding debt issuance and management, this is an appropriate
time for the City Council to review and update the current policy to match current
practices.
Street Maintenance (Resurfacing/Reconstruction) Borrowing
Beginning in 2007, the City began funding street resurfacing/reconstruction through
note issues.
The table below breaks down a 5-year funding history for street resurfacing and
reconstruction:
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Street Resurfacing/Reconstruction Funding Breakdown - 2006-2011
200620072008200920102011
General Fund $ 1,289,000$ 1,548,000$ 1,556,099$ 1,109,573$ 829,654 $ 362,200
Street Note Issue - 500,000 500,000 650,000 520,000 975,000
LRIP/ARRA Funding - - 150,000 1,439,300 842,000 152,323
Total Funding 1,289,000 2,048,000 2,206,099 3,198,873 2,191,654 1,489,523
% Note Issue (Debt) Funded0%24%23%20%24%65%
Since 2006, the percent of street resurfacing/reconstruction funded by the General Fund
has decreased by 72 percent and the burden of costs has shifted to street note issues.
From 2007 to 2010, note issue funding accounted for approximately 20 percent of the
total funding for street resurfacing/reconstruction. In 2011, note issue funding increased
to 65% percent of the total costs.
A survey of Janesville’s peer cities indicates that 11 of 13 communities borrow to fund
street resurfacing/reconstruction. Additionally, the average amount borrowed for street
resurfacing/reconstruction is approximately $2.1 million.
2010
Borrowing for
Street Maint.
Appleton$ -
Beloit 306,500
Eau Claire 6,405,000
Fond du Lac 2,355,500
Green Bay N/A
Kenosha -
La Crosse 1,162,330
Manitowac 4,636,465
Oshkosh 1,293,300
Racine 3,772,250
Sheboygan 1,201,700
Waukesha 1,829,000
Wausau 2,428,250
Average 2,115,858
Janesville (2011) 975,000
In summary, borrowing for street resurfacing/ reconstruction began in 2007 as a way to
manage levy limits and keep the operating tax levy at a minimal increase for city
residents. Street resurfacing has a life of 15 years, so it meets our definition of a capital
outlay. If the City Council determines that it wants to move street resurfacing and
reconstruction projects back to being funded by the general fund operating budget, the
funding will come from other general fund programs due to the constraints on the City’s
revenues.
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Fund Balance Policy
The level of fund balance is intended to serve as a measure of the financial resources
available to mitigate risk. It is prudent to maintain unrestricted General Fund balance for
several reasons, including:
To quickly respond to unexpected situations requiring significant financial
resources; such as natural disasters and unanticipated service cost level
increases resulting from inclement winter weather
To respond to financial emergencies, such as revenue shortfalls and cyclical
downturns
To avoid large variations in taxes and fees or variations in the type and quality of
municipal services provided due to financial emergencies
Avoid the need for short-term borrowing to cover delays in revenue receipt
Preserve the credit worthiness (credit rating) of the City of Janesville for
borrowing monies at favorable interest rates
The following table summarizes the general fund balances over the last five (5) years:
General Fund 5-Year Fund Balance History
20062007200820092010
Revenue$ 37,586,029$ 39,296,706$ 39,922,962$ 40,642,421$ 41,172,344
Expenditures 37,208,723 39,473,648 40,963,454 41,186,393 40,906,075
Net change in fund balance 377,306 (176,942) (1,040,492) (543,972) 266,269
Fund balance - beg of year 8,614,371 8,991,677 8,814,735 7,774,243 7,230,271
Fund balance - end of year$ 8,991,677$ 8,814,735$ 7,774,243$ 7,230,271$ 7,496,540
The proposed Fund Balance policy adopts the new financial statement reporting
requirements issued by the Governmental Accounting Standards Board (GASB)
Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions.
This statement changes the terminology used for fund balance reporting. It is intended
to clearly defined categories to make the nature and extent of the constraints placed on
a government’s fund balance more transparent. This Statement is effective with the
December 31, 2011 financial statement.
With GASB Statement No.54, the fund balance will be reported in five new categories:
nonspendable, restricted, committed, assigned, or unassigned.
Nonspendable fund balance
- Amounts cannot be spent because they are not
in spendable form such as inventories and prepaid items and long-term inter-fund
advances (TIF cash deficits).
Restricted fund balance
- Include those resources that are externally restricted
by creditors, grantors, and contributors.
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Committed fund balance
- Amounts limited by self-imposed formal action
(ordinance or resolution) on how funds will be spent.
Assigned fund balance
- Reflects a government’s intended use or earmarking
of resources (formerly the designated fund balance).
Unassigned fund balance
- Net resources that have not been restricted,
committed, or assigned to specific purposes within the City’s general fund and is
available to be used for any purpose.
Unrestricted fund balance includes committed, assigned and unassigned fund balances.
The unrestricted fund balances are the amounts that the City can control internally.
The following table summarizes the General Fund balance restated with the new fund
balance terminology for the past five years and shows some ratios commonly used to
measure fund balance:
General Fund 5-Year Fund Balance Analysis
20062007200820092010
Nonspendable Fund Balance$996,342$952,401$906,483$690,567$513,769
Assigned Fund Balance$2,529,837$2,578,820$1,231,000$850,000$890,000
Unassigned Fund Balance 5,465,498 5,283,514 5,678,760 5,689,704 6,092,771
Unrestricted Fund Balance$7,995,335$7,862,334$6,909,760$6,539,704$6,982,771
Total General Fund Balance$8,991,677$8,814,735$7,816,243$7,230,271$7,496,540
General Fund Budget
Operating Expenditures$32,813,342$34,901,460$36,241,110$35,893,524$35,541,627
Debt Service 4,395,381 4,572,188 4,722,344 5,292,869 5,364,448
Total Expenditures$37,208,723$39,473,648$40,974,227$41,642,684$41,467,999
Unassigned Fund Bal/ Total Exp.14.7%13.4%13.9%13.7%14.7%
Unrestricted Fund Bal/ Operating Exp.24.4%22.5%19.1%18.2%19.6%
Two Months Operating Expenditures$5,468,890$5,816,910$6,040,185$5,982,254$5,923,605
Unrestricted fund balance is the remaining current assets the City of Janesville has
available to run day to day operations, or has in case of an emergency revenue shortfall
or program expense overrun.
The appropriate fund balance level is dependent upon a variety of factors including
potential fluctuations in revenue sources, anticipated levels of services, trends in debt
service, and the comfort level of management and the City Council.
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A key factor to consider in the development of a fund balance policy is the diversification
and stability of revenue sources. The following table summarizes the General Fund
revenue sources for the past five years:
General Fund Revenue Sources 5-Year Summary
ActualActualActualActualBudget
20072008200920102011
State Shared Revenues $5,327,617$5,328,355$5,340,661$5,020,877$5,016,320
Expenditure Restraint 821,496 844,382 806,939 733,720 746,680
Shared Revenue Total 6,149,11316% 6,172,73715% 6,147,60015% 5,754,59714% 5,763,00014%
Other State Aid 2,669,3337% 2,718,2857% 2,988,2317% 2,992,2597% 2,990,0007%
Property Taxes22,461,407 56%23,597,800 59%24,438,013 60%24,841,061 60%25,437,644 62%
Other taxes 1,592,5614% 1,682,3754% 1,620,2914% 1,763,7074% 1,757,5004%
Interest Income 1,466,5474% 978,4392% 617,5682% 374,6121% 425,0001%
Fines, Rents, Sale of Prop. 645,2472% 607,9802% 554,6061% 559,1082% 648,0002%
Licenses & Permits 1,514,0444% 1,087,4223% 1,085,0923% 1,260,4903% 1,032,0003%
Dept Charges & Other 2,227,4126% 2,606,9567% 2,484,1636% 2,438,0906% 2,295,1006%
Transfers 571,0421% 470,9681% 706,8572% 1,188,4203% 350,0001%
39,296,706 100%39,922,962 100%40,642,421 100%41,172,344 100%40,698,244 100%
This table shows that property taxes are the City’s largest revenue. The second largest
revenue source is the state shared revenue and other state aids received from the State
of Wisconsin. This percentage had dropped slightly from 2007, but was still at 21% of
the General Fund revenue in 2011. Property taxes typically provide a stable source of
revenue and are not as subject to volatile swings during poor economic times as other
sources of revenue, such as sales tax. Although with the current State budget, there is
limited ability to grow revenues in the future coming from the property tax levy. State
Aids are anticipated to decrease by approximately $1.5 million in 2012 with the
proposed state budget. Since property taxes and state aid combined amount to 84% of
the 2011 budget, the levy limits and proposed state aid reduction will significantly
restrict the City’s ability to finance the services the City provides.
These revenue constraints reaffirm the need for a fund balance policy so the City can
maintain its strong financial reserves. A sufficient level of fund balance is necessary to
preserve the long-term stability of the City. It will enable the City to respond to
unexpected situations requiring significant financial resources, such as natural
disasters, and allow enough operating cash during the year to pay for operational costs
without reliance on short-term borrowing.
Currently, as stated in the annual budget document, the City of Janesville fund balance
policy is to maintain an undesignated (unassigned) balance of 10% of the adopted
General Fund expenditure budget.
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The Government Finance Officers Association (GFOA) recommends that the City
establish a formal policy on the level of unrestricted fund balance that should be
maintained in the General Fund. GFOA recommends, at a minimum, that the General
Fund unrestricted fund balance be no less than two months of General Fund operating
expenditures. As shown in the fund balance analysis table above, Janesville has meet
that criteria for all years listed. Another common measure used by credit ratings
agencies is the unrestricted fund balance as a percentage of general fund operating
expenditures. The current ratio of 19.6% was considered very strong as stated in
Standard and Poor’s October 2010 rating summary.
The recommendation for the appropriate fund balance level is included in the proposed
City Council Policy Statement - Policy No.88 on Fund Balance. The unrestricted
General Fund balance should be between 15 and 25 percent of the budgeted general
fund operating expenditures for the subsequent year. The target goal is that the
unrestricted fund balance be two months of the general fund operating expenditures.
Flow of funds assumption
Some projects are funded by a variety of resources including both restricted and
unrestricted funds. GASB Statement No.54 requires that Council set a spending
prioritization policy. The fund balance policy recommends that we spend the most
restricted funds first.
Determination of funds reporting status
GASB Statement No.54 has also provides new definitions for governmental fund types.
The governmental fund types and their definitions are listed below:
General Fund
- to account for all financial resources not accounted for in
another fund.
Special Revenue Fund
– to account for specific revenue sources that are
restricted or committed to expenditures for specified purposes other than debt
service or capital projects.
Debt Service Fund
– to account for the accumulation of resources for, and the
payment of, general long-term debt principal and interest.
Capital Projects Fund
- to account for financial resources are restricted,
committed, or assigned to expenditures for capital outlays.
For the most part, the GASB definitions just provided clarification to the current
definition; however the special revenue funds types require additional review. Our
auditors, Baker Tilly Virchow Krause, LLC have requested that we review all funds to
make certain of the fund type determination under the new GASB standard. To meet
the definition of a special revenue fund must have a specific revenue source and
expenditures must be for a specific project.
To be in compliance with GASB Statement No.54 requirements, at year-end 2010 the
uncompleted projects fund and several activities in the “special accounts” fund were
closed. Funds in the amount of $290,454 from these accounts were recorded as
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revenue (Transfer In) in the general fund. These transfers were a major contributor to
the fund balance increase reported in 2010.
Another part of this review requires that each special revenue fund have its resources
restricted by external grants, state statues, or committed by enabling legislation of the
City Council (via resolution or ordinance). There has been a review of the City of
Janesville’s 28 special revenue funds and 34 activities within the Special Accounts fund
to make certain the accounts meet the new special revenue definitions. Since many of
these special revenue funds/activities were set-up years ago, evidence of enabling
legislation is not readily available. To satisfy the requirements of GASB Statement No.
54, a City Council resolution needs to be adopted to formally commit the following
special revenue funds for specific purposes.
These items listed that will come forward to the City Council in the form of a resolution:
20% of the Cable TV franchise fees shall be committed for the cost related
to operation of JATV-12
Resources of the Golf Courses Special Revenue Fund shall be committed
for the costs associated with the Golf Courses
37.5% of the Room Tax collected shall be committed for the support of the
Janesville Visitor and Convention Bureau
Resources collected in the Parkland Acquisition Special Account fund
shall be committed to the cost associated with acquiring and improving
parkland
Resources collected in the Crime Prevention Special Account Fund shall
be committed to the for cost associated with crime prevention activities
Resources collected in the Federal Forfeiture Sharing Special Account
Fund shall be committed to the cost associated with for drug enforcement
activities and / or police equipment
Resources collected for Police Department Drug Unit shall be committed
to the cost associated with for drug enforcement activities
Resources collected from the Janesville School District for Police Liaison
Service in the Special Account Fund shall be committed to the costs
associated with school resource officers
Resources collected from the Townships surrounding Janesville in the
Rural Fire Protection Special Account Fund shall be committed to the
costs associated with Fire Protection Services
Resources collected in the Landfill Long-term Care of Site 3023 Special
Account shall be committed to the cost associated with long-term care of
landfill site 3023
cc: Eric Levitt, City Manager
Max Gagin, Administrative Intern
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BEST PRACTICE
Debt Management Policy (1995 and 2003) (DEBT)
Background
.
Debt management policies are written guidelines and restrictions that affect the amount and type
of debt issued by a state or local government, the issuance process, and the management of a debt portfolio. A
debt management policy improves the quality of decisions, provides justification for the structure of debt
issuance, identifies policy goals, and demonstrates a commitment to long-term financial planning, including a
multi-year capital plan. Adherence to a debt management policy signals to rating agencies and the capital markets
that a government is well managed and should meet its obligations in a timely manner.
Debt levels and their related annual costs are important long-term obligations that must be managed within
available resources. An effective debt management policy provides guidelines for a government to manage its
debt program in line with those resources.
Recommendation
.
The Government Finance Officers Association (GFOA) recommends that all state and local
governments adopt comprehensive written debt management policies, and that governments review them at least
annually and revise them as necessary. A Debt Management Policy should address:
Direct Debt - debt payable from general revenues, including capital leases,
Revenue Debt - debt payable from a specific pledged revenue source,
Conduit Debt - debt payable by third parties for which the government does not provide credit or security,
State Revolving Loan Funds and Pools
Other Types of Hybrid Debt – debt payable from special revenues or containing other unique security
pledges, and
Interfund Borrowing – loans for short-term cash flow needs.
1.Debt Limits. The Policy should define specific limits or acceptable ranges for each type of debt. Limits are
generally set for legal, public policy, and financial reasons.
a.
Legal limits may be determined by:
State constitution or law,
Local charter, by-laws, resolution or ordinance, or covenant.
b.
Public Policy limits can include:
Purposes for which debt proceeds may be used or prohibited,
Types of debt that may be issued or prohibited,
Relationship to and integration with the Capital Improvement Program, and
Policy goals related to economic development, capital improvement financings, tax increment
financing, and public-private partnerships.
c.
Financial limits generally reflect public policy or other financial resource constraints, such as reduced use
of a particular type of debt due to changing financial conditions. Appropriate debt limits can positively
impact bond ratings, if the government demonstrates adherence to such policies over time. Financial
limits are often expressed as ratios customarily used by credit analysts. Different financial limits are used
for different types of debt. Examples include:
Direct Debt can be measured or limited by the following ratios:
Debt per capita,
o
Debt to personal income,
o
Debt to taxable property value, and
o
Debt service payments as a percentage of general fund revenues or expenditures.
o
Revenue Debt levels are often limited by debt service coverage ratios (e.g., annual net pledged
revenues to annual debt service) or credit rating impacts (e.g., additional bonds should not lower
ratings) contained in bond covenants.
Conduit Debt limitations may reflect the right of the issuing government to approve the borrower’s
creditworthiness, the purpose of the borrowing issue, or a minimum credit rating. Such limitations
reflect sound public policy, particularly if there is a contingent impact on the general revenues of the
government or marketability of the government’s direct debt.
Short-Term Debt Issuance should describe the specific purposes and circumstances under which it
can be used, as well as limitations in term or size of borrowing.
2.Use of Derivatives. The Policy should:
Specify how derivatives fit within the overall debt management program.
State the conditions under which derivatives can be utilized.
Identify the types of derivatives that may be employed or are prohibited.
Identify approach(es) for measuring, evaluating, and managing derivative risk, including basis risk, tax
risk, counter-party risk, termination risk, liquidity renewal risk, remarketing risk, and credit risk.
State the methods for procuring and selecting derivative products.
3.Debt Structuring Practices. The Policy should include specific policies regarding the debt structuring practices
for each type of bond, including:
Maximum term (often stated in absolute terms or based on the useful life of the asset(s)),
Average maturity,
Debt service pattern such as equal payments or equal principal amortization,
Use of optional redemption features that reflect market conditions and/or needs of the government,
Use of variable or fixed-rate debt, credit enhancements, derivatives, and short-term debt, and limitations
as to when each can be used, and
Other structuring practices should be considered such as capitalized interest, deferral of principal and/or
other internal credit support, including general obligation pledges.
4.Debt Issuance Practices. The Policy should provide guidance regarding the issuance
process, which may differ for each type of debt. These practices include:
Criteria for determining the sale method (competitive, negotiated, placement) and investment of proceeds,
Criteria for issuance of advance refunding and current refunding bonds,
Selection and use of professional service providers,
Use of comparative bond pricing services or market indices as a benchmark in negotiated transactions, as
well as to evaluate final bond pricing results, and
Use of credit ratings, minimum bond ratings, determination of the number of ratings, and selection of
rating services.
5.Debt Management Practices. The Policy should provide guidance for ongoing administrative activities
including:
Investment of bond proceeds,
Primary and secondary market disclosure practices, including annual certifications as required,
Arbitrage rebate monitoring and filing,
Federal and state law compliance practices, and
Market and investor relations efforts.
References
A Guide for Preparing a Debt Policy, Patricia Tigue, GFOA, 1998.
Benchmarking and Measuring Debt Capacity, Rowan Miranda and Ron Picur, GFOA, 2000.
Approved by the GFOA’s Executive Board, February 28, 2003.
BEST PRACTICE
Appropriate Level of Unrestricted Fund Balance in the General Fund (2002 and 2009) (BUDGET
and CAAFR)
Background.
Accountants employ the term fund balance to describe the net assets of governmental funds
calculated in accordance with generally accepted accounting principles (GAAP). Budget professionals commonly
use this same term to describe the net assets of governmental funds calculated on a government’s budgetary
1
basis. In both cases, fund balance is intended to serve as a measure of the financial resources available
in a governmental fund.
Accountants distinguish up to five separate categories of fund balance, based on the extent to which the
government is bound to honor constraints on the specific purposes for which amounts can be spent: nonspendable
fund balance,restricted fund balance,committed fund balance,assigned fund balance, and unassigned fund
2
balance. The total of the last three categories, which include only resources without a constraint on spending or
for which the constraint on spending is imposed by the government itself, is termed unrestricted fund balance.
It is essential that governments maintain adequate levels of fund balance to mitigate current and future risks (e.g.,
revenue shortfalls and unanticipated expenditures) and to ensure stable tax rates. Fund balance levels are a crucial
consideration, too, in long-term financial planning.
In most cases, discussions of fund balance will properly focus on a government’s general fund. Nonetheless,
financial resources available in other funds should also be considered in assessing the adequacy of unrestricted
fund balance (i.e., the total of the amounts reported as committed, assigned, and unassigned fund balance) in the
general fund.
Credit rating agencies monitor levels of fund balance and unrestricted fund balance in a government’s general
fund to evaluate a government’s continued creditworthiness. Likewise, laws and regulations often govern
appropriate levels of fund balance and unrestricted fund balance for state and local governments.
Those interested primarily in a government’s creditworthiness or economic condition (e.g., rating agencies) are
likely to favor increased levels of fund balance. Opposing pressures often come from unions, taxpayers and
citizens’ groups, which may view high levels of fund balance as "excessive."
Recommendation.
The Government Finance Officers Association (GFOA) recommends that governments
3
establish a formal policy on the level of unrestricted fund balance that should be maintained in the general fund.
Such a guideline should be set by the appropriate policy body and should provide both a temporal framework and
1
For the sake of clarity, this recommended practice uses the terms GAAP fund balance and budgetary fund balance to
distinguish these two different uses of the same term.
2
These categories are set forth in Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance
Reporting and Governmental Fund Type Definitions, which must be implemented for financial statements for periods ended
June 30, 2011 and later.
3
Sometimes restricted fund balance includes resources available to finance items that typically would require the use of
unrestricted fund balance (e.g., a contingency reserve). In that case, such amounts should be included as part of unrestricted
fund balance for purposes of analysis.
specific plans for increasing or decreasing the level of unrestricted fund balance, if it is inconsistent with that
4
policy.
The adequacy of unrestricted fund balance in the general fund should be assessed based upon a government’s own
specific circumstances. Nevertheless, GFOA recommends, at a minimum, that general-purpose governments,
regardless of size, maintain unrestricted fund balance in their general fund of no less than two months of regular
5
general fund operating revenues or regular general fund operating expenditures. The choice of revenues or
expenditures as a basis of comparison may be dictated by what is more predictable in a government’s particular
6
circumstances. Furthermore, a government’s particular situation often may require a level of unrestricted fund
balance in the general fund significantly in excess of this recommended minimum level. In any case, such
measures should be applied within the context of long-term forecasting, thereby avoiding the risk of placing too
much emphasis upon the level of unrestricted fund balance in the general fund at any one time.
In establishing a policy governing the level of unrestricted fund balance in the general fund, a government should
consider a variety of factors, including:
The predictability of its revenues and the volatility of its expenditures (i.e., higher levels of unrestricted
fund balance may be needed if significant revenue sources are subject to unpredictable fluctuations or if
operating expenditures are highly volatile);
Its perceived exposure to significant one-time outlays (e.g., disasters, immediate capital needs, state
budget cuts);
The potential drain upon general fund resources from other funds as well as the availability of resources
in other funds (i.e., deficits in other funds may require that a higher level of unrestricted fund balance be
maintained in the general fund, just as, the availability of resources in other funds may reduce the amount
7
of unrestricted fund balance needed in the general fund);
Liquidity (i.e., a disparity between when financial resources actually become available to make payments
and the average maturity of related liabilities may require that a higher level of resources be maintained);
and
Commitments and assignments (i.e., governments may wish to maintain higher levels of unrestricted fund
balance to compensate for any portion of unrestricted fund balance already committed or assigned by the
government for a specific purpose).
Furthermore, governments may deem it appropriate to exclude from consideration resources that have been
committed or assigned to some other purpose and focus on unassigned fund balance rather than on unrestricted
fund balance.
Naturally, any policy addressing desirable levels of unrestricted fund balance in the general fund should be in
conformity with all applicable legal and regulatory constraints. In this case in particular, it is essential that
differences between GAAP fund balance and budgetary fund balance be fully appreciated by all interested parties.
Approved by the GFOA’s Executive Board, October, 2009.
4
See Recommended Practice 4.1 of the National Advisory Council on State and Local Budgeting governments on the need to
"maintain a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of
temporary revenue shortfalls or unpredicted one-time expenditures" (Recommended Practice 4.1).
5
In practice, a level of unrestricted fund balance significantly lower than the recommended minimum may be appropriate for
states and America’s largest governments (e.g., cities, counties, and school districts) because they often are in a better
position to predict contingencies (for the same reason that an insurance company can more readily predict the number of
accidents for a pool of 500,000 drivers than for a pool of fifty), and because their revenues and expenditures often are more
diversified and thus potentially less subject to volatility.
6
In either case, unusual items that would distort trends (e.g., one-time revenues and expenditures) should be excluded,
whereas recurring transfers should be included. Once the decision has been made to compare unrestricted fund balance to
either revenues or expenditures, that decision should be followed consistently from period to period.
7
However, except as discussed in footnote 4, not to a level below the recommended minimum.
2
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CITY OF JANESVILLE Policy No. 75
Page 1 of 3
CITY COUNCIL POLICY STATEMENT
Date Issued
General Subject: Administration Effective Date 5/13/97
Special Subject: Debt Management Cancellation Date
Supersedes No.
PURPOSE
To record and clarify the City Council's policy regarding the
management and issuance of debt.
STATEMENT OF POLICY
In accordance with State Statutes, Chapter 67, the City is granted
the authority to issue debt. The following practices and
procedures shall be followed by the City:
1. Capital Improvement Program
The Administration will present an updated Capital Improvement
Program to the City Council bi-annually.
The Capital Improvement Program will indicate the source of
funding for all proposed capital projects and/or assets.
The first year of the Capital Improvement Program will be
included in the Annual City Budget. Those projects and/or
assets which require financing through the issuance of debt
will be reconsidered when the City Council undertakes the Debt
Issuance process.
2. Review of Financing Alternatives
The City will seek to maintain a sufficient General Fund cash
balance in order to prevent the need for external cash flow
borrowing.
The issuance of debt for funding annual general operating
expenditures will be prohibited.
The City will seek all possible Federal and State
reimbursement for mandated projects and/or programs.
The City will encourage pay-as-you-go financing of capital
improvements where feasible. However, it will strive to
maintain a balanced relationship between issuing debt and pay-
as-you-go financing.
CITY OF JANESVILLE Policy No. 75
Page 2 of 3
CITY COUNCIL POLICY STATEMENT
Date Issued
General Subject: Administration Effective Date 5/13/97
Special Subject: Debt Management Cancellation Date
Supersedes No.
3. Analysis of Debt Capacity
The City recognizes the importance of issuing debt prudently
and should first determine its long-term financial capability
to repay. The City will review the following factors:
Legal Debt Limit Margin.
Annual Operating Revenue and Expenditure trends.
Unreserved Fund Balance levels.
Projections of relevant economic variables such as
the City's employment base and unemployment rates.
The City recognizes there are several key debt ratios used by
investors and financial rating analysts when reviewing the
City's credit worthiness. Therefore, the City will address
the following ratios:
Debt Per Capita.
Debt as a Percentage of Equalized Property Value.
Annual Debt Service as a percentage of annual
General Fund operating expenditure appropriations.
4. Selection of Debt Instruments
The City will issue General Obligation Debt for those capital
improvement projects benefiting the City as a whole. Such
debt would be secured by the full faith, credit, and taxing
powers of the City.
The City will consider the issuance of Revenue Debt for
capital improvement projects providing benefits to specific
users. Such debt would be secured by revenues of the financed
project. However, if the projected revenues will not be
sufficient to meet the corresponding annual debt service
payments or the credit rating of the proposed Revenue Debt
instrument would result in an adverse interest rate, the City
would consider issuing General Obligation Debt for such
projects.
The scheduled maturities of long-term obligations should not
exceed the expected useful life of the capital project or
asset(s) financed.
CITY OF JANESVILLE Policy No. 75
Page 3 of 3
CITY COUNCIL POLICY STATEMENT
Date Issued
General Subject: Administration Effective Date 5/13/97
Special Subject: Debt Management Cancellation Date
Supersedes No.
5. Issuance Procedures
The City will use competitive sales as the primary means of
selling long term bonds and notes. Negotiated sales will be
permitted only if there is evidence of volatile market
conditions, complex security features, or other unique
factors.
Bonds - The issuance of bonds requires the City Council to
follow various procedures identified in State Statutes 67.05.
These include separate Council actions to authorize and
establish the bond details and is comprised of, but not
limited to, setting the final amount of bonds to be issued.
Promissory Notes - Although State Statutes 67.12 permit the
City Council to combine the authorization and details of a
note issue into one Council action, the Council will adopt the
aforementioned issuance procedure required for bonds.
6. Selection of Service Providers
The City shall retain an independent financial advisor for
debt structuring, the rating review process, marketing debt
issuances, sale and post-sale services, and to assist in
issuing the City's official statement.
The City shall retain bond counsel for legal and procedural
advice on all debt issuances, which include determining the
legal authority to issue the proposed debt and that it
qualifies for tax exempt status.
7. Communications
The City will maintain effective communications with the debt
rating agencies concerning the City's financial condition.
The City's Comprehensive Annual Financial Report shall be
distributed to the rating agencies after its acceptance by the
City Council.
The City will comply with the Security and Exchange
Commission’s reporting requirements concerning "Continuing
Disclosure Undertakings".
CITY OF JANESVILLE Policy No. 75
Page 1 of 4
CITY COUNCIL POLICY STATEMENT
Date Issued
General Subject: Administration Effective Date 5/13/97
Special Subject: Debt Management Cancellation Date
DRAFT
Supersedes #75 of 5-13-97
PURPOSE
To record and clarify the City Council's policy regarding the
management and issuance of debt.
STATEMENT OF POLICY
In accordance with State Statutes, Chapter 67, the City is granted
the authority to issue debt. The following practices and procedures
shall be followed by the City:
1. Conditions for Debt Issuance
The City shall limit the issuance of debt to capital outlays
(and costs associated with the capital outlay), including the
acquisition or construction of capital facilities,
infrastructure, and other capital assets.
2. Capital Improvement Program
The Administration prepares an updated Capital Improvement
Program on a bi-annual basis.
The Capital Improvement Program will indicate the source of
funding for all proposed capital projects and/or assets.
The first year of the Capital Improvement Program will be
included in the Annual City Budget. Those projects and/or
assets which require financing through the issuance of debt
will be reconsidered when the City Council undertakes the Debt
Issuance process.
3. General Obligation Debt
The City will issue General Obligation Debt for those capital
improvement projects benefiting the City as a whole. Such
debt would be secured by the full faith, credit, and taxing
powers of the City.
Every capital improvement project proposed for financing
through general obligation debt should be accompanied by a
full analysis of the future operating and maintenance costs
associated with the project, including the impact of the
proposed project on the annual operating budget.
Whenever possible, the City will finance capital improvement
CITY OF JANESVILLE Policy No. 75
Page 2 of 4
CITY COUNCIL POLICY STATEMENT
Date Issued
General Subject: Administration Effective Date 5/13/97
Special Subject: Debt Management Cancellation Date
DRAFT
Supersedes #75 of 5-13-97
projects by using self-supporting Revenue or Special
Assessment Bonds. Such Bonds assure the greatest degree of
equity because those who benefit from a project closely match
those who pay for a project.
3.1 Debt Limit
Section 67.03(1) of the Wisconsin Statutes provides that the
amount of indebtedness of a municipality shall not exceed five
(5) percent of the equalized assessed valuation of the taxable
property in the municipality.
The City shall limit outstanding General Obligation Debt to
less than or equal to 50 percent of the legal amount of
indebtedness. The City Council, by super majority vote, may
increase the stated debt limit.
The City recognizes the importance of issuing debt prudently
and should first determine its long-term financial capability
to repay.
4. Revenue Debt
To promote taxpayer equity, the City will consider the
issuance of Revenue Debt for capital improvement projects
providing benefits to specific users. Such debt would be
secured by revenues of the financed project.
However, if the projected revenues will not be sufficient to
meet the corresponding annual debt service payments or the
credit rating of the proposed Revenue Debt instrument would
result in an adverse interest rate, the City would consider
issuing General Obligation Debt for such projects.
5. Debt Service Limitations
Annual General Fund Debt Service payments for General
Obligation Debt, exclusive of that funded by enterprise
operations or debt approved exceeding the debt limit described
above, shall not exceed 15 percent of annual General Fund
expenditures.
6. Review of Financing Alternatives
The City will seek all possible Federal and State
CITY OF JANESVILLE Policy No. 75
Page 3 of 4
CITY COUNCIL POLICY STATEMENT
Date Issued
General Subject: Administration Effective Date 5/13/97
Special Subject: Debt Management Cancellation Date
DRAFT
Supersedes #75 of 5-13-97
reimbursements for mandated projects and/or programs.
The City will encourage pay-as-you-go financing of capital
improvement projects where feasible. However, it will strive
to maintain a balanced relationship between issuing debt and
pay-as-you-go financing to ensure property tax stabilization.
The City will seek to maintain a sufficient General Fund cash
balance in order to prevent the need for external cash flow
borrowing.
7. Characteristics of Debt Issuance
The issuance of debt for funding annual general operating
expenditures will be prohibited.
The average maturities of long-term obligations shall notonly
exceed 10 years if the expected useful life of the capital
project or asset financed justifies it.
The scheduled maturities of long-term obligations should
not exceed the expected useful life of the capital project or
asset(s) financed.
8. Debt Issuance Process
The City will use competitive sales as the primary means of
selling long-term bonds and notes. Negotiated sales will be
permitted only if there is evidence of volatile market
conditions, complex security features, or other unique
factors.
Bonds
- The issuance of bonds requires the City Council to
follow various procedures identified in State Statutes 67.05.
These include separate Council actions to authorize and
establish the bond details and are comprised of, but not
limited to, setting the final amount of bonds to be issued.
Promissory Notes
- Although State Statutes 67.12 permits the
City Council to combine the authorization and details of a
note issue into one Council action, the Council will adopt the
aforementioned issuance procedure required for bonds.
CITY OF JANESVILLE Policy No. 75
Page 4 of 4
CITY COUNCIL POLICY STATEMENT
Date Issued
General Subject: Administration Effective Date 5/13/97
Special Subject: Debt Management Cancellation Date
DRAFT
Supersedes #75 of 5-13-97
9. Professional Services
The City shall retain an independent financial advisor for
debt structuring, the rating review process, marketing debt
issuances, sale and post-sale services, and to assist in
issuing the City's official statement.
The City shall retain bond counsel for legal and procedural
advice on all debt issuances, which include determining the
legal authority to issue the proposed debt and that it
qualifies for tax exempt status.
10. Rating Agency Relations
The City will maintain effective communications with financial
and debt rating agencies concerning the City's financial
condition. The City's Comprehensive Annual Financial Report
shall be distributed to the rating agencies.
Additionally, the City recognizes there are several key debt
ratios used by investors and financial rating analysts when
reviewing the City's credit worthiness. Therefore, the City
will address the following ratios:
Debt Per Capita.
Debt as a Percentage of Equalized Property Value.
Annual Debt Service as a percentage of annual
General Fund operating expenditure appropriations.
The City will comply with the Security and Exchange
Commission’s reporting requirements concerning "Continuing
Disclosure Undertakings".
11. Bond Rating Goals
The City will seek to maintain and improve its bond rating to
minimize borrowing costs and to ensure access to credit
markets.
CITY OF JANESVILLE Policy No. 88_
Page 1 of 4
CITY COUNCIL POLICY STATEMENT
Date Issued
General Subject: Administration Effective Date ______
Special Subject: Fund Balance Cancellation Date
DRAFT
Supersedes No.
PURPOSE
The objectives of this fund balance policy are as follows:
Preserve the credit worthiness (credit rating) of the City for
borrowing monies at favorable interest rates.
Provide working capital for the City to meet cash flow needs
during the year.
Provide a comfortable margin of safety to address
unanticipated expenditures / emergencies and unexpected
declines in revenue due to economic downturns, natural
disasters, etc.
Provide a resource to stabilize fluctuations from year to year
in the property taxes paid by the City taxpayers.
STATEMENT OF POLICY
This statement identifies the amount the City of Janesville will
strive to maintain in its unrestricted General Fund balance, how
the fund balance will be funded, and the conditions under which
fund balance may be spent.
1. Fund Balance Reporting Categories
This policy follows the Fund Balance reporting categories
stated in Government Accounting Standards Board (GASB)
Fund Balance Reporting and Governmental Fund
Statement No. 54,
Type Definitions
. This statement impacts governmental fund
types. The fund balance will be reported in these five
categories: Nonspendable Fund Balance, Restricted Fund
Balance, Committed Fund Balance, Assigned Fund Balance and
Unassigned Fund Balance.
2. Flow of Funds
It is the policy of the City of Janesville that in cases where
multiple types of funds are available to pay for expenditures
in the various funds, restricted resources will be used first,
followed by committed, assigned, and finally unassigned.
Unrestricted fund balance includes committed, assigned and
unassigned fund balances.
3. Procedures
In order to achieve the objectives of this policy, the
following guidelines shall be adhered to by the Common
CITY OF JANESVILLE Policy No. 88_
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CITY COUNCIL POLICY STATEMENT
Date Issued
General Subject: Administration Effective Date ______
Special Subject: Fund Balance Cancellation Date
DRAFT
Supersedes No.
Council:
3.1 The unrestricted General Fund balance should be between
15 and 25 percent of the budgeted general fund operating
expenditures for the subsequent year. The target goal is
that the unrestricted fund balance be two months of the
general fund operating expenditures.
3.2 The City will maintain appropriate commitments or
assignments of General Fund, special revenue funds, debt
service funds and capital projects funds for specified
purposes, including but not limited to contingencies,
compensated absences or similar items. Commitments and/or
assignments of fund balance shall be made pursuant to
appropriate legislation adopted by the City Council.
3.3 As part of the annual budget process, the Comptroller
will estimate the surplus or deficit for the current year
and prepare a projection of the year-end unrestricted
General Fund balance. Such projection will include an
analysis of trends in fund balance levels on an
historical and future projection basis. Any anticipated
balance in excess of the minimum unrestricted General
Fund balance may be assigned to other purposes, or
budgeted to reduce the ensuing year’s property tax levy.
3.4 Funds in excess of the targeted unrestrictedtargeted
unrestricted General Fund balance may be considered to
supplement “pay as you go” capital outlay expenditures
(including reduction of anticipated debt issues).
Unrestricted fund balance above the targeted unrestricted
General Fund balance may be used to support recurring
operating expenditures in times of fiscal stress, but
this practice is discouraged.
3.5 Withdrawal of any amount of unrestricted General Fund
balance in excess of the targeted minimum of the amount
budgeted under (3.1) above, for the sole purpose of
reducing the ensuing year’s property tax levy, may be
made only upon a supermajority vote of the City Council.
CITY OF JANESVILLE Policy No. 88_
Page 3 of 4
CITY COUNCIL POLICY STATEMENT
Date Issued
General Subject: Administration Effective Date ______
Special Subject: Fund Balance Cancellation Date
DRAFT
Supersedes No.
3.6 The Common Council, by vote, can declare a fiscal
emergency and withdraw any amount of General Fund balance
for purposes of addressing the fiscal emergency. Any such
action must also provide for necessary appropriations to
restore the unrestricted General Fund balance to the
minimum balance within a three-year period.
3.7 This policy will be reviewed by the City Manager’s Office
every three years following adoption or sooner at the
direction of the Common Council.
3.8 It is the policy of this government that assignments of
fund balances and resources within a fund may be
determined by the Comptroller.