06-12-19 Personnel and Finance - Laserfiche WebLink

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CITY OF SOUTH BEND i OFFICE OF THE CLERK we aren't deferring maintenance and ultimately finding out the costs of the repairs later on. That's the most important purpose of reserves. The second (2nd), and no less important, purpose of reserves is because in certain cases we are legally required to have cash-on-hand,particularly when it comes to debt covenants. So, when we issue debt, through bonds primarily, often the lender or the people who purchased those bonds will require us to maintain a certain level of cash-on-hand through the debt contract agreement. We are required to maintain that cash as basically a way that the bond holder ensures that we are going to be able to pay the debt service on that bond. So, there are certain things that we are legally required to have. He went on, So, in terms of debt service, it is hard to see on the screen here (referencing a slide in the presentation),our debt service comes out to about$8.4 million in cash reserves on hand. That's the reserve requirement. We have a little bit more than that in there, but that's the reserve requirement.The last, and extremely important reason to maintain reserves is to maintain our bond rating. We'll get into bond rating a little bit when we talk about debt, but bond rating, as everyone knows, is really important in terms of our ability to borrow money and issue debt at a very low interest rate. We do have a very good bond rating. Our bond rating is Double-A (AA), which is one of the best in Indiana, and we're proud of that. We mention it every chance we can. Cash reserves is one (1) of the reasons, if not the primary reason that we are able to maintain that high bond rating and that is because bond rating agencies recognize that we have this high level of cash, this strong balance sheet that allows us to meet our obligations in the future. So, in order to make sure we are satisfying and meeting all those requirements,we do have a City policy that establishes a reserve, a cash reserve requirement by fund and I want to take you through how we establish that reserve and why we set the reserve requirements where they are. I think it's helpful to understand, you know, here's how we decide, for each fund,how much money we want to maintain on hand. He continued, So, the default City policy regarding cash reserves is that most funds have to have at least twenty-five percent (25%) of annual expenditures on hand from that fund. So, the default is,most funds require a reserve of at least twenty-five percent(25%)of all the annual expenditures that come from that fund. I did want to point out that that's higher than the GFOA's recommendation of two (2) months because we feel that twenty-five percent (25%) is a better cushion being able to make sure that we're able to meet future fiscal challenges. Certain governmental funds, particularly the General Fund and the Liability Fund, have higher reserve requirements. So, the General Fund has a thirty-five percent (35%) of annual expenditures requirement, and the Liability Fund actually has a fifty percent (50%) of annual expenditures requirement. So, we have set those funds higher because those funds need to be a little bit more liquid than others. So, our General Fund is where our general governmental operations; Police, Fire, the Mayor's Office, Admin and Finance, the Legal Department, Council, the Clerk's Office, all of those are funded from the General Fund. So, we need to make sure that those core governmental operations are able to be funded, even if there is any kind of dip in tax revenue that comes in. So, that's why we set the General Fund requirement a little bit higher. He went on,Now the Liability Fund, that's where unforeseen events come in, so again; floods that destroy our property, we have a really bad year when it comes to worker's compensation, or health insurance and health care claims. So, we need to make sure that we have liquid assets on hand to cover those unforeseen events if they were to occur. Debt service funds, as I said, generally have a cash reserve requirement that is governed by the debt covenant. So,when we look at debt service funds, that's how we determine those cash reserves. Capital projects funds, so when we look at capital project funds, which are used for specific capital projects, as well as grants funds,generally EXCELLENCE ACCOUNTABILITY INNOVATION INCLUSION EMPOWERMENT 455 County-City Building 227 VV.Jefferson Bvld South Bend,Indiana 46601 p 574.235.9221 1574.235.9173 TTD 574.235.5567 www.southbendin.gov 5