Memorandum

City of Lawrence

Finance Department

TO:	Dave Corliss, City Manager
FROM:	Ed Mullins, Finance Director
CC:
Date:	June 14,  2007
RE:	Fund Balances

Background 

The City of Lawrence maintains over 40 distinct funds.  These funds are established to isolate specific sources of revenue for defined purposes.  The funds are categorized into three major areas:  governmental, proprietary, and fiduciary.  Governmental funds are those that focus on current resources and expenditures, such as the General Fund.  Proprietary funds focus on the allocation of resources over their useful life and are more similar to business operations, such as the Water and Sewer Fund.  Fiduciary funds are those where the City holds funds for the benefit of others, such as payroll withholdings.

Analysis

The attached file shows the fund balances for all of the City funds for the last ten years and just the fund balances of the property tax supported funds.  The City does not have a formal policy for the level of fund balance for its funds with the exception of the General Fund.  The General Fund policy is attached as well as the Government Finance Officers recommended practice on fund balance.  Because the General Fund is used to record the majority of the governmental activities of the City, it receives the most attention.  The 2006 expenditures from the General Fund were in excess of $54 million.  The 2006 expenditures of the Debt Service Fund, Capital Projects Fund, and all Special Revenue Funds (over 20 funds) were $8.8 million, $16.0 million, and $21.6 million, respectively.   Because the emphasis on the proprietary funds is more on net income and matching revenues and expenses over time, fund balances are not the major focus.

The Finance Department does not recommend the adoption of fund balance policies for the other governmental funds, with the possible exception of the debt service fund.  Because most of the governmental funds have been established to account for specific activities, the amount of transactions and level of services is not as significant as the General Fund.  While it is important to provide adequate working capital, the City is fortunate because it receives a large property tax distribution early in the fiscal year.  However, it is very important that the City maintain an adequate balance in the debt service fund to insure that future principal and interest payments are made on its bonds.  This is not a concern at the present time due to the healthy level of fund balance in the debt service fund.

General Fund Balances

The ending total General Fund balance has increased from $7.6 million at the end of the 1997 to $11.9 million at the end of 2006.  The City typically has approximately $800,000 in encumbrances at the end of the year in the General Fund.  Encumbrances represent future expenditures that have been allocated to the prior year budget.  In 1997, the unencumbered General Fund balance was 22.0% of expenditures and 20.5% at the end of 2006.  The adopted General Fund balance policy calls for a range of between 15-30%.  The total fund balance during the last ten years has averaged $10.7 million with a high of $15.3 million in 2005.

        The level of General Fund balance is of primary concern to our bond rating agency.  The following statement was part of their rating summary of our Series 2006-A general obligation bond, “The city’s General Fund balance has grown in recent years, form $9.6 million in 2002 to $15.3 million in 2005, or 31% of General Fund revenues, which approximates the median of 30% for Kansas cities.  Given the economically sensitive nature of the sales tax revenue stream, Moody’s believes the importance of retaining sound reserves is underscored.”