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Background <br />11 <br />Cash Reserves <br />SpringstedÓs clients often ask about the amount of cash that sho <br />in their Utility funds. Utility funds need sufficient cash to pay current expenses, <br />together with principal and interest on outstanding bonds. This would typically <br />require each Utility fund to have a minimum of three months of anticipated <br />operating expenses and one yearÓs total debt service in cash at <br />year. However, this does not provide any level of cash reserves for unforeseen <br />expenses, emergencies, or to cover any shortfalls in the budget. The amount of <br />cash reserves that the Water and Sewer Funds should have is dependent on a <br />number of factors, including: <br />Reserves that are legally required <br />Variability of the annual revenue stream <br />Variability in annual expenditures <br />Variability in rainfall <br />Age and condition of fixed assets <br />Anticipated future capital needs <br />Capital improvement plan <br />Regulatory compliance <br />Tolerance for risk <br />Number of relatively large customers <br /> <br />Unfortunately, there are no prescribed formulas, and the amount <br />varies considerably between utilities. We encourage the City to maintain a <br />minimum cash balance in the Water and Sewer Fund of at least thr <br />months/ninety days of anticipated operating expenses and one yearÓs debt <br />service at the end of the year. <br /> <br /> <br />Depreciation <br />Costs incurred in the operation of each Utility are either recorded as operating <br />expenses or capitalized as assets. Whether the cost is expensed immediately or <br />capitalized, the City actually pays for the asset at the time it <br />Generally, anything that is used up in the period in which the c <br />is incurred is treated as an operating expense. Personnel, supplies, and repairs <br />and maintenance are typical examples of costs that are treated a <br />expenses. These costs are shown on the income statement each year in the total <br />amount of the expenditure for each category. The cost incurred <br />acquisition or construction of assets such as buildings and major pieces of <br />equipment are capitalized. That means their cost does not show <br />expense on the income statement in the year in which the expenditure occurs, <br />rather the cost of these assets are depreciated. Depreciation is the process of <br />allocating the cost of an asset over its useful life in a system <br />manner. <br /> <br /> <br />City of Lino Lakes, Minnesota – Water and Sewer Rate Study Update <br /> <br />