05-03-2021 Council Work Session Packet

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City of Lino Lakes, Minnesota P a g e | 10 2. Background Cash Reserves Baker Tilly’s clients often ask about the amount of cash that should be available in their Utility funds. Utility funds need sufficient cash to pay current expenses, together with principal and interest on outstanding bonds. This would typically require each Utility fund to have a minimum of three months of anticipated operating expenses and one year’s total debt service in cash at the end of each year. However, this does not provide any level of cash reserves for unforeseen expenses, emergencies, or to cover any shortfalls in the budget. The amount of cash reserves that each fund should have is dependent on several factors, including: • Reserves that are legally required • Variability of the annual revenue stream • Variability in annual expenses • Variability in rainfall • Age and condition of fixed assets • Anticipated future capital needs − Capital improvement plan − Asset renewal and replacement − Regulatory compliance • Replacement reserve • Tolerance for risk • Number of relatively large customers Unfortunately, there are no prescribed formulas, and the amount of reserves varies considerably between utilities. We recommend the reserve policy for the studied funds be established at 25% of operating expenses and one year of renewal and replacement. Assumptions The City provided Baker Tilly with a variety of material including: • Water and Sewer 2020 and 2021 budgets • 2-3 new utility FTEs during the planning period • Projected depreciation for each utility • Verification of outstanding loan amortization schedules • Current utility rates • Current capital improvement plan for each utility • Detailed water consumption data by quarter for 2019 and 2020 • Asset information for each utility • Water Treatment Plant Feasibility Study, dated June 29, 2020 • Sample bills • Utility Connection Fees Justification Report, dated September 11, 2017 • 165 new connections to each system/year