02-04-13 Council Packet - Laserfiche WebLink

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Background 11 City of Lino Lakes, Minnesota – Water and Sewer Rate Study Update Cash Reserves Springsted’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 mini mum 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 the Water and Sewer Funds should have is dependent on a number of factors, including:  Reserves that are legally required  Variability of the annual revenue stream  Variability in annual expenditures  Variability in rainfall  Age and condition of fixed assets  Anticipated future capital needs ○ Capital improvement plan ○ Regulatory compliance  Tolerance for risk  Number of relatively large customers Unfortunately, there are no prescribed formulas, and the amount of reserves varies considerably between utilities. We encourage the City to maintain a minimum cash balance in the Water and Sewer Fund of at least three months/ninety days of anticipated ope rating expenses and one year’s debt service at the end of the year. Depreciation Costs incurred in the operation of each Utility are either recorded as operating expenses or capitalized as assets. Whether the cost is expensed immediately or capitalized, the City actually pays for the asset at the time it is acquired. Generally, anything that is used up in the period in which the cost of acquiring it is incurred is treated as an operating expe nse. Personnel, supplies, and repairs and maintenance are typical examples of costs that are treated as operating expenses. These costs are shown on the inco me statement each year in the total amount of the expenditure for each category. The cost incurred in the acquisition or construction of assets su ch as buildings and major pieces of equipment are capitalized. That means their cost does not show up as an expense on the income statement in the year in which the expenditure occurs, rather the cost of these assets are depr eciated. Depreciation is the process of allocating the cost of an asset over its useful life in a systematic and rational manner.