Management Report and Recommendations 12/31/1989

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City of Lino Lakes, Minnesota Management Report, Page 20 The State of Minnesota is apparently developing a unique view of what constitutes prudent fiscal management for Minnesota cities. Currently, the Minnesota Department of Revenue is exploring options for reducing LGA and HACA for 1990 and future years as a method of reducing the State's budget shortfall. One method that is under consideration for cutting aids is based upon city reserve balances. Presumably, cities with "large" reserve balances would experience "large" aid cuts. We recommend that the City strongly oppose this method of targeting aid reductions to cities for the following reasons: 1. The proposed targeting would penalize those cities which do practice sound fiscal management. 2. The proposed targeting would encourage less responsible fiscal management. This would result in financial crisis for individual cities and ultimately affect the bond ratings of all Minnesota cities including the City of Lino Lakes. 3. The targeting program would be virtually impossible to administer on a fair and equitable basis because financial management practices and fund structures are not consistent or easily comparable among cities. What may appear to be a low reserve balance of a city's General Fund may be an adequate reserve balance for such city. Examples are as follows: • Transferring monies from the General Fund to other funds for capital acquisitions or anticipated acquisitions. • The use of Special Revenue funds to account for basic services such as police, fire and other. • The use of Internal Service funds for compensated absences and other purposes. • The reservation of General Fund Balance for cash flow, compensated absences, etc. • Transferring of reserved balance amounts to other city funds. 4. Many cities have established reserve policies and made significant fiscal management decisions based on the established/targeted reserve policy. The effectiveness of such planning and fiscal management would be severely hampered (if not destroyed) by reserve balance "raiding" by the State. 5. The State is possibly seeking to pass its financial crisis on to local government. This would be a temporary solution to apparently poor fiscal management at the State level. 6. The potentially lost reserve balance could diminish the city's bond rating and potentially deplete a city's reserve balance pledged to secure debt service requirements.