Management Report and Recommendations 12/31/1986

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City of Lino Lakes, Minnesota Management Report, Page 33 Adequate Retained Earnings Balances Adequate retained earnings balances is an area which should be reviewed and defined by City policy for the Water and Sewer Fund. Reserve balances are required for the following: 1. Financing of accounts receivable and inventories. The City provides sewer ser- vice and bills customers for such service. Revenue is recognized under the accrual method of accounting as the service is provided (i.e., billed revenue is included in the retained earnings balances). Billings however, may be collected up to four months following the actual service. The City bills residential customers quarterly and therefore the service provided in December may not be collected until the end of March (i.e., sewer service for December, January and February is billed at the start of March and collected later in the month). In addition to the normal collection process, there are delinquencies which further delay the collection of billings. The Utility Fund had $76,000 of accounts receivable at December 31, 1986. Adequate retained earnings balances are required to avoid cash overdrafts caused by the timing difference between ser- vices provided and collections. 2. Capital asset replacement. The City has three primary classifications of capi- tal purchases for the Water and Sewer Fund as follows: • Machinery and equipment are purchased with revenues generated by the Water and Sewer Fund. • Water and sewer core systems are purchased through bonded debt which is funded by a combination of property taxes and net revenues of the Water and Sewer Fund. • Water and sewer lateral improvements are contributed to the Water and Sewer Fund through the special assessment process (i.e., paid for directly by benefiting property owners). The replacement of assets purchased from Sewer and Water Fund revenues must be funded from sewer and water revenues. The City should maintain adequate reserves to fund equipment and core system replacement. Major system purchases are financed through revenue bonds and the resulting debt payments are spread over a fifteen year (or greater) period. Such systems will be paid for through future property taxes, increases in utility rates, and /or other City Council designated sources. Routine equipment replacement is funded annually. The City has three options with regard to replacing contributed systems as follows: • Pay for all such replacements from net utility revenues and /or tax levies. • Pay for all such replacements through the special assessment process. • Pay for such improvements through a combination of the above two methods.