Agenda Packets - 1996/12/02 - Laserfiche WebLink

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City of Mounds View Utility Rate Study Page 8 • Reserves and Capital Replacement Policies • 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 water and sewer service 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 October may not be collected until the end of February(i.e., service for October,November, and December is billed in January and collected in the following month). In addition to the normal collection process, there are delinquencies which further delay the collection of billings. The water and sewer funds had over $470,000 of accounts receivable at December 31, 1995. Adequate retained earnings balances are required to avoid cash overdrafts caused by the timing difference between services provided and collections. 2. Capital Asset Replacement. a) Purchased assets: The City has three primary classifications of capital purchases for water and sewer funds as follows: 1) Machinery and equipment are purchased with revenues generated by the water and sewer funds. 2) Water and sewer core systems are purchased through bonded debt with may be funded by a combination of property taxes and net revenues of the water and sewer funds. 3) Water and sewer lateral improvements are contributed to the water and sewer funds through the special assessment process(i.e., paid for directly by benefiting property owners). The replacement of assets purchased from water and sewer fund revenues are normally funded from water and sewer revenues. The City should maintain adequate reserves to fund targeted levels of 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 may be paid for through future property taxes, increases in utility rates, and/or other City Council designated sources. Routine equipment replacement is funded annually.