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March 19, 1983 Page 3 other factors to be taken into consideration as to levels of funds to keep on hand involve specific planned future expenditures. This would be the setting aside of funds for a major capital ex- penditure which is either unusual or which is non-recurring. In such a case the City may wish to save funds gradually over a period of years rather than to sell bonds at the time the expenditure is made. This practice would result in substantial savings on interest costs if this approach is adopted and the Council could budget an amount each year for the capital expenditure. Another factor to consider involves bonding and bond ratings. When a bond is issued the bond agreements normally require that adequate funds be maintained for protection of bond holders. In the case of Utility Funds if revenue bonds are sold it is sometimes re- quired that retained earnings be restricted in a specific amount until the bond issue is paid off. Also the amount of fund balance or cash on hand plays an important part in the bond rating process. Normally the better the rating the less the interest costs. Over a typical bond issue the savings from lower interest costs as a result of a good bond rating can be quite substantial. While rating agencies do not publish any specific guide lines on fund balance levels be- cause it is just one of many rating factors they do look at the trends of fund balances, a positive factor in rating is a history of the fund balance increasing as opposed to the fund balance decreasing. Bond rating analysts also stress the importance of maintaining a cushion" in fund balances. This is important because it would min- imize possible short term borrowing. The absence of short term bor- rowing is a positive factor in a bond rating. The exhibits attached show the recommended levels of cash for the Water Fund and the Sewer Fund. It should be noted that the Water Fund has a balance of $427,364 after immediate cash needs have been meet and the Sewer Fund falls short of meeting its immediate cash needs by $342,571. Planned future expenditures for replacement of Water and Sewer Fund physical plant, mains, and equipment have not been taken into consideration. A discussion of that is beyond the scope of this report. However, I would like to illustrate part of the problem we may face in the future. The 1981 Financial Statements Statement 22) indicate that the Water Utility has $3,784,043 of property, plant, and equipment and that the Sewer Fund has $4,959,345 of property, plant, and equipment. The values of the property, plant, and equipment are stated at cost. Replacement cost would be substan- tially more. Replacement of existing property, plant;. and equipment is another reason to maintain cash balances. Some cash is available in the Water Fund for this purpose. The Sewer Fund has no cash avail- able for this purpose. The 1981 Financial Statements indicate that $1,343,335 of depreciation expense has been taken for Water Fund property, plant and equipment and $1,408,774 has been taken for Sewer Fund property, plant, and equipment. I have often been asked: "Since depreciation expense is not an actual expenditure of cash, why don't the Water and Sewer Funds have that cash on hand?" The answer is that the cash will