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12 MEMORANDUM DATE: April 23, 1996 TO: Mike Mornson, City Manager FROM: Roger Larson, Finance Director ITEM: UNAPPROPRIATED FUND BALANCES During the 1989 Special Session, the 1990 and 1991 regular sessions, many legislators focused attention on cities' fund balances. Discussions centered on what some legislators call "excessive" reserves. This trend continues in 1997 and in light of the consistent attention to these dollars, it becomes essential for St. Anthony to designate or earmark these funds prior to completing its annual State Auditors Report. Like St. Anthony, many Cities have developed a policy to designate Unappropriated Fund Balances. These reserves come from fiscal years where revenues exceeded expenditures and have a significant impact on the operation of St. Anthony. To assist local governments, the League of Minnesota Cities developed a task force to formulate recommendations how cities should designate the use of these funds. Their suggestions are as follows: 1) Cities designated part or all of their undesignated reserve fund balances prior to submitting its annual Financial Profile to the State Auditors Office. 2) Cities should plan carefully in the designation of these funds and indicate to their auditors they would like these designations included in their annual Financial Statements. 3) Designations may be established to indicate tentative plans for financial resource utilization in a future period. Such designations reflect managerial plans or intent, however, they are not permanent and Council may choose to re- direct or redesignate these funds at any time. 4) Cities analyze its cash flow needs for the purpose of designating an adequate amount of cash in the General Fund for Working Capital. Since cities receive their revenues twice a year, a significant amount of cash on hand is required to draw from when there is no revenue coming into a City. It is recommended 25 % to 35 % of the general fund budget be held in reserves. This prevents short term borrowing of which expenses for interest can be significant and have a negative impact on the current years operating budget.