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Review of draft Financial Reserves Policy - Part II: Debt Service and Capital Projects Fund
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A. Issue
A financial reserve provides protection from risk. The City of Wauwatosa faces risks like revenue shortfalls during recessions and losses from extra-ordinary events, like a pandemic or extreme weather event. Reserves help make sure that the City can respond quickly and decisively to extreme events. Reserves also support vital public services during revenue declines. A reserve policy describes how much we will try to retain in our reserve. It also describes acceptable uses of reserves. The City has had an informal reserve policy but as a best practice, and to protect our Aaa bond rating, we seek to formalize that policy. This is a continued discussion from January 10, 2023.
B. Background/Options
At the January 10, 2023 meeting, staff introduced a draft fund balance policy and reviewed General Fund balances and policy recommendations. Included in this packet is an updated policy to include the Debt Service Fund and the Capital Projects Fund. The table below summarizes the balances of the funds discussed to-date including the Debt Service and Capital Project Funds.
The Debt Service Fund is used to pay all non-utility principal and interest debt payments as well as debt issuance expenses. Special revenue funds, such as Tax Incremental Districts, transfer funds to this fund for the debt service owed. The Debt Service Fund includes a non-spendable balance for a loan provided to the Milwaukee Area Domestic Animal Control Commission that will be paid off in 2036. The designated fund balance includes bond premium that is held to be used for subsequent year’s interest payments. No additional fund balance may accumulate, per state statute.
The Capital Projects Fund is used for expenses and revenues related to constructing, improving or acquiring a non-utility asset. Examples includes roads, bridges, fire apparatus and public building renovations. Unspent bond proceeds are held in reserve and considered restricted. It includes a “Public Works Building and Yard Improvement” assigned balance that was created with funds received by the Department of Transportation for temporary easements necessary for the Zoo interchange reconstruction. These funds are designated for one-time projects at the Public Works Complex. The Capital projects fund also maintains a restricted balance for cash flow as the fund often expends resources prior to receiving revenues such as grants and bond proceeds. A benchmark of 20% above the 3-year average of the maximum monthly cash deficit is recommended. The fund is currently at 102% of that benchmark.
C. Strategic Plan (Area of Focus)
Priority 1: Economic Development and Financial Resilience. A fund balance policy is a critical component of financial resiliency.
D. Fiscal Impact
This item is for informational purposes only.
E. Recommendation
This item is for informational purposes only. Staff will continue to provide updates until all funds have been reviewed. At that point staff will recommend adoption of the policy.