03-28-11 WS Agenda Packet
CITY OF SHOREWOOD 5755 COUNTRY CLUB ROAD
CITY COUNCIL WORK SESSION COUNCIL CHAMBERS
MONDAY, MARCH 28, 2011 6:00 P.M.
AGENDA
Attachments
1. CONVENE CITY COUNCIL WORK SESSION
A. Roll Call
Mayor Lizée ____
Hotvet____
Siakel ____
Woodruff____
Zerby ____
B. Review Agenda
2. LONG-RANGE FINANCIAL MANAGEMENT PLAN Finance Director’s
Memo
3. ADJOURN
City of Shorewood Council Meeting Item
Item # 2
Title / Subject: Long-Range Financial Management Plan
Meeting Date: March 28, 2011
MEETING TYPE
Prepared by: Bruce DeJong
Work Session
Reviewed by: Brian Heck
Attachments: Financial Management Plan Spreadsheets
State Auditor’s Report Tables
Policy Consideration:
This report will touch on the policy of how city operations should be financed and the level of property
tax support and user fees required.
Background:
The City of Shorewood needs to determine a multi-year strategy to deal with upcoming financial
challenges. In the current economic environment there are many financial pressures facing cities.
While Shorewood has already dealt with the loss of Local Government Aid (LGA) and Market Value
Homestead Credit (MVHC) several years ago, the State of Minnesota’s ongoing budget challenges have
prompted a wide variety of legislative proposals that would limit the city’s ability to control its funding
sources and respond to community infrastructure and service requests.
Legislative Challenges
The legislature recognizes that in order to provide the same level of services after state funding cuts that
a city generally has to raise property taxes in an equal amount. To mitigate the complaint that state cuts
cause property tax increases, levy limits have been in place for most of the past decade. Typically, those
limits have allowed some modest percentage increase in property taxes limited by inflation as
determined by the Implicit Price Deflator from the US Bureau of Economic Analysis. This is what staff
used to estimate the 2% inflation factor built into the spreadsheets for estimating 2012-2020
expenditures. This inflation calculation, which has run slightly below the Consumer Price Index (CPI),
may be abandoned by the legislature in favor of stricter limits – possibly an absolute prohibition on any
property tax increases over the next several years (the hard freeze option).
The legislature has also discussed the possibility of reducing other aids to cities. We currently receive
funds for Police and Fire pension costs (generated from a 2% tax on insurance policies) that may be
reduced. If that happens, the city would be required to increase the payment to the South Lake
Minnetonka Police Department and Excelsior Fire District in order to maintain the same level of service.
There is also the possibility that more unfunded mandates may be passed on to the cities in the form of
required activities without any offsetting funding sources.
Mission Statement: The City of Shorewood is committed to providing residents quality public services, a
healthy environment, a variety of attractive amenities, a sustainable tax base, and sound financial
management through effective, efficient, and visionary leadership. Page 1
Office of State Auditor (OSA) Calculations
The State Auditor annually prepares a Minnesota City Finances Report. Unfortunately, the calculation
the OSA uses to determine level of fund balance is different than how Shorewood calculates it. Our
process compares the General Fund balance to the next fiscal year’s operating expenditures, capital
outlay, and transfers. By that calculation, we are just slightly over our policy level of 60%. The OSA
compares the Fund balance to the next fiscal year’s operating expenditures and excludes capital outlay
and transfers. By this calculation, Shorewood’s fund balance is over 94%. City budgeting and
accounting practices should probably be modified to conform more closely to OSA practices. Without
modifications, we may not be in a credible position to discuss city finances with legislators.
City Operations
General Fund
The city is in an interesting position, having done what many legislators have wanted by budgeting a
deficit in the General Fund and other funds in order to spend down cash balances. While that may be
appropriate, the challenge comes when the city is in compliance with its fund balance policy and needs
to begin to fully cover the operating expenses. At that point, the city would find itself in a $160,000 hole
that would need to be covered by property tax increases or expenditure reductions. We will be starting
the 2012 budget process from a revenue base that is already $40,000 lower because of the loss of the
transfer in from the Liquor Funds.
Equipment Replacement Fund
This fund has sufficient cash balance to cover most purchases through 2014. After that, the $50,000
annual transfer will not cover replacements for rolling stock. Staff believes that this could be mitigated
if the Municipal Building and Technology funds were combined with Equipment Replacement. The logic
is that each of these funds cover city equipment, just different types. It doesn’t seem reasonable that
we would continue funding computer purchases through 2020 merely because there is money in that
fund and stop purchasing vehicles in 2015 because there isn’t any money in the Equipment Fund. The
longer term implication is that we need more resources to purchase equipment beyond 2014.
Community Investment Fund
The City Council has put aside about $1,800,000 from the Sewer Fund and the Liquor Fund. This money
will sit quietly earning interest until the City Council determines some guidelines for its use. It could
function as a revolving loan fund where it provides the upfront cost for a project such as a water project
and is repaid and earns interest. It could be used to purchase land for future redevelopment or finance
new city amenities such as trails. Staff suggests that the City Council determine a process for public
input into the use of this money prior to any expenditure.
South Shore Community Center
The City needs to decide on long term arrangements for the Community Center in 2011. The contract to
operate the center expires at the end of 2012. Staff believes that the Center may potentially cover
operating costs in future years with Ms. Anderson’s diligent efforts to generate additional rentals. A
transfer of $11,300 has been programmed for 2011. This amount may cover the actual 2010 operating
deficit, but additional annual operating losses are projected. In addition, the costs of building repair,
new furniture and fixtures, signs, and other capital items will likely have to be paid out of undedicated
city revenues for the foreseeable future – and those costs have not been incorporated into this budget.
Enterprise Funds
The only fund out of the four enterprises operated by Shorewood that has been making money on an
accrual basis is the Storm Water Fund. The others have been losing money at various rates through the
past several years. When looking at the analysis in this report, staff has changed several items to get
back to a cash flow view of the enterprise operations:
Depreciation has been eliminated because it is a non-cash expense
Capital outlay and debt service principal payments are included though they don’t show up as
expenditures on the income statement since they are balance sheet transactions.
The Water Fund actually becomes cash flow positive when the capital projects drop off in 2015. The
others continue lowering cash balances each year with the balance going negative in 2013 for Storm
Water and 2018 for Recycling.
Financial or Budget Considerations:
Without service or funding modifications, current city resources are inadequate to cover all existing
commitments over the long-run. The cash balance drops over $8.5 million during the review period with
very little to show for it except continued operations. The City Council needs to determine service level
priorities and how to fund them – regardless of whether it is increased revenues or decreased
expenditures.
Options:
The City Council can choose to respond to this information in any manner they feel is appropriate. Staff
recommends that the City Council use this as background information for the 2012 budget and 2012-
2016 Capital Improvement Plan (CIP) adoption processes. Staff intends to update the report with actual
2010 results following completion of the audit and will incorporate suggested changes in the model to
bring back prior to starting the budget process in July.
Recommendation / Action Requested:
Staff requests that Council members provide feedback on the usefulness of the model and suggest
potential improvements.
Next Steps and Timelines:
This document will be updated prior to starting work on the budget in July.
Connection to Vision / Mission:
Preparation and evaluation of a Financial Management Plan contributes to sound financial management.
3/24/201111
City of Shorewood
Financial Management Plan
March 28, 2011
Community Investment Fund - policies for the use of this fund are yet to be determined
2%2%2%2%2%
ActualProjectedBudgetProjectedProjectedProjectedProjectedProjectedProjectedProjectedProjectedProjected
REVENUES200920102011201220132014201520162017201820192020
Beginning Balance - 1,000,000 1,808,500 1,817,500 1,826,600 1,835,700 1,844,900 1,854,100 1,863,400 1,872,700 1,882,100
1,891,500
Interest Earnings - 8,500 9,000 9,100 9,100 9,200 9,200 9,300 9,300
9,400 9,400 9,500
Miscellaneous Income - - - - - - - -
- - - -
Transfers in 1,000,000 800,000 - - - - - - -
- - -
Total Revenues 1,000,000 808,500 9,000 9,100 9,100 9,200 9,200 9,300 9,300
9,400 9,400 9,500
EXPENDITURES
OTHER SERVICES
- - - - - - - - -
- - -
Engineering Fees - - - - - - - - -
- - -
Contractual Services - - - - - - - -
- - - -
Miscellaneous Services - - - - - - - -
- - - -
Bank Charges - - - - - - - - -
- - -
TOTAL OTHER SERVICES - - - - - - - -
- - - -
CAPITAL OUTLAY
Machinery and Equipment - - - - - - - -
- - - -
Other Improvements - - - - - - - -
- - - -
TOTAL CAPITAL OUTLAY - - - - - - - -
- - - -
Transfers out
Operating Transfers - - - - - - - -
- - - -
Total - - - - - - - - -
- - -
TOTAL EXPENDITURES - - - - - - - -
- - - -
Revenue over/(under) 1,000,000 808,500 9,000 9,100 9,100 9,200 9,200 9,300 9,300
9,400 9,400 9,500
Ending Fund Balance 1,000,000 1,808,500 1,817,500 1,826,600 1,835,700 1,844,900 1,854,100 1,863,400 1,872,700 1,882,100 1,891,500
1,901,000