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03-28-11 CC WS Mtg MinCITY OF SHOREWOOD CITY COUNCIL WORK SESSION MONDAY, MARCH 28, 2011 MINUTES 1. CONVENE CITY COUNCIL WORK SESSION Mayor Liz& called the meeting to order at 6:00 P.M 5755 COUNTRY CLUB ROAD COUNCIL CHAMBERS 6:00 P.M. A. Roll Call Present. Mayor Liz&e; Councilmembers Hotvet, Siakel, Woodruff and Zerby; Administrator Heck; Finance Director DeJong; Planning Director Nielsen (arrived at 6:12 P.M.); Director of Public Works Brown; and Engineer Landini Absent: None B. Review Agenda Zerby moved, Siakel seconded, approving the agenda as presented. Motion passed 510. 2. LONG -RANGE FINANCIAL MANAGEMENT PLAN Mayor Liz6e turned the meeting over to Director DeJong. Director DeJong stated since he started his employment with the City one goal is to develope a comprehensive long -range financial management plan for the City. He noted a copy of his first draft is in the meeting packet. He explained the plan includes all of the City's various funds. It shows revenues and expenditures and is projected forward through 2020. He stated this plan will serve as the starting point for developing the 2012 General Fund Budget, the 2012 Enterprise Budgets and the 2012 - 2016 Capital Improvement Program (CIP). The plan will be updated to reflect what impact the 2012 budgets and CIP will have on the City's financial plan through 2020. He noted that not everything in this first draft of the plan is perfect. He also noted that the 2012 information in the plan will very likely change during the budgeting process. Director DeJong stated it's not very efficient to have employees who don't have the correct equipment to do their jobs. The City has to have the financial wherewithal to acquire the necessary equipment and tools when needed. He commented that sending Public Works staff out with shovels instead of trucks won't be efficient or effective. DeJong noted that he and Administrator Heck will revisit the plan again prior to the start of the 2012 budget process which will start after the 2010 audit has been completed. He stated Council can obviously change any of the assumptions used when creating the plan DeJong stated the City has a lot of financial resources. Its fund balances are healthy. There are some funds that are running deficits and if those funds are projected out without changes, the financial picture does not look very good for a few funds. He noted that Staff is not charged with deciding how to make CITY OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2011 Page 2 of 6 the deficits disappear. It is Staff's responsibility to provide Council with options for correcting deficit situations and to implement the decisions Council makes to correct the situations in the future. DeJong stated the General Fund projects a 2 percent increase each year for revenues and expenditures starting in 2012. In the capital funds the 2 percent increase does not start until 2016. He stated the CIP factors in an in inflation. The Street Reconstruction Fund has a 2 percent inflation factor built into the transfer in from the General Fund starting in 2012; that may not be enough if oil prices continue to remain high. Revenues in the other capital funds have an inflation factor built in starting in 2016. He stated Council may want to change some of the inflation factors incorporated into the plan. DeJong stated the League of Minnesota Cities, the State Economist, and the State Demographer have stated because of the State's aging population, the State's revenues going forward may not be able to fund the social services needs with the existing formulas. The State Senate and House of Representatives are proposing cuts to aids to cities. There could be cuts to police and fire pension aid, general aid for police, police and fire training, Minnesota State Aid funding for roadways, and so forth. There is also the possibility that cities' 2012 and 2013 levies cannot be any higher than their 2011 levies. Administrator Heck stated it's his understanding that the property tax bill put forward by the House extends the current levy limits for two years. Heck explained that the levy limit for 2011 could not have been less than zero. It could not have been higher than the lower of either 3.9 percent of the 2010 allowable levy or the Implicit Price Deflator (IPD). The last time he checked the IPD was approximately 1.8 percent. Therefore, the allowable Levy limit increase at this time would be a maximum of 1.8 percent over the 2011 levy. In the past cities were not penalized for not levying the total amount allowable under levy and he's not sure if that will carry forward. Councilmember Woodruff stated that in the past if the City did not levy the maximum allowed under levy limits the City could include in the next year's levy the difference between the amount that could have levied and the actual amount actually levied for each past years that occurred. The City could therefore levy more than the levy limit allows. He noted the City has not increased its levy for the last three years. Administrator Heck stated if the levy limits remain as they were in 2011 the City could increase the levy to what the Department of Revenue says the City can levy. Director DeJong stated Council doesn't have to make any decisions on the financial plan now. Council does need to understand what the impact of the budget and tax levy will be on the plan. He cautioned against making big changes based on one financial year because they could have a significant impact. DeJong explained a few things in the financial plan are different from the City's financial statements with regard to Enterprise Funds. The accounting for Enterprise Funds is similar to that for businesses. The accounting for Enterprise Funds doesn't hack cash position like the General Fund and the Capital Funds do. The accounting tracks the value of the enterprise. The enterprise value equals the cash it has on hand plus the assets purchased. In the plan he took depreciation out of the plan and put in the capital outlay amounts identified in the CIP for the enterprises. The plan projects whether or not there will be enough cash on hand to fund larger capital projects. For enterprise operations that project income losses, the City may have to consider raising utility rates at the same time it's increasing its property taxes. DeJong stated the meeting packet included two tables prepared by the Office of the State Auditor (OSA). One table is titled Classification of Expenditures for All Government Funds for the Year Ended December 31, 2009. The other is titled Percent Change of Unreserved Fund Balances in the General Fund and Special Revenue Funds Unreserved Fund Balance as a Percent ofTotal Current Expenditure for the Year Ended December 31, 2009. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2011 Page 3 of 6 DeJong explained the City calculates its Fund balance by comparing the balance to the next fiscal year's operating expenditures, capital outlay, and transfers out of the General Fund. Based on that calculation, the City's Fund Balance is approximately 62 percent; just over the targeted Fund Balance Policy of between 55 and 60 percent. The OSA compares the Fund Balance to the current year's operating expenditures; capital outlay and transfers are not considered. Based on OSA calculation, the City's Fund balance is over 94 percent. He stated it's difficult to generate any sympathy from the City's representatives to the State Legislature when it appears as if the City has enough Fund Balance to pay all of the upcoming year's expenditures. He then stated Staff may want Council to consider putting the budget together somewhat differently so the City's financials would more closely reflect the way the OSA looks at things. He noted the OSA pays attention to the City's General Fund balance. He also noted a healthy fund balance helps to maintain the City's good bond rating. Couneilmember Woodruff stated the City's Fund Balance Policy allows for the City to fund slightly more than six months of its operations with cash on hand. He noted the City receives tax revenue from Hennepin County twice a year and therefore it needs that amount of cash. Director DeJong explained residents have to pay one half of their property taxes to Hennepin County by May 15` The City gets some of that money the end of June. In the past three years on average there have only been three months in each year when the City has a positive cash flow. With regard to the General Fund, DeJong stated the plan is broken down by department. He reiterated a 2 percent increase in revenues and expenditures is factored in starting in 2012. He noted that salary and benefit increases were programmed in separate from the general expenses. He explained there were no increases in health insurance costs the last two years. That's unlikely to remain that way for long so health insurance increases should be programmed in at some point. He stated the plan for elections needs to be adjusted to reflect the election cycle. DeJong explained that in order to make this plan look more like the GSA's information, he pulled out capital outlay and transfers from individual departments and put them in the respective separate categories titled Capital Outlay and Transfers Out. He then explained for a number of years the General Fund Budget included a transfer in of $40,000 from the Liquor Fund. In 2010, the funds in the Liquor Fund were put into the Community Investment Fund in order to comply with Governmental Accounting Standards Board (GASB) Standard 54. This financial plan no longer programs such a transfer into the General Fund. Administrator Heck stated there had been a history of transferring $40,000 from the Liquor Fund to the General Fund prior to the City selling its liquor operations. After the sale, the council decided to continue making transfers The most recent transfer included using about $38,000 in Liquor Fund principal in the $40,000 transfer. Staff wants Council to provide some direction on how it would like to resolve the impact of eliminating that transfer. Councihnember Zerby asked if the Police Capital Outlay line item is for the police public safety facility. Administrator Heck and Director DeJong responded that is correct. DeJong explained that some of the police and fire debt service will be retired in 2022 and the remainder in 2023. There was a short discussion about refunding debt service bonds. Zerby asked what the City Engineer Capital Outlay is for. Heck explained it's to purchase tools and equipment. DeJong noted those purchases could be funded out of the Technology Fund. Zerby asked why the Technology Fund is not under the Capital Outlay category. DeJong stated the City has generally had a $5,000 limit for capitalizing purchases and the engineering capital items individually don't satisfy that limit. CI'T'Y OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2011 Page 4 of 6 After discussion there was consensus to at some point address capitalizing purchases. Director DeJong explained the Fund Balance Policy suggests a targeted Fund balance equal to 60 percent of the next year's total expenditures, capital outlay and transfers. The General Fund financial plan calculates both the dollar amount and percent level through 2020. The plan also calculates what the percent level would be if it was calculated using the OSA's method. Administrator Heck explained the Fund Balance Policy recommends a level of 55 — 60 percent. Any balance in excess of 60 percent is to be used to reduce the levy amount until a level of 55 — 60 percent is reached. He said using the Fund balance to fund general operations is delaying the impact on the City's taxpayers. Continuing down that path will result in the potential for a significant tax increase when the desired level is achieved. He suggested taking a percent of the excess using it to fund CIP funds. He recommended Council discuss the current Policy and decide if it should be refined. Mayor Lizde stated continuing to help fund general operations with the use of Fund balance is sort of like kicking the can down the road. She stated the City has really not held to a zero percent increase the last three years because it used General ,Fund balance and Liquor Fund balance to offset costs. She agreed that Council needs to discuss how it wants to use the $1.8 million dollars in the Community Investment Fund. Director DeJong explained that the only City tax debt in the Debt Service and Capital Outlay plan is the bonded debt for the renovation of City Hall. The bonds for the public safety facilities are accounted for in the General Fund. The water bonds are accounted for in the Water Fund plan. Councilmember Woodruff stated the bonds for City Hall can be recalled in 2016. He then stated Council could consider taking cash to retire some of those bonds to save on the interest costs. With regard to Municipal Buildings Fund, Director DeJong explained there is $20,000 budgeted for improvements in 2011 and then there is nothing budgeted for that purpose until 2016 when $10,000 is budgeted. A 2 percent inflation factor is applied starting in 2017. There will still be a fund balance at the end of 2020. With regard to the Park Improvement Fund, DeJong explained the 2 percent inflation factor was applied to the transfer in amount starting in 2016. The park improvement capital costs for 2011 — 2015 were taken from the 2011 — 2015 Park CIP. The plan reflects expenditures were adjusted to balance with revenues on an annual basis. With regard to the Equipment Replacement Fund, DeJong explained the Miscellaneous Income line item in 2011 — 2015 is for the payments the City will receive from the Excelsior Fire District for the City's loan to the District for the purchase of the District's self contained breathing apparatus. The plan programs a $50,000 transfer from the General Fund beginning in 2011. There is a 2 percent inflation is factored in stating in 2016. Prior to 2016, the actual replacement costs include an inflation factor as well as revenues from the sale of old equipment. He noted that in every year going forward, with the exception of 2018, equipment replacement capital purchases exceed the amount transferred in. With regard to the Street Maintenance Fund, DeJong explained Council reviewed the proposed 20 -Year Pavement Improvement Plan in 2010. The amounts in this plan were taken from that Plan and the amounts already include inflation. Transfers in from the General Fund also include 2 percent inflation starting in 2012. The Eureka Road project scheduled for 2019 is an extremely costly project and it's very likely that an alternative method of financing that project will have to be used. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2011 Page 5 of 6 DeJong stated the City has three different types of equipment funds; Municipal Buildings Fund, Equipment Replacement, and Technology. He suggested combing the three Funds for ease of use. He commented he did not think the City would keep buying computers because there are funds in the Technology Fund and stop buying trucks because the funds in the Equipment Replacement Fund have been depleted or vice versa. He noted if the Funds were combined there could be separate line items for each of equipment types. With regard to the Community Investment Fund, Councilmember Zerby stated there must be an error in that plan because the interest earnings seem unreasonably low. Director DeJong stated he thought he factored in interest earnings of 0.5 percent for the 2011 budget. Zerby questioned earning only 0.5 percent. DeJong explained that in order to achieve a rate of return of 2 percent the investments have to be for a 4 — 5 year maturity. Most of the investments available in the shorter investment time period have earnings of 0.5 — 2.0 percent. Councilmember Woodruff suggested the overall plan project a conservative rate of return until Council decides how to use Fund. Administrator Heck reiterated Council need to establish a policy on how it would like to use the Community Investment Fund. He stated Council has to decide if it wants to keep separate the $800,000 in the Investment Fund that was transferred in from the Liquor Fund and use it for other purposes. He noted a previous council wanted resident feedback on how to use the funds from the Liquor Fund. He suggested the City provided a limited number of uses for residents to provide feedback on. He clarified he was not suggesting the funds from the Liquor Fund or the other funds in the Community Investment Fund have to be spent. He did think there needs to be a plan for their eventual use. Mayor Liz& recommended the City start to solicit that feedback this spring before 2012 budget discussion begin. She noted the issue of how to use the funds from the liquor operations has been out there for years. She also noted that 'funds from the Liquor Fund have been used to balance prior years budgets. She stated now is the time to plan for the responsible use of those funds. She suggested Council have a work session in late April or early May to discuss the use of Liquor Fund as well as the $1 million in the Community Investment Fund. Administrator Heck recommended discussions about the policy decisions he mentioned earlier in the meeting should be completed before 2012 budget discussions begin. Councilmember Siakel recommended that the work session be scheduled for longer than one hour to allow Council adequate time for the discussions. Siakel stated that the summary of ideas generated during the Council and Staff retreat could be used as a starting point for the discussion on how to use some of the funds from the Liquor Fund. She then stated that she would like to have a longer term strategic plan. With regard to the Southshore Community Center Fund, Director DeJong explained he did not spend a lot of time on it because the City's current agreement to run the Center is through 2012. Administrator Heck noted that the operation of the Center will have to be subsidized as long as the City runs it. With regard to the Enterprise Funds, DeJong explained that even though the Water Fund loses money some years it's projected to have a very healthy balance through 2020. He noted the plan reflects a $2 million expenditure for a water treatment plant in 2020. He explained the challenge in the Sewer Fund is with the Metropolitan Council Environmental Services treatment fee. Due to the economy, the city's MCES fees increased to help pay bonds for system expansion. The City's 2011 fee increased about 20 percent over its 2010 fee. The Recycling Fund loses a little bit every year. The recycling utility rates only cover the cost of collection. The City is using up the cash in its Stormwater Management Fund fairly quickly. An alternative method for 'funding stormwater management projects will have to be identified. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2011 Page 6 of 6 Administrator Heck explained all of the rates in all of the Enterprise Funds include a 2 percent inflation factor starting in 2012. He suggested taking out the inflation factor before Council reviews the plan again. Director DeJong explained that the combined fund balances for all of the funds is projected to drop approximately $8.5 million by the end of 2020, noting there is not much new regarding equipment or services other than the water infrastructure in the plan. He noted he did not think the City wants to be in that position. Councilmember Woodruff commented he considered roadway improvements long -term investments that are using up the City's reserves. Director DeJong stated he did not think the average pavement rating will go up, and that staff thinks the City will be primarily maintaining its roadway system if it continues with the 20 -year Pavement Improvement Plan. Woodruff stated he did not think the rating would go down. DeJong stated the City would have to invest in its roadways more than planned to increase the average pavement rating. k ,l are] 1J - mgl Zerby moved, Woodruff seconded, Adjourning the City Council Work Session of March 28, 2011, at 7:03 P.M. Motion passed 510. RESPECTFULLY SUBMITTED Christine Freeman, Recorder Christine Lizde, Mayor ATTEST Administrator /Clerk