The Free Press, Mankato, MN

September 23, 2013

North Kato considering budget reserve policy

By Dan Linehan

---- — NORTH MANKATO — Though the city of North Mankato has fattened its checking account in recent years, it’s considering a policy that will make a healthy budget reserve a matter of policy.

The policy calls for the city to have general fund reserves of between 25 percent and 35 percent of its expenditures for that year. That’s enough to cover about three or four months of spending.

If the reserves in any fund falls below the target, the finance director has to submit a recovery plan as part of the annual budget.

The policy also describes what the city might do with extra cash, which is defined as revenues in excess of 30 percent of expenditures. That money could be spent on one-time expenses like capital purchases, to add to the reserves, to offset a short-term economic downtown or, more generally, on “community priorities deemed necessary by the governing body.”

The city’s most recent audit showed the general fund had a balance of 46 percent last year, which is up from 33 percent in 2009. The Office of the State Auditor and the League of Minnesota Cities recommend fund balances of between 35 percent and 50 percent.

The draft policy also has reserve targets for water and sewer funds, in these cases for either 33 percent of budgeted revenues or 120 days of operating expenses, whichever is larger.

The sewer fund doesn’t meet that threshold. As of the most recent audit, the fund had about $400,000 cash and annual expenses of about $1.5 million.

“We have a little work to do there,” City Administrator John Harrenstein said.

He said the policy will maintain fiscal stability, contribute to a good bond rating and ensure the city can pay its bills.

That’s common sense for anyone with a checkbook, but the problem is more complicated for cities. They incur expenses more or less evenly throughout the year but don’t receive all of their property taxes and state aid until the year is almost over.

Harrenstein said bong rating agencies like governments to show that they’re prepared to pay their bills. Moody’s downgraded some of the city’s debt in March.

A strong fund balance also allows the city to be resilient and flexible when unbudgeted costs arise, such as lawsuits and equipment replacements.

The council gave a tentative thumbs-up to the policy at a recent work session.

Mayor Mark Dehen noted that auditors have long recommended the city create such a policy.

Councilman Bob Freyberg agreed: “Yes, we finally answered the suggestions.”