08-CASH RESERVES POLICY - Laserfiche WebLink

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Item No. 8 memo�andum TO: Mayor & City Council John Godwin, City Manager FROM: Gene Anderson, Finance Director SUBJECT: CASH RESERVES POLICY DATE: February 15, 2013 BACKGROLTND: As part of the City's strategic plan, a policy establishing the minimum cash reserves for each of the City's major operating funds needs to be established. The City has two major operating funds: the General Fund and the Water & Sewer Fund. The importance of a consistently strong cash reserve can hardly be exaggerated. The City recently underwent a financial review by Moody's Investors Service in preparation for issuing General Obligation Refunding Bonds Series 2012. Reference to the City's strong reserves is referred to directly four times in the resulting Moody's rating report and indirectly two other times. Strong cash reserves were clearly a key factor to the City obtaining the high Aa3 rating on its bond debt. This rating in turn allows the City to pay lower interest rates on its bond debt. On a large debt issue like the proposed $45 million general obligation bond issue, a drop in the City rating could mean a substantial amount of dollars in additional interest over the 20 year life of typical bonds. Moody's cited only two reasons the City's rating would likely go down, and one of those reasons was a deterioration of the City's reserves. Closely related to the strong cash reserves cited by Moody's was the City's sound financial management evidenced by balanced budgets without having to dip into reserves and by the City having a third party rate study completed each year to maintain adequate utility rates. STATUS OF ISSUE: The City has not had a formally adopted cash reserve policy in the past, but has informally tried to maintain an amount equal to five months of the General Fund budget and four months of the Water & Sewer budget. In addition to helping the City maintain a strong bond rating, the reserves generate a revenue stream that can be used for operating purposes. BUDGET: This policy is not a budget line item. RECOMMENDATION: Motion to approve a policy which states that the City of Paris will maintain cash reserves in the General Fund equal to at least five months of the current General Fund budget and at least four months of the current Water & Sewer Fund budget. 30