08-CASH RESERVES POLICYItem 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.
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CITY OF PARIS
CASH RESERVES POLICY
This policy is intended to establish and describe the basic guidelines and policies for maintaining a
minimum balance of cash reserves for the City's General Fund and Water & Sewer Fund.
1. An amount equal to five months of the most recently adopted General Fund operating budget
(inclusive of capital items but exclusive of debt service) shall be maintained as a minimum cash
balance at all times.
2. An amount equal to four months of the most recently adopted Water & Sewer Fund operating
budget (inclusive of capital items but exclusive of debt service) shall be maintained as a
minimum cash balance at all times.
3. Should an emergency or catastrophic event require the expenditure of all or part of these cash
reserves, the cash reserve depleted will be replenished within twelve months of dropping below
the minimum required amount.
4. Cash reserves may not be used for routine operating expenditures or capital projects that
should rightly be funded as part of the normal operating budget.
5. These cash reserves are independent of any new reserve requirement specified by a bond
covenant or other contract.
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