Memorandum
City of Lawrence
City Manager’s Office
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DATE: |
DRAFT |
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TO: |
David L. Corliss, City Manager |
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FROM: |
Casey Toomay, Budget Manager |
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CC: |
Cynthia Wagner, Assistant City Manager Diane Stoddard, Assistant City Manager Jonathan Douglass, Assistant to the City Manager / City Clerk |
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RE: |
Transfer Policy |
In response to the recommendation of the City Auditor, a policy on interfund transfers for enterprise operations is provided below.
Background
State statutes allow cities to transfer surplus revenue derived from a utility to their general funds.
The purpose for the transfer is two-fold. First, the transfer helps fund many of the functions that support the utilities such as payroll, human resources, information systems, legal, risk management, etc. that are funded out of the general fund. In addition, the transfer is made in lieu of property taxes and franchise fees that would be paid if the utilities were privately owned like electric, gas, cable, or telephone companies. Franchise fees are to compensate the city for the use as well as the wear and tear of public right of way. Currently, the City has established franchise fees for most privately owned utility companies equivalent to five percent of their gross receipts.
Current Practice
Each year, the City of Lawrence transfers funds from the Water and Sewer, Solid Waste, and Storm Water utilities to the general operating fund. The transfer from the Water and Wastewater Fund was increased by 5% in 2010 and 2011. For 2012, the increase in the transfer was only 2%. The transfers from Solid Waste and Storm Water have remained constant since 2009.
The table below shows the amounts of the general fund transfers made from 2009 through 2012 by fund.
|
Source of Transfer |
Actual |
Actual |
Budget |
Budget |
|
Water and Wastewater Fund |
$2,744,858 |
$2,882,103 |
$3,021,849 |
$3,084,896 |
|
Solid Waste Fund |
161,025 |
161,025 |
161,025 |
161,025 |
|
Storm Water Fund |
400,000 |
400,000 |
400,000 |
400,000 |
The table below shows the transfers to the general fund from each enterprise fund as a percent of the total revenues of that fund from 2009 through 2012.
|
2009 |
2010 |
2011 |
2012 |
|
|
Fund |
Actual |
Actual |
Budget |
Budget |
|
Water and Wastewater |
9.4% |
9.4% |
9.5% |
9.9% |
|
Solid Waste |
1.6% |
1.6% |
1.5% |
1.5% |
|
Storm Water |
13.7% |
13.6% |
13.5% |
13.5% |
In addition to transfers to the general fund, the enterprise funds also make transfers to other City reserve funds – the Employee Worker’s Compensation Reserve Fund and General Liability Reserve Fund. Staff is exploring ways to change how these transfers are calculated however, they will be address separately from the policy contained in this memo.
Also, there are a number of positions are paid for in part or in whole out of enterprise funds but benefit the entire organization. Ideally, the salary and benefit expenses related to these positions would be paid from the general fund and the amount of transfer from the enterprise funds would be adjusted accordingly. Alternatively, these expenses should be considered when calculating the amount of transfer to the general fund.
Draft Policy
Staff has drafted the following policy for transfers from the City’s enterprise funds to the general operating fund.
Existing transfers will remain flat for the duration of the 2012 Water and Wastewater Master Plans. Future Transfers between any of the City’s enterprise funds and the general operating fund are permissible for the following reasons.
1) In lieu of a property tax payment that would be made if the utility were privately owned. The amount of the transfer will be calculated by applying the general fund mill levy equivalent to an estimate of the assessed valuation of all city-owned utilities. The estimate will be calculated according to principles similar to those used to assess private owned utilities.
a. Market value will be calculated as the total capital assets of all utilities less depreciation as stated in the City’s Comprehensive Annual Financial Report.
b. The assessment rate will be 33% of market value.
2) In lieu of a franchise fee for use of the City’s right of way by City owned utilities. The amount of the transfer should be no more than 7% of the total revenues of all utilities.
3) To compensate the general fund for overhead expenses paid out of the general fund. Costs shall be allocated to the enterprise funds, based on the prior year budget, as follows:
a. The budget for the City Commission and Human Resources divisions will be allocated based on the number of budgeted FTEs in each enterprise fund.
b. The budget for the City Auditor, City Manager’s Office, Legal, and Information Systems departments will be allocated using the budgeted expenditures of the fund as a percent of the total expenditures for all budgeted funds.
c. The budget for Finance Administration will be allocated using the budgeted revenues as a percent of the total budgeted revenues for all budgeted funds. (Prior year fund balance not included)
4) Transfers should be offset by any salaries paid and/or costs of services provided by the enterprise fund.
Rationale for Proposed Policy
The proposed policy recognized that it is appropriate for City owned utilities to make a payment in lieu of property tax because like privately owned utilities who pay property taxes, City utilities benefit from public safety, parks and recreation, planning and development services, and other city functions. The draft policy uses the same principles the state uses to determine the value of privately owned utilities. The policy also uses the same assessment rate as the State, 33% of market value. However, the policy only applies the City’s general fund mill levy, rather than the entire City mill levy.
The draft policy also tries to recognize that city utilities, like private utilities, should pay for use of the City’s right of way since they use the right of way for their business activities. While privately held utilities pay 5% of their gross receipts, staff suggested a higher percentage for city owned utilities because, while private owned utilities are responsible for repairing the right of way, the City is responsible for repairing the right of way when it is damaged by City owned utilities. For instance, city street crews often repair damage done to city streets by water and sewer repair.
The proposed policy also recognizes that enterprise funds should pay for support services provided by other city departments paid from the general operating fund. It would be more costly to rate payers if each utility maintained their own departments responsible for human resources, risk management, legal, information systems, purchasing, accounts payable, payroll, etc.. The policy allocates overhead expenses using three methods. The costs of the City Commission and Human Resources division are allocated on a per FTE basis. The costs of the City Auditor, City Manager’s Office, Information Systems Department, and Legal Department will be allocated based on the budgeted expenditures for each fund as a percent of the total budgeted expenditures for all funds. Finally, finance administration will be allocated based on the budgeted revenues for each fund as a percent of the total budgeted revenues for all funds.
In some instances, salaries are paid from enterprise funds for positions that in whole or in part support other City funds. Also, there are charges for services that are not collected by the enterprise funds. For instance, city facilities do not pay for water or solid waste collection services. The proposed policy accounts for these items when calculating the amount of transfer from an enterprise fund to the general fund.
Application of Proposed Policy
The table below shows how the proposed policy would apply to the enterprise transfers to the general fund in 2012.
|
Fund |
general fund mill levy equiv |
Franchise Fee Equivalent |
overhead cost allocation |
(salaries paid / services provided) |
Maximum Transfer |
Actual Transfer |
Compliant |
|
Water and Wastewater |
$1,015,352 |
$2,185,071 |
$969,140 |
($700,000) |
$3,469,563 |
$3,084,896 |
yes |
|
Solid Waste |
14,376 |
766,912 |
320,312 |
(185,348) |
916,252 |
161,025 |
yes |
|
Storm Water |
73,397 |
206,675 |
80,298 |
52,422 |
412,792 |
400,000 |
yes |
Action Requested
Staff recommends the City Commission approve the draft policy regarding transfers from the City’s enterprise funds to the general operating fund, as outlined above.