Memorandum

City of Lawrence

City Manager’s Office

DATE:	08/16/2012
TO:	David L. Corliss, City Manager
FROM:	Casey Toomay, Budget Manager
CC:	Cynthia Wagner, Assistant City Manager Diane Stoddard, Assistant City Manager Jonathan Douglass, Assistant to the City Manager / City Clerk
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 table below shows the amounts of the general fund transfers made from 2009 through 2013 by fund.

Source of  Transfer	Actual 2009	Actual 2010	Actual 2011	Budget 2012	Budget 2013
Water and Wastewater Fund	$2,744,858	$2,882,103	$3,021,849	$3,084,896	$3,084,896
Solid Waste Fund	161,025	161,025	161,025	161,025	161,025
Storm Water Fund	400,000	400,000	400,000	400,000	400,000

Since 2009, transfers from Solid Waste and Storm Water have remained constant.  The transfer from the Water and Wastewater Fund was increased by 5% in 2010 and 2011.  For 2012, the transfer from the fund was increased only 2%.

The transfers from all enterprise funds into the general operating fund were held flat for the 2013 budget.  Increasing all the transfers into the general fund by 5% for 2013 could have meant an additional $182,400 in revenue for the general fund in 2013.  Increasing all the transfers into the general fund by 2% could have meant an additional $72,960 of revenue for the general fund in 2013. 

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	2013
Fund	Actual	Actual	Budget	Budget	Budget
Water and Wastewater	9.4%	9.4%	9.5%	9.9%	9.5%
Solid Waste	1.6%	1.6%	1.5%	1.5%	1.5%
Storm Water	13.7%	13.6%	13.5%	13.5%	13.6%

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 drafted the attached policy for transfers from the City’s enterprise funds to the general operating fund.  It would hold the amount of transfers flat for the duration of the five-year Water and Wastewater Master Plans.  Future Transfers between any of the City’s enterprise funds and the general operating fund would be permissible for the following reasons. 

· In lieu of a property tax payment that would be made if the utility were privately owned; 

· 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;

· To compensate the general fund for overhead expenses paid out of the general fund. 

Finally, the policy allows for the amount of transfer to be reduced based on 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 public 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 the maximum transfer amount allowed under the proposed policy for 2013 and the transfers included in the 2013 Budget . 

Fund	general fund mill levy equivalent	Franchise Fee Equivalent	overhead cost allocation	(salaries paid / services provided)	Maximum Transfer	Budgeted Transfer	Compliant
Water and Wastewater	$1,081,321	$2,274,776	$1,021,335	($700,000)	$3,677,432	$3,084,896	yes
Solid Waste	13,283	759,790	289,636	(185,348)	877,361	161,025	yes
Storm Water	76,342	206,605	84,593	52,422	419,962	400,000	yes

Practices in Other Communities

Staff contacted a number of communities to learn what policies and practices they have in place regarding payments from their enterprise funds into their general operating fund.  The attached summary shows that there are a number of communities that use methods similar to those described in the proposed policy. 

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.