City of Culver City, California
City Council Agenda Item Report
RECOMMENDATION:
That the City Council approve this best business practice and direct the City
Treasurer to draft a City Council policy on this concept for adoption.
BACKGROUND:
Part of this year’s budget preparation process included an in depth review of each
fund’s fund balance and the interplay of the various funds, in particular the impact
other funds have on the City’s primary fund, the General Fund. At the request of the
CAO, the City Treasurer’s Office has prepared a best business practice to address
the concern that certain funds are, during the year, conducting short-term borrowing
from the General Fund. This proposal comports with the Government Finance
Officers Association 1996 recommended practice|1010| for setting charges and fees,
which calls for full costing incorporating direct and indirect costs.
There are certain City funds that have insufficient cash, on a month to month basis,
to operate independently. The City Treasurer’s Office pools the cash of all the funds
together (separately for the Redevelopment Agency monies) to maximize investment
returns. Those funds with insufficient cash can have disbursements paid with cash
from the City investment pool.
In effect, those funds are borrowing cash from the City investment pool. The lion’s
share of the City’s investment pool (short and long term portions) is associated with |1010| “Recommend Practices for State and Local Governments,” Government Finance Officers Association, March 2000.
Page 75
Meeting Date: 11/07/05 Item Number: A-7
AGENDA ITEM: Discussion of a Best Business Practice to Charge Funds a
Monthly Interest Assessment (Payable to the General Fund) When Showing a
Negative Cash Balance.
Contact Person/Dept.:
Crystal C. Alexander/City Treasurer's Office
Phone Number: (310) 253-5865
Fiscal Impact: Yes [X] No [] General Fund: Yes [X] No []
Public Hearing: [] Action Item: [X] Attachments: []
Public Notification: Master Notification List on 11/2/05
Department Approval:
Crystal C. Alexander 10/25/05
CAO Approval:
Jerry Fulwood 11/2/05
City Controller Approval:
Marlee Chang 11/1/05City of Culver City, California
City Council Agenda Item Report
income for General Fund purposes. Thus, the short term borrowing that is occurring
comes from the General Fund and it is that fund that is losing interest income
because of it.
The cash flow requirements of the City are such that the liquid (short term) portion of
the investment pool is used to smooth out the peaks and valleys of the cash flow.
These funds, readily turned into cash, are used to make payments because invoices
must be paid if legal, budgetarily authorized and properly approved. Examples of
payments may be an accounts payable expense to an outside vendor, or a payroll
payable expense to City employees.
The reason why an individual fund may have insufficient cash is the different timing
of the cash in (revenues) versus the cash out (expenses). This is a cyclical reason
for a temporary cash shortfall and is normal as far as typical business practices are
concerned. An example is the Capital Grants Fund, where the City receives funds
from grantor agencies on a reimbursement basis. It might take some years (as in
the case of a large, multi-grant funded project such as the Senior Center) before the
cash is received. In other cases there is a chronic cash shortfall due to other
reasons, such as in the Refuse Disposal Fund.
DISCUSSION:
The City Treasurer’s Office makes the following recommendations regarding short-
term cash borrowing by certain funds from the investment pool that is, basically, the
General Fund. This only pertains to the City’s general investment pool, and does not
apply to individual bond proceeds/debt service portfolios, which are restricted in their
use, nor the Redevelopment Agency’s separate investment pool.
1) Whenever possible, each fund should be self-supporting and financially viable
enough to generate a positive cash balance monthly. In particular, the enterprise
funds (currently Municipal Bus Lines, Refuse Disposal, and Sewer Enterprise)
are dependent on service fees and charges to support their operations, and the
fee schedules should be designed to ensure sufficiency of the cash flow. This is
also true for the Internal Service Funds. Internal Service Funds account for
financial transactions related to the repair and usage of City-owned equipment
and vehicles, the City's self-insurance programs, the purchase and distribution of
office supplies, and the City's innovation fund. These services are provided to
other departments or agencies of the City on a cost reimbursement basis.
2) Whenever an enterprise fund is determined, at the end of a month, to have a
negative cash balance, an appropriate interest charge will be booked for accrual
to the fund. This action will take place for only those internal service funds where City of Culver City, California
City Council Agenda Item Report
allowable by governmental accounting standards, and as allowable by other
governing documents and laws, in particular those pertaining to grant funds.
Generally, this would exclude the Operating and Capital Grant Funds. Whenever
an enterprise fund is determined, at the end of the month, to have a positive cash
balance, it is considered, per current practice, to be a participant in the City’s
investment pool and will receive its proportionate share of investment earnings
for the month.
3) The interest charge to be accrued will be based on the monthly revenue earned
on the total City’s investment portfolio. For example, if revenue earned from
investment earnings in the month of May is 4%, then this will be the rate used to
calculate the interest expense for the fund with the cash shortfall.
4) If a fund accruing such interest charges has a positive cash balance position, the
payment for the interest charges will be transferred over to the General Fund. If a
fund accruing such interest charges is, at the end of a fiscal year in a negative
cash balance position, the accrual will be carried forward into the new fiscal year
as a debt owed to the General Fund. Interest charges will be compounded,
meaning there can be interest on unpaid interest. The compounded interest rate
is the same rate discussed in number 3 and will likely vary month to month.
FISCAL ANALYSIS:
There are a number of factors which could impact the monthly cash balance position
(positive or negative) of any fund. Careful management of a particular fund could
result in practices that could lessen the occurrences of a negative monthly cash
balance. However, it is unlikely that negative monthly cash balances will go away
completely depending on the funds and the funds ability to increase its revenue.
CTO staff has reviewed the monthly cash balance position of various funds at
sample time periods during this current fiscal year. Figures coming for this sampling,
which we caution may not be replicated in the new fiscal year due to the vagaries of
the cash flow, indicate that about $71,000 in interest income would be owed to the
General Fund due to the short term borrowing. The estimate is based on funds
which we believe would be allowed to make such interest payments.
Primary funds allowing interest payments for short term borrowing would be the
enterprise funds, with the caveat that the heavily grant funded nature of the
Municipal Bus Lines may restrict our ability to do so with much effect to that fund.City of Culver City, California
City Council Agenda Item Report
The General Fund is the largest component part of the investment portfolio, so it is
highly unlikely it would be conducting such short term borrowing (and paying
interest) unless the City were in a severe bad economic condition.
MOTION:
That the City Council:
Discuss the best business practice and direct the City Treasurer to draft this concept
in the form of a City Council policy for adoption.