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HomeMy WebLinkAbout14 Finance Workshop Agenda Item # TRUPublic i • DONNER Memorandum To: Board of Directors From: Peter Holzmeister Date: July 16, 2004 WORKSHOP Finance Master Plan Policies: Cash Reserves, Debt and Other Planning Matters Introduction During the last strategic plan workshop we talked about the finance master plan. We concluded that the finance master plan would not be a completely useful tool until it reflected policies regarding cash reserves and the use of debt. These policies would be entered into the finance master plan such that we would build reserves and structure debt over a reasonable period of years to build a healthy financial condition for the District while maintaining reasonable rates. I began the review of finance policies by researching the web site maintained by the Government Finance Officers Association (GFOA). GFOA is the professional association for persons who work in the government finance field, to state the obvious. It is a long-standing group with an excellent reputation. It publishes test books, a monthly journal, conducts annual seminars. I have used its material for many years. Attached under the first tab is information about GFOA from the web page. Additionally, I am concerned that we do not evaluate adequately the costs and revenues of operations as distinct from the costs and revenues of system development. I believe our financial planning, reporting and review needs to make this distinction. GFOA recommended policy areas Although our strategic plan meeting discussion focused on finance policies dealing with debt and cash reserves, my review of the GFOA web page got me thinking about other issues that relate to finance master planning, such as general planning, annual budgeting and revenue planning. Attached under tab 2 are policy statements adopted by GFOA that help us think about the following policy areas: • Financial Forecasting in the Budget Preparation Process • Adoption of Financial Policies • Appropriate Level of Unreserved Fund Balance in the General Fund • Debt Management Policy • Setting of Government Charges and fees GFOA does not necessarily provide specific advice on what a policy should say. It leaves that to us to wrestle with based on our values and factual circumstances. GFOA does, however, suggest that we develop policies in certain areas to help us get our arms around the District's overall financial position. Suggested policies (as a place to start) Planning Policies • Review water and electric master plans at least every five years. • Review finance master plan every year Budget Policies • Prepare annual operating budget • Prepare five year capital replacement budget • Prepare five year finance projection Revenue Policies • Review rate structure and levels at least once every three years • Set operating revenues to capture entire cost to provide service plus maintain reserves and satisfy debt coverage ratios • Review connection charges each year and set then to recover all costs • Review facilities fees every three years Debt Policies • Separate debt that is serving development (facilities fees), debt serving current customers (rates), and debt serving a special assessment district(assessments). These categories of debt should be separately identified in the budget. • One-half the debt service for all long-term debt in the aggregate is due in the first ten years • No more than one half the projected annual facilities fee revenue committed to debt service • No more than twenty percent of general fund revenues committed to debt service • No debt more than 25 years maturity • No debt longer than useful life of the project Cash Reserve Policies Operations • Water general fund should have a reserve equal twice the highest month budgeted expenditure (this will probably be the month in which principal and interest on debt is due) • Electric general fund should have a cash reserve equal to twice the highest month budgeted expenditure (This will be the month in which the highest wholesale electric bill is due plus the highest debt service payment) • Electric rate stabilization fund should maintain a balance of$1,000,000 Capital Reserve • There should be a revolving water capital reserve fund in the amount of$4,000,000 to permit projects to be initiated and funded prior to arrangement of long-term debt or other financing. • There should be an electric capital reserve fund in the amount of$1,000,000. Debt reserves There should be a reserve fund for each debt instrument equal to one year's principal and interest Conclusion 1 would like the chance to review these matters with the board at the workshop on July 21. Government Finance Officers Association - GFOA.ORG Page 1 of 2 c�, .`max _ t `�,.., ,, :a+e�sc•-w Viz- �' rrr .r,,, f ,, improve Your yields sireaptin S E R V ICES Tuesday,July 13th About GFOA I Contact GFOA ( e-Store Events *Annual Conference • Advanced iy t' ^ '�` Search (G Government Finance Institute About GFOA • Award Programs • Certification GFOA is the professional association of state/provincial and local finance officers in the ' Committees United States and Canada, and has served the public finance profession since 1906. " Consulting Services Over 15,500 GFOA members are dedicated to the sound management of government " Digital Finance financial resources. Library • Employment e-Store ' GAAFR Review Membership Selected Articles Membership in GFOA is open to everyone whose career, studies or interests involve GASB 34 Forum Government government financial management. GFOA members form a diverse group Finance from en e Review of individuals-- ftry- 9 level employees to senior managers--who work for a broad range of inanc Federal Government governments, including cities, towns, and other municipalities of all sizes; county Relations governments; school districts and special districts; public employee retirement systems; ' Budget Practices states and provinces; schools of administration and public affairs; libraries; federal * Links agencies; and accounting firms, law firms, investment banks, and consulting institutions. Publications Public Policy Membership Application Statements * Recommended Practices Professional Services Special The association's full-time staff administer a broad range of services and programs in the Reports/Samples major functional areas of government financial management, including: ' Scholarships Training • Accounting, auditing, and financial reporting; as • Budgeting and financial planning; • Capital finance and debt administration; • Cash management and investments; Financial management; • Retirement administration and finance; and, • Health care and other employee benefits. -XI Membership Services GFOA members regularly take advantage of the following association programs, services, and activities to strengthen their professional skills and keep up-to-date on developments in their field: • Publications. GFOA is a major publisher with an inventory of nearly 100 books on government finance topics. • Periodicals. In addition to a twice-monthly membership newsletter and bimonthly professional magazine, the association also publishes specialty newsletters on cash management; accounting, auditing, and financial reporting; and pension and benefit issues. • National Training. More than 40 national seminars at beginning, intermediate, and advanced levels offer year-round learning opportunities for finance managers. http://www.gfoa.org/main/about.shtml 7/13/2004 Government Finance Officers Association - GFOA.ORG Page 2 of 2 • Consulting. The association's full-time research staff contracts with public- and private-sector clients in a variety of financial management areas. • Scholarships. The association sponsors several scholarships to recognize outstanding undergraduate and graduate students in public finance. • Annual Conference. Over 5,000 people gather each year for this three-and-one- half day professional meeting. • Technical Race ninon Pr�rams. GFOA offers a range of technical recognition programs, including: the Certificate of Achievement for Excellence in Financial Reporting, the Canadian Award for Financial Reporting, the Popular Annual Financial Reporting Program, the Distinguished Budget Presentation Award Program, and the Award for Excellence in Financial Management. FWormsnre • Washington, D.C. Representation. Association staff maintain regular contact with rssurrment members of Congress and key administration officials to present the concerns of Restlurees For public finance officers and keep members informed of federal policies that affect Lttcl uverumet them. • Technical Inquiry Services. Members may contact the GFOA offices with technical questions about financial management topics. View GFOA's Audited Financial Statement Offices Chicago Washington, D.C. 203 N. LaSalle St., Suite 2700 1301 Pennsylvania Avenue, N.W., Suite Chicago, IL 60601-1210 309 Phone: 312-977-9700 Washington, D.C. 20004 Fax: 312-977-4806 Phone: 202-393-8020 Fax: 202-393-0780 W Home ( FAOs I Site Map I E-mail This Page j Printer Friendly Page 203 N. LaSalle St., Suite 2700•Chicago, IL 60601-1210 Phone: 312-977-9700•Fax:312-977-4806 Copyright©2003 Government Finance Officers Association.All rights reserved. http://www.gfoa.org/main/about.shtm] 7/13/2004 Financial Forecasting in the Budget Preparation Process (1999) Background. The National Advisory Council on State and Local Budgeting (NACSLB) has endorsed the forecasting of revenues and the forecasting of expenditures in their Recommended Budget Practices. The Government Finance Officers Association (GFOA) recognizes the importance of combining the forecasting of revenues and the forecasting Of expenditures into a single financial forecast. A government should have a financial planning process that assesses long-term financial implications of current and proposed policies, programs, and assumptions that develop appropriate strategies to achieve its goals. A key component in determining future options, potential problems, and opportunities is the forecast of revenues and expenditures. Revenue and expenditure forecasting does the following: • Provides an understanding of available funding; • Evaluates financial risk; • Assesses the likelihood that services can be sustained; • Assesses the level at which capital investment can be made; • Identifies future commitments and resource demands; and • Identifies the key variables that cause change in the level of revenue. Recommendation. The GFOA recommends that governments at all levels forecast major revenues and expenditures. The forecast should extend at least three to five years beyond the budget period and should be regularly monitored and periodically updated. The forecast, along with its underlying assumptions and methodology, should be clearly stated and made available to participants in the budget process. It also should be referenced in the final budget document. To improve future forecasting, the variances between previous forecast and actual amounts should be analyzed. The variance analysis should identify the factors that influence revenue collections, expenditure levels, and forecast assumptions. References • Recommended Budget Practices: A Framework for Improved State and Local Government Budgeting,NACSLB, 1998. • Recommended Budget Practices CD-ROM, NACSLB, 1998. - Budget Awards Program:Illustrations and Examples ofProgram Criteria, Juliet Carol Powdar, GFOA, 1999. • An Elected Official's Guide to Multi-Year Budgeting, Salomon A. Guajardo, GFOA, 2000. • An Elected Official's Guide to Revenue Forecasting, Salomon A. Guajardo and Rowan Miranda, GFOA, 2000. Adoption of Financial Policies (2001) Back.-round. The National Advisory Council on State and Local Budgeting(NACSLB) has developed a comprehensive set of recommended budget practices. The recommendations have been endorsed by a number of key governmental associations, by academia and by labor groups associated with state and local governments. These practices and the associated framework outline a budget process that encompasses the broad scope of governmental planning and decision-making with regard to the use of resources. This work is recognized as one of the most important advances in governmental finance in decades. The Goverment Finance Officers Association (GFOA) has adopted a recommended practice endorsing the NACSLB practices and the associated framework. However, the policies included in this Recommended Practice are those considered fundamental to the budget process and relevant to the broadest number of jurisdictions. The work of the NACSLB provides a framework for describing the overall budget process. The framework is organized around the four principles of the budget process: • Establish Broad Goals to Guide Government Decision Making • Develop Approaches to Achieve Goals • Develop a Budget Consistent with Approaches to Achieve Goals • Evaluate Performance and Make Adjustments Each of these principles has additional elements that provide guidance for an effective budget process. Element #4, of Principle 2, Adopt Financial Policies, addresses the need for jurisdictions to establish policies to help frame resource allocation decisions. Recommendation. The Government Finance Officers Association (GFOA) recommends that, at a minimum, financial policies in the following areas be developed by professional staff and formally adopted by the jurisdiction's governing board as well as the governing boards of those component units; state,provincial and municipal corporations and organizations; and other bodies under their jurisdiction. • Financial Planning Policies • Revenue Policies • Expenditure Policies The jurisdiction's adopted financial policies should be used to frame major policy initiatives and be summarized in the budget document. It is further recommended that these policies, along with any others that may be adopted, be reviewed during the budget process. Professional staff should review the policies to ensure continued relevance and to identify any gaps that should be addressed with new policies. The results of the review should be shared with the governing board during the review of the proposed budget. Policy categories that should be considered for development, adoption and regular review are as follows: Financial Planning Policies These policies address both the need for a long-term view and the fundamental principle of a balanced budget. At a minimum,jurisdictions should have policies that support: 1. Balanced Budget -A jurisdiction should adopt a policy(s) that defines a balanced operating budget, encourages commitment to a balanced budget under normal circumstances, and provides for disclosure when a deviation from a balanced operating budget is planned or when it occurs. (NACSLB Practice 4.5) 2. Long-Range Planning - A jurisdiction should adopt a policy(s) that supports a financial planning process that assesses the long-term financial implications of current and proposed operating and capital budgets, budget policies, cash management and investment policies, programs and assumptions. (NACSLB Element 9, GFOA Recommended Practice) 3. Asset Inventory - A jurisdiction should adopt a policy(s) to inventory and assess the condition of all major capital assets. This information should be used to plan for the ongoing financial commitments required to maximize the public's benefit. (NACSLB Practice 2.2) Revenue Policies Understanding the revenue stream is essential to prudent planning. Most of these policies seek stability to avoid potential service disruptions caused by revenue shortfalls. At a minimum jurisdictions should have policies that address: 1. Revenue Diversification - A jurisdiction should adopt a policy(s) that encourages a diversity of revenue sources in order to improve the ability to handle fluctuations in individual sources. (NACSLB Practice 4.6) 2. Fees and Charges- A jurisdiction should adopt policy(s) that identify the manner in which fees and charges are set and the extent to which they cover the cost of the service provided. (NACSLB Practice 4.2) 3. Use of One-time Revenues - A jurisdiction should adopt a policy(s) discouraging the use of one-time revenues for ongoing expenditures. (NACSLB Practice 4.4) 4. Use of Unpredictable Revenues - A jurisdiction should adopt a policy(s) on the collection and use of major revenue sources it considers unpredictable. (NACSLB Practice 4.4a) Expenditure Policies The expenditures of jurisdictions define the ongoing public service commitment. Prudent expenditure planning and accountability will ensure fiscal stability. At a minimum jurisdictions should have policies that address: 1. Debt Capacity, Issuance, and Management -A jurisdiction should adopt a policy(s) that specifies appropriate uses for debt and identifies the maximum amount of debt and debt service that should be outstanding at any time. (NACSLB Practice 4.3, 4.3a, GFOA Recommend Practices pp.90-92) 2. Reserve or Stabilization Accounts - A jurisdiction should adopt a policy(s)to maintain a prudent level of financial resources to protect against the need to reduce service levels or raise taxes and fees due to temporary revenue shortfalls or unpredicted one-time gfpoa expenditures. (NACSLB Practice 4. 1) 3. Operating/Capital Expenditure Accountability - A jurisdiction should adopt a policy(s) to compare actual expenditures to budget periodically (e.g., quarterly) and decide on actions to bring the budget into balance, if necessary. (NACSLB Practice 7.2) References • National Advisory Council on State and Local Budgeting. Recommended Budget Practices: A Framework for Improved State and Local Government Budgeting. GFOA, 1998. • A Guide for Preparing a Debt Policy, Patricia Tigue, GFOA, 1998- • GFOA Recommended Practice. "Setting of Government Charges and Fees" (1996). • "Elements of a Comprehensive Local Debt Policy," Government Finance Review, October 1994. • 'Developing Formal Debt Policies," Government Finance Review, August 1991. Appropriate Level of Unreserved Fund Balance in the General Fund (2002) Background. Accountants employ the teen fund balance to describe the net assets of governmental funds calculated in accordance with generally accepted accounting principles(GAAP). Budget professionals commonly use this same term to describe the net assets of governmental funds calculated on a govennnent's budgetary basis.' In both cases,fund balance is intended to serve as a measure of the financial resources available in a governmental fund. Accountants distinguish reservedfund balance from unreserved fund balance. Typically, only the latter is available for spending. Accountants also sometimes report a designated portion of unreserved fund balance to indicate that the governing body or management have tentative plans concerning the use of all or a portion of unreserved fund balance. It is essential that governments maintain adequate levels of fund balance to mitigate current and future risks(e.g., revenue shortfalls and unanticipated expenditures)and to ensure stable tax rates. Fund balance levels are a crucial consideration, too,in long-term financial planning. In most cases, discussions of fund balance will properly focus on a government's general fund. Nonetheless,financial resources available in other funds should also be considered in assessing the adequacy of unreserved fund balance in the general fiord. Credit rating agencies carefully monitor levels of fund balance and unreserved fund balance in a government's general fiend to evaluate a government's continued creditworthiness. Likewise,laws and regulations often govern appropriate levels of fund balance and unreserved fiord balance for state and local governments. Those interested primarily in a government's creditworthiness or economic condition(e.g.,rating agencies)are likely to favor increased levels of fund balance. Opposing pressures often come from unions,taxpayers and citizens'groups, which may view high levels of fund balance as"excessive." Recommendation. GFOA recommends that governments establish a formal policy on the level of unreserved fund balance that should be maintained in the general fund.2 GFOA also encourages the adoption of similar policies for other types of governmental funds. Such a guideline should be set by the appropriate policy body and should provide both a temporal framework and specific plans for increasing or decreasing the level of unreserved fund balance, if it is inconsistent with that policy.a The adequacy of unreserved fund balance in the general fund should be assessed based upon a government's own specific circumstances. Nevertheless,GFOA recommends,at a minimum,that general-purpose governments,regardless of size,maintain unreserved fiord balance in their general fund of no less than five to 15 percent of regular general fund operating revenues,or of no less than one to two months of regular general fund operating expenditures 4 A government's particular situation may require levels of unreserved fund balance in the general fund significantly in excess of these recommended minimum levels.` Furthermore,such measures should be applied within the context of r For the sake of clarity,this recommended practice uses the terms GAAPfund balance and budgetaryfaid balance to distinguish these two different uses of the same term. s Sometimes reserved fund balance includes resources available to finance items that typically would require the use of unreserved fund balance(e.g,a contingency reserve). In that case,such amounts should be included as pan of unreserved fund balance for purposes of analysis. "sea Recommended Practice 4.1 of the National Advisory Council on State and Local Budgeting governments on the need to maintain a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of temporary revenue shortfalls or unpredicted one-time expenditures" (Recommended Practice 4.1). °The choice of revenues or expenditures as a basis of comparison may be dictated by what is more predictable in a government's particular circumstances. In either case,unusual items that would distort trends(e.g.,one-time revenues and expenditures)should be excluded,whereas recurring transfers should be included.Once the decision has been made to compare unreserved fiord balance to either revenues or expenditures,that decision should be followed consistently from period to period. s In practice,levels of had balance,(expressed as a percentage of revenues/expenditures or as a multiple of monthly expenditures), typically are less for larger governments than for smaller governments because of the magnitude of the amounts involved and because the diversification of their revenues and expenditures often results in lower degrees of volatility. long-term forecasting,thereby avoiding the risk of placing too much emphasis upon the level of unreserved fund balance in the general fund at any one time. In establishing a policy goveming the level of unreserved fund balance in the general fund,a government should consider a variety of factors,including: • The predictability of it revenues and the volatility of its expenditures(i.e.,higher levels of unreserved fund balance may be needed if significant revenue sources are subject to unpredictable fluctuations or if operating expenditures are highly volatile). • The availability of resources in other funds as well as the potential drain upon general fund resources from other funds(i.e.,the availability of resources in other funds may reduce the amount of unreserved fundbalance needed in the general fund,just as deficits in other funds may require that a higher level of unreserved fund balance be maintained in the general fund). • Liquidity(i.e- a disparity between when financial resources actually become available to make payments and the average maturity of related liabilities may require that a higher level of resources be maintained). • Designations(i.e.,governments may wish to maintain higher levels of unreserved fund balance to compensate for any portion of unreserved fiord balance already designated for a specific purpose). Naturally,any policy addressing desirable levels of unreserved fund balance in the general fund should be in conformity with all applicable legal and regulatory constraints, In this case in particular,it is essential that differences between GAAP fiord balance and budgetary fund balance be fully appreciated by all interested parties. Approved by the Committee on Accounting, Auditing and Financial Reporting and the Committee on Governmental Budgeting and Management,January 30, 2002 Approved by the Executive Board, February 15, 2002. GFOA RECOMMENDED PRACTICE Debt Management Policy* (1995 and 2003) Background. Debt management policies are written guidelines and restrictions that affect the amount and type of debt issued by a state or local government, the issuance process, and the management of a debt portfolio. A debt management policy improves the quality of decisions, provides justification for the structure of debt issuance, identifies policy goals, and demonstrates a commitment to long-tenn financial planning, including a multi-year capital plan. Adherence to a debt management policy signals to rating agencies and the capital markets that a government is well managed and should meet its obligations in a timely manner. Debt levels and their related annual costs are important long-term obligations that must be managed within available resources. An effective debt management policy provides guidelines for a government to manage its debt program in line with those resources. Recommendation. The Government Finance Officers Association (GFOA) recommends that all state and local governments adopt comprehensive written debt management policies, and that governments review them at least annually and revise them as necessary. A Debt Management Policy should address: • Direct Debt - debt payable from general revenues, including capital leases, • Revenue Debt - debt payable from a specific pledged revenue source, • Conduit Debt - debt payable by third parties for which the government does not provide credit or security, • State Revolving Loan Funds and Pools • Other Types ofHybrid Debt—debt payable from special revenues or containing other unique security pledges, and ■ 1111erfm2d Borrowing—loans for short-tern cash flow needs. I. Debt Limits. The Policy should define specific limits or acceptable ranges for each type of debt. Limits are generally set for legal, public policy, and financial reasons. a. Legal limits may be detennined by: • State constitution or law, • Local charter,by-laws, resolution or ordinance, or covenant. b. Public Policy limits can include: • Purposes for which debt proceeds may be used or prohibited, • Types of debt that may be issued or prohibited, • Relationship to and integration with the Capital Improvement Program, and • Policy goals related to economic development, capital improvement financings, tax increment financing, and public-private partnerships. e. Financial limits generally reflect public policy or other financial resource constraints, such as reduced use of a particular type of debt due to changing financial conditions. Appropriate debt limits can positively impact bond ratings, if the government demonstrates adherence to such policies over time. Financial limits are often expressed as ratios customarily used by credit analysts. Different financial limits are used for different types of debt. Examples include: • Direct Debt can be measured or limited by the following ratios: ✓ Debt per capita, ✓ Debt to personal income, ✓ Debt to taxable property value, and ✓ Debt service payments as a percentage of general fund revenues or expenditures. • Revenue Debt levels are often limited by debt service coverage ratios (e.g., annual net pledged revenues to annual debt service) or credit rating impacts (e.g., additional bonds should not lower ratings) contained in bond covenants. • Conduit Debt limitations may reflect the right of the issuing government to approve the borrower's creditworthiness, the purpose of the borrowing issue, or a minimum credit rating. Such limitations reflect sound public policy, particularly if there is a contingent impact on the general revenues of the government or marketability of the government's direct debt. • Short-Term Debt Issuance should describe the specific purposes and circumstances under which it can be used, as well as limitations in term or size of borrowing. 2. Use of Derivatives. The Policy should: • Specify how derivatives fit within the overall debt management program. • State the conditions under which derivatives can be utilized. • Identify the types of derivatives that may be employed or are prohibited. • ing, evaluating, and managing derivative risk, Identify approach(es) for measur including basis risk, tax risk, counter-party risk, termination risk,liquidity renewal risk, remarketing risk, and credit risk. • State the methods for procuring and selecting derivative products. 3. Debt Structuring Practices. The Policy should include specific policies regarding the debt structuring practices for each type of bond, including: • Maximum term (often stated in absolute terms or based on the useful life of the asset(s)), • Average maturity, • Debt service pattern such as equal payments or equal principal amortization, • Use of optional redemption features that reflect market conditions and/or needs of the government, • Use of variable or fixed-rate debt, credit enhancements, derivatives, and short-term debt,and limitations as to when each can be used, and • Other structuring practices should be considered such as capitalized interest, deferral of principal and/or other internal credit support, including general obligation pledges. 4. Debt Issuance Practices. The Policy should provide guidance regarding the issuance process,which may differ for each type of debt. These practices include: Criteria for determining the sale method (competitive,negotiated, placement) and investment of proceeds, e refunding and current refunding bonds, Criteria for issuance of advanc * Selection and use of professional service providers, Use of comparative bond pricing services or market indices as a benchmark in negotiated transactions, as well as to evaluate final bond pricing results, and Use of credit ratings, minimum bond ratings, determination of the number of ratings, and selection of rating services. 5. Debt Managenvent Practices. The Policy should provide guidance for ongoing administrative activities including: • Investment of bond proceeds, • Primary and secondary market disclosure practices,including annual certifications as required, • Arbitrage rebate monitoring and filing, • Federal and state law compliance practices, and • Market and investor relations efforts. References • A Guide for Preparing a Debt Policy, Patricia Tigue, GFOA, 1998. • Benchmarking and Measuring Debt Capacity, Rowan Miranda and Ron Picur, GFOA, 2000. Recommended for Approval by the Committee on Governmental Debt and Fiscal Policy, January 24, 2003. Approved by the GFOA's Executive Board, February 28, 2003. * This RP replaces the GFOA's RPs—Development of a Debt Policy and Analyzing Debt Capacity and Establishing Debt Limits. Settinia of Government Charges and Fees (1226} Background. State and local governments use charges and fees to fund the provision of goods and services. Charges are voluntary payments that are used to finance traditional governmental services such as water, sewerage, and mass transit; recreational activities such as golf and swimming; and miscellaneous programs such as libraries, dangerous tree removal, animal shelters, school lunches, and continuing education programs. From a technical standpoint, fees are distinctively different from charges, although the terms may be used interchangeably by some. A fee is imposed as a result of a public need to typically related to health, safety, or other protective purposes. Fees regulate activities, result in the purchase of a privilege or authorization and are applied to such activities as restaurant inspections,landfill use,building pennits, and marriage licenses. According to economic theory, the most efficient use of resources is achieved if the price for a good or service is set at a level that is related to the cost of producing the good or service. In practice, governments set some charges and fees to recover 100 percent of the cost. Other charges and fees are set at levels above or below cost for various reasons, and in some cases, the amount of a charge or fee may be restricted by state or local law. Recom�anon. The Government Finance Officers Association (GFOA) supports the use of charges and fees as a method of financing governmental goods and services. GFOA makes the following recommendations about the charge- and fee- setting process: 1. A formal policy regarding charges and fees should be adopted. The policy should identify what factors are to be taken into account when pricing goods and services. The policy should state whether the jurisdiction intends to recover the full cost of providing goods and services. It also should set forth under what cireumstances the jurisdiction might set a charge or fee at more or less than 100 percent of full cost. If the full cost of a good or service is not recovered, then an explanation of the government's rationale for this deviation should be provided. Some considerations that might influence governmental pricing practices are the need to regulate demand, the desire to subsidize a certain product, administrative concerns such as the cost of collection, and the promotion of other goals. For example, mass transit might be subsidized because of environmental concerns. 2. The full cost of providing a service should be calculated in order to provide a basis for setting the charge or fee. Full cost incorporates direct and indirect costs, including operations and maintenance, overhead, and charges for the use of capital facilities. Examples of overhead costs include: payroll processing, accounting services, computer usage, and other central administrative services. 3. Charges and fees should be reviewed and updated periodically based on factors such as the impact of inflation, other cost increases, the adequacy of the coverage of costs, and current competitive rates. 4. Information on charges and fees should be available to the public. This includes the government's policy regarding full cost recovery and information about the amounts of charges and fees, current and proposed, both before and after adoption. References . "User Charges and Fees,'C. Kurt Zorn in Local Government Finance: Concepts and Practices, edited by John E.Petersen and Dennis R. Strachota, GFOA, 1991. • Catalog of Public Fees and Charges, compiled by Dennis Strachota and Bruce Engelbrekt, GFOA, 1991 WATER DEBT Operations (Rate Supported) Loan Purpose Annual amount Term 1996 COPs Pipeline Replacement $ 8041105 2021 Prop 55 Pipeline Replacement $ 153,200 2021 MSG 5 Vehicle(s) $ 87327 2005 MSG 6 Vehicle(s) $ 387214 2005 MSG 8 Vehicle(s) $ 20,345 2007 MSG 9 Equipment $ 61 ,740 2008 Internal loan #2 Pipeline Replacement $ 44,970 2015 Internal loan #313 Pipeline Replacement $ 437766 2018 TOTAL $ 1 , 1747667 Total operating Expenses (2004) $ 7 871 795 Debt as percent of operation 14.9% 25% of operation $ 17967,948 ELECTRIC DEBT Operations (Rate Supported) Loan Purn� Annual amount Term ;MSG 4 Line Truck $ 389175 2005 MSG 5 Vehicle(s) $ 16,085 2005 MSG 7 Snow Removal Equipment $ 14, 183 2006 MSG 8 Vehicle(s) $ 12,860 2007 2002-COP Idacorp Contract $ 334737886 2012 TOTAL $ 395551189 Total operating Expenses (2004) $ 161729,654 Debt as percent of operation 21 .0% 25% of operation $ 49182,413 Remaining debt within policy $ 627,224 /year $4.5 million CASH RESERVES Operations Electric Water Highest month expenses $ 17452,463 $ 6117187 Goal: times 2 $ 21904,926 $ 112227374 Cash on hand $ 1 ,002, 136 $ 4247641 Cash still needed $ 11842,790 $ 797,735 Capital Financial Goal $ 170003000 $ 47000,000 Cash on hand Building fund $ 272,048 Land Sale Trust Fund $ 826,603 Facilities Fees $ 942,339 $ 11603,775 $ 11214,387 $ 2,430,378 N/A $ 11569,622