09.02 - Utility Rate Study Proposals

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a Fj Complementary Review of Pequot Lakes Water and Sewer Funds Enterprise funds are used to account for public services which are operated as business -type activities that are owned and operated by the jurisdiction. They should be self - supporting funds that generate a majority of their revenues from fees charged to those receiving services. One fundamental for enterprise fundsis the maintenance of cash and reserves at reasonable levels in order to maintain working capital, fund capital asset replacement, and service their debt. The appropriate amount of cash and reserves for a given fund varies by entity due to differences in cash flow, revenue volatility, services provided, and statutory considerations. One other financial fundamental is positive operating income. Profitability is generally not a consideration of core public sector activities; however, for enterprise funds profitability must be maintained in order to deliver services and maintain capital assets, since general tax support may not be available, or even permitted. To measure the health and liquidity in an enterprise fund we look at several financial indicators, including: Operating Income - Operating income is a fundamental measure of the ability to manage a profitable enterprise. It measures the excess 'mwk of revenues collected from users over the costs of operating the utility. While positive operating income indicates the utility is operating at a surplus, it does not take into account interest payments or other non - operating items such as transfers to the General Fund, unusual non - recurring items, or functions not essential to the operation of the utility. These factors can vary considerably over time and therefore are not included in this analysis. Cash - The level of cash will determine the ability of your jurisdiction 19 to fund operating, capital and debt service requirements. A low level of cash indicates that the users benefitting from the enterprise fund operations may not be funding the costs of providing the service. Cash Reserves /Day's Cash - Enterprise funds need sufficient cash to pay current expenses, together with principal and interest on outstanding bonds. This would typically require each enterprise fund to have a minimum of 90 days of anticipated operating expenses and one year's total debt service in cash at the end of each year. However, this does not provide any level of cash reserves for unforeseen expenses, emergencies, or to cover any shortfalls in the budget. The level of cash reserves is dependent on a number of factors, and should be determined separately for each enterprise fund. M For the purposes of this report, we analyzed the following enterprise funds: % • Water Utility • Sewer Utility Springsted